##### 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 March 31, 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
 (Exact name of registrant as specified in its charter)
 Delaware
    
    56-2517815(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)215 Centerview Drive, Suite 360Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 (615) 369-1914  (Registrants telephone number, including area code)
 þ o
  o o  o þ
 o þ




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##### 



INDEX
 PagePart I. Financial Information.Item 1. Financial Statements.Condensed Consolidated Balance Sheets as of March 31, 2008
and December 31, 2007
    
    
    1Condensed Consolidated Statements of Operations for the three
months ended March 31, 2008 and 2007
    
    
    2Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2008 and 2007
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18Part II. Other Information.Item 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    20EX-10.11 PET DRx CORPORATION 2008 EMPLOYEE BONUS PLANEX-10.12 PET DRx CORPORATION 2008 NON-EMPLOYEE DIRECTOR COMPENSATION PROGRAMEX-10.13 FORM OF STOCK OPTION AGREEMENTEX-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)
 March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    29,459
    
    
    $
    2,005Trade accounts receivable, net
    
    
    244
    
    
    
    179Inventory
    
    
    1,122
    
    
    
    1,268Prepaid expenses and other
    
    
    1,370
    
    
    
    910Due from related parties
    
    
    238
    
    
    
    238Total current assets
    
    
    32,433
    
    
    
    4,600Property and Equipment, net
    
    
    7,902
    
    
    
    7,887Other assets:Goodwill
    
    
    49,190
    
    
    
    49,190Other intangible assets, net
    
    
    6,926
    
    
    
    7,145Other
    
    
    469
    
    
    
    1,020Total assets
    
    $
    96,920
    
    
    $
    69,842LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current portion of long-term obligations, net of debt discount
    
    $
    1,663
    
    
    $
    1,533Accounts payable
    
    
    603
    
    
    
    6,481Accrued payroll and other expenses
    
    
    5,360
    
    
    
    5,577Accrued income taxes
    
    
    
    
    
    
    189Due to a related party
    
    
    356
    
    
    
    356Obligations under capital leases, current portion
    
    
    478
    
    
    
    520Total Current liabilities
    
    
    8,460
    
    
    
    14,656Long-term liabilities:Convertible debt
    
    
    3,095
    
    
    
    11,361Term notes, less current portion and net of debt discount
    
    
    21,263
    
    
    
    21,532Obligations under capital leases, less current portion
    
    
    464
    
    
    
    531Deferred rent
    
    
    127
    
    
    
    97Other
    
    
    73
    
    
    
    145Total long term liabilities
    
    
    25,022
    
    
    
    33,666Total liabilities
    
    
    33,482
    
    
    
    48,322Stockholders equityPreferred stock, par value $0.0001, 10,000,000 shares authorized
Series A: 0 and 9,925,000 shares outstanding as of March 31,
2008 and December 31, 2007, respectively
    
    
    
    
    
    
    1Series B: 0 and 34,581 shares outstanding as of March 31, 2008
and December 31, 2007, respectively
    
    
    
    
    
    
    Common stock, par value $0.0001, 90,000,000 shares authorized,
23,602,702 and 4,247,632 shares outstanding as of March 31,
2008 and December 31, 2007, respectively
    
    
    2
    
    
    
    1Additional paid-in capital
    
    
    86,348
    
    
    
    41,402Accumulated deficit
    
    
    (22,912
    )
    
    
    (19,884
    )Total stockholders equity
    
    
    63,438
    
    
    
    21,520Total liabilities and stockholders equity
    
    $
    96,920
    
    
    $
    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 March 31,2008
    
    
    2007Revenue
    
    $
    17,835
    
    
    $
    10,673Direct costs
    
    
    15,614
    
    
    
    10,019Depreciation and amortization expense
    
    
    498
    
    
    
    293Stock-based compensation expense
    
    
    16
    
    
    
    2Hospital contribution
    
    
    1,707
    
    
    
    359Selling, general and administrative expense(Excluding
stock-based compensation and depreciation and amortization expense)
    
    
    3,501
    
    
    
    2,561Depreciation and amortization expense
    
    
    36
    
    
    
