##### Table of Contents



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 September 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
    
    (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  (Registrants telephone number, including area code)
 þ o
 o þ
  Large
accelerated
filer oAccelerated
filer oNon-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 September 30, 2009 and December 31, 2008
    
    
    1Condensed Consolidated Statements Of Operations for the three and nine months ended September 30, 2009 and 2008
    
    
    3Condensed Consolidated Statements Of Cash Flows for the nine months ended September 30, 2009 and 2008
    
    
    4Notes To Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    27PART II: OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    28Item 1A.
    
    Risk Factors
    
    
    28Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3.
    
    Defaults Upon Senior Securities
    
    
    29Item 4.
    
    Submissions of Matters to a Vote of Security Holders
    
    
    29Item 5.
    
    Other Information
    
    
    31Item 6.
    
    Exhibits.
    
    
    31EX-31.1EX-31.2EX-32.1EX-32.2




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##### 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)
 September 30,2009
    
    
    December 31,(unaudited)
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,716
    
    
    $
    1,723Trade accounts receivable, net
    
    
    360
    
    
    
    369Inventory
    
    
    944
    
    
    
    1,154Prepaid expenses and other
    
    
    953
    
    
    
    1,719Assets held for sale
    
    
    
    
    
    
    900Due from related parties
    
    
    
    
    
    
    32Assets of discontinued operations
    
    
    
    
    
    
    1Total current assets
    
    
    5,973
    
    
    
    5,898Property and equipment, net
    
    
    6,832
    
    
    
    7,422Other assets:Goodwill
    
    
    49,031
    
    
    
    49,373Other intangible assets, net
    
    
    5,917
    
    
    
    6,704Restricted cash
    
    
    425
    
    
    
    500Other
    
    
    299
    
    
    
    447Total assets
    
    $
    68,477
    
    
    $
    70,344LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term obligations, net of debt discount
    
    $
    3,778
    
    
    $
    3,718Accounts payable
    
    
    1,464
    
    
    
    2,394Accrued payroll and other expenses
    
    
    4,391
    
    
    
    6,551Due to a related party
    
    
    
    
    
    
    96Obligations under capital leases, current portion
    
    
    334
    
    
    
    312Deferred rent, current portion
    
    
    8
    
    
    
    Liabilities of discontinued operations
    
    
    
    
    
    
    55Total current liabilities
    
    
    9,975
    
    
    
    13,126
 1




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##### Table of Contents



September 30,2009
    
    
    December 31,(unaudited)
    
    
    2008Long-term liabilities:Convertible debt, net of debt discount
    
    
    9,239
    
    
    
    4,949Term notes, less current portion and net of debt discount
    
    
    2,102
    
    
    
    3,687Warrant liabilities
    
    
    213
    
    
    
    Obligations under capital leases, less current portion
    
    
    430
    
    
    
    361Deferred rent, less current portion
    
    
    503
    
    
    
    355Other
    
    
    150
    
    
    
    83Total long term liabilities
    
    
    12,637
    
    
    
    9,435Total liabilities
    
    
    22,612
    
    
    
    22,561Stockholders equity:Common stock, par value $0.0001, 90,000,000 shares authorized
and 23,690,460 and 23,660,460 outstanding as of September 30,
2009 and December 31, 2008, respectively, net of treasury
shares of 1,361,574 at September 30, 2009 and December 31,
2008, respectively
    
    
    2
    
    
    
    2Additional paid-in-capital
    
    
    93,101
    
    
    
    87,686Accumulated deficit
    
    
    (47,238
    )
    
    
    (39,905
    )Total stockholders equity
    
    
    45,865
    
    
    
    47,783Total liabilities and stockholders equity
    
    $
    68,477
    
    
    $
    70,344
 See Notes to Condensed Consolidated Financial Statements
 2




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##### Table of Contents



PET DRX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    15,734
    
    
    $
    17,299
    
    
    $
    49,158
    
    
    $
    52,193Direct costs
    
    
    14,488
    
    
    
    16,339
    
    
    
    44,375
    
    
    
    48,054Hospital contribution
    
    
    1,246
    
    
    
    960
    
    
    
    4,783
    
    
    
    4,139Selling, general, and administrative
expenses
    
    
    1,644
    
    
    
    3,677
    
    
    
    6,204
    
    
    
    11,388Loss from operations
    
    
    (398
    )
    
    
    (2,717
    )
    
    
    (1,421
    )
    
