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EX-32.2 - EX-32.2 - Pet DRx CORP | g22721exv32w2.htm |
EX-23.1 - EX-23.1 - Pet DRx CORP | g22721exv23w1.htm |
EX-21.1 - EX-21.1 - Pet DRx CORP | g22721exv21w1.htm |
EX-31.2 - EX-31.2 - Pet DRx CORP | g22721exv31w2.htm |
EX-31.1 - EX-31.1 - Pet DRx CORP | g22721exv31w1.htm |
EX-32.1 - EX-32.1 - Pet DRx CORP | g22721exv32w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
o | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-3473
PET DRX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 56-2517815 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
215 Centerview Drive, Suite 360 | ||
Brentwood, Tennessee | 37027 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code:
(615) 369-1914
(615) 369-1914
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
|
Name of each exchange on which registered | |
Common Stock, par value $.0001 per share
|
Nasdaq Capital Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of
the Act). Yes o No þ
At June 30 2009, the aggregate market value of the voting common stock held by non-affiliates
of the Registrant (without admitting that any person whose shares are not included in such
calculation is an affiliate) was approximately $6,400,000. At March 23, 2010, there were
23,714,460 shares of the Registrants common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement to be filed within 120 days of the close of the
registrants fiscal year in connection with the registrants 2010 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K.
INDEX
TO FORM 10-K
ii
Table of Contents
PART I
Item 1. BUSINESS
Company Overview
Pet DRx Corporation is a provider of primary and specialty veterinary care services to companion
animals through a network of veterinary hospitals. As of December 31, 2009, we owned and operated
twenty-three veterinary hospitals located in northern and southern California.
Our hospitals offer a full range of general medical treatment for companion animals, including (i)
preventative care, such as vaccinations, examinations, spaying/neutering, and dental care, and (ii)
a broad range of specialized diagnostic and medical services, such as x-ray, ultra-sound, internal
medicine, surgery, cardiology, ophthalmology, dermatology, oncology, neurology and other services.
Our hospitals also sell pharmaceutical products, pet food and pet supplies.
We intend to grow and enhance our profitability by expanding same-store revenue and capitalizing on
economies of scale and cost reduction efficiencies and by acquiring established veterinary
practices in select regions throughout the United States.
Our principal executive offices are located at 215 Centerview Drive, Suite 360, Brentwood,
Tennessee 37027. We can be contacted at (615) 369-1914.
For convenience, the terms Pet DRx, Company, our, and we are used to refer collectively to
Pet DRx Corporation and its subsidiaries, unless otherwise required by the context.
Operating Segment
As of December 31, 2009, we had a single operating and reporting segment, animal hospitals. Our
objective is to become a preferred provider of high quality pet care by offering a broad array of
pet care services under one brand.
Company History
We were incorporated in Delaware on June 10, 2005 as Echo Healthcare Acquisition Corp. (Echo), a
blank check company formed for the purpose of acquiring, through a merger, capital stock exchange,
asset acquisition or other similar business combination, one or more domestic or international
operating businesses in the healthcare industry. A registration statement for our initial public
offering was declared effective on March 17, 2006. On March 22, 2006, we consummated our initial
public offering of 6,250,000 units. On March 27, 2006, we consummated the closing of an additional
937,500 units that were subject to the underwriters over-allotment option. Each unit consisted of
one share of common stock, par value $0.0001 per share, and one warrant. Each warrant entitles the
holder to purchase from us one share of our common stock at an exercise price of $6.00 per share.
Our common stock and warrants began trading separately on June 6, 2006.
Concurrently with the closing of our initial public offering, certain of our initial stockholders
and directors purchased an aggregate of 458,333 warrants (Founding Director Warrants) in a
private placement transaction (the Private Placement) at an offering price of $1.20 per Founding
Director Warrant, generating gross proceeds to us of $550,000, which was deposited in our trust
account along with net proceeds from the Offering. The Founding Director Warrants entitle the
holders to purchase, when exercised, one share of our common stock, at $6.00 per share. The
Founding Director Warrants were sold to accredited investors in a private placement transaction
under exemptions provided by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder.
Our gross proceeds from the sale of our units, together with the proceeds of our Private Placement,
were approximately $58,050,000. Of this amount, $54,947,000 was deposited in trust. Approximately
$233,000 of the remaining proceeds were available to be used by us to provide for business, legal
and accounting due diligence on prospective acquisitions and continuing general and administrative
expenses.
Table of Contents
On September 11, 2006, we entered into a merger agreement with Pet DRx Veterinary Group, Inc.
(PVGI) (f/k/a XLNT Veterinary Care, Inc.) which merger agreement was subsequently amended and
restated on February 16, 2007 and on October 23, 2007 (as so amended and restated, the Merger
Agreement). On January 4, 2008, we closed the merger transaction pursuant to the Merger Agreement,
pursuant to which a wholly-owned subsidiary of ours merged with and into PVGI (the Merger). In
connection with the Merger, we changed our name from Echo to Pet DRx Corporation.
Upon the closing of the Merger on January 4, 2008, we issued 16,214,267 shares of common stock (of
which 1,589,872 shares were placed in escrow (the Escrow Shares) to satisfy any indemnification
claims that may be asserted by us under the Merger Agreement) for the benefit of the former holders
of capital stock of PVGI, based on an exchange ratio, calculated pursuant to the Merger Agreement,
of 0.7710 of a share of our common stock for each share of PVGI common stock issued and outstanding
immediately prior to the effective time of the Merger (the Effective Time). All of the Escrow
Shares were subsequently released to the former holders of capital stock of PVGI in accordance with
terms of the Merger Agreement.
Immediately after giving effect to the Merger, the former holders of PVGI common stock prior to the
Merger held approximately 72% of our issued and outstanding shares of common stock on a fully
diluted basis (including escrowed shares).
Holders of 1,361,573 shares of common stock elected to convert their common stock at the Effective
Time into their pro rata portion of the trust account established at the time of our initial public
offering, at a conversion price of $8.10 per share of common stock. Cash in the amount of
approximately $11 million was paid to converting stockholders.
On March
17, 2010, the Founding Director Warrants and the publicly-traded
warrants expired by their terms.
Business Strategy
Our objective is to deliver a broad scope of high-quality services to our customers through a hub
and spoke network of veterinary hospitals within select local markets. Specifically, we offer,
through specialty and emergency hospitals (hubs), a wide range of medical, diagnostic and
specialty-medical services and use the traditional smaller general practices as spokes to feed to
the hub units patients requiring more specialized services than a general practice is equipped to
provide. We pursue the following strategies to achieve our objectives:
o | recruit and retain top veterinary professionals; | |||
o | provide high quality veterinary care to our customers; | |||
o | pursue acquisitions of additional veterinary hospitals, with a focus on continuing to develop hub and spoke networks that will improve customer service; | |||
o | increase veterinary hospital visits through advertising, market positioning, consumer education, wellness programs and branding; | |||
o | increase veterinary hospital margins through same-store revenue growth and cost savings realized through consolidated purchasing arrangements for high volume items such as food and medical supplies and generally lower costs through economies of scale; | |||
o | increase veterinary hospital productivity through professional development and training, integration of performance data collection systems, application of productivity standards to previously under-managed operations and removal of administrative burdens from veterinary professionals; and | |||
o | capture valuation arbitrage differentials between individual practice value and larger consolidated enterprise value. |
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Table of Contents
Our Veterinary Hospitals
As of December 31, 2009, we owned and operated twenty-three veterinary hospitals located throughout
the state of California.
Medical Advisory Board
We have established a medical advisory board to support our management team, our veterinarians and
our operations. Under the direction of our Chief Medical Officer, our medical advisory board
recommends standards of excellence in the provision of veterinary care services across all of our
veterinary hospitals. Our medical advisory board is comprised of both general practitioners and
specialists recognized for their outstanding knowledge and reputations in the veterinary field.
Customers
Our customers consist almost entirely of individual pet owners. For the years ended December 31,
2009, 2008 and 2007, no customer accounted for more than 5% of the Companys net revenue.
Industry and Competition
The Industry
The U.S. veterinary market is a large and growing industry sector. Pet ownership, share of
household income spent on pets and general awareness of the value of effective veterinary care due
to advances in science, medicine and technology are all on the rise. There are over 60,000
veterinarians in the U.S. and 22,000 veterinary hospitals who are members of the American
Veterinary Medical Association, or AVMA as of December 31, 2009. The American Pet Products
Manufacturers Association, Inc., or APPMA, estimates that spending on pets in the U.S. reached
$45.5 billion in 2009. Veterinary medical services accounted for $12.0 billion, medications and
over the counter supplies represented $10.4 billion, pet food
represented $17.6 billion, and
ancillary services such as grooming and boarding reached $3.5 billion in 2009. The APPMA
estimates that $47.7 billion will be spent on pets in the U.S. in 2010.
Within the Companys initial target market of California, the State of California Veterinary
Medical Board lists 12,577 licensed veterinarians (State of California Department of Consumer
Affairs, 2005).
According to the APPMA, the ownership of pets is widespread and growing, with over 71 million U.S.
households, representing approximately 63% of U.S. households, owning at least one pet, including
companion and other animals, including about 77.5 million dogs and 93.6 million cats. Specifically,
45 million households owned at least one dog and 38 million households owned at least one cat.
The growth of the veterinary care industry is primarily being driven by:
o | an increased emphasis on pet health and wellness; | |||
o | continued technological and medical developments which are migrating from human healthcare to veterinary medicine, driving new and previously unconsidered diagnostic tests, procedures and treatments; and | |||
o | favorable demographic trends supporting a growing pet population. |
While it is growing, the U.S. veterinary services market remains highly fragmented and comprised
principally of smaller independent practices. We estimate that the three largest companies in the
industry, Banfield, the Pet Hospital®, VCA Antech, Inc. and National Veterinary
Associates (NVA) represent approximately 5% of companion animal veterinary hospitals in the U.S.
According to the AVMA, there are approximately 22,000
veterinary hospitals/clinics in the U.S. and these three companies combined currently own or
operate about 1,300 hospitals.
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Most Doctors of Veterinary Medicine (DVMs or veterinarians) are highly educated, and we believe are
attracted to the industry because they care for the welfare of animals. As a result, often they
spend their careers developing individual or small practices that have few liquidity options. The
small economic scale of these practices often makes it difficult to afford and adopt
state-of-the-art technologies, and medical and diagnostic equipment. We believe veterinarians are
gravitating toward larger, multi-doctor animal hospitals that provide state-of-the-art facilities,
treatments, methods and pharmaceuticals to enhance the services they can provide their clients. In
addition, we believe the fragmented animal hospital industry is consolidating due to:
o | the purchasing, marketing and administrative cost advantages that can be realized by large, multiple location, multi-doctor veterinary providers; | |||
o | the cost of financing equipment purchases and upgrading technology necessary for a successful practice and the associated ability of a large provider to obtain the necessary financing on more competitive terms; | |||
o | the desire of veterinarians to minimize the percentage of their time spent dealing with administrative functions and to focus instead on practicing veterinary medicine; | |||
o | the desire of some owners of animal hospitals to obtain liquidity by selling all or a portion of their investment in the animal hospital (which we believe will increase as more owners of animal hospitals approach retirement); and | |||
o | the appeal to many veterinarians of the benefits and flexible work schedule that is not typically available to a sole practitioner or single-site provider. |
The veterinary care industry also has other notable characteristics, including:
o | Extensive veterinarian training requirements represent significant competitive barriers to entry. Although the number of pets and pet services is growing rapidly, the number of veterinarians and available hospitals is limited, with the potential for increasing the number of veterinarians constrained by the extensive training requirements for veterinarians. | |||
o | Highly fragmented industry service sector. Although the pet care market is large and growing, no single entity accounts for more than 5% of the hospital industry. The market consists mainly of independent private practices consisting of sole practitioners or small groups of veterinarians. Most practices do not offer a broad range of products and services. Many veterinarians spend a significant portion of their time handling the administrative burden of running a small business, versus seeing customers. The Company believes that these small animal hospitals tend to be profitable in spite of the inefficiencies associated with a small operating scale and limited marketing clout and that these factors make veterinary hospitals an attractive consolidation opportunity. | |||
o | Attractive industry payor and pricing characteristics. The animal health care services industry does not experience the problems of extended payment collection cycles or pricing pressures from third-party payors faced by human health care providers. Fees for animal hospital services are due, and typically paid for, at the time of the service via cash or credit card. Pet care services are predominantly provided on a cash-pay basis. Thus, (unlike human healthcare) there are (i) few accounts receivable to finance, (ii) no government payors, and (iii) no managed care contracting. Also, because of expanding options for care services coupled with the growing awareness of pet health and wellness and pet owner sentiments to their pets, veterinarians typically enjoy the ability to pass through pricing increases to their customers. | |||
o | Opportunity to increase hospital productivity through an integrated management information system. By deploying integrated management information systems that monitor each veterinarian and hospital on products and services delivered, productivity and prices, veterinary hospitals are able to identify opportunities and areas for growth and to monitor veterinarians and target individuals who may benefit |
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from additional training in specific treatment disciplines. | ||||
o | Limited medical malpractice liabilities. Unlike human healthcare, veterinarians have limited corresponding medical malpractice liabilities. | |||
o | Veterinary cares recession resistant revenue characteristics. Although the practice of veterinary medicine is subject to seasonal fluctuations based on weather and holiday seasons, the Company believes that veterinary care revenues have historically been recession resistant and veterinary hospitals have one of the lowest failure rates of any business. However, the industry was affected by the recent recession that started in 2008. |
Competition
The market for veterinary care services to companion animals is highly competitive, particularly in
urban environments, and evolving in the manner in which services are delivered and providers are
selected. The Company believes that the primary factors influencing a customers selection of an
animal hospital are convenient location and hours, quality of care and reasonableness of fees. The
Companys primary competitors are individual practitioners or small, regional multi-clinic
practices. In addition, the Company experiences competition from some national and large regional
companies in the pet care industry, such as our three largest competitors mentioned above, as well
as operators of pet super-stores that are developing networks of animal hospitals in markets that
include our animal hospitals.
Companion Animals
As the U.S. population has gravitated from rural to urban environments, and the extended family
with all its opportunities for close relationships has been replaced by the nuclear family, the
single family, or no family at all, we believe the pet has assumed a more important role in
maintaining good mental health and well being in society. According to the American Animal Hospital
Associations (AAHA) 2004 Pet Owner Survey, 94% of pet owners surveyed said they take their pets
for regular veterinary checkups to ensure their pets quality of life.
Favorable demographic trends should continue to fuel the growth in demand for pet care services in
the foreseeable future. The leading edge of the baby boom generation has already entered middle
age and their ranks will swell by 46% in this decade. This middle-aged demographic, age 45 to 69,
own more pets, have more income and account for nearly two-thirds of all pet care expenditures.
Acquisition Program
We target veterinary hospitals for acquisitions that are profitable or which we believe will be
profitable when integrated into our operations. We work to build incremental value through programs
designed to drive incremental new revenues and benefit from economies of scale, proactive
marketing, centralized management, management information systems, brand name identification, and
by broadening the scope of services and products offered at our hospitals. The consideration paid
in our acquisitions may consist of cash, promissory notes, common stock, warrants and/or
debentures, including convertible debentures.
Government Regulation
California imposes various registration requirements upon our veterinary hospitals. Accordingly, we
have registered each of our facilities with appropriate governmental agencies and, where required,
have appointed a licensed veterinarian to act on behalf of each facility. All veterinarians
practicing in our hospitals are required to maintain valid state licenses to practice.
Employees
As of December 31, 2009, we employed approximately 600 full-time employees. We have not
entered into any collective bargaining agreements with our employees and we believe that relations
with our employees are good. We
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believe that our future success will depend in part upon the
continued service of our key employees and on our continued ability to hire and retain qualified
personnel.
Seasonality
The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for
veterinary services is slightly higher during the warmer months because pets spend a greater amount
of time outdoors where they are more likely to be injured and are more susceptible to disease and
parasites. In addition, use of veterinary services may be affected by levels of flea infestation,
heartworm and ticks, and the number of daylight hours. The seasonality we experience at our clinics
varies throughout the year depending on the geographic region of those locations. Our clinics in
the desert region of California experience their highest sales volume in the winter months.
However, revenue may be impacted significantly from quarter to quarter by natural disasters, such
as earthquakes, landslides and fires, and other factors unrelated to such adverse events, such as
changing economic conditions.
Executive Officers of Pet DRx
We provide below information regarding each of our executive officers.
Name | Age | Position | ||||
Gene E. Burleson
|
69 | Chairman of the Board and Chief Executive Officer | ||||
Harry L. Zimmerman
|
54 | Executive Vice President and Chief Financial Officer | ||||
George A. Villasana
|
42 | Executive Vice President, General Counsel and Secretary |
GENE E. BURLESON, our Chairman of the Board, has served as a director of the Company since the
Merger in January 2008. Mr. Burleson has served as Chief Executive Officer of the Company since
November 18, 2008 and served as interim Chief Executive Officer of the Company from September 25,
2008 until November 17, 2008. Mr. Burleson also served as the Chief Executive Officer of the
Company from its formation in June 2005 until it merged with PVGI. Mr. Burleson served as Chairman
of the board of directors of Mariner Post-Acute Network, Inc., an operator of long-term care
facilities, from January 2000 to June 2002. Mr. Burleson also served as Chairman of the board of
directors of Alterra Healthcare Corporation, a developer and operator of assisted living
facilities, during 2003 and as a member of the board of directors from 1995 to 2003. Mr. Burleson
also served on the board of directors of Deckers Outdoor Corporation (Nasdaq:DECK), an outdoor shoe
company, where he served from 1993 until 2008; and Prospect Medical Holdings, Inc. (AMEX:PZZ), a
provider of management services to affiliated independent physician associations from 2004 to 2008.
Mr. Burleson currently serves on the board of directors of SunLink Health Systems, Inc.
(AMEX:SSY), an owner and operator of acute care hospitals. In addition, Mr. Burleson is involved
with several private companies, including Med Images, Inc., a provider of integrated documentation
services to surgeons and hospitals through multimedia technology and Marina Medical, Inc., a
provider of medical billing and accounts receivable management services to hospital based
physicians. Mr. Burleson served as Chairman of the board of directors of GranCare (formerly an NYSE
listed company) from 1989 to 1997. Additionally, Mr. Burleson served as President and Chief
Executive Officer of GranCare from 1990 to 1997. Upon completion of the merger of GranCares
pharmacy operations with Vitalink Pharmacy Services, Inc. in 1997, he became Chief Executive
Officer and a Director of Vitalink Pharmacy Services Inc. (formerly an NYSE listed company). Mr.
Burleson resigned as Chief Executive Officer and Director of Vitalink Pharmacy Services, Inc. in
1997. From 1986 to 1989, Mr. Burleson served as President, Chief Operating Officer and a Director
of American Medical International (AMI), one of the largest owners and operators of acute care
hospitals in the nation. Based in London from 1981 to 1986, Mr. Burleson served as Managing
Director of AMIs international operations. Mr. Burleson graduated from East Tennessee State
University with a Bachelor of Science in accounting and earned an M.B.A. in 1972.
HARRY L. ZIMMERMAN has served as our Chief Financial Officer since October 13, 2008 and was
appointed as Executive Vice President on March 18, 2009. Prior thereto, Mr. Zimmerman served as
our Chief of Business Development since September 1, 2008. Prior to joining the Company, Mr.
Zimmerman served as Executive Vice
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President and General Counsel of Encore Medical Corporation
(formerly a Nasdaq listed company), an orthopedics medical device company, from early 1994 until
the end of 2007. Prior to joining Encore, Mr. Zimmerman was a senior corporate associate with the
law firm of Winstead, Sechrest & Minick, P.C. Mr. Zimmerman has a Bachelor of Science in Economics
(cum laude) from the Wharton School at the University of Pennsylvania and a Juris Doctor (with
honors) from the University of Texas School of Law. He is licensed as a Certified Public
Accountant and an attorney in the State of Texas.
GEORGE A. VILLASANA has served as our General Counsel and Secretary since the Merger and was also
appointed as Executive Vice President on March 6, 2008. Mr. Villasana served as the General
Counsel and Secretary of PVGI from June 2007 until the Merger. Prior thereto, he served as Senior
Corporate Counsel of AutoNation, Inc., the largest automotive retailer in the U.S. (NYSE: AN), from
August 2000 until June 2007. Prior thereto, Mr. Villasana was a corporate attorney with Holland &
Knight, LLP from 1999 to 2000 and with Shutts & Bowen, LLP from 1997 to 1999. From 1995 to 1997, he
served as a staff attorney with the U.S. Securities & Exchange Commission in Washington, D.C. He
received a Master of Laws from Georgetown University Law Center, a Juris Doctor from American
University, Washington College of Law, a Master of Accounting from Florida International University
and a Bachelor of Science in Accounting from The Pennsylvania State University.
Availability of Our Reports Filed with the Securities and Exchange Commission
Our web site is located at www.petdrx.com. The information on or accessible through our web site
is not incorporated by reference in the Annual Report on Form 10-K. Our Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or
furnished pursuant to Sections 13(a) and 15(d) of the Securities and Exchange Act of 1934, as
amended, are available free of charge, on our web site as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and Exchange Commission
(SEC).
The SEC maintains an Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. Copies of our reports
filed electronically with the SEC may be accessed on the SECs website www.sec.gov. The public
also may read and copy any materials filed with the SEC at the SECs Public Reference Room at 100 F
Street N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at (800) SEC-0330.
Item 1A. RISK FACTORS
Risks Related to Our Business
We have a history of losses and may incur losses in the foreseeable future.
We do not have a significant operating history upon which potential investors may assess future
performance. PVGI acquired its first two veterinary hospitals in September 2004 and acquired
additional veterinary hospitals throughout 2005, 2006 and 2007. We also acquired a veterinary
hospital in 2008. We have only incurred losses to date. We are continuing to develop our
operational infrastructure and face additional risks similar to those of other businesses with
limited operating history. Our prospects must be considered in light of the risks, expenses,
delays, problems and difficulties frequently encountered in the establishment of a new business.
Operating results may also vary depending on a number of factors, many of which are outside our
control, including:
| changes in pricing policies or those of our competitors; | ||
| the hiring and retention of key personnel; | ||
| fluctuation in costs related to acquisitions of businesses; | ||
| wage and cost pressures; | ||
| availability of facilities that are suitable for acquisition; | ||
| viability of the hub and spoke model; | ||
| hiring and retention of veterinarians; | ||
| increased competition and pricing pressure; |
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| seasonal and general economic factors, including a recession or economic slowdown; and | ||
| level of personal discretionary spending. |
We have substantial indebtedness which requires a significant amount of cash to service. We may not
be able to generate or raise sufficient cash to meet our debt service obligations, and these
obligations will reduce the amount of cash available to operate and expand our business.
We have, and will continue to have, a substantial amount of debt, including debt incurred as a
result of financing acquisitions and the Senior Notes described below (See Risk Factors We may
not be able to pay our obligations with respect to our Senior Notes upon maturity, prepayment or
redemption). Our substantial amount of debt requires us to dedicate a significant portion of our
cash flow from operations to pay down our indebtedness and related interest, thereby reducing the
funds available to use for working capital, capital expenditures, acquisitions and general
corporate purposes. Because interest on the Senior Notes is payable by increasing the principal
amount of the Senior Notes, our interest payments on the Senior Notes will not affect cash flow.
However, interest on the Senior Notes will increase our interest expense and thereby impact net
earnings (loss).
Our ability to make payments on our debt, pay our expenses and fund acquisitions will depend upon
our ability to generate cash in the future. Insufficient cash flow could place us at risk of
default under our debt agreements which could result in the acceleration of the maturity of our
debt obligations and could prevent us from paying fixed costs or expanding our business as planned.
Our ability to generate cash is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. Our business may not generate sufficient
cash flow from operations, our strategy to increase operating efficiencies may not be realized and
future borrowings may not be available in an amount sufficient to enable us to service our debt or
to fund our other liquidity needs. Our debt comes due in various
amounts between 2010 and 2014. In
order to meet our debt obligations, we may need to refinance all or a portion of our debt. We may
not be able to refinance any of our debt on commercially reasonable terms or at all.
We may not be able to pay our obligations with respect to our Senior Notes upon maturity,
prepayment or redemption.
In the first quarter of 2009, we issued an aggregate original principal amount of $6.5 million of
our 12% senior secured convertible notes (the Senior Notes). The terms of the Senior Notes
require us to pay a premium of 184% of the original principal amount of the Senior Notes (in
addition to the repayment of the then-outstanding principal amount and accrued but unpaid interest)
(i) upon any repayment of the Senior Notes at maturity, (ii) if accelerated upon the occurrence of
an event of default (as defined in the Senior Notes), or (iii) upon any redemption or prepayment
of the Senior Notes prior to maturity. Accordingly, the amount due upon maturity, prepayment or
redemption of the $6.5 million principal amount of Senior Notes outstanding as of the date of this
report will be approximately $18.5 million after giving effect to such premium, but before giving
effect to future increases in the principal amount outstanding as payment-in-kind of the interest
on the outstanding Senior Notes. After giving effect to payment-in-kind of interest on the Senior
Notes by increasing the outstanding principal through maturity, the amount due on maturity of the
Senior Notes at January 21, 2013 would be approximately $22.4 million. We do not currently have the
resources to pay the full redemption price in cash, and anticipate that we would need to refinance
such debt prior to its maturity or redemption. We have not established a sinking fund for payment
of our obligations under the Senior Notes, nor do we anticipate doing so.
Our debt instruments may adversely affect our ability to run our business.
