##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2009
 OR
 o
    
    TRANSITION 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
  Delaware(State or other jurisdiction of 
incorporation or organization)
    
    56-2517815(I.R.S. Employer
Identification No.)215 Centerview Drive, Suite 360
Brentwood, Tennessee(Address of principal executive offices)
    
    37027(Zip Code)
 (615) 369-1914  (Registrants telephone number, including area code)
 þ o
 o þ
  Large accelerated filer o
    
    Accelerated filer oNon-accelerated filer o
    
    (Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




---



##### 



INDEX
  
 PagePart I.
    
    Financial Information.Item 1.
    
    Financial Statements.Condensed Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008
    
    
    1Condensed Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008
    
    
    2Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    20Part II.
    
    Other Information.Item 1.
    
    Legal Proceedings
    
    
    21Item 1A.
    
    Risk Factors
    
    
    21Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 6.
    
    Exhibits
    
    
    22EX-10.1EX-10.2EX-10.3EX-10.4EX-10.5EX-31.1EX-31.2EX-32.1EX-32.2




---



##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements.
 
 PET DRX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and number of shares)
 March 31,
    
    
    December 31,2009
    
    
    2008(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    6,073
    
    
    $
    1,723Trade accounts receivable, net
    
    
    390
    
    
    
    369Inventory
    
    
    1,109
    
    
    
    1,154Prepaid expenses and other
    
    
    1,281
    
    
    
    1,719Assets held for sale
    
    
    900
    
    
    
    900Due from related parties
    
    
    
    
    
    
    32Assets of discontinued operations
    
    
    
    
    
    
    1Total Current assets
    
    
    9,753
    
    
    
    5,898Property and Equipment, net
    
    
    7,099
    
    
    
    7,422Other assets:Goodwill
    
    
    49,373
    
    
    
    49,373Other intangible assets, net
    
    
    6,438
    
    
    
    6,704Restricted cash
    
    
    425
    
    
    
    500Other
    
    
    297
    
    
    
    447Total assets
    
    $
    73,385
    
    
    $
    70,344LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current portion of long-term obligations, net of debt discount
    
    $
    2,358
    
    
    $
    3,718Accounts payable
    
    
    2,625
    
    
    
    2,394Accrued payroll and other expenses
    
    
    5,229
    
    
    
    6,551Due to a related party
    
    
    110
    
    
    
    96Obligations under capital leases, current portion
    
    
    313
    
    
    
    312Liabilities of discontinued operations
    
    
    
    
    
    
    55Total Current liabilities
    
    
    10,635
    
    
    
    13,126Long-term liabilities:Convertible debt, net of debt discount
    
    
    8,822
    
    
    
    4,949Term notes, less current portion and net of debt discount
    
    
    3,455
    
    
    
    3,687Warrant liabilities
    
    
    1,692
    
    
    
    Obligations under capital leases, less current portion
    
    
    305
    
    
    
    361Deferred rent
    
    
    410
    
    
    
    355Other
    
    
    150
    
    
    
    83Total long term liabilities
    
    
    14,834
    
    
    
    9,435Total liabilities
    
    
    25,469
    
    
    
    22,561Stockholders equity:Common stock, par value $0.0001, 90,000,000 shares authorized
and 23,660,460 outstanding as of March 31, 2009 and December
31, 2008, respectively, net of treasury shares of 1,361,574
at March 31, 2009 and December 31, 2008, respectively
    
    
    2
    
    
    
    2Additional paid-in-capital
    
    
    85,960
    
    
    
    87,686Accumulated deficit
    
    
    (38,046
    )
    
    
    (39,905
    )Total stockholders equity
    
    
    47,916
    
    
    
    47,783Total liabilities and stockholders equity
    
    $
    73,385
    
    
    $
    70,344
 See Notes to Condensed Consolidated Financial Statements
 1




---



##### Table of Contents



PET DRX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 Three MonthsEnded March 31,2009
    
    
    2008Revenue
    
    $
    16,722
    
    
    $
    17,397Direct costs
    
    
    15,039
    
    
    
    15,605Hospital contribution
    
    
    1,683
    
    
    
    1,792Selling, general, and administrative expenses
    
    
    2,340
    
    
    
