##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                    to
 Commission File Number 1-3473
 PET DRX CORPORATION
  Delaware
    
    56-2517815(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)215 Centerview Drive, Suite 360
Brentwood, Tennessee(Address of principal executive offices)
    
    37027(Zip Code)
 (615) 369-1914  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




---



##### 



INDEX
 PagePart I. Financial InformationItem 1. Financial Statements
    
    1Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    1Condensed Consolidated Statements of Operations for the three months and nine months ended September
30, 2008 and 2007
    
    2Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007
    
    3Notes to Condensed Consolidated Financial Statements
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    20Item 4. Controls and Procedures
    
    21Part II. Other InformationItem 1. Legal Proceedings
    
    22Item 1A. Risk Factors
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    22Item 3. Defaults Upon Senior Securities
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    22Item 5. Other Information
    
    22Item 6. Exhibits
    
    22Ex-10.1Ex-10.2Ex-31.1Ex-31.2Ex-32.1Ex-32.2




---



##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 PET DRX CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except par value and number of shares)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    5,189
    
    
    $
    2,005Trade accounts receivable, net
    
    
    330
    
    
    
    179Inventory
    
    
    1,164
    
    
    
    1,268Prepaid expenses and other
    
    
    1,049
    
    
    
    910Assets held for sale
    
    
    3,780
    
    
    
    Due from related parties
    
    
    55
    
    
    
    238Total current assets
    
    
    11,567
    
    
    
    4,600Property and Equipment, net
    
    
    4,336
    
    
    
    7,887Other assets:Goodwill
    
    
    53,749
    
    
    
    49,190Other intangible assets, net
    
    
    6,489
    
    
    
    7,145Other
    
    
    411
    
    
    
    1,020Total assets
    
    $
    76,552
    
    
    $
    69,842LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current portion of long-term obligations, net of debt discount
    
    $
    2,254
    
    
    $
    1,533Accounts payable
    
    
    1,855
    
    
    
    6,481Accrued payroll and other expenses
    
    
    5,139
    
    
    
    5,577Accrued income taxes
    
    
    
    
    
    
    189Due to a related party
    
    
    96
    
    
    
    356Obligations under capital leases, current portion
    
    
    395
    
    
    
    520Total current liabilities
    
    
    9,739
    
    
    
    14,656Long-term liabilities:Convertible debt, net of debt discount
    
    
    5,047
    
    
    
    11,361Term notes, less current portion and net of debt discount
    
    
    5,161
    
    
    
    21,532Obligations under capital leases, less current portion
    
    
    434
    
    
    
    531Deferred rent
    
    
    237
    
    
    
    97Other
    
    
    73
    
    
    
    145Total long-term liabilities
    
    
    10,952
    
    
    
    33,666Total liabilities
    
    
    20,691
    
    
    
    48,322Stockholders equityPreferred stock, par value $0.0001, 10,000,000 shares authorizedSeries A: 0 and 7,652,175 shares outstanding as of September
30, 2008 and December 31, 2007, respectively
    
    
    
    
    
    
    1Series B: 0 and 26,661 shares outstanding as of September 30,
2008 and December 31, 2007, respectively
    
    
    
    
    
    
    Common stock, par value $0.0001, 90,000,000 shares authorized,
23,660,460 and 4,247,632 shares outstanding as of September 30,
2008 and December 31, 2007, respectively net of 1,361,574 and 0
treasury shares at September 30, 2008 and December 31, 2007,
respectively
    
    
    2
    
    
    
    1Additional paid-in capital
    
    
    87,181
    
    
    
    41,402Accumulated deficit
    
    
    (31,322
    )
    
    
    (19,884
    )Total stockholders equity
    
    
    55,861
    
    
    
    21,520Total liabilities and stockholders equity
    
    $
    76,552
    
    
    $
    69,842
 See Notes to Condensed Consolidated Financial Statements
 1




---



##### Table of Contents



PET DRX CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    $
    17,662
    
    
    $
    17,696
    
    
    $
    53,419
    
    
    $
    46,099Direct costs
    
    
    16,858
    
    
    