Our substantial amount of debt, as well as the guarantees of our subsidiaries and the security
interests in our assets and those of our subsidiaries, could impair our ability to operate our
business effectively and may limit our ability to take advantage of business opportunities. For
example, our debt instruments contain certain restrictions that:
| limit our ability to borrow additional funds or to obtain other financing in the future for working capital, capital expenditures, acquisitions, investments or general corporate purposes; | ||
| limit our ability to dispose of our assets, create liens on our assets or to extend credit; and | ||
| make us more vulnerable to economic downturns and reduce our flexibility in responding to changing business and economic conditions; |
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If compliance with our debt obligations materially hinders our ability to operate our business and
adapt to changing industry conditions, we may lose market share, our revenue may decline and our
operating results may suffer.
The issuance of the Senior Notes and related financing warrants will impact net earnings (loss)
going forward.
We recorded $3.6 million as a debt discount to the Senior Notes. Additionally, we also recorded
approximately $930,000 of fees and expenses related to the sale of the Senior Notes, as a debt
discount as well. We are amortizing these amounts over the life of the Senior Notes. Additionally,
we are accounting for the 184% debt discount as a loan accretion, by which we are charging the
accretion to interest expense, which amounts to approximately $12.0 million, over the life of the
loan. Interest on the Senior Notes is paid by increasing the principal amount of the Senior Notes,
which will increase our interest expense going forward. Furthermore, a number of the holders of
outstanding seller notes agreed to a standstill provision contemplated by the loan
documentation in exchange for warrants and/or a higher interest rate on their notes, which will
also increase our interest expense going forward.
Galen and Camden, investors in the Senior Notes, may have the ability to significantly influence
our business and affairs.
A representative of Camden Partners Strategic Fund III, L.P. and Camden Partners Strategic Fund
III-A, L.P. (collectively, Camden) and a representative of Galen Partners IV, L.P., Galen
Partners International IV, L.P. and Galen Employee Fund IV, L.P. (collectively, Galen, and
together with Camden, collectively, the lead investors) serve on our board of directors. In
addition, the lead investors currently hold a significant principal amount of the issued and
outstanding Senior Notes, and accordingly, control our ability to obtain consents, waivers and
amendments with respect to the loan documentation and covenants contained therein. In addition, the
lead investors are each substantial shareholders in our company.
We may be unable to effectively execute our growth strategy which could cause our margins and
profitability to decline. Even if we are able to effectively execute our growth strategy, the
growth of the business may put a strain on the business, and we may not achieve desired economies
of scale.
Our success depends in part on our ability to build on our position as a leading animal healthcare
services company through selective acquisitions of established animal hospitals and internal growth
initiatives. If we cannot implement or effectively execute this strategy, our results of operations
may be adversely affected. We intend, as part of our growth strategies, to acquire additional
veterinary hospitals. We may not be able to attract or compete successfully for prospective
acquisition candidates or achieve sufficient cluster hospitals in any market we may target in
order to achieve targeted efficiencies. In addition, acquisitions may take longer than anticipated
or may not be cost effective.
Results of operations may be materially adversely affected if we are unable to manage our growth
effectively, which may increase costs of operations and hinder our ability to execute our business
strategy. Our internal revenue growth from new services and pet pharmaceuticals as well as our
expected cost savings may not develop as anticipated, and reduction in our expected rate of
internal growth may cause our revenue and margins to decrease from managements expectations.
Expected growth may place a significant strain on management and operational systems and resources.
If our business grows, we will need to improve and enhance our overall financial and managerial
controls, reporting systems and procedures, and expand, train and manage our workforce. We will
also need to increase the capacity of current systems to meet additional demands.
Even if we effectively implement our growth strategy, we may not achieve the presently targeted
internal growth and the growth may be below historical rates. Any reductions in the rate of
internal growth may cause revenues and margins to decrease. Investors should not assume that the
historical growth rates and margins are reliable indicators of results in future periods.
Failure to satisfy covenants in our debt instruments will cause a default under those instruments.
In addition to imposing restrictions on our business and operations, some of our debt instruments
include a number of covenants imposing restrictions on our business and operations, and we may
borrow money on terms requiring us
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to meet financial ratios and other tests. Our ability to comply
with these covenants may be affected by events beyond our control, including prevailing economic,
financial and industry conditions. The breach of any of these covenants would result in a default
under these instruments. An event of default would permit our lenders and other debtholders to
declare all amounts borrowed from them to be due and payable, together with accrued and unpaid
interest. If we are unable the repay debt to our senior lenders, these lenders and debtholders
could proceed against our assets.
Incurring substantial amounts of debt could adversely affect our financial condition.
Leverage. We have and may continue to utilize a leveraged capital structure to, among other things,
fund our operations. We have issued promissory notes and other forms of debt in connection with
past acquisitions and may likely do so in the future. As a result, we are, and in the future may
be, subject to the risks normally associated with debt financing, including, (i) the risk that cash
flow from operations will be insufficient to meet required payments of principal and interest, (ii)
the risk that existing debt (which will not have been fully amortized at
maturity) will not be able to be refinanced or that the terms of such refinancings will not be as
favorable to us, and (iii) the risk that necessary capital expenditures will not be able to be
financed on favorable terms or at all.
Risk of Rising Interest Rates. While currently all of our debt bears interest at a fixed rate, we
may incur indebtedness in the future that also bears interest at a variable rate or may be required
to refinance our debt at higher rates. By its very nature, a variable interest rate will move up or
down based on changes in the economy and other factors, all of which are beyond our control.
Accordingly, there can be no assurance that such rates will not rise significantly and,
consequently, that we would be required to pay more interest than is anticipated. A significant
increase in market interest rates could jeopardize our ability to pay required debt service on
loans and could possibly result in a default under the loan and/or foreclosure.
Limitations on Debt. Our second amended and restated certificate of incorporation does not contain
any limitation on the amount of indebtedness we may incur. Accordingly, we could become more
leveraged, resulting in an increase in debt service that could increase the risk of default on our
indebtedness.
Our business strategy includes growth through acquisitions, which involve special risks that could
increase expenses, and divert the time and attention of management. Difficulties integrating new
acquisitions may impose substantial costs and disrupt our business, which could adversely affect
our financial condition, results of operations, cash flows and prospects.
As part of our business strategy, we have in the past acquired veterinary hospitals. We expect to
continue to acquire animal hospitals. Acquisitions involve a number of special risks and
challenges, including:
| diversion of managements attention from our existing business; | |
| integration of acquired veterinary hospitals and employees into our existing business, including coordination of geographically dispersed operations, which can take longer and be more complex than initially expected; | |
| dependence on retention, hiring and training of key personnel, including specialists; | |
| loss or termination of employees, including costs associated with the termination of those employees; | |
| dilution of then-current stockholders percentage ownership; | |
| dilution of earnings if synergies with the acquired veterinary hospitals are not achieved; | |
| inability to generate sufficient revenue and profitability to offset acquisition or investment costs; | |
| assumption of liabilities of the acquired businesses, including costly litigation related to alleged liabilities of the acquired businesses; and | |
| risk of impairment charges related to potential write-down of acquired assets in future acquisitions. |
Acquisitions of veterinary hospitals are inherently risky and create many challenges. Future
acquisitions may not achieve the desired objectives. If we fail to properly evaluate and execute
acquisitions or investments, our financial condition, results of operations, cash flows and
prospects may be seriously harmed.
We may be unsuccessful in the integration of the acquired businesses that are new to our
operations. The process of integration may require a disproportionate amount of the time and
attention of management, which may distract
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managements attention from its day-to-day duties.
During these periods, there may be less attention directed to marketing efforts or staffing issues,
which could affect our revenue and expenses. In addition, any interruption or deterioration in
service resulting from an acquisition may result in a customers decision to stop doing business
with us. Any difficulties in the integration process could result in increased expense, loss of
customers and a decline in profitability or an increase in exiting losses. We have experienced
delays and increased costs in integrating acquired businesses. We also could experience delays in
converting the systems of acquired businesses into our systems, which could result in increased
staff and payroll expense as well as delays in reporting our results, both for a particular region
and on a consolidated basis. Further, the legal and business environment prevalent in new
territories and with respect to new businesses may pose risks that we do not anticipate and could
adversely impact our ability to integrate newly acquired operations. For all of these reasons, our
historical record in integrating acquired businesses is not a reliable indicator of our ability to
do so in the future. If we are not successful in timely and cost-effectively integrating future
acquisitions, it could adversely affect our financial condition, results of operations, cash flows
and prospects.
The termination or failure to renew a lease or sublease for a veterinary hospital facility would
require us to relocate such hospital to a different facility and make substantial capital
expenditures, which could disrupt our business and adversely impact our results of operations, cash
flows and financial condition.
The majority of our veterinary hospital facilities are leased or subleased. Certain of these leases
or subleases are on a month-to-month basis or do not include a renewal option. We may be unable to
renew these leases or subleases upon termination or expiration on terms acceptable to us or at all.
Higher lease costs could adversely impact our results of operations, cash flows and financial
condition. Failure by a lessor or sublessor to renew an existing lease or sublease could require us
to relocate to a different facility which could disrupt our business and require us to make
significant capital expenditures for leasehold improvements which could adversely impact our
results of operations, cash flows and financial condition.
Loss of key personnel could adversely affect our business.
Our results of operations will depend, in part, on our ability to attract and retain highly
qualified directors, executive officers, veterinarians and other employees. We may not be able to
continue to attract and retain highly qualified persons for such positions, which could have a
material adverse effect on us.
Due to the fixed cost nature of our business, fluctuations in our revenue could adversely affect
its operating income.
A substantial portion of our expenses, particularly rent and personnel costs, are relatively fixed
costs and are based in part on expectations of revenue. We may be unable to reduce spending in a
timely manner to compensate for any significant fluctuations in our revenue. Accordingly,
shortfalls in revenue may adversely affect our operating income.
Demand for certain products and services, including animal vaccinations, may decline, which could
have a material adverse effect on our financial condition, results of operations, cash flows and
prospects.
Demand for vaccinations will be impacted in the future as protocols for vaccinations change. Some
professionals in the industry have recommended that vaccinations be given less frequently. In the
summer of 2003, the Centers for Disease Control and Prevention updated a publication on animal
vaccinations, which called for less frequent canine revaccinations. The study concluded that some
vaccinations remain effective for periods of three to five years, suggesting that veterinarians
should decrease the frequency of vaccinations. Our veterinarians establish their own vaccine
protocols. Some of our veterinarians have changed their protocols and others may change their
protocols in
light of such recent and/or future literature. A decrease in the frequency of revaccinations and
the related revenue could adversely affect our results of operations.
The frequency of customer visits to our animal hospitals may also decline. We believe that the
frequency of visits is impacted by several trends in the industry. Pet-related products, including
medication prescriptions, traditionally sold at animal hospitals, have become more widely available
in retail stores and other channels of distribution, including the internet. Client visits may also
be negatively impacted as a result of preventative care and better pet
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nutrition. If demand for
retail products, vaccinations or for our services generally decline, the frequency of visits may
decline which may result in a reduction in revenue, which could have a material adverse effect on
our financial condition, results of operations, cash flows and prospects.
Further economic downturn could materially adversely affect our business and recessionary economic
conditions may reduce demand for our services.
Our business may be materially adversely affected by negative trends in the general economy that
reduce consumer spending. Our business depends on the ability and willingness of animal owners to
pay for its services. This dependence could make us more vulnerable to any reduction in consumer
confidence or disposable income as compared to companies in other industries that are less reliant
on consumer spending, such as the human health care
industry, in which a large portion of payments are made by insurance programs. The current
financial crises and related economic uncertainty have had a significant impact on our revenue and
profitability. Other veterinary care providers similar to us have recently reported a decline in
demand for their veterinary services due, in part, to present economic conditions. If demand for
our veterinary services similarly declines, our operating results will be negatively impacted. In
addition, declines in our profitability could result in a charge to earnings for the impairment of
goodwill, which would not affect our cash flow but could decrease our earnings, and our stock price
could be adversely affected. Additionally, many of the effects and consequences of the global
financial crisis currently are unknown, and may have a material adverse effect on our liquidity and
capital resources, including our ability to refinance our existing long-term debt, raise additional
capital if needed, and may negatively impact our business and financial results.
Goodwill and other intangible assets comprise a significant portion of our total assets. We must
test our intangible assets for impairment at least annually, which may result in a material,
non-cash write down of goodwill and could have a material adverse impact on our results of
operations and stockholders equity.
Goodwill and indefinite-lived intangibles are subject to impairment assessments at least annually
(or more frequently when events or circumstances indicate that an impairment may have occurred) by
applying a fair-value based test. These impairment assessments may result in a material, non-cash
write-down of goodwill. An impairment could have a material adverse impact on our results of
operations and stockholders equity.
During the fourth quarter of 2009, in conjunction with our annual impairment test of goodwill, we
recorded a goodwill impairment charge of $22.5 million. The factors that caused us to record the
impairment were primarily the decreased revenues sustained in 2009 from the decline in the U.S.
economy coupled with the increased amount of debt incurred by the Company. The fair market
valuation of the reporting units was based on an income and market approach.
Shortages of skilled veterinarians may cause us to experience hiring difficulties which could
result in a disruption of our business.
As the pet population continues to grow, the need for skilled veterinarians continues to increase.
If we are unable to retain an adequate number of skilled veterinarians, we may lose customers, our
revenue may decline and we may need to sell or close animal hospitals. As of December 2009, there
were 28 veterinary schools in the country accredited by the American Veterinary Medical
Association. These schools graduate approximately 2,500 veterinarians per year. There is a shortage
of skilled veterinarians in some regional markets in which we operate animal hospitals. During
shortages in these regions, we may be unable to hire enough qualified veterinarians to adequately
staff our animal hospitals, in which event we may lose market share and our revenues and
profitability may decline.
Currently existing or newly enacted laws and regulations could restrict our business or result in
significant costs and expenses. Any failure to comply with these laws and regulations could have a
material adverse effect on our financial condition, results of operations, cash flows and
prospects.
We may expand our operations into states which have laws and regulations that prohibit business
corporations from providing, or holding themselves out as providers of, veterinary-medical care. In
those states, we will be unable to provide veterinary services or own veterinary practices.
However, if we choose to enter such states, we would seek
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alternative structures for operating in
those states, including providing management and other administrative services to veterinary
practices located in these states. Although we will seek to structure our operations to comply with
the veterinary medicine laws of each state in which we operate, given the varying and uncertain
interpretations of these laws, we may not be in compliance with restrictions on the corporate
practice of veterinary medicine in all states. A determination that we are in violation of
applicable restrictions on the practice of veterinary medicine in any state in which we operate
could have a material adverse effect on our operations, particularly if we are unable to
restructure our operations to comply with the requirements of that state.
In addition, most states impose various registration requirements on veterinarians and veterinary
hospitals. To fulfill these requirements, we are required to register each of our facilities with
appropriate governmental agencies and, where required, appoint a licensed veterinarian to act on
behalf of each facility. All veterinarians practicing in our clinics are required to maintain valid
state licenses to practice. Any failure to comply with these laws and regulations could have a
material adverse effect on our operations.
The possible widespread implementation of pet insurance could adversely affect our business,
operating results and prospects.
The possible widespread implementation of pet insurance and our operation under such insurance
could impose additional fees and costs upon us and reduce the revenue from services and related
items. If we do not accept such insurance or choose not to participate in pet insurance programs,
it could place us at a competitive disadvantage. Acceptance of pet insurance could result in a
reduction in fees or the possible imposition of caps for services. The involvement of insurance
companies could also increase various administrative requirements related to the submission and
processing of claims resulting in a delay in payments or disputes regarding the terms and amounts
of available coverage.
We face increasing competition, including from better-established companies that have significantly
greater resources, which places pressure on our pricing and which could prevent us from increasing
revenue or maintaining profitability.
The market for our products and services is intensely competitive and is likely to become even more
so in the future. Many of our potential competitors have substantial competitive advantages, such
as:
| greater name recognition and larger marketing budgets and resources; | ||
| established marketing relationships and access to larger customer bases; and | ||
| substantially greater financial, technical and other resources. |
As a result, they may be able to respond more quickly and effectively than we can to new or
changing opportunities or customer requirements. For all of the foregoing reasons, we may not be
able to compete successfully against our current and future competitors, and our results of
operations could be adversely affected.
The costs of defending litigation and potential claims could be significant and adversely affect
our results and financial condition.
From time to time we may be involved in various claims and legal actions arising in the ordinary
course of business. We do not believe that the ultimate resolution of these matters will have a
material adverse effect on our business, results of operations, financial condition, or cash flows.
However, the results of these matters cannot be predicted
with certainty, and an unfavorable resolution or the costs of defending of one or more of these
matters could have a material adverse effect on our business, results of operations, financial
condition, cash flows and prospects.
We are subject to local market risks as a result of the geographic concentration of our operations.
Our operations currently are concentrated in the California market. This concentration makes our
business subject to the health of Californias economy, as well as actual or threatened natural
disasters (such as earthquakes and fires) which may disrupt the operations of our veterinarian
hospitals, all of which may adversely impact our financial condition, results of operations, cash
flows and prospects.
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Risks Related to our Common Stock
We may not be able to maintain compliance with NASDAQs continued listing requirements.
Our common stock is presently quoted on the Nasdaq Capital Market (NASDAQ). To maintain our
listing on NASDAQ, we must satisfy certain minimum financial and other continued listing standards,
including, among other requirements, (i) a $1.00 minimum bid price requirement, (ii) a requirement
to maintain either (a) $2.5 million minimum stockholders equity, (b) $500,000 minimum annual net
income or (c) $35 million minimum market value of listed securities, and (ii) a majority of
independent directors. Our common stock price has been below the $1.00 minimum bid requirement
since November 19, 2008. NASDAQ temporarily suspended the $1.00 minimum bid requirement through
July 31, 2009 and reinstated it effective as of August 3, 2009.
On September 15, 2009, we received notification from the NASDAQ Listings Qualifications Department
indicating that for the last 30 consecutive business days, the bid price of our common stock had
closed below the minimum $1.00 per share required for continued inclusion on NASDAQ as set forth in
NASDAQ Marketplace Rule 5550(a)(2). In accordance with NASDAQ Marketplace Rule 5810(c) (3) (A), we
had 180 calendar days, or until March 15, 2010, to regain compliance. We would achieve compliance
with this requirement if at any time before March 15, 2010, the bid price of our common stock
closes at $1.00 per share or more for a minimum of ten consecutive business days. The Company
was unable to regain compliance prior to March 15, 2010.
On March 16, 2010, we received a notice from The NASDAQ Stock Market indicating that we are
not in compliance with the minimum bid price requirement for continued listing, and as a result our
common stock is subject to suspension from trading and delisting from The NASDAQ Capital Market at
the opening of business on March 25, 2010, unless we request a hearing by March 23, 2010 in
accordance with the NASDAQ Marketplace Rules. We requested an appeal hearing on March 23, 2010 with
the NASDAQ Listing Qualifications Panel (the Panel) to review the delisting determination. The
hearing was scheduled by NASDAQ to occur on May 5, 2010. NASDAQ will stay the delisting of our common stock
pending the Panels decision. We are required to present a plan for regaining compliance with the
bid price rule which will likely include our potential plan to consummate a reverse stock split
which was approved by the stockholders at an annual meeting held on July 28, 2009 subject to
approval by our board of directors of the Company, in order to exceed the minimum bid price
requirement. The NASDAQ letter stated that historically, Panels have generally viewed a reverse
stock split in 30 60 days as the only definitive plan acceptable to resolve a bid price
deficiency. Nevertheless, there can be no assurance that NASDAQ will grant our request for the
continued listing of our common stock on the NASDAQ Capital Market.
Effective as of July 28, 2009, Mr. Gary Brukardt retired from our board of directors. Mr. Brukardt
also served on our audit committee and, accordingly, Mr. Brukardts retirement caused our audit
committee to have only two members. As a result, we are currently noncompliant with NASDAQ
Marketplace Rule 5605(c)(2)(A), which requires listed companies to have at least three audit
committee members. The NASDAQ staff has informed us that we have until the earlier of the date of
our next annual shareholders meeting or July 28, 2010 to comply with this requirement. Our board
expects to appoint a new independent director to become a member of the audit committee prior to
the expiration of the cure period at which time we expect to be in full compliance with NASDAQ
Marketplace Rule 5605(c)(2)(A). In addition, if we must record significant impairment or other
charges, the Company may have difficulty maintaining its NASDAQ Capital Market listing due to the
stockholders equity requirement.
If the Company is unsuccessful in maintaining its NASDAQ listing, then trading in its common stock
after a delisting would likely be conducted in the over-the-counter markets in the so-called pink
sheets or the Over-The-Counter Bulletin Board and could also be subject to additional
restrictions. There can be no assurance that the Company will meet the continued listing
requirements for the NASDAQ Capital Market, or that it will not be delisted from the NASDAQ Capital
Market in the future. The delisting of the Companys common stock could have a material adverse
effect on the trading price, liquidity, value and marketability of its common stock. In addition,
certain of the Companys outstanding convertible notes provide that the holder may demand payment
in full upon the delisting of its common stock from NASDAQ.
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If our securities are delisted from NASDAQ, trading of our securities may be restricted by the
SECs penny stock regulations and FINRAs sales practice requirements, which may limit a holders
ability to buy and sell our securities.
If our securities are delisted from NASDAQ, trading of our securities may be subject to the penny
stock rules. The Securities and Exchange Commission has adopted Rule 3a51-1 which generally defines
penny stock to be any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain exceptions. The penny
stock rules impose additional sales practice requirements on broker-dealers who sell to persons
other than established customers and accredited investors. The term accredited investor refers
generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The
penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the
SEC which provides information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the
transaction and monthly account statements showing the market value of each penny stock held in the
customers account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customers confirmation. In
addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise
exempt from these rules, the broker-dealer must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchasers written agreement to
the transaction. These disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for the stock that is subject to these penny stock rules.
Consequently, these penny stock rules may affect the ability of broker-dealers to trade our
securities if they are delisted from NASDAQ.
In addition to the penny stock rules promulgated by the Securities and Exchange Commission, the
Financial Industry Regulatory Authority (FINRA) has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to recommending speculative low
priced securities to their non-institutional customers, broker-dealers must make reasonable efforts
to obtain information about the customers financial status, tax status, investment objectives and
other information. Under interpretations of these rules, FINRA believes that there is a high
probability that speculative low-priced securities will not be suitable for at least some
customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their
customers buy our equity securities, which may limit your ability to buy and sell our equity
securities.
The market prices of our securities are likely to be highly volatile and subject to wide
fluctuations.
The market price of our common stock, units and warrants could be highly volatile and could be
subject to wide fluctuations in response to a number of factors that are beyond our control,
including changes in government regulations and changes in general economic conditions.
In addition, the market prices of our securities could be subject to wide fluctuations in response
to a number of additional factors, including:
| announcements of new products or services by our competitors; | ||
| demand for our services; | ||
| changes in the pricing policies of our competitors; and | ||
| changes in government regulations. |
The amount of stock held by executive officers, directors and other affiliates may limit your
ability to influence the outcome of director elections and other matters requiring stockholder
approval.
Our executive officers, directors and affiliates beneficially own a majority of our voting stock.
In addition, certain of these stockholders are parties to a board voting agreement pursuant to
which they have each agreed for three years following the consummation of the Merger to vote shares
beneficially owned by them for the election to our board
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of directors of (a) Robert Wallace, for so
long as Mr. Wallace owns two percent or more of its fully diluted shares, (b) five designees named
by the stockholders representatives of PVGI pursuant to the Merger Agreement, one of whom shall be
the designee of Galen who shall serve as non-executive vice chairman of our board of directors, and
(c) four designees named by Echos initial stockholders, one of whom shall include Gene Burleson.
These stockholders can have a substantial influence on all matters requiring approval by
stockholders, including the election of directors and the approval of mergers or other business
combination transactions. This concentration of ownership could have the effect of delaying or
preventing a change in control or discouraging a potential acquirer from attempting to obtain
control of our company, which in turn could have a material adverse effect on the market price of
the common stock or prevent stockholders from realizing a premium over the market price for their
shares of common stock.
If our existing stockholders exercise their registration rights, it may have an adverse effect on
the market price of our common stock.
Certain stockholders are parties to registration rights agreements which entitle them to require us
to register the resale of their shares of common stock under certain circumstances. The lead
investors and certain of our directors and executive officers are among the parties to registration
rights agreements with us. If these stockholders exercise their registration rights with respect to
all of their shares of common stock, then there will be significantly more shares of common stock
eligible for trading in the public market. The presence of this additional number of shares of
common stock eligible for trading in the public market may have an adverse effect on the market
price of our common stock.
The exercise of our outstanding warrants and/or conversion of our outstanding convertible
securities will result in a dilution of our current stockholders voting power and an increase in
the number of shares eligible for future resale in the public market which may negatively impact
the market price of our stock.
The conversion or exercise of some or all our convertible debt obligations and warrants could
significantly dilute the ownership interests of our existing stockholders.
We had outstanding warrants to purchase an aggregate of 23,870,685 shares of common stock as of
December 31, 2009, including without limitation (i) the public warrants to purchase 7,187,500
shares of common stock which are offered hereby, (ii) the founding director warrants to purchase
458,333 shares of common stock subject to transfer restrictions but otherwise generally on the same
terms as the public warrants, (iii) warrants to purchase 15,070,986 shares of common stock at an
exercise price of $0.10 per share, which warrants were issued in connection with the private
placement of the Senior Notes, (iv) warrants to purchase 250,000 shares of common stock at an
exercise price of $0.10 per share issued to a lender, and (v) warrants to purchase up to 1,349,294
shares of common stock upon exercise of outstanding warrants originally issued by PVGI. On March
17, 2010, the public warrants and the founding director warrants referenced above expired by their terms and
are no longer deemed outstanding.
The currently outstanding Senior Notes, together with accrued interest and the premium, are
convertible into 1,918,178 shares of common stock. Additionally, the issuance of up to 714,295
shares issuable upon conversion of convertible debentures originally issued by PVGI, as well as
stock options and other awards pursuant to our incentive plans, will further dilute our existing
stockholders voting interest.