    3,790Loss from operations
    
    
    (657
    )
    
    
    (1,998
    )Other income (expense)Gain on change in fair value of warrant liabilities
    
    
    1,972
    
    
    
    Interest income
    
    
    2
    
    
    
    217Interest expense
    
    
    (1,333
    )
    
    
    (1,152
    )Loss before provision for income taxes
    
    
    (16
    )
    
    
    (2,933
    )Provision for income taxes
    
    
    5
    
    
    
    9Loss from continuing operations
    
    
    (21
    )
    
    
    (2,942
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (86
    )Net loss
    
    $
    (21
    )
    
    $
    (3,028
    )Basic and diluted loss per common shareLoss from continuing operations
    
    $
    (0.00
    )
    
    $
    (0.13
    )Loss from discontinued operations
    
    $
    (0.00
    )
    
    $
    (0.00
    )Net loss per share
    
    $
    (0.00
    )
    
    $
    (0.13
    )Shares used for computing basic and diluted loss per share
    
    
    23,660
    
    
    
    22,751
 See Notes to Condensed Consolidated Financial Statements
 2




---



##### Table of Contents



PET DRX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 Three MonthsEnded March 31,2009
    
    
    2008Cash flows used in operating activities:Net loss
    
    $
    (21
    )
    
    $
    (3,028
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    86Loss from continuing operations
    
    
    (21
    )
    
    
    (2,942
    )Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:Depreciation and amortization
    
    
    678
    
    
    
    529Amortization of debt discount
    
    
    953
    
    
    
    363Gain on change in fair value of warrant liabilities
    
    
    (1,972
    )
    
    
    Paid-in-kind interest on loans
    
    
    118
    
    
    
    79Amortization of debt amendment costs
    
    
    
    
    
    
    7Share-based compensation
    
    
    171
    
    
    
    269Deferred rent
    
    
    55
    
    
    
    30Changes in operating assets and liabilities:Accounts receivable
    
    
    (21
    )
    
    
    (75
    )Inventory
    
    
    45
    
    
    
    150Prepaid expenses and other
    
    
    263
    
    
    
    (462
    )Accounts payable
    
    
    176
    
    
    
    (5,924
    )Accrued payroll and other expenses
    
    
    (1,606
    )
    
    
    459Income taxes
    
    
    
    
    
    
    (189
    )Other
    
    
    5
    
    
    
    (24
    )Net cash used in continuing operations
    
    
    (1,156
    )
    
    
    (7,730
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (3
    )Net cash used in operating activities
    
    
    (1,156
    )
    
    
    (7,733
    )Cash flows used in investing activities:Property and equipment additions
    
    
    (89
    )
    
    
    (326
    )Net cash used in continuing operations
    
    
    (89
    )
    
    
    (326
    )Net cash used in discontinued operations
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (89
    )
    
    
    (326
    )Cash flow used in financing activities:Net proceeds from IPO received as a result of
merger with PVGI
    
    
    
    
    
    
    36,372Payment of debt waiver fees
    
    
    (100
    )
    
    
    (182
    )Payment of debt financing costs
    
    
    (307
    )
    
    
    Deferral of legal settlement to term loan
    
    
    131
    
    
    
    Payments on notes payable
    
    
    (549
    )
    
    
    (568
    )Payments on capital lease obligations
    
    
    (55
    )
    
    
    (106
    )Net proceeds from 12% secured convertible notes
    
    
    6,475
    
    
    
    Net cash used in continuing operations
    
    
    5,595
    
    
    
    35,516Net cash used in discontinued operations
    
    
    
    
    
    
    (3
    )Net cash provided by financing activities
    
    
    5,595
    
    
    
    35,513Increase in cash and cash equivalents
    
    
    4,350
    
    
    
    27,454Consolidated cash and cash equivalents at beginning of period
    
    
    1,723
    
    
    
    2,005Consolidated cash and cash equivalents at end of period
    
    $
    6,073
    
    
    $
    29,459Cash and cash equivalents of continuing operations
    
    $
    6,073
    
    
    $
    29,453Cash and cash equivalents of discontinued operations
    
    
    
    
    