    
    (7,249
    )Other income (expense):Gain/(Loss) on change in fair value of
warrant liabilities
    
    
    144
    
    
    
    
    
    
    
    (3,449
    )
    
    
    Interest income
    
    
    3
    
    
    
    5
    
    
    
    9
    
    
    
    344Interest expense
    
    
    (1,535
    )
    
    
    (292
    )
    
    
    (4,324
    )
    
    
    (4,179
    )Loss before provision/(benefit) for
income taxes
    
    
    (1,786
    )
    
    
    (3,004
    )
    
    
    (9,185
    )
    
    
    (11,084
    )Provision/(benefit) for income taxes
    
    
    23
    
    
    
    12
    
    
    
    28
    
    
    
    (17
    )Loss from continuing operations
    
    
    (1,809
    )
    
    
    (3,016
    )
    
    
    (9,213
    )
    
    
    (11,067
    )Loss from discontinued operations, net
of tax
    
    
    
    
    
    
    (156
    )
    
    
    
    
    
    
    (371
    )Net loss
    
    $
    (1,809
    )
    
    $
    (3,172
    )
    
    $
    (9,213
    )
    
    $
    (11,438
    )Basic and diluted loss per common shareLoss from continuing operations
    
    $
    (0.08
    )
    
    $
    (0.13
    )
    
    $
    (0.39
    )
    
    $
    (0.47
    )Loss from discontinued operations
    
    $
    (0.00
    )
    
    $
    (0.00
    )
    
    $
    (0.00
    )
    
    $
    (0.02
    )Net loss per share
    
    $
    (0.08
    )
    
    $
    (0.13
    )
    
    $
    (0.39
    )
    
    $
    (0.49
    )Shares used for computing basic and
diluted loss per share
    
    
    23,674
    
    
    
    23,656
    
    
    
    23,665
    
    
    
    23,357
 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)
 Nine Months Ended September 30,2009
    
    
    2008Cash flows used in operating activities:Net loss
    
    $
    (9,213
    )
    
    $
    (11,438
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    371Loss from continuing operations
    
    
    (9,213
    )
    
    
    (11,067
    )Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:Depreciation and amortization
    
    
    2,035
    
    
    
    1,627Amortization of debt discount
    
    
    3,018
    
    
    
    1,816Loss on change in fair value of warrant liabilities
    
    
    3,449
    
    
    
    Paid-in-kind interest on loans
    
    
    517
    
    
    
    Amortization of debt amendment costs
    
    
    
    
    
    
    182Share-based compensation
    
    
    396
    
    
    
    1,161Impairment of fixed assets
    
    
    
    
    
    
    412Deferred rent
    
    
    156
    
    
    
    94Loss on sale of assets
    
    
    61Other
    
    
    23
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    9
    
    
    
    (159
    )Inventory
    
    
    210
    
    
    
    220Prepaid expenses and other
    
    
    456
    
    
    
    118Accounts payable
    
    
    (985
    )
    
    
    (5,119
    )Accrued payroll and other expenses
    
    
    (2,104
    )
    
    
    355Income taxes
    
    
    
    
    
    
    (168
    )Other
    
    
    3
    
    
    
    (36
    )Net cash used in continuing operations
    
    
    (1,969
    )
    
    
    (10,492
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    5Net cash used in operating activities
    
    
    (1,969
    )
    
    
    (10,487
    )Cash flows provided by (used in) investing activities:Property and equipment additions
    
    
    (327
    )
    
    
    (1,338
    )Proceeds from sale of assets
    
    
    841
    
    
    
    Payments made on prior acquisitions
    
    
    
    
    
    
    (356
    )Business acquisition, net of cash received
    
    
    
    
    
    
    (3,019
    )Net cash provided by (used in) continuing operations
    
    
    514
    
    
    
    (4,713
    )Net cash used in discontinued operations
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    514
    
    
    
    (4,713
    )
 4




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##### Table of Contents



Nine Months Ended September 30,2009
    
    
    2008Cash flow provided by financing activities:Net proceeds from IPO received as a result of merger
with PVGI
    
    
    
    
    
    
    36,313Payment of debt waiver fees
    
    
    
    
    
    
    (182
    )Capitalized debt issuance costs
    
    
    (307
    )Deferral of debt waiver fees
    
    
    (100
    )Deferral of legal settlement to term loan
    
    
    21
    
    
    
    Payments on notes payable
    
    
    (2,412
    )
    
    
    (17,426
    )Payments on capital lease obligations
    
    
    (254
    )
    