To the extent warrants are exercised or convertible securities converted, additional shares of
common stock will be issued, which will dilute existing stockholders and increase the number of
shares eligible for resale in the public market. In addition to the dilutive effects described
above, the conversion or exercise of those securities would lead
to a potential increase in the number of shares eligible for resale in the public market. Sales of
substantial numbers of such shares in the public market could adversely affect the market price of
our shares.
Future financings may dilute your ownership and investment or result in the issuance of additional
debt.
We may seek additional equity or debt financings to allow us to meet our future growth, operating
and/or capital requirements or to refinance our Senior Notes or other debt. Any equity financing
may be dilutive to our stockholders, and debt financing, if available, may involve restrictive
covenants or other adverse terms with respect
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to raising future capital and other financial and
operational matters. We may not be able to obtain additional financing in sufficient amounts or on
acceptable terms when needed, which could adversely affect our financial condition, results of
operations, cash flows and prospects. If we fail to arrange for sufficient capital in the future,
we may be required to limit or reduce the scope of our business activities until we can obtain
adequate financing.
Item 1B. Unresolved Staff Comments
Not applicable to smaller reporting companies.
Item 2. Properties.
We lease our corporate headquarters facility in Brentwood, Tennessee, pursuant to a lease expiring
in 2012. As of March 2010, we also own one facility and lease numerous facilities relating to our
operations in California. These facilities consist primarily of veterinary hospitals. We believe
that our facilities are sufficient for our current needs and are in good condition in all material
respects.
Item 3. Legal Proceedings.
We are involved in various claims and legal actions arising in the ordinary course of
business. We do not believe that the ultimate resolution of these matters will have a material
adverse effect on our business, results of operations, financial condition, or cash flows.
However, the results of these matters cannot be predicted with certainty, and an unfavorable
resolution of one or more of these matters could have a material adverse effect on our business,
results of operations, financial condition, cash flows and prospects.
Item 4.
Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
On May 29, 2008, our common stock, warrants and units commenced trading on the NASDAQ Capital
Market under the symbols VETS, VETSW and VETSU, respectively. Until May 29, 2008, our units,
common stock and warrants traded on the OTC Bulletin Board under the symbols PDXC.OB, PDXCW.OB
and PDXCU.OB, respectively.
The following tables set forth, for the calendar quarter indicated, the quarterly high and low
sales prices of our common stock, warrants and units as reported on the OTC Bulletin Board and on
the NASDAQ Capital Market for the respective periods presented.
Common Stock | Warrants | Units | ||||||||||||||||||||||
2009 | High | Low | High | Low | High | Low | ||||||||||||||||||
Fourth Quarter |
$ | 0.64 | $ | 0.19 | $ | 0.02 | $ | 0.01 | $ | 0.75 | $ | 0.25 | ||||||||||||
Third Quarter |
$ | 0.70 | $ | 0.49 | $ | 0.04 | $ | 0.00 | $ | 0.66 | $ | 0.24 | ||||||||||||
Second Quarter |
$ | 1.10 | $ | 0.17 | $ | 0.02 | $ | 0.00 | $ | 0.96 | $ | 0.01 | ||||||||||||
First Quarter |
$ | 0.53 | $ | 0.10 | $ | 0.08 | $ | 0.00 | $ | 0.80 | $ | 0.11 |
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Common Stock | Warrants | Units | ||||||||||||||||||||||
2008 | High | Low | High | Low | High | Low | ||||||||||||||||||
Fourth Quarter |
$ | 3.01 | $ | 0.08 | $ | 0.25 | $ | 0.01 | $ | 4.00 | $ | 0.16 | ||||||||||||
Third Quarter |
$ | 4.23 | $ | 1.00 | $ | 0.54 | $ | 0.16 | $ | 4.40 | $ | 2.00 | ||||||||||||
Second Quarter |
$ | 4.78 | $ | 3.30 | $ | 0.65 | $ | 0.36 | $ | 4.85 | $ | 4.30 | ||||||||||||
First Quarter |
$ | 7.85 | $ | 3.74 | $ | 1.12 | $ | 0.40 | $ | 8.20 | $ | 4.05 |
On March 23, 2010, the last reported sales price on the NASDAQ Capital Market for our common stock
was $.35 per share. On March 17, 2010, our publicly-traded warrants expired by their terms and ceased to
trade on the Nasdaq Capital Market.
Stockholders
As of
March 23, 2010, there were approximately 67 holders of record of our common stock.
Dividends
We have not paid cash dividends on our common stock and we do not anticipate paying cash dividends
in the foreseeable future. Any future determination as to the payment of dividends will depend on
our results of operations, financial condition, capital requirements and other factors deemed
relevant by our board of directors.
EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 2009 regarding equity compensation
plans approved and not approved by stockholders.
(C) | ||||||||||||
Number of Securities | ||||||||||||
Remaining Available for | ||||||||||||
(A) | (B) | Future Issuance Under | ||||||||||
Number of Securities | Weighted-Average | Equity | ||||||||||
to be Issued Upon | Exercise Price of | Compensation Plans | ||||||||||
Exercise of | Outstanding | (Excluding Securities | ||||||||||
Outstanding Options, | Options, Warrants | Reflected | ||||||||||
Warrants and Rights | and Rights | in Column A) | ||||||||||
Plan Category |
||||||||||||
Equity Compensation
Plans Approved by Security Holders |
2,580,377 | $ | 1.53 | 2,619,623 | ||||||||
Equity Compensation
Plans Not Approved by Security Holders |
624,866 | $ | 4.20 | | ||||||||
Total |
3,205,243 | $ | 2.06 | 2,619,623 |
Equity Compensation Plan not approved by Security Holders. The Company maintains the XLNT
Veterinary Care, Inc. 2004 Stock Option Plan, as amended (the 2004 Plan) as part of its
compensation program. The Company adopted and assumed the 2004 Plan in connection with the
Companys merger involving XLNT Veterinary Care, Inc. (the Merger), including with respect to (i)
the future issuance of awards and shares thereunder, (ii) the
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reservation for future issuance under
the 2004 Plan of shares of common stock of the Company, representing the remaining number of shares
of XLNT Veterinary Care, Inc. common stock reserved under the 2004 Plan immediately prior to
January 4, 2008, the date the Merger was consummated, multiplied by the Exchange Ratio (as defined
in the Merger Agreement), less any shares of common stock of the Company actually issued under the
2004 Plan, and (iii) the issuance of common stock in accordance with the terms of awards granted
under the 2004 Plan, which upon such issuance shall be validly issued, fully paid and
non-assessable. The 2004 Plan has not been approved by the
stockholders of the Company. On July 28, 2009, the 2004 Plan was
terminated such that no additional awards may be made under the 2004
Plan; however, the validity of options issued and outstanding as of
the termination date are not affected.
Item 6. Selected Financial Data.
Not applicable to smaller reporting companies.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following should be read in conjunction with our consolidated financial statements and the
related notes.
Overview
General
The Company is a provider of primary and specialty veterinary care services to companion animals
through a network of veterinary hospitals. As of December 31, 2009, we owned and operated
twenty-three veterinary hospitals located in northern and southern California. Our hospital
operations are conducted by our subsidiaries.
Our hospitals offer a full range of general medical treatment for companion animals, including (i)
preventative care, such as vaccinations, examinations, spaying/neutering, and dental care, and (ii)
a broad range of specialized diagnostic and medical services, such as x-ray, ultra-sound, internal
medicine, surgery, cardiology, ophthalmology,
dermatology, oncology, neurology and other services. Our hospitals also sell pharmaceutical
products, pet food and pet supplies.
We intend to grow and enhance our profitability by expanding same-store revenue and capitalizing on
economies of scale and cost reduction efficiencies and by acquiring established veterinary
practices in select regions throughout the United States.
Business Strategy
Our objective is to deliver a broad scope of high-quality services to our customers through a hub
and spoke network of veterinary hospitals within select local markets. Specifically, we offer,
through specialty and emergency hospitals (hubs), a wide range of medical, diagnostic and
specialty-medical services and use the traditional smaller general practices as spokes to feed to
the hub units patients requiring more specialized services than a general practice is equipped to
provide. We pursue the following strategies to achieve our objectives:
o | recruit and retain top veterinary professionals; | |||
o | provide high quality veterinary care to our customers; | |||
o | pursue acquisitions of additional veterinary hospitals, with a focus on continuing to develop hub and spoke networks that will improve customer service; | |||
o | increase veterinary hospital visits through advertising, market positioning, consumer education, wellness programs and branding; |
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o | increase veterinary hospital margins through same-store revenue growth and cost savings realized through consolidated purchasing arrangements for high volume items such as food and medical supplies and generally lower costs through economies of scale; | |||
o | increase veterinary hospital productivity through professional development and training, integration of performance data collection systems, application of productivity standards to previously under-managed operations and removal of administrative burdens from veterinary professionals; and | |||
o | capture valuation arbitrage differentials between individual practice value and larger consolidated enterprise value. |
Seasonality
The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for
veterinary services is slightly higher during the warmer months because pets spend a greater amount
of time outdoors where they are more likely to be injured and are more susceptible to disease and
parasites. In addition, use of veterinary services may be affected by levels of flea infestation,
heartworm and ticks, and the number of daylight hours. The seasonality we experience at our clinics
varies throughout the year depending on the geographic region of those locations. Our clinics in
the desert region of California experience their highest sales volume in the winter months.
However, revenue may be impacted significantly from quarter to quarter by natural disasters, such
as earthquakes, landslides and fires, and other factors unrelated to such adverse events, such as
changing economic conditions.
Overview of Our Financial Results
(Results discussed relate to continuing operations unless stated otherwise)
The year of 2009 was a challenging year for the Company due to the economic environment of the U.S.
and more
specifically, the state of California. Revenues were down due to decreased sales volume; however,
the Company made many great improvements in the area of cost of goods sold as well as veterinary
and staff payroll. For the full year of 2009, 22 of our 23 hospitals achieved positive Hospital
EBITDA (see Other Metrics below for definition of Hospital EBITDA).
Net revenue and net loss from continuing operations are key measurements of our financial results.
For the year 2009, net revenue was $63.9 million, a decrease of 6.4% from net revenues in 2008. The
net loss from continuing operations for 2009 of $30.3 million was an increase of $10.9 million, or
56.0%, over 2008 net loss of $19.4 million. Basic and diluted net loss from continuing operations
per share was $(1.28) for the year ended December 31, 2009 versus $(0.83) at December 31, 2008.
The revenue decrease in 2009 from 2008 was primarily a result of the decreased volumes in our
animal hospitals as a result of the economic environment of the U.S. and especially California,
where all of our hospitals are located. Partially offsetting these decreases were acquisition
revenues of Valley Animal Medical Center which was not acquired until the beginning of the third
quarter of 2008. The increase in net loss from continuing operations and loss per share was
primarily a result of the $22.5 million impairment charge to goodwill, offset by decreased
veterinary and staff payroll at our animal hospitals and the lack of certain duplicative occupancy
and staff costs at our corporate office, which were incurred in 2008 when the Company relocated its
headquarters from San Jose, California to Brentwood, Tennessee.
The revenue increase in 2008 from 2007 was primarily due to the acquisition of five veterinary
hospitals during the first quarter of 2007 and one acquisition in the third quarter of 2008. The
increase in net loss from continuing operations and loss per share was primarily a result of
expenses associated with relocating the Companys
20
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headquarters from California to Tennessee,
developing a new executive and corporate staff in Brentwood, and recognizing the loss related to
the impairment of goodwill and intangible assets. Additionally, the Company incurred increased
interest expense as a result of one-time charges taken in conjunction with pre-paying the Fifth
Street loans.
Cash used in operations for 2009 was $2.2 million compared to cash used in 2008 of $11.7 million.
The use of cash in 2009 was primarily due to net loss incurred during the year of $30.3 million
offset by certain non-cash expenses included in the net loss, including the goodwill impairment
charge. Cash provided by investing activities during 2009 was from the sale of one of its
buildings during the year, partially offset by purchases of property and equipment for our various
animal hospitals. Cash provided from financing activities was principally from the $6.5 million of
net proceeds received from the issuance of the Senior Notes in the first quarter of 2009.
Cash used in operations for 2008 was $11.7 million compared to cash used in 2007 of $2.6 million.
The use of cash in 2008 was primarily due to the pay down of approximately $10.0 million of working
capital deficit of PVGI on the date of the Merger. Cash used in investing activities during 2008
was principally for the acquisition of Valley Animal Medical Center on July 1, 2008 and for
purchases of property and equipment for our various animal hospitals. Cash provided from financing
activities was principally from the $36.4 million of net proceeds from the IPO that were received
as a result of the merger with PVGI, which was partially offset by the $16.2 million payoff of the
Fifth Street loans.
We had a working capital deficit of $4.4 million at December 31, 2009 as compared to working
capital deficit of $7.2 million at December 31, 2008. The December 31, 2009 working capital deficit
was favorably impacted by the $6.5 million of net proceeds received from the issuance of the Senior
Notes.
Results of Our Operations
Fiscal year 2009 compared to fiscal year 2008
(in millions, except percentages)
Revenue
For The Years Ended | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | %Change | ||||||||||
Revenue |
$ | 63.9 | $ | 68.3 | (6.4 | %) |
Revenues decreased $4.3 million, or 6.4%, in 2009 as compared to 2008 primarily resulting from
decreased volumes as a result of the economic environment of the U.S. and especially California,
where all of our hospitals are located, partially offset by the acquisition revenues of Valley
Animal Medical Center, which was not acquired until the beginning of the third quarter of 2008.
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Direct Costs
Continuing Operations:
For The Years Ended | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | %Change | ||||||||||
Total direct costs |
$ | 58.1 | $ | 64.5 | (9.9 | %) | ||||||
Gross Margin as a percentage of total net revenue from continuing operations |
9.1 | % | 5.5 | % |
Direct costs decreased $6.4 million, or 9.9%, in 2009 as compared to 2008. The decrease in direct
costs was partially due to a $1.3 million reduction in cost of goods sold for the twelve months
ended December 31, 2009 compared to the same time period one year ago due to lower revenue volumes
and the continued improvement with centralization of purchasing of inventory items. Further
decreasing direct costs was a $3.6 million decrease in veterinary and staff payroll in 2009 versus
2008 due to lower compensation paid to veterinarians as a result of lower revenues, improvements in
adjusting staff levels to be in line with lower revenues, and the elimination of certain cost
redundancies from three hospital consolidations that took place during 2008.
Selling, General and Administrative (SG&A)
For The Years Ended | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | %Change | ||||||||||
Selling, general and administrative |
$ | 31.1 | $ | 19.0 | 63.4 | % | ||||||
As a percentage of total net revenue from continuing operations |
48.6 | % | 27.9 | % |
The increase in SG&A of $12.1 million, or 63.4%, in 2009 as compared to 2008 was a result of the
$22.5 million impairment charge to goodwill recorded in the fourth quarter of 2009, offset by
several factors. First, the impairment charge taken in 2008 related
to goodwill and intangible assets at two of its hospital locations
totaled $4.6 million. Additionally, in 2008, the Company
recorded approximately $0.3 million more of an impairment charge
on its Assets Held for Sale than in 2009 when it recorded a smaller
impairment amount at the time of sale of the building.
Additionally,
in 2008, the Company was relocating its headquarters from California to
Tennessee, which required the hiring of a new corporate team in Tennessee. For a period of time in
2008, the Company incurred certain duplicative staff and occupancy costs and experienced higher
than normal travel, relocation, and recruiting expenditures. Additionally, in 2008, the Company
executed certain corporate staff reductions and paid severance costs, which were also not incurred
in 2009. Since these 2008 transition and staff reduction costs were not incurred in 2009, there
was a direct reduction in payroll, travel, relocation/recruiting, and occupancy related costs for
the twelve months ended December 31, 2009 of $2.0 million, $0.5 million, $0.4 million, and $0.2
million, respectively.
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Further offsetting the increase in SG&A in 2009 as compared to 2008 were reductions in stock
compensation expense and professional fees. Stock compensation expense was down $1.1 million in
2009 primarily from the majority of the option grants granted to certain executives and Board of
Directors members in the first quarter of
2008 having completed their vesting in that year. The number of stock option granted in 2009 was
significantly lower than grants in 2008 when the Company first became publicly traded.
Professional fees, decreased $0.9 million from 2008 due to the decreased utilization of third party
costs to assist with SEC filings and Sarbanes-Oxley requirements, as well as discontinuing the use
of contract labor at its former headquarters location after the relocation to Tennessee.
Interest income
For The Years Ended | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | %Change | ||||||||||
Interest income |
$ | 0.0 | $ | 0.3 | (96.5 | %) | ||||||
As a percentage of total net revenues from continuing operations |
0.0 | % | 0.5 | % |
The decrease in interest income for the twelve months ended December 31, 2009 as compared to the
same time periods in the prior year was a result of having more cash on deposit at a banking
institution for the majority of the prior year time period primarily due to the $36.4 million in
net proceeds received from the merger with PVGI on January 4, 2008.
Interest Expense
For The Years Ended | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | %Change | ||||||||||
Interest expense |
$ | 5.8 | $ | 4.6 | 27.1 | % | ||||||
As a percentage of total net revenues from continuing operations |
9.0 | % | 6.7 | % |
Interest expense increased by $1.2 million, or 27.1%, in 2009 compared to 2008; however, the
majority of interest expense incurred in the two comparative periods was unrelated to one another.
In 2008, the Company had recorded certain one-time charges to interest expense related to the
payoff of its Fifth Street loans in June 2008, including a $1.4 million charge to eliminate the
debt discounts associated with those loans, a $0.2 million charge related to the write-off of the
debt amendment costs incurred in February 2008, and a $0.2 million prepayment penalty that had been
incurred. Additionally, interest expense incurred on the principal of the Fifth Street loans in
the twelve months ended December 31, 2008 was approximately $1.2 million. In 2009, interest
expense was incurred primarily from the issuance of the Senior Notes in the first quarter of 2009.
Interest expense incurred on the principal of the notes, interest expense from the loan value
accretion, and interest expense from the amortization of certain debt discounts associated with the
notes was $0.7 million, $2.7 million, and $1.0 million, respectively, for the twelve months ended
December 31, 2009. Additionally, for the twelve months ended December 31, 2009, the Company
recorded a one-time charge to interest expense of $0.3 million related to the amendment of the
Huntington Promissory Note.
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Fiscal year 2008 compared to fiscal year 2007
(in millions, except percentages)
Revenue
Continuing Operations:
For The Years Ended | ||||||||||||
December 31, | ||||||||||||
2008 | 2007 | %Change | ||||||||||
Revenue |
$ | 68.3 | $ | 60.3 | 13.3 | % |
Revenues increased $8.0 million, or 13.3%, during 2008 as compared to 2007. The revenue increase
was due to having twelve months of revenue in 2008 from the five veterinary hospitals acquired in
the first quarter of 2007 as well as six months of results from Valley Animal Medical Center, which
was acquired in July 2008, as summarized below:
Comparative Analysis | ||||||||||||
2008 | 2007 | %Change | ||||||||||
Same-store revenue (1) |
$ | 37.5 | $ | 37.5 | (0.2) | % | ||||||
Net acquired revenue (2) |
30.8 | 22.8 | 35.5 | % | ||||||||
Total |
$ | 68.3 | $ | 60.3 | 13.3 | % |
(1) | Same-store revenue was calculated using animal hospital operating results for the animal hospitals that we owned as of January 1, 2007. | |
(2) | Net acquired revenue represents the revenue from those five animal hospitals acquired after January 1, 2007. Fluctuations in net acquired revenue occurred due to the volume, size and timing of acquisitions. |
Same-store revenues remained fairly consistent year over year, with a slight decrease in overall
foot traffic to our clinics; however, revenue per invoice slightly increased, which partially
offset the decrease in foot traffic.
Discontinued Operations:
For The Years Ended | ||||||||||||
December 31, | ||||||||||||
2008 | 2007 | %Change | ||||||||||
Revenue |
$ | 1.3 | $ | 2.2 | (42.0 | )% |
Revenues decreased $0.9 million, or 42.0%, during 2008 as compared to 2007. The revenue decrease
was primarily due to a loss of key veterinarians coupled with increased competition in the area of
South Bay. Management made
the decision to close South Bay in the fourth quarter of 2008. See Note 16 in the notes to the
consolidated financial statements for further discussion on South Bay.
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Direct Costs
Continuing Operations:
For The Years Ended | ||||||||||||
December 31, | ||||||||||||
2008 | 2007 | %Change | ||||||||||
Total direct costs |
$ | 64.5 | $ | 56.5 | 14.3 | % | ||||||
Gross Margin as a percentage of
total net revenue from continuing
operations |
5.5 | % | 6.4 | % |
Direct costs increased $8.1 million, or 14.3%, in 2008 as compared to 2007 primarily due to the
Company having a full twelve months of direct costs incurred in 2008 related to the 5 acquisitions
that were made in the first quarter of 2007 and to the acquisition of Valley Animal Medical Center,
which was purchased in July 2008.
Same store direct costs decreased $0.8 million year over year partially as a result of the Company
centralizing its purchasing of medical and pet supplies during 2008, which allowed the Company to
begin realizing advantageous pricing from economies of scale. Further decreasing same-store direct
costs was a decrease in hospital staff costs as the Company merged six of its existing animal
hospitals into three locations, which allowed the Company to avoid certain duplicative costs within
hospitals in similar geographic regions.
Discontinued Operations:
For The Years Ended | ||||||||||||
December 31, | ||||||||||||
2008 | 2007 | %Change | ||||||||||
Total direct costs |
$ | 1.9 | $ | 2.6 | (29.2) | % | ||||||
Gross Margin as a percentage of
net revenue from discontinued
operations |
(43.4 | )% | (17.7) | % |
Direct costs from discontinued operations decreased $0.8 million, or 29.2%, in 2008 as compared to
2007. The decrease in direct costs year over year was primarily due to the timing of the closure of
the facility, which occurred in early November 2008. Further reducing direct costs were lower
payroll costs after the loss of key veterinarians in 2007, lower cost of goods sold due to the
centralization of purchasing in 2008, and no amortization expense from intangible assets being
incurred in 2008 since the Company recorded a one-time impairment charge in 2007 to write-off the
full value of the intangible assets.
Selling, General and Administrative
For The Years Ended | ||||||||||||
December 31, | ||||||||||||
2008 | 2007 | %Change | ||||||||||
Selling, general and administrative |
$ | 19.0 | $ | 12.7 | 50.1 | % | ||||||
As a percentage of total net revenue from continuing operations |
27.9 | % | 21.0 | % |
The
increase in selling, general and administrative of $6.4 million or 50.1% for 2008 over 2007,
was largely due to the $4.6 million one-time impairment charge recorded for goodwill and
intangibles at two of our hospitals. Further increasing our expenses were duplicative staff costs
incurred during the first quarter of 2008 as the Company moved its headquarters to Tennessee from
California, the build-out of the Companys infrastructure as a result of the Merger and our public
company reporting responsibilities, the $0.5 million non-cash impairment charges taken in
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the third
and fourth quarter of 2008 related to the Assets Held for Sale, and increased non-cash stock
compensation expense, offset by the substantial decrease in professional fees that were largely
incurred in 2007 in preparation for the Merger.
In 2007, the Company also had recorded a $3.7 million one-time impairment charge for the goodwill
and intangibles assets at South Bay, which has been recorded in the loss from discontinued
operations in the accompanying consolidated statement of operations.
Interest income
For The Years Ended | ||||||||||||
December 31, | ||||||||||||
2008 | 2007 | %Change | ||||||||||
Interest income |
$ | 0.3 | $ | 0.1 | 192 | % | ||||||
As a percentage of total net revenues from continuing operations |
0.5 | % | 0.2 | % |
Interest income in 2008 was $0.3 million compared to $0.1 million in 2007, resulting from larger
cash balances on hand at banking institutions in the first half of 2008 as a direct result of the
$36.4 million in net proceeds received through the Merger in January 2008.
Interest Expense
For The Years Ended | ||||||||||||
December 31, | ||||||||||||
2008 | 2007 | %Change | ||||||||||
Interest expense |
$ | 4.6 | $ | 3.8 | 18.4 | % | ||||||
As a percentage of total net revenues from continuing operations |
6.7 | % | 6.4 | % |
Interest expense increased by $0.7 million in 2008 compared to 2007, which was primarily
attributable to one-time charges incurred in 2008 related to the Company paying off all loans with
Fifth Street in June 2008, including a $1.4 million charge to interest expense to eliminate the
debt discounts associated with the loans, a $0.2 million charge related to the write-off of the
debt amendment costs incurred in February 2008, and a $0.2 million charge to interest expense
resulting from a prepayment penalty that was incurred on the payoff of the $12 million Fifth Street
loan. These costs were partially offset by lower interest expense in 2008 on the outstanding
principal of the Fifth Street loans themselves due to the payoff in June 2008 as well as lower
interest expense incurred on the convertible notes that were outstanding as of 2007, as
approximately $8.3 million of the outstanding notes were converted to common stock in conjunction
with the Merger.
Restatement of three and nine months ended September 30, 2009
For The Three Months Ended | For The Twelve Months Ended | |||||||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||||||
% | % | |||||||||||||||||||||||
2009 | 2008 | Change | 2009 | 2008 | Change | |||||||||||||||||||
Gain on Change in Fair
Value of Warrant
Liabilities |
$ | 4.2 | $ | | | % | $ | 0.8 | $ | | | % | ||||||||||||
As a percentage of total net revenue |
28.4 | % | | % | 1.2 | % | | % |
The gain on change in fair value of warrant liabilities of $4.2 million
for the three months ended
December 31, 2009 was primarily a result of the Companys stock price decreasing from $0.58 on
September 30, 2009 to $0.28 on December 31, 2009, offset by a $0.5 million loss related to the
mark-to-market adjustment from August 31, 2009 to September 30, 2009 as a result of the Companys
restatement discussed in further detail below and in Note 21. The
gain on change in fair value of warrant liabilities of $0.8 million for the twelve months ended
December 31, 2009 was primarily driven by the decrease in the Companys stock price from January 1,
2009 to December 31, 2009, in which it decreased from $0.36 to $0.28.
