UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 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
 (Exact name of registrant as specified in its charter)
 Delaware
    
    56-2517815(State or other jurisdiction of 
incorporation or organization)
    
    (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 o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




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##### 



INDEX
 PART I: FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    1Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
    
    
    1Condensed Consolidated Statements Of Operations for the three and six months ended June 30, 2009 and 2008
    
    
    3Condensed Consolidated Statements Of Cash Flows for the six months ended June 30, 2009 and 2008
    
    
    4Notes To Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    25PART II: OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3.
    
    Defaults Upon Senior Securities
    
    
    27Item 4.
    
    Submissions of Matters to a Vote of Security Holders
    
    
    27Item 5.
    
    Other Information
    
    
    27Item 6.
    
    Exhibits
    
    
    27




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##### 



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)
 June 30, 2009
    
    
    December 31,(unaudited)
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,370
    
    
    $
    1,723Trade accounts receivable, net
    
    
    448
    
    
    
    369Inventory
    
    
    1,107
    
    
    
    1,154Prepaid expenses and other
    
    
    1,367
    
    
    
    1,719Assets held for sale
    
    
    
    
    
    
    900Due from related parties
    
    
    
    
    
    
    32Assets of discontinued operations
    
    
    
    
    
    
    1Total current assets
    
    
    7,292
    
    
    
    5,898Property and equipment, net
    
    
    6,751
    
    
    
    7,422Other assets:Goodwill
    
    
    49,031
    
    
    
    49,373Other intangible assets, net
    
    
    6,175
    
    
    
    6,704Restricted cash
    
    
    425
    
    
    
    500Other
    
    
    299
    
    
    
    447Total assets
    
    $
    69,973
    
    
    $
    70,344LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term obligations, net of debt discount
    
    $
    2,096
    
    
    $
    3,718Accounts payable
    
    
    1,479
    
    
    
    2,394Accrued payroll and other expenses
    
    
    4,800
    
    
    
    6,551Due to a related party
    
    
    
    
    
    
    96Obligations under capital leases, current portion
    
    
    295
    
    
    
    312Deferred rent, current portion
    
    
    6
    
    
    
    Liabilities of discontinued operations
    
    
    
    
    
    
    55Total current liabilities
    
    
    8,676
    
    
    
    13,126Long-term liabilities:
 1




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##### 



June 30, 2009
    
    
    December 31,(unaudited)
    
    
    2008Convertible debt, net of debt discount
    
    
    9,880
    
    
    
    4,949Term notes, less current portion and net of debt discount
    
    
    2,632
    
    
    
    3,687Warrant liabilities
    
    
    7,257
    
    
    
    Obligations under capital leases, less current portion
    
    
    238
    
    
    
    361Deferred rent, less current portion
    
    
    454
    
    
    
    355Other
    
    
    150
    
    
    
    83Total long term liabilities
    
    
    20,611
    
    
    
    9,435Total liabilities
    
    
    29,287
    
    
    
    22,561Stockholders equity:Common stock, par value $0.0001, 90,000,000 shares authorized
and 23,660,460 outstanding as of June 30, 2009 and December
31, 2008, respectively, net of treasury shares of 1,361,574
at June 30, 2009 and December 31, 2008, respectively
    
    
    2
    
    
    
    2Additional paid-in-capital
    
    
    86,112
    
    
    
    87,686Accumulated deficit
    
    
    (45,428
    )
    
    
    (39,905
    )Total stockholders equity
    
    
    40,686
    
    
    
    47,783Total liabilities and stockholders equity
    
    $
    69,973
    
    
    $
    70,344
 See Notes to Condensed Consolidated Financial Statements
 2




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##### 



PET DRX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    16,702
    
    
    $
    17,498
    
    
    $
    33,424
    
    
    $
    34,894Direct costs
    
    
    14,848
    
    
    
    16,071
    
    
    
    29,887
    
    
    
    31,676Hospital contribution
    
    
    1,854
    
    
    
    1,427
    
    
    
    3,537
    
    
    
    3,218Selling, general, and administrative
expenses
    
    
    2,220
    
    
    