    
    (312
    )Net proceeds from 12% senior secured convertible notes
    
    
    6,500
    
    
    
    Net cash provided by continuing operations
    
    
    3,448
    
    
    
    18,393Net cash used in discontinued operations
    
    
    
    
    
    
    (9
    )Net cash provided by financing activities
    
    
    3,448
    
    
    
    18,384Increase in cash and cash equivalents
    
    
    1,993
    
    
    
    3,184Consolidated cash and cash equivalents at beginning of period
    
    
    1,723
    
    
    
    2,005Consolidated cash and cash equivalents at end of period
    
    $
    3,716
    
    
    $
    5,189Cash and cash equivalents of continuing operations
    
    $
    3,716
    
    
    $
    5,184Cash and cash equivalents of discontinued operations
    
    $
    
    
    
    $
    5Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    20
    
    
    $
    Interest
    
    $
    575
    
    
    $
    3,263Schedule 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
    
    
    $
    16Equipment acquired through capital lease
    
    $
    341
    
    
    $
    Common stock issued as payment of earn-out note
    
    $
    16
    
    
    $
    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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3. Goodwill and Other Intangible Assets
   As of September 30, 2009
    
    
    As of December 31, 2008Gross
    
    
    Accumulated
    
    
    Net
    
    
    Gross
    
    
    Accumulated
    
    
    NetCarrying Amount
    
    
    Amortization
    
    
    Carrying Amount
    
    
    Carrying Amount
    
    
    Amortization
    
    
    Carrying AmountCovenants not-to-compete
    
    $
    684
    
    
    $
    (436
    )
    
    $
    248
    
    
    $
    684
    
    
    $
    (286
    )
    
    $
    398Non-contractual
customer relationships
    
    
    8,118
    
    
    
    (2,449
    )
    
    
    5,669
    
    
    
    8,118
    
    
    
    (1,812
    )
    
    
    6,306Total
    
    $
    8,802
    
    
    $
    (2,885
    )
    
    $
    5,917
    
    
    $
    8,802
    
    
    $
    (2,098
    )
    
    $
    6,704
   8




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##### Table of Contents



Remainder of 2009
    
    $
    2542010
    
    
    9852011
    
    
    8922012
    
    
    7892013
    
    
    716Thereafter
    
    
    2,281Total
    
    $
    5,917
 4. Property and Equipment
  September 30,
    
    
    December 31,2009
    
    
    2008Buildings
    
    $
    2,787
    
    
    $
    2,787Leasehold improvements
    
    
    1,015
    
    
    
    935Equipment
    
    
    3,853
    
    
    
    3,318Furniture and equipment
    
    
    606
    
    
    
    606Computer equipment & software
    
    
    2,336
    
    
    
    2,307Construction-in-progress
    
    
    19
    
    
    
    62Total property and equipment
    
    
    10,616
    
    
    
    10,015Less-accumulated depreciation and amortization
    
    
    (3,784
    )
    
    
    (2,593
    )Total property and equipment, net
    
    $
    6,832
    
    
    $
    7,422
  5. Assets Held For Sale
  6. Long-Term Obligations
  September 30,
    
    
    December 31,2009
    
    
    2008Convertible notes
    
    Convertible notes payable, maturing from
2010 to 2014, secured by substantially all
of the Companys assets, various interest
rates ranging from 6.0% to 12.5% (net of
debt discounts of $3.8 million and $18,081)
at September 30, 2009 and December 31,
2008, respectively
    
    $
    10,145
    
    
    $
    5,049Promissory notes
    
    Notes payable, maturing from 2009 to
2013, secured by assets and stock of
certain subsidiaries, various interest rates
ranging from 6.5% to 12.0%
    
    
    4,610
    
    
    
    6,686
 9




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##### Table of Contents



September 30,
    
    
    December 31,2009
    
    
    2008Earn-out notes
    
    Notes payable, various maturities through
2010, interest rates ranging from none to 8.0%
    
    
    364
    
    
    
    619Total debt obligations
    
    
    15,119
    
    
    
    12,354Less-current portion, net of debt discount
    
    
    (3,778
    )
    
    
    (3,718
    )Long-term portion
    
    $
    11,341
    
    
    $
    8,636
  Remainder of 2009
    
    $
    1,2722010
    
    
    4,4082011
    
    
    3,1222012
    
    
    5172013
    
    
    19,053Thereafter
    
    
    540Total
    
    $
    28,912
 12% Senior Secured Convertible Notes
     10




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##### Table of Contents



Amendment to Huntington Promissory Note
    7. Stockholders Equity
  11




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##### 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. 12