    9Stock-based compensation expense
    
    
    253
    
    
    
    18Selling,
general, and administrative expenses
    
    
    3,790
    
    
    
    2,588Loss from operations
    
    
    (2,083
    )
    
    
    (2,229
    )Other income (expense):Interest income
    
    
    217
    
    
    
    48Interest expense
    
    
    (1,152
    )
    
    
    (348
    )Loss before provision for income taxes
    
    
    (3,018
    )
    
    
    (2,529
    )Provision for income taxes
    
    
    10
    
    
    
    5Net loss
    
    $
    (3,028
    )
    
    $
    (2,534
    )Basic and diluted loss per common share
    
    $
    (0.13
    )
    
    $
    (0.68
    )Weighted average shares used in computing
basic and diluted loss per share
    
    
    22,751
    
    
    
    3,746
 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)
 Three Months Ended March 31,2008
    
    
    2007Cash flows provided by (used in) operating activities:Net loss
    
    $
    (3,028
    )
    
    $
    (2,534
    )Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    534
    
    
    
    301Amortization of debt costs
    
    
    363
    
    
    
    22Share-based compensation
    
    
    269
    
    
    
    20Paid-in-kind interest on term loans
    
    
    79
    
    
    
    Amortization of debt amendment costs
    
    
    7Deferred rent
    
    
    30
    
    
    
    (5
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (65
    )
    
    
    41Inventory
    
    
    146
    
    
    
    (54
    )Prepaid expenses and other
    
    
    (460
    )
    
    
    (127
    )Accounts payable
    
    
    (5,878
    )
    
    
    1,960Accrued payroll and other expenses
    
    
    483
    
    
    
    763Income taxes
    
    
    (189
    )
    
    
    (209
    )Other
    
    
    (24
    )
    
    
    Net cash provided by (used in) operating activities
    
    
    (7,733
    )
    
    
    178Cash flows used in investing activities:Property and equipment additions
    
    
    (326
    )
    
    
    (3,982
    )Business acquisitions, net of cash received
    
    
    
    
    
    
    (16,782
    )Net cash used in investing activities
    
    
    (326
    )
    
    
    (20,764
    )Cash flow provided by financing activities:Net proceeds from merger with XLNT
    
    
    36,372
    
    
    
    Payments made on prior acquisitions
    
    
    
    
    
    
    (3,940
    )Deferral of debt waiver fees
    
    
    (182
    )Proceeds from term loan with preferred stock warrants
    
    
    
    
    
    
    11,097Proceeds from Series B preferred stock, net of
expenses paid in cash
    
    
    
    
    
    
    13,563Payments on notes payable
    
    
    (568
    )
    
    
    (301
    )Payments on capital lease obligations
    
    
    (109
    )
    
    
    (79
    )Net cash provided by financing activities
    
    
    35,513
    
    
    
    20,340Increase (decrease) in cash and cash equivalents
    
    
    27,454
    
    
    
    (246
    )Cash and cash equivalents at beginning of period
    
    
    2,005
    
    
    
    3,968Cash and cash equivalents at end of period
    
    $
    29,459
    
    
    $
    3,722Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    197
    
    
    $
    19Interest
    
    $
    793
    
    
    $
    337Schedule of non-cash investing and financing activities:Detail of acquisitions:Fair value of assets acquired
    
    $
    
    
    
    $
    32,159Cash paid for acquisitions and related direct costs
    
    
    
    
    
    
    (16,782
    )Obligations to sellers of acquired hospitals, notes
payable and assumed liabilities
    
    $
    
    
    
    $
    15,377Building 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
    
    
    $
    Conversion of Series A and Series B preferred stock to common stock
    
    $
    1
    
    
    $
    
 See Notes to Condensed Consolidated Financial Statements
 3




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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
 3. Merger with XLNT Veterinary Care, Inc.
  all
  4




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
    
    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.
 4. Goodwill and Other Intangible Assets
   As of March 31, 2008
    
    
    As of December 31, 2007Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCovenants not-to-compete
    
    $
    323
    
    
    $
    (165
    )
    
    $
    158
    
    
    $
    323
    
    
    $
    (140
    )
    