    3,962
    
    
    
    4,560
    
    
    
    7,752Loss from operations
    
    
    (366
    )
    
    
    (2,535
    )
    
    
    (1,023
    )
    
    
    (4,534
    )Other income
(expense):Loss on change in fair value of
warrant liabilities
    
    
    (5,565
    )
    
    
    
    
    
    
    (3,593
    )
    
    
    Interest income
    
    
    4
    
    
    
    121
    
    
    
    6
    
    
    
    339Interest expense
    
    
    (1,456
    )
    
    
    (2,735
    )
    
    
    (2,789
    )
    
    
    (3,887
    )Loss before
provision/(benefit) for income taxes
    
    
    (7,383
    )
    
    
    (5,149
    )
    
    
    (7,399
    )
    
    
    (8,082
    )Provision/(benefit) for income taxes
    
    
    
    
    
    
    (41
    )
    
    
    5
    
    
    
    (32
    )Loss from continuing operations
    
    
    (7,383
    )
    
    
    (5,108
    )
    
    
    (7,404
    )
    
    
    (8,050
    )Loss from discontinued operations, net
of tax
    
    
    
    
    
    
    (129
    )
    
    
    
    
    
    
    (215
    )Net loss
    
    $
    (7,383
    )
    
    $
    (5,237
    )
    
    $
    (7,404
    )
    
    $
    (8,265
    )Basic and diluted loss per common shareLoss from continuing operations
    
    $
    (0.31
    )
    
    $
    (0.22
    )
    
    $
    (0.31
    )
    
    $
    (0.35
    )Loss from discontinued operations
    
    $
    (0.00
    )
    
    $
    (0.00
    )
    
    $
    (0.00
    )
    
    $
    (0.01
    )Net loss per share
    
    $
    (0.31
    )
    
    $
    (0.22
    )
    
    $
    (0.31
    )
    
    $
    (0.36
    )Shares used for computing basic and
diluted loss per share
    
    
    23,660
    
    
    
    23,655
    
    
    
    23,660
    
    
    
    23,204
 See Notes to Condensed Consolidated Financial Statements
 3




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##### 



PET DRX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 Six Months Ended June 30,2009
    
    
    2008Cash flows used in operating activities:Net loss
    
    $
    (7,404
    )
    
    $
    (8,265
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    215Loss from continuing operations
    
    
    (7,404
    )
    
    
    (8,050
    )Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:Depreciation and amortization
    
    
    1,345
    
    
    
    1,075Amortization of debt discount
    
    
    1,986
    
    
    
    1,803Loss on change in fair value of warrant liabilities
    
    
    3,593
    
    
    
    Paid-in-kind interest on loans
    
    
    313
    
    
    
    Amortization of debt amendment costs
    
    
    
    
    
    
    182Share-based compensation
    
    
    323
    
    
    
    673Impairment of fixed assets
    
    
    59
    
    
    
    88Deferred rent
    
    
    105
    
    
    
    49Changes in operating assets and liabilities:Accounts receivable
    
    
    (79
    )
    
    
    (66
    )Inventory
    
    
    47
    
    
    
    126Prepaid expenses and other
    
    
    42
    
    
    
    93Accounts payable
    
    
    (970
    )
    
    
    (6,068
    )Accrued payroll and other expenses
    
    
    (1,694
    )
    
    
    (443
    )Income taxes
    
    
    
    
    
    
    (174
    )Other
    
    
    5
    
    
    
    (17
    )Net cash used in continuing operations
    
    
    (2,329
    )
    
    
    (10,729
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    10Net cash used in operating activities
    
    
    (2,329
    )
    
    
    (10,719
    )Cash flows provided by (used in) investing activities:Property and equipment additions
    
    
    (146
    )
    
    
    (950
    )Proceeds from sale of assets
    
    
    841
    
    
    
    Payments made on prior acquisitions
    
    
    
    
    
    
    (356
    )Capitalized costs associated with successful acquisitions
    
    
    
    
    