    $
    6Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    
    
    
    $
    197Interest
    
    $
    274
    
    
    $
    793Schedule of non-cash investing and financing activities:Deferred costs and accrued liabilities associated with merger of
PVGI recorded to additional paid-in-capital on January 4, 2008
(Date of Merger)
    
    $
    
    
    
    $
    700Retirement of debt to offset related party receivable
    
    $
    30
    
    
    $
    Common stock warrants issued as payment of offering costs
    
    $
    4,374
    
    
    $
    Common stock issued upon conversion of debt
    
    $
    
    
    
    $
    8,305Conversion of Series A and Series B preferred stock to common stock
    
    $
    
    
    
    $
    1
 See Notes to Condensed Consolidated Financial Statements
 3




---



##### Table of Contents



PET DRX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
    2. New Accounting Pronouncements
 Adoption of New Accounting Pronouncements
 Fair Value Measurements Effective Date of FASB Statement No. 157
    4




---



##### Table of Contents



3. Goodwill and Other Intangible Assets
   As of March 31, 2009
    
    
    As of December 31, 2008Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCovenants not-to-compete
    
    $
    684
    
    
    $
    (339
    )
    
    $
    345
    
    
    $
    684
    
    
    $
    (286
    )
    
    $
    398Non-contractual customer
relationships
    
    
    8,118
    
    
    
    (2,025
    )
    
    
    6,093
    
    
    
    8,118
    
    
    
    (1,812
    )
    
    
    6,306Total
    
    $
    8,802
    
    
    $
    (2,364
    )
    
    $
    6,438
    
    
    $
    8,802
    
    
    $
    (2,098
    )
    
    $
    6,704
   Remainder of 2009
    
    $
    7762010
    
    
    9852011
    
    
    8922012
    
    
    7892013
    
    
    716Thereafter
    
    
    2,280Total
    
    $
    6,438
 5




---



##### Table of Contents



4. Property and Equipment
  March 31,
    
    
    December 31,2009
    
    
    2008Buildings
    
    $
    2,787
    
    
    $
    2,787Leasehold improvements
    
    
    1,006
    
    
    
    935Equipment
    
    
    3,364
    
    
    
    3,318Furniture and equipment
    
    
    606
    
    
    
    606Computer equipment & software
    
    
    2,324
    
    
    
    2,307Construction-in-progress
    
    
    
    
    
    
    62Total property and equipment
    
    
    10,087
    
    
    
    10,015Less-accumulated depreciation and amortization
    
    
    (2,988
    )
    
    
    (2,593
    )Total property and equipment, net
    
    $
    7,099
    
    
    $
    7,422
  5. Long-Term Obligations
  March 31,
    
    December 31,2009
    
    2008Convertible notes
    
    Convertible notes payable, maturing from
2010 to 2013, secured by substantially all
of the Companys assets, various interest
rates ranging from 6.0% to 12.0% (net of
debt discounts of $4.3 million and $15,830)
at March 31, 2009 and December 31, 2008,
respectively.
    
    $

    7,793
    
    
    $

    5,049Promissory notes
    
    Notes payable, maturing from 2008 to
2012, secured by assets and stock of
certain subsidiaries, various interest rates
ranging from 6.5% to 12.0%
    
    
    6,272
    
    
    
    6,686Earn-out notes
    
    Notes payable, various maturities through
2010, interest rates ranging from none
to 8.0%
    
    
    570
    
    
    
    619Total debt obligations
    
    
    14,635
    
    
    
    12,354Less-current portion, net of debt discount
    
    
    (2,358
    )
    
    
    (3,718
    )Long-term portion
    
    $
    12,277
    
    
    $
    8,636
 6




---



##### Table of Contents



Remainder of 2009
    
    $
    3,2162010
    
    
    5,7912011
    
    
    2,6142012
    
    
    2842013
    
    
    18,595Thereafter
    
    
    Total
    
    $
    30,500
 12% Senior Secured Convertible Notes
      7




---



##### Table of Contents



Amendment to Huntington Promissory Note
    6. Stockholders Equity
  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
    %
 8




---



##### Table of Contents



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 options 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.  Number ofCommon
    