    $
    183Non-contractual customer
relationships
    
    
    7,975
    
    
    
    (1,207
    )
    
    
    6,768
    
    
    
    7,975
    
    
    
    (1,013
    )
    
    
    6,962Total
    
    $
    8,298
    
    
    $
    (1,372
    )
    
    $
    6,926
    
    
    $
    8,298
    
    
    $
    (1,153
    )
    
    $
    7,145
  5




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##### Table of Contents



Remainder of 2008
    
    $
    6552009
    
    
    8512010
    
    
    7362011
    
    
    7762012
    
    
    776Thereafter
    
    
    3,132Total
    
    $
    6,926
 5. Property and Equipment
  March 31,
    
    
    December 31,2008
    
    
    2007Buildings
    
    $
    4,177
    
    
    $
    4,177Leasehold improvements
    
    
    544
    
    
    
    524Equipment
    
    
    2,530
    
    
    
    2,484Furniture and equipment
    
    
    585
    
    
    
    402Computer equipment & software
    
    
    1,696
    
    
    
    1,639Construction in-progress
    
    
    20
    
    
    
    Total property and equipment
    
    
    9,552
    
    
    
    9,226Less-accumulated depreciation and amortization
    
    
    (1,650
    )
    
    
    (1,339
    )Total property and equipment, net
    
    $
    7,902
    
    
    $
    7,887
  6. Long-Term Obligations
  March 31,
    
    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)
    
    $
    3,095
    
    
    $
    11,292Promissory notes
    
    Notes payable, maturing from 2008 to
2012, secured by assets and stock of
certain subsidiaries, various interest rates
ranging from 6.5% to 15.0% (net of debt
discount)
    
    
    22,702
    
    
    
    22,900Earn-out notes
    
    Notes payable, various maturities through
2010, interest rates ranging from none
to 6.5%
    
    
    224
    
    
    
    234Total debt obligations
    
    
    26,021
    
    
    
    34,426Less-current portion, net of debt discount
    
    
    (1,663
    )
    
    
    (1,533
    )Long-term portion
    
    $
    24,358
    
    
    $
    32,893
 6




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Remainder of 2008
    
    $
    1,7992009
    
    
    2,2182010
    
    
    20,0942011
    
    
    1,7312012
    
    
    1,680Thereafter
    
    
    56Total
    
    $
    27,578
 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
  7




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##### Table of Contents



7. Stockholders Equity
    Common Stock Warrants
    Number ofCommon
    
    
    WeightedStock
    
    
    AverageWarrants
    
    
    PriceOutstanding, December 31, 2007
    
    
    970,684
    
    
    $
    3.24Granted
    
    
    
    
    
    
    Pet DRx warrants assumed in Merger
    
    
    7,645,833
    
    
    
    6.00Series B Preferred Stock warrants converted to common stock warrants
    
    
    69,621
    
    
    
    0.00Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Outstanding, March 31, 2008
    
    
    8,686,138
    
    
    $
    5.64Exercisable, March 31, 2008
    
    
    8,686,138
    
    
    $
    5.64
 8




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##### Table of Contents



RemainingContractualExercise
    
    Warrants
    
    LifePrice
    
    Outstanding
    
    (years)$2.72
    
    
    168,459
    
    
    
    7.58$3.11
    
    
    740,160
    
    
    
    7.83$6.00
    
    
    7,645,833
    
    
    
    2.00$6.16
    
    
    62,065
    
    
    
    9.50$0.00
    
    
    69,621
    
    
    
    9.138,686,138
 8. Calculation of Loss Per Common Share
   Three Months EndedMarch 312008
    
    
    2007Convertible debenture notes, if converted to common stock
    
    
    404
    
    
    
    2,247Warrants for common stock
    
    
    8,686
    
    
    
    1,178Warrants for preferred stock, if exercised and converted
to common stock
    
    
    
    
    
    
    180Preferred shares, if converted to common stock
    
    
    
    
    
    
    13,168Options for common stock
    
    
    2,685
    
    
    
    438Total
    
    
    11,775
    
    
    