    
    (16
    )Net cash provided by (used in) continuing operations
    
    
    695
    
    
    
    (1,322
    )Net cash used in discontinued operations
    
    
    
    
    
    
    
 4




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##### 



Six Months Ended June 30,2009
    
    
    2008Net cash provided by (used in) investing activities
    
    
    695
    
    
    
    (1,322
    )Cash flow provided by financing activities:Net proceeds from IPO received as a result of merger
with PVGI
    
    
    
    
    
    
    36,316Payment of debt waiver fees
    
    
    (100
    )
    
    
    (182
    )Payment of debt financing costs
    
    
    (307
    )
    
    
    Deferral of legal settlement to term loan
    
    
    21
    
    
    
    Payments on notes payable
    
    
    (1,693
    )
    
    
    (16,815
    )Payments on capital lease obligations
    
    
    (140
    )
    
    
    (233
    )Net proceeds from 12% senior secured convertible notes
    
    
    6,500
    
    
    
    Net cash provided by continuing operations
    
    
    4,281
    
    
    
    19,086Net cash used in discontinued operations
    
    
    
    
    
    
    (5
    )Net cash provided by financing activities
    
    
    4,281
    
    
    
    19,081Increase in cash and cash equivalents
    
    
    2,647
    
    
    
    7,040Consolidated cash and cash equivalents at beginning of period
    
    
    1,723
    
    
    
    2,005Consolidated cash and cash equivalents at end of period
    
    $
    4,370
    
    
    $
    9,045Cash and cash equivalents of continuing operations
    
    $
    4,370
    
    
    $
    9,040Cash and cash equivalents of discontinued operations
    
    $
    
    
    
    $
    5Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    
    
    
    $
    215Interest
    
    $
    414
    
    
    $
    2,992Schedule 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
    
    $
    141
    
    
    $
    16Common 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
 5




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##### 



PET DRX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
    2. New Accounting Pronouncements
 Adopted
    6




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##### 



7




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##### 



Issued
 TM TM
 8




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##### 



3. Goodwill and Other Intangible Assets
   As of June 30, 2009
    
    
    As of December 31, 2008Gross Carrying
    
    
    Accumulated
    
    
    Net
    
    
    Gross Carrying
    
    
    Accumulated
    
    
    NetAmount
    
    
    Amortization
    
    
    Carrying Amount
    
    
    Amount
    
    
    Amortization
    
    
    Carrying AmountCovenants not-to-compete
    
    $
    684
    
    
    $
    (390
    )
    
    $
    294
    
    
    $
    684
    
    
    $
    (286
    )
    
    $
    398Non-contractual
customer relationships
    
    
    8,118
    
    
    
    (2,237
    )
    
    
    5,881
    
    
    
    8,118
    
    
    
    (1,812
    )
    
    
    6,306Total
    
    $
    8,802
    
    
    $
    (2,627
    )
    
    $
    6,175
    
    
    $
    8,802
    
    
    $
    (2,098
    )
    
    $
    6,704
   Remainder of 2009
    
    $
    5122010
    
    
    9852011
    
    
    8922012
    
    
    7892013
    
    
    716Thereafter
    
    
    2,281Total
    
    $
    6,175
 4. Property and Equipment
  June 30,
    
    
    December 31,2009
    
    
    2008Buildings
    
    $
    2,787
    
    
    $
    2,787Leasehold improvements
    
    
    1,015
    
    
    
    935Equipment
    
    
    3,385
    
    
    
    3,318Furniture and equipment
    
    
    606
    
    
    
    606Computer equipment & software
    
    
    2,324
    
    
    
    2,307Construction-in-progress
    
    
    1
    
    
    
    62Total property and equipment
    
    
    10,118
    
    
    
    10,015Less-accumulated depreciation and amortization
    
    
    (3,367
    )
    
    
    (2,593
    )Total property and equipment, net
    
    $
    6,751
    
    
    $
    7,422
 9




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##### 



5. Assets Held For Sale
  6. Long-Term Obligations
  June 30,
    
    
    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 $4.1 million and $18,081)
at June 30, 2009 and December 31, 2008,
respectively
    