    
    WeightedStock
    
    
    AverageWarrants
    
    
    PriceOutstanding, December 31, 2008
    
    
    8,628,313
    
    
    $
    5.68Granted
    
    
    15,322,024
    
    
    
    0.10Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (78,614
    )
    
    
    2.72Outstanding, March 31, 2009
    
    
    23,871,723
    
    
    $
    2.11Exercisable, March 31, 2009
    
    
    8,871,723
    
    
    $
    5.55
 9




---



##### Table of Contents



RemainingContractualWarrants
    
    LifeExercise Price
    
    Outstanding
    
    (years)$0.00
    
    
    11,796
    
    
    
    8.13$0.10
    
    
    15,322,024
    
    
    
    6.84$2.72
    
    
    89,845
    
    
    
    6.58$3.11
    
    
    740,160
    
    
    
    6.83$6.00
    
    
    7,645,833
    
    
    
    1.00$6.16
    
    
    62,065
    
    
    
    8.5823,871,723
 7. Calculation of Loss Per Common Share
   Three Months Ended March 312009
    
    
    2008Convertible debenture notes, if converted to common stock
    
    
    731
    
    
    
    372Warrants for common stock
    
    
    23,872
    
    
    
    8,686Options for common stock
    
    
    3,480
    
    
    
    2,641Total
    
    
    28,083
    
    
    
    11,699
   Three Months Ended March 312009
    
    
    2008Loss from continuing operations
    
    $
    (21
    )
    
    $
    (2,942
    )Loss from discontinued operations
    
    
    
    
    
    
    (86
    )Net loss
    
    
    (21
    )
    
    
    (3,028
    )Weighted average common shares outstanding:Basic
    
    
    23,660
    
    
    
    22,751Effect of dilutive common stock equivalents
    
    
    
    
    
    
    Diluted
    
    
    23,660
    
    
    
    22,751Basic and diluted loss per common shareLoss from continuing operations
    
    $
    (0.00
    )
    
    $
    (0.13
    )Loss from discontinued operations
    
    $
    (0.00
    )
    
    $
    (0.00
    )Basic and diluted net loss per common share
    
    $
    (0.00
    )
    
    $
    (0.13
    )
 10




---



##### Table of Contents



8. Share-Based Compensation
    Three Months Ended March 31,2009
    
    
    2008Direct costs
    
    $
    10
    
    
    $
    16Selling, general and administrative and marketing
    
    
    161
    
    
    
    253Total
    
    $
    171
    
    
    $
    269
 Stock Option Activity
  WeightedStock
    
    
    
    
    
    
    
    
    
    
    AverageOptions
    
    
    
    
    
    
    Weighted
    
    
    RemainingAvailable
    
    
    Stock
    
    
    Average
    
    
    Contractual
    
    
    Aggregatefor
    
    
    Options
    
    
    Exercise
    
    
    Life
    
    
    IntrinsicGrant
    
    
    Outstanding
    
    
    Price
    
    
    (years)
    
    
    ValueBalance as of December 31, 2008
    
    
    1,752
    
    
    
    3,053
    
    
    $
    4.90
    
    
    
    
    
    
    
    Granted
    
    
    (1,555
    )
    
    
    1,555
    
    
    
    0.26Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited or canceled
    
    
    1,128
    
    
    
    (1,128
    )
    
    
    5.74Balance as of March 31, 2009
    
    
    1,325
    
    
    
    3,480
    
    
    $
    2.55
    
    
    
    9.21
    
    
    
    Vested at March 31, 2009
    
    
    
    
    
    
    2,928
    
    
    $
    2.69
    
    
    
    9.16
    
    
    
    Exercisable at March 31, 2009
    
    
    
    
    
    
    1,305
    
    
    $
    3.36
    
    
    
    9.05
    
    
    
    
 11




---



##### Table of Contents



Weighted Average
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    Remaining
    
    Average
    
    Number
    
    AverageRange of
    
    Outstanding
    
    Contractual Life
    
    Exercise
    
    Exercisable
    
    ExerciseExercise Prices
    
    As of 3/31/09
    
    (years)
    
    Price
    
    As of 3/31/09
    
    Price$0.20
    
    
    $0.20
    
    
    