    16,227
    
    
    
    49,651
    
    
    
    43,442Hospital contribution
    
    
    804
    
    
    
    1,469
    
    
    
    3,768
    
    
    
    2,657Selling,
general and administrative expense before impairment charge
    
    
    3,353
    
    
    
    3,718
    
    
    
    11,064
    
    
    
    9,301Impairment of assets held for sale
    
    
    324
    
    
    
    
    
    
    
    324
    
    
    
    Selling,
general and administrative expenses
    
    
    3,677
    
    
    
    3,718
    
    
    
    11,388
    
    
    
    9,301Loss from operations
    
    
    (2,873
    )
    
    
    (2,249
    )
    
    
    (7,620
    )
    
    
    (6,644
    )Other income (expense):Interest income
    
    
    5
    
    
    
    28
    
    
    
    344
    
    
    
    104Interest expense
    
    
    (292
    )
    
    
    (1,143
    )
    
    
    (4,179
    )
    
    
    (2,615
    )Loss before provision for income taxes
    
    
    (3,160
    )
    
    
    (3,364
    )
    
    
    (11,455
    )
    
    
    (9,155
    )Benefit/(Provision) from income taxes
    
    
    12
    
    
    
    13
    
    
    
    (17
    )
    
    
    23Net loss
    
    $
    (3,172
    )
    
    $
    (3,377
    )
    
    $
    (11,438
    )
    
    $
    (9,178
    )Basic and diluted loss per common share
    
    $
    (0.13
    )
    
    $
    (0.80
    )
    
    $
    (0.49
    )
    
    $
    (2.25
    )Weighted average shares used in computing
basic and diluted loss per share
    
    
    23,656
    
    
    
    4,247
    
    
    
    23,357
    
    
    
    4,082
 See Notes to Condensed Consolidated Financial Statements
 2




---



##### Table of Contents



PET DRX CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows used in operating activities:Net loss
    
    $
    (11,438
    )
    
    $
    (9,178
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,642
    
    
    
    1,545Amortization of debt amendment costs
    
    
    182
    
    
    
    379Amortization of debt discount
    
    
    1,816Stock-based compensation
    
    
    1,161
    
    
    
    355Impairment of assets held for sale
    
    
    324
    
    
    
    Impairment of fixed assets
    
    
    88
    
    
    
    Deferred rent
    
    
    94
    
    
    
    (5
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (152
    )
    
    
    19Inventory
    
    
    220
    
    
    
    124Prepaid expenses and other
    
    
    119
    
    
    
    (562
    )Accounts payable
    
    
    (4,711
    )
    
    
    4,913Accrued payroll and other expenses
    
    
    300
    
    
    
    1,252Income taxes
    
    
    (168
    )
    
    
    (141
    )Other
    
    
    36
    
    
    
    Net cash used in operating activities
    
    
    (10,487
    )
    
    
    (1,299
    )Cash flows used in investing activities:Property and equipment additions
    
    
    (1,338
    )
    
    
    (4,738
    )Payments made on prior acquisitions
    
    
    (356
    )
    
    
    (3,940
    )Business acquisitions, net of cash received
    
    
    (3,019
    )
    
    
    (16,832
    )Net cash used in investing activities
    
    
    (4,713
    )
    
    
    (25,510
    )Cash flow provided by financing activities:Net proceeds
from IPO received as a result of merger with XLNT
    
    
    36,313
    
    
    
    Payment of debt waiver fees
    
    
    (182
    )
    
    
    Proceeds from term loan with preferred stock warrants
    
    
    
    
    
    
    13,978Repurchases of preferred stock and common stock warrants
    
    
    
    
    
    
    (25
    )Proceeds from Series B preferred stock, net of expenses paid in cash
    
    
    
    
    
    
    13,560Payments on notes payable
    
    
    (17,426
    )
    
    
    (1,554
    )Payments on capital lease obligations
    
    
    (321
    )
    
