##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 OR
 o
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File Number 1-3473
 PET DRX CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    56-2517815(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)215 Centerview Drive, Suite 360Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 (615) 369-1914
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $.0001 per share
    
    Nasdaq Capital Market
  None
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    

Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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##### 



INDEX
 TO FORM 10-K
 PagePART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    7Item 1B.
    
    Unresolved Staff Comments
    
    
    17Item 2.
    
    Properties
    
    
    17Item 3.
    
    Legal Proceedings
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17PART IIItem 5.
    
    Market for the
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    17Item 6.
    
    Selected Financial Data
    
    
    19Item 7.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 8.
    
    Financial Statements and Supplementary Data
    
    
    35Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    69Item 9A.
    
    Controls and Procedures
    
    
    69Item 9B.
    
    Other Information
    
    
    70PART IIIItem 10.
    
    Directors, Executive Officers, and Corporate Governance
    
    
    70Item 11.
    
    Executive Compensation
    
    
    70Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters
    
    
    70Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    70Item 14.
    
    Principal Accountant Fees and Services
    
    
    70PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    70EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
  ii




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PART I
 
 Item 1. BUSINESS
 Company Overview
      Operating Segment
  Company History




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Business Strategy
  o
    
    recruit and retain top veterinary professionals;o
    
    provide high quality veterinary care to our customers;o
    
    pursue acquisitions of additional veterinary hospitals, with a focus
on continuing to develop hub and spoke networks that will improve
customer service;o
    
    increase veterinary hospital visits through advertising, market
positioning, consumer education, wellness programs and branding;o
    
    increase veterinary hospital margins through same-store revenue growth
and cost savings realized through consolidated purchasing arrangements
for high volume items such as food and medical supplies and generally
lower costs through economies of scale;o
    
    increase veterinary hospital productivity through professional
development and training, integration of performance data collection
systems, application of productivity standards to previously
under-managed operations and removal of administrative burdens from
veterinary professionals; ando
    
    capture valuation arbitrage differentials between individual practice
value and larger consolidated enterprise value.
 2




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##### Table of Contents



Our Veterinary Hospitals
  Medical Advisory Board
  Customers
  Industry and Competition
 The Industry
     o
    
    an increased emphasis on pet health and wellness;o
    
    continued technological and medical developments which are migrating
from human healthcare to veterinary medicine, driving new and
previously unconsidered diagnostic tests, procedures and treatments;
ando
    
    favorable demographic trends supporting a growing pet population.
 ®
 3




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o
    
    the purchasing, marketing and administrative cost advantages that can
be realized by large, multiple location, multi-doctor veterinary
providers;o
    
    the cost of financing equipment purchases and upgrading technology
necessary for a successful practice and the associated ability of a
large provider to obtain the necessary financing on more competitive
terms;o
    
    the desire of veterinarians to minimize the percentage of their time
spent dealing with administrative functions and to focus instead on
practicing veterinary medicine;o
    
    the desire of some owners of animal hospitals to obtain liquidity by
selling all or a portion of their investment in the animal hospital
(which we believe will increase as more owners of animal hospitals
approach retirement); ando
    
    the appeal to many veterinarians of the benefits and flexible work
schedule that is not typically available to a sole practitioner or
single-site provider.
  o
    
    Extensive veterinarian training requirements represent significant
competitive barriers to entry. Although the number of pets and pet
services is growing rapidly, the number of veterinarians and available
hospitals is limited, with the potential for increasing the number of
veterinarians constrained by the extensive training requirements for
veterinarians.o
    
    Highly fragmented industry service sector. Although the pet care
market is large and growing, no single entity accounts for more than
5% of the hospital industry. The market consists mainly of independent
private practices consisting of sole practitioners or small groups of
veterinarians. Most practices do not offer a broad range of products
and services. Many veterinarians spend a significant portion of their
time handling the administrative burden of running a small business,
versus seeing customers. The Company believes that these small animal
hospitals tend to be profitable in spite of the inefficiencies
associated with a small operating scale and limited marketing clout
and that these factors make veterinary hospitals an attractive
consolidation opportunity.o
    
    Attractive industry payor and pricing characteristics. The animal
health care services industry does not experience the problems of
extended payment collection cycles or pricing pressures from
third-party payors faced by human health care providers. Fees for
animal hospital services are due, and typically paid for, at the time
of the service via cash or credit card. Pet care services are
predominantly provided on a cash-pay basis. Thus, (unlike human
healthcare) there are (i) few accounts receivable to finance, (ii) no
government payors, and (iii) no managed care contracting. Also,
because of expanding options for care services coupled with the
growing awareness of pet health and wellness and pet owner sentiments
to their pets, veterinarians typically enjoy the ability to pass
through pricing increases to their customers.o
    
    Opportunity to increase hospital productivity through an integrated
management information system. By deploying integrated management
information systems that monitor each veterinarian and hospital on
products and services delivered, productivity and prices, veterinary
hospitals are able to identify opportunities and areas for growth and
to monitor veterinarians and target individuals who may benefit
 4




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from additional training in specific treatment disciplines.o
    
    Limited medical malpractice liabilities. Unlike human healthcare,
veterinarians have limited corresponding medical malpractice
liabilities.o
    
    Veterinary cares recession resistant revenue characteristics.
Although the practice of veterinary medicine is subject to seasonal
fluctuations based on weather and holiday seasons, the Company
believes that veterinary care revenues have historically been
recession resistant and veterinary hospitals have one of the lowest
failure rates of any business. However, the industry was affected by
the recent recession that started in 2008.
 Competition
  Companion Animals
   Acquisition Program
  Government Regulation
  Employees
  5




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Seasonality
  Executive Officers of Pet DRx
  Name
    
    Age
    
    PositionGene E. Burleson
    
    
    69
    
    
    Chairman of the Board and Chief Executive OfficerHarry L. Zimmerman
    
    
    54
    
    
    Executive Vice President and Chief Financial OfficerGeorge A. Villasana
    
    
    42
    
    
    Executive Vice President, General Counsel and Secretary
 GENE E. BURLESON
 HARRY L. ZIMMERMAN
 6




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GEORGE A. VILLASANA
 Availability of Our Reports Filed with the Securities and Exchange Commission
   
 Item 1A. RISK FACTORS
 Risks Related to Our Business
 We have a history of losses and may incur losses in the foreseeable future.
  
    
    changes in pricing policies or those of our competitors;
    
    the hiring and retention of key personnel;
    
    fluctuation in costs related to acquisitions of businesses;
    
    wage and cost pressures;
    
    availability of facilities that are suitable for acquisition;
    
    viability of the hub and spoke model;
    
    hiring and retention of veterinarians;
    
    increased competition and pricing pressure;
 7




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
    
    seasonal and general economic factors, including a recession or economic slowdown; and
    
    level of personal discretionary spending.
 We have substantial indebtedness which requires a significant amount of cash to service. We may not
be able to generate or raise sufficient cash to meet our debt service obligations, and these
obligations will reduce the amount of cash available to operate and expand our business.
 Risk Factors We may
not be able to pay our obligations with respect to our Senior Notes upon maturity, prepayment or
redemption
  We may not be able to pay our obligations with respect to our Senior Notes upon maturity,
prepayment or redemption.
  Our debt instruments may adversely affect our ability to run our business.
  
    
    limit our ability to borrow additional funds or to obtain other financing in the future for
working capital, capital expenditures, acquisitions, investments or general corporate
purposes;
    
    limit our ability to dispose of our assets, create liens on our assets or to extend credit; and
    
    make us more vulnerable to economic downturns and reduce our flexibility in responding to
changing business and economic conditions;
 8




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The issuance of the Senior Notes and related financing warrants will impact net earnings (loss)
going forward.
  Galen and Camden, investors in the Senior Notes, may have the ability to significantly influence
our business and affairs.
  We may be unable to effectively execute our growth strategy which could cause our margins and
profitability to decline. Even if we are able to effectively execute our growth strategy, the
growth of the business may put a strain on the business, and we may not achieve desired economies
of scale.
    Failure to satisfy covenants in our debt instruments will cause a default under those instruments.
  9




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Incurring substantial amounts of debt could adversely affect our financial condition.
 Leverage.
 Risk of Rising Interest Rates.
 Limitations on Debt.
 Our business strategy includes growth through acquisitions, which involve special risks that could
increase expenses, and divert the time and attention of management. Difficulties integrating new
acquisitions may impose substantial costs and disrupt our business, which could adversely affect
our financial condition, results of operations, cash flows and prospects.
  
    
    diversion of managements attention from our existing business;
    
    integration of acquired veterinary hospitals and employees into our existing business, including
coordination of geographically dispersed operations, which can take longer and be more complex than
initially expected;
    
    dependence on retention, hiring and training of key personnel, including specialists;
    
    loss or termination of employees, including costs associated with the termination of those employees;
    
    dilution of then-current stockholders percentage ownership;
    
    dilution of earnings if synergies with the acquired veterinary hospitals are not achieved;
    
    inability to generate sufficient revenue and profitability to offset acquisition or investment costs;
    
    assumption of liabilities of the acquired businesses, including costly litigation related to alleged
liabilities of the acquired businesses; and
    
    risk of impairment charges related to potential write-down of acquired assets in future acquisitions.
   10




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The termination or failure to renew a lease or sublease for a veterinary hospital facility would
require us to relocate such hospital to a different facility and make substantial capital
expenditures, which could disrupt our business and adversely impact our results of operations, cash
flows and financial condition.
  Loss of key personnel could adversely affect our business.
  Due to the fixed cost nature of our business, fluctuations in our revenue could adversely affect
its operating income.
  Demand for certain products and services, including animal vaccinations, may decline, which could
have a material adverse effect on our financial condition, results of operations, cash flows and
prospects.
   11