    1,000
    
    
    
    9.96
    
    
    $
    0.20
    
    
    
    398
    
    
    $
    0.20$0.30
    
    
    $1.00
    
    
    
    1,145
    
    
    
    9.75
    
    
    $
    0.69
    
    
    
    241
    
    
    $
    0.91$2.50
    
    
    $6.50
    
    
    
    1,194
    
    
    
    8.13
    
    
    $
    5.82
    
    
    
    619
    
    
    $
    6.09$6.70
    
    
    $6.70
    
    
    
    141
    
    
    
    8.78
    
    
    $
    6.70
    
    
    
    47
    
    
    $
    6.70$0.20
    
    
    $6.70
    
    
    
    3,480
    
    
    
    9.21
    
    
    $
    2.55
    
    
    
    1,305
    
    
    $
    3.36
  Calculation of Fair Value
   March 31,
    
    December 31,2009
    
    2008Weighted- average volatility (1)
    
    
    44.5
    %
    
    
    44.5
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %Expected term  employees (2)
    
    4.7 years
    
    4.6 yearsRisk-free rate  employees (3)
    
    
    2.6%-3.3
    %
    
    
    1.4%-3.3
    %
 
 (1)
    
    In 2008 and 2009, 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 options to be outstanding. We estimate the expected term for
employees based on the simplified method permitted under SAB No.
110.(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.  9. Contingencies
  10. Related Parties
  12




---



##### Table of Contents



11. Warrant Liabilities
   December 31, 2008
    
    $
    January 1, 2009 (cumulative effect adjustment)
    
    
    18Issuance of new warrants
    
    
    3,646Mark-to-market adjustment to fair value at March 31, 2009
    
    
    (1,972
    )March 31, 2009
    
    $
    1,692
  March 31,
    
    January 1,2009
    
    2009Weighted- average volatility (1)
    
    
    46.4
    %
    
    
    46.4
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %Expected term (2)
    
    5.8  8.6 years
    
    6.8  8.8 yearsRisk-free rate (3)
    
    
    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 options 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. 12. Subsequent Events
 Litigation Matters
  13




---



##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
 The following discussion should be read in conjunction with our condensed consolidated
financial statements and notes thereto provided under Part I, Item 1 of this Quarterly Report on
Form 10-Q (the  Form 10-Q ). The Companys disclosure and analysis in this Form 10-Q contain some
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 that set forth anticipated results based on managements plans and assumptions. From time to
time, the Company also provides forward-looking statements in other materials it releases to the
public, as well as oral forward-looking statements. Such statements give the Companys current
expectations or forecasts of future events; they do not relate strictly to historical or current
facts. The Company has tried, wherever possible, to identify such statements by using words such as
anticipate, estimate, expect, project, intend, plan, believe, will, target,
forecast and similar expressions in connection with any discussion of future operating or
financial performance or business plans or prospects. In particular, these include statements
relating to future actions, business plans and prospects, future performance or results of current
and anticipated services, sales efforts, expenses, interest rates, the outcome of contingencies,
such as legal proceedings, and financial results.
 The Company cannot guarantee that any forward-looking statement will be realized. Achievement
of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should
known or unknown risks or uncertainties materialize, or should underlying assumptions prove
inaccurate, actual results could differ materially from past results and those anticipated,
estimated or projected. Investors should keep this in mind as they consider forward-looking
statements. Factors that may cause our plans, expectations, future financial condition and results
to change are described under the heading Risk Factors in Item 1A of our Annual Report on Form
10-K for the year ended December 31, 2008 filed with the SEC on March 31, 2009.
 The forward-looking information set forth in this Quarterly Report on Form 10-Q is as of March
31, 2009, and the Company undertakes no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. Investors are advised, however,
to consult any further disclosures the Company makes on related subjects in its reports to the SEC
filed after March 31, 2009 at the SECs website at www.sec.gov
 Overview
 General
    Business Strategy
  
    
    recruit and retain top veterinary professionals;
 14




---



##### Table of Contents




    
    provide high quality veterinary care to our customers;
    
    increase veterinary hospital visits through advertising, market positioning, consumer
education, wellness programs and branding;
    
    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;
 