The
Company began treating certain of its convertible debt and common stock warrants as derivative liabilities beginning
on January 1, 2009 as a result of new accounting guidance issued by the FASB in determining whether
certain financial instruments are considered indexed to the Companys stock. Upon the adoption of
the new guidance, the Company determined that certain of its
convertible debt and warrants, including the Financing
Warrants issued in connection with the 12% Senior Notes, should be accounted as a derivative
liability. As such, the Company established the fair value of those warrants that required
derivative treatment as a liability on the consolidated balance sheet and has been modifying the
fair value amount by recording mark-to-market adjustments through Gain on Change in Fair Value of
Warrant Liabilities in the consolidated statement of operations every reporting period.
On August 31, 2009, the Company amended the anti-dilution provision of the Financing Warrants such
that if the Company ever issued additional securities at a price below $0.10 (the exercise price of
the Financing Warrants), the holders of the Financing Warrants would have their exercise price of
the Financing Warrants lowered to that new price only if that price was also below the Companys
current stock price on the date the additional securities are issued. The Company originally
believed that this modification allowed these warrants to be considered indexed to the Companys
stock; and therefore, modified its accounting for those Financing Warrants on August 31, 2009 by
recording a mark-to-market adjustment for the warrants as of August 31, 2009 and then charging the
remaining liability amount to additional paid-in-capital. The Company then did not make any fair
value adjustments to the warrants from August 31, 2009 to September 30, 2009.
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The Company subsequently discovered that the amendment to the Financing Warrants did not fully
satisfy the FASBs guidance on determining whether an instrument is indexed to an entitys own
stock, which was a requirement for the Company to discontinue its treatment of the Financing
Warrants as derivative instruments. The Company has re-examined the accounting treatment in light
of this discovery and now concludes that the more appropriate accounting treatment is to have not
discontinued the derivative treatment of the Financing Warrants at September 30, 2009 and to
continue treating them as derivatives going forward. As such, the Company has restated its
financial statements related to the three and nine months ended September 30, 2009 to account for
the Financing Warrants as derivative liabilities. The restated amounts include a reversal of the
$6,900,000 charge we had originally recorded to additional
paid-in-capital (in stockholders equity) relating to the
outstanding warrant liability for the Financing Warrants and reclassified that amount back to
warrant liabilities (in long-term liabilities) as well as we recorded the mark-to-mark adjustment of the liability from August
31, 2009 (the date of our last adjustment prior to changing our accounting) and September 30, 2009,
which was $450,000 and has been recorded to gain in change in fair value of warrant liabilities in
the accompanying consolidated statement of operations. See Note 21 for further information relating
to the restatement. The Financing Warrants will continue to be treated as derivative liabilities in
future reporting periods.
The following table sets forth unaudited balance sheet at September 30, 2009 and statement of
operations data for the three and nine months ended September 30, 2009. The quarter ended September
30, 2009 has been restated with comparisons to the results as
previously reported.
As Reported | As Restated | |||||||
September 30, | September 30, | |||||||
2009 | 2009 | |||||||
(unaudited) | (unaudited) | |||||||
Current assets |
5,973 | 5,973 | ||||||
Long-term assets |
62,504 | 62,504 | ||||||
Total assets |
68,477 | 68,477 | ||||||
Current liabilities |
9,975 | 9,975 | ||||||
Long-term liabilities |
12,637 | 19,987 | ||||||
Total liabilities |
22,612 | 29,962 | ||||||
Stockholders equity |
45,865 | 38,515 | ||||||
Total liabilities and stockholders equity |
68,477 | 68,477 | ||||||
As Reported | As Restated | |||||||||||||||
For the three | For the nine | For the three | For the nine | |||||||||||||
months ended | months ended | months ended | months ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2009 | 2009 | 2009 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Revenue |
15,734 | 49,158 | 15,734 | 49,158 | ||||||||||||
Direct Costs |
14,488 | 44,375 | 14,488 | 44,375 | ||||||||||||
Hospital Contribution |
1,246 | 4,783 | 1,246 | 4,783 | ||||||||||||
Selling, general, and administrative expenses |
1,644 | 6,204 | 1,644 | 6,204 | ||||||||||||
Loss from operations |
(398 | ) | (1,421 | ) | (398 | ) | (1,421 | ) | ||||||||
Gain/(Loss) on change in fair value of warrant liabilities |
144 | (3,449 | ) | (306 | ) | (3,899 | ) | |||||||||
Interest expense, net |
(1,532 | ) | (4,315 | ) | (1,532 | ) | (4,315 | ) | ||||||||
Loss before provision for income taxes |
(1,786 | ) | (9,185 | ) | (2,236 | ) | (9,635 | ) | ||||||||
Tax provision |
23 | 28 | 23 | 28 | ||||||||||||
Net Loss |
(1,809 | ) | (9,213 | ) | (2,259 | ) | (9,663 | ) | ||||||||
Liquidity and Financial Condition
(Results discussed relate to continuing operations unless stated otherwise)
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Cash Flows from Operating Activities
Our largest source of operating cash flows is cash collections from our customers for purchases of
veterinary healthcare services. We usually receive payment at the time of service. Our primary uses
of cash for operating activities include compensation for hospital and corporate personnel,
facility related expenditures including purchases of inventory, and costs associated with outside
support and services.
Cash used in operating activities was $2.2 million, $11.7 million, and $2.6 million for the years
ended December 31, 2009, 2008, and 2007, respectively.
Cash used in operating activities during 2009 of $2.2 million was largely driven by the $30.3
million net loss incurred during 2009 and reduction of $2.8 million in accounts payable and accrued
liabilities, offset by non-cash expenses incurred during the year in the amount of $22.5 million,
$2.9 million, and $4.1 million for impairment change to goodwill, depreciation and amortization,
and amortization of debt discounts, respectively. Further offsetting the net loss and reduction in
current liabilities was the $0.9 million of interest expense that was accrued back to the principal
of their respective loans.
Cash used in operating activities during 2008 of $11.7 million was impacted by a $19.4 million net
loss from continuing operations and a $4.7 million decrease in accounts payable as the Company used
a portion of the proceeds received from the Merger with PVGI to pay off its working capital deficit
buildup from the prior year. Offsetting these amounts were non-cash expenses of $2.5 million for
depreciation and amortization, $1.9 million of amortization from debt discounts associated
primarily with the Fifth Street loans that were paid off in June 2008, and $1.6 million for
share-based compensation expense, as well as a $1.2 million increase in accrued payroll and
other expenses due to higher wages and workers compensation liabilities at the end of 2008 as
compared to the end of 2009.
The $2.6 million of net cash used in operating activities for 2007 resulted from the $12.4 million
net loss, $0.8 million increase in prepaid expenses and other assets, $0.4 million decrease in
inventory, and $0.3 million increase in taxes payable, which were substantially offset by $5.2
million and $3.1 million increases in accounts payable and accrued payroll and other expenses,
respectively, as PVGI was building up a working capital deficit prior to the Merger and $1.7
million of non-cash expenses for depreciation and amortization.
Cash Flows from Investing Activities
Cash provided by investing activities in 2009 was $0.4 million, while cash used in investing
activities in 2008 and 2007 was $5.5 million and $24.5 million, respectively.
Cash provided by investing activities in 2009 of $0.4 million was a result of the $0.8 million net
proceeds received from selling one of its buildings, offset by $0.4 million of property and
equipment purchased at various hospital locations during the year.
Cash used in investing activities in 2008 of $5.5 million was mainly due to the $3.0 million used
for the acquisition of Valley Animal Medical Center in July 2008 as well as $2.1 million spent on
capital expenditures at the various animal hospitals.
Cash used in investing activities for 2007 was attributable to the acquisition of five veterinary
hospitals for $14.3 million plus $2.5 million for South Bay, payments of $3.9 million related to
prior year acquisitions, and the purchases of $5.0 million of property and equipment, including the
purchase and installation of practice management systems at twenty-two of our hospitals.
Offsetting this cash used in investing activities were the proceeds of $1.2 million from the sale
of a building in December 2007.
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Cash Flows from Financing Activities
Cash provided by financing activities was $2.7 million, $17.0 million, and $25.1 million in
2009, 2008 and 2007, respectively.
Cash provided by financing activities of $2.7 million in 2009 was primarily the result of the $6.5
million the Company raised from the issuance of the Senior Notes in the first quarter of 2009,
offset by $3.4 million of recurring term loan and capital lease payments during the year.
Cash provided by financing activities in 2008 of $17.0 million was a result of the $36.4 million of
net proceeds received in the Merger with PVGI, offset by $18.7 million of payments made on term
loans, including $16.2 million used to prepay the Fifth Street loans in June 2008, as well as
monthly capital lease payments.
Cash provided by financing activities in 2007 principally consisted of the issuance of preferred
stock and debt financing. In February 2007, PVGI completed the issuance of 25,007 shares of a
Series B convertible preferred stock offering for cash proceeds of $13.6 million, net of issuance
costs of $1.5 million. In 2007, PVGI received net proceeds of $14.9 million from the issuance of
two loans with Fifth Street. These proceeds were partially offset by $3.4 million of principal
payments on term loans and capital leases.
Cash Flows from Discontinued Operations
Cash used in discontinued operations in 2008 was primarily due to a $0.5 million build-up in
accounts payable at the end of the year offset by a $0.6 million net loss. In 2007, there was a
small increase in cash driven by a $0.6 million increase in accounts payable and accrued
liabilities as well as the non-cash charge of $3.7 million for the impairment
of goodwill and intangible assets, which offset the $4.1 million net loss from discontinued
operations for that year. There were no cash flows from discontinued operations in 2009.
Off-Balance Sheet Arrangements
As of December 31, 2009, we did not have any off-balance sheet arrangements as defined in item
303(a)(4)(ii) of Regulation S-K.
Debt Covenants
On March 30, 2009, the Company entered into the First Amendment (the Amendment) dated as of March
30, 2009 to the Huntington Promissory Note dated November 2, 2005. The First Amendment waives the
Companys future covenant requirements through the term of the Huntington Promissory Note. The
Company does not have any other financial covenants with any of its other outstanding loans.
Other Metrics
The non-GAAP metric of adjusted earnings before interest, gain on change in fair value of warrant
liabilities, income taxes, depreciation and amortization (Adjusted EBITDA) is an important
performance measure for us and we believe that it is a useful metric to investors and management of
the ability of our business to generate cash and to repay and incur additional debt. Computations
of Adjusted EBITDA may differ from company to company. Therefore, Adjusted EBITDA should be used as
a compliment to, and in conjunction with, our consolidated financial statements included
elsewhere in this report. Adjusted EBITDA was unfavorably impacted in
2009 by the $22.5 million impairment charge to goodwill.
The following table presents a reconciliation of our computation of Adjusted EBITDA to Net Loss
from Continuing Operations for the twelve months ended December 31, 2009, 2008 and 2007 (in
thousands):
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Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net loss from continuing operations |
$ | (30,341 | ) | $ | (19,448 | ) | $ | (12,365 | ) | |||
Depreciation |
1,863 | 1,318 | 932 | |||||||||
Amortization |
1,041 | 1,138 | 801 | |||||||||
Gain on change in fair value of warrant liabilities |
(750 | ) | | | ||||||||
Interest expense, net |
5,773 | 4,207 | 3,725 | |||||||||
Provision/(benefit) for income taxes |
36 | (21 | ) | 44 | ||||||||
Adjusted EBITDA |
$ | (22,378 | ) | $ | (12,806 | ) | $ | (6,863 | ) | |||
Additionally, the Company also reviews the non-GAAP metric of hospital contribution before
depreciation and amortization expense (Hospital EBITDA) as an ability of our hospitals being able
to individually generate cash without the burden of corporate spending. Computations of Hospital
EBITDA may differ from company to company. Therefore, Hospital EBITDA should be used as a
compliment to, and in conjunction with, our consolidated financial statements included
elsewhere in this report.
The following table presents a reconciliation of our computation of Hospital EBITDA for the twelve
months ended December 31, 2009, 2008 and 2007 (in thousands):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Hospital contribution |
$ | 5,820 | $ | 3,774 | $ | 3,835 | ||||||
Depreciation at hospitals |
1,038 | 1,149 | 943 | |||||||||
Amortization at hospitals |
1,041 | 1,135 | 799 | |||||||||
Hospital EBITDA |
$ | 7,899 | $ | 6,058 | $ | 5,577 | ||||||
The Company believes that the foregoing non-GAAP financial measures improve the transparency of the
Companys disclosure and provides a meaningful presentation of the Companys results from its core
hospital operations excluding the impact of items not related to the Companys ongoing core
hospital operations.
Critical Accounting Policies and Estimates
Several accounting policies that are critical to our financial position and results in operations
require significant judgments and estimates on the part of management. For a summary of our
accounting policies, including the accounting policies discussed below, see Note 2 to our
historical consolidated financial statements included in this Form 10-K. These critical accounting
policies and estimates include:
w valuation of goodwill and other intangible assets; | |||
w accounting for stock options; and | |||
w accounting for income taxes. |
Valuation of Goodwill and other Intangible Assets
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the net of the amounts
assigned to identifiable assets acquired and liabilities assumed.
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In accordance with the FASBs guidance on goodwill and intangible assets, we have determined that
we have one reporting unit, Animal Hospitals, and we estimate annually, or sooner if circumstances
indicate an impairment may exist, the fair market value of our reporting unit, and compare its
estimated fair market value against its net book value to determine if our goodwill is impaired.
Other Intangible Assets
In addition to goodwill, we acquire other identifiable intangible assets in our acquisitions,
including, but not limited to, covenants-not-to-compete, client lists, lease related assets and
customer relationships. We value these identifiable intangible assets at estimated fair value. We
use independent valuation experts to advise and assist us in determining what identifiable assets
we have acquired in an acquisition as well as how to estimate the fair value of those assets. Our
estimated fair values are based on generally accepted valuation techniques such as market
comparables, discounted cash flow techniques or replacement costs. These valuation methods involve
the use of significant assumptions such as the timing and amount of future cash flows, risks,
appropriate discount rates, and the useful lives of intangible assets.
Subsequent to acquisition, we test our identifiable intangible assets for impairment as part of a
broader test for impairment of long-lived assets under the FASBs guidance on accounting for the
impairment or disposal of long-lived assets, whenever events or changes in circumstances indicate
that the carrying value may not be recoverable.
The recognition and measurement of an impairment loss under this accounting guidance also involves
a two-step process:
First we identify potential impairment by estimating the aggregate projected undiscounted future
cash flows associated with an asset or asset pool and compare that amount with the carrying value
of those assets. If the aggregate projected cash flow is greater than our carrying amount, there
is no impairment and the second step is not needed.
When we test for impairment, the cash flows that are used contain our best estimates, which include
appropriate and customary assumptions.
If we identify a potential impairment in the first step, we are then required to write the assets
down to fair value with a corresponding charge to earnings. If the fair value is greater than
carrying value, there is no adjustment. We may be required to make significant estimates in
determining the fair value of some of our assets.
Impairment of Goodwill and Other Intangible Assets
During the fourth quarter of 2009, in conjunction with our annual impairment test of goodwill, we
recorded a goodwill impairment charge of $22.5 million. The factors that caused us to record the
impairment were primarily the decreased revenues sustained in 2009 from the decline in the U.S.
economy coupled with the increased amount of debt incurred by the Company. The fair market
valuation of the reporting units was based on an income and market approach.
During the fourth quarter of 2008, we recorded a goodwill impairment of $4.0 million and an
impairment of $0.6 million of certain long-lived assets at two of our animal hospitals. The
factors that caused us to record the impairments were the loss of key veterinarians and increased
competition in the area of those animal hospitals. The fair market valuation of the reporting units
was based on an income and market approach.
During the fourth quarter of 2007, we recorded a goodwill impairment of $2.9 million and an
impairment of $0.8 million of certain long-lived assets at one of our animal hospitals, South Bay.
The factors that caused us to record the impairments were the loss of key veterinarians coupled
with increasing competition in the area of that hospital;
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both substantially driving down the
existing customer base. In the fourth quarter of 2008, the Company closed the South Bay facility
permanently.
Accounting for Stock Options
Prior to January 1, 2006, we accounted for our share-based payments to our employees and directors
(hereafter referred to collectively as employees) under the intrinsic value method. Under that
method, when options are granted with a strike price equal to or greater than market price on date
of issuance, there is no impact on earnings either on the date of grant or thereafter, absent
modification to the options. Accordingly, we recognized no share-based compensation expense in
periods prior to January 1, 2006.
Effective January 1, 2006, we adopted the FASBs most recent guidance on share-based compensation,
which required us to measure the cost of share-based payments granted to our employees, including
stock options, based on the grant-date fair value and to recognize the cost over the requisite
service period, which is typically the vesting period. We adopted this guidance using the modified
prospective transition method, which requires us to recognize compensation expense for share-based
payments granted or modified on or after January 1, 2006. Additionally, we are required to
recognize compensation expense for the fair value of unvested share-based awards at January 1, 2006
over the remaining requisite service period. Operating results from prior periods have not been
restated.
This guidance also requires the benefits of tax deductions from the exercise of options in excess
of the compensation cost for those options to be classified as cash provided by financing
activities. Prior to the adoption of this guidance, we did not recognize any income tax benefits
resulting from the exercise of stock options.
Accounting for Income Taxes
We are required to estimate our federal income taxes as well as income taxes in each state in which
we operate. This process requires that management estimate the current tax exposure as well as
assess temporary differences between the accounting and tax treatment of assets and liabilities,
including items such as accruals and allowances not currently deductible for tax purposes. The
income tax effects of the differences identified are classified as current or long-term deferred
tax assets and liabilities in our consolidated balance sheets. Managements judgments, assumptions
and estimates relative to the current provision for income taxes takes into account current tax
laws, its interpretation of current tax laws and possible outcomes of current and future audits
conducted by domestic tax authorities. Changes in tax laws or managements interpretation of tax
laws, including the provisions of the American Jobs Creation Act of 2004, and the resolution of
current and future tax audits could significantly impact the amounts provided for income taxes in
our balance sheet and results of operations. We must also assess the likelihood that deferred tax
assets will be realized from future taxable income and, based on this assessment, establish a
valuation allowance if required. As of December 31, 2009, management determined the valuation
allowance to be approximately $17.3 million based upon uncertainties related to our ability to
recover certain deferred tax assets. These deferred tax assets are primarily related to net
operating losses and may be subject to significant annual limitation under certain provisions of
the Internal Revenue Code. Managements determination of valuation allowance is based upon a number
of assumptions, judgments and estimates, including forecasted earnings, future taxable income and
the relative proportions of revenue and income before taxes in the various jurisdictions in which
we operate. Future results may vary from these estimates, and at this time, it cannot be determined
if we will need to establish an additional valuation allowance and if so, whether it would have a
material impact on our financial statements.
Recent Accounting Pronouncements
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Adopted
On January 1, 2009, Pet DRx adopted changes issued by the FASB to fair value accounting and
reporting as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized
or disclosed at fair value in the financial statements on at least an annual basis. These changes
define fair value, establish a framework for measuring fair value in GAAP, and expand disclosures
about fair value measurements. This guidance applies to other GAAP that require or permit fair
value measurements and is to be applied prospectively with limited exceptions. The adoption of
these changes, as it relates to nonfinancial assets, had no impact on the Companys consolidated
financial statements.
On January 1, 2009, Pet DRx adopted changes issued by the FASB to consolidation accounting and
reporting. These changes establish accounting and reporting for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. This guidance defines a noncontrolling
interest, previously called a minority interest, as the portion of equity in a subsidiary not
attributable, directly or indirectly, to a parent. These changes require, among other items, that
a noncontrolling interest be included in the balance sheet within equity separate from the parents
equity; separately, the amounts of consolidated net income attributable to the parent and
noncontrolling interest all on the consolidated statement of operations; and if a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured
at fair value and a gain or loss be recognized in net income based on such fair value. The
adoption of these changes had no impact on the Companys consolidated financial statements as the
Company does not have any noncontrolling interest in any of its subsidiaries.
On January 1, 2009, Pet DRx adopted changes issued by the FASB to disclosures about derivative
instruments and hedging activities. These changes require enhanced disclosures about an entitys
derivative and hedging activities, including (i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedged items are accounted for, and (iii) how
derivative instruments and related hedged items affect an entitys financial position, financial
performance, and cash flows. The adoption of these changes did not have an impact on the Companys
consolidated financial statements as the Company is not involved in any hedging activities.
On January 1, 2009, Pet DRx adopted changes issued by the FASB to accounting for business
combinations. While retaining the fundamental requirements of accounting for business
combinations, including that the purchase method be used for all business combinations and for an
acquirer to be identified for each business combination, these changes define the acquirer as the
entity that obtains control of one or more businesses in the business combination and establishes
the acquisition date as the date that the acquirer achieves control instead of the date that the
consideration is transferred. These changes require an acquirer in a business combination,
including the business combinations achieved in stages (step acquisition), to recognize the assets
acquired, liabilities assumed, and any noncontrolling interest in the acquire at the acquisition
date, measured at their fair values as of that date, with limited exceptions. This guidance also
requires the recognition of assets acquired and the liabilities assumed arising from certain
contractual contingencies as of the acquisition date, measured at their acquisition-date fair
values. Additionally, these changes require acquisition-related costs to be expensed in the period
in which the costs are incurred and the services are received instead of including such costs as
part of the acquisition price. The adoption of these changes did not have an impact to the
Companys consolidated financial statements as the Company has not completed any acquisitions in
2009.
On January 1, 2009, Pet DRx adopted changes issued by the FASB on accounting for business
combinations. These changes apply to all assets acquired and liabilities assumed in a business
combination that arise from certain contingencies and requires (i) an acquirer to recognize at fair
value, at the acquisition date, an asset acquired or liability assumed in a business combination
that arises from a contingency if the acquisition-date fair value of that asset or liability can be
determined during the measurement period otherwise the asset or liability should be recognized at
the acquisition date if certain defined criteria are met; (ii) contingent consideration
arrangements of an acquire assumed by the acquirer in a business combination be recognized
initially at fair value; (iii) subsequent measurements of assets and liabilities arising from
contingencies be based on a systematic and rational method depending on their nature and contingent
consideration arrangements be measured subsequently; and (iv) disclosures
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of the amounts and
measurement basis of such assets and liabilities and the nature of the contingencies. The adoption
of these changes had no impact to the Companys consolidated financial statements as the Company
has not made any acquisitions in 2009.
On January 1, 2009, Pet DRx adopted changes issued by the FASB on derivative accounting,
specifically in identifying whether an instrument or embedded feature is indexed to an entitys own
stock. Prior to the change, the FASB specified that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Companys own stock and (b) classified in
stockholders equity in the statement of financial position would not be considered a derivative
financial instrument. The change now provides a new two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed to an issuers own stock and thus
some instruments or embedded features that werent originally considered derivatives may now be
considered derivatives. See Note 18 for further information.
On January 1, 2009, Pet DRx adopted changes issued by the FASB to accounting for intangible assets.
These changes amend the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset in order to improve
the consistency between the useful life of a recognized intangible asset in a business combination.
The adoption of these changes had no impact on the Companys consolidated financial statements.
On June 30, 2009, Pet DRx adopted changes issued by the FASB to accounting for and disclosure of
events that occur after the balance sheet date but before financial statements are issued or are
available to be issued, otherwise
known as subsequent events. Specifically, these changes set forth the period after the balance
sheet date during which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. The adoption of these
changes had no impact to the Companys consolidated financial statements.
On June 30, 2009, Pet DRx adopted additional changes issued by the FASB to fair value accounting.
These changes provide additional guidance for estimating fair value when the volume and level of
activity for an asset or liability have significantly decreased and includes guidance for
identifying circumstances that indicate a transaction is not orderly. This guidance is necessary
to maintain the overall objective of fair value measurement, which is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date under current market conditions. The adoption of these
changes had no impact on the Companys consolidated financial statements.
On June 30, 2009, Pet DRx adopted changes issued by the FASB to the recognition and presentation of
other-than-temporary impairments. These changes amend existing other-than-temporary impairment
guidance for debt securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities. The adoption of
these changes had no impact on the Companys consolidated financial statements.
On June 30, 2009, Pet DRx adopted changes issued by the FASB to fair value disclosures of financial
instruments. These changes require a publicly traded company to include disclosures about the fair
value of its financial instruments whenever it issues summarized financial information for interim
reporting periods. Such disclosures include the fair value of all financial instruments, for which
it is practicable to estimate that value, whether recognized or not recognized in the financial
statements; the related carrying amount of these financial instruments; and the method(s) and
significant assumptions used to estimate the fair value. Other than the required disclosures, the
adoption of these changes had no impact to the Companys consolidated financial statements.
On September 30, 2009 Pet DRx adopted changes issued by the FASB to the authoritative hierarchy of
GAAP. These changes establish the FASB Accounting Standard Codification (Codification) as the
source of authoritative
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accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of the financial statements in conformity with GAAP.
Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will
no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting
Standards Updates will not be authoritative in their own right as they will only serve to update
the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these
changes had no impact to the Companys consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable to smaller reporting companies.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Pet DRx Corporation and Subsidiaries
36 | ||||
37 | ||||
38 | ||||
39 | ||||
41 | ||||
44 |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Pet DRx Corporation and subsidiaries
Pet DRx Corporation and subsidiaries
We have audited the accompanying consolidated balance sheets of Pet DRx Corporation and
subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the three years in the
period ended December 31, 2009. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Pet DRx Corporation and subsidiaries as of December
31, 2009 and 2008, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
We were not engaged to examine managements assessment of the effectiveness of the Companys
internal control over financial reporting as of December 31, 2009, included in the accompanying
Managements Annual Report on Internal Control over Financial Reporting and, accordingly, we do not
express an opinion thereon.
As discussed in Note 18 to the consolidated financial statements, the Company has adopted the
provisions of ASC 815-40-15, Evaluating Whether an Instrument Involving a Contingency Is
Considered Indexed to an Entitys Own Stock on January 1, 2009.
/s/ SingerLewak LLP
SingerLewak LLP
Irvine, CA
March 31, 2010
Irvine, CA
March 31, 2010
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PET DRx CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and number of shares)
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2,650 | $ | 1,723 | ||||
Trade accounts receivable, net |
385 | 369 | ||||||
Inventory |
901 | 1,154 | ||||||
Prepaid expenses and other |
1,155 | 1,719 | ||||||
Assets held for sale |
| 900 | ||||||
Due from related parties |
| 32 | ||||||
Assets of discontinued operations |
| 1 | ||||||
Total current assets |
5,091 | 5,898 | ||||||
Property and equipment, net |
6,306 | 7,422 | ||||||
Other assets: |
||||||||
Goodwill |
26,525 | 49,373 | ||||||
Other intangible assets, net |
5,663 | 6,704 | ||||||
Restricted cash |
425 | 500 | ||||||
Other |
290 | 447 | ||||||
Total assets |
$ | 44,300 | $ | 70,344 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current portion of long-term obligations, net of debt discount |
$ | 2,853 | $ | 3,718 | ||||
Accounts payable |
1,583 | 2,394 | ||||||
Accrued payroll and other expenses |
4,740 | 6,551 | ||||||
Due to a related party |
| 96 | ||||||
Obligations under capital leases, current portion |
320 | 312 | ||||||
Deferred rent, current portion |
9 | | ||||||
Liabilities of discontinued operations |
| 55 | ||||||
Total current liabilities |
9,505 | 13,126 | ||||||
Long-term liabilities: |
||||||||
Convertible
debt, less current portion, net of debt discount |
11,257 | 4,949 | ||||||
Term notes, less current portion |
1,726 | 3,687 | ||||||
Warrant liabilities |
2,914 | | ||||||
Obligations under capital leases, less current portion |
369 | 361 | ||||||
Deferred rent, less current portion |
549 | 355 | ||||||
Other |
| 83 | ||||||
Total long term liabilities |
16,815 | 9,435 | ||||||
Total liabilities |
26,320 | 22,561 | ||||||
Stockholders equity: |
||||||||
Common stock, par value $0.0001, 90,000,000 shares
authorized, 23,714,460 and 23,660,460 shares outstanding as
of December 31, 2009 and 2008, respectively, net of 1,361,574
treasury shares at December 31, 2009 and 2008, respectively |
2 | 2 | ||||||
Additional paid-in-capital |
86,345 | 87,686 | ||||||
Accumulated deficit |
(68,367 | ) | (39,905 | ) | ||||
Total stockholders equity |
17,980 | 47,783 | ||||||
Total liabilities and stockholders equity |
$ | 44,300 | $ | 70,344 | ||||
See Notes to Consolidated Financial Statements
37
Table of Contents
PET DRx CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenue |
$ | 63,947 | $ | 68,295 | $ | 60,287 | ||||||
Direct costs |
58,127 | 64,521 | 56,452 | |||||||||
Hospital contribution |
5,820 | 3,774 | 3,835 | |||||||||
Selling, general and administrative expense before impairment charges |
8,537 | 13,965 | 12,680 | |||||||||
Impairment of goodwill and intangibles |
22,506 | 4,580 | | |||||||||
Impairment of Assets Held for Sale |
59 | 491 | | |||||||||
Selling, general and administrative expenses |
31,102 | 19,036 | 12,680 | |||||||||
Loss from operations |
(25,282 | ) | (15,262 | ) | (8,845 | ) | ||||||
Other income (expense): |
||||||||||||
Gain on change in fair value of warrant liabilities |
750 | | | |||||||||
Interest income |
12 | 344 | 118 | |||||||||
Interest expense |
(5,785 | ) | (4,551 | ) | (3,843 | ) | ||||||
Gain on sale of building |
| | 249 | |||||||||
Loss before provision (benefit) for income taxes |
(30,305 | ) | (19,469 | ) | (12,321 | ) | ||||||
Provision (benefit) for income taxes |
36 | (21 | ) | 44 | ||||||||
Loss from continuing operations |
(30,341 | ) | (19,448 | ) | (12,365 | ) | ||||||
Loss from discontinued operations, net of tax |
| (565 | ) | (4,066 | ) | |||||||
Loss on disposition of discontinued operations, net of tax |
| (8 | ) | | ||||||||
Loss from discontinued operations, net of tax |
| (573 | ) | (4,066 | ) | |||||||
Net loss |
$ | (30,341 | ) | $ | (20,021 | ) | $ | (16,431 | ) | |||
Basic and diluted loss per common share |
||||||||||||
Loss from continuing operations |
$ | (1.28 | ) | $ | (0.83 | ) | $ | (3.00 | ) | |||
Loss from discontinued operations |
$ | (0.00 | ) | $ | (0.02 | ) | $ | (0.98 | ) | |||
Net loss per share |
$ | (1.28 | ) | $ | (0.85 | ) | $ | (3.98 | ) | |||
Shares used for computing basic and diluted loss per share |
23,675 | 23,433 | 4,124 | |||||||||
See Notes to Consolidated Financial Statements
38
Table of Contents
PET DRx CORPORATION AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS EQUITY
(In thousands except number of shares)
Preferred | Preferred | |||||||||||||||||||||||||||||||||||
Stock A | Stock B | Common Stock | ||||||||||||||||||||||||||||||||||
Additional | ||||||||||||||||||||||||||||||||||||
Paid-in- | Accumulated | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | capital | Deficit | Total | ||||||||||||||||||||||||||||
Balance as of December 31, 2006 |
7,652,175 | $ | 1 | | $ | | 3,560,864 | $ | | $ | 24,747 | $ | (3,453 | ) | $ | 21,295 | ||||||||||||||||||||
Sale of Preferred B for cash, net |
| | 25,391 | | | | 13,644 | | 13,644 | |||||||||||||||||||||||||||
Repurchase of common stock |
| | | | (4,819 | ) | | (25 | ) | | (25 | ) | ||||||||||||||||||||||||
Exercise of warrants |
| | 1,270 | | | | | | | |||||||||||||||||||||||||||
Common stock issued upon debt conversion |
| | | | 691,587 | 1 | 1,495 | | 1,496 | |||||||||||||||||||||||||||
Warrants issued as debt discount |
| | | | | | 1,371 | | 1,371 | |||||||||||||||||||||||||||
Stock compensation expense |
| | | | | | 170 | | 170 | |||||||||||||||||||||||||||
Net loss |
| | | | | | | (16,431 | ) | (16,431 | ) | |||||||||||||||||||||||||
Balance as of December 31, 2007 |
7,652,175 | $ | 1 | 26,661 | $ | | 4,247,632 | $ | 1 | $ | 41,402 | $ | (19,884 | ) | $ | 21,520 | ||||||||||||||||||||
Net proceeds from IPO received as a result of merger with PVGI |
| | | | | | 36,355 | | 36,355 | |||||||||||||||||||||||||||
Conversion of Preferred A and B stock to common stock |
(7,652,175 | ) | $ | (1 | ) | (26,661 | ) | | 10,318,275 | 1 | | | | |||||||||||||||||||||||
Pet DRx shares assumed in Merger |
| | | | 8,750,000 | | | | | |||||||||||||||||||||||||||
Exercise of warrants |
| | | | 57,806 | | | | | |||||||||||||||||||||||||||
Common stock issued upon debt conversion |
| | | | 1,327,024 | | 8,305 | | 8,305 | |||||||||||||||||||||||||||
Inducement shares issued in Merger with PVGI |
| | | | 321,297 | | | | | |||||||||||||||||||||||||||
Stock compensation expense |
| | | | | | 1,624 | | 1,624 | |||||||||||||||||||||||||||
Shares retained in Treasury |
| | | | (1,361,574 | ) | | | | | ||||||||||||||||||||||||||
Net loss |
| | | | | | | (20,021 | ) | (20,021 | ) | |||||||||||||||||||||||||
Balance as of December 31, 2008 |
| | | | 23,660,460 | $ | 2 | $ | 87,686 | $ | (39,905 | ) | $ | 47,783 | ||||||||||||||||||||||
Issuance of stock as payment of earn-out note |
| | | | 30,000 | | 16 | | 16 |
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Preferred | Preferred | |||||||||||||||||||||||||||||||||||
Stock A | Stock B | Common Stock | ||||||||||||||||||||||||||||||||||
Additional | ||||||||||||||||||||||||||||||||||||
Paid-in- | Accumulated | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | capital | Deficit | Total | ||||||||||||||||||||||||||||
Reclassification of warrants from equity to liabilities |
| | | | | | (5,543 | ) | | (5,543 | ) | |||||||||||||||||||||||||
Issuance of warrants |
| | | | | | 3,646 | | 3,646 | |||||||||||||||||||||||||||
Exercise of stock options |
| | | | 24,000 | | 5 | | 5 | |||||||||||||||||||||||||||
Cumulative adjustment to beginning retained earnings for
warrant liability |
| | | | | | | 1,879 | 1,879 | |||||||||||||||||||||||||||
Stock compensation expense |
| | | | | | 535 | | 535 | |||||||||||||||||||||||||||
Net loss |
| | | | | | | (30,341 | ) | (30,341 | ) | |||||||||||||||||||||||||
Balance as of December 31, 2009 |
| | | | 23,714,460 | $ | 2 | $ | 86,345 | ($68,367 | ) | $ | 17,980 | |||||||||||||||||||||||
See Notes to Consolidated Financial Statements
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PET DRx CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(In thousands)
Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows used in operating activities: |
||||||||||||
Net loss |
$ | (30,341 | ) | $ | (20,021 | ) | $ | (16,431 | ) | |||
Loss from discontinued operations, net of tax (includes impairment of
goodwill and intangibles of $3,670 in 2007) |
| 573 | 4,066 | |||||||||
Loss from continuing operations |
(30,341 | ) | (19,448 | ) | (12,365 | ) | ||||||
Adjustments to reconcile net loss from continuing operations to net
cash used in operating activities: |
||||||||||||
Depreciation and amortization |
2,904 | 2,456 | 1,733 | |||||||||
Amortization of debt discount |
4,050 | 1,903 | 627 | |||||||||
Gain on change in fair value of warrant liabilities |
(750 | ) | | | ||||||||
Impairment of fixed assets |
| 219 | | |||||||||
Paid-in-kind interest |
881 | | | |||||||||
Impairment of Assets Held for Sale |
61 | 491 | | |||||||||
Impairment of goodwill and intangibles |
22,506 | 4,580 | | |||||||||
Amortization of debt amendment costs |
| 182 | | |||||||||
Share-based compensation |
535 | 1,624 | 415 | |||||||||
Gain on sale of building |
| | (249 | ) | ||||||||
Deferred rent |
203 | 212 | (113 | ) | ||||||||
Other |
31 | 85 | (602 | ) | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
(16 | ) | (203 | ) | 268 | |||||||
Inventory |
253 | 212 | 397 | |||||||||
Prepaid expenses and other |
254 | (369 | ) | (786 | ) | |||||||
Accounts payable |
(866 | ) | (4,734 | ) | 5,176 | |||||||
Accrued payroll and other expenses |
(1,905 | ) | 1,231 | 3,147 | ||||||||
Income taxes |
| (168 | ) | (328 | ) | |||||||
Other |
3 | (18 | ) | 123 | ||||||||
Net cash used in continuing operations |
(2,197 | ) | (11,745 | ) | (2,557 | ) | ||||||
Net cash provided by discontinued operations |
| 26 | 55 | |||||||||
Net cash used in operating activities |
(2,197 | ) | (11,719 | ) | (2,502 | ) | ||||||
Cash flows provided by (used in) investing activities: |
||||||||||||
Property and equipment additions |
(416 | ) | (2,128 | ) | (5,004 | ) | ||||||
Business acquisitions, net of cash received (including $2,450 for
the acquisition of South Bay in 2007) |
| (3,003 | ) | (16,832 | ) | |||||||
Proceeds from sale of buildings |
841 | | 1,244 | |||||||||
Payments made related to prior year acquisition |
| (356 | ) | (3,940 | ) | |||||||
Net cash provided by (used in) continuing operations |
425 | (5,487 | ) | (24,532 | ) |
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Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net cash used in discontinued operations |
| (26 | ) | (32 | ) | |||||||
Net cash provided by (used in) investing activities |
425 | (5,513 | ) | (24,564 | ) | |||||||
Cash flow provided by financing activities: |
||||||||||||
Proceeds from term loan with preferred stock warrants |
| | 14,935 | |||||||||
Proceeds from Series B preferred stock, net of expenses paid in
cash |
| | 13,641 | |||||||||
Repurchases of preferred stock and common stock warrants |
| | (25 | ) | ||||||||
Net proceeds from IPO received as a result of merger with PVGI |
| 36,355 | | |||||||||
Proceeds from issuance of Senior Notes |
6,500 | | | |||||||||
Deferral of legal settlement to term note |
21 | | | |||||||||
Deferral of debt waiver fees |
(100 | ) | (182 | ) | | |||||||
Capitalized debt issuance costs |
(307 | ) | | | ||||||||
Deferred financing costs |
| (132 | ) | | ||||||||
Proceeds from stock option exercise |
5 | | | |||||||||
Payments on notes payable |
(3,091 | ) | (18,151 | ) | (3,063 | ) | ||||||
Payments on capital lease obligations |
(329 | ) | (503 | ) | (374 | ) | ||||||
Payments made as collateral on accounts |
| (425 | ) | | ||||||||
Net cash provided by continuing operations |
2,699 | 16,962 | 25,114 | |||||||||
Net cash used in discontinued operations |
| (12 | ) | (11 | ) | |||||||
Net cash provided by financing activities |
2,699 | 16,950 | 25,103 | |||||||||
Increase (decrease) in cash and cash equivalents |
927 | (282 | ) | (1,963 | ) | |||||||
Consolidated cash and cash equivalents at beginning of period |
1,723 | 2,005 | 3,968 | |||||||||
Consolidated cash and cash equivalents at end of period |
$ | 2,650 | $ | 1,723 | $ | 2,005 | ||||||
Cash and cash equivalents of continuing operations |
$ | 2,650 | $ | 1,723 | $ | 1,993 | ||||||
Cash and cash equivalents of discontinued operations |
$ | | $ | | $ | 12 | ||||||
Supplemental disclosures: |
||||||||||||
Cash paid during the period for: |
||||||||||||
Income taxes |
$ | 20 | $ | 18 | $ | 97 | ||||||
Interest |
$ | 689 | $ | 3,533 | $ | 2,510 | ||||||
Schedule of non-cash investing and financing activities: |
||||||||||||
Detail of acquisitions: |
||||||||||||
Fair value of assets acquired |
$ | | $ | 5,728 | $ | 30,659 | ||||||
Cash paid for acquisitions and related direct costs |
| (3,003 | ) | (14,382 | ) | |||||||
Cash paid for acquisition of discontinued operations |
| | (2,450 | ) | ||||||||
Obligations to sellers of acquired hospitals, notes payable and
assumed liabilities |
$ | | $ | 2,725 | $ | 13,827 | ||||||
Building acquired: |
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Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Purchase price |
$ | | $ | | $ | 930 | ||||||
Cash paid |
| | (430 | ) | ||||||||
Mortgage held by seller |
$ | | $ | | $ | 500 | ||||||
Deferred costs and accrued liabilities associated with merger of PVGI
recorded to additional paid-in-capital on January 4, 2008 (Date of
Merger) |
$ | | $ | 700 | $ | | ||||||
Retirement of debt to offset related party receivable |
$ | 141 | $ | 16 | $ | | ||||||
Acquisition of equipment from capital lease |
$ | 341 | $ | | $ | | ||||||
Conversion of Series A and Series B preferred stock to common stock |
$ | | $ | 1 | $ | | ||||||
Common stock issued as payment of earn-out note |
$ | 16 | $ | | $ | | ||||||
Common stock issued upon conversion of debt |
$ | | $ | 8,305 | $ | 1,495 | ||||||
See Notes to Consolidated Financial Statements
43
Table of Contents
PET DRx CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
December 31, 2009
1. The Company
Pet DRx Corporation (Pet DRx or the Company) was incorporated in the state of Delaware on June
10, 2005. The Company is a provider of primary and specialty veterinary care services to companion
animals through a network of veterinary hospitals. It intends to grow and enhance its
profitability by acquiring established veterinary practices in select regions throughout the United
States, and by expanding same-store revenue and capitalizing on economies of scale and cost
reduction efficiencies.
At December 31, 2009, we owned and operated 23 animal hospitals in 5 regions of the state of
California. Our headquarters are located in Brentwood, Tennessee. The 23 hospitals are
wholly-owned subsidiaries, which operate either in the name of the subsidiary or, in certain cases,
under a fictitious name.
On January 4, 2008, the Company merged with Pet DRx Veterinary Group, Inc. (PVGI) (formally known
as XLNT Veterinary Care, Inc.) pursuant to the Second Amended and Restated Agreement and Plan of
Merger dated October 23, 2007 (the Merger Agreement). See Note 5 for further information related
to the Merger. The Companys fiscal year end is December 31. The presentation of Pet DRx and its subsidiaries in
these consolidated statements is for the years ended December 31, 2009, 2008, and 2007.
2. Summary of Significant Accounting Policies
a. Basis of Presentation
Our consolidated financial statements include the accounts of Pet DRx and all wholly-owned
subsidiaries. We have eliminated all intercompany transactions and balances. Certain prior year
amounts have been reclassified to conform to current-year presentation.
Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations only
(see Note 16 for more information on discontinued operations).
b. Cash and Cash Equivalents
Financial instruments that potentially subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents. The Company considers highly liquid money market
investments with original maturities of three months or less at the date of purchase to be cash
equivalents. The Company maintains its cash and cash equivalents with high-credit quality
financial institutions. At times, such amounts may exceed federally insured limits; however, the
Company has not experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on its cash equivalent accounts.
c. Revenue Recognition
Revenue is comprised of sales of veterinary care services, pharmaceutical products, pet food and
pet supplies. We recognize revenue and direct costs, barring other facts, when the following
revenue recognition criteria have been met:
o persuasive evidence of a sales arrangement exists;
o delivery of goods has occurred or services have been rendered;
o the sales price or fee is fixed or determinable; and,
o collectability is reasonably assured.
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Revenue is reported net of sales discounts and excludes sales taxes.
Direct costs are comprised of all costs of services and products at the animal hospitals,
including, but not limited to, salaries of veterinarians, technicians and all other veterinary
hospital-based personnel, facilities rent, occupancy costs, supply costs, depreciation and
amortization, certain marketing and promotional expense and costs of goods sold associated with the
retail sales of pharmaceutical products, pet food and pet supplies.
d. Inventory
Inventory consists of clinical supplies and products sold to customers. Inventory is valued at the
lower of cost or market using the average price method. Inventory quantities on hand in excess of
forecasted demand are considered to have reduced market value; and therefore, the cost basis is
adjusted to the net realizable value. Typically, the market values for excess or obsolete
inventories are considered to be zero.
e. Property and Equipment
Property and equipment are recorded at cost. Equipment held under capital leases is recorded at
the lower of the present value of the minimum lease payments or the fair value of the equipment at
the beginning of the lease term.
Depreciation is recognized on the straight-line method over the following estimated useful lives:
Buildings
|
40 years | |
Leasehold improvements
|
Lesser of lease term or asset life | |
Furniture and equipment
|
5 to 7 years | |
Computer equipment
|
3 to 7 years | |
Equipment held under capital leases
|
Lesser of lease term or 5 to 10 years |
f. Income Taxes
In accordance with the FASB guidance for accounting for income taxes, we record deferred tax
liabilities and deferred tax assets, which represent taxes to be recovered or settled in the
future. We adjust our deferred tax assets and deferred tax liabilities to reflect changes in tax
rates or other statutory tax provisions. We make judgments in assessing our ability to realize
future benefits from our deferred tax assets, which include operating and capital loss
carryforwards. As such, we have a valuation allowance to reduce our deferred tax assets for the
portion we believe may not be realized. Changes in tax rates or other statutory provisions are
recognized in the period the changes occur.
Effective January 1, 2007, we adopted changes issued by the FASB for measuring and recognizing tax
benefits associated with uncertain tax provisions.
g. Deferred Financing Costs
Deferred financing costs are amortized under the effective interest method over the life of the
related debt.
h. Convertible Debt
Convertible debt is accounted for under the guidelines established by the FASB when warrants are
issued in connection with the debt, there are beneficial conversion features associated with the
debt, or there are income tax consequences from issuing convertible debt with beneficial conversion
debt. The Company records a beneficial conversion feature (BCF) related to the issuance of
convertible debt that have conversion features at fixed or adjustable rates that are in-the-money
when issued and records the fair value of warrants issued with those instruments. The BCF for the
convertible instruments is recognized and measured by allocating a portion of the proceeds to
warrants and as a reduction of the carrying amount of the convertible instrument equal to the
intrinsic
value of the conversion features, both of which are credited to paid-in-capital. The Company
calculates the fair value of warrants issued with the convertible instruments using the Modified
Black-Scholes-Merton option-pricing
45
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model, using the same assumptions used for valuing employee
share-based compensation, except that the contractual life of the warrant is used. Under these
guidelines, the Company allocates the value of the proceeds received from a convertible debt
transaction between the conversion feature and any other detachable instruments (such as warrants)
on a relative fair value basis. The allocated fair value is recorded as a debt discount or premium
and is amortized over the expected term of the convertible debt to interest expense. For a
conversion price change of a convertible debt issuance, the additional intrinsic value of the debt
conversion feature, calculated as the number of additional shares issuable due to a conversion
price change multiplied by the previous conversion price, is recorded as additional debt discount
and amortized over the remaining life of the debt.
i. Derivative Financial Instruments
The Company issues financial instruments in the form of stock options, stock warrants, and debt
conversion features of its convertible debt issuances. The Company has not issued any derivative
instruments for hedging purposes since inception. The Company uses the guidance of and has adopted
the disclosure requirements of the FASB, including guidance to determine whether the derivative
instrument is indexed to, or potentially settled in, a companys own stock. Freestanding
derivative contracts where settlement is required by physical share settlement or in a net share
settlement; or where the company has a choice of share or net cash settlement are accounted for as
equity. Contracts where settlement is in cash or where the counterparty may choose cash settlement
are accounted for as debt. Beginning January 1, 2009, the Company adopted new guidance regarding
derivative treatment for a certain number of our warrants and BCFs. See Note 4 and 18 for more
information.
j. Business Segments
The FASBs guidance regarding disclosures about segments of an enterprise requires that a public
company report annual and interim financial and descriptive information about its reportable
operating segments. Operating segments, as defined, are components of an enterprise about which
separate financial information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing performance. The FASB allows
aggregation of business units of an enterprise that have similar economic characteristics. The
Companys animal hospitals have similar services, have similar types of patients, operate in a
consistent manner and have similar economic and regulatory characteristics. Therefore, the Company
has aggregated its operating segments into one reportable segment: Animal Hospitals.
k. Share-Based Compensation
Prior to January 1, 2006, we accounted for our share-based payments to our employees and directors
(hereafter referred to collectively as employees) under the intrinsic value method. Under that
method, when options are granted with a strike price equal to or greater than market price on date
of issuance, there is no impact on earnings either on the date of grant or thereafter, absent
modification to the options. Accordingly, we recognized no share-based compensation expense in
periods prior to January 1, 2006.
Effective January 1, 2006, we adopted the FASBs most recent guidance on share-based compensation,
which required us to measure the cost of share-based payments granted to our employees, including
stock options, based on the grant-date fair value and to recognize the cost over the requisite
service period, which is typically the vesting period. We adopted this guidance using the modified
prospective transition method, which requires us to recognize compensation expense for share-based
payments granted or modified on or after January 1, 2006. Additionally, we are required to
recognize compensation expense for the fair value of unvested share-based awards at January 1, 2006
over the remaining requisite service period. Operating results from prior periods have not been
restated.
This guidance also requires the benefits of tax deductions from the exercise of options in excess
of the compensation cost for those options to be classified as cash provided by financing
activities. Prior to the adoption of this guidance, we did not recognize any income tax benefits
resulting from the exercise of stock options.
3. Use of estimates
The preparation of our consolidated financial statements in conformity with accounting principles
generally accepted in the United States (GAAP) requires us to make estimates and
assumptions. These estimates and
46
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assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of revenues and expenses during the reporting period. We
evaluate these estimates and judgments on an ongoing basis and base our estimates on experience,
current and expected future conditions, third-party evaluations and various other assumptions that
we believe are reasonable under the circumstances. The results of these estimates form the basis
for making judgments about the carrying values of assets and liabilities as well as identifying and
assessing the accounting treatment with respect to commitments and contingencies. Actual results
may differ from the estimates and assumptions used in the financial statements and related notes.
Listed below are certain significant estimates and assumptions used in the preparation of our
consolidated financial statements. Certain other estimates and assumptions are further explained
in the related Notes.
Accounts Receivable Allowances The Company records an allowance for estimated uncollectible
accounts for anticipated losses. Individual uncollectible accounts are written off against the
allowance when collection of the individual accounts appears doubtful. Trade accounts receivable
are stated net of an allowance for doubtful accounts. The allowance for doubtful accounts was $0.2
million and $0.3 million at December 31, 2009 and 2008, respectively.