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Further economic downturn could materially adversely affect our business and recessionary economic
conditions may reduce demand for our services.
  Goodwill and other intangible assets comprise a significant portion of our total assets. We must
test our intangible assets for impairment at least annually, which may result in a material,
non-cash write down of goodwill and could have a material adverse impact on our results of
operations and stockholders equity.
 .
  Shortages of skilled veterinarians may cause us to experience hiring difficulties which could
result in a disruption of our business.
  Currently existing or newly enacted laws and regulations could restrict our business or result in
significant costs and expenses. Any failure to comply with these laws and regulations could have a
material adverse effect on our financial condition, results of operations, cash flows and
prospects.
  12




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The possible widespread implementation of pet insurance could adversely affect our business,
operating results and prospects.
  We face increasing competition, including from better-established companies that have significantly
greater resources, which places pressure on our pricing and which could prevent us from increasing
revenue or maintaining profitability.
  
    
    greater name recognition and larger marketing budgets and resources;
    
    established marketing relationships and access to larger customer bases; and
    
    substantially greater financial, technical and other resources.
  The costs of defending litigation and potential claims could be significant and adversely affect
our results and financial condition.
  We are subject to local market risks as a result of the geographic concentration of our operations.
  13




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Risks Related to our Common Stock
 We may not be able to maintain compliance with NASDAQs continued listing requirements.
      14




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If our securities are delisted from NASDAQ, trading of our securities may be restricted by the
SECs penny stock regulations and FINRAs sales practice requirements, which may limit a holders
ability to buy and sell our securities.
   The market prices of our securities are likely to be highly volatile and subject to wide
fluctuations.
   
    
    announcements of new products or services by our competitors;
    
    demand for our services;
    
    changes in the pricing policies of our competitors; and
    
    changes in government regulations.
 The amount of stock held by executive officers, directors and other affiliates may limit your
ability to influence the outcome of director elections and other matters requiring stockholder
approval.
  15




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If our existing stockholders exercise their registration rights, it may have an adverse effect on
the market price of our common stock.
  The exercise of our outstanding warrants and/or conversion of our outstanding convertible
securities will result in a dilution of our current stockholders voting power and an increase in
the number of shares eligible for future resale in the public market which may negatively impact
the market price of our stock.
     Future financings may dilute your ownership and investment or result in the issuance of additional
debt.
  16




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties.
  
 Item 3. Legal Proceedings.
  
 Item 4.
Submission of Matters to a Vote of Security Holders.
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
   Common Stock
    
    Warrants
    
    Units2009
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    LowFourth Quarter
    
    $
    0.64
    
    
    $
    0.19
    
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.75
    
    
    $
    0.25Third Quarter
    
    $
    0.70
    
    
    $
    0.49
    
    
    $
    0.04
    
    
    $
    0.00
    
    
    $
    0.66
    
    
    $
    0.24Second Quarter
    
    $
    1.10
    
    
    $
    0.17
    
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.96
    
    
    $
    0.01First Quarter
    
    $
    0.53
    
    
    $
    0.10
    
    
    $
    0.08
    
    
    $
    0.00
    
    
    $
    0.80
    
    
    $
    0.11
 17




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Common Stock
    
    Warrants
    
    Units2008
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    LowFourth Quarter
    
    $
    3.01
    
    
    $
    0.08
    
    
    $
    0.25
    
    
    $
    0.01
    
    
    $
    4.00
    
    
    $
    0.16Third Quarter
    
    $
    4.23
    
    
    $
    1.00
    
    
    $
    0.54
    
    
    $
    0.16
    
    
    $
    4.40
    
    
    $
    2.00Second Quarter
    
    $
    4.78
    
    
    $
    3.30
    
    
    $
    0.65
    
    
    $
    0.36
    
    
    $
    4.85
    
    
    $
    4.30First Quarter
    
    $
    7.85
    
    
    $
    3.74
    
    
    $
    1.12
    
    
    $
    0.40
    
    
    $
    8.20
    
    
    $
    4.05
  Stockholders
  Dividends
  EQUITY COMPENSATION PLANS
  (C)Number of SecuritiesRemaining Available for(A)

    
    (B)

    
    Future Issuance UnderNumber of Securities
    
    Weighted-Average
    
    Equityto be Issued Upon
    
    Exercise Price of
    
    Compensation PlansExercise of
    
    Outstanding
    
    (Excluding SecuritiesOutstanding Options,
    
    Options, Warrants
    
    ReflectedWarrants and Rights
    
    and Rights
    
    in Column A)Plan CategoryEquity Compensation
Plans Approved by Security Holders
    
    
    2,580,377
    
    
    $
    1.53
    
    
    
    2,619,623Equity Compensation
Plans Not Approved by Security Holders
    
    
    624,866
    
    
    $
    4.20
    
    
    
    Total
    
    
    3,205,243
    
    
    $
    2.06
    
    
    
    2,619,623
 Equity Compensation Plan not approved by Security Holders
 18




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##### Table of Contents



Item 6. Selected Financial Data.
  
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
 General
    Business Strategy
  o
    
    recruit and retain top veterinary professionals;o
    
    provide high quality veterinary care to our customers;o
    
    pursue acquisitions of additional veterinary hospitals, with a focus
on continuing to develop hub and spoke networks that will improve
customer service;o
    
    increase veterinary hospital visits through advertising, market
positioning, consumer education, wellness programs and branding;
 19




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o
    
    increase veterinary hospital margins through same-store revenue growth
and cost savings realized through consolidated purchasing arrangements
for high volume items such as food and medical supplies and generally
lower costs through economies of scale;o
    
    increase veterinary hospital productivity through professional
development and training, integration of performance data collection
systems, application of productivity standards to previously
under-managed operations and removal of administrative burdens from
veterinary professionals; ando
    
    capture valuation arbitrage differentials between individual practice
value and larger consolidated enterprise value.
 Seasonality
  Overview of Our Financial Results
 (Results discussed relate to continuing operations unless stated otherwise)
     20




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Results of Our Operations
 Fiscal year 2009 compared to fiscal year 2008
 (in millions, except percentages)
 Revenue
 For The Years EndedDecember 31,2009
    
    2008
    

%ChangeRevenue
    
    $
    63.9
    
    
    $
    68.3
    
    
    
    (6.4
    %)
  21




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Direct Costs
 Continuing Operations:
 For The Years EndedDecember 31,2009
    
    2008
    

%ChangeTotal direct costs
    
    $
    58.1
    
    
    $
    64.5
    
    
    
    (9.9
    %)Gross Margin as a percentage of total net revenue from continuing operations
    
    
    9.1
    %
    
    
    5.5
    %
  Selling, General and Administrative (SG&A)
 For The Years EndedDecember 31,2009
    
    2008
    

%ChangeSelling, general and administrative
    
    $
    31.1
    
    
    $
    19.0
    
    
    
    63.4
    %As a percentage of total net revenue from continuing operations
    
    
    48.6
    %
    
    
    27.9
    %
   22




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Interest income
 For The Years EndedDecember 31,2009
    
    2008
    

%ChangeInterest income
    
    $
    0.0
    
    
    $
    0.3
    
    
    
    (96.5
    %)As a percentage of total net revenues from continuing operations
    
    
    0.0
    %
    
    
    0.5
    %
  Interest Expense
 For The Years EndedDecember 31,2009
    
    2008
    
    %ChangeInterest expense
    
    $
    5.8
    
    
    $
    4.6
    
    
    
    27.1
    %As a percentage of total net revenues from continuing operations
    
    
    9.0
    %
    
    
    6.7
    %
  23




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Fiscal year 2008 compared to fiscal year 2007
 (in millions, except percentages)
 Revenue
 Continuing Operations:
 For The Years EndedDecember 31,2008
    
    2007
    
    %ChangeRevenue
    
    $
    68.3
    
    
    $
    60.3
    
    
    
    13.3
    %
  Comparative Analysis2008
    
    
    2007
    
    

%ChangeSame-store revenue (1)
    
    $
    37.5
    
    
    $
    37.5
    
    
    
    (0.2)
    %Net acquired revenue (2)
    
    
    30.8
    
    
    
    22.8
    
    
    
    35.5
    %Total
    
    $
    68.3
    
    
    $
    60.3
    
    
    
    13.3
    %
 
 (1)
    
    Same-store revenue was calculated using animal hospital operating results for the animal
hospitals that we owned as of January 1, 2007.(2)
    
    Net acquired revenue represents the revenue from those five animal hospitals acquired after
January 1, 2007. Fluctuations in net acquired revenue occurred due to the volume, size and
timing of acquisitions.  Discontinued Operations:
 For The Years EndedDecember 31,2008
    
    2007
    

%ChangeRevenue
    
    $
    1.3
    
    
    $
    2.2
    
    
    
    (42.0
    )%
  24




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Direct Costs
 Continuing Operations:
 For The Years EndedDecember 31,2008
    
    2007
    
    %ChangeTotal direct costs
    
    $
    64.5
    
    
    $
    56.5
    
    
    
    14.3
    %Gross Margin as a percentage of
total net revenue from continuing
operations
    
    
    5.5
    %
    
    
    6.4
    %
   Discontinued Operations:
 For The Years EndedDecember 31,2008
    
    2007
    
    %ChangeTotal direct costs
    
    $
    1.9
    
    
    $
    2.6
    
    
    