    
    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;
    
    pursue acquisitions of additional veterinary hospitals, with a focus on continuing to
develop hub and spoke networks that will improve customer service; and
 
    
    capture valuation arbitrage differentials between individual practice value and larger
consolidated enterprise value.
 Seasonality
  Overview of Our Financial Results
(Amounts relate to continuing operations unless otherwise note)
    15




---



##### Table of Contents



Results of Our Operations
 Three Months Ended March 31, 2009 and 2008
 (In millions, except percentages)
 Revenue
  For The Three Months endedMarch 31,2009
    
    2008
    
    % ChangeRevenue
    
    $
    16.7
    
    
    $
    17.4
    
    
    
    (3.9
    )%
  Direct Costs
 Continuing Operations:
 For The Three Months Ended
    March 31,2009
    
    2008
    
    % ChangeTotal direct costs
    
    $
    15.0
    
    
    $
    15.6
    
    
    
    (3.6
    )%Hospital Contribution Margin as a percentage of total net revenue
    
    
    10.1
    %
    
    
    10.3
    %
   Selling, General and Administrative (SG&A)
 For The Three MonthsEnded March 31,2009
    
    2008
    
    % ChangeSelling, general and administrative
    
    $
    2.3
    
    
    $
    3.8
    
    
    
    (38.4
    )%As a percentage of total net revenue
    
    
    14.0
    %
    
    
    21.8
    %
 16




---



##### Table of Contents



Interest income
 For The Three MonthsEnded March 31,2009
    
    2008
    
    % ChangeInterest income
    
    $
    0.0
    
    
    $
    0.2
    
    
    
    (98.9
    )%As a percentage of total net revenue
    
    
    0.0
    %
    
    
    1.2
    %
  Interest Expense
 For The Three Months EndedMarch 31,2009
    
    2008
    
    % ChangeInterest expense
    
    $
    1.3
    
    
    $
    1.2
    
    
    
    15.7
    %As a percentage of total net revenue
    
    
    8.0
    %
    
    
    6.6
    %
   Gain on change in fair value of warrant liabilities
 For The Three MonthsEnded March 31,2009
    
    2008
    
    % ChangeGain on change in fair value of warrant liabilities
    
    $
    2.0
    
    
    $   
    
    %As a percentage of total net revenue
    
    
    11.8
    %
    
    %
 17




---



##### Table of Contents



Liquidity and Capital Resources
  Cash Flows from Operating Activities
   Cash Flows from Investing Activities
  Cash Flows from Financing Activities
  18




---



##### Table of Contents



Non-GAAP Financial Measures
 Adjusted EBITDA
   March 31,
    
    
    December 31,2009
    
    
    2008Net loss
    
    $
    (21
    )
    
    $
    (3,028
    )Depreciation
    
    
    412
    
    
    
    305Amortization
    
    
    266
    
    
    
    224Gain on change in fair value of warrant liabilities
    
    
    (1,972
    )
    
    
    Interest expense
    
    
    1,333
    
    
    
    1,152Income taxes
    
    
    5
    
    
    
    9Adjusted EBITDA
    
    $
    23
    
    
    $
    (1,338
    )
 Hospital EBITDA
   March 31,
    
    
    December 31,2009
    
    
    2008Hospital contribution
    
    $
    1,683
    
    
    $
    1,792Depreciation at hospitals
    
    
    325
    
    
    
    274Amortization at hospitals
    
    
    266
    
    
    
    219Hospital EBITDA
    
    $
    2,274
    
    
    $
    2,285
 
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
  19




---



##### Table of Contents



Item 4.
    
    Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  20




---



##### Table of Contents



PART II: OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings.
   
 Item 1A. Risk Factors.
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
     21




---



##### Table of Contents



Item 6.
    
    Exhibits.
 ExhibitNo.
    