Impairment of Long-Lived Assets and Intangibles Subject to Amortization We continually review
whether events and circumstances subsequent to the acquisition of any long-lived assets, or
intangible assets subject to amortization, have occurred that indicate the remaining estimated
useful lives of those assets may warrant revision or that the remaining balance of those assets may
not be recoverable. If events and circumstances indicate that the long-lived assets should be
reviewed for possible impairment, we use projections to assess whether future cash flows on an
undiscounted basis related to the assets are likely to exceed the related carrying amount to
determine if a write-down is appropriate. We will record an impairment charge to the extent that
the carrying value of the assets exceed their fair values as determined by valuation techniques
appropriate in the circumstances, which could include the use of similar projections on a
discounted basis.
In determining the estimated useful lives of definite-lived intangibles, we consider the nature,
competitive position, life cycle position, and historical and expected future operating cash flows
of each acquired asset. In 2008, the Company recorded a $0.5 million impairment on its Assets Held
for Sale. See Note 8 for further information. Additionally, in the fourth quarters of 2009, 2008
and 2007, the Company recorded impairment charges related to certain long-lived assets. See
discussion below in Goodwill and Indefinite-Lived Intangible Assets.
Goodwill and Indefinite-Lived Intangible Assets We test goodwill and indefinite-lived intangible
assets for impairment annually during the fourth quarter and continually review whether a
triggering event has occurred to determine whether the carrying value exceeds the implied value.
The fair value of reporting units is based generally on discounted projected cash flows, but we
also consider factors such as comparable industry price multiples. We employ cash flow projections
that we believe to be reasonable under current and forecasted circumstances, the results of which
form the basis for making judgments about the carrying values of the reported net assets of our
hospitals. Actual results may differ from these estimates under different assumptions or
conditions.
During the fourth quarter of 2009, in conjunction with our annual impairment test of goodwill, we
recorded a goodwill impairment charge of $22.5 million. The factors that caused us to record the
impairment were primarily the decreased revenues sustained in 2009 from the decline in the U.S.
economy coupled with the increased amount of debt incurred by the Company. The fair market
valuation of the reporting units was based on an income and market approach.
During the fourth quarter of 2008, we recorded a goodwill impairment of $4.0 million and an
impairment of $0.6 million of certain long-lived assets at two of our animal hospitals. The
factors that caused us to record the impairments were the loss of key veterinarians and increased
competition in the area of those animal hospitals. The fair market valuation of the reporting units
was based on an income and market approach.
During the fourth quarter of 2007, we recorded a goodwill impairment of $2.9 million and an
impairment of $0.8 million of certain long-lived assets at one of our animal hospitals, South Bay
Veterinary Specialists, Inc (South Bay). The factors that caused us to record the impairments
were the loss of key veterinarians coupled with
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increasing competition in the area of that
hospital; both substantially driving down the existing customer base, which eventually led
management to the decision to close the South Bay facility in the fourth quarter of 2008. See Note
16 for further information. The fair market valuation of the reporting units was based on an income
and market approach.
Accrued Expenses We make estimates and judgments in establishing accruals as required under GAAP.
4. New Accounting Pronouncements
Adopted
On January 1, 2009, Pet DRx adopted changes issued by the FASB to fair value accounting and
reporting as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized
or disclosed at fair value in the financial statements on at least an annual basis. These changes
define fair value, establish a framework for measuring fair value in GAAP, and expand disclosures
about fair value measurements. This guidance applies to other GAAP that require or permit fair
value measurements and is to be applied prospectively with limited exceptions. The adoption of
these changes, as it relates to nonfinancial assets, had no impact on the Companys consolidated
financial statements.
On January 1, 2009, Pet DRx adopted changes issued by the FASB to consolidation accounting and
reporting. These changes establish accounting and reporting for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. This guidance defines a noncontrolling
interest, previously called a minority interest, as the portion of equity in a subsidiary not
attributable, directly or indirectly, to a parent. These changes require, among other items, that
a noncontrolling interest be included in the balance sheet within equity separate from the parents
equity; separately, the amounts of consolidated net income attributable to the parent and
noncontrolling interest all on the consolidated statement of operations; and if a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured
at fair value and a gain or loss be recognized in net income based on such fair value. The
adoption of these changes had no impact on the Companys consolidated financial statements as the
Company does not have any noncontrolling interest in any of its subsidiaries.
On January 1, 2009, Pet DRx adopted changes issued by the FASB to disclosures about derivative
instruments and hedging activities. These changes require enhanced disclosures about an entitys
derivative and hedging activities, including (i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedged items are accounted for, and (iii) how
derivative instruments and related hedged items affect an entitys financial position, financial
performance, and cash flows. The adoption of these changes did not have an impact on the Companys
consolidated financial statements as the Company is not involved in any hedging activities.
On January 1, 2009, Pet DRx adopted changes issued by the FASB to accounting for business
combinations. While retaining the fundamental requirements of accounting for business
combinations, including that the purchase method be used for all business combinations and for an
acquirer to be identified for each business combination, these changes define the acquirer as the
entity that obtains control of one or more businesses in the business combination and establishes
the acquisition date as the date that the acquirer achieves control instead of the date that the
consideration is transferred. These changes require an acquirer in a business combination,
including the business combinations achieved in stages (step acquisition), to recognize the assets
acquired, liabilities assumed, and any noncontrolling interest in the acquire at the acquisition
date, measured at their fair values as of that date, with limited exceptions. This guidance also
requires the recognition of assets acquired and the liabilities assumed arising from certain
contractual contingencies as of the acquisition date, measured at their acquisition-date fair
values. Additionally, these changes require acquisition-related costs to be expensed in the period
in which the costs are incurred and the services are received instead of including such costs as
part of the acquisition price. The adoption of these changes did not have an impact to the
Companys consolidated financial statements as the Company has not completed any acquisitions in
2009.
On January 1, 2009, Pet DRx adopted changes issued by the FASB on accounting for business
combinations. These changes apply to all assets acquired and liabilities assumed in a business
combination that arise from certain contingencies and requires (i) an acquirer to recognize at fair
value, at the acquisition date, an asset acquired or
liability assumed in a business combination that arises from a contingency if the acquisition-date
fair value of that asset or liability can be determined during the measurement period otherwise
the asset or liability should be recognized at the acquisition date if certain defined criteria are
met; (ii) contingent consideration arrangements of an
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acquire assumed by the acquirer in a business
combination be recognized initially at fair value; (iii) subsequent measurements of assets and
liabilities arising from contingencies be based on a systematic and rational method depending on
their nature and contingent consideration arrangements be measured subsequently; and (iv)
disclosures of the amounts and measurement basis of such assets and liabilities and the nature of
the contingencies. The adoption of these changes had no impact to the Companys consolidated
financial statements as the Company has not made any acquisitions in 2009.
On January 1, 2009, Pet DRx adopted changes issued by the FASB on derivative accounting,
specifically in identifying whether an instrument or embedded feature is indexed to an entitys own
stock. Prior to the change, the FASB specified that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Companys own stock and (b) classified in
stockholders equity in the statement of financial position would not be considered a derivative
financial instrument. The change now provides a new two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed to an issuers own stock and thus
some instruments or embedded features that werent originally considered derivatives may now be
considered derivatives. See Note 18 for further information.
On January 1, 2009, Pet DRx adopted changes issued by the FASB to accounting for intangible assets.
These changes amend the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset in order to improve
the consistency between the useful life of a recognized intangible asset in a business combination.
The adoption of these changes had no impact on the Companys consolidated financial statements.
On June 30, 2009, Pet DRx adopted changes issued by the FASB to accounting for and disclosure of
events that occur after the balance sheet date but before financial statements are issued or are
available to be issued, otherwise known as subsequent events. Specifically, these changes set
forth the period after the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that occurred after the balance
sheet date. The adoption of these changes had no impact to the Companys consolidated financial
statements.
On June 30, 2009, Pet DRx adopted additional changes issued by the FASB to fair value accounting.
These changes provide additional guidance for estimating fair value when the volume and level of
activity for an asset or liability have significantly decreased and includes guidance for
identifying circumstances that indicate a transaction is not orderly. This guidance is necessary
to maintain the overall objective of fair value measurement, which is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date under current market conditions. The adoption of these
changes had no impact on the Companys consolidated financial statements.
On June 30, 2009, Pet DRx adopted changes issued by the FASB to the recognition and presentation of
other-than-temporary impairments. These changes amend existing other-than-temporary impairment
guidance for debt securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities. The adoption of
these changes had no impact on the Companys consolidated financial statements.
On June 30, 2009, Pet DRx adopted changes issued by the FASB to fair value disclosures of financial
instruments. These changes require a publicly traded company to include disclosures about the fair
value of its financial instruments whenever it issues summarized financial information for interim
reporting periods. Such disclosures include the fair value of all financial instruments, for which
it is practicable to estimate that value, whether recognized or not recognized in the financial
statements; the related carrying amount of these financial instruments; and the method(s) and
significant assumptions used to estimate the fair value. Other than the required disclosures, the
adoption of these changes had no impact to the Companys consolidated financial statements.
On September 30, 2009 Pet DRx adopted changes issued by the FASB to the authoritative hierarchy of
GAAP. These changes establish the FASB Accounting Standard Codification (Codification) as the
source of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of the
financial statements in conformity with GAAP. Rules and interpretive releases of the Securities
and Exchange Commission (SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of
Statements, FASB Staff Positions, or
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Emerging Issues Task Force Abstracts; instead the FASB will
issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in
their own right as they will only serve to update the Codification. These changes and the
Codification itself do not change GAAP. Other than the manner in which new accounting guidance is
referenced, the adoption of these changes had no impact to the Companys consolidated financial
statements.
5. Merger with Pet DRx Veterinary Group, Inc.
Pursuant to the Merger Agreement on January 4, 2008, a wholly-owned subsidiary of Echo Healthcare
Acquisition Corp. (Echo) merged with and into PVGI and Echo changed its name to Pet DRx
Corporation (the Merger). As a result of the Merger, the Company received approximately $36.4
million in proceeds from capital that was raised through the initial public offering of Echo in
2006, net of certain costs incurred in connection with completing the Merger.
The Merger was accounted for under the reverse acquisition application of the equity
recapitalization method of accounting in accordance with US GAAP for accounting and financial
reporting purposes. Under this method of accounting, Pet DRx was treated as the acquired company
for financial reporting purposes. In accordance with the guidance applicable to these
circumstances, the Merger was considered to be a capital transaction in substance. Accordingly, for
accounting purposes, the Merger was treated as the equivalent of PVGI issuing stock for the net
monetary assets of Pet DRx, accompanied by a recapitalization. The net monetary assets of Pet DRx
were stated at their fair value, essentially equivalent to historical costs, with no goodwill or
other intangible assets recorded. The accumulated deficit of PVGI only was carried forward after
the Merger. All common stock share amounts for all periods presented have been adjusted to reflect
the Merger except where noted. Acquisition expenses incurred by PVGI were recorded as equity.
In connection with the Merger, the following equity transactions were completed:
All Series A convertible preferred stock of PVGI was converted to PVGI common stock at a 1:1
ratio and all Series B convertible preferred stock of PVGI was converted to PVGI common stock at a
1:100 ratio;
Certain holders of PVGIs convertible debentures converted approximately $8.3 million of
debentures into approximately 1.7 million shares of PVGI common stock;
A holder of PVGIs Series B warrants exercised a warrant for 1,647 shares of Series B convertible
preferred stock of PVGI which was subsequently converted to PVGI common stock at a 1:100 ratio;
PVGI issued 416,728 shares of PVGI common stock to certain investors who purchased shares of Echo
common stock in privately negotiated transactions with various Echo stockholders who were
stockholders of Echo as of the record date for Echos Special Meeting of Stockholders and who had
voted against the Merger and submitted their shares for conversion (the Inducement Shares);
Each outstanding share of PVGI common stock (including those issued in connection with the Merger
on conversion of preferred stock, convertible debentures, the exercise of warrants and the
Inducement Shares) was converted to .771 shares of Pet DRx common stock (Merger Conversion Ratio);
Pet DRx reserved approximately 3.16 million of additional shares of common stock for future
issuance upon the exercise of outstanding options and warrants and the conversion of convertible
notes previously issued by PVGI;
Pet DRx placed approximately 1.6 million shares of common stock into escrow to satisfy any
indemnification claims that may arise from such Merger, which were released on July 3, 2008;
Certain executives of the Company were granted options to purchase 424,480 shares of the
Companys common stock in the aggregate at an exercise price of $6.70 per share in accordance with
the terms of their respective employment agreements; and
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The stockholders of Pet DRx approved the 2007 Stock Incentive Plan.
6. Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquired entity over the net of the fair value of
identifiable assets acquired and liabilities assumed. The goodwill balance at December 31, 2009 was
$26.5 million. During the twelve month period ended December 31, 2009, in addition to our goodwill
impairment charge recorded in the fourth quarter, adjustments totaling $0.3 million were made to
goodwill after a certain contingent liability that might have been assumed in the acquisition of
Valley Animal Medical Center was determined to not be a liability of the Company.
Balance as of December 31, 2008 |
$ | 49,373 | ||
Impairment to goodwill |
(22,506 | ) | ||
Adjustments to Goodwill |
(342 | ) | ||
Balance as of December 31, 2009 |
$ | 26,525 | ||
In addition to goodwill, we have amortizable intangible assets at December 31, 2009 and 2008 as
follows (in thousands):
As of December 31, 2009 | As of December 31, 2008 | |||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
Covenants not-to-compete |
$ | 684 | $ | (478 | ) | $ | 206 | $ | 713 | $ | (300 | ) | $ | 413 | ||||||||||
Non-contractual
customer relationships |
8,118 | (2,661 | ) | 5,457 | 8,886 | (2,009 | ) | 6,877 | ||||||||||||||||
Impairment of assets |
| | | (797 | ) | 211 | (586 | ) | ||||||||||||||||
Total |
$ | 8,802 | $ | (3,139 | ) | $ | 5,663 | $ | 8,802 | $ | (2,098 | ) | $ | 6,704 | ||||||||||
Amortization expense related to intangible assets was approximately $1.0 million, $1.1 million, and
$0.8 million for the years ended December 31, 2009, 2008, and 2007, respectively.
The estimated amortization expense related to intangible assets for each of the five succeeding
years and thereafter as of December 31, 2009 is as follows (in thousands):
2010 |
$ | 985 | ||
2011 |
892 | |||
2012 |
789 | |||
2013 |
716 | |||
2014 |
657 | |||
Thereafter |
1,624 | |||
Total |
$ | 5,663 | ||
7. Property and Equipment
Property and equipment at December 31, 2009 and 2008 is as follows (in thousands):
2009 | 2008 | |||||||
Buildings |
$ | 2,787 | $ | 2,787 | ||||
Leasehold improvements |
1,047 | 935 | ||||||
Equipment |
3,872 | 3,318 |
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2009 | 2008 | |||||||
Furniture and equipment |
606 | 606 | ||||||
Computer equipment & software |
2,357 | 2,307 | ||||||
Construction-in-progress |
37 | 62 | ||||||
Total property and equipment |
10,706 | 10,015 | ||||||
Less-accumulated depreciation and amortization |
(4,400 | ) | (2,593 | ) | ||||
Total property and equipment, net |
$ | 6,306 | $ | 7,422 | ||||
Depreciation expense, including from property under capital leases, for the twelve months ended
December 31, 2009, 2008, and 2007 was $1.9 million, $1.3 million and $0.9 million, respectively.
See Note 20 for further information on our buildings.
8. Assets Held for Sale
Assets held for sale at December 31, 2008 consisted of one vacant building that was on the market
to be sold. In the third quarter of 2008, the Company ceased depreciating the building and
recorded a one-time impairment charge of approximately $0.5 million in order to state the building
at the lower of depreciated cost or fair value less costs to sell. This charge was recorded as
impairment of assets held for sale in the accompanying consolidated statement of operations.
On June 30, 2009, the Company sold the vacant building for $900,000 less certain closing costs and
sales commissions of approximately $59,000, which have been recorded to selling, general, and
administrative expenses in the accompanying consolidated statement of operations for the twelve
months ended December 31, 2009.
9. Employee Benefit Plans
In August 2006, the Company adopted the Pet DRx Retirement Plan (the Plan) pursuant to Section
401(k) of the U.S. Internal Revenue Code. Under the Plan, eligible U.S. employees may voluntarily
contribute up to 100% of their compensation into the Plan, subject to IRS imposed limits. To be
eligible, an employee must be 21 years of age and have worked a minimum period of 90 days.
The Company elects, from time-to-time, to make discretionary matches to employees contributions.
Any matching contributions vest over a period of 6 years. Under the Plan, the Company matched
approximately $0.2 million, $0.3 million, and $0.2 million for the years ended December 31, 2009,
2008 and 2007, respectively, and have allocated such matching contributions between direct hospital
costs and selling, general, and administrative expenses in the accompanying consolidated statement
of operations.
10. Long-Term Obligations
Long-term obligations consisted of the following at December 31, 2009 and 2008 (in thousands):
2009 | 2008 | |||||||||
Convertible notes
|
Convertible notes payable, maturing from 2010 to 2014, secured by assets and stock of certain subsidiaries, various interest rates ranging from 7.0% to 12.5% (net of debt discounts of $3.5 million and $18 thousand at December 31, 2009 and 2008, respectively.) | $ | 11,464 | $ | 5,049 | |||||
Promissory notes
|
Notes payable, maturing from 2010 to 2013, secured by assets and stock of certain subsidiaries, various interest rates ranging from 6.5% to 12.0% | 4,100 | 6,686 |
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2009 | 2008 | |||||||||
Earn-out notes
|
Notes payable, various maturities through 2010, interest rates ranging from none to 8.0% | 272 | 619 | |||||||
Total debt obligations | 15,836 | 12,354 | ||||||||
Less-current portion (net of debt discount of $1.1 million) | (2,853 | ) | (3,718 | ) | ||||||
Long-term portion | $ | 12,983 | $ | 8,636 | ||||||
The future payments under long-term obligations as of December 31, 2009 are as follows:
2010 |
$ | 3,980 | ||
2011 |
4,159 | |||
2012 |
586 | |||
2013 |
19,282 | |||
2014 |
585 | |||
Total |
$ | 28,592 | ||
Certain convertible and promissory notes have a prepayment option at the note holders demand, for
a portion or all of the outstanding balances after a certain amount of time has elapsed. As such,
those amounts that can be called on demand by note holders as of December 31, 2009 have been
classified as current maturities.
Convertible Notes
Since 2004, the Company has issued convertible notes as partial consideration for the acquisition
of certain of its hospitals to the sellers. These notes mature from September 2010 to June 2014
with varying interest rates from 7.0% to 12.5% and quarterly interest-only payments. Beginning on
January 1, 2009, in accordance with new guidance issued by the FASB on indentifying whether or not
an instrument or embedded feature is indexed to an entitys own stock, the Company reviewed the
anti-dilution provisions and determined that i) the beneficial conversion feature of many of the
convertible notes issued prior to 2009 should be accounted for as a derivative liability, but ii)
there was no value assigned to the beneficial conversion features as the conversion rates were out
of the money. Therefore, the change in accounting treatment of these beneficial conversion
features had no impact to the Companys consolidated financial statements.
On January 4, 2008, in conjunction with the Merger with PVGI, several of the convertible note
holders converted approximately $8.3 million of their notes to 1,327,024 shares of common stock in
accordance with their agreements. The debt discount related to one of the convertible notes of
approximately $0.1 million was charged to interest expense in the consolidated statement of
operations in the first quarter of 2008.
On July 1, 2008, in conjunction with the acquisition of Valley Animal, the Company entered into two
Secured Convertible Notes with the sellers of the animal hospital. The principal amount of the
notes are $1.0 million and $0.9 million and each have interest payments due quarterly at a rate of
8% and 7% per annum, respectively. All principal and unpaid accrued interest on the original notes
are due on the maturity date of September 30, 2010. See Note 20 for further information. The notes
contain certain conversion rights with respect to Pet DRx stock ranging from $5.50 to $6.50 per
share, subject to other provisions. The Company also has certain optional conversion rights if the
Companys stock continues to be publically traded on NASDAQ and is trading at 150% of the
conversion price for note holders. The notes also have certain anti-dilution provisions provided
the Company issues new common stock at or less than $1.00 per share. During the second quarter
ended June 30, 2009, the Company reduced
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the amount of the $0.9 million note by approximately $0.1
million to offset certain purchase price adjustments owed to the Company in accordance with the
Stock Purchase Agreement dated July 1, 2008.
As of December 31, 2009, the convertible notes in total, less the Senior Notes discussed below, are
convertible into 714,295 shares of common stock upon certain events with anti-dilution provisions.
12% Senior Secured Convertible Notes
On January 21, 2009, the Company entered into a purchase agreement with certain investors pursuant
to which the Company agreed to issue and sell up to $6.5 million of senior secured convertible
notes (the Senior Notes) in a private placement offering, with warrants to purchase up to
15,000,000 shares of the Companys common stock (the Financing Warrants). The notes are secured
by a lien on substantially all of the Companys assets.
The Company sold the first $3 million of the Senior Notes, along with Financing Warrants to
purchase 6,923,077 shares of common stock on January 21, 2009. On February 4, 2009, it sold another
$2.5 million of the Senior Notes along with Financing Warrants to purchase 5,769,230 shares of
common stock. The final $1.0 million of the Senior Notes along with Financing Warrants to purchase
2,307,693 shares of common stock closed on March 27, 2009.
The Senior Notes have a maturity date of January 21, 2013 and bear interest at 12% per annum, which
is payable by increasing the principal amount of the Senior Notes semi-annually, which began on
June 30, 2009. The Company accrued $0.2 million and $0.7 million of interest expense related to the
Senior Notes during the three and twelve months ended December 31, 2009, respectively, and added
this amount to the principal amount of the Senior Notes. The Senior Notes, including accrued
interest, convert at a rate of $10 per share; however, if the Senior Notes are repaid either at
maturity or before then, the outstanding principal, unpaid accrued interest, and a premium of 184%
of the original principal amount is due. The premium was based on how many holders of the Companys
existing notes issued in connection with previous veterinary hospital acquisitions agreed to a note
amendment providing for a payment moratorium if the Company fails to generate specified levels of
cash flow from operations during any fiscal quarter in 2009. The holders of the Senior Notes issued
in the private placement may require the Company to redeem the Senior Notes at the outstanding
principal amount plus the applicable premium if there is a change of control as defined in the
Senior Notes.
On December 31, 2009, the Senior Notes were amended such that the premium, in addition to the
principal and accrued interest, is also convertible into stock at the $10 exercise price.
Additionally, as long as 60% of the note holders agree to convert their Senior Notes into common
stock, all of the Senior Notes will automatically be converted except for amounts held by Galen
Partners and Camden Partners or their affiliates, which their consent is required for conversion of
their Senior Notes to occur.
The Financing Warrants, when originally issued, were exercisable at $0.10 per share, or, if the
Company issued additional common stock or common stock equivalents at a lower price, they would be
exercisable at that lower price. On August 31, 2009, the Financing Warrants were amended such that
if the Company issues additional common stock or common stock equivalents at a lower price than
$0.10 per share, the exercise price would not decrease to the lower price unless that price is also
below the then fair market value of the stock price. The Company has the right to redeem the
Financing Warrants at any time for a price equal to 12.5 times the exercise price, less the
exercise price. The Financing Warrants have an expiration date of January 21, 2016. Stockholders
approved issuing common stock upon the conversion of the Senior Notes and the exercise of Financing
Warrants at the Companys Annual Meeting on July 28, 2009.
The Company calculated the fair value of the Financing Warrants issued using the Modified
Black-Scholes-Merton option-pricing model and recorded the value of $3.6 million as a debt discount
to the Senior Notes (See Notes 11 and 18 for further information on the valuation and recording of
the warrants). Additionally, the Company also recorded approximately $930,000 of fees and expenses,
including $132,000 that were incurred during 2008, related to the sale of the Senior Notes, as a
debt discount as well. The Company is amortizing these amounts over the life of the Senior Notes.
The Company amortized approximately $0.3 million and $1.0 million of the debt discounts to interest
expense in the accompanying statement of operations during the three and twelve months ended
December 31, 2009, respectively.
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Additionally, the Company is accounting for the aforementioned 184% debt discount as a loan
accretion, by which the Company is charging the accretion to interest expense, which amounts to
approximately $12.0 million, over the life of the loan. The Company charged interest expense
relating to the loan accretion in the amount of approximately $0.7 million and $2.7 million in the
accompanying statement of operations during the three and twelve months ended December 31, 2009,
respectively.
Promissory Notes
The Company, in conjunction with certain of its acquisitions, has issued non-convertible notes as
partial consideration for the acquisition of certain of its hospitals. These notes mature from
2010 to March 2013 with various interest rates ranging from 6.5% to 12.0%. The notes are payable
in equal monthly payments over periods ranging from three to five years.
During the first quarter of 2007, the Company issued $0.5 million of debt secured by the real
estate properties acquired by the Company during the quarter. The mortgage notes have an 8%
interest rate. The notes are payable in equal monthly payments and mature in 2013.
Amendment to Huntington Promissory Note
On March 30, 2009, PVGI, amended the terms of a Business Loan Agreement and Promissory Note, each
dated November 2, 2005, relating to that certain $1.4 million loan from Huntington Capital, L.P.
(the Huntington Loan) by entering into an Amended and Restated Business Loan Agreement and a
Change in Terms Agreement (collectively, the Amended and Restated Huntington Loan Agreement).
The Amended and Restated Huntington Loan Agreement waived the Companys default of the prior
covenants as of December 31, 2008 and through March 31, 2009. In addition, all future financial
covenant requirements were removed through the term of the promissory note underlying the
Huntington Loan (the Huntington Promissory Note).