    (29.2)
    %Gross Margin as a percentage of
net revenue from discontinued
operations
    
    
    (43.4
    )%
    
    
    (17.7)
    %
  Selling, General and Administrative
 For The Years EndedDecember 31,2008
    
    2007
    
    %ChangeSelling, general and administrative
    
    $
    19.0
    
    
    $
    12.7
    
    
    
    50.1
    %As a percentage of total net revenue from continuing operations
    
    
    27.9
    %
    
    
    21.0
    %
  25




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Interest income
 For The Years EndedDecember 31,2008
    
    2007
    
    %ChangeInterest income
    
    $
    0.3
    
    
    $
    0.1
    
    
    
    192
    %As a percentage of total net revenues from continuing operations
    
    
    0.5
    %
    
    
    0.2
    %
  Interest Expense
 For The Years EndedDecember 31,2008
    
    2007
    

%ChangeInterest expense
    
    $
    4.6
    
    
    $
    3.8
    
    
    
    18.4
    %As a percentage of total net revenues from continuing operations
    
    
    6.7
    %
    
    
    6.4
    %
  Restatement of three and nine months ended September 30, 2009
 For The Three Months Ended
    
    For The Twelve Months EndedDecember 31,
    
    December 31,%
    
    
    
    
    
    
    
    
    
    %2009
    
    2008
    
    Change
    
    2009
    
    2008
    
    ChangeGain on Change in Fair
Value of Warrant
Liabilities
    
    $
    4.2
    
    
    $
    
    
    
    
    
    %
    
    $
    0.8
    
    
    $
    
    
    
    
    
    %As a percentage of total net revenue
    
    
    28.4
    %
    
    
    
    %
    
    
    
    
    
    
    1.2
    %
    
    
    
    %
    26




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##### Table of Contents



As Reported
    
    As RestatedSeptember 30,
    
    September 30,2009
    
    2009(unaudited)
    
    (unaudited)Current assets
    
    
    5,973
    
    
    
    5,973Long-term assets
    
    
    62,504
    
    
    
    62,504Total assets
    
    
    68,477
    
    
    
    68,477Current liabilities
    
    
    9,975
    
    
    
    9,975Long-term liabilities
    
    
    12,637
    
    
    
    19,987Total liabilities
    
    
    22,612
    
    
    
    29,962Stockholders equity
    
    
    45,865
    
    
    
    38,515Total liabilities and stockholders equity
    
    
    68,477
    
    
    
    68,477
 As Reported
    
    As RestatedFor the three
    
    For the nine
    
    For the three
    
    For the ninemonths ended
    
    months ended
    
    months ended
    
    months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2009
    
    2009
    
    2009
    
    2009(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)Revenue
    
    
    15,734
    
    
    
    49,158
    
    
    
    15,734
    
    
    
    49,158Direct Costs
    
    
    14,488
    
    
    
    44,375
    
    
    
    14,488
    
    
    
    44,375Hospital Contribution
    
    
    1,246
    
    
    
    4,783
    
    
    
    1,246
    
    
    
    4,783Selling, general, and administrative expenses
    
    
    1,644
    
    
    
    6,204
    
    
    
    1,644
    
    
    
    6,204Loss from operations
    
    
    (398
    )
    
    
    (1,421
    )
    
    
    (398
    )
    
    
    (1,421
    )Gain/(Loss) on change in fair value of warrant liabilities
    
    
    144
    
    
    
    (3,449
    )
    
    
    (306
    )
    
    
    (3,899
    )Interest expense, net
    
    
    (1,532
    )
    
    
    (4,315
    )
    
    
    (1,532
    )
    
    
    (4,315
    )Loss before provision for income taxes
    
    
    (1,786
    )
    
    
    (9,185
    )
    
    
    (2,236
    )
    
    
    (9,635
    )Tax provision
    
    
    23
    
    
    
    28
    
    
    
    23
    
    
    
    28Net Loss
    
    
    (1,809
    )
    
    
    (9,213
    )
    
    
    (2,259
    )
    
    
    (9,663
    )
 Liquidity and Financial Condition
 (Results discussed relate to continuing operations unless stated otherwise)
 27




---



##### Table of Contents



Cash Flows from Operating Activities
      Cash Flows from Investing Activities
     28




---



##### Table of Contents



Cash Flows from Financing Activities
     Cash Flows from Discontinued Operations
  Off-Balance Sheet Arrangements
  Debt Covenants
  Other Metrics
   29




---



##### Table of Contents



Year Ended December 31,2009
    
    
    2008
    
    
    2007Net loss from continuing operations
    
    $
    (30,341
    )
    
    $
    (19,448
    )
    
    $
    (12,365
    )Depreciation
    
    
    1,863
    
    
    
    1,318
    
    
    
    932Amortization
    
    
    1,041
    
    
    
    1,138
    
    
    
    801Gain on change in fair value of warrant liabilities
    
    
    (750
    )
    
    
    
    
    
    
    Interest expense, net
    
    
    5,773
    
    
    
    4,207
    
    
    
    3,725Provision/(benefit) for income taxes
    
    
    36
    
    
    
    (21
    )
    
    
    44Adjusted EBITDA
    
    $
    (22,378
    )
    
    $
    (12,806
    )
    
    $
    (6,863
    )
   Year Ended December 31,2009
    
    
    2008
    
    
    2007Hospital contribution
    
    $
    5,820
    
    
    $
    3,774
    
    
    $
    3,835Depreciation at hospitals
    
    
    1,038
    
    
    
    1,149
    
    
    
    943Amortization at hospitals
    
    
    1,041
    
    
    
    1,135
    
    
    
    799Hospital EBITDA
    
    $
    7,899
    
    
    $
    6,058
    
    
    $
    5,577
  Critical Accounting Policies and Estimates
  w valuation of goodwill and other intangible assets;w accounting for stock options; andw accounting for income taxes.
 Valuation of Goodwill and other Intangible Assets
 Goodwill
  30




---



##### Table of Contents



Other Intangible Assets
       Impairment of Goodwill and Other Intangible Assets
    31




---



##### Table of Contents



Accounting for Stock Options
    Accounting for Income Taxes
  Recent Accounting Pronouncements
 32




---



##### Table of Contents



Adopted
      33




---



##### Table of Contents



34




---



##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 8. Financial Statements and Supplementary Data.
   Report of Independent Registered Public Accounting Firm.
    
    
    36Consolidated Balance Sheets as of December 31, 2009 and 2008.
    
    
    37Consolidated Statements of Operations for the years ended December 31, 2009, 2008, and 2007.
    
    
    38Consolidated Statements of Stockholders Equity for the years ended December 31, 2009, 2008, and 2007.
    
    
    39Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, and 2007.
    
    
    41Notes to Consolidated Financial Statements.
    
    
    44
 35




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
       
 36




---



##### Table of Contents



PET DRx CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except par value and number of shares)
 December 31,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,650
    
    
    $
    1,723Trade accounts receivable, net
    
    
    385
    
    
    
    369Inventory
    
    
    901
    
    
    
    1,154Prepaid expenses and other
    
    
    1,155
    
    
    
    1,719Assets held for sale
    
    
    
    
    
    
    900Due from related parties
    
    
    
    
    
    
    32Assets of discontinued operations
    
    
    
    
    
    
    1Total current assets
    
    
    5,091
    
    
    
    5,898Property and equipment, net
    
    
    6,306
    
    
    
    7,422Other assets:Goodwill
    
    
    26,525
    
    
    
    49,373Other intangible assets, net
    
    
    5,663
    
    
    
    6,704Restricted cash
    
    
    425
    
    
    
    500Other
    
    
    290
    
    
    
    447Total assets
    
    $
    44,300
    
    
    $
    70,344LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term obligations, net of debt discount
    
    $
    2,853
    
    
    $
    3,718Accounts payable
    
    
    1,583
    
    
    
    2,394Accrued payroll and other expenses
    
    
    4,740
    
    
    
    6,551Due to a related party
    
    
    
    
    
    
    96Obligations under capital leases, current portion
    
    
    320
    
    
    
    312Deferred rent, current portion
    
    
    9
    
    
    
    Liabilities of discontinued operations
    
    
    
    
    
    
    55Total current liabilities
    
    
    9,505
    
    
    
    13,126Long-term liabilities:Convertible
debt, less current portion, net of debt discount
    
    
    11,257
    
    
    
    4,949Term notes, less current portion
    
    
    1,726
    
    
    
    3,687Warrant liabilities
    
    
    2,914
    
    
    
    Obligations under capital leases, less current portion
    
    
    369
    
    
    
    361Deferred rent, less current portion
    
    
    549
    
    
    
    355Other
    
    
    
    
    
    
    83Total long term liabilities
    
    
    16,815
    
    
    
    9,435Total liabilities
    
    
    26,320
    
    
    
    22,561Stockholders equity:Common stock, par value $0.0001, 90,000,000 shares
authorized, 23,714,460 and 23,660,460 shares outstanding as
of December 31, 2009 and 2008, respectively, net of 1,361,574
treasury shares at December 31, 2009 and 2008, respectively
    
    
    2
    
    
    
    2Additional paid-in-capital
    
    
    86,345
    
    
    
    87,686Accumulated deficit
    
    
    (68,367
    )
    
    
    (39,905
    )Total stockholders equity
    
    
    17,980
    
    
    
    47,783Total liabilities and stockholders equity
    
    $
    44,300
    
    
    $
    70,344
 See Notes to Consolidated Financial Statements
 37




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##### Table of Contents



PET DRx CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 Year ended December 31,2009
    