    Description4.1
    
    Form of 12% Senior Convertible Note with aggregate principal amount of $6,500,000
issued to various investors by the Company (incorporated by reference to Exhibit
10.1 of the Companys Current Report on Form 8-K filed on January 27, 2009).4.2
    
    Form of Warrant to purchase aggregate of 15,000,000 shares of common stock of the
Company issued to various investors in connection with issuance of $6,500,000 of 12%
Senior Convertible Notes (incorporated by reference to Exhibit 10.2 of the Companys
Current Report on Form 8-K filed on January 27, 2009).4.3
    
    Form of Registration Rights Agreement entered into with various investors in
connection with issuance of $6,500,000 of 12% Senior Convertible Notes
(incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form
8-K filed on February 10, 2009).4.4
    
    Amended and Restated Business Loan Agreement dated March 30, 2009 relating to
$1,400,000 loan between Huntington Capital, L.P. and Pet DRx Veterinary Group, Inc.,
a wholly-owned subsidiary of the Company (incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K filed on April 2, 2009).4.5
    
    Change in Terms Agreement amending $1,400,000 promissory note in favor of Huntington
Capital, L.P. (incorporated by reference to Exhibit 10.2 of the Companys Current
Report on Form 8-K filed on April 2, 2009).10.1*
    
    Pet DRx Corporation 2009 Employee Bonus Plan.10.2*
    
    Pet DRx Corporation 2009 Non-Employee Director Compensation Program.10.3*
    
    Employment Agreement between Gene E. Burleson and the Company dated March 18, 2009.10.4*
    
    Employment Agreement between Harry L. Zimmerman and the Company dated March 18, 2009.10.5*
    
    Form of Incentive Stock Option Award under the 2007 Pet DRx Stock Incentive Plan
(for grants to certain officers).31.1*
    
    Section 302 Certification from Gene E. Burleson.31.2*
    
    Section 302 Certification from Harry L. Zimmerman.32.1*
    
    Section 906 Certification from Gene E. Burleson.32.2*
    
    Section 906 Certification from Harry L. Zimmerman.
 
 *
    
    Filed or furnished herewith. 22




---



##### Table of Contents



SIGNATURES
  PET DRX CORPORATIONDate:  May 15, 2009
    By:
    /s/ Kyle MorseKyle MorseVice President and Corporate Controller
(Duly Authorized Officer and Principal Accounting
Officer) 23




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description4.1
    
    Form of 12% Senior Convertible Note with aggregate principal amount of $6,500,000
issued to various investors by the Company (incorporated by reference to Exhibit
10.1 of the Companys Current Report on Form 8-K filed on January 27, 2009).4.2
    
    Form of Warrant to purchase aggregate of 15,000,000 shares of common stock of the
Company issued to various investors in connection with issuance of $6,500,000 of 12%
Senior Convertible Notes (incorporated by reference to Exhibit 10.2 of the Companys
Current Report on Form 8-K filed on January 27, 2009).4.3
    
    Form of Registration Rights Agreement entered into with various investors in
connection with issuance of $6,500,000 of 12% Senior Convertible Notes
(incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form
8-K filed on February 10, 2009).4.4
    
    Amended and Restated Business Loan Agreement dated March 30, 2009 relating to
$1,400,000 loan between Huntington Capital, L.P. and Pet DRx Veterinary Group, Inc.,
a wholly-owned subsidiary of the Company (incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K filed on April 2, 2009).4.5
    
    Change in Terms Agreement amending $1,400,000 promissory note in favor of Huntington
Capital, L.P. (incorporated by reference to Exhibit 10.2 of the Companys Current
Report on Form 8-K filed on April 2, 2009).10.1*
    
    Pet DRx Corporation 2009 Employee Bonus Plan.10.2*
    
    Pet DRx Corporation 2009 Non-Employee Director Compensation Program.10.3*
    
    Employment Agreement between Gene E. Burleson and the Company dated March 18, 2009.10.4*
    
    Employment Agreement between Harry L. Zimmerman and the Company dated March 18, 2009.10.5*
    
    Form of Incentive Stock Option Award under the 2007 Pet DRx Stock Incentive Plan
(for grants to certain officers).31.1*
    
    Section 302 Certification from Gene E. Burleson.31.2*
    
    Section 302 Certification from Harry L. Zimmerman.32.1*
    
    Section 906 Certification from Gene E. Burleson.32.2*
    
    Section 906 Certification from Harry L. Zimmerman.
 
 *
    
    Filed or furnished herewith. 24