    $
    8,909
    
    
    $
    5,049Promissory notes
    
    Notes payable, maturing from 2009 to
2012, secured by assets and stock of
certain subsidiaries, various interest rates
ranging from 6.5% to 12.0%
    
    
    5,232
    
    
    
    6,686Earn-out notes
    
    Notes payable, various maturities through
2010, interest rates ranging from none
to 8.0%
    
    
    467
    
    
    
    619Total debt obligations
    
    
    14,608
    
    
    
    12,354Less-current portion, net of debt discount
    
    
    (2,096
    )
    
    
    (3,718
    )Long-term portion
    
    $
    12,512
    
    
    $
    8,636
  Remainder of 2009
    
    $
    2,0322010
    
    
    5,6022011
    
    
    2,6552012
    
    
    3482013
    
    
    18,790Thereafter
    
    
    Total
    
    $
    29,427
 10




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##### 



12% Senior Secured Convertible Notes
       Amendment to Huntington Promissory Note
  11




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##### 



7. 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%
  12




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##### 



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.(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
    
    
    15,320,986
    
    
    
    0.10Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (78,614
    )
    
    
    2.72Outstanding, March 31, 2009
    
    
    23,870,685
    
    
    $
    2.11Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Outstanding, June 30, 2009
    
    
    23,870,685
    
    
    $
    2.11Exercisable, June 30, 2009
    
    
    8,870,685
    
    
    $
    5.55
  13




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##### 



RemainingContractualWarrants
    
    LifeExercise Price
    
    Outstanding
    
    (years)$0.00
    
    
    11,796
    
    
    
    7.88$0.10
    
    
    15,320,986
    
    
    
    6.58$2.72
    
    
    89,845
    
    
    
    6.33$3.11
    
    
    740,160
    
    
    
    6.58$6.00
    
    
    7,645,833
    
    
    
    0.75$6.16
    
    
    62,065
    
    
    
    8.3323,870,685
 8. Calculation of Loss Per Common Share
   June 30,2009
    
    2008Convertible debenture notes, if converted to common stock
    
    
    1,413
    
    
    
    372Warrants for common stock
    
    
    23,871
    
    
    
    8,628Options for common stock
    
    
    3,474
    
    
    
    2,651Total
    
    
    28,758
    
    
    
    11,651
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (7,383
    )
    
    $
    (5,237
    )
    
    $
    (7,404
    )
    
    $
    (8,265
    )Weighted average common shares outstanding:Basic
    
    
    23,660
    
    
    
    23,655
    
    
    
    23,660
    
    
    
    23,204Effect of dilutive common stock equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    23,660
    
    
    
    23,655
    
    
    
    23,660
    
    
    
    23,204Basic and diluted loss per common share
    
    $
    (0.31
    )
    
    $
    (0.22
    )
    
    $
    (0.31
    )
    
    $
    (0.36
    )
 9. Share-Based Compensation
 14




---



##### 



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Direct costs
    
    $
    8
    
    
    $
    25
    
    
    $
    18
    
    
    $
    41Selling, general
and administrative
expenses
    
    $
    143
    
    
    $
    379
    
    
    $
    305
    
    
    $
    632Total
    
    $
    151
    
    
    $
    404
    
    
    $
    323
    
    
    $
    673
 Stock Option Activity
  Weighted AverageRemaining
    
    AggregateStock Options
    
    Stock Options
    
    Weighted Average
    
    Contractual Life
    
    IntrinsicAvailable for Grant
    
    Outstanding
    
    Exercise 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
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited or canceled
    
    
    6
    
    
    
    (6
    )
    
     $
   0.30Balance as of June 30, 2009
    
    
    1,331
    
    
    
    3,474
    
    
    $
    2.56
    
    
    
    8.96
    
    
    $
    467Exercisable at June 30, 2009
    
    
    
    
    
    
    1,453
    
    
    $
    3.18
    
    
    