    
    2008
    
    
    2007Revenue
    
    $
    63,947
    
    
    $
    68,295
    
    
    $
    60,287Direct costs
    
    
    58,127
    
    
    
    64,521
    
    
    
    56,452Hospital contribution
    
    
    5,820
    
    
    
    3,774
    
    
    
    3,835Selling, general and administrative expense before impairment charges
    
    
    8,537
    
    
    
    13,965
    
    
    
    12,680Impairment of goodwill and intangibles
    
    
    22,506
    
    
    
    4,580
    
    
    
    Impairment of Assets Held for Sale
    
    
    59
    
    
    
    491
    
    
    
    Selling, general and administrative expenses
    
    
    31,102
    
    
    
    19,036
    
    
    
    12,680Loss from operations
    
    
    (25,282
    )
    
    
    (15,262
    )
    
    
    (8,845
    )Other income (expense):Gain on change in fair value of warrant liabilities
    
    
    750
    
    
    
    
    
    
    
    Interest income
    
    
    12
    
    
    
    344
    
    
    
    118Interest expense
    
    
    (5,785
    )
    
    
    (4,551
    )
    
    
    (3,843
    )Gain on sale of building
    
    
    
    
    
    
    
    
    
    
    249Loss before provision (benefit) for income taxes
    
    
    (30,305
    )
    
    
    (19,469
    )
    
    
    (12,321
    )Provision (benefit) for income taxes
    
    
    36
    
    
    
    (21
    )
    
    
    44Loss from continuing operations
    
    
    (30,341
    )
    
    
    (19,448
    )
    
    
    (12,365
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (565
    )
    
    
    (4,066
    )Loss on disposition of discontinued operations, net of tax
    
    
    
    
    
    
    (8
    )
    
    
    Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (573
    )
    
    
    (4,066
    )Net loss
    
    $
    (30,341
    )
    
    $
    (20,021
    )
    
    $
    (16,431
    )Basic and diluted loss per common shareLoss from continuing operations
    
    $
    (1.28
    )
    
    $
    (0.83
    )
    
    $
    (3.00
    )Loss from discontinued operations
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.98
    )Net loss per share
    
    $
    (1.28
    )
    
    $
    (0.85
    )
    
    $
    (3.98
    )Shares used for computing basic and diluted loss per share
    
    
    23,675
    
    
    
    23,433
    
    
    
    4,124
 See Notes to Consolidated Financial Statements
 38




---



##### Table of Contents



PET DRx CORPORATION AND SUBSIDIARIES
 
 STATEMENT OF STOCKHOLDERS EQUITY
 (In thousands except number of shares)
 Preferred
    
    
    PreferredStock A
    
    
    Stock B
    
    
    Common StockAdditionalPaid-in-
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    Deficit
    
    
    TotalBalance as of December 31, 2006
    
    
    7,652,175
    
    
    $
    1
    
    
    
    
    
    
    $
    
    
    
    
    3,560,864
    
    
    $
    
    
    
    $
    24,747
    
    
    $
    (3,453
    )
    
    $
    21,295Sale of Preferred B for cash, net
    
    
    
    
    
    
    
    
    
    
    25,391
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,644
    
    
    
    
    
    
    
    13,644Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,819
    )
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    (25
    )Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    1,270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued upon debt conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    691,587
    
    
    
    1
    
    
    
    1,495
    
    
    
    
    
    
    
    1,496Warrants issued as debt discount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,371
    
    
    
    
    
    
    
    1,371Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170
    
    
    
    
    
    
    
    170Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,431
    )
    
    
    (16,431
    )Balance as of December 31, 2007
    
    
    7,652,175
    
    
    $
    1
    
    
    
    26,661
    
    
    $
    
    
    
    
    4,247,632
    
    
    $
    1
    
    
    $
    41,402
    
    
    $
    (19,884
    )
    
    $
    21,520Net proceeds from IPO received as a result of merger with PVGI
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,355
    
    
    
    
    
    
    
    36,355Conversion of Preferred A and B stock to common stock
    
    
    (7,652,175
    )
    
    $
    (1
    )
    
    
    (26,661
    )
    
    
    
    
    
    
    10,318,275
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Pet DRx shares assumed in Merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,750,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued upon debt conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,327,024
    
    
    
    
    
    
    
    8,305
    
    
    
    
    
    
    
    8,305Inducement shares issued in Merger with PVGI
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321,297
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,624
    
    
    
    
    
    
    
    1,624Shares retained in Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,361,574
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,021
    )
    
    
    (20,021
    )Balance as of December 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,660,460
    
    
    $
    2
    
    
    $
    87,686
    
    
    $
    (39,905
    )
    
    $
    47,783Issuance of stock as payment of earn-out note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    16
 39




---



##### Table of Contents



Preferred
    
    
    PreferredStock A
    
    
    Stock B
    
    
    Common StockAdditionalPaid-in-
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    Deficit
    
    
    TotalReclassification of warrants from equity to liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,543
    )
    
    
    
    
    
    
    (5,543
    )Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,646
    
    
    
    
    
    
    
    3,646Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,000
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Cumulative adjustment to beginning retained earnings for
warrant liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,879
    
    
    
    1,879Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535
    
    
    
    
    
    
    
    535Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,341
    )
    
    
    (30,341
    )Balance as of December 31, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,714,460
    
    
    $
    2
    
    
    $
    86,345
    
    
    
    ($68,367
    )
    
    $
    17,980
 See Notes to Consolidated Financial Statements
 40




---



##### Table of Contents



PET DRx CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
 Year ended December 31,2009
    
    
    2008
    
    
    2007Cash flows used in operating activities:Net loss
    
    $
    (30,341
    )
    
    $
    (20,021
    )
    
    $
    (16,431
    )Loss from discontinued operations, net of tax (includes impairment of
goodwill and intangibles of $3,670 in 2007)
    
    
    
    
    
    
    573
    
    
    
    4,066Loss from continuing operations
    
    
    (30,341
    )
    
    
    (19,448
    )
    
    
    (12,365
    )Adjustments to reconcile net loss from continuing operations to net
cash used in operating activities:Depreciation and amortization
    
    
    2,904
    
    
    
    2,456
    
    
    
    1,733Amortization of debt discount
    
    
    4,050
    
    
    
    1,903
    
    
    
    627Gain on change in fair value of warrant liabilities
    
    
    (750
    )
    
    
    
    
    
    
    Impairment of fixed assets
    
    
    
    
    
    
    219
    
    
    
    Paid-in-kind interest
    
    
    881
    
    
    
    
    
    
    
    Impairment of Assets Held for Sale
    
    
    61
    
    
    
    491
    
    
    
    Impairment of goodwill and intangibles
    
    
    22,506
    
    
    
    4,580
    
    
    
    Amortization of debt amendment costs
    
    
    
    
    
    
    182
    
    
    
    Share-based compensation
    
    
    535
    
    
    
    1,624
    
    
    
    415Gain on sale of building
    
    
    
    
    
    
    
    
    
    
    (249
    )Deferred rent
    
    
    203
    
    
    
    212
    
    
    
    (113
    )Other
    
    
    31
    
    
    
    85
    
    
    
    (602
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (16
    )
    
    
    (203
    )
    
    
    268Inventory
    
    
    253
    
    
    
    212
    
    
    
    397Prepaid expenses and other
    
    
    254
    
    
    
    (369
    )
    
    
    (786
    )Accounts payable
    
    
    (866
    )
    
    
    (4,734
    )
    
    
    5,176Accrued payroll and other expenses
    
    
    (1,905
    )
    
    
    1,231
    
    
    
    3,147Income taxes
    
    
    
    
    
    
    (168
    )
    
    
    (328
    )Other
    
    
    3
    
    
    
    (18
    )
    
    
    123Net cash used in continuing operations
    
    
    (2,197
    )
    
    
    (11,745
    )
    
    
    (2,557
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    26
    
    
    
    55Net cash used in operating activities
    
    
    (2,197
    )
    
    
    (11,719
    )
    
    
    (2,502
    )Cash flows provided by (used in) investing activities:Property and equipment additions
    
    
    (416
    )
    
    
    (2,128
    )
    
    
    (5,004
    )Business acquisitions, net of cash received (including $2,450 for
the acquisition of South Bay in 2007)
    
    
    
    
    
    
    (3,003
    )
    
    
    (16,832
    )Proceeds from sale of buildings
    
    
    841
    
    
    
    
    
    
    
    1,244Payments made related to prior year acquisition
    
    
    
    
    
    
    (356
    )
    
    
    (3,940
    )Net cash provided by (used in) continuing operations
    
    
    425
    
    
    
    (5,487
    )
    
    
    (24,532
    )
 41




---



##### Table of Contents



Year ended December 31,2009
    
    
    2008
    
    
    2007Net cash used in discontinued operations
    
    
    
    
    
    
    (26
    )
    
    
    (32
    )Net cash provided by (used in) investing activities
    
    
    425
    
    
    
    (5,513
    )
    
    
    (24,564
    )Cash flow provided by financing activities:Proceeds from term loan with preferred stock warrants
    
    
    
    
    
    
    
    
    
    
    14,935Proceeds from Series B preferred stock, net of expenses paid in
cash
    
    
    
    
    
    
    
    
    
    
    13,641Repurchases of preferred stock and common stock warrants
    
    
    
    
    
    
    
    
    
    
    (25
    )Net proceeds from IPO received as a result of merger with PVGI
    
    
    
    
    
    
    36,355
    
    
    