    17,211
  9




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##### Table of Contents



Three Months EndedMarch 312008
    
    
    2007Net loss
    
    $
    (3,028
    )
    
    $
    (2,534
    )Weighted average common shares outstanding:Basic
    
    
    22,751
    
    
    
    3,746Effect of dilutive common stock equivalents
    
    
    
    
    
    
    Diluted
    
    
    22,751
    
    
    
    3,746Basic and diluted loss per common share
    
    $
    (0.13
    )
    
    $
    (0.68
    )
 9. Share-Based Compensation
     Three Months EndedMarch 312008
    
    
    2007Direct costs
    
    $
    16
    
    
    $
    2Selling, general and administrative and
marketing
    
    
    253
    
    
    
    18Total
    
    $
    269
    
    
    $
    20
 10




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##### 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
    
    
    $
    375Vested at March 31, 2008
    
    
    
    
    
    
    218
    
    
    $
    6.01
    
    
    
    9.39
    
    
    $
    28Exercisable at March 31, 2008
    
    
    
    
    
    
    218
    
    
    $
    6.01
    
    
    
    9.39
    
    
    $
    28
  WeightedAverageNumber
    
    Remaining
    
    Weighted
    
    Number
    
    WeightedRange of
    
    Outstanding
    
    Contractual Life
    
    Average
    
    Exercisable
    
    AverageExercise Prices
    
    As of 03/31/08
    
    (years)
    
    Exercise Price
    
    As of 03/31/08
    
    Exercise Price$2.17
    
    $
    2.17
    
    
    
    21
    
    
    
    7.04
    
    
    $
    2.17
    
    
    
    10
    
    
    $
    2.17$3.11
    
    $
    3.11
    
    
    
    16
    
    
    
    7.97
    
    
    $
    3.11
    
    
    
    8
    
    
    $
    3.11$3.18
    
    $
    3.18
    
    
    
    347
    
    
    
    9.67
    
    
    $
    3.18
    
    
    
    0
    
    
    $
    0.00$5.71
    
    $
    5.71
    
    
    
    163
    
    
    
    8.41
    
    
    $
    5.71
    
    
    
    41
    
    
    $
    5.71$6.16
    
    $
    6.16
    
    
    
    1,056
    
    
    
    9.28
    
    
    $
    6.16
    
    
    
    10
    
    
    $
    6.16$6.26
    
    $
    6.26
    
    
    
    80
    
    
    
    9.88
    
    
    $
    6.26
    
    
    
    0
    
    
    $
    0.00$6.50
    
    $
    6.50
    
    
    
    578
    
    
    
    4.06
    
    
    $
    6.50
    
    
    
    144
    
    
    $
    6.50$6.70
    
    $
    6.70
    
    
    
    424
    
    
    
    8.12
    
    
    $
    6.70
    
    
    
    5
    
    
    $
    6.70$2.17
    
    $
    6.70
    
    
    
    2,685
    
    
    
    9.49
    
    
    $
    5.85
    
    
    
    218
    
    
    $
    6.01
  Calculation of Fair Value
  11




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##### Table of Contents



March 31,
    
    
    December 31,2008
    
    
    2007Weighted- average volatility (1)
    
    
    174.0
    %
    
    
    46.0
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %Expected term  employees (2)
    
    6.1 years
    
    6.1 yearsExpected term  nonemployees (2)
    
    10.0 years
    
    10.0 yearsRisk-free rate  employees (3)
    