Under the terms of the Amended and Restated Huntington Loan Agreement, PVGI made a $0.3 million
principal payment on April 1, 2009 and is required to pay the remaining $1.1 million of principal
over eighteen ratable monthly payments, which commenced on July 1, 2009 and will end on December 1,
2010. There was no change to the interest rate of the Huntington Promissory Note. Additionally,
upon execution of the Amended and Restated Huntington Loan Agreement, PVGI paid a $100,000
restructuring fee and will be required to pay an additional restructuring fee of $150,000 on
December 1, 2010. In addition to the restructuring payments, the Company issued to Huntington
Capital warrants to purchase 250,000 shares of common stock at an exercise price of $0.10 per share
and cancelled the 78,614 warrants then held by Huntington Capital that had an exercise price of
$2.72 per share. See Notes 11 and 18 for further information regarding the warrants.
Under guidance of the FASB, in certain circumstances, amending a current loan of the Company should
be accounted for as an extinguishment of the old loan and the issuance of a new loan. The Company,
meeting the requirements of this guidance, has accounted for the Amended and Restated Huntington
Loan Agreement in that manner. As such, the Company recorded a one-time charge to interest expense
of $295,000 in the accompanying consolidated statement of operations in the first quarter of 2009
for the fair value of the warrants issued totaling $45,000, as well as the $250,000 aggregate
restructuring fee charged by Huntington Capital to complete the Amendment. The remaining unpaid
portion of the restructuring fee in the amount of $150,000 has been recorded as a short-term
liability on the accompanying consolidated balance sheet.
Fifth Street loans
In March 2007, the Company entered into a term loan of $12.0 million with Fifth Street Mezzanine
Partners II, L.P. (Fifth Street). In June 2007, the Company entered into a second term loan with
Fifth Street for $3.0 million, which was increased to a total of $4.0 million in November 2007. In
connection with closing each of these transactions, the Company issued to Fifth Street warrants to
purchase an aggregate amount of 2,400 shares of Series B preferred PVGI stock at an exercise price
of $0.10 per share. The debt discounts associated with these warrants were amortizing over the
life of the loan. The Company received proceeds in the aggregate of approximately $14.2 million
after costs associated with the debt financing. Fifth Street exercised a portion of their warrants
in December 2007 and April 2008 (see Note 11 for further information).
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Amendments to Credit Agreements for $12.0 million and $4.0 million term loans with Fifth Street
On February 19, 2008, Pet DRx entered into the First Amendment (the First Amendment) and the
Second Amendment (the Second Amendment) (together the Amendments) to the Credit Agreement and
Loan Documents dated as of March 29, 2007 and June 29, 2007, respectively, with Fifth Street. The
Amendments, among other things, changed the interest rate on the term loans from 12.0% to 15.0%,
beginning March 1, 2008. The additional 3% interest accrued and was added to the principal balance
of the loans. The Amendments also modified the financial covenants and ratios required under the
credit agreements and waived the Companys default under the prior financial covenants and ratios
for the fiscal quarter ended December 31, 2007 and the Companys requirement for financial
covenants and ratios for the fiscal quarter ending March 31, 2008. Upon execution of the Amendment,
the Company paid Fifth Street a total of $156,381in restructuring fees which was deferred to Other
Assets in the accompanying balance sheet.
Retirement of term loans with Fifth Street
In June 2008, the Company elected to prepay its $12.0 and $4.0 million Credit Agreements with Fifth
Street and paid $16.2 million for all outstanding principal, interest, and fees. Included in that
payoff amount was a one-time pre-payment penalty of $0.2 million, which was recorded to interest
expense in the accompanying consolidated statement of operations. As a result of the payoff, the
Company recorded a one-time charge to interest expense of $1.4 million to eliminate its remaining
debt discounts related to these loans in the accompanying consolidated statement of operations.
Additionally, as a result of the payoff of these loans, the Company also recorded a one-time charge
to interest expense in the amount of approximately $0.2 million in the accompanying consolidated
statement of operations to eliminate the deferred debt amendment costs described above that had
been recorded in Other Assets in the accompanying consolidated balance sheet.
Retirement of partial term loan to satisfy related party receivable
During 2009, in addition to the $0.1 million reduction to one of the convertible notes issued in
conjunction with the acquisition of Valley Animal, we also reduced the value of one of our
outstanding term loans by $30,000 in exchange as payment for a receivable owed from that party to
the Company.
During the second quarter of 2008, the Company agreed to retire approximately $16,000 of a term
loan owed to a related party in exchange as payment for a receivable owed from that party to the
Company.
Earn-out Notes
The Company has approximately $0.3 million of earn-out promissory notes outstanding as partial
consideration for the acquisition of certain of its hospitals. The notes all mature in 2010. All
are payable monthly and have interest rates ranging from 0.0% to 8.0% per annum.
Compensating Balance Arrangements
The Company maintains $425,000 on deposit with a certain banking institution as collateral against
one of its accounts.
11. Stockholders Equity
(All share and warrant amounts stated are after conversion to Pet DRx stock using the Merger
Conversion Ratio)
Preferred Stock
As of December 31, 2009, the Company had 10,000,000 shares of preferred stock authorized of which
none was outstanding at December 31, 2009.
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In February 2007, PVGI issued 25,007 shares of Series B convertible preferred stock at prices of
approximately $596 and $616 per share for cash proceeds of $13.6 million net of issuance costs of
$1.5 million. Additionally, in November 2007, a certain former member of PVGI management purchased
approximately 385 shares of Series B convertible preferred stock at a price of $616 per share for
cash proceeds of $0.2 million. Also, in the fourth quarter of 2007, Fifth Street exercised 1,270
Preferred Stock Warrants into Series B preferred stock.
In conjunction with the Merger on January 4, 2008, each share of PVGIs Series A convertible
preferred stock was converted to one share of PVGI common stock and each share of PVGIs Series B
convertible preferred stock was converted to 100 shares of PVGI common stock
Preferred Stock Warrants
In March 2007, PVGI issued 1,388 warrants to purchase shares of its Series B convertible preferred
stock as part of the $12.0 million term loan entered into with Fifth Street (see Note 10). A
portion of the proceeds in the amount of $0.8 million were allocated to paid-in-capital for the
fair value of the warrants, with the remaining balance becoming the discounted carrying value of
the debt. PVGI valued the warrants at fair value as calculated by using the Modified
Black-Scholes-Merton option-pricing model.
In June 2007, PVGI issued 347 warrants to purchase shares of its Series B convertible preferred
stock as part of the $3.0 million term loan entered into with Fifth Street (see Note 10). A
portion of the proceeds in the amount of $0.3 million were allocated to paid-in-capital for the
fair value of the warrants, with the remaining balance becoming the discounted carrying value of
the debt.
In November and December 2007, PVGI issued a total of 231 warrants to purchase shares of its Series
B convertible preferred stock as part of the additional $1.0 million term loan entered into with
Fifth Street (see Note 10). A portion of the proceeds in the amount of $0.1 million were allocated
to paid-in capital for the fair value of the warrants, with the remaining balance becoming the
discounted carrying value of the debt.
As mentioned previously, Fifth Street exercised 1,270 of its preferred stock warrants at $0.13 per
share in December 2007.
In conjunction with the Merger on January 4, 2008, the remaining 69,621 outstanding Series B
preferred stock warrants were converted to common stock warrants.
Common Stock
As of December 31, 2009, there were 90,000,000 shares of common stock of Pet DRx authorized, with
23,714,460 shares outstanding. Additionally, 1,361,574 shares of common stock are held as treasury
shares.
In the first quarter of 2007, seven holders of $1.5 million of convertible notes converted their
notes into an aggregate 691,587 shares of common stock. In April 2007, the Company repurchased
4,819 shares of common stock for $25,000.
In conjunction with the Merger on January 4, 2008, approximately $8.3 million of convertible notes
were converted to 1,327,024 shares of common stock. Additionally, the Company issued 321,297
shares of common stock to certain investors who purchased shares of Echo common stock in privately
negotiated transactions with various Echo stockholders who were stockholders of Echo as of the
record date for Echos special meeting of stockholders and who had voted against the Merger and
submitted their shares for conversion (the Enforcement Shares).
On April 7, 2008, Fifth Street exercised 57,825 of its warrants and was issued 57,806 shares of
common stock in a cashless exchange.
In August 2009, the Company issued 30,000 shares of common stock to one of its veterinarians in
connection with an agreed upon settlement regarding final payment of an earn-out note associated
with the acquisition of one of our
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facilities. Additionally, in fourth quarter of 2009, a former
member of the Board of Directors exercised 24,000 stock options into common stock.
Common Stock Warrants
The Company has issued warrants to purchase common shares of the Company either as compensation for
consultants and vendors or as additional incentive for investors and lenders. The value of warrants
issued for compensation is accounted for as a non-cash expense to the Company at the fair value of
the warrants issued. The value of warrants issued in conjunction with financing events is either a
reduction in paid-in-capital for common stock issuances or as a discount for debt issuances. The
Company values the warrants at fair value as calculated by using the Modified Black-Scholes-Merton
option-pricing model.
In 2007, 62,065 of common stock warrants were issued to a financial services firm for consulting
work performed for PVGI. See Note 15 for further information on these common stock warrants that
were issued.
Between January 21, 2009 and March 27, 2009, the Company issued Financing Warrants to purchase
15,000,000 shares of common stock of the Company in conjunction with the issuance of the Senior
Notes (See Note 10). A portion of the Senior Note sales proceeds, totaling $3.6 million, was
allocated to warrant liabilities for the fair value of the Financing Warrants, with the remaining
balance becoming the discounted carrying value of the debt (See Notes 10 and 18 for further
information on the classification of these warrants). The following assumptions were used to
determine the fair value of the Financing 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 years | |
Risk-free rate (3) |
1.4% - 2.4% |
On February 17, 2009, the Company issued warrants to purchase 70,986 shares of common stock to
certain of its veterinarians. The fair value of the warrants, in the amount of approximately
$13,000, was allocated to warrant liabilities and charged to interest expense in the accompanying
consolidated statement of operations. The following assumptions were used to determine the fair
value of those warrants:
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 years | |
Risk-free rate (3) |
2.1% |
On March 30, 2009, the Company issued warrants to purchase 250,000 shares of common stock as part
of the amendment of the Huntington Loan (See Note 10). The fair value of the warrants, in the
amount of $45,000, was allocated to warrant liabilities and charged to interest expense in the
accompanying consolidated statement of operations. The following assumptions were used to determine
the fair value of those warrants:
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 years | |
Risk-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. |
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(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. |
The following table summarizes all activities of common stock warrants during the year-ended
December 31, 2009:
Number of | ||||||||
Common | Weighted | |||||||
Stock | Average | |||||||
Warrants | Price | |||||||
Outstanding, December 31, 2006 |
908,619 | $ | 3.04 | |||||
Granted |
62,065 | 6.16 | ||||||
Exercised |
| | ||||||
Cancelled |
| | ||||||
Outstanding, December 31, 2007 |
970,684 | $ | 3.24 | |||||
Pet DRx warrants assumed in Merger |
7,645,833 | 6.00 | ||||||
Granted |
| | ||||||
Series B Preferred Stock warrants converted to
common stock warrants |
69,621 | 0.00 | ||||||
Exercised |
(57,825 | ) | 0.00 | |||||
Cancelled |
| | ||||||
Outstanding, December 31, 2008 |
8,628,313 | $ | 5.68 | |||||
Granted |
15,320,986 | 0.10 | ||||||
Exercised |
| | ||||||
Cancelled |
(78,614 | ) | 2.72 | |||||
Outstanding and Exercisable, December 31, 2009 |
23,870,685 | $ | 2.11 | |||||
The following table summarizes information about the warrants outstanding at December 31, 2009:
Remaining | ||||||||
Contractual | ||||||||
Warrants | Life | |||||||
Exercise Price | Outstanding | (years) | ||||||
$0.00 |
11,796 | 7.38 | ||||||
$0.10 |
15,320,986 | 6.08 | ||||||
$2.72 |
89,845 | 5.83 | ||||||
$3.11 |
740,160 | 6.08 | ||||||
$6.00 |
7,645,833 | 0.25 | ||||||
$6.16 |
62,065 | 7.83 | ||||||
23,870,685 | ||||||||
See Note 20 for further information on the common stock warrants with a $6.00 exercise price.
Dividends
We have not paid cash dividends on our common stock and we do not anticipate paying cash dividends
in the foreseeable future. Any future determination as to the payment of dividends will depend on
our results of operations, financial condition, capital requirements and other factors deemed
relevant by our board of directors.
12. Calculation of Loss Per Common Share
Basic and diluted net loss per share is presented in conformity with the FASBs guidance for
earnings per share for all periods presented. Basic net loss per share excludes dilution and is
computed by dividing net loss available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted net loss per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that then shares in the
losses of the Company.
The following common stock equivalents were excluded from the calculation of diluted loss per share
since their effect would have been anti-dilutive (in thousands):
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For the year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Convertible debenture notes, if converted to common stock |
2,632 | 731 | 1,736 | |||||||||
Warrants for common stock |
23,871 | 8,628 | 971 | |||||||||
Warrants for preferred stock, if exercised and converted
to common stock |
| | 69 | |||||||||
Preferred shares, if converted to common stock |
| | 7,679 | |||||||||
Options for common stock |
3,205 | 3,053 | 1,618 | |||||||||
Total |
29,708 | 12,412 | 12,073 | |||||||||
Options and warrants, had they been dilutive, would have been included in the computation of
diluted net loss per share using the treasury stock method.
Basic and diluted loss per common share was calculated as follows (in thousands, except per share
amounts):
Twelve months ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Loss from continuing operations |
$ | (30,341 | ) | $ | (19,448 | ) | $ | (12,365 | ) | |||
Loss from discontinued operations |
$ | | $ | (573 | ) | $ | (4,066 | ) | ||||
Net loss |
$ | (30,341 | ) | $ | (20,021 | ) | $ | (16,431 | ) | |||
Weighted average common shares outstanding: |
||||||||||||
Basic |
23,675 | 23,433 | 4,124 | |||||||||
Effect of dilutive common stock equivalents |
| | | |||||||||
Diluted |
23,675 | 23,433 | 4,124 | |||||||||
Basic and diluted loss per common share |
||||||||||||
Loss from continuing operations |
$ | (1.28 | ) | $ | (0.83 | ) | $ | (3.00 | ) | |||
Loss from discontinued operations |
$ | (0.00 | ) | $ | (0.02 | ) | $ | (0.98 | ) | |||
Basic and diluted net loss per common share |
$ | (1.28 | ) | $ | (0.85 | ) | $ | (3.98 | ) | |||
13. Share-Based Compensation
Under the 2004 Employee Stock Option Plan (2004 Plan), up to 2,255,175 shares of our common stock
were eligible to be granted to key employees. The 2004 Plan permitted the issuance of new shares
or shares from treasury upon the exercise of options. In January 2008, in conjunction with the
Merger, the Company adopted the Pet DRx 2007 Stock Incentive Plan (2007 Plan), which authorized
another 2,700,000 shares of our common stock to be granted as options.
On July 28, 2009, at our annual meeting of stockholders, our shareholders approved an amendment to
the 2007 Plan that increased the number of shares of the Companys common stock reserved for
issuance under the 2007 Plan by 2,500,000 shares to an aggregate of 5,200,000 shares (the 2007
Amendment). Our Board of Directors had authorized the termination of the 2004 Plan, which took
effect upon the approval and the implementation of the 2007 Amendment. Accordingly, no additional
awards may be made under the 2004 Plan; however, the validity of options issued and outstanding
under the 2004 Plan as of the termination date will not be affected.
We classify stock-based compensation in the same expense line items as cash compensation.
Information about stock-based compensation included in the results of operations for the years
ended December 31, 2009, 2008, and 2007 is as follows (in thousands):
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For the year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Direct costs |
$ | 31 | $ | 97 | $ | | ||||||
Selling, general and
administrative expenses |
504 | 1,527 | 170 | |||||||||
Totals |
$ | 535 | $ | 1,624 | $ | 170 | ||||||
Stock Option Activity
A summary of our stock option activity is as follows (in thousands, except weighted-average
exercise price and weighted-average remaining contractual life):
Stock | Weighted | |||||||||||||||||||
Options | Weighted | Average | ||||||||||||||||||
Available | Stock | Average | Remaining | Aggregate | ||||||||||||||||
for | Options | Exercise | Contractual | Intrinsic | ||||||||||||||||
Grant | Outstanding | Price | Life (years) | Value | ||||||||||||||||
Balance as of December
31, 2006 |
(15 | ) | 212 | $ | 5.03 | 8.21 | $ | 26 | ||||||||||||
Authorized |
1,908 | | | |||||||||||||||||
Granted |
(1,505 | ) | 1,505 | $ | 5.47 | |||||||||||||||
Exercised |
| | | |||||||||||||||||
Forfeited or canceled |
99 | (99 | ) | $ | 5.78 | |||||||||||||||
Balance as of December
31, 2007 |
487 | 1,618 | $ | 5.39 | 9.35 | $ | 3 | |||||||||||||
Authorized under the
Pet DRx 2007 Stock
Incentive Plan |
2,700 | | | |||||||||||||||||
Granted |
(1,765 | ) | 1,765 | $ | 4.65 | |||||||||||||||
Exercised |
| | | |||||||||||||||||
Forfeited or canceled |
330 | (330 | ) | $ | 6.03 | |||||||||||||||
Balance as of December
31, 2008 |
1,752 | 3,053 | $ | 4.90 | 8.72 | $ | | |||||||||||||
Granted |
(1,735 | ) | 1,735 | $ | 0.28 | |||||||||||||||
Exercised |
24 | (24 | ) | $ | 0.20 | |||||||||||||||
Forfeited or canceled |
1,559 | (1,559 | ) | $ | 5.67 | |||||||||||||||
Termination of 2004 Plan |
(1,210 | ) | | | ||||||||||||||||
Authorization of
additional shares for
2007 Plan |
2,500 | | | |||||||||||||||||
Balance as of December
31, 2009 |
2,890 | 3,205 | $ | 2.06 | 8.59 | $ | 78 | |||||||||||||
Exercisable at December
31, 2009 |
1,782 | $ | 2.61 | 8.41 | $ | 44 | ||||||||||||||
During the fourth quarter of 2008, the Company accelerated the vesting of 58,115 options. The
expense recognized from these accelerated options in 2008 was approximately $77,000.
24,000 options with intrinsic value of $4 were exercised in 2009. No options with intrinsic
value were exercised in 2008 or 2007. We have not realized an actual tax benefit on any options to
date. The weighted average grant date fair value of options granted during the year-ended 2009,
2008, and 2007 was $0.08, $1.33, and $1.12, respectively.
The following table summarizes information about the options outstanding at December 31, 2009 (in
thousands, except per share amounts and the weighted average remaining contractual life):
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Number | Weighted | Number | |||||||||||||||||||||||
Outstanding | Average | Weighted | Exercisable | Weighted | |||||||||||||||||||||
As of | Remaining | Average | As of | Average | |||||||||||||||||||||
Range of | December 31, | Contractual | Exercise | December 31, | Exercise | ||||||||||||||||||||
Exercise Price | 2009 | Life (years) | Price | 2009 | Price | ||||||||||||||||||||
$ |
0.20 | $ | 0.20 | 976 | 9.21 | $ | 0.20 | 549 | $ | 0.20 | |||||||||||||||
$ |
0.30 | $ | 0.50 | 722 | 9.33 | $ | 0.40 | 180 | $ | 0.50 | |||||||||||||||
$ |
1.00 | $ | 3.18 | 674 | 8.79 | $ | 1.25 | 437 | $ | 1.23 | |||||||||||||||
$ |
5.71 | $ | 6.50 | 775 | 6.99 | $ | 6.30 | 597 | $ | 6.35 | |||||||||||||||
$ |
6.70 | $ | 6.70 | 58 | 8.03 | $ | 6.70 | 19 | $ | 6.70 | |||||||||||||||
$ |
0.20 | $ | 6.70 | 3,205 | 8.59 | $ | 2.06 | 1,782 | $ | 2.61 | |||||||||||||||
As of December 31, 2009, there was $0.5 million of total unrecognized compensation cost related to
non-vested shared-based compensation arrangements related to stock options granted to employee and
directors. The costs are expected to be recognized over a weighted-average period of 1.55 years.
Calculation of Fair Value
The fair value of our options to employees is estimated on the date of grant using the Modified
Black-Scholes- Merton option-pricing model. We amortize the fair value of employee options on a
straight-line basis over the requisite service period. The fair value of options to nonemployees is
estimated throughout the requisite service period using the Modified Black-Scholes-Merton
option-pricing model and the amount of share-based compensation expense recorded is affected each
reporting period by changes in the estimated fair value of the underlying common stock until the
options vest.
The following assumptions were used to determine the fair value of those options valued:
2009 | 2008 | 2007 | ||||||||||
Expected volatility of peer group (1) |
29.0%-66.0 | % | 35.5%-66.0 | % | 34.6%-68.0 | % | ||||||
Weighted- average volatility (1) |
29.0%-44.5 | % | 44.5 | % | 46.0 | % | ||||||
Expected dividends |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected term employees (2) |
3.9 - 4.7 years | 4.6 years | 6.1 years | |||||||||
Expected term nonemployees (2) |
N/A | N/A | 10.0 years | |||||||||
Risk-free rate employees (3) |
1.7%-2.1 | % | 1.4%-3.3 | % | 4.4%-4.8 | % | ||||||
Risk-free rate nonemployees |
N/A | N/A | 4.5%-5.2 | % |
(1) | We estimate the volatility of our common stock on the valuation date based on historical volatility of the common stock of a peer group of public companies as the Company has limited stock price history and it would not be practical to use internal volatility. | |
(2) | The expected term represents the period of time that we expect the options to be outstanding. We estimate the expected term for employees based on the simplified method. The expected term presented for nonemployees is based upon the option expiration date at the date of grant. | |
(3) | The risk-free interest rate is based on the implied yield in effect on U.S. Treasury zero-coupon issues with equivalent remaining terms. |
The FASBs guidance on share-based compensation requires entities to estimate the number of
forfeitures expected to occur and record expense based upon the number of awards expected to vest.
Prior to adoption of SFAS No. 123(R), the Company accounted for forfeitures as they occurred, as
permitted under SFAS No. 123. The cumulative effect of adopting the method change of estimating
forfeitures was not material to the Companys financial statements.
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14. Income Taxes
Loss before income taxes and the provision for income taxes consisted of the following:
Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Provision for income taxes: |
||||||||||||
Current: |
||||||||||||
Federal |
$ | | 1 | | ||||||||
State |
36 | (23 | ) | 44 | ||||||||
36 | (22 | ) | 44 | |||||||||
Deferred: |
||||||||||||
Federal |
(2,411 | ) | (5,140 | ) | (4,341 | ) | ||||||
State |
(743 | ) | (1,310 | ) | (1,294 | ) | ||||||
Valuation allowance |
3,154 | 6,450 | 5,635 | |||||||||
| | | ||||||||||
$ | 36 | $ | (22 | ) | $ | 44 | ||||||
The net deferred income taxes assets (liabilities) at December 31, 2009 and 2008 is comprised
of the following (in thousands):
2009 | 2008 | |||||||
Current deferred income tax assets: |
||||||||
Accounts receivable |
$ | 75 | $ | 111 | ||||
State taxes |
13 | 10 | ||||||
Other liabilities and reserves |
414 | 409 | ||||||
502 | 530 | |||||||
Non-current deferred income tax assets (liabilities) |
||||||||
Stock based compensation |
1,079 | 863 | ||||||
Deferred rent |
227 | 145 | ||||||
Property and equipment |
(44 | ) | 120 | |||||
Intangible assets |
1,035 | 916 | ||||||
Contributions |
3 | 3 | ||||||
Net operating loss carry forwards |
14,486 | 11,557 | ||||||
16,786 | 13,604 | |||||||
Total deferred tax assets (liabilities) |
17,288 | 14,134 | ||||||
Valuation allowance |
(17,288 | ) | (14,134 | ) | ||||
Net deferred tax assets (liabilities) |
$ | | $ | | ||||
At December 31, 2009, we had federal net operating loss (NOL) carry-forwards of approximately
$35.4 million, comprised of prior Company losses and acquired NOL carry forwards. These NOLs
expire at various dates through 2029. Under the Tax Reform Act of 1986, the utilization of NOL
carry-forwards to reduce taxable income will be restricted under certain circumstances. Events
that cause such a limitation include, but are not limited to, a
cumulative ownership change of more than 50% over a three-year period. We believe that some of our
acquisitions caused such a change of ownership and, accordingly, utilization of the NOL
carry-forwards may be limited in future years. Accordingly, the valuation allowance is principally
related to NOL carry-forwards. The state net operating losses of approximately $36.3 million will
expire in years beginning 2014. A deferred tax benefit has been calculated although a valuation
allowance has been recorded due to lack of measureable future income.
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At
December 31, 2009, 2008, and 2007, the Company had no uncertain
tax positions.
Additionally, there were no interest or penalties recognized in the statement of operations for
those years relating to income taxes.
The
Company is subject to U.S. federal income tax as well as income tax
in multiple states. For federal taxes, the tax years 2006 through
2009 remain open to federal examination and for state taxes, 2005
through 2009 remain open to state examination.