    Proceeds from issuance of Senior Notes
    
    
    6,500
    
    
    
    
    
    
    
    Deferral of legal settlement to term note
    
    
    21
    
    
    
    
    
    
    
    Deferral of debt waiver fees
    
    
    (100
    )
    
    
    (182
    )
    
    
    Capitalized debt issuance costs
    
    
    (307
    )
    
    
    
    
    
    
    Deferred financing costs
    
    
    
    
    
    
    (132
    )
    
    
    Proceeds from stock option exercise
    
    
    5
    
    
    
    
    
    
    
    Payments on notes payable
    
    
    (3,091
    )
    
    
    (18,151
    )
    
    
    (3,063
    )Payments on capital lease obligations
    
    
    (329
    )
    
    
    (503
    )
    
    
    (374
    )Payments made as collateral on accounts
    
    
    
    
    
    
    (425
    )
    
    
    Net cash provided by continuing operations
    
    
    2,699
    
    
    
    16,962
    
    
    
    25,114Net cash used in discontinued operations
    
    
    
    
    
    
    (12
    )
    
    
    (11
    )Net cash provided by financing activities
    
    
    2,699
    
    
    
    16,950
    
    
    
    25,103Increase (decrease) in cash and cash equivalents
    
    
    927
    
    
    
    (282
    )
    
    
    (1,963
    )Consolidated cash and cash equivalents at beginning of period
    
    
    1,723
    
    
    
    2,005
    
    
    
    3,968Consolidated cash and cash equivalents at end of period
    
    $
    2,650
    
    
    $
    1,723
    
    
    $
    2,005Cash and cash equivalents of continuing operations
    
    $
    2,650
    
    
    $
    1,723
    
    
    $
    1,993Cash and cash equivalents of discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    12Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    20
    
    
    $
    18
    
    
    $
    97Interest
    
    $
    689
    
    
    $
    3,533
    
    
    $
    2,510Schedule of non-cash investing and financing activities:Detail of acquisitions:Fair value of assets acquired
    
    $
    
    
    
    $
    5,728
    
    
    $
    30,659Cash paid for acquisitions and related direct costs
    
    
    
    
    
    
    (3,003
    )
    
    
    (14,382
    )Cash paid for acquisition of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (2,450
    )Obligations to sellers of acquired hospitals, notes payable and
assumed liabilities
    
    $
    
    
    
    $
    2,725
    
    
    $
    13,827Building acquired:
 42




---



##### Table of Contents



Year ended December 31,2009
    
    
    2008
    
    
    2007Purchase price
    
    $
    
    
    
    $
    
    
    
    $
    930Cash paid
    
    
    
    
    
    
    
    
    
    
    (430
    )Mortgage held by seller
    
    $
    
    
    
    $
    
    
    
    $
    500Deferred costs and accrued liabilities associated with merger of PVGI
recorded to additional paid-in-capital on January 4, 2008 (Date of
Merger)
    
    $
    
    
    
    $
    700
    
    
    $
    Retirement of debt to offset related party receivable
    
    $
    141
    
    
    $
    16
    
    
    $
    Acquisition of equipment from capital lease
    
    $
    341
    
    
    $
    
    
    
    $
    Conversion of Series A and Series B preferred stock to common stock
    
    $
    
    
    
    $
    1
    
    
    $
    Common stock issued as payment of earn-out note
    
    $
    16
    
    
    $
    
    
    
    $
    Common stock issued upon conversion of debt
    
    $
    
    
    
    $
    8,305
    
    
    $
    1,495
 See Notes to Consolidated Financial Statements
 43




---



##### Table of Contents



PET DRx CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
 1. The Company
    2. Summary of Significant Accounting Policies
 a. Basis of Presentation
   b. Cash and Cash Equivalents
  c. Revenue Recognition
  o
 o
 o
 o
 44




---



##### Table of Contents



d. Inventory
  e. Property and Equipment
   Buildings
    
    40 yearsLeasehold improvements
    
    Lesser of lease term or asset lifeFurniture and equipment
    
    5 to 7 yearsComputer equipment
    
    3 to 7 yearsEquipment held under capital leases
    
    Lesser of lease term or 5 to 10 years
 f. Income Taxes
   g. Deferred Financing Costs
  h. Convertible Debt
  45




---



##### Table of Contents



i. Derivative Financial Instruments
  j. Business Segments
  k. Share-Based Compensation
    3. Use of estimates
  46




---



##### Table of Contents



Accounts Receivable Allowances
 Impairment of Long-Lived Assets and Intangibles Subject to Amortization
  Goodwill and Indefinite-Lived Intangible Assets
    47




---



##### Table of Contents



Accrued Expenses
 4. New Accounting Pronouncements
 Adopted
      48




---



##### Table of Contents



49




---



##### Table of Contents



5. Merger with Pet DRx Veterinary Group, Inc.
    
 
 
 
 
 
 
 
 50




---



##### Table of Contents




 6. Goodwill and Other Intangible Assets
  Balance as of December 31, 2008
    
    $
    49,373Impairment to goodwill
    
    
    (22,506
    )Adjustments to Goodwill
    
    
    (342
    )Balance as of December 31, 2009
    
    $
    26,525
  As of December 31, 2009
    
    
    As of December 31, 2008Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCovenants not-to-compete
    
    $
    684
    
    
    $
    (478
    )
    
    $
    206
    
    
    $
    713
    
    
    $
    (300
    )
    
    $
    413Non-contractual
customer relationships
    
    
    8,118
    
    
    
    (2,661
    )
    
    
    5,457
    
    
    
    8,886
    
    
    
    (2,009
    )
    
    
    6,877Impairment of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (797
    )
    
    
    211
    
    
    
    (586
    )Total
    
    $
    8,802
    
    
    $
    (3,139
    )
    
    $
    5,663
    
    
    $
    8,802
    
    
    $
    (2,098
    )
    
    $
    6,704
   2010
    
    $
    9852011
    
    
    8922012
    
    
    7892013
    
    
    7162014
    
    
    657Thereafter
    
    
    1,624Total
    
    $
    5,663
 7. Property and Equipment
  2009
    
    
    2008Buildings
    
    $
    2,787
    
    
    $
    2,787Leasehold improvements
    
    
    1,047
    
    
    
    935Equipment
    
    
    3,872
    
    
    
    3,318
 51




---



##### Table of Contents



2009
    
    
    2008Furniture and equipment
    
    
    606
    
    
    
    606Computer equipment & software
    
    
    2,357
    
    
    
    2,307Construction-in-progress
    
    
    37
    
    
    
    62Total property and equipment
    
    
    10,706
    
    
    
    10,015Less-accumulated depreciation and amortization
    
    
    (4,400
    )
    
    
    (2,593
    )Total property and equipment, net
    
    $
    6,306
    
    
    $
    7,422
   8. Assets Held for Sale
   9. Employee Benefit Plans
   10. Long-Term Obligations
  2009
    
    2008Convertible notes
    
    Convertible notes
payable, maturing from
2010 to 2014, secured by
assets and stock of
certain subsidiaries,
various interest rates
ranging from 7.0% to
12.5% (net of debt
discounts of $3.5 million
and $18 thousand at
December 31, 2009 and
2008, respectively.)
    
    $
    11,464
    
    
    $
    5,049Promissory notes
    
    Notes payable,
maturing from 2010 to
2013, secured by assets
and stock of certain
subsidiaries, various
interest rates
ranging from 6.5% to 12.0%
    
    
    4,100
    
    
    
    6,686
 52




---



##### Table of Contents



2009
    
    2008Earn-out notes
    
    Notes payable,
various maturities
through 2010, interest
rates ranging from none
to 8.0%
    
    
    272
    
    
    
    619Total debt obligations
    
    
    15,836
    
    
    
    12,354Less-current portion (net
of debt discount of $1.1
million)
    
    
    (2,853
    )
    
    
    (3,718
    )Long-term portion
    
    $
    12,983
    
    
    $
    8,636
  2010
    
    $
    3,9802011
    
    
    4,1592012
    
    
    5862013
    
    
    19,2822014
    
    
    585Total
    
    $
    28,592
  Convertible Notes
    53




---



##### Table of Contents



12% Senior Secured Convertible Notes
       54




---



##### Table of Contents



Promissory Notes
   Amendment to Huntington Promissory Note
    Fifth Street loans
  55




---



##### Table of Contents



Amendments to Credit Agreements for $12.0 million and $4.0 million term loans with Fifth Street
  Retirement of term loans with Fifth Street
   Retirement of partial term loan to satisfy related party receivable
   Earn-out Notes
  Compensating Balance Arrangements
  11. Stockholders Equity
 (All share and warrant amounts stated are after conversion to Pet DRx stock using the Merger
Conversion Ratio)
 Preferred Stock
  56




---



##### Table of Contents



Preferred Stock Warrants
      Common Stock
      57




---



##### Table of Contents



Common Stock Warrants
    Expected volatility of peer group (1)
    
    36.2% - 66.0%Weighted- average volatility (1)
    
    44.5%Expected dividends
    
    0.0%Expected term (2)
    
    4.0 yearsRisk-free rate (3)
    
    1.4% - 2.4%
  Expected volatility of peer group (1)
    
    36.2% - 66.0%Weighted- average volatility (1)
    
    46.4%Expected dividends
    
    0.0%Expected term (2)
    
    7.0 yearsRisk-free rate (3)
    
    2.1%
  Expected volatility of peer group (1)
    
    36.2% - 66.0%Weighted- average volatility (1)
    