    
    2.6%-3.3
    %
    
    
    4.4%-4.8
    %Risk-free rate  nonemployees
    
    
    4.3%-4.6
    %
    
    
    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
  12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 The following discussion should be read in conjunction with our condensed consolidated
financial statements and notes thereto provided under Part I, Item 1 of this Quarterly Report on
Form 10-Q (the  Form 10-Q ). The Companys disclosure and analysis in this Form 10-Q contain some
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 that set forth anticipated results based on managements plans and assumptions. From time to
time, the Company also provides forward-looking statements in other materials it releases to the
public, as well as oral forward-looking statements. Such statements give the Companys current
expectations or forecasts of future events; they do not relate strictly to historical or current
facts. The Company has tried, wherever possible, to identify such statements by using words such as
anticipate, estimate, expect, project, intend, plan, believe, will, target,
forecast and similar expressions in connection with any discussion of future operating or
financial performance or business plans or prospects. In particular, these include statements
relating to future actions, business plans and prospects, future performance or results of current
and anticipated services, sales efforts, expenses, interest rates, the outcome of contingencies,
such as legal proceedings, and financial results.
 The Company cannot guarantee that any forward-looking statement will be realized. Achievement
of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should
known or unknown risks or uncertainties materialize, or should underlying assumptions prove
inaccurate, actual results could differ materially from past results and those anticipated,
estimated or projected. Investors should keep this in mind as they consider forward-looking
statements. Factors that may cause our plans, expectations, future financial condition and results
to change are described under the heading Risk Factors in Item 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 March
31, 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 March 31, 2008 at the SECs website at www.sec.gov
 Overview
 Merger with XLNT Veterinary Care, Inc.
   13




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##### Table of Contents



General
    Seasonality
  Overview of Our Financial Results
     14




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##### Table of Contents



Results of Our Operations
 Three Months Ended March 31, 2008 and 2007
 Revenue
 For The Three Months EndedMarch 31,
    
    
    %2008
    
    
    2007
    
    
    Change(In millions, except percentages)Revenue
    
    $
    17.8
    
    
    $
    10.7
    
    
    
    67
    %
  Comparative Analysis2008
    
    
    2007
    
    
    % Change(In millions, except percentages)Same-store revenue (1)
    
    $
    9.7
    
    
    $
    9.4
    
    
    
    3
    %Net acquired revenue (2)
    
    
    8.1
    
    
    
    1.3
    
    
    
    538
    %Total
    
    $
    17.8
    
    
    $
    10.7
    
    
    
    67
    %
 (1)
    
    Same-store revenue were calculated using animal hospital
operating results for the twenty animal hospitals that we owned
for the full three months of 2008 and the full three month period ended March
31, 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 EndedMarch 31,2008
    
    
    2007
    
    
    % Change(In millions, except percentages)Total direct costs
    
    $
    16.1
    
    
    $
    10.3
    
    
    
    56
    %Hospital Contribution Margin as a percentage of total net revenue
    
    
    9.6
    %
    
    
    3.4
    %
 15




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##### Table of Contents



Selling, General and Administrative
 For The Three MonthsEnded March 31,2008
    
    
    2007
    
    
    % Change(In millions, except percentages)Selling, general and administrative
    
    $
    3.8
    
    
    $
    2.6
    
    
    
    46
    %As a percentage of total net revenue
    
    
    21.3
    %
    
    
    24.2
    %
   Interest income
 For The Three MonthsEnded March 31,2008
    
    
    2007
    
    
    % Change(In millions, except percentages)Interest income
    
    $
    0.2
    
    
    $
    0.0
    
    
    
    350.0
    %As a percentage of total net revenue
    
    
    1.2
    %
    
    
    0.4
    %
  16




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##### Table of Contents



Interest Expense
 For The Three MonthsEnded March 31,2008
    
    
    2007
    
    
    % Change(In millions, except percentages)Interest expense
    
    $
    1.2
    
    
    $
    0.3
    
    
    
    231
    %As a percentage of total net revenue
    
    
    6.5
    %
    
    
    3.3
    %
  Liquidity and Capital Resources
    Cash Flows from Operating Activities
   Cash Flows from Investing Activities
  Anticipated Acquisition Program
   17




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##### Table of Contents



Cash Flows from Financing Activities
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Internal Control over Financial Reporting
    18




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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.
   For
    
    
    6,783,250
    
    
    Against
    
    
    1,392,173
    
    
    Abstaining
    
    
    0
  For
    
    
    6,982,515
    
    
    Against
    
    
    825,190
    
    
    Abstaining
    
    
    367,718
  For
    
    
    6,976,505
    
    
    Against
    
    
    831,200
    
    
    Abstaining
    
    
    367,718
  19




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##### Table of Contents



For
    
    
    6,970,505
    
    
    Against
    
    
    1,054,200
    
    
    Abstaining
    
    
    150,718
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
 ExhibitNo.
    
