UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~December 31, 2022~~September 30, 2023

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: 000-28827

________________________

PETMED EXPRESS, INC.

(Exact name of registrant as specified in its charter)

________________________


FLORIDA			65-0680967
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

420 South Congress Avenue, Delray Beach, Florida 33445

(Address of principal executive offices, including zip code)

(561) 526-4444

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.001 per share	PETS	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o			Accelerated Filer x
Non-accelerated filer o			Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~21,084,277~~21,147,006 shares of Common Stock, $.001 par value per share, at ~~February 7,~~October 31, 2023.

PART I - FINANCIAL INFORMATION

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, certain information in this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements, other than statements of historical facts, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position and our business outlook, business trends and other information, may be forward-looking statements. You can identify these forward-looking statements by the words "believes," "intends," "expects," “might,” "may," "will," "should," "plans," "projects," "contemplates," "intends," "budgets," “potential,” "predicts," "estimates," "anticipates," “future,” “goal,” and variations of such words or similar expressions. These statements are based on our beliefs, as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved, and actual future results may differ materially from what is expressed in or indicated by the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A, under the heading “Risk Factors,” in our Annual Report on Form 10-K for the year ended March 31, 2023, filed with the Securities and Exchange Commission (“SEC”), and under “Part II, Item 1A., Risk Factors” in this Quarterly Report on Form 10-Q. Such risk factors may be updated from time to time in our periodic filings with the SEC. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and a reader, whether investing in our common stock or not, should not place undue reliance on these forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this Quarterly Report on Form 10-Q apply only as of the date of this Quarterly Report on Form 10-Q or as of the date they were made or as otherwise specified herein. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Investors and others should note that we use our websites (https://petmeds.com, https://petcarerx.com and https://www.investors.petmeds.com), as well as social media, press releases, SEC filings, public conference calls and webcasts, as channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings, public conference calls and webcasts. The contents of our websites and social media posts, however, are not incorporated by reference into this Quarterly Report on Form 10-Q. Further, our references to website URLs in this filing are intended to be inactive textual references only.

NOTE REGARDING COMPANY REFERENCES

When used in this Quarterly Report on Form 10-Q, unless otherwise stated or the context otherwise indicates, "PetMed Express," "PetMeds," "PetMed," "the Company," "we," "our," and "us" refers to PetMed Express, Inc. and its direct and indirect wholly owned subsidiaries, taken as a whole.

ITEM 1. CONDENSED FINANCIAL STATEMENTS.

PETMED EXPRESS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share amounts)


		December 31, 2022		March 31, 2022			September 30, 2023		March 31, 2023
		(Unaudited)					(Unaudited)
ASSETS	ASSETS					ASSETS

Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	102,428	$	111,080	Cash and cash equivalents	$	53,471	$	104,086
Accounts receivable, less allowance for doubtful accounts of $40 and $39, respectively		1,944		1,913
Accounts receivable, less allowance for doubtful accounts of $44 and $35, respectively						Accounts receivable, less allowance for doubtful accounts of $44 and $35, respectively	2,174		1,740
Inventories - finished goods	Inventories - finished goods	22,402		32,455		Inventories - finished goods	18,902		19,023
Prepaid expenses and other current assets	Prepaid expenses and other current assets	5,637		4,866		Prepaid expenses and other current assets	9,656		4,719
Prepaid income taxes	Prepaid income taxes	1,608		681		Prepaid income taxes	1,457		1,883
Total current assets	Total current assets	134,019		150,995		Total current assets	85,660		131,451

Noncurrent assets:	Noncurrent assets:					Noncurrent assets:
Property and equipment, net	Property and equipment, net	25,242		24,464		Property and equipment, net	26,968		26,178
Intangible and other assets		5,860		860
Intangible and other assets, net						Intangible and other assets, net	17,181		5,860
Goodwill						Goodwill	22,451		–
Operating lease right-of-use assets, net						Operating lease right-of-use assets, net	1,826		–
Deferred tax assets, net						Deferred tax assets, net	5,185		628
Total noncurrent assets	Total noncurrent assets	31,102		25,324		Total noncurrent assets	73,611		32,666

Total assets	Total assets	$	165,121	$	176,319	Total assets	$	159,271	$	164,117

LIABILITIES AND SHAREHOLDERS' EQUITY	LIABILITIES AND SHAREHOLDERS' EQUITY					LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	24,317	$	27,500	Accounts payable	$	25,379	$	25,208
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	6,754		5,697		Accrued expenses and other current liabilities	10,986		11,289
Current lease liabilities						Current lease liabilities	757		–
Deferred revenue						Deferred revenue	3,573		–

Total current liabilities	Total current liabilities	31,071		33,197		Total current liabilities	40,695		36,497

Deferred tax liabilities		465		936
Long-term lease liabilities						Long-term lease liabilities	1,080		–
Other long-term liabilities						Other long-term liabilities	3,825		3,825

Total liabilities	Total liabilities	31,536		34,133		Total liabilities	45,600		40,322

Commitments and contingencies
Commitments and contingencies (Note 9)						Commitments and contingencies (Note 9)

Shareholders' equity:	Shareholders' equity:					Shareholders' equity:
Preferred stock, $.001 par value, 5,000 shares authorized; 3 convertible shares issued and outstanding with a liquidation preference of $4 per share		9		9
Common stock, $.001 par value, 40,000 shares authorized; 21,077 and 20,979 shares issued and outstanding, respectively		21		21
Preferred stock, $.001 par value, 5,000,000 shares authorized; 2,500 convertible shares issued and outstanding with a liquidation preference of $4 per share						Preferred stock, $.001 par value, 5,000,000 shares authorized; 2,500 convertible shares issued and outstanding with a liquidation preference of $4 per share	9		9
Common stock, $.001 par value, 40,000,000 shares authorized; 21,147,006 and 21,084,302 shares issued and outstanding, respectively						Common stock, $.001 par value, 40,000,000 shares authorized; 21,147,006 and 21,084,302 shares issued and outstanding, respectively	21		21
Additional paid-in capital	Additional paid-in capital	16,647		11,660		Additional paid-in capital	21,765		18,277
Retained earnings	Retained earnings	116,908		130,496		Retained earnings	91,876		105,488

Total shareholders' equity	Total shareholders' equity	133,585		142,186		Total shareholders' equity	113,671		123,795

Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	165,121	$	176,319	Total liabilities and shareholders' equity	$	159,271	$	164,117

See accompanying notes to ~~condensed consolidated financial statements.~~

~~PETMED EXPRESS, INC. AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENTS OF INCOME~~

~~(In thousands, except for per share amounts) (Unaudited)~~

Three Months Ended
December 31, Nine Months Ended
December 31,
2022 2021 2022 2021
Sales $ 58,870 $ 60,717 $ 194,451 $ 207,415
Cost of sales 43,632 42,992 140,819 148,736
Gross profit 15,238 17,725 53,632 58,679
Operating expenses:
General and administrative 10,425 7,541 30,529 22,540
Advertising 4,641 4,327 14,869 15,435
Depreciation 941 710 2,552 2,051
Total operating expenses 16,007 12,578 47,950 40,026
Income (loss) from operations (769) 5,147 5,682 18,653
Other income:
Interest income, net 708 84 1,213 243
Other, net 259 287 718 741
Total other income 967 371 1,931 984
Income before provision for income taxes 198 5,518 7,613 19,637
Provision for income taxes 217 1,261 2,278 4,603
Net income (loss) $ (19) $ 4,257 $ 5,335 $ 15,034
Net income (loss) per common share:
Basic $ (0.00) $ 0.21 $ 0.26 $ 0.75
Diluted $ (0.00) $ 0.21 $ 0.26 $ 0.74
Weighted average number of common shares outstanding:
Basic 20,301 20,208 20,257 20,165
Diluted 20,301 20,329 20,339 20,365
Cash dividends declared per common share $ 0.30 $ 0.30 $ 0.90 $ 0.90

~~See accompanying notes to~~unaudited condensed consolidated financial statements.