    44.5%Expected dividends
    
    0.0%Expected term (2)
    
    7.0 yearsRisk-free rate (3)
    
    2.3%
 
 (1)
    
    We estimated the volatility of our common stock on the valuation date based on historical
volatility of the common stock of a peer group of public companies as the Company has limited
stock price history and it would not be practical to use internal volatility.(2)
    
    The expected term represents the period of time that we expect the warrants to be
outstanding. 58




---



##### Table of Contents



(3)
    
    The risk-free interest rate is based on the implied yield in effect on U.S. Treasury
zero-coupon issues with equivalent remaining terms.  Number ofCommon
    
    
    WeightedStock
    
    
    AverageWarrants
    
    
    PriceOutstanding, December 31, 2006
    
    
    908,619
    
    
    $
    3.04Granted
    
    
    62,065
    
    
    
    6.16Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Outstanding, December 31, 2007
    
    
    970,684
    
    
    $
    3.24Pet DRx warrants assumed in Merger
    
    
    7,645,833
    
    
    
    6.00Granted
    
    
    
    
    
    
    Series B Preferred Stock warrants converted to
common stock warrants
    
    
    69,621
    
    
    
    0.00Exercised
    
    
    (57,825
    )
    
    
    0.00Cancelled
    
    
    
    
    
    
    Outstanding, December 31, 2008
    
    
    8,628,313
    
    
    $
    5.68Granted
    
    
    15,320,986
    
    
    
    0.10Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (78,614
    )
    
    
    2.72Outstanding and Exercisable, December 31, 2009
    
    
    23,870,685
    
    
    $
    2.11
  RemainingContractualWarrants
    
    
    LifeExercise Price
    
    Outstanding
    
    
    (years)$0.00
    
    
    11,796
    
    
    
    7.38$0.10
    
    
    15,320,986
    
    
    
    6.08$2.72
    
    
    89,845
    
    
    
    5.83$3.11
    
    
    740,160
    
    
    
    6.08$6.00
    
    
    7,645,833
    
    
    
    0.25$6.16
    
    
    62,065
    
    
    
    7.8323,870,685
  Dividends
  12. Calculation of Loss Per Common Share
   59




---



##### Table of Contents



For the year ended December 31,2009
    
    
    2008
    
    
    2007Convertible debenture notes, if converted to common stock
    
    
    2,632
    
    
    
    731
    
    
    
    1,736Warrants for common stock
    
    
    23,871
    
    
    
    8,628
    
    
    
    971Warrants for preferred stock, if exercised and converted
to common stock
    
    
    
    
    
    
    
    
    
    
    69Preferred shares, if converted to common stock
    
    
    
    
    
    
    
    
    
    
    7,679Options for common stock
    
    
    3,205
    
    
    
    3,053
    
    
    
    1,618Total
    
    
    29,708
    
    
    
    12,412
    
    
    
    12,073
   Twelve months ended December 31,2009
    
    
    2008
    
    
    2007Loss from continuing operations
    
    $
    (30,341
    )
    
    $
    (19,448
    )
    
    $
    (12,365
    )Loss from discontinued operations
    
    $
    
    
    
    $
    (573
    )
    
    $
    (4,066
    )Net loss
    
    $
    (30,341
    )
    
    $
    (20,021
    )
    
    $
    (16,431
    )Weighted average common shares outstanding:Basic
    
    
    23,675
    
    
    
    23,433
    
    
    
    4,124Effect of dilutive common stock equivalents
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    23,675
    
    
    
    23,433
    
    
    
    4,124Basic and diluted loss per common shareLoss from continuing operations
    
    $
    (1.28
    )
    
    $
    (0.83
    )
    
    $
    (3.00
    )Loss from discontinued operations
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.98
    )Basic and diluted net loss per common share
    
    $
    (1.28
    )
    
    $
    (0.85
    )
    
    $
    (3.98
    )
 13. Share-Based Compensation
    60




---



##### Table of Contents



For the year ended December 31,2009
    
    
    2008
    
    
    2007Direct costs
    
    $
    31
    
    
    $
    97
    
    
    $
    Selling, general and
administrative expenses
    
    
    504
    
    
    
    1,527
    
    
    
    170Totals
    
    $
    535
    
    
    $
    1,624
    
    
    $
    170
 Stock Option Activity
  Stock
    
    
    
    
    
    
    
    
    
    
    WeightedOptions
    
    
    
    
    
    
    Weighted
    
    
    AverageAvailable
    
    
    Stock
    
    
    Average
    
    
    Remaining
    
    
    Aggregatefor
    
    
    Options
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicGrant
    
    
    Outstanding
    
    
    Price
    
    
    Life (years)
    
    
    ValueBalance as of December
31, 2006
    
    
    (15
    )
    
    
    212
    
    
    $
    5.03
    
    
    
    8.21
    
    
    $
    26Authorized
    
    
    1,908
    
    
    
    
    
    
    
    Granted
    
    
    (1,505
    )
    
    
    1,505
    
    
    $
    5.47Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited or canceled
    
    
    99
    
    
    
    (99
    )
    
    $
    5.78Balance as of December
31, 2007
    
    
    487
    
    
    
    1,618
    
    
    $
    5.39
    
    
    
    9.35
    
    
    $
    3Authorized under the
Pet DRx 2007 Stock
Incentive Plan
    
    
    2,700
    
    
    
    
    
    
    
    Granted
    
    
    (1,765
    )
    
    
    1,765
    
    
    $
    4.65Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited or canceled
    
    
    330
    
    
    
    (330
    )
    
    $
    6.03Balance as of December
31, 2008
    
    
    1,752
    
    
    
    3,053
    
    
    $
    4.90
    
    
    
    8.72
    
    
    $
    Granted
    
    
    (1,735
    )
    
    
    1,735
    
    
    $
    0.28Exercised
    
    
    24
    
    
    
    (24
    )
    
    $
    0.20Forfeited or canceled
    
    
    1,559
    
    
    
    (1,559
    )
    
    $
    5.67Termination of 2004 Plan
    
    
    (1,210
    )
    
    
    
    
    
    
    Authorization of
additional shares for
2007 Plan
    
    
    2,500
    
    
    
    
    
    
    
    Balance as of December
31, 2009
    
    
    2,890
    
    
    
    3,205
    
    
    $
    2.06
    
    
    
    8.59
    
    
    $
    78Exercisable at December
31, 2009
    
    
    
    
    
    
    1,782
    
    
    $
    2.61
    
    
    
    8.41
    
    
    $
    44
    61




---



##### Table of Contents



Number
    
    
    Weighted
    
    
    
    
    
    
    NumberOutstanding
    
    
    Average
    
    
    Weighted
    
    
    Exercisable
    
    
    WeightedAs of
    
    
    Remaining
    
    
    Average
    
    
    As of
    
    
    AverageRange of

    
    
    December 31,
    
    
    Contractual
    
    
    Exercise
    
    
    December 31,
    
    
    ExerciseExercise Price

    
    
    2009
    
    
    Life (years)
    
    
    Price
    
    
    2009
    
    
    Price$
0.20
    
    $
    0.20
    
    
    
    976
    
    
    
    9.21
    
    
    $
    0.20
    
    
    
    549
    
    
    $
    0.20$
0.30
    
    $
    0.50
    
    
    
    722
    
    
    
    9.33
    
    
    $
    0.40
    
    
    
    180
    
    
    $
    0.50$
1.00
    
    $
    3.18
    
    
    
    674
    
    
    
    8.79
    
    
    $
    1.25
    
    
    
    437
    
    
    $
    1.23$
5.71
    
    $
    6.50
    
    
    
    775
    
    
    
    6.99
    
    
    $
    6.30
    
    
    
    597
    
    
    $
    6.35$
6.70
    
    $
    6.70
    
    
    
    58
    
    
    
    8.03
    
    
    $
    6.70
    
    
    
    19
    
    
    $
    6.70$
0.20
    
    $
    6.70
    
    
    
    3,205
    
    
    
    8.59
    
    
    $
    2.06
    
    
    
    1,782
    
    
    $
    2.61
  Calculation of Fair Value
   2009
    
    2008
    
    2007Expected volatility of peer group (1)
    
    
    29.0%-66.0
    %
    
    
    35.5%-66.0
    %
    
    
    34.6%-68.0
    %Weighted- average volatility (1)
    
    
    29.0%-44.5
    %
    
    
    44.5
    %
    
    
    46.0
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected term  employees (2)
    
    3.9 - 4.7 years
    
    4.6 years
    
    6.1 yearsExpected term  nonemployees (2)
    
    
    N/A
    
    
    
    N/A
    
    
    10.0 yearsRisk-free rate  employees (3)
    
    
    1.7%-2.1
    %
    
    
    1.4%-3.3
    %
    
    
    4.4%-4.8
    %Risk-free rate  nonemployees
    
    
    N/A
    
    
    
    N/A
    
    
    
    4.5%-5.2
    %
 
 (1)
    
    We estimate the volatility of our common stock on the valuation date
based on historical volatility of the common stock of a peer group of
public companies as the Company has limited stock price history and it
would not be practical to use internal volatility.(2)
    
    The expected term represents the period of time that we expect the
options to be outstanding. We estimate the expected term for
employees based on the simplified method. The expected term presented
for nonemployees is based upon the option expiration date at the date
of grant.(3)
    
    The risk-free interest rate is based on the implied yield in effect on
U.S. Treasury zero-coupon issues with equivalent remaining terms.  62