    Description3.1
    
    
    Second Amended and Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit 3.1 of the Registrants
Current Report on Form 8-K filed on January 10, 2008.)3.2
    
    
    Amended and Restated By-Laws. (Incorporated by reference to
Exhibit 3.2 of the Registrants Current Report on Form 8-K filed on
January 10, 2008.)10.1
    
    
    Backstop Agreement dated January 3, 2008 by and among Windy City,
Inc., Gene Burleson, Joel Kanter, Chicago Investments, Inc. and
Hudson Bay Fund, LP. (Incorporated by reference to Exhibit 99.2 of
the Registrants Current Report on Form 8-K filed on January 3,
2008.)10.2
    
    
    Letter Agreement dated January 3, 2008 by and between Chicago
Investments, Inc. and Hudson Bay Fund, LP. (Incorporated by
reference to Exhibit 99.3 of the Registrants Current Report on
Form 8-K filed on January 3, 2008.)10.3
    
    
    Board Voting Agreement dated as of January 4, 2008 by and among the
Registrant and Certain Stockholders named on the signature pages
thereof. (Incorporated by reference to Exhibit 10.20 of the
Registrants Current Report on Form 8-K filed on January 10, 2008.)10.4
    
    
    Escrow Agreement dated as of February 12, 2008 by and among the
Company, the stockholder representatives acting on behalf of the
former stockholders of XLNT Veterinary Care, Inc., and JP Morgan
Chase Bank, National Association, as Escrow Agent. (Incorporated
by reference to Exhibit 10.1 of the Registrants Current Report on
Form 8-K filed on February 12, 2008.)10.5
    
    
    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 Registrants
Current Report on Form 8-K filed on February 12, 2008.)10.6
    
    
    First Amendment to Credit Agreement and Loan Documents dated as of
February 19, 2008 by and among Fifth Street Mezzanine Partners II,
L.P., as Lender, XLNT Veterinary Care, Inc., as Lead Borrower,
certain subsidiaries of XLNT Veterinary Care, Inc. named therein,
as Non-Lead Borrowers, and Bay Area Veterinary Specialist, Inc. and
Bradshaw Veterinary Clinic, Inc., as New Borrowers. (Incorporated
by reference to Exhibit 10.1 of the Registrants Current Report on
Form 8-K filed on February 25, 2008.)10.7
    
    
    Second Amendment to Credit Agreement and Loan Documents dated as of
February 19, 2008 by and among Fifth Street Mezzanine Partners II,
L.P., as Lender, and XLNT Veterinary Care, Inc., as Borrower.
(Incorporated by reference to Exhibit 10.2 of the Registrants
Current Report on Form 8-K filed on February 25, 2008.)
 20




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##### Table of Contents



ExhibitNo.
    
    Description10.8
    
    
    Guaranty made as of February 19, 2008 by and among Fifth Street
Mezzanine Partners II, L.P., as Lender, and Pet DRx Corporation, as
Guarantor. (Incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K filed on February 25,
2008.)10.9
    
    
    Security Agreement dated February 19, 2008 by and among Fifth
Street Mezzanine Partners II, L.P., as Secured Party, and Pet DRx
Corporation, Bay Area Veterinary Specialist, Inc., and Bradshaw
Veterinary Clinic, Inc., as Debtors. (Incorporated by reference to
Exhibit 10.4 of the Registrants Current Report on Form 8-K filed
on February 25, 2008.)10.10
    
    
    2007 Pet DRx Corporation Stock Incentive Plan (Incorporated by
reference to Exhibit 10.28 of the Registrants Registration
Statement on Form S-4, as amended, filed on November 11, 2007.)10.11*
    
    
    Pet DRx Corporation 2008 Employee Bonus Plan.10.12*
    
    
    Pet DRx Corporation 2008 Non-Employee Director Compensation Program.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. 21




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##### Table of Contents



SIGNATURES
  PET DRX CORPORATION
             (Registrant)Date: May 14, 2008
    By:

/s/
Gregory J. EisenhauerGregory J. EisenhauerExecutive Vice President and Chief
Financial OfficerSigning on behalf of the Registrant
and as principal financial and accounting officer. 22




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1
    
    
    Second Amended and Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit 3.1 of the Registrants
Current Report on Form 8-K filed on January 10, 2008.)3.2
    
    
    Amended and Restated By-Laws. (Incorporated by reference to
Exhibit 3.2 of the Registrants Current Report on Form 8-K filed on
January 10, 2008.)10.1
    
    
    Backstop Agreement dated January 3, 2008 by and among Windy City,
Inc., Gene Burleson, Joel Kanter, Chicago Investments, Inc. and
Hudson Bay Fund, LP. (Incorporated by reference to Exhibit 99.2 of
the Registrants Current Report on Form 8-K filed on January 3,
2008.)10.2
    
    
    Letter Agreement dated January 3, 2008 by and between Chicago
Investments, Inc. and Hudson Bay Fund, LP. (Incorporated by
reference to Exhibit 99.3 of the Registrants Current Report on
Form 8-K filed on January 3, 2008.)10.3
    
    
    Board Voting Agreement dated as of January 4, 2008 by and among the
Registrant and Certain Stockholders named on the signature pages
thereof. (Incorporated by reference to Exhibit 10.20 of the
Registrants Current Report on Form 8-K filed on January 10, 2008.)10.4
    
    
    Escrow Agreement dated as of February 12, 2008 by and among the
Company, the stockholder representatives acting on behalf of the
former stockholders of XLNT Veterinary Care, Inc., and JP Morgan
Chase Bank, National Association, as Escrow Agent. (Incorporated
by reference to Exhibit 10.1 of the Registrants Current Report on
Form 8-K filed on February 12, 2008.)10.5
    
    
    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 Registrants
Current Report on Form 8-K filed on February 12, 2008.)10.6
    
    
    First Amendment to Credit Agreement and Loan Documents dated as of
February 19, 2008 by and among Fifth Street Mezzanine Partners II,
L.P., as Lender, XLNT Veterinary Care, Inc., as Lead Borrower,
certain subsidiaries of XLNT Veterinary Care, Inc. named therein,
as Non-Lead Borrowers, and Bay Area Veterinary Specialist, Inc. and
Bradshaw Veterinary Clinic, Inc., as New Borrowers. (Incorporated
by reference to Exhibit 10.1 of the Registrants Current Report on
Form 8-K filed on February 25, 2008.)10.7
    
    
    Second Amendment to Credit Agreement and Loan Documents dated as of
February 19, 2008 by and among Fifth Street Mezzanine Partners II,
L.P., as Lender, and XLNT Veterinary Care, Inc., as Borrower.
(Incorporated by reference to Exhibit 10.2 of the Registrants
Current Report on Form 8-K filed on February 25, 2008.)10.8
    
    
    Guaranty made as of February 19, 2008 by and among Fifth Street
Mezzanine Partners II, L.P., as Lender, and Pet DRx Corporation, as
Guarantor. (Incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K filed on February 25,
2008.)10.9
    
    
    Security Agreement dated February 19, 2008 by and among Fifth
Street Mezzanine Partners II, L.P., as Secured Party, and Pet DRx
Corporation, Bay Area Veterinary Specialist, Inc., and Bradshaw
Veterinary Clinic, Inc., as Debtors. (Incorporated by reference to
Exhibit 10.4 of the Registrants Current Report on Form 8-K filed
on February 25, 2008.)10.10
    
    
    2007 Pet DRx Corporation Stock Incentive Plan (Incorporated by
reference to Exhibit 10.28 of the Registrants Registration
Statement on Form S-4, as amended, filed on November 11, 2007.)
 23




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##### Table of Contents



ExhibitNo.
    
    Description10.11*
    
    
    Pet DRx Corporation 2008 Employee Bonus Plan.10.12*
    
    
    Pet DRx Corporation 2008 Non-Employee Director Compensation Program.10.13*
    
    

Form
of Stock Option Agreement for stock options granted to Non-Employee
Directors under the 2007 Pet DRx Corporation Stock Incentive Plan.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