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##### 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, 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
    
    
    $
    2.11Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Outstanding, September 30, 2009
    
    
    23,870,685
    
    
    $
    2.11Exercisable, September 30, 2009
    
    
    23,870,685
    
    
    $
    2.11
  RemainingContractualWarrants
    
    LifeExercise Price
    
    Outstanding
    
    (years)$
    0.00
    
    
    
    11,796
    
    
    7.63$
    0.10
    
    
    
    15,320,986
    
    
    6.33$
    2.72
    
    
    
    89,845
    
    
    6.08$
    3.11
    
    
    
    740,160
    
    
    6.33$
    6.00
    
    
    
    7,645,833
    
    
    0.50$
    6.16
    
    
    
    62,065
    
    
    8.0823,870,685
 8. Calculation of Loss Per Common Share
  13




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September 30,2009
    
    
    2008Convertible debenture notes, if converted to common stock
    
    
    1,433
    
    
    
    372Warrants for common stock
    
    
    23,871
    
    
    
    8,628Options for common stock
    
    
    3,467
    
    
    
    2,651Total
    
    
    28,771
    
    
    
    11,651
   Three  Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (1,809
    )
    
    $
    (3,172
    )
    
    $
    (9,213
    )
    
    $
    (11,438
    )Weighted average common shares outstanding:Basic
    
    
    23,674
    
    
    
    23,656
    
    
    
    23,665
    
    
    
    23,357Effect of dilutive common stock equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    23,674
    
    
    
    23,656
    
    
    
    23,665
    
    
    
    23,357Basic and diluted loss per common share
    
    $
    (0.08
    )
    
    $
    (0.13
    )
    
    $
    (0.39
    )
    
    $
    (0.49
    )
 9. Share-Based Compensation
     14




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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Direct costs
    
    $
    8
    
    
    $
    11
    
    
    $
    26
    
    
    $
    52Selling, general
and administrative
expenses
    
    $
    65
    
    
    $
    477
    
    
    $
    370
    
    
    $
    1,109Total
    
    $
    73
    
    
    $
    488
    
    
    $
    396
    
    
    $
    1,161
 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
    
    
    $
    467Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited or canceled
    
    
    7
    
    
    
    (7
    )
    
    $
    0.30Termination of 2004 Plan
    
    
    (1,210
    )

    
    
    

    
    
    
    Authorization of additional
shares for 2007 Plan
    
    
    2,500
    
    
    
    
    
    
    
    Balance as of September
30, 2009
    
    
    2,628
    
    
    
    3,467
    
    
    $
    2.56
    
    
    
    8.71
    
    
    $
    496Exercisable at September
30, 2009
    
    
    
    
    
    
    1,739
    
    
    $
    3.27
    
    
    
    8.57
    
    
    $
    206
  15




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##### Table of Contents



Weighted AverageNumber Outstanding
    
    
    Remaining
    
    
    
    
    
    
    Number ExercisableAs of September 30,
    
    
    Contractual Life
    
    
    Weighted Average
    
    
    As of September 30,
    
    
    Weighted AverageRange of Exercise Price
    
    
    2009
    
    
    (years)
    
    
    Exercise Price
    
    
    2009
    
    
    Exercise Price$
    0.20
    
    
    $
    0.20
    
    
    
    1,000
    
    
    
    9.46
    
    
    $
    0.20
    
    
    
    515
    
    
    $0.20$
    0.30
    
    
    $
    1.00
    
    
    
    1,132
    
    
    
    9.24
    
    
    $
    0.70
    
    
    
    333
    
    
    $0.80$
    2.50
    
    
    $
    6.50
    
    
    
    1,194
    
    
    
    7.63
    
    
    $
    5.82
    
    
    
    844
    
    
    $5.93$
    6.70
    
    
    $
    6.70
    
    
    
    141
    
    
    
    8.28
    
    
    $
    6.70
    
    
    
    47
    
    
    $6.70$
    0.20
    
    
    $
    6.70
    
    
    
    3,467
    
    
    
    8.71
    
    
    $
    2.56
    
    
    
    1,739
    
    
    $3.27
  Calculation of Fair Value
   10. Contingencies
  11. Warrant Liabilities
   16




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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 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
    