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##### Table of Contents



14. Income Taxes
  Year ended December 31,2009
    
    
    2008
    
    
    2007Provision for income taxes:Current:Federal
    
    $
    
    
    
    
    1
    
    
    
    State
    
    
    36
    
    
    
    (23
    )
    
    
    4436
    
    
    
    (22
    )
    
    
    44Deferred:Federal
    
    
    (2,411
    )
    
    
    (5,140
    )
    
    
    (4,341
    )State
    
    
    (743
    )
    
    
    (1,310
    )
    
    
    (1,294
    )Valuation allowance
    
    
    3,154
    
    
    
    6,450
    
    
    
    5,635
    
    

    
    
    
    
    
    $
    36
    
    
    $
    (22
    )
    
    $
    44
  2009
    
    
    2008Current deferred income tax assets:Accounts receivable
    
    $
    75
    
    
    $
    111State taxes
    
    
    13
    
    
    
    10Other liabilities and reserves
    
    
    414
    
    
    
    409502
    
    
    
    530Non-current deferred income tax assets (liabilities)Stock based compensation
    
    
    1,079
    
    
    
    863Deferred rent
    
    
    227
    
    
    
    145Property and equipment
    
    
    (44
    )
    
    
    120Intangible assets
    
    
    1,035
    
    
    
    916Contributions
    
    
    3
    
    
    
    3Net operating loss carry forwards
    
    
    14,486
    
    
    
    11,55716,786
    
    
    
    13,604Total deferred tax assets (liabilities)
    
    
    17,288
    
    
    
    14,134Valuation allowance
    
    
    (17,288
    )
    
    
    (14,134
    )Net deferred tax assets (liabilities)
    
    $
    
    
    
    $
    
  63




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##### Table of Contents



Year ended December 31,2009
    
    
    2008
    
    
    2007Federal income tax at statutory rate
    
    
    (35.0
    %)
    
    
    (35.0
    %)
    
    
    (35.0
    %)State taxes, net of federal benefit
    
    
    (1.6
    %)
    
    
    (4.8
    %)
    
    
    (5.0
    %)Goodwill impairment
    
    
    26.0
    %
    
    
    7.0
    %
    
    
    6.2
    %Other
    
    
    0.2
    %
    
    
    0.5
    %
    
    
    (0.3
    %)Warrant liabilities
    
    
    (0.9
    %)
    
    
    Valuation allowance
    
    
    11.4
    %
    
    
    32.4
    %
    
    
    34.4
    %0.1
    %
    
    
    0.1
    %
    
    
    0.3
    %
 15. Related party transactions
  Leases
  Consulting Services
  16. Discontinued Operations
    64




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##### Table of Contents



(Dollars in thousands)2009
    
    
    2008
    
    
    2007Revenues
    
    $
    
    
    
    $
    1,301
    
    
    $
    2,241Operating loss
    
    
    
    
    
    
    (566
    )
    
    
    (396
    )Impairment of goodwill and intangibles
    
    
    
    
    
    
    
    
    
    
    (3,670
    )Net loss
    
    
    
    
    
    
    (573
    )
    
    
    (4,066
    )
 17. Commitments and Contingencies
 Leases
   Operating
    
    
    Capital2010
    
    $
    4,008
    
    
    $
    3692011
    
    
    3,671
    
    
    
    2072012
    
    
    3,511
    
    
    
    982013
    
    
    3,197
    
    
    
    982014
    
    
    3,223
    
    
    
    17Thereafter
    
    
    14,593
    
    
    
    Total minimum future payments
    
    $
    32,203
    
    
    
    789Less imputed interest
    
    
    
    
    
    
    (100
    )Less current portion
    
    
    
    
    
    
    (320
    )Long-term capital lease obligations
    
    
    
    
    
    $
    369
   2009
    
    
    2008Equipment
    
    $
    2,676
    
    
    $
    2,306Accumulated amortization
    
    
    (2,048
    )
    
    
    (1,684
    )Net book value
    
    $
    628
    
    
    $
    622
 Litigation Matters
  18. Warrant Liabilities
  65




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##### Table of Contents



Balance, December 31, 2008
    
    $
    January 1, 2009 (cumulative effect adjustment)
    
    
    18Issuance of new warrants
    
    
    3,646Mark-to-market adjustments to fair value, net
    
    
    (750
    )Balance, December 31, 2009
    
    $
    2,914
  December 31,
    
    
    March 31,
    
    
    January 1,2009
    
    
    2009
    
    
    2009Weighted-average volatility (1)
    
    
    29.9
    %
    
    
    46.4
    %
    
    
    46.4
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected term (2)
    
    3.0  7.8 years
    
    3.8 - 8.6 years
    
    4.0 - 8.8 yearsRisk-free rate (3)
    
    
    1.7  3.5
    %
    
    
    1.4% - 2.5
    %
    
    
    1.9% - 2.1
    %
 
 (1)
    
    We estimated the volatility of our common stock on the valuation date based on historical
volatility of the common stock of a peer group of public companies as the Company has limited
stock price history and it would not be practical to use internal volatility.(2)
    
    The expected term represents the period of time that we expect the warrants to be
outstanding.(3)
    
    The risk-free interest rate is based on the implied yield in effect on U.S. Treasury
zero-coupon issues with equivalent remaining terms. 19. Fair Value
  66




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##### Table of Contents



20. Subsequent Events
 Sale of Building
  Amendment to Convertible Note
 nd nd nd nd
 Expiration of Certain Common Stock Warrants
  Change in FDIC Limits of Primary Bank
   21.
Restated Unaudited Quarterly Financial Information
  67




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##### Table of Contents



As Reported
    
    
    As RestatedSeptember 30,
    
    
    September 30,2009
    
    
    2009(unaudited)
    
    
    (unaudited)Current assets
    
    
    5,973
    
    
    
    5,973Long-term assets
    
    
    62,504
    
    
    
    62,504Total assets
    
    
    68,477
    
    
    
    68,477Current liabilities
    
    
    9,975
    
    
    
    9,975Long-term liabilities
    
    
    12,637
    
    
    
    19,987Total liabilities
    
    
    22,612
    
    
    
    29,962Stockholders equity
    
    
    45,865
    
    
    
    38,515Total liabilities and
stockholders equity
    
    
    68,477
    
    
    
    68,477
 As Reported
    
    
    As RestatedFor the three
    
    
    For the nine
    
    
    For the three
    
    
    For the ninemonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2009
    
    
    2009
    
    
    2009
    
    
    2009(unaudited)
    
    
    (unaudited)
    
    
    (unaudited)
    
    
    (unaudited)Revenue
    
    
    15,734
    
    
    
    49,158
    
    
    
    15,734
    
    
    
    49,158Direct Costs
    
    
    14,488
    
    
    
    44,375
    
    
    
    14,488
    
    
    
    44,375Hospital Contribution
    
    
    1,246
    
    
    
    4,783
    
    
    
    1,246
    
    
    
    4,783Selling, general, and administrative expenses
    
    
    1,644
    
    
    
    6,204
    
    
    
    1,644
    
    
    
    6,204Loss from operations
    
    
    (398
    )
    
    
    (1,421
    )
    
    
    (398
    )
    
    
    (1,421
    )Gain/(Loss) on change in fair value of warrant liabilities
    
    
    144
    
    
    
    (3,449
    )
    
    
    (306
    )
    
    
    (3,899
    )Interest expense, net
    
    
    (1,532
    )
    
    
    (4,315
    )
    
    
    (1,532
    )
    
    
    (4,315
    )Loss before provision for income taxes
    
    
    (1,786
    )
    
    
    (9,185
    )
    
    
    (2,236
    )
    
    
    (9,635
    )Tax provision
    
    
    23
    
    
    
    28
    
    
    
    23
    
    
    
    28Net Loss
    
    
    (1,809
    )
    
    
    (9,213
    )
    
    
    (2,259
    )
    
    
    (9,663
    )
 68




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A(T). Controls and Procedures.
 (a) Evaluation of Disclosure Controls and Procedures
  (b) Managements Annual Report on Internal Control over Financial Reporting
       69




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##### Table of Contents



(c) Changes in Internal Control over Financial Reporting
  
 Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
   
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
 70




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##### Table of Contents



(a)(1) Consolidated Financial Statements.
 (a)(2) Financial Statement Schedules.
 (a)(3) Exhibits.
 (b) Exhibits.
 (c) Financial Statement Schedules.
 71




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##### Table of Contents



SIGNATURES
  PET DRX CORPORATIONDate: March 31, 2010
    By:
    /s/ Gene E. BurlesonGene E. BurlesonChairman of the Board and 
Chief Executive Officer  Name
    
    Position
    
    Date/s/ Gene E. Burleson

Gene E. Burleson
    
    Chairman
of the
Board and Chief
Executive Officer
    
    March 31, 2010/s/ Harry L. ZimmermanHarry L. Zimmerman
    
    Executive Vice
President and Chief
Financial Officer
    
    March 31, 2010/s/ Kyle MorseKyle Morse
    
    Vice President,
Corporate
Controller and
Chief Accounting
Officer
    
    March 31, 2010/s/ Joel KanterJoel Kanter
    
    Director
    
    March 31, 2010/s/ Christopher W. KerseyChristopher W. Kersey
    
    Director
    
    March 31, 2010/s/ Richard O. MartinRichard O. Martin
    
    Director
    
    March 31, 2010/s/ J. David ReedJ. David Reed
    
    Director
    
    March 31, 2010/s/ Zubeen ShroffZubeen Shroff
    
    Director
    
    March 31, 2010
 72




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.2.1
    
    Second Amended and Restated Agreement and Plan of Merger dated October
23, 2007 by and among Echo Healthcare Acquisition Corp. (the
Company), Pet DRx Acquisition Company and XLNT Veterinary Care, Inc.
(Incorporated by reference to Exhibit 2.1 of the Companys
Registration Statement on Form S-4, as amended, filed on November 8,
2007.)3.1
    