    
    (244
    )Net cash provided by financing activities
    
    
    18,384
    
    
    
    25,715Increase (decrease) in cash and cash equivalents
    
    
    3,184
    
    
    
    (1,094
    )Cash and cash equivalents at beginning of period
    
    
    2,005
    
    
    
    3,968Cash and cash equivalents at end of period
    
    $
    5,189
    
    
    $
    2,874Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    
    
    
    $
    51Interest
    
    $
    3,263
    
    
    $
    1,947Schedule of non-cash investing and financing activities:Detail of acquisitions:Fair value of assets acquired
    
    $
    5,249
    
    
    $
    29,936Cash paid for acquisitions and related direct costs
    
    
    (3,019
    )
    
    
    (16,832
    )Obligations to sellers of acquired hospitals, notes payable and assumed liabilities
    
    $
    2,230
    
    
    $
    13,104Building acquired:Purchase price
    
    $
    
    
    
    $
    930Cash paid
    
    
    
    
    
    
    (430
    )Mortgage held by seller
    
    $
    
    
    
    $
    500Deferred costs and accrued liabilities associated with merger of XLNT recorded to
additional paid-in-capital on January 4, 2008 (Date of Merger)
    
    $
    700
    
    
    $
    Conversion of Convertible Notes to Equity
    
    $
    8,305
    
    
    $
    1,495Retirement of debt to offset related party receivable
    
    $
    16
    
    
    $
    Conversion of Series A and Series B preferred stock to common stock
    
    $
    1
    
    
    $
    
 See Notes to Condensed Consolidated Financial Statements
 3




---



##### Table of Contents



PET DRX CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
   2. New Accounting Pronouncements
 Adoption of New Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 Recently Issued Accounting Pronouncements
   4




---



##### Table of Contents



3. Merger with XLNT Veterinary Care, Inc.
    
    
    All Series A convertible preferred stock of XLNT was converted to XLNT common stock
at a 1:1 ratio and all Series B convertible preferred stock of XLNT was converted to XLNT
common stock at a 1:100 ratio;
    
    Certain holders of XLNTs convertible debentures converted approximately $8.3 million
of debentures into approximately 1.7 million shares of XLNT common stock;
    
    A holder of XLNTs Series B warrants exercised a warrant for 1,647 shares of Series B
convertible preferred stock of XLNT which was subsequently converted to XLNT common stock
at a 1:100 ratio;
    
    XLNT issued 416,728 shares of XLNT 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 Echos Special
Meeting of Stockholders and who had voted against the Merger and submitted their shares
for conversion (the Inducement Shares);
    
    Each outstanding share of XLNT 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;
    
    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 XLNT;
    
    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 was released on
July 3, 2008;
    
    Certain executives of the Company were granted options to purchase 424,480 shares of
the Companys 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
    
    The stockholders of Pet DRx approved the 2007 Stock Incentive Plan.
 5




---



##### Table of Contents



4. Acquisitions
  Business Combinations
  September 30, 2008Consideration:Cash, net of cash acquired
    
    $
    2,900Convertible notes (2)
    
    
    1,947Direct costs
    
    
    119Total
    
    $
    4,966Purchase Price Allocation (1):Tangible assets:Inventories
    
    $
    116Prepaid and other current assets
    
    
    166Property and equipment
    
    
    285Other long-term assets
    
    
    107Liabilities:Accounts payable
    
    
    (85
    )Accrued expenses
    
    
    (51
    )Current portion of capitalized leases
    
    
    (30
    )Long-term capitalized leases
    
    
    (71
    )Deferred rent
    
    
    (46
    )Capitalized acquisition success fees
    
    
    16Goodwill
    
    
    4,559Total
    
    $
    4,966
 
 (1)
    
    The Company is in the process of finalizing its valuations on these
acquisitions. The completion of these valuations may result in
adjustments to the goodwill and other intangibles, as disclosed.(2)
    
    The convertible notes can be converted into 327,510 shares of Pet DRx common stock. 6




---



##### Table of Contents



Pro Forma Information
  Nine monthsended Sept 30,2008(in thousands)Revenues
    
    $
    55,658Loss from operations
    
    
    (7,971
    )Other income
    
    
    346Interest expense
    
    
    (4,247
    )Loss before income taxes
    
    
    (11,873
    )Provision for income taxes
    
    
    17Net loss
    
    
    (11,856
    )Basic and
diluted loss per common share
    
    $
    (0.50
    )Weighted average shares used in computing basic and diluted loss per share
    
    
    23,656
 5. Goodwill and Other Intangible Assets
   As of September 30, 2008
    
    
    As of December 31, 2007Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCovenants not-to-compete
    
    $
    323
    
    
    $
    (215
    )
    
    $
    108
    
    
    $
    323
    
    
    $
    (140
    )
    
    $
    183Non-contractual customer relationships
    
    
    7,975
    
    
    
    (1,594
    )
    
    
    6,381
    
    
    
    7,975
    
    
    
    (1,013
    )
    
    
    6,962Total
    
    $
    8,298
    
    
    $
    (1,809
    )
    
    $
    6,489
    
    
    $
    8,298
    
    
    $
    (1,153
    )
    
    $
    7,145
   Remainder of 2008
    
    $
    2142009
    
    
    8512010
    
    
    7362011
    
    
    7762012
    
    
    776Thereafter
    
    
    3,136Total
    
    $
    6,489
 7




---



##### Table of Contents



6. Property and Equipment
  September 30,
    
    
    December 31,2008
    
    
    2007Buildings
    
    $
    
    
    
    $
    4,177Leasehold improvements
    
    
    914
    
    
    
    524Equipment
    
    
    2,719
    
    
    
    2,484Furniture and equipment
    
    
    624
    
    
    
    402Computer equipment & software
    
    
    2,155
    
    
    
    1,639Construction-in-progress
    
    
    58
    
    
    
    Total property and equipment
    
    
    6,470
    
    
    
    9,226Less-accumulated depreciation and amortization
    
    
    (2,134
    )
    
    
    (1,339
    )Total property and equipment, net
    
    $
    4,336
    
    
    $
    7,887
   7. Assets Held for Sale
  8. Long-Term Obligations
  September 30,
    
    
    December 31,2008
    
    
    2007Convertible notes
    
    Convertible notes payable, maturing from
2010 to 2012, secured by assets and stock
of certain subsidiaries, various interest
rates ranging from 6.0% to 12.0% (net of
debt discount)
    
    $
    5,047
    
    
    $
    11,292Promissory notes
    
    Notes payable, maturing from 2008 to
2012, some of which are secured by assets
and stock of certain subsidiaries,
various interest rates ranging from 6.5%
to 15.0% (net of debt discount)
    
    
    7,289
    
    
    
    22,900Earn-out notes
    
    Notes payable, various maturities through
2010, interest rates ranging from none to
6.5%
    
    
    126
    
    
    
    234Total debt obligations
    
    
    12,462
    
    
    
    34,426Less-current portion, net of debt discount
    
    
    (2,254
    )
    
    
    (1,533
    )Long-term portion
    
    $
    10,208
    
    
    $
    32,893
 8




---



##### Table of Contents



Remainder of 2008
    
    $
    6002009
    
    
    2,2162010
    
    
    6,3252011
    
    
    1,7152012
    
    
    1,680Thereafter
    
    
    32Total
    
    $
    12,568
 Convertible Notes
   Amendment to Credit Agreement for $12.0 million term loan with Fifth Street
  Amendment to Credit Agreement for $4.0 million term loan with Fifth Street
  9




---



##### Table of Contents



Retirement of term loans with Fifth Street
    Retirement of partial term loan to satisfy related party receivable
  9. Stockholders Equity
    Common Stock Warrants
    10




---



##### Table of Contents



Number ofCommon
    
    
    WeightedStock
    
    
    AverageWarrants
    
    
    PriceOutstanding, December 31, 2007
    
    
    970,684
    
    
    $
    3.24Pet DRx warrants assumed in Merger
    
    
    7,645,833
    
    
    
    6.00Granted
    
    
    
    
    
    
    Series B Preferred Stock warrants converted to common stock warrants
    
    
    69,621
    
    
    
    0.00Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Outstanding, March 31, 2008
    
    
    8,686,138
    
    
    $
    5.64Granted
    
    
    
    
    
    
    Exercised
    
    
    (57,825
    )
    
    
    0.00Cancelled
    
    
    
    
    
    
    Outstanding, June 30, 2008
    
    
    8,628,313
    
    
    $
    5.68Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Outstanding and Exercisable, September 30, 2008
    
    
    8,628,313
    
    
    $
    5.68
  RemainingContractualExercise
    
    Warrants
    
    LifePrice
    
    Outstanding
    
    (years)$
    2.72
    
    
    
    168,459
    
    
    
    7.08$
    3.11
    
    
    
    740,160
    
    
    
    7.33$
    6.00
    
    
    
    7,645,833
    
    
    
    1.50$
    6.16
    
    
    
    62,065
    
    
    
    9.00$
    0.00
    
    
    
    11,796
    
    
    
    8.638,628,313
 10. Calculation of Loss Per Common Share
   Nine Months EndedSeptember 302008
    
    
    2007Convertible debenture notes, if converted to common stock
    
    
    731
    
    
    
    1,735Warrants for common stock
    
    
    8,628
    
    
    
    971Warrants for preferred stock, if exercised and converted to common stock
    
    
    
    
    
    
    173Preferred shares, if converted to common stock
    
    
    
    
    
    
    10,153Options for common stock
    
    
    2,581
    
    
    
    450Total
    
    
    11,940
    
    
    
    13,482
  11




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    
    ($3,172
    )
    
    
    ($3,377
    )
    
    
    ($11,438
    )
    
    
    ($9,178
    )Weighted average common shares outstanding:Basic
    
    
    23,656
    
    
    
    4,247
    
    
    
    23,357
    
    
    
    4,082Effect of dilutive common stock equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    23,656
    
    
    
    4,247
    
    
    
    23,357
    
    
    
    4,082Basic and diluted loss per common share
    
    
    ($0.13
    )
    
    
    ($0.80
    )
    
    
    ($0.49
    )
    
    
    ($2.25
    )
 11. Share-Based Compensation
     Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302008
    
    
    2007
    
    
    2008
    
    
    2007Direct costs
    
    $
    11
    
    
    $
    2
    
    
    $
    52
    
    
    $
    9Selling, general and administrative
    
    $
    477
    
    
    $
    9
    
    
    $
    1,109
    
    
    $
    105Total
    
    $
    488
    
    
    $
    11
    
    
    $
    1,161
    
    
    $
    114
 12




---



##### Table of Contents



Stock Option Activity
  WeightedStock
    
    
    
    
    
    
    
    
    
    
    AverageOptions
    
    
    
    
    
    
    Weighted
    
    
    RemainingAvailable
    
    
    Stock
    
    
    Average
    
    
    Contractual
    
    
    Aggregatefor
    
    
    Options
    
    
    Exercise
    
    
    Life
    
    
    IntrinsicGrant
    
    
    Outstanding
    
    
    Price
    
    
    (years)
    
    
    ValueBalance as of December 31, 2007
    
    
    487
    
    
    
    1,618
    
    
    $
    5.40
    
    
    
    9.40
    
    
    $
    22Authorized under Pet DRx 2007 Stock Incentive Plan
    
    
    2,700
    
    
    
    Granted
    
    
    (1,082
    )
    
    
    1,082
    
    
    
    6.56Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited or canceled
    
    
    15
    
    
    
    (15
    )
    
    
    6.16Balance as of March 31, 2008
    
    
    2,120
    
    
    
    2,685
    
    
    $
    5.85
    
    
    
    9.49
    
    
    $
    375Granted
    
    
    (8
    )
    
    
    8
    
    
    
    6.50Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited or canceled
    
    
    41
    
    
    
    (41
    )
    
    
    6.16Balance as of June 30, 2008
    
    
    2,153
    
    
    
    2,652
    
    
    $
    5.85
    
    
    
    9.38
    
    
    $
    187Granted
    
    
    (85
    )
    
    
    85
    
    
    
    5.56Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited or canceled
    
    
    156
    
    
    
    (156
    )
    
    
    5.80Balance as of September 30, 2008
    
    
    2,224
    
    
    
    2,581
    
    
    $
    5.85
    
    
    
    8.70
    
    
    $
    10Exercisable as of September 30, 2008
    
    
    
    
    
    
    610
    
    
    $
    5.55
    
    
    
    8.29
    
    
    $
    7
  WeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    Remaining
    
    Average
    
    Number
    
    AverageRange of
    
    Outstanding
    
    Contractual Life
    
    Exercise
    
    Exercisable
    
    ExerciseExercise Prices
    
    As of 09/30/08
    
    (years)
    
    Price
    
    As of 09/30/08
    
    Price$
    2.17
    
    
    $
    2.17
    
    
    
    21
    
    
    
    6.54
    
    
    $
    2.17
    
    
    
    16
    
    
    $
    2.17$
    2.50
    
    
    $
    2.50
    
    
    
    20
    
    
    
    9.99
    
    
    $
    2.50
    
    
    
    0
    
    
    $
    0.00$
    3.18
    
    
    $
    3.18
    
    
    
    347
    
    
    
    9.17
    
    
    $
    3.18
    
    
    
    116
    
    
    $
    3.18$
    5.71
    
    
    $
    5.71
    
    
    
    113
    
    
    
    4.49
    
    
    $
    5.71
    
    
    
    58
    
    
    $
    5.71$
    6.16
    
    
    $
    6.16
    
    
    
    969
    
    
    
    8.22
    
    
    $
    6.16
    
    
    
    249
    
    
    $
    6.16$
    6.26
    
    
    $
    6.26
    
    
    
    80
    
    
    
    9.38
    
    
    $
    6.26
    
    
    
    0
    
    
    $
    0.00$
    6.50
    
    
    $
    6.50
    
    
    
    607
    
    
    
    9.51
    
    
    $
    6.50
    
    
    
    152
    
    
    $
    6.50$
    6.70
    
    
    $
    6.70
    
    
    
    424
    
    
    
    9.28
    
    
    $
    6.70
    
    
    
    20
    
    
    $
    6.70$
    2.17
    
    
    $
    6.70
    
    
    
    2,581
    
    
    
    8.70
    
    
    $
    5.85
    
    
    
    610
    
    
    $
    5.55
  Calculation of Fair Value
  13




---



##### Table of Contents



Three monthsended
    
    Year endedSeptember 30,
    
    December 31,2008
    
    2007Weighted-average volatility (1)
    
    
    44.5
    %
    
    
    46.0
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %Expected term  employees (2)
    
    5.1 years
    
    
    6.1 yearsExpected term  nonemployees (2)
    
    
    N/A
    
    
    10.0 yearsRisk-free rate  employees (3)
    
    
    3.2
    %
    
    
    4.4%-4.8
    %Risk-free rate  nonemployees
    
    
    N/A
    
    
    
    4.5%-5.2
    %
 
 (1)
    
    For 2007 and 2008, we estimated the volatility of our common stock on the valuation date
based on historical volatility of the common stock of a peer group of public companies as the
Company has limited stock price history and it would not be practical to use internal
volatility.(2)
    
    The expected term represents the period of time that we expect the options to be outstanding.
We estimate the expected term for employees based on the simplified method permitted under SAB
No. 110. The expected term presented for nonemployees is based upon 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.  12. Contingencies
  13. Subsequent Events
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 The following discussion should be read in conjunction with our condensed consolidated
financial statements and notes thereto provided under Part I, Item 1 of this Quarterly Report on
Form 10-Q (the Form 10-Q). The Companys disclosure and analysis in this Form 10-Q contain
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 that set forth anticipated results based on managements plans and assumptions. From time to
time, the Company also provides forward-looking statements in other materials it releases to the
public, as well as oral forward-looking statements. Such statements give the Companys current
expectations or forecasts of future events; they do not relate strictly to historical or current
facts. The Company, wherever possible, identifies such statements by using words such as
anticipate, estimate, expect, project, intend, plan, believe, will, target,
forecast and similar expressions in connection with any discussion of future operating or
financial performance or business plans or prospects. In particular, these include statements
relating to future actions, business plans and prospects, future performance or results of current
and anticipated services, sales efforts, expenses, interest rates, the outcome of contingencies,
such as legal proceedings, and financial results.
 14




---



##### Table of Contents



The Company cannot guarantee that any forward-looking statement will be realized. Achievement
of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should
known or unknown risks or uncertainties materialize, or should underlying assumptions prove
inaccurate, actual results could differ materially from past results and those anticipated,
estimated or projected. Investors should keep this in mind as they consider forward-looking
statements. Some factors that may cause our plans, expectations, future financial condition and
results to change are described under the heading Risk Factors in Item 2.01 of our Current Report
on Form 8-K/A (Amendment No. 1) filed on April 4, 2008 and in Part II, Item 1A of the Quarterly
Report on Form 10-Q ,
 The forward-looking information set forth in this Quarterly Report on Form 10-Q is as of
September 30, 2008, and the Company undertakes no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or otherwise. Investors are
advised, however, to consult any further disclosures the Company makes on related subjects in its
reports to the SEC filed after September 30, 2008 at the SECs website at www.sec.gov
 Overview
 Merger with XLNT Veterinary Care, Inc.
   General
    Seasonality
  15




---



##### Table of Contents



Acquisition Program
  Overview of Our Financial Results
        16




---



##### Table of Contents



Results of Our Operations
 Three and Nine Months Ended September 30, 2008 and 2007 (In millions, except percentages)
 Revenue
 For The Three Months ended
    
    
    
    
    
    For The Nine Months endedSeptember 30,
    
    
    
    
    
    September 30,%
    
    
    
    
    
    
    
    
    
    %2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeRevenues
    
    $
    17.7
    
    
    $
    17.7
    
    
    
    (0.2
    )%
    
    $
    53.4
    
    
    $
    46.1
    
    
    
    15.9
    %
   17




---



##### Table of Contents



Comparative Analysis Three
    
    
    
    
    
    
    Comparative Analysis Ninemonths ended
    
    
    
    
    
    
    months ended%
    
    
    
    
    
    
    
    
    
    
    %2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    ChangeSame-store revenue (1)
    
    $
    9.5
    
    
    $
    9.7
    
    
    
    (2
    )%
    
    $
    28.9
    
    
    $
    28.7
    
    
    
    1
    %Net acquired revenue (2)
    
    $
    8.2
    
    
    $
    8.0
    
    
    
    2
    %
    
    $
    24.5
    
    
    $
    17.4
    
    
    
    41
    %Total
    
    $
    17.7
    
    
    $
    17.7
    
    
    
    0
    %
    
    $
    53.4
    
    
    $
    46.1
    
    
    
    16
    %
 
 (1)
    
    Same-store revenue was calculated using animal hospital operating results for the 18 animal
hospitals that we owned for the full nine month period ended September 30, 2007.(2)
    
    Net acquired revenue represents the revenue from the six animal hospitals acquired during the
three month period ended March 31, 2007 and Valley Animal, which was acquired on June 30,
2008. Fluctuations in net acquired revenue occur due to the volume, size and timing of those
acquisitions. Direct Costs
 For The Three Months Ended
    
    
    
    
    
    For The Nine Months EndedSeptember 30,
    
    
    
    
    
    September 30,%
    
    
    
    
    
    
    
    
    
    %2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeTotal direct costs
    
    $
    16.9
    
    
    $
    16.2
    
    
    
    3.9
    %
    
    $
    49.7
    
    
    $
    43.4
    
    
    
    14.3
    %Hospital
ContributionMargin
as a percentage of
total net revenue
    
    
    4.6
    %
    
    
    8.3
    %
    
    
    
    
    
    
    7.1
    %
    
    
    5.7
    %
    Selling, General and Administrative
 For The Three Months
    
    
    
    
    
    For The Nine MonthsEnded September 30,
    
    
    
    
    
    Ended September 30,%
    
    
    
    
    
    
    
    
    
    %2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeSelling, general and administrative
    
    $
    3.7
    
    
    $
    3.7
    
    
    
    (0.8
    )%
    
    $
    11.4
    
    
    $
    9.3
    
    
    
    23.2
    %As a percentage of total net
revenue
    
    
    20.9
    %
    
    
    21.0
    %
    
    
    
    
    
    
    21.4
    %
    
    
    20.2
    %
 18




---



##### Table of Contents



Interest income
 For The Three Months
    
    
    
    
    
    For The Nine MonthsEnded September 30,
    
    
    
    
    
    Ended September 30,%
    
    
    
    
    
    
    
    
    
    %2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeInterest income
    
    $
    0.0
    
    
    $
    0.0
    
    
    
    0
    %
    
    $
    0.3
    
    
    $
    0.1
    
    
    
    0
    %As a percentage of
total net revenue
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    
    
    
    
    0.6
    %
    
    
    0.2
    %
  Interest Expense
 For The Three Months
    
    
    
    
    
    For The Nine MonthsEnded September 30,
    
    
    
    
    
    Ended September 30,%
    
    
    
    
    
    
    
    
    
    %2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeInterest expense
    
    $
    0.3
    
    
    $
    1.1
    
    
    
    (72.7
    )%
    
    $
    4.2
    
    
    $
    2.6
    
    
    
    61.5
    %As a percentage of
total net revenue
    
    
    1.7
    %
    
    
    6.4
    %
    
    
    
    
    
    
    7.8
    %
    
    
    5.7
    %
   19




---



##### Table of Contents



Liquidity and Capital Resources
  Cash Flows from Operating Activities
   Cash Flows from Investing Activities
  Cash Flows from Financing Activities
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  20




---



##### Table of Contents



Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Internal Control over Financial Reporting
    21




---



##### Table of Contents



PART II: OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
 
 We will need to secure additional financing and/or raise additional capital, which may not be
available, on favorable terms or at all, in order to fund our operations and growth plans.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
 10.1*
    
    Amendment to Executive Employment Agreement dated August 14, 2008 between Gregory J.
Eisenhauer and the Company.10.2*
    
    Separation Agreement dated September 25, 2008 between Robert Wallace and the Company.31.1*
    
    Section 302 Certification from Steven T. Johnson.31.2*
    
    Section 302 Certification from Gregory J. Eisenhauer.32.1*
    
    Section 906 Certification from Steven T. Johnson.32.2*
    
    Section 906 Certification from Gregory J. Eisenhauer.
 
 *
    
    Filed or furnished herewith. 22




---



##### Table of Contents



SIGNATURES
  PET DRX CORPORATIONDate: November 14, 2008
    By:
    /s/ Kyle MorseKyle MorseVice President and Corporate Controller



(Duly Authorized Officer and Principal Accounting Officer) 23




---



##### Table of Contents



EXHIBIT INDEX
 10.1*
    
    Amendment to Executive Employment Agreement dated August 14, 2008 between Gregory J.
Eisenhauer and the Company.10.2*
    
    Separation Agreement dated September 25, 2008 between Robert Wallace and the Company.31.1*
    
    Section 302 Certification from Steven T. Johnson.31.2*
    
    Section 302 Certification from Gregory J. Eisenhauer.32.1*
    
    Section 906 Certification from Steven T. Johnson.32.2*
    
    Section 906 Certification from Gregory J. Eisenhauer.
 
 *
    
    Filed or furnished herewith. 24