    
    7,257Market-to-market adjustment to fair value at September 30, 2009
    
    
    (144
    )Extinguishment of liability relating to Financing Warrants
    
    
    (6,900
    )Balance, September 30, 2009
    
    $
    213
  September 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
  17




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##### Table of Contents



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; and
 Level 3
    
    Unobservable inputs in which there is little or no market data, which require the
reporting entity to develop its own assumptions.
   13. Subsequent Events
  18




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##### 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, as amended, filed with the SEC.
 The forward-looking information set forth in this Quarterly Report on Form 10-Q is as of the
date of this report, 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 the date hereof at the SECs website at www.sec.gov
 Overview
 General
    19




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##### Table of Contents



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)
  20




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21




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##### Table of Contents



Results of Our Operations
 Three and Nine Months Ended September 30, 2009 and 2008
 (In millions, except percentages)
 Revenue
  For The Three Months Ended
    
    For The Nine Months EndedSeptember 30,
    
    September 30,%
    
    
    
    
    
    
    
    
    
    %2009
    
    2008
    
    Change
    
    2009
    
    2008
    
    ChangeRevenues
    
    $
    15.7
    
    
    $
    17.3
    
    
    
    (9.0
    %)
    
    $
    49.2
    
    
    $
    52.2
    
    
    
    (5.8
    %)
  Direct Costs
  For The Three Months Ended
    
    For The Nine Months EndedSeptember 30,
    
    September 30,%
    
    
    
    
    
    
    
    
    
    %2009
    
    2008
    
    Change
    
    2009
    
    2008
    
    ChangeTotal direct costs
    
    $
    14.4
    
    
    $
    16.3
    
    
    
    (11.3
    %)
    
    $
    44.4
    
    
    $
    48.1
    
    
    
    (7.7
    %)Hospital
ContributionMargin as a percentage
of total net revenue
    
    
    7.9
    %
    
    
    5.5
    %
    
    
    
    
    
    
    9.7
    %
    
    
    7.9
    %
  22




---



##### Table of Contents



Selling, General and Administrative (SG&A)
 For The Three Months Ended
    
    For The Nine Months EndedSeptember 30,
    
    September 30,%
    
    
    
    
    
    
    
    
    
    %2009
    
    2008
    
    Change
    
    2009
    
    2008
    
    ChangeSelling, general
and administrative
    
    $
    1.6
    
    
    $
    3.7
    
    
    
    (55.3
    %)
    
    $
    6.2
    
    
    $
    11.4
    
    
    
    (45.5
    %)As a percentage of
total net revenue
    
    
    10.4
    %
    
    
    21.3
    %
    
    
    
    
    
    
    12.6
    %
    
    
    21.8
    %
      Interest Income
 For The Three Months Ended
    
    For The Nine Months EndedSeptember 30,
    
    September 30,%
    
    
    
    
    
    
    
    
    
    %2009
    
    2008
    
    Change
    
    2009
    
    2008
    
    ChangeInterest income
    
    $
    0.0
    
    
    $
    0.0
    
    
    
    (40.0
    %)
    
    $
    0.0
    
    
    $
    0.3
    
    
    
    (97.4
    %)As a percentage of
total net revenue
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    0.1
    %
 23




---



##### Table of Contents



Interest Expense
 For The Three Months Ended
    
    For The Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    % Change
    
    2009
    
    2008
    
    % ChangeInterest expense
    
    $
    1.5
    
    
    $
    0.3
    
    
    
    (425.7
    %)
    
    $
    4.3
    
    
    $
    4.2
    
    
    
    (3.5
    %)As a percentage of
total net revenue
    
    
    9.8
    %
    
    
    1.7
    %
    
    
    
    
    
    
    8.8
    %
    
    
    8.0
    %
   Liquidity and Capital Resources
  Cash Flows from Operating Activities
  24




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##### Table of Contents



Cash Flows from Investing Activities
  Cash Flows from Financing Activities
  Other Metrics
   25




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss from continuing operations
    
    $
    (1,809
    )
    
    $
    (3,016
    )
    
    $
    (9,213
    )
    
    $
    (11,067
    )Depreciation
    
    
    433
    
    
    
    333
    
    
    
    1,249
    
    
    
    967Amortization
    
    
    259
    
    
    
    218
    
    
    
    786
    
    
    
    661Gain/(loss) on change in fair value of warrant liabilities
    
    
    (144
    )
    
    
    
    
    
    
    3,449
    
    
    
    Interest expense, net
    
    
    1,532
    
    
    
    287
    
    
    
    4,315
    
    
    