    Second Amended and Restated Certificate of Incorporation of Pet DRx
Corporation. (Incorporated by reference to Exhibit 3.1 of the
Companys Current Report on Form 8-K filed on January 10, 2008.)3.2
    
    Amended and Restated By-laws of Pet DRx Corporation. (Incorporated
by reference to Exhibit 3.2 of the Companys Current Report on Form
8-K filed on January 10, 2008.)4.1
    
    Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.1 of the Companys Current Report on Form 8-K filed on
January 10, 2008.)4.2
    
    Specimen Unit Certificate. (Incorporated by reference to Exhibit
4.2 of the Companys Current Report on Form 8-K filed on January 10,
2008.)10.1
    
    Form of Stock Escrow Agreement by and among the Company, Corporate
Stock Transfer, Inc. and the Existing Stockholders. (Incorporated by
reference to Exhibit 10.2 of the Companys Registration Statement on
Form S-1, as amended, filed on February 2, 2006.)10.2
    
    Form of Registration Rights Agreement by and among the Company and
the Existing Stockholders. (Incorporated by reference to Exhibit
10.3 of the Companys Registration Statement on Form S-1, as
amended, filed on February 2, 2006.)10.3
    
    Form of Unit Option Purchase Agreement by and among the Company,
Morgan Joseph & Co. and Roth Capital Partners, LLC. (Incorporated by
reference to Exhibit 10.26 of the Companys Registration Statement
on Form S-1, as amended, filed on February 2, 2006.)10.4+
    
    Executive Employment Agreement by and between XLNT Veterinary Care,
Inc. and George Villasana (Incorporated by reference to Exhibit
10.32 of the Companys Registration Statement on Form S-4, as
amended, filed on November 7, 2007.)10.5+
    
    Separation Agreement dated September 25, 2008 between Robert
Wallace and the Company. (Incorporated by reference to Exhibit 10.2
of the Companys Current Report on Form 10-Q filed on November 14,
2008.)10.6+
    
    Amendment to Executive Employment
Agreement dated August 14, 2008 between Gregory J. Eisenhauer and the Company.
(Incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 10-Q filed on November 14,
2008.)10.7+
    
    Executive Employment Agreement dated March 18, 2009 between Gene E.
Burleson and the Company. (Incorporated by reference to Exhibit
10.21 of the Companys Annual Report on Form 10-K filed on March
31, 2009.)10.8+
    
    Executive Employment Agreement dated March 18, 2009 between Harry
L. Zimmerman and the Company. (Incorporated by reference to Exhibit
10.22 of the Companys Annual Report on Form 10-K filed on March
31, 2009.)10.9+
    
    Separation Agreement effective December 31, 2008 between Steven T.
Johnson and the Company. (Incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K filed on January 2,
2009.)
 73




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##### Table of Contents



ExhibitNo.10.10+
    
    XLNT Veterinary Care, Inc. 2004 Stock Option Plan, as
amended. (Incorporated by reference to Exhibit 10.23 of the
Companys Current Report on Form 8-K filed on January 10, 2008.)10.11+
    
    Form of XLNT Veterinary Care, Inc. Non-Qualified Stock Option
Agreement by and between XLNT Veterinary Care, Inc. and Certain
Employees of XLNT Veterinary Care. Inc. (Incorporated by reference
to Exhibit 10.24 of the Companys Current Report on Form 8-K filed
on January 10, 2008.)10.12+
    
    Form of XLNT Veterinary Care, Inc. Non-incentive Stock Option
Agreement by and between XLNT Veterinary Care, Inc. and Certain
Executives of XLNT Veterinary Care, Inc. (Incorporated by
reference to Exhibit 10.25 of the Companys Current Report on Form
8-K filed on January 10, 2008.)10.13+
    
    2007 Pet DRx Corporation Stock Incentive Plan (Incorporated by
reference to Exhibit 10.28 of the Companys Registration Statement
on Form S-4, as amended, filed on November 11, 2007.)10.14+
    
    Form of Stock Option Agreement for stock options granted to
Employees under the 2007 Pet DRx Corporation Stock Incentive Plan.
(Incorporated by reference to Exhibit 10.28 of the Companys Annual
Report on Form 10-K filed on March 31, 2009.)10.15+
    
    Form of Stock Option Agreement for stock options granted to
Non-Employee Directors under the 2007 Pet DRx Corporation Stock
Incentive Plan. (Incorporated by reference to Exhibit 10.13 of the
Companys Current Report on Form 10-Q filed on May 14, 2008.)10.16+
    
    Pet DRx Corporation 2008 Employee Bonus Plan. (Incorporated by
reference to Exhibit 10.11 of the Companys Current Report on Form
10-Q filed on May 14, 2008.)10.17+
    
    Pet DRx Corporation 2008 Non-Employee Director Compensation
Program. (Incorporated by reference to Exhibit 10.12 of the
Companys Current Report on Form 10-Q filed on May 14, 2008.)10.18+
    
    Pet DRx Corporation 2009 Employee Bonus Plan. (Incorporated by
reference to Item 5.02 of the Companys Current Report on Form 8-K
filed on March 23, 2009.)10.19+
    
    Pet DRx Corporation 2009 Non-Employee Director Compensation
Program. (Incorporated by reference to Item 5.02 of the Companys
Current Report on Form 8-K filed on March 23, 2009.)10.20
    
    Board Voting Agreement dated as of January 4, 2008 by and among the
Company and Certain Stockholders named on the signature pages
thereof. (Incorporated by reference to Exhibit 10.20 of the
Companys Current Report on Form 8-K filed on January 10, 2008.)10.21
    
    Form of Indemnification Agreement for Executive Officers and
Directors by and between XLNT Veterinary Care, Inc. and Certain
Executive Officers and Directors of XLNT Veterinary Care,
Inc. (Incorporated by reference to Exhibit 10.22 of the Companys
Current Report on Form 8-K filed on January 10, 2008.)10.22
    
    Form of Stock Purchase Warrant Issued by XLNT Veterinary Care, Inc.
to Certain Lenders. (Incorporated by reference to Exhibit 10.26 of
the Companys Current Report on Form 8-K filed on January 10,
2008.)10.23
    
    Form of Convertible Promissory Note Issued to Sellers of Veterinary
Clinics Acquired by XLNT Veterinary Care, Inc. (Incorporated by
reference to Exhibit 10.27 of the Companys Current Report on Form
8-K filed on January 10, 2008.)10.24
    
    Form of Warrant to Purchase Common Stock of XLNT Veterinary Care,
Inc. (Incorporated by reference to Exhibit 10.28 of the Companys
Current Report on Form 8-K filed on January 10, 2008.)10.25
    
    Warrant to Purchase Common Stock of XLNT Veterinary care, Inc. for
Galen Partners IV, L.P. dated September 26, 2007. (Incorporated by
reference to Exhibit 10.29 of the Companys Current Report on
 74




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##### Table of Contents



ExhibitNo.Form 8-K filed on January 10, 2008.)10.26
    
    Promissory Note between XLNT Veterinary Care, Inc. and Huntington
Capital, L.P. in the amount of $1,400,000 dated November 2,
2005. (Incorporated by reference to Exhibit 10.30 of the Companys
Current Report on Form 8-K filed on January 10, 2008.)10.27
    
    Amended and Restated Registration Rights Agreement dated as of
February 12, 2008 by and among the Company, the founders of the
Company, as listed on the signature pages thereof, and former
affiliates of XLNT Veterinary Care, Inc., as listed on the signature
pages thereof. (Incorporated by reference to Exhibit 10.2 of the
Companys Current Report on Form 8-K filed on February 12, 2008.)10.28
    
    Form of 12% Senior Convertible Note. (Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed on
January 27, 2009.)10.29
    
    Form of Warrant to Purchase Shares of Common Stock. (Incorporated
by reference to Exhibit 10.2 of the Companys Current Report on
Form 8-K filed on January 27, 2009.)10.30
    
    Registration Rights Agreement dated as of February 10, 2009 by and
among the Company and the purchasers of 12% Senior Convertible
Notes and Warrants. (Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on February 10,
2009.)10.31
    
    Amendment to Promissory Note in the
Amount of $1,400,000 between Pet DRx Veterinary Group, Inc. as
successor in interest to XLNT Veterinary Care, Inc. and Huntington
Capital, L.P. dated March 30, 2009.
(Incorporated by reference to Exhibit 10.2
of the Companys Current Report on Form 8-K filed on
April 2, 2009.)14.1
    
    Code of Business Conduct and Ethics. (Incorporated by reference to
Exhibit 5.1 of the Companys Current Report on Form 8-K filed
February 12, 2008.)21.1*
    
    List of Subsidiaries23.1*
    
    Consent of SingerLewak LLP31.1 *
    
    Section 302 Certification from Gene E. Burleson31.2 *
    
    Section 302 Certification from Harry L. Zimmerman32.1 **
    
    Section 906 Certification from Gene E. Burleson32.2 **
    
    Section 906 Certification from Harry L. Zimmerman
 
 *
    
    Exhibits that are filed herewith.**
    
    Exhibits that are furnished herewith.+
    
    Management contract or compensatory plan, contract or arrangement. 75