    8.82
    
    
    $
    170
 15




---



##### 



Weighted AverageRemainingNumber Outstanding
    
    
    Contractual Life
    
    
    Weighted Average
    
    
    Number Exercisable
    
    
    Weighted AverageRange of Exercise Price
    
    
    As of June 30, 2009
    
    
    (years)
    
    
    Exercise Price
    
    
    As of June 30, 2009
    
    
    Exercise Price$
    0.20
    
    
    $
    0.20
    
    
    
    1,000
    
    
    
    9.72
    
    
    $
    0.20
    
    
    
    457
    
    
    $
    0.20$
    0.30
    
    
    $
    1.00
    
    
    
    1,139
    
    
    
    9.5
    
    
    $
    0.69
    
    
    
    287
    
    
    $
    0.84$
    2.50
    
    
    $
    6.50
    
    
    
    1,194
    
    
    
    7.88
    
    
    $
    5.82
    
    
    
    662
    
    
    $
    6.00$
    6.70
    
    
    $
    6.70
    
    
    
    141
    
    
    
    8.53
    
    
    $
    6.70
    
    
    
    47
    
    
    $
    6.70$
    0.20
    
    
    $
    6.70
    
    
    
    3,474
    
    
    
    8.96
    
    
    $
    2.56
    
    
    
    1,453
    
    
    $
    3.18
  Calculation of Fair Value
   10. Contingencies
  11. Warrant Liabilities
   16




---



##### 



Balance, 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
    )Balance, March 31, 2009
    
    
    1,692Mark-to-market adjustment to fair value at June 30, 2009
    
    
    5,565Balance, June 30, 2009
    
    $
    7,257
  June 30,
    
    March 31,
    
    January 1,2009
    
    2009
    
    2009Weighted-average volatility (1)
    
    
    46.4
    %
    
    
    46.4
    %
    
    
    46.4
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected term (2)
    
    3.5 - 8.3
    years
    
    3.8 - 8.6
    years
    
    4.0 - 8.8
    yearsRisk-free rate (3)
    
    
    1.9% - 2.8
    %
    
    
    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. 12. Fair Value
  Level 1
    
    Observable inputs such as quoted prices in active markets;Level 2
    
    Inputs, other than quoted prices, that are observable for the asset or liability,
either directly or indirectly. These include quoted prices for similar assets or liabilities in
active markets and quoted prices for identical or similar assets or liabilities in markets that are
not active; andLevel 3
    
    Unobservable inputs in which there is little or no market data, which require the
reporting entity to develop its own assumptions.
   17




---



##### 



13. Subsequent Events
  
 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 June
30, 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 June 30, 2009 at the SECs website at www.sec.gov
 Overview
 General
    18




---



##### 



Business Strategy
  
    
    recruit and retain top veterinary professionals;
    
    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 noted)
  19




---



##### 



20




---



##### 



Results of Our Operations
 Three and Six Months Ended June 30, 2009 and 2008
 (In millions, except percentages)
 Revenue
  For The Three Months Ended
    
    For The Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    % Change
    
    2009
    
    2008
    
    % ChangeRevenues
    
    $
    16.7
    
    
    $
    17.5
    
    
    
    (4.5
    %)
    
    $
    33.4
    
    
    $
    34.9
    
    
    
    (4.2
    %)
  Direct Costs
  For The Three Months Ended
    
    For The Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    % Change
    
    2009
    
    2008
    
    % ChangeTotal direct costs
    
    $
    14.8
    
    
    $
    16.1
    
    
    
    (7.6
    %)
    
    $
    29.9
    
    
    $
    31.7
    
    
    
    (5.6
    %)Hospital
Contribution Margin
as a percentage of
total net revenue
    
    
    11.1
    %
    
    
    8.2
    %
    
    
    
    
    
    
    10.6
    %
    
    
    9.2
    %
  21




---



##### 



Selling, General and Administrative (SG&A)
 For The Three Months
    
    For The Six MonthsEnded June 30,
    
    Ended June 30,2009
    
    2008
    
    % Change
    
    2009
    
    2008
    
    % ChangeSelling, general
and administrative
    
    $
    2.2
    
    
    $
    4.0
    
    
    