PETMED EXPRESS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(In thousands, except for share and per share amounts) (Unaudited)


	Three Months Ended September 30,				Six Months Ended September 30,
	2023		2022		2023		2022

Sales	$	70,999	$	65,394	$	149,243	$	135,581
Cost of sales	50,937		46,943		106,655		97,187

Gross profit	20,062		18,451		42,588		38,394

Operating expenses:
General and administrative	13,278		10,753		28,989		20,104
Advertising	5,512		3,879		12,777		10,228
Depreciation and amortization	1,713		858		3,391		1,611
Total operating expenses	20,503		15,490		45,157		31,943

(Loss) income from operations	(441)		2,961		(2,569)		6,451

Other income:
Interest income, net	570		388		1,190		505
Other, net	254		261		760		459
Total other income	824		649		1,950		964

Income (loss) before provision for income taxes	383		3,610		(619)		7,415

Provision for income taxes	453		1,031		338		2,061

Net (loss) income	$	(70)	$	2,579	$	(957)	$	5,354

Net (loss) income per common share:
Basic	$	(0.00)	$	0.13	$	(0.05)	$	0.26
Diluted	$	(0.00)	$	0.13	$	(0.05)	$	0.26

Weighted average number of common shares outstanding:
Basic	20,382,979		20,261,114		20,357,752		20,234,904
Diluted	20,382,979		20,343,980		20,357,752		20,317,522

Cash dividends declared per common share	$	0.30	$	0.30	$	0.60	$	0.60

See accompanying notes to unaudited condensed consolidated financial statements.

PETMED EXPRESS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)


		Nine Months Ended December 31,					Six Months Ended September 30,
		2022		2021			2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income		$	5,335	$	15,034
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,552		2,051
Net (loss) income						Net (loss) income	$	(957)	$	5,354
Adjustments to reconcile net (loss) income to net cash provided by operating activities:						Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization						Depreciation and amortization	3,391		1,611
Share based compensation	Share based compensation	4,987		3,040		Share based compensation	3,489		3,217
Deferred income taxes	Deferred income taxes	(471)		(19)		Deferred income taxes	(81)		(389)
Bad debt expense	Bad debt expense	292		104		Bad debt expense	36		66
(Increase) decrease in operating assets and increase (decrease) in operating liabilities:	(Increase) decrease in operating assets and increase (decrease) in operating liabilities:					(Increase) decrease in operating assets and increase (decrease) in operating liabilities:
Accounts receivable	Accounts receivable	(324)		1,216		Accounts receivable	(345)		257
Inventories - finished goods	Inventories - finished goods	10,053		6,780		Inventories - finished goods	3,237		(1,567)
Prepaid income taxes	Prepaid income taxes	(927)		(911)		Prepaid income taxes	426		86
Prepaid expenses and other current assets	Prepaid expenses and other current assets	(771)		1,287		Prepaid expenses and other current assets	(3,516)		(597)
Operating lease right-of-use assets, net						Operating lease right-of-use assets, net	394		–
Accounts payable	Accounts payable	(3,183)		(17,613)		Accounts payable	(5,542)		(3,520)
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	536		(1,188)		Accrued expenses and other current liabilities	(943)		590
Net cash provided by operating activities		18,079		9,781
Lease liabilities						Lease liabilities	(383)		–
Deferred revenue						Deferred revenue	579		–

Net cash (used in) provided by operating activities						Net cash (used in) provided by operating activities	(215)		5,108

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchase of minority interest investment in Vetster	Purchase of minority interest investment in Vetster	(5,000)		-		Purchase of minority interest investment in Vetster	–		(5,000)
Acquisition of PetCareRx, net of cash acquired						Acquisition of PetCareRx, net of cash acquired	(35,859)		–
Purchases of property and equipment	Purchases of property and equipment	(3,329)		(1,266)		Purchases of property and equipment	(2,137)		(2,336)
Net cash used in investing activities	Net cash used in investing activities	(8,329)		(1,266)		Net cash used in investing activities	(37,996)		(7,336)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Dividends paid	Dividends paid	(18,402)		(18,322)		Dividends paid	(12,404)		(12,306)
Net cash used in financing activities	Net cash used in financing activities	(18,402)		(18,322)		Net cash used in financing activities	(12,404)		(12,306)

Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents	(8,652)		(9,807)		Net decrease in cash and cash equivalents	(50,615)		(14,534)
Cash and cash equivalents, at beginning of period	Cash and cash equivalents, at beginning of period	111,080		118,718		Cash and cash equivalents, at beginning of period	104,086		111,080

Cash and cash equivalents, at end of period	Cash and cash equivalents, at end of period	$	102,428	$	108,911	Cash and cash equivalents, at end of period	$	53,471	$	96,546

Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:

Cash paid for income taxes	Cash paid for income taxes	$	3,870	$	5,580	Cash paid for income taxes	$	–	$	2,560

Dividends payable in accrued expenses	Dividends payable in accrued expenses	$	1,079	$	329	Dividends payable in accrued expenses	$	1,513	$	856

See accompanying notes to unaudited condensed consolidated financial statements.

PETMED EXPRESS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Summary of Significant Accounting Policies

Organization

PetMed Express, Inc. and subsidiaries, d/b/a PetMeds® ~~(the “Company”)~~, is a leading ~~nationwide~~direct-to-consumer pet pharmacy and ~~Your Trusted Pet Health Expert~~TM~~. The Company markets~~online provider of prescription and non-prescription ~~pet~~ medications, ~~health products,~~food, supplements, supplies and ~~supplies~~vet services for dogs, cats, and ~~horses,~~horses. The Company markets and sells directly to ~~the consumer.~~consumers through its websites, toll-free numbers, and mobile applications. The Company offers consumers an attractive ~~alternative~~option for obtaining pet medications, food, and supplies in terms of ~~expertise,~~ convenience, price, speed of delivery, and valued customer service. ~~The Company markets its products through advertising and promotional campaigns, which aim to increase the recognition of the “PetMeds®” brand name, increase traffic on its website at~~ ~~www.petmeds.com, acquire new customers, and maximize repeat purchases. Virtually all of~~

Founded in 1996, the Company’s ~~sales~~executive headquarters offices are ~~to customers in the United States. The Company’s corporate headquarters and distribution facility is~~ located in Delray Beach, Florida. The Company’s fiscal year end is March 31, and references herein to fiscal ~~2023~~2024 or fiscal ~~2022~~2023 refer to the Company's fiscal years ending March 31, 2024 and 2023, ~~and 2022,~~ respectively.