A reconciliation of the provision for income taxes for the years ended December 31, 2009, 2008, and
2007 for the Company to the amount computed at federal statutory rate is follows:
Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Federal income tax at statutory rate |
(35.0 | %) | (35.0 | %) | (35.0 | %) | ||||||
State taxes, net of federal benefit |
(1.6 | %) | (4.8 | %) | (5.0 | %) | ||||||
Goodwill impairment |
26.0 | % | 7.0 | % | 6.2 | % | ||||||
Other |
0.2 | % | 0.5 | % | (0.3 | %) | ||||||
Warrant liabilities |
(0.9 | %) | | |||||||||
Valuation allowance |
11.4 | % | 32.4 | % | 34.4 | % | ||||||
0.1 | % | 0.1 | % | 0.3 | % | |||||||
15. Related party transactions
From time-to-time, the Company enters into transactions in the normal course of business with
related parties. Management believes that such transactions are on fair and reasonable terms that
are no more favorable than those that would be available in a comparable transaction in arms-length
dealings with an unrelated third party.
Leases
Certain of the veterinary facilities are owned by the Companys veterinarians; and therefore, the
Company pays rent to these veterinarians for use of the facilities. Monthly rents are based either
on net revenues of the facility or are a fixed cost every month. During the years ended December
31, 2009, 2008, and 2007, the Company paid a total of $2.3 million, $2.6 million, and $2.6 million,
respectively, to veterinarians for monthly rent payments.
Consulting Services
In 2007, 62,065 common stock warrants at an exercise price of $6.16 were issued to Galen Partners
for certain consulting work that was performed in conjunction with the pending merger between Echo
and PVGI. One of the current members of the Companys Board of Directors is a managing partner of
Galen Partners.
16. Discontinued Operations
We report discontinued operations in accordance with the FASBs guidance regarding the disposal of
long-lived assets. Accordingly, we report clinics as discontinued operations when, among other
things, we commit to a plan to divest a clinic through a sale or closure of the facility and that
sale or closure will be completed within the next 12 months. Operating results and any gain or
loss recognized on the divestiture of a clinic is reported as discontinued operations in the
consolidated statement of operations for all periods presented.
During the fourth quarter of 2008, we committed to and completed our plan to close South Bay. A
permanent decline in revenues at South Bay due to increased competition and loss of key
veterinarians was the primary driver behind managements decision to close the facility. The
Company had already taken an impairment charge for the full value of its goodwill and intangible
assets associated with this facility in 2007.
The following amounts related to South Bay have been segregated from continuing operations and
reported as discontinued operations through the date of closure, and do not reflect the costs of
certain services provided to South Bay by the Company. Such costs, which were not allocated, were
for services that included legal, insurance, accounting, human resources, and information
technology systems support. Additionally, the Company uses a centralized approach to cash
management and financing of its operations and accordingly, debt and the associated interest
expense was not allocated to South Bay.
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(Dollars in thousands) | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues |
$ | | $ | 1,301 | $ | 2,241 | ||||||
Operating loss |
| (566 | ) | (396 | ) | |||||||
Impairment of goodwill and intangibles |
| | (3,670 | ) | ||||||||
Net loss |
| (573 | ) | (4,066 | ) |
17. Commitments and Contingencies
Leases
The Company leases certain animal hospitals and equipment under capital and operating lease
agreements. We operate many of our animal hospitals from premises that are leased under operating
leases with terms, including renewal options, ranging from 5 to 30 years. Lease agreements
generally require the Company to pay maintenance, repairs, property taxes and insurance costs.
There are contingent rent payments on 4 animal hospitals, which are based on revenues of the
individual animal hospitals.
Commitments relating to non-cancelable operating and capital leases for each of the next five
years and thereafter are as follows (in thousands):
Operating | Capital | |||||||
2010 |
$ | 4,008 | $ | 369 | ||||
2011 |
3,671 | 207 | ||||||
2012 |
3,511 | 98 | ||||||
2013 |
3,197 | 98 | ||||||
2014 |
3,223 | 17 | ||||||
Thereafter |
14,593 | | ||||||
Total minimum future payments |
$ | 32,203 | 789 | |||||
Less imputed interest |
(100 | ) | ||||||
Less current portion |
(320 | ) | ||||||
Long-term capital lease obligations |
$ | 369 | ||||||
Rent expense on our facilities totaled $4.2 million, $4.4 million, and $3.6 million in the years
ended December 31, 2009, 2008, and 2007, respectively. See Note 15 for further information
regarding rent payments.
The following summarizes amounts related to equipment leased by us under capital leases at December
31, 2009 and 2008 (in thousands):
2009 | 2008 | |||||||
Equipment |
$ | 2,676 | $ | 2,306 | ||||
Accumulated amortization |
(2,048 | ) | (1,684 | ) | ||||
Net book value |
$ | 628 | $ | 622 | ||||
Litigation Matters
We have certain contingent liabilities resulting from litigation and claims incidental to the
ordinary course of our business that we believe will not have a material adverse effect on our
future consolidated financial position, results of operations, or cash flows.
18. Warrant Liabilities
As a result of adopting certain changes to the FASBs guidance on embedded features of a
convertible debt instrument, 892,070 of our issued and outstanding common stock warrants as of
December 31, 2008 that were
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previously treated as equity pursuant to the derivative treatment exemption, are no longer afforded
equity treatment. Upon adoption of the change in accounting for the embedded features, we
reclassified the fair value of the common stock warrants, which have exercise price reset features,
from equity to liabilities as if these warrants had been treated as a derivative liability since
their date of issue. On January 1, 2009, as a cumulative effect adjustment, we reduced additional
paid-in-capital by $1.9 million, increased beginning accumulated deficit by $1.9 million and
recorded $18,000 to a long-term warrant liability to recognize the fair value of such warrants on
the date of adoption. Additionally, the Company issued 15,320,986 warrants during the first
quarter of 2009, which also qualified as derivative liabilities upon adoption of the changes.
During the three and twelve months ended December 31, 2009, we recognized a total net gain of $4.6
million and $0.8 million, respectively. These amounts were recorded in change in the fair value of
warrant liabilities in the accompanying consolidated statement of operations.
These warrant liabilities have been measured in accordance with the FASBs guidance of fair value.
The valuation assumptions above are classified within Level 1 inputs. The following table
represents the Companys warrant liability activity:
Balance, December 31, 2008 |
$ | | ||
January 1, 2009 (cumulative effect adjustment) |
18 | |||
Issuance of new warrants |
3,646 | |||
Mark-to-market adjustments to fair value, net |
(750 | ) | ||
Balance, December 31, 2009 |
$ | 2,914 | ||
These warrants were not issued with the intent of effectively hedging any future cash flow, fair
value of any asset, liability or any net investment in a foreign operation. The warrants do not
qualify for hedge accounting, and as such, all future changes in the fair value of these warrants
will be recognized currently in earnings until such time as the warrants are exercised or expire.
The following assumptions were used to determine the fair value of those warrants needing
retroactive treatment as of January 1, 2009 as well as for all warrants which qualified for the new
accounting treatment, which included warrants issued during the first quarter of 2009, as of
December 31, 2009:
December 31, | March 31, | January 1, | ||||||||||
2009 | 2009 | 2009 | ||||||||||
Weighted-average volatility (1) |
29.9 | % | 46.4 | % | 46.4 | % | ||||||
Expected dividends |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected term (2) |
3.0 7.8 years | 3.8 - 8.6 years | 4.0 - 8.8 years | |||||||||
Risk-free rate (3) |
1.7 3.5 | % | 1.4% - 2.5 | % | 1.9% - 2.1 | % |
(1) | We estimated the volatility of our common stock on the valuation date based on historical volatility of the common stock of a peer group of public companies as the Company has limited stock price history and it would not be practical to use internal volatility. | |
(2) | The expected term represents the period of time that we expect the warrants to be outstanding. | |
(3) | The risk-free interest rate is based on the implied yield in effect on U.S. Treasury zero-coupon issues with equivalent remaining terms. |
19. Fair Value
Effective January 1, 2009, we adopted the FASBs changes of fair valuing our nonfinancial assets
and nonfinancial liabilities measured on a non-recurring basis. We adopted the changes for
measuring the fair value of our financial assets and liabilities during 2008. As defined by these
changes, fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. We utilize
market data or assumptions that we believe market participants would use in pricing the asset or
liability, including assumptions about risk and the risks inherent in the inputs to the valuation
technique. The FASBs fair value guidance establishes a three-tiered fair value hierarchy which
prioritizes the inputs used in measuring fair value as follows:
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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.
The carrying amount of our cash and equivalents, receivables, and accounts payable reported in the
consolidated balance sheets approximates fair value because of the short maturity of those
instruments.
The fair value of our current and long-term debt instruments at December 31, 2009 is undeterminable
due to the related party nature of the obligations and/or the financial circumstances around the
issuance of the debt instruments
20. Subsequent Events
Sale of Building
In January 2010, the Company completed a sale and leaseback transaction of one of its buildings in
California for $1.1 million, net of certain closing costs. The Company simultaneously entered into
a five year lease from the buyers. While the Company did not record an impairment charge on the
building, it did accelerate depreciation expense on the building, including approximately $0.2
million of additional depreciation expense in 2009. As of December
31, 2009, per FASB guidelines, the Company will continue to classify
the building as held and used since the Company will retain more than
a minor portion of the use of the building.
Amendment to Convertible Note
On March 29, 2010, one of our note holders amended their note that was issued in connection with
the purchase of Valley Animal Medical Clinic effective July 1,
2008
(2nd
Amendment).
The 2nd Amendment delays the maturity date of the principal portion of the note from
September 30, 2010 to April 1, 2011 and changes the interest rate owed on the principal portion of
the loan from 8% to 10% starting April 1, 2010. Additionally, under the 2nd Amendment,
the Company had to pay any outstanding interest accrued and unpaid as of the date of the amendment
within 5 business days of the amendment taking effect. As a result of the 2nd Amendment, the Company
has reclassified the $1.0 million principal amount from current portion of long-term debt, net of
debt discount to Convertible Debt, net of debt discount in long-term liabilities in the
accompanying consolidated balance sheets.
Expiration of Certain Common Stock Warrants
On March 17, 2010, all of the Companys warrants with an exercise price of $6.00 expired by their
terms and are no longer deemed outstanding.
Change in FDIC Limits of Primary Bank
On January 1, 2010, the Companys primary United States bank exited the Federal Deposit Insurance
Corporations Transaction Account Guarantee Program (the Program). Thus, after December 31, 2009,
funds held in noninterest-bearing transaction accounts will no longer be guaranteed in full, but
will be insured up to $250,000 under the FDICs general deposit insurance rules.
Management
evaluated all activity through the issue date of the consolidated
financial statements and concluded that no other subsequent events,
other than those noted above, have occurred that would require
recognition in the consolidated financial statements or disclosure in
the Notes to the consolidated financial statements.
21.
Restated Unaudited Quarterly Financial Information
The following table sets forth unaudited balance sheet at September 30, 2009 and statement of
operations data for the three and nine months ended September 30, 2009. The quarter ended
September 30, 2009 has been restated with comparisons to the results as previously reported. The
restatement was due to the Companys discovery that the amendment it made to the Financing Warrants
on August 31, 2009 (see Notes 10 and 18) did not fully satisfy the FASBs guidance on determining
whether an instrument is indexed to an entitys own stock, which was a requirement for the Company
to discontinue its treatment of the Financing Warrants as derivative instruments.
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The Company has re-examined the accounting treatment in light of this discovery and now concludes
that the more appropriate accounting treatment is to have not discontinued the derivative treatment
of the Financing Warrants at September 30, 2009 and to continue treating them as derivatives going
forward. As such, the restated amounts below include a reversal of the $6,900,000 charge we had
originally recorded to additional paid-in-capital (in stockholders equity) relating to the
outstanding warrant liability for the Financing Warrants and reclassified that amount back to
warrant liabilities (in long-term liabilities) as well as we recorded the mark-to-mark adjustment
of the liability from August 31, 2009 (the date of our last adjustment prior to changing our
accounting) and September 30, 2009, which was $450,000 and has been recorded to gain in change in
fair value of warrant liabilities.
As Reported | As Restated | |||||||
September 30, | September 30, | |||||||
2009 | 2009 | |||||||
(unaudited) | (unaudited) | |||||||
Current assets |
5,973 | 5,973 | ||||||
Long-term assets |
62,504 | 62,504 | ||||||
Total assets |
68,477 | 68,477 | ||||||
Current liabilities |
9,975 | 9,975 | ||||||
Long-term liabilities |
12,637 | 19,987 | ||||||
Total liabilities |
22,612 | 29,962 | ||||||
Stockholders equity |
45,865 | 38,515 | ||||||
Total liabilities and
stockholders equity |
68,477 | 68,477 | ||||||
As Reported | As Restated | |||||||||||||||
For the three | For the nine | For the three | For the nine | |||||||||||||
months ended | months ended | months ended | months ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2009 | 2009 | 2009 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Revenue |
15,734 | 49,158 | 15,734 | 49,158 | ||||||||||||
Direct Costs |
14,488 | 44,375 | 14,488 | 44,375 | ||||||||||||
Hospital Contribution |
1,246 | 4,783 | 1,246 | 4,783 | ||||||||||||
Selling, general, and administrative expenses |
1,644 | 6,204 | 1,644 | 6,204 | ||||||||||||
Loss from operations |
(398 | ) | (1,421 | ) | (398 | ) | (1,421 | ) | ||||||||
Gain/(Loss) on change in fair value of warrant liabilities |
144 | (3,449 | ) | (306 | ) | (3,899 | ) | |||||||||
Interest expense, net |
(1,532 | ) | (4,315 | ) | (1,532 | ) | (4,315 | ) | ||||||||
Loss before provision for income taxes |
(1,786 | ) | (9,185 | ) | (2,236 | ) | (9,635 | ) | ||||||||
Tax provision |
23 | 28 | 23 | 28 | ||||||||||||
Net Loss |
(1,809 | ) | (9,213 | ) | (2,259 | ) | (9,663 | ) | ||||||||
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
Item 9A(T). Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
completed an evaluation of the effectiveness of the design and operation of the Companys
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period
covered by this Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures, as of the end of the
fiscal year covered by this Form 10-K, were effective.
(b) Managements Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act and for
assessing the effectiveness of internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. In addition, projections of any evaluation of effectiveness of internal
control over financial reporting to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Because PVGI was a private company as of December 31, 2007, PVGI was not required to comply with
Section 404 of the Sarbanes-Oxley Act of 2002, and, therefore, was not required to make an
assessment of the effectiveness of its internal control over financial reporting for the fiscal
year ended December 31, 2007.
Following the consummation of the Merger, we began to implement an infrastructure to better manage
the operations of the Company and its needs and requirements as a public reporting company, which
included, among other things, the hiring of a corporate accounting and finance team, an internal
audit professional, and human resources and legal support. We implemented procedures and processes
that organized the financial statement preparation process and the capturing and recording of
operational and financial information, and we are in the process of centralizing key hospital level
accounting and administrative activities. We have implemented a variety of internal controls in
many aspects of our operations. As we continue this process, we expect to be able to continue to
improve and strengthen our internal control over financial reporting procedures to ensure that they
are adequate and effective.
The process of designing and implementing effective internal controls and procedures is a
continuous effort that will require the Company to anticipate and react to changes in its business
and the economic and regulatory environments. It will also require the Company to continue to
devote resources to assuring that the proper procedures, processes and people are in place as the
Company grows in the future.
Our management has assessed the effectiveness of our internal control over financial reporting as
of December 31, 2009. In making its assessment of internal control over financial reporting,
management used the criteria established in Internal Control Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission. This assessment included an
evaluation of the design of our internal control over financial reporting and testing of the
operational effectiveness of those controls. Based on the results of this assessment, management
has concluded that our internal control over financial reporting was effective as of December 31,
2009.
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This Annual Report on Form 10-K does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by our registered public accounting firm pursuant to rules of the SEC that
permit us to provide only managements report in this Annual Report on Form 10-K.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the
fourth quarter of the year ended December 31, 2009 that have materially affected, or that are
reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to Pet DRxs Proxy Statement for
its 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of
the fiscal year ended December 31, 2009.
The information required by Item 401 of Regulation S-K with respect to our executive officers
is set forth under the heading Executive Officers of Pet DRx in Part I, Item 1, of this Annual
Report on Form 10-K.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to Pet DRxs Proxy Statement for
its 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of
the fiscal year ended December 31, 2009.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is incorporated by reference to Pet DRxs Proxy Statement for
its 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of
the fiscal year ended December 31, 2009.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference to Pet DRxs Proxy Statement for
its 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of
the fiscal year ended December 31, 2009.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to Pet DRxs Proxy Statement for
its 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of
the fiscal year ended December 31, 2009.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
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(a)(1) Consolidated Financial Statements. The Consolidated Financial Statements of Pet DRx are set
forth in Part II, Item 8.
(a)(2) Financial Statement Schedules. Not applicable.
(a)(3) Exhibits. See Item 15(b) below.
(b) Exhibits. We have filed, or incorporated into this Annual Report on Form 10-K by
reference, the exhibits listed on the accompanying Index to Exhibits immediately following the
signature page of this Form 10-K.
(c) Financial Statement Schedules. See Item 15(a) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PET DRX CORPORATION |
||||
Date: March 31, 2010 | By: | /s/ Gene E. Burleson | ||
Gene E. Burleson | ||||
Chairman of the Board and Chief Executive Officer |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Name | Position | Date | ||
/s/ Gene E. Burleson
|
Chairman of the Board and Chief Executive Officer | March 31, 2010 | ||
/s/ Harry L. Zimmerman
|
||||
Harry L. Zimmerman
|
Executive Vice President and Chief Financial Officer | March 31, 2010 | ||
/s/ Kyle Morse
|
||||
Kyle Morse
|
Vice President, Corporate Controller and Chief Accounting Officer | March 31, 2010 | ||
/s/ Joel Kanter
|
||||
Joel Kanter
|
Director | March 31, 2010 | ||
/s/ Christopher W. Kersey
|
||||
Christopher W. Kersey
|
Director | March 31, 2010 | ||
/s/ Richard O. Martin
|
||||
Richard O. Martin
|
Director | March 31, 2010 | ||
/s/ J. David Reed
|
||||
J. David Reed
|
Director | March 31, 2010 | ||
/s/ Zubeen Shroff
|
||||
Zubeen Shroff
|
Director | March 31, 2010 |
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EXHIBIT INDEX
Exhibit | ||
No. | ||
2.1
|
Second Amended and Restated Agreement and Plan of Merger dated October 23, 2007 by and among Echo Healthcare Acquisition Corp. (the Company), Pet DRx Acquisition Company and XLNT Veterinary Care, Inc. (Incorporated by reference to Exhibit 2.1 of the Companys Registration Statement on Form S-4, as amended, filed on November 8, 2007.) | |
3.1
|
Second Amended and Restated Certificate of Incorporation of Pet DRx Corporation. (Incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
3.2
|
Amended and Restated By-laws of Pet DRx Corporation. (Incorporated by reference to Exhibit 3.2 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
4.1
|
Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
4.2
|
Specimen Unit Certificate. (Incorporated by reference to Exhibit 4.2 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
10.1
|
Form of Stock Escrow Agreement by and among the Company, Corporate Stock Transfer, Inc. and the Existing Stockholders. (Incorporated by reference to Exhibit 10.2 of the Companys Registration Statement on Form S-1, as amended, filed on February 2, 2006.) | |
10.2
|
Form of Registration Rights Agreement by and among the Company and the Existing Stockholders. (Incorporated by reference to Exhibit 10.3 of the Companys Registration Statement on Form S-1, as amended, filed on February 2, 2006.) | |
10.3
|
Form of Unit Option Purchase Agreement by and among the Company, Morgan Joseph & Co. and Roth Capital Partners, LLC. (Incorporated by reference to Exhibit 10.26 of the Companys Registration Statement on Form S-1, as amended, filed on February 2, 2006.) | |
10.4+
|
Executive Employment Agreement by and between XLNT Veterinary Care, Inc. and George Villasana (Incorporated by reference to Exhibit 10.32 of the Companys Registration Statement on Form S-4, as amended, filed on November 7, 2007.) | |
10.5+
|
Separation Agreement dated September 25, 2008 between Robert Wallace and the Company. (Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 10-Q filed on November 14, 2008.) | |
10.6+
|
Amendment to Executive Employment Agreement dated August 14, 2008 between Gregory J. Eisenhauer and the Company. (Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 10-Q filed on November 14, 2008.) | |
10.7+
|
Executive Employment Agreement dated March 18, 2009 between Gene E. Burleson and the Company. (Incorporated by reference to Exhibit 10.21 of the Companys Annual Report on Form 10-K filed on March 31, 2009.) | |
10.8+
|
Executive Employment Agreement dated March 18, 2009 between Harry L. Zimmerman and the Company. (Incorporated by reference to Exhibit 10.22 of the Companys Annual Report on Form 10-K filed on March 31, 2009.) | |
10.9+
|
Separation Agreement effective December 31, 2008 between Steven T. Johnson and the Company. (Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on January 2, 2009.) |
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Exhibit | ||
No. | ||
10.10+
|
XLNT Veterinary Care, Inc. 2004 Stock Option Plan, as amended. (Incorporated by reference to Exhibit 10.23 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
10.11+
|
Form of XLNT Veterinary Care, Inc. Non-Qualified Stock Option Agreement by and between XLNT Veterinary Care, Inc. and Certain Employees of XLNT Veterinary Care. Inc. (Incorporated by reference to Exhibit 10.24 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
10.12+
|
Form of XLNT Veterinary Care, Inc. Non-incentive Stock Option Agreement by and between XLNT Veterinary Care, Inc. and Certain Executives of XLNT Veterinary Care, Inc. (Incorporated by reference to Exhibit 10.25 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
10.13+
|
2007 Pet DRx Corporation Stock Incentive Plan (Incorporated by reference to Exhibit 10.28 of the Companys Registration Statement on Form S-4, as amended, filed on November 11, 2007.) | |
10.14+
|
Form of Stock Option Agreement for stock options granted to Employees under the 2007 Pet DRx Corporation Stock Incentive Plan. (Incorporated by reference to Exhibit 10.28 of the Companys Annual Report on Form 10-K filed on March 31, 2009.) | |
10.15+
|
Form of Stock Option Agreement for stock options granted to Non-Employee Directors under the 2007 Pet DRx Corporation Stock Incentive Plan. (Incorporated by reference to Exhibit 10.13 of the Companys Current Report on Form 10-Q filed on May 14, 2008.) | |
10.16+
|
Pet DRx Corporation 2008 Employee Bonus Plan. (Incorporated by reference to Exhibit 10.11 of the Companys Current Report on Form 10-Q filed on May 14, 2008.) | |
10.17+
|
Pet DRx Corporation 2008 Non-Employee Director Compensation Program. (Incorporated by reference to Exhibit 10.12 of the Companys Current Report on Form 10-Q filed on May 14, 2008.) | |
10.18+
|
Pet DRx Corporation 2009 Employee Bonus Plan. (Incorporated by reference to Item 5.02 of the Companys Current Report on Form 8-K filed on March 23, 2009.) | |
10.19+
|
Pet DRx Corporation 2009 Non-Employee Director Compensation Program. (Incorporated by reference to Item 5.02 of the Companys Current Report on Form 8-K filed on March 23, 2009.) | |
10.20
|
Board Voting Agreement dated as of January 4, 2008 by and among the Company and Certain Stockholders named on the signature pages thereof. (Incorporated by reference to Exhibit 10.20 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
10.21
|
Form of Indemnification Agreement for Executive Officers and Directors by and between XLNT Veterinary Care, Inc. and Certain Executive Officers and Directors of XLNT Veterinary Care, Inc. (Incorporated by reference to Exhibit 10.22 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
10.22
|
Form of Stock Purchase Warrant Issued by XLNT Veterinary Care, Inc. to Certain Lenders. (Incorporated by reference to Exhibit 10.26 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
10.23
|
Form of Convertible Promissory Note Issued to Sellers of Veterinary Clinics Acquired by XLNT Veterinary Care, Inc. (Incorporated by reference to Exhibit 10.27 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
10.24
|
Form of Warrant to Purchase Common Stock of XLNT Veterinary Care, Inc. (Incorporated by reference to Exhibit 10.28 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
10.25
|
Warrant to Purchase Common Stock of XLNT Veterinary care, Inc. for Galen Partners IV, L.P. dated September 26, 2007. (Incorporated by reference to Exhibit 10.29 of the Companys Current Report on |
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Table of Contents
Exhibit | ||
No. | ||
Form 8-K filed on January 10, 2008.) | ||
10.26
|
Promissory Note between XLNT Veterinary Care, Inc. and Huntington Capital, L.P. in the amount of $1,400,000 dated November 2, 2005. (Incorporated by reference to Exhibit 10.30 of the Companys Current Report on Form 8-K filed on January 10, 2008.) | |
10.27
|
Amended and Restated Registration Rights Agreement dated as of February 12, 2008 by and among the Company, the founders of the Company, as listed on the signature pages thereof, and former affiliates of XLNT Veterinary Care, Inc., as listed on the signature pages thereof. (Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on February 12, 2008.) | |
10.28
|
Form of 12% Senior Convertible Note. (Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on January 27, 2009.) | |
10.29
|
Form of Warrant to Purchase Shares of Common Stock. (Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on January 27, 2009.) | |
10.30
|
Registration Rights Agreement dated as of February 10, 2009 by and among the Company and the purchasers of 12% Senior Convertible Notes and Warrants. (Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on February 10, 2009.) | |
10.31
|
Amendment to Promissory Note in the Amount of $1,400,000 between Pet DRx Veterinary Group, Inc. as successor in interest to XLNT Veterinary Care, Inc. and Huntington Capital, L.P. dated March 30, 2009. (Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on April 2, 2009.) | |
14.1
|
Code of Business Conduct and Ethics. (Incorporated by reference to Exhibit 5.1 of the Companys Current Report on Form 8-K filed February 12, 2008.) | |
21.1*
|
List of Subsidiaries | |
23.1*
|
Consent of SingerLewak LLP | |
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 |
* | Exhibits that are filed herewith. | |
** | Exhibits that are furnished herewith. | |
+ | Management contract or compensatory plan, contract or arrangement. |
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