    (44.0
    %)
    
    $
    4.6
    
    
    $
    7.8
    
    
    
    (41.2
    %)As a percentage of
total net revenue
    
    
    13.3
    %
    
    
    22.6
    %
    
    
    
    
    
    
    13.6
    %
    
    
    22.2
    %
    Interest Income
 For The Three Months Ended
    
    For The Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    % Change
    
    2009
    
    2008
    
    % ChangeInterest income
    
    $
    0.0
    
    
    $
    0.1
    
    
    
    (96.7
    %)
    
    $
    0.0
    
    
    $
    0.3
    
    
    
    (98.2
    %)As a percentage oftotal net revenue
    
    
    
    %
    
    
    0.7
    %
    
    
    
    
    
    
    
    %
    
    
    1.0
    %
  22




---



##### 



Interest Expense
 For The Three Months Ended
    
    For The Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    % Change
    
    2009
    
    2008
    
    % ChangeInterest expense
    
    $
    1.5
    
    
    $
    2.7
    
    
    
    (46.8
    %)
    
    $
    2.8
    
    
    $
    3.9
    
    
    
    (28.2
    %)As a percentage oftotal net revenue
    
    
    8.7
    %
    
    
    15.6
    %
    
    
    
    
    
    
    8.3
    %
    
    
    11.1
    %
  Liquidity and Capital Resources
  Cash Flows from Operating Activities
   Cash Flows from Investing Activities
  23




---



##### 



Cash Flows from Financing Activities
  Other Metrics
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss from continuing operations
    
    $
    (7,383
    )
    
    $
    (5,108
    )
    
    $
    (7,404
    )
    
    $
    (8,050
    )Depreciation
    
    
    403
    
    
    
    329
    
    
    
    816
    
    
    
    634Amortization
    
    
    263
    
    
    
    219
    
    
    
    529
    
    
    
    441Loss on change in fair value of warrant liabilities
    
    
    5,565
    
    
    
    
    
    
    
    3,593
    
    
    
    Interest expense, net
    
    
    1,452
    
    
    
    2,614
    
    
    
    2,783
    
    
    
    3,548Provision/(benefit) for income taxes
    
    
    
    
    
    
    (41
    )
    
    
    5
    
    
    
    (32
    )Adjusted EBITDA
    
    $
    300
    
    
    $
    (1,987
    )
    
    $
    322
    
    
    $
    (3,459
    )
   24




---



##### 



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Hospital contribution
    
    $
    1,854
    
    
    $
    1,427
    
    
    $
    3,537
    
    
    $
    3,218Depreciation at hospitals
    
    
    318
    
    
    
    277
    
    
    
    643
    
    
    
    551Amortization at hospitals
    
    
    263
    
    
    
    219
    
    
    
    529
    
    
    
    438Hospital EBITDA
    
    $
    2,435
    
    
    $
    1,923
    
    
    $
    4,709
    
    
    $
    4,207
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  25




---



##### 



PART II: OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors.
  We may not be able to maintain compliance with NASDAQs continued listing requirements.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  26




---



##### 



Item 3. Defaults Upon Senior Securities
  
 Item 4. Submissions of Matters to a Vote of Security Holders
  
 Item 5. Other Information
      
 Item 6. Exhibits.
 ExhibitNo.
    
    Description10.1*
    
    Form of Indemnification Agreement for Directors and Officers.10.2*
    
    First Amendment to the 2007 Pet DRx Corporation Stock Incentive Plan31.1*
    
    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. 27




---



##### 



SIGNATURES
  PET DRX CORPORATIONDate:  August 14, 2009
    By:
    /s/ Kyle MorseKyle MorseVice President and Corporate Controller(Duly Authorized Officer and Principal Accounting
Officer) 28




---



##### 



EXHIBIT INDEX
 ExhibitNo.
    
    Description10.1*
    
    Form of Indemnification Agreement for Directors and Officers.10.2*
    
    First Amendment to the 2007 Pet DRx Corporation Stock Incentive Plan31.1*
    
    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. 29