Basis of Presentation and Consolidation

The accompanying unaudited ~~Condensed Consolidated Financial Statements~~condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the information and footnotes required by accounting principles generally accepted in the United States ~~of America~~("GAAP") for complete financial statements. In the opinion of management, the accompanying ~~Condensed Consolidated Financial Statements~~unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company at ~~December 31, 2022,~~September 30, 2023, the Statements of (Loss) Income for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2023 and 2022, ~~and 2021,~~ and Cash Flows for the ~~nine~~six months ended ~~December 31, 2022~~September 30, 2023 and ~~2021.~~2022. The results of operations for the three and ~~nine~~six months ended ~~December 31, 2022~~September 30, 2023 are not necessarily indicative of the operating results expected for the fiscal year ending March 31, ~~2023.~~2024. These financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, ~~2022.~~2023. The ~~Condensed Consolidated Financial Statements~~unaudited condensed consolidated financial statements include the accounts of PetMed Express, Inc. and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated ~~upon~~in consolidation.

Business Combinations

The Company accounts for its business combinations using the acquisition method of accounting in accordance with Accounting Standards Codification ("ASC") Topic 805 ("Business Combinations"). The purchase price is allocated to the fair value of the assets acquired and liabilities assumed. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date. The excess of the purchase price of acquisition over the fair value of the identifiable net assets of the acquiree is recorded as goodwill. The results of businesses acquired in a business combination are included in the Company’s unaudited condensed consolidated financial statements from the date of acquisition.

Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including market conditions, technological developments, economic conditions, and competition. In connection with the determination of fair values, the Company may engage a third-party valuation specialist to assist with the valuation of intangible and certain tangible assets acquired and certain obligations assumed. Acquisition-related transaction costs incurred by the Company are not included as a component of consideration transferred but are accounted for as an operating expense in the period in which the costs are incurred.

Use of Estimates

The preparation of ~~Condensed Consolidated Financial Statements~~unaudited condensed consolidated financial statements in conformity with ~~accounting principles generally accepted in the United States of America~~GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ~~Condensed Consolidated Financial Statements~~unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Fair Value of Financial Instruments

The carrying amounts of the Company's cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these instruments.

Deferred Revenue

Deferred revenue is recorded when payments are received or due in advance of performing our service obligations and revenue is recognized over the service period. Deferred revenue represents prepayments of PetPlus memberships with PetCareRx, Inc. (“PetCareRx”). The total deferred revenue as of September 30, 2023 for these memberships was $3.6 million. Memberships provide discounted pricing, free standard shipping, veterinary telehealth services and local Caremark Pharmacy prescription pickup. The membership fee is an annual charge and automatically renews one year from the initial enrollment date. The Company generally recognizes the revenue ratably over the term of the membership.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is not amortized but instead is tested for impairment annually on January 1, or more frequently if events or changes in circumstances indicate goodwill might be impaired. When testing goodwill for impairment, the Company has the option to choose whether it will apply a qualitative assessment first and then a quantitative assessment, if necessary, or to apply the quantitative assessment directly. The Company has concluded that it has one reporting unit and has assigned the entire balance of goodwill to this reporting unit.

Intangible Assets

The Company acquired definite-lived intangible assets in the acquisition (see Note 3) that will be amortized based on their estimated useful lives in accordance with ASC Topic 350 (“Goodwill and Other Intangible Assets”). These definite-lived intangible assets are being amortized over periods ranging from three to seven years. Acquired trade name is not being amortized and is subject to an annual review for impairment consistent with the existing intangible assets in fiscal 2024.

Leases

The Company accounts for leases in accordance with ASC Topic 842 ("Leases"). The Company reviews all contracts and determines if the arrangement is or contains a lease, at inception. Operating leases are reported as right-of-use (“ROU”) assets, current lease liabilities and long-term lease liabilities on the unaudited Condensed Consolidated Balance Sheets. The Company does not have any have any material leases, individually or in the aggregate, classified as a finance lease.

Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. The operating lease ROU asset also includes any upfront lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with a term of 12 months or less are not recorded on the balance sheet. The Company’s lease agreements do not contain any residual value guarantees.

Recent Accounting Pronouncements

The Company does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on the Company's consolidated financial position, results of operations, or cash flows.

Note 2: Revenue Recognition

~~The~~In accordance with ASC Topic 606 ("Revenue from Contracts with Customers"), the Company generates revenue by selling prescription and non-prescription pet medication products, pet food, supplements, supplies, membership fees, and ~~pet supplies mainly to retail customers.~~veterinary services. Certain pet supplies offered on the Company’s website are drop shipped to customers. The Company considers itself the principal in the arrangement because the Company controls the specified good before it is transferred to

the customer. Revenue contracts contain one performance obligation, which is delivery of the product. Customer care and support is deemed not to be a material right to the contract. The transaction price is adjusted at the date of sale for any applicable sales discounts and an estimate of product returns, which are based on historical patterns, however this is not considered a key

judgment. Revenue is recognized when control transfers to the customer at the point in time at which the shipment of the product occurs. This key judgment is determined as the shipping point, which represents the point in time when the Company has a present right to payment, title has transferred to the customer, and the customer has assumed the risks and rewards of ownership. Virtually all the Company’s sales are paid by credit cards and the Company usually receives the cash settlement in two to three banking days. Credit card sales minimize the accounts receivable balances relative to sales.

Outbound shipping and handling fees are an accounting policy election and are included in sales as the Company considers itself the principal in the arrangement given its responsibility for supplier selection and discretion over pricing. Shipping costs associated with outbound freight after control over a product has transferred to a customer are an accounting policy election and are accounted for as fulfillment costs and are included in cost of sales.

Membership fees represent the amounts recognized periodically from two membership models. The first is the PetPlus membership for PetCareRx customers, the second is a partner membership provided through PetCareRx. These memberships provide discounted pricing, free standard shipping, veterinary telehealth services and local Caremark Pharmacy prescription pickup which represent a single stand-ready performance obligation to provide these benefits. The PetPlus membership fee is an upfront annual charge and automatically renews one year from the initial enrollment date. The Company recognizes the revenue ratably over the term of the PetPlus membership which is generally one year. As shown in the following table, under the PetPlus program, the Company recognized $1.7 million and $3.5 million of previously deferred annual membership fees in the three and six months ended September 30, 2023, respectively, and had $3.6 million of deferred revenue as of the quarter ended September 30, 2023 (amounts in millions).


	2023
Deferred revenue, March 31,	$	–
Deferred revenue acquired with PetCareRx	3.0
Deferred memberships fees received	2.0
Deferred membership fee revenue recognized	(1.8)
Deferred revenue, June 30,	3.2
Deferred memberships fees received	2.1
Deferred membership fee revenue recognized	(1.7)
Deferred revenue, September 30,	3.6

In addition to annual membership fees earned under the PetPlus program, the Company also earns membership fees on a month-to-month basis under its PetCareRx partner membership program. For the three and six months ended September 30, 2023, membership fees earned under the partner program were $0.7 million and $1.3 million, respectively.

The Company has no material contract asset or liability balances at September 30, 2023 and March 31, 2023, respectively.

The Company disaggregates sales in the following ~~two~~ categories: ~~(1)~~ reorder sales vs new order sales ~~and (2) internet sales vs. contact center sales.~~vs membership fees. The following table illustrates sales in those categories:


	Three Months Ended September 30,								Increase (Decrease)
Revenue (in thousands)	2023		%		2022		%		$		%

Reorder sales	$	62,403	87.9	%	$	59,729	91.3	%	$	2,674	4.5	%
New order sales	6,172		8.7	%	5,665		8.7	%	507		8.9	%
Membership fees	2,424		3.4	%	–		–	%	2,424		–	%

Total net sales	$	70,999	100.0	%	$	65,394	100.0	%	$	5,605	8.6	%


	Six Months Ended September 30,								Increase (Decrease)
Revenue (in thousands)	2023		%		2022		%		$		%

Reorder sales	$	130,441	87.4	%	$	123,068	90.8	%	$	7,373	6.0	%
New order sales	13,992		9.4	%	12,513		9.2	%	1,479		11.8	%
Membership fees	4,810		3.2	%	–		–	%	4,810		–	%

Total net sales	$	149,243	100.0	%	$	135,581	100.0	%	$	13,662	10.1	%

Note 3: Acquisition

On April 3, 2023, the Company acquired 100% of the issued and outstanding equity interests of PetCareRx, a New York corporation and a leading supplier of pet food, pet medications, and supplies. The acquisition was completed pursuant to an Agreement and Plan of Merger ("Merger Agreement") by ~~various classifications:~~and among the Company, Harry Merger Sub, Inc., a New York corporation and a wholly-owned subsidiary of the Company ("Merger Sub"), PetCareRx and Jeanette Loeb (as representative of the PetCareRx equity holders). The Merger Agreement provided for the Company’s acquisition of PetCareRx pursuant to the merger of Merger Sub with and into PetCareRx, with PetCareRx as the surviving corporation. The aggregate purchase price consideration was $36.1 million and was funded from the Company's cash on hand.

Three Months Ended December 31,
Revenue (In thousands) 2022 % 2021 % $ Variance % Variance
Reorder sales $ 53,316 90.6 % $ 55,259 91.0 % $ (1,943) -3.5 %
New order sales 5,554 9.4 % 5,458 9.0 % 96 1.8 %
Total net sales $ 58,870 100.0 % $ 60,717 100.0 % $ (1,847) -3.0 %
Internet sales $ 51,109 86.8 % $ 51,305 84.5 % $ (196) -0.4 %
Contact center sales 7,761 13.2 % 9,412 15.5 % (1,651) -17.5 %
Total net sales $ 58,870 100.0 % $ 60,717 100.0 % $ (1,847) -3.0 %

Nine Months Ended December 31,
Revenue (In thousands) 2022 % 2021 % $ Variance % Variance
Reorder sales $ 176,384 90.7 % $ 184,607 89.0 % $ (8,223) -4.5 %
New order sales 18,067 9.3 % 22,808 11.0 % (4,741) -20.8 %
Total net sales $ 194,451 100.0 % $ 207,415 100.0 % $ (12,964) -6.3 %
Internet sales $ 167,952 86.4 % $ 173,713 83.8 % $ (5,761) -3.3 %
Contact center sales 26,499 13.6 % 33,702 16.2 % (7,203) -21.4 %
Total net sales $ 194,451 100.0 % $ 207,415 100.0 % $ (12,964) -6.3 %
The acquisition of PetCareRx allowed the Company to significantly expand its product catalog, most notably in non-medication products, including food. In addition, PetCareRx brings increased distribution capability.

The Company ~~changed~~recognized preliminary goodwill of approximately $22.5 million, which is calculated as the ~~definition~~excess of both the consideration exchanged and liabilities assumed as compared to the fair value of the identifiable assets acquired. Goodwill recognized in the transaction represent synergies or scale achieved by significantly increasing the customer base without adding corresponding levels of additional overhead, the value of additional vendor relationships, including the food manufacturing relationships, a broader product catalog, and an assembled and experienced workforce. These items represent intangible assets that do not qualify for separate recognition. No goodwill is deductible for tax purposes. During the three months ended September 30, 2023, the Company recorded a $1.7 million increase to goodwill with an offsetting decrease to net deferred tax assets. The adjustment is related to revisions of the calculation of deferred tax assets and liabilities acquired in the acquisition.

The values assigned to the assets acquired and liabilities assumed are based on their estimates of fair value available as of April 3, 2023, as calculated by an independent third-party firm. The selected rates of returns were chosen in consideration of the individual risk profiles of the assets, as well as the resulting weighted average return on assets. Intangible assets are considered to be riskier than the overall business, so the Company included a premium to the investment rate of return on the identified intangible discount rates.

The fair values of intangible assets acquired consist of a ~~new~~trade name, customer relationships, and developed technology, which were estimated by applying various discounted cash flow models such as the relief from royalty rate for the trade name, the multi-period excess earnings method for the customer relationships, and the cost to replace method for the developed technology. The fair value measurements were based on significant inputs that are not observable (Level 3). The assumptions made by management in determining the fair value of intangible assets included a discount rate of 12% based on the weighted average cost of capital.

As a result of the acquisition, the Company performed an Internal Revenue Code Section 382 analysis to determine if the net operating losses carried forward will have a utilization limitation. Refer to Note 11 for further discussion.

The table below outlines the purchase price allocation of the purchase for PetCareRx to the acquired identifiable assets, liabilities assumed and goodwill (in thousands):


Cash and cash equivalents	$	220
Accounts receivable, net	125
Other receivables	506
Inventory	3,116
Other current assets	835
Property and equipment	1,065
Deferred tax assets, net	4,476
Goodwill	22,451
Intangible assets, net	12,300
Right of use assets	2,220
Other assets	80
Total assets	47,394
Accounts payable	5,713
Accrued liabilities	131
Deferred revenue	2,993
Other current liabilities	258
Lease liabilities	2,220
Total liabilities	11,315
Total purchase consideration	$	36,079

The Company incurred a total of $1.7 million in acquisition related costs that were expensed as incurred and recorded in general and administrative expenses in the Company’s unaudited Condensed Consolidated Statements of (Loss) Income, of which $0.5 million was recorded in fiscal year 2023. These costs include banking, legal, accounting, and consulting fees related to the acquisition.

Supplemental Pro Forma Information

The supplemental pro forma financial information presented below is for illustrative purposes only, does not include the pro forma adjustments that would be required under Regulation S-X of the Exchange Act for pro forma financial information, is not necessarily indicative of the financial position or results of operations that would have been realized if the PetCareRx acquisition had been completed on April 1, 2022, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions that the Company believes are reasonable under the circumstances.

The supplemental pro forma financial information reflects pro forma adjustments to present the combined pro forma results of operations as if the PetCareRx acquisition had occurred on April 1, 2022 to ~~include anyone who has not ordered over~~give effect to certain events that the ~~past thirty-six months.~~ Company believes to be directly attributable to the acquisition. These pro forma adjustments primarily include:

a.A decrease in depreciation expense that would have been recognized due to acquired identifiable fixed assets;

b.A decrease in amortization expense that would have been recognized due to acquired identifiable intangible assets; and

c.A decrease in payroll costs and benefits.

The ~~reorder and new order sales amounts~~supplemental pro forma financial information for the ~~three and nine~~prior period six months ended ~~December 31,~~September 30, 2022 ~~and the reorder and new order sales amounts for the three and nine months ended December 31, 2021 reflect this new customer definition change.~~is as follows (in thousands):

Under the previous definition of a new customer, reorder and new order sales were $56.3 million and $4.4 million, respectively, for the three months ended December 31, 2021. Under the previous definition of a new customer, reorder and new order sales were $189.3 million and $18.2 million, respectively, for the nine months ended December 31, 2021.

Virtually all the Company’s sales are paid by credit cards and the Company usually receives the cash settlement in two to three banking days. Credit card sales minimize the accounts receivable balances relative to sales. The Company had no material contract asset or liability balances as of December 31, 2022 or March 31, 2022.


	Six Months Ended September 30, 2022
	(unaudited)
Revenue	$	157,634
Net income	1,980

Note 3:4: Net (Loss) Income Per Share

In accordance with the provisions of ~~Accounting Standards Codification (“ASC”)~~ASC Topic 260 (“Earnings Per Share”) basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share includes the dilutive effect of potential restricted and performance stock and the effects of the potential conversion of preferred shares, calculated using the treasury stock method. Unvested restricted stock and convertible preferred shares issued by the Company represent the only dilutive effect reflected in the diluted weighted average shares outstanding.

The following is a reconciliation of the numerators and denominators of the basic and diluted net (loss) income per share computations for the periods presented (in thousands, except for share and per share amounts):


		Three Months Ended December 31,				Nine Months Ended December 31,					Three Months Ended September 30,				Six Months Ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Net income (loss) (numerator):
Net income		$	(19)	$	4,257	$	5,335	$	15,034
Net (loss) income (numerator):										Net (loss) income (numerator):
Net (loss) income										Net (loss) income	$	(70)	$	2,579	$	(957)	$	5,354

Shares (denominator):	Shares (denominator):									Shares (denominator):
Weighted average number of common shares outstanding used in basic computation	Weighted average number of common shares outstanding used in basic computation	20,301		20,208		20,257		20,165		Weighted average number of common shares outstanding used in basic computation	20,382,979		20,261,114		20,357,752		20,234,904
Common shares issuable upon vesting of restricted stock	Common shares issuable upon vesting of restricted stock	—		111		72		190		Common shares issuable upon vesting of restricted stock	–		72,741		–		72,493
Common shares issuable upon conversion of preferred shares	Common shares issuable upon conversion of preferred shares	—		10		10		10		Common shares issuable upon conversion of preferred shares	–		10,125		–		10,125
Shares used in diluted computation	Shares used in diluted computation	20,301		20,329		20,339		20,365		Shares used in diluted computation	20,382,979		20,343,980		20,357,752		20,317,522

Net income (loss) per common share:
Net (loss) income per common share:										Net (loss) income per common share:

Basic	Basic	$	(0.00)	$	0.21	$	0.26	$	0.75	Basic	$	(0.00)	$	0.13	$	(0.05)	$	0.26
Diluted	Diluted	$	(0.00)	$	0.21	$	0.26	$	0.74	Diluted	$	(0.00)	$	0.13	$	(0.05)	$	0.26

For the ~~three~~quarter ended September 30, 2023 and ~~nine months ended December 31,~~ 2022, 387,357 and ~~2021, 243,604 and 205,219~~261,228 shares issuable upon vesting of ~~common~~ restricted stock and 10,125 and zero shares issuable upon conversion of preferred shares, respectively, were excluded from the ~~computations~~computation of diluted net (loss) income per common share, as their inclusion would have had an anti-dilutive effect on diluted net (loss) income per common share. For the ~~three~~six months ended ~~December 31,~~September 30, 2023 and 2022, 71402,872 and 261,228 shares issuable upon vesting of restricted stock and 1010,125 and zero shares issuable upon conversion of preferred shares, respectively, were excluded from the computation of diluted net (loss) income per common share, as their inclusion would have had an anti-dilutive effect on diluted net (loss) income per common share.

Note ~~4: Accounting for~~5: Stock-Based Compensation

The Company records compensation expense associated with restricted stock in accordance with ASC Topic 718 (“~~Share Based Payment~~Compensation - Stock Compensation”) ~~(ASU 2016-09)~~. The Company had ~~959,548~~962,240 common shares issued under the 2016 Employee Equity Compensation Restricted Stock Plan (“(the “2016 Employee Plan”) (which 2016 Employee Plan was succeeded by the 2022 Employee Plan in April 2023, and no further awards will be granted under the 2016 Employee Plan), 75,742 common shares issued under the 2022 Employee Equity Compensation Plan (as amended) (the “2022 Employee Plan”), and ~~240,755~~225,251 common shares issued under the 2015 Outside Director Equity Compensation ~~Restricted Stock~~ Plan ~~(“2015~~(as amended) (the “2015 Director Plan”) ~~at December 31, 2022,~~. At September 30, 2023, all shares ~~of which~~ were issued with service-based vesting conditions which vest subject to the employee's continued employment with the Company or the director’s continued directorship with the Company through the applicable vesting date. The Company records stock-based compensation expense for these awards on a ~~restriction or forfeiture period that lapses ratably on the first, second, and third anniversaries of the date of grant, and the fair value of which is being amortized~~straight-line basis over the ~~one~~ ~~to three-year restriction period, with the exception~~requisite service period. The Company reverses stock-based compensation expense previously recorded upon forfeiture of ~~performance~~unvested awards except for restricted shares ~~which were~~with a market condition issued to the Chief Executive Officer (“CEO”) and performance stock units (“PSUs”) with a market condition issued to the Chief Financial ~~Officer.~~

Officer (“CFO”) as described in the following paragraphs. Stock-based compensation expense previously recorded for these awards will not be reversed if the awards are forfeited.

In June 2023, the Board of Directors amended and restated the 2015 Director Plan and the 2022 Employee Plan (collectively, the "Plans") to include the ability to grant restricted stock units ("RSUs") and performance stock units ("PSUs") under the Plans. The amendments and restatement of the Plans did not increase the maximum number of shares of common stock that may be awarded under the Plans. At September 30, 2023, the Company had 55,380 RSUs and 12,000 PSUs granted under the 2022 Employee Plan and 30,000 RSUs granted under the 2015 Director Plan.

In August 2021, the Company issued 90,000 restricted shares and 510,000 ~~performance~~ restricted shares with a market condition to the Company’s CEO, in accordance with the CEO’s employment agreement, under the 2016 Employee Plan. The ~~performance~~ restricted shares ~~are~~with a market condition vest based on achieving absolute stock hurdles ~~with~~within the three-year period from the grant date. If the shares meet the absolute stock price hurdle, they will only vest on the third anniversary of the date of grant. As of ~~December 31, 2022,~~September 30, 2023, none of the performance stock hurdles were met.

In ~~August 2022,~~June 2023, the Company ~~issued 13,000 restricted shares~~granted the Company's CFO 11,750 RSUs under the 2022 Employee Plan, of which 3,750 RSUs were awarded in recognition of the CFO’s contributions during fiscal year 2023 and ~~3,000 performance restricted shares~~the remaining 8,000 awarded as a part of the equity award cycle for fiscal year 2024. One-third of the RSUs will vest on each of the first three anniversaries of the date of grant, subject to the ~~Company's new CFO, in accordance~~CFO’s continued employment with the ~~CFO's employment agreement, under~~Company through the ~~2016 Employee Plan.~~applicable vesting date, with any unvested RSUs being forfeited upon the CFO ceasing to be an employee of the Company.Also in June 2023, the CFO was awarded 8,000 PSUs with a market condition. The ~~performance restricted~~CFO will earn shares ~~are~~of our common stock pursuant to the PSUs based on the ~~attainment~~Company’s total shareholder return (“TSR”) relative to the S&P 600 Specialty Retail Index (“Index”) over an overall three-year performance period consisting of ~~performance criteria equally weighted between adjusted EBITDA and revenue. The~~the 2024 through 2026 fiscal years, as follows:

•100% of the target number of shares, ~~for each grant~~which is 8,000 shares, will be ~~released from restriction equally over a three (3) year period on~~earned if the ~~anniversary~~Company’s TSR is equal to or greater than the 75th percentile of the ~~grant date, and in the case~~Index (the “maximum target payout”);

•50% of the ~~performance restricted~~target number of shares, ~~subject~~which is 4,000 shares, will be earned if the Company’s TSR is equal toat least the 50th percentile of the Index;

•25% of the target number of shares, which is 2,000 shares, will be earned if the Company’s TSR is equal to at least the 25th percentile of the Index (the “minimum threshold”);

•No shares will be earned if the TSR is less than the 25th percentile of the Index, and the payout is capped at 2,000 shares if absolute TSR is negative, regardless of relative position to the ~~attainment~~Index; and

•Linear scaling will be used to determine the number of shares earned for performance ~~criteria .~~between the maximum target payout level and the minimum threshold payout level.

The Company issued ~~550~~zero shares of restricted stock ~~net of forfeitures,~~ to ~~certain~~ employees under the ~~2016~~2022 Employee Plan during the quarter ended ~~December 31, 2022.~~September 30, 2023. The Company issued zero shares of restricted stock and 30,000 RSUs to board members under the 2015 Director Plan during the quarter ended September 30, 2023. For the quarters ended ~~December 31,~~September 30, 2023 and 2022, ~~and 2021,~~ the Company recognized $~~1.8~~1.7 million and ~~$1.4~~$1.7 million, respectively, of compensation expense related to the 2016 Employee Plan, 2022 Employee Plan, and 2015 Director Plan. For the ~~nine~~six months ended ~~December 31,~~September 30, 2023 and 2022, ~~and 2021,~~ the Company recognized ~~$5.0~~$3.5 million and ~~$3.0~~$3.2 million, respectively, of compensation expense related to the 2016 Employee Plan, 2022 Employee Plan, and 2015 Director Plan. At ~~December 31,~~September 30, 2023 and 2022 ~~and 2021~~ there was ~~$10.6~~$7.7 million and ~~$14.4~~$12.2 million of unrecognized compensation cost related to the non-vested restricted stock awards, respectively, which is expected to be recognized over the next one to three years. All stock-based compensation expense is recognized as a payroll-related expense and it is included within the general and administrative expenses line item within the Company’s unaudited Consolidated Statements of (Loss) Income, , and the offset is included in the additional paid-in capital line item of the Company’s unaudited Condensed Consolidated Balance Sheets. ~~On December 31,~~As of September 30, 2023 and 2022, ~~and 2021,~~ there were ~~759,204~~725,529 and ~~749,219~~776,928 non-vested restricted shares issued and outstanding, respectively.

~~In July 2022,~~Restricted Stock Awards

The fair value assigned to restricted stock awards is the market price of the Company’s ~~2022~~stock at the grant date. The vesting period range from one to three years. Restricted stock award activity under the 2016 Employee ~~Equity Compensation Restricted Stock~~ Plan, ~~(“2022 Employee Plan”) became effective upon the approval of the plan by the Company’s shareholders. The~~ 2022 Employee Plan, ~~authorizes 1,000,000~~and 2015 Director Plan was as follows:


	2015 Director Plan	2016 Employee Plan	2022 Employee Plan	Total	Weighted-Average Grant Date Fair Value
Non-vested restricted stock outstanding at March 31, 2023	68,629	684,200	–	752,829	$	27.73
Granted and issued	1,623	12,400	75,742	89,765	$	16.06
Vested	(28,585)	(61,419)	–	(90,004)	$	27.21
Forfeited	(17,127)	(9,934)	–	(27,061)	$	26.47
Balance at September 30, 2023	24,540	625,247	75,742	725,529	$	24.01

Restricted Stock Units

The fair value assigned to RSUs is the market price of the Company’s stock on the grant date. The vesting period for employees and members of the Board of Directors ranges from one to three years.

RSU activity under the Plans was as follows:


	RSUs	Weighted-Average Grant Date Fair Value Per RSU
Balance at March 31, 2023	–	$	–
Granted	85,380	$	12.66
Vested and issued	–	$	–
Forfeited	–	$	–
Balance at September 30, 2023	85,380	$	12.66

The total grant-date fair value of RSUs granted during the quarters ended September 30, 2023 and 2022 was $0.9 million and zero, respectively. The total grant-date fair value of RSUs granted during the six months ended September 30, 2023 and 2022 was $1.1 million and zero, respectively.

For the three months ended September 30, 2023 and 2022, the Company recorded stock-based compensation related to RSUs of $0.1 million and zero, respectively. For the six months ended September 30, 2023 and 2022, the Company recorded stock-based compensation related to RSUs of $0.1 million and zero, respectively.

Performance Stock Units

The fair value assigned to PSUs is determined using the market price of the Company’s stock on the grant date for awards with a performance condition, and by using a Monte Carlo simulation for awards with a market condition. PSUs with a performance condition vest over one year. PSUs with a market condition vest over three years. Stock-based compensation costs associated with PSUs with a performance condition are re-assessed each reporting period based upon the estimated performance attainment on the reporting date until the performance conditions are met. The ultimate number of shares of ~~the Company's~~ common stock ~~available for issuance.~~ that are issued to an employee is the result of the actual performance of the Company at the end of the performance period compared to the performance targets and generally ranges from 0% to 200% of the initial PSU grant.

PSU activity under the Plans was as follows:

PSUs

Weighted-Average
Grant Date
Fair Value Per PSU

Balance at March 31, 2023

–

Granted

12,000

11.35

Vested and issued

–

Forfeited

–

Performance adjustment

–

Balance at September 30, 2023

12,000

11.35

The total grant-date fair value of PSUs granted during the ~~restricted stock is determined based on the market~~quarters ended September 30, 2023 and 2022 was zero for both periods. The total grant-date fair value of PSUs granted during the ~~stock at~~six months ended September 30, 2023 and 2022 was $0.1 million and zero, respectively.

For the ~~issuance date. The restriction period or forfeiture period is determined by~~three months ended September 30, 2023 and 2022, the ~~Company’s Compensation Committee~~Company recorded stock-based compensation related to PSUs of zero for both periods. For the six months ended September 30, 2023 and is2022, the Company recorded stock-based compensation related to ~~be no less than 1 year and no more than ten years, unless otherwise specified by the Compensation Committee. No shares had been issued under the 2022 Employee Plan as~~PSUs of ~~December 31, 2022.~~zero for both periods.

Note 5:6: Fair Value

The Company carries cash and cash equivalents at fair value in the unaudited Condensed Consolidated Balance Sheets. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. ASC Topic 820 (“Fair Value ~~Measurements~~Measurement”) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. At ~~December~~September 30, 2023 and March 31, ~~2022,~~2023, the Company had invested the majority of its ~~$102.4~~$53.5 million and $104.1 million cash and cash equivalents balance in money market funds which are classified within Level 1.

Note 7: Intangible and Other Assets, Net

Intangible assets and other assets, net consisted of the following (in thousands):


	Useful Life	Gross Value		Accumulated Amortization		Net Carrying Value		Weighted Average Remaining Useful Life (Years)
September 30, 2023
Intangible Assets
Toll-free telephone number	Indefinite	$	375	$	–	$	375	Indefinite
Internet domain names	Indefinite	485		–		485		Indefinite
Trade Names - PetCareRx	Indefinite	2,600		–		2,600		Indefinite
Customer Relationships -PetCareRx	7 years	6,700		(479)		6,221		6.75
Developed Technology - PetCareRx	3 years	3,000		(500)		2,500		2.75
		$	13,160	$	(979)	$	12,181
Other Assets
Initial minority interest investment in Vetster	N/A	5,000		–		5,000		N/A

Balance September 30, 2023		$	18,160	$	(979)	$	17,181

March 31, 2023
Intangible Assets
Toll-free telephone number	Indefinite	$	375	$	–	$	375	Indefinite
Internet domain names	Indefinite	485		–		485		Indefinite
		$	860	$	–	$	860
Other Assets
Initial minority interest investment in Vetster	N/A	5,000		–		5,000		N/A

Balance March 31, 2023		$	5,860	$	–	$	5,860

Amortization expense for intangible assets was $0.5 million and for the three months ended September 30, 2023 and 2022, respectively. Amortization expense for intangible assets was $1.0 million and zero for the six months ended September 30, 2023 and 2022, respectively. The indefinite life intangibles are not being amortized and are subject to an annual review for impairment in accordance with the ASC Topic 350 (“Goodwill and Other Intangible Assets”).

On April 19, 2022, the Company engaged in a three-year partnership agreement with Vetster Inc. (“Vetster”), a Canadian veterinary telehealth company. The Company also purchased a 5% minority interest in Vetster in the amount of $5.0 million and received warrants for additional equity in Vetster, which are tied to future performance milestones. Under the terms of the agreement, the Company became the exclusive e-commerce provider for Vetster, and Vetster became the exclusive provider of telehealth and telemedicine services to the Company. The minority interest investment is being valued on the cost basis and the investment will be evaluated periodically for any impairment. In October 2023, the Company purchased additional shares in Vetster in the amount of $0.3 million (see Note 12).

Note 8: Leases

The Company’s leasing activities primarily consist of real estate leases acquired during the acquisition of PetCareRx for use in the business operations. The leases had initial terms ranging from 5 years to 10 years. Some of the initial lease terms have already matured and the remaining leases have maturity dates ranging from 2024 to 2027. The Company assesses whether each lease is an operating lease or a finance lease at the lease commencement date. The Company does not have any material leases, individually or in the aggregate, classified as a finance lease.

Variable Lease Costs

Certain of the Company’s leases require payments for taxes, insurance, and other costs applicable to the property, in addition to the minimum lease payment. These costs are considered variable costs which are based on actual expenses

incurred by the lessor. Therefore, these amounts are not included in the calculation of the right-of-use assets and lease liabilities.

The Company has lease agreements which provide for fixed and scheduled escalations, which are included in the calculation of the right-of-use assets and lease liabilities.

Options to Extend or Terminate Leases

The Company’s leases may contain an option to extend the lease term for periods from one to five years The exercise of lease renewal options is at the Company’s sole discretion. If it is reasonably certain that the Company will exercise such options, the periods covered by such options are included in the lease term and are recognized as part of the Company’s right-of-use assets and lease liabilities. The Company’s leases do not generally contain options to early terminate.

Other Lease items

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company's operating leases are included in operating lease right-of-use assets, other current liabilities, and operating lease liabilities on the accompanying unaudited Condensed Consolidated Balance Sheets.

Discount Rate and Lease Term

As of September 30, 2023, the weighted average remaining lease term and discount rate for the Company’s operating leases were 3.2 years and 3.8%, respectively. As the rate implicit in the lease is generally not readily determinable for the Company’s operating leases, the Company uses its estimated incremental borrowing rate based on the information available at the date of acquisition, April 3, 2023, in determining the present value of future payments.

Lease Costs and Activity

The Company’s lease costs as recorded in the general and administrative costs and activity for the six months ended September 30, 2023 are as follows (in thousands):


Lease cost	Six Months Ended September 30, 2023
Operating lease cost - fixed	$	431
Operating lease costs - variable	28
Total lease cost	$	459

Supplemental cash flow information for the six months ended September 30, 2023 are as follows (in thousands):


	Six Months Ended September 30, 2023
Cash paid for the amounts included in the measurement of operating lease liabilities	$	419
Right-of-use assets obtained in exchange for new operating lease liabilities as a result of acquisition	$	2,220

Maturity of Lease Liabilities

The maturity of the Company’s lease liabilities on an undiscounted cash flow basis and a reconciliation to the operating lease liabilities recognized on the Company’s unaudited Condensed Consolidated Balance Sheet as of September 30, 2023 were as follows (in thousands):


	September 30, 2023
Six months ending March 31, 2024	$	412
2025	501
2026	488
2027	502
2028	42
Total lease payments	1,945
Less: Imputed Interest	(108)
Present value of lease liabilities	$	1,837

Note 6:9: Commitments and Contingencies

Legal Matters and Routine Proceedings

The Company has settled complaints that had been filed with various states’ pharmacy boards in the past. There can be no assurances made that other states will not attempt to take similar actions against the Company in the future. The Company also intends to vigorously defend its trade or service marks. There can be no assurance that the Company will be successful in protecting its trade or service marks. Legal costs related to the above matters are expensed as ~~incurred .From~~incurred. From time to time, the Company may be involved in and subject to disputes and legal proceedings, as well as demands, claims and threatened litigation that arise in the ordinary course of its business. These proceedings may include allegations involving business practices, infringement of intellectual property, employment or other matters. The ultimate outcome of any legal proceeding is often uncertain, there can be no assurance that the Company will be successful in any legal proceeding, and unfavorable outcomes could have a negative impact on our results of operations and financial condition. In accordance with ASC Topic 450-20 ("Loss Contingencies"), the Company records a liability in its financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews the status of each significant matter each accounting period as additional information is known and adjusts the loss

provision when appropriate. If a matter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary to make the financial statements not misleading. If the loss is not probable and cannot be reasonably estimated, a liability is not recorded in the Company’s financial statements. Gain contingencies are not recorded until they are realized. Legal costs related to any legal matters are expensed as incurred.

Sales Tax

On June 21, 2018, the United States Supreme Court rendered a decision in South Dakota v. Wayfair, Inc., holding that a state may require a remote seller with no physical presence in the state to collect and remit sales tax on goods and services provided to purchasers in the state, overturning certain existing court precedent. The Company ~~evaluates contingencies on an ongoing basis~~has evaluated its state tax filings with respect to the Wayfair decision and ~~has established loss provisions for matters~~currently collects and remits applicable sales taxes in all jurisdictions in which ~~losses are probable and~~it has a physical presence or it believes nexus exists. During the ~~amount of~~year ended March 31, 2023, the ~~loss can be reasonably estimated and is not currently a party to any legal proceeding that management believes could have a material adverse effect on our results of operations. Based upon~~Company received an assessment for sales ~~tax received by~~tax; based upon this, the Company evaluated the various jurisdictions for additional exposure and recorded an ~~accrual in~~increase of $7.8 million for potential sales tax exposure as of March 31, 2023. As of September 30, 2023, the ~~amount~~company paid $0.7 million related to sales tax from prior periods and reversed $0.3 million related to sales tax reserve based on sales tax settlements with states. The Company reported a sales tax reserve as at September 30, 2023 of ~~$0.9~~$6.8 million. The Company included $4.0 million ~~is included~~and $3.0 million in the "Accrued expenses and other current liabilities" line item ~~on the Condensed Consolidated Balance Sheets as of December 31, 2022~~ and ~~the offsetting expense was recognized~~$3.8 million and $3.8 million in the ~~"General and administrative"~~"Other long-term liabilities" line item ~~within the Condensed Consolidated Statements of Income for the nine months ended December 31, 2022.~~

Based upon the assessment received, the Company initiated a process to evaluate the potential for further sales tax contingencies, The effect of such evaluation of potential sales tax exposure, which the Company expects to complete in the ~~fourth quarter ending March 31, 2023, could have a material effect on the results of operations.~~

~~Separation Agreement~~

In connection with the separation of the Company's former Chief Financial Officer, the Company has accrued $364 thousand with respect to the severance, pursuant to the CFO Transition and Separation Agreement, included in "Accrued expenses and other current liabilities" on theaudited Condensed Consolidated Balance Sheet as of ~~December~~March 31, ~~2022.~~2023 and the unaudited Condensed Consolidated Balance Sheet as of September 30, 2023, respectively.

Note 7:10: Changes in Shareholders’ Equity:

Changes in Shareholders’ Equity for the ~~nine~~six months ended ~~December 31,~~September 30, 2023 is summarized below (in thousands):


	Common Stock		Additional Paid-In Capital		Retained Earnings
Beginning balance at March 31, 2023:	$	21	$	18,277	$	105,488
Share based compensation	—		1,760		—
Dividends declared	—		—		(6,346)
Net loss	—		—		(887)
Ending balance at June 30, 2023:	$	21	$	20,037	$	98,255

Share based compensation	—		1,729		—
Dividends declared	—		—		(6,309)
Net loss	—		—		(70)
Ending balance at September 30, 2023:	$	21	$	21,766	$	91,876

Changes in Shareholders’ Equity for the six months ended September 30, 2022 is summarized below (in thousands):

Common Stock Additional
Paid-In
Capital Retained
Earnings
Beginning balance at March 31, 2022: $ 21 $ 11,660 $ 130,496
Share based compensation — 1,536 —
Dividends declared — — (6,297)
Net income — — 2,775
Ending balance at June 30, 2022 $ 21 $ 13,196 $ 126,974
Shares Issued — — —
Share based compensation — 1,681 —
Dividends declared — — (6,307)
Net income — — 2,579
Ending balance at September 30, 2022 $ 21 $ 14,877 $ 123,246
Share based compensation — 1,770 —
Dividends declared — — $ (6,319)
Net income (loss) — — (19)
Ending balance at December 31, 2022: $ 21 $ 16,647 $ 116,908

~~Changes in Shareholders’ Equity for the nine months ended December 31, 2021 is summarized below (in thousands):~~


		Common Stock		Additional Paid-In Capital		Retained Earnings			Common Stock		Additional Paid-In Capital		Retained Earnings
Beginning balance at March 31, 2021:		$	20	$	7,111	$	134,141
Beginning balance at March 31, 2022:								Beginning balance at March 31, 2022:	$	21	$	11,660	$	130,496
Share based compensation	Share based compensation	—		718		—		Share based compensation	—		1,536		—
Dividends declared	Dividends declared	—		—		(6,080)		Dividends declared	—		—		(6,297)
Net income	Net income	—		—		4,428		Net income	—		—		2,775
Ending balance at June 30, 2021		$	20	$	7,829	$	132,489
Shares Issued		1		—		—
Ending balance at June 30, 2022								Ending balance at June 30, 2022	$	21	$	13,196	$	126,974

Share based compensation	Share based compensation	—		882		—		Share based compensation	—		1,681		—
Dividends declared	Dividends declared	—		—		(6,092)		Dividends declared	—		—		(6,307)
Net income	Net income	—		—		6,349		Net income	—		—		2,579
Ending balance at September 30, 2021		$	21	$	8,711	$	132,746
Share based compensation		—		$	1,440	—
Dividends declared		—		—		(6,282)
Net income		—		—		4,257
Ending balance at December 31, 2021:		$	21	$	10,151	$	130,721
Ending balance at September 30, 2022								Ending balance at September 30, 2022	$	21	$	14,877	$	123,246

There were no shares of common stock that were purchased or retired in the ~~nine~~six months ended ~~December 31, 2022~~September 30, 2023 or ~~2021.~~2022. At ~~December 31, 2022,~~September 30, 2023, the Company had approximately $28.7 million remaining under the Company’s share repurchase plan.

Note 8:11: Income Taxes

For the quarters ended ~~December 31,~~September 30, 2023 and 2022, ~~and 2021,~~ the Company recorded an income tax provision of approximately ~~$0.2~~$0.5 million and ~~$1.3~~an income tax provision of approximately $1.0 million, respectively, and for the ~~nine~~six months ended ~~December 31,~~September 30, 2023 and 2022 ~~and 2021~~ the Company recorded an income tax provision of approximately ~~$2.3~~$0.3 million and ~~$4.6~~an income tax provision of approximately $2.1 million, respectively. The decrease in the income tax provision for the three and ~~nine~~six months ended ~~December 31, 2022~~September 30, 2023 is related to ~~a decrease in~~the utilization of net operating ~~income during~~losses available related to the ~~periods.~~acquisition of PetCareRx. The effective tax rate for the quarter ended ~~December 31, 2022~~September 30, 2023 was approximately ~~109.6%~~118.3%, compared to approximately ~~22.9%~~28.6% for the quarter ended ~~December 31, 2021,~~September 30, 2022, and the effective tax rate for the ~~nine~~six months ended ~~December 31, 2022~~September 30, 2023 was approximately ~~29.9%~~(54.6)% compared to approximately ~~23.4% for the nine months ended December 31, 2021.~~27.8%. The increase to the effective tax rate for the three ~~and nine~~ months ended ~~December 31, 2022~~September 30, 2023 can be attributed to ~~more~~net operating losses offsetting taxable income, partially offset by an increase in state income tax. The decrease to the effective tax rate for the six months ended September 30, 2023 can be attributed to non-deductible ~~expenses~~items and an increase in state income tax.

Under Internal Revenue Code Section 382, if a corporation undergoes an “ownership change”, the corporation’s ability to use its pre-change net operating loss and tax ~~due~~credit carryforwards to offset its post-change income and tax liabilities may be limited. Generally, an ownership change occurs when the ~~extension~~equity ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over

their lowest ownership percentage in a testing period (typically three years). On April 3, 2023, 100% of the ~~Company's business operations.~~

~~Note 9: Minority Interest Investment in Vetster~~

On April 19, 2022, the Company engaged in a three-year partnership agreement with Vetster Inc. (“Vetster”), a veterinary telehealth Canadian company. The Company also purchased a 5% minority interest in Vetster in the amountissued and outstanding stock of $5.0 million and received warrants for additional equity in Vetster, which are tied to future performance milestones. Under the terms of the agreement, the Company became the exclusive e-commerce provider for Vetster, and Vetster became the exclusive provider of telehealth and telemedicine services toPetCareRx was acquired by the Company. The ~~minority~~merger triggered an ownership change of PetCareRx within the meaning of Section 382.

As a result of the acquisition, the Company performed a Section 382 analysis to determine if the net operating losses carried forward will have a utilization limitation. Any limitation may result in the expiration of a portion of the federal net operating loss carryforward before utilization, which would reduce the Company's gross deferred tax assets. As of April 3, 2023, and prior to the acquisition, PetCareRx had approximately $96.0 million of net operating losses and $1.9 million of disallowed interest ~~investment is being valued on~~expense. The results of the ~~cost basis~~preliminary Section 382 analysis determined the net operating losses and ~~the investment will~~disallowed interest expense in total, would be ~~evaluated periodically for any impairment.~~limited and reduced to approximately $33.0 million.

Note ~~10:~~12: Subsequent Events

On ~~January 13,~~October 3, 2023, the Company entered into an Agreement and Plan of Merger to acquire PetCareRx, Inc. ("PetCareRx"), a leading supplier of pet medications, food, and supplies, for an aggregate consideration of approximately $36.0 millionpurchased additional shares in cash, subject to adjustment. The closing of the transaction is subject to customary