    3,835Provision/(benefit) for income taxes
    
    
    23
    
    
    
    12
    
    
    
    28
    
    
    
    (17
    )Adjusted EBITDA
    
    $
    294
    
    
    $
    (2,166
    )
    
    $
    614
    
    
    $
    (5,621
    )
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Hospital contribution
    
    $
    1,246
    
    
    $
    960
    
    
    $
    4,783
    
    
    $
    4,139Depreciation at hospitals
    
    
    353
    
    
    
    293
    
    
    
    995
    
    
    
    844Amortization at hospitals
    
    
    259
    
    
    
    218
    
    
    
    787
    
    
    
    661Hospital EBITDA
    
    $
    1,858
    
    
    $
    1,471
    
    
    $
    6,565
    
    
    $
    5,644
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  26




---



##### Table of Contents



Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  27




---



##### Table of Contents



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.
     28




---



##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submissions of Matters to a Vote of Security Holders
  1.
    
    The election of six directors, each for a term expiring at the next Annual Meeting or until
their successors are duly elected and qualified;2.
    
    The ratification of the selection of SingerLewak, LLP as our independent registered public
accounting firm for 2009;3.
    
    The approval of the issuance of common stock upon conversion of the Senior Notes and
exercise of the Financing Warrants of 15,650,000 shares of the common stock, plus an
indeterminate number of additional shares as may become issuable under the Senior Notes and
Financing Warrants due to anti-dilution adjustments and under additional Senior Notes to be
issued in satisfaction of the Companys interest payment obligations;4.
    
    The approval of the amendment to our restated certificate of incorporation to effect a
reverse stock split of common stock at one of three reverse split ratios1-for-10, 1-for-15 or
1-for-20, as may be selected by our board of directors,; and5.
    
    The approval of an amendment to the 2007 Pet DRx Corporation Stock Incentive Plan to
increase the number of shares of common stock reserve for issuance there under by 2,500,000
shares to an aggregate of 5,200,000 shares.
  29




---



##### Table of Contents



Name
    
    Votes For
    
    WithheldGene Burleson
    
    
    18,032,558
    
    
    
    435,956Richard Johnston
    
    
    18,136,743
    
    
    
    331,771Joel Kanter
    
    
    18,032,658
    
    
    
    435,856Richard O. Martin
    
    
    18,032,658
    
    
    
    435,856J. David Reed
    
    
    18,032,583
    
    
    
    435,931Zubeen Shroff
    
    
    18,031,483
    
    
    
    437,031
  For
    
    Against
    
    Abstain18,305,278
    
    163,236
    
    0
  For
    
    Against
    
    Abstain
    
    Broker Non-Votes13,684,650
    
    467,748
    
    0
    
    4,316,116
  For
    
    Against
    
    Abstain17,387,355
    
    1,081,159
    
    0
  For
    
    Against
    
    Abstain
    
    Broker Non-Votes13,616,228
    
    535,170
    
    1,000
    
    4,316,116
 30




---



##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits.
 ExhibitNo.
    
    Description10.1
    
    Form of First Amendment of Financing Warrants. (Incorporated by
reference to Exhibit 10.1 of the Companys Current Report on Form
8-K filed on September 3, 2009.)10.2
    
    Form of Indemnification Agreement for the Directors and Officers
(Incorporated by reference to Exhibit 10.1 of the Companys Form
10-Q for the quarter ended June 30, 2009.)10.3
    
    First Amendment to the 2007 Pet DRx Corporation Stock Incentive
Plan (Incorporated by reference to Exhibit 10.2 of the Companys
Form 10-Q for the quarter ended June 30, 2009.)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. 31




---



##### Table of Contents



SIGNATURES
  PET DRX CORPORATIONDate: November 16, 2009By:
    /s/ Kyle MorseKyle MorseVice President and Corporate
Controller
(Duly Authorized Officer and Principal
Accounting Officer) 32




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description10.1
    
    Form of First Amendment to Financing Warrants. (Incorporated
by reference to Exhibit 10.1 of the Companys Current Report
on Form 8-K filed on September 3, 2009.)10.2
    
    Form of Indemnification Agreement for Directors and Officers
(Incorporated by reference to Exhibit 10.1 of the Companys
Form 10-Q for the quarter ended June 30, 2009.)10.3
    
    First Amendment of the 2007 Pet DRx Corporation Stock
Incentive Plan (Incorporated by reference to Exhibit 10.2 of
the Companys Form 10-Q for the quarter ended June 30, 2009.)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. 33