##### 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 June 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)215 Centerview Drive, Suite 360Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 (615) 369-1914  (Registrants telephone number, including area code)
 þ o
  o o  o þ
 o þ




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##### 



INDEX
 PagePart I. Financial Information.Item 1. Financial Statements.Condensed Consolidated Balance Sheets as of June
30, 2008 and December 31, 2007
    
    
    1Condensed Consolidated Statements of Operations for
the three months and six months ended June 30, 2008 and 2007
    
    
    2Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2008 and 2007
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    5Item 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-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO




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##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 Item 1.
Financial Statements.
 PET DRX CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except par value and number of shares)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    9,045
    
    
    $
    2,005Trade accounts receivable, net
    
    
    238
    
    
    
    179Inventory
    
    
    1,138
    
    
    
    1,268Prepaid expenses and other
    
    
    905
    
    
    
    910Due from related parties
    
    
    115
    
    
    
    238Total current assets
    
    
    11,441
    
    
    
    4,600Property and Equipment, net
    
    
    8,105
    
    
    
    7,887Other assets:Goodwill
    
    
    49,190
    
    
    
    49,190Other intangible assets, net
    
    
    6,707
    
    
    
    7,145Other
    
    
    303
    
    
    
    1,020Total assets
    
    $
    75,746
    
    
    $
    69,842LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesCurrent portion of long-term obligations, net of debt discount
    
    $
    2,320
    
    
    $
    1,533Accounts payable
    
    
    663
    
    
    
    6,481Accrued payroll and other expenses
    
    
    4,288
    
    
    
    5,577Accrued income taxes
    
    
    
    
    
    
    189Due to a related party
    
    
    96
    
    
    
    356Obligations under capital leases, current portion
    
    
    416
    
    
    
    520Total Current liabilities
    
    
    7,783
    
    
    
    14,656Long-term liabilities:Convertible debt
    
    
    3,097
    
    
    
    11,361Term notes, less current portion and net of debt discount
    
    
    5,701
    
    
    
    21,532Obligations under capital leases, less current portion
    
    
    398
    
    
    
    531Deferred rent
    
    
    146
    
    
    
    97Other
    
    
    73
    
    
    
    145Total long-term liabilities
    
    
    9,415
    
    
    
    33,666Total liabilities
    
    
    17,198
    
    
    
    48,322Stockholders equityPreferred stock, par value $0.0001, 10,000,000 shares authorizedSeries A: 0 and 9,925,000 shares outstanding as of June 30,
2008 and December 31, 2007, respectively
    
    
    
    
    
    
    1Common stock, par value $0.0001, 90,000,000 shares authorized,
23,659,037 and 4,247,632 shares outstanding as of June 30, 2008
and December 31, 2007, respectively net of 1,361,574 and 0 treasury
shares at June 30, 2008 and December 31, 2007, respectively
    
    
    2
    
    
    
    1Additional paid-in capital
    
    
    86,696
    
    
    
    41,402Accumulated deficit
    
    
    (28,150
    )
    
    
    (19,884
    )Total stockholders equity
    
    
    58,548
    
    
    
    21,520Total liabilities and stockholders equity
    
    $
    75,746
    
    
    $
    69,842
 See Notes to Condensed Consolidated Financial Statements
 1




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PET DRX CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 Three  Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    $
    17,922
    
    
    $
    17,730
    
    
    $
    35,757
    
    
    $
    28,403Direct costs
    
    
    16,123
    
    
    
    16,350
    
    
    
    31,737
    
    
    
    26,369Depreciation and
amortization expense
    
    
    501
    
    
    
    546
    
    
    
    999
    
    
    
    839Stock-based
compensation expense
    
    
    25
    
    
    
    5
    
    
    
    41
    
    
    
    7Hospital contribution
    
    
    1,273
    
    
    
    829
    
    
    
    2,980
    
    
    
    1,188Selling, general and
administrative expense
    
    
    3,507
    
    
    
    2,855
    
    
    
    7,007
    
    
    
    5,417Depreciation and
amortization expense
    
    
    51
    
    
    
    62
    
    
    
    88
    
    
    
    70Stock-based
compensation expense
    
    
    379
    
    
    
    78
    
    
    
    632
    
    
    
    96Loss from operations
    
    
    (2,664
    )
    
    
    (2,166
    )
    
    
    (4,747
    )
    
    
    (4,395
    )Other income (expense):Interest income
    
    
    121
    
    
    
    28
    
    
    
    338
    
    
    
    76Interest expense
    
    
    (2,735
    )
    
    
    (1,124
    )
    
    
    (3,887
    )
    
    
    (1,472
    )Loss before provision
for income taxes
    
    
    (5,278
    )
    
    
    (3,262
    )
    
    
    (8,296
    )
    
    
    (5,791
    )Provision/(benefit) for income
taxes
    
    
    (41
    )
    
    
    5
    
    
    
    (31
    )
    
    
    10Net loss
    
    $
    (5,237
    )
    
    $
    (3,267
    )
    
    $
    (8,265
    )
    
    $
    (5,801
    )Basic and diluted loss
per common share
    
    $
    (.22
    )
    
    $
    (0.77
    )
    
    $
    (.36
    )
    
    $
    (1.45
    )Weighted average
shares used in
computing basic and
diluted loss per share
    
    
    23,655
    
    
    
    4,248
    
    
    
    23,204
    
    
    
    3,998
 See Notes to Condensed Consolidated Financial Statements
 2




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##### Table of Contents



PET DRX CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months Ended June 30,2008
    
    
    2007Cash flows provided by (used in) operating activities:Net loss
    
    $
    (8,265
    )
    
    $
    (5,801
    )Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    1,085
    
    
    
    908Amortization
of debt amendment costs
    
    
    182
    
    
    
    186Amortization of debt discount
    
    
    1,803Share-based compensation
    
    
    673
    
    
    
    102Impairment of fixed assets
    
    
    88
    
    
    
    Deferred rent
    
    
    49
    
    
    
    (5
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (59
    )
    
    
    145Inventory
    
    
    130
    
    
    
    (52
    )Prepaid expenses and other
    
    
    96
    
    
    
    71Accounts payable
    
    
    (5,818
    )
    
    
    4,002Accrued payroll and other expenses
    
    
    (493
    )
    
    
    769Income taxes
    
    
    (174
    )
    
    
    (217
    )Other
    
    
    (16
    )
    
    
    Net cash provided by (used in) operating activities
    
    
    (10,719
    )
    
    
    108Cash flows used in investing activities:Property and equipment additions
    
    
    (950
    )
    
    
    (4,609
    )Payments made on prior acquisitions
    
    
    (356
    )
    
    
    (3,940
    )Capitalized costs associated with successful acquisitions
    
    
    (16
    )Business acquisitions, net of cash received
    
    
    
    
    
    
    (16,832
    )Net cash used in investing activities
    
    
    (1,322
    )
    
    
    (25,381
    )
 3




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##### Table of Contents



Six Months Ended June 30,2008
    
    
    2007Cash flow provided by financing activities:Net proceeds from merger with XLNT
    
    
    36,316
    
    
    
    Deferral 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
    
    
    (16,815
    )
    
    
    (1,249
    )Payments on capital lease obligations
    
    
    (238
    )
    
    
    (156
    )Net cash provided by financing activities
    
    
    19,081
    
    
    
    26,108Increase in cash and cash equivalents
    
    
    7,040
    
    
    
    835Cash and cash equivalents at beginning of period
    
    
    2,005
    
    
    
    3,968Cash and cash equivalents at end of period
    
    $
    9,045
    
    
    $
    4,803Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    215
    
    
    $
    46Interest
    
    $
    2,992
    
    
    $
    1,140Schedule of non-cash investing and financing activities:Detail of acquisitions:Fair value of assets acquired
    
    $
    
    
    
    $
    29,936Cash paid for acquisitions and related direct costs
    
    
    
    
    
    
    (16,832
    )Obligations to sellers of acquired hospitals, notes payable and
assumed liabilities
    
    $
    
    
    
    $
    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
 4




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PET DRX CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
   2. New Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
   5




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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;
    
    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.
 6




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##### Table of Contents



4. Goodwill and Other Intangible Assets
   As of June 30, 2008
    
    
    As of December 31, 2007Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCovenants not-to-compete
    
    $
    323
    
    
    $
    (190
    )
    
    $
    133
    
    
    $
    323
    
    
    $
    (140
    )
    
    $
    183Non-contractual customer
relationships
    
    
    7,975
    
    
    
    (1,401
    )
    
    
    6,574
    
    
    
    7,975
    
    
    
    (1,013
    )
    
    
    6,962Total
    
    $
    8,298
    
    
    $
    (1,591
    )
    
    $
    6,707
    
    
    $
    8,298
    
    
    $
    (1,153
    )
    
    $
    7,145
   Remainder of 2008
    
    $
    4362009
    
    
    8512010
    
    
    7362011
    
    
    7762012
    
    
    776Thereafter
    
    
    3,132Total
    
    $
    6,707
 5. Property and Equipment
  June 30,
    
    
    December 31,2008
    
    
    2007Buildings
    
    $
    4,177
    
    
    $
    4,177Leasehold improvements
    
    
    570
    
    
    
    524Equipment
    
    
    2,579
    
    
    
    2,484Furniture and equipment
    
    
    605
    
    
    
    402Computer equipment & software
    
    
    2,012
    
    
    
    1,639Construction-in-progress
    
    
    74
    
    
    
    Total property and equipment
    
    
    10,017
    
    
    
    9,226Less-accumulated depreciation and amortization
    
    
    (1,912
    )
    
    
    (1,339
    )Total property and equipment, net
    
    $
    8,105
    
    
    $
    7,887
 7




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##### Table of Contents



6. Long-Term Obligations
  June 30,
    
    
    December 31,2008
    
    
    2007Convertible notes
    
    Convertible notes payable, maturing from2010 to 2012, secured by assets and stockof certain subsidiaries, various interestrates ranging from 6.0% to 12.0% (net ofdebt discount)
    
    $
    3,097
    
    
    $
    11,292Promissory notes
    
    Notes payable, maturing from 2008 to2012, secured by assets and stock ofcertain subsidiaries, various interest ratesranging from 6.5% to 15.0% (net of debtdiscount)
    
    
    7,845
    
    
    
    22,900Earn-out notes
    
    Notes payable, various maturities through2010, interest rates ranging from noneto 6.5%
    
    
    176
    
    
    
    234Total debt obligations
    
    
    11,118
    
    
    
    34,426Less-current portion, net of debt discount
    
    
    (2,320
    )
    
    
    (1,533
    )Long-term portion
    
    $
    8,798
    
    
    $
    32,893
  Remainder of 2008
    
    $
    1,2042009
    
    
    2,2162010
    
    
    4,3772011
    
    
    1,7152012
    
    
    1,680Thereafter
    
    
    45Total
    
    $
    11,237
 Convertible Notes
  8




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##### Table of Contents



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
  Retirement of term loans with Fifth Street
    Retirement of partial term loan to satisfy related party receivable
  9




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##### Table of Contents



7. Stockholders Equity
    Common Stock Warrants
     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
and Exercisable, June 30, 2008
    
    
    8,628,313
    
    
    $
    5.68
 10




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##### Table of Contents



RemainingContractualExercise
    
    Warrants
    
    LifePrice
    
    Outstanding
    
    (years)$2.72
    
    
    168,459
    
    
    
    7.33$3.11
    
    
    740,160
    
    
    
    7.58$6.00
    
    
    7,645,833
    
    
    
    1.75$6.16
    
    
    62,065
    
    
    
    9.25$0.00
    
    
    11,796
    
    
    
    8.888,628,313
 8. Calculation of Loss Per Common Share
   Three Months EndedJune 302008
    
    
    2007Convertible debenture notes, if converted to common stock
    
    
    372
    
    
    
    1,735Warrants for common stock
    
    
    8,628
    
    
    
    908Warrants for preferred stock, if exercised and converted
to common stock
    
    
    
    
    
    
    173Preferred shares, if converted to common stock
    
    
    
    
    
    
    10,153Options for common stock
    
    
    2,651
    
    
    
    355Total
    
    
    11,651
    
    
    
    13,324
   Three  Months Ended
    
    
    Six  Months EndedJune 30
    
    
    June 302008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    
    ($5,237
    )
    
    
    ($3,267
    )
    
    
    ($8,265
    )
    
    
    ($5,801
    )Weighted average common shares outstanding:Basic
    
    
    23,655
    
    
    
    4,248
    
    
    
    23,204
    
    
    
    3,998Effect of dilutive common stock equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    23,655
    
    
    
    4,248
    
    
    
    23,204
    
    
    
    3,998Basic and diluted loss per common share
    
    
    ($0.22
    )
    
    
    ($0.77
    )
    
    
    ($0.36
    )
    
    
    ($1.45
    )
 11




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##### Table of Contents



9. Share-Based Compensation
     Three Months Ended
    
    
    Six  Months EndedJune 30
    
    
    June 302008
    
    
    2007
    
    
    2008
    
    
    2007Direct costs
    
    $
    25
    
    
    $
    5
    
    
    $
    41
    
    
    $
    7Selling, general
and administrative
and marketing
    
    $
    379
    
    
    $
    78
    
    
    $
    632
    
    
    $
    96Total
    
    $
    404
    
    
    $
    83
    
    
    $
    673
    
    
    $
    103
 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
    
    
    $
    375Authorized
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    (8
    )
    
    
    8
    
    
    
    6.50Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited or canceled
    
    
    41
    
    
    
    (41
    )
    
    
    6.16Balance as of June 30, 2008
    
    
    2,153
    
    
    
    2,652
    
    
    $
    5.85
    
    
    
    9.38
    
    
    $
    187Exercisable at June 30, 2008
    
    
    
    
    
    
    241
    
    
    $
    5.97
    
    
    
    9.13
    
    
    $
    26
 12




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##### Table of Contents



WeightedAverage
    
    Weighted
    
    
    
    WeightedNumber
    
    Remaining
    
    Average
    
    Number
    
    AverageRange of
    
    Outstanding
    
    Contractual Life
    
    Exercise
    
    Exercisable
    
    ExerciseExercise Prices
    
    As of 06/30/08
    
    (years)
    
    Price
    
    As of 06/30/08
    
    Price$2.17
    
    $
    2.17
    
    
    
    21
    
    
    
    6.79
    
    
    $
    2.17
    
    
    
    16
    
    
    $
    2.17$3.11
    
    $
    3.11
    
    
    
    15
    
    
    
    7.72
    
    
    $
    3.11
    
    
    
    8
    
    
    $
    3.11$3.18
    
    $
    3.18
    
    
    
    347
    
    
    
    9.42
    
    
    $
    3.18
    
    
    
    0
    
    
    $
    0.00$5.71
    
    $
    5.71
    
    
    
    163
    
    
    
    8.16
    
    
    $
    5.71
    
    
    
    41
    
    
    $
    5.71$6.16
    
    $
    6.16
    
    
    
    1,015
    
    
    
    9.33
    
    
    $
    6.16
    
    
    
    13
    
    
    $
    6.16$6.26
    
    $
    6.26
    
    
    
    80
    
    
    
    9.63
    
    
    $
    6.26
    
    
    
    0
    
    
    $
    0.00$6.50
    
    $
    6.50
    
    
    
    587
    
    
    
    9.78
    
    
    $
    6.50
    
    
    
    151
    
    
    $
    6.50$6.70
    
    $
    6.70
    
    
    
    424
    
    
    
    9.53
    
    
    $
    6.70
    
    
    
    12
    
    
    $
    6.70$2.17
    
    $
    6.70
    
    
    
    2,652
    
    
    
    9.38
    
    
    $
    5.85
    
    
    
    241
    
    
    $
    5.97
  Calculation of Fair Value
   Three monthsended
    
    Year endedJune 30,
    
    December 31,2008
    
    2007Weighted-average volatility (1)
    
    
    44.5
    %
    
    
    46.0
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %Expected term  employees (2)
    
    5.5 years
    
    6.1 yearsExpected term  nonemployees (2)
    
    10.0 years
    
    10.0 yearsRisk-free rate  employees (3)
    
    
    3.3
    %
    
    
    4.4%-4.8
    %Risk-free rate  nonemployees
    
    
    3.5
    %
    
    
    4.5%-5.2
    %
 (1)
    
    In 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.
  10. Contingencies
  11. Subsequent Events
  13




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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
 The following discussion should be read in conjunction with our condensed consolidated
financial statements and notes thereto provided under Part I, Item 1 of this Quarterly Report on
Form 10-Q (the  Form 10-Q ). The Companys disclosure and analysis in this Form 10-Q contain some
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 that set forth anticipated results based on managements plans and assumptions. From time to
time, the Company also provides forward-looking statements in other materials it releases to the
public, as well as oral forward-looking statements. Such statements give the Companys current
expectations or forecasts of future events; they do not relate strictly to historical or current
facts. The Company has tried, wherever possible, to identify such statements by using words such as
anticipate, estimate, expect, project, intend, plan, believe, will, target,
forecast and similar expressions in connection with any discussion of future operating or
financial performance or business plans or prospects. In particular, these include statements
relating to future actions, business plans and prospects, future performance or results of current
and anticipated services, sales efforts, expenses, interest rates, the outcome of contingencies,
such as legal proceedings, and financial results.
 The Company cannot guarantee that any forward-looking statement will be realized. Achievement
of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should
known or unknown risks or uncertainties materialize, or should underlying assumptions prove
inaccurate, actual results could differ materially from past results and those anticipated,
estimated or projected. Investors should keep this in mind as they consider forward-looking
statements. 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.
 The forward-looking information set forth in this Quarterly Report on Form 10-Q is as of June
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 June 30, 2008 at the SECs website at www.sec.gov
 Overview
 Merger with XLNT Veterinary Care, Inc.
   14




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##### Table of Contents



General
     Seasonality
  Overview of Our Financial Results
     15




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##### Table of Contents



Results of Our Operations
 Three and Six Months Ended June 30, 2008 and 2007
 Revenue
 For The Three Months ended
    
    
    
    
    
    
    For The Six Months endedJune 30,
    
    
    
    
    
    
    June 30,%
    
    
    
    
    
    
    
    
    
    
    %2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In millions, except percentages)
    
    
    
    
    
    
    (In millions, except percentages)Revenues
    
    $
    17.9
    
    
    $
    17.7
    
    
    
    1.1
    %
    
    $
    35.8
    
    
    $
    28.4
    
    
    
    25.9
    %
  16




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##### Table of Contents



Comparative Analysis Three
    
    
    
    
    
    
    Comparative Analysis  Sixmonths ended
    
    
    
    
    
    
    months ended%
    
    
    
    
    
    
    
    
    
    
    %2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    ChangeIn millions, except percentages)
    
    
    
    
    
    
    (In millions, except percentages)Same-store revenue (1)
    
    $
    9.7
    
    
    $
    9.6
    
    
    
    1
    %
    
    $
    19.4
    
    
    $
    19.0
    
    
    
    2
    %Net acquired revenue (2)
    
    $
    8.2
    
    
    $
    8.1
    
    
    
    1
    %
    
    $
    16.4
    
    
    $
    9.4
    
    
    
    74
    %Total
    
    $
    17.9
    
    
    $
    17.7
    
    
    
    1
    %
    
    $
    35.8
    
    
    $
    28.4
    
    
    
    26
    %
 (1)
    
    Same-store revenue was calculated using animal hospital
operating results for the 18 animal hospitals that we owned for
the full six month period ended June 30, 2007.(2)
    
    Net acquired revenue represents the revenue from the six animal
hospitals acquired during the three month period ended March
31, 2007. Fluctuations in net acquired revenue occur due to the
volume, size and timing of acquisitions during the three months
ended March 31, 2007.
  Direct Costs
 For The Three Months Ended
    
    
    
    
    
    
    For The Six Months EndedJune 30,
    
    
    
    
    
    
    June 30,%
    
    
    
    
    
    
    
    
    
    
    %2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In millions, except percentages)
    
    
    
    
    
    
    (In millions, except percentages)Total direct costs
    
    $
    16.6
    
    
    $
    16.9
    
    
    
    (2
    %)
    
    $
    32.8
    
    
    $
    27.2
    
    
    
    20
    %Hospital
Contribution Margin
as a percentage of
total net revenue
    
    
    7.1
    %
    
    
    4.5
    %
    
    
    
    
    
    
    8.3
    %
    
    
    4.2
    %
  17




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##### Table of Contents



Selling, General and Administrative
 For The Three Months
    
    
    
    
    
    
    For The Six MonthsEnded June 30,
    
    
    
    
    
    
    Ended June 30,%
    
    
    
    
    
    
    
    
    
    
    %2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In millions, except percentages)
    
    
    
    
    
    
    (In millions, except percentages)Selling, general
and administrative
    
    $
    3.9
    
    
    $
    3.0
    
    
    
    31
    %
    
    $
    7.7
    
    
    $
    5.6
    
    
    
    38
    %As a percentage of
total net revenue
    
    
    22.0
    %
    
    
    16.7
    %
    
    
    
    
    
    
    21.6
    %
    
    
    19.6
    %
   Interest income
 For The Three Months
    
    
    
    
    
    
    For The Six MonthsEnded     June 30,
    
    
    
    
    
    
    Ended June 30,%
    
    
    
    
    
    
    
    
    
    
    %2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In millions, except percentages)
    
    
    
    
    
    
    (In millions, except percentages)Interest income
    
    $
    0.1
    
    
    $
    0.0
    
    
    
    332
    %
    
    $
    0.3
    
    
    $
    0.1
    
    
    
    345
    %As a percentage of
total net revenue
    
    
    0.7
    %
    
    
    0.1
    %
    
    
    
    
    
    
    0.9
    %
    
    
    0.3
    %
  18




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##### Table of Contents



Interest Expense
 For The Three Months
    
    
    
    
    
    
    For The Six MonthsEnded June 30,
    
    
    
    
    
    
    Ended June 30,%
    
    
    
    
    
    
    
    
    
    
    %2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In millions, except percentages)
    
    
    
    
    
    
    (In millions, except percentages)Interest expense
    
    $
    2.7
    
    
    $
    1.1
    
    
    
    142
    %
    
    $
    3.9
    
    
    $
    1.5
    
    
    
    163
    %As a percentage of
total net revenue
    
    
    15.3
    %
    
    
    6.4
    %
    
    
    
    
    
    
    10.9
    %
    
    
    5.2
    %
  Liquidity and Capital Resources
  Cash Flows from Operating Activities
   Cash Flows from Investing Activities
  19




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##### Table of Contents



Acquisition Program
     Cash Flows from Financing Activities
  
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
  20




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##### Table of Contents



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




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##### Table of Contents



PART II: OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5.
    
    Other Information.
  
 Item 6. Exhibits.
 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




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##### Table of Contents



SIGNATURES
  PET DRX CORPORATIONDate:  August 14, 2008
    By:
    /s/ Steven T. JohnsonSteven T. JohnsonPresident and Chief Operating Officer  Name
    
    Position
    Date/s/ Steven T. Johnson

Steven T. Johnson
    
    President and Chief Operating Officer
    
    August 14, 2008/s/ Gregory J. Eisenhauer

Gregory J. Eisenhauer
    
    Executive Vice President and Chief
Financial Officer
    
    August 14, 2008
 23




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##### Table of Contents



EXHIBIT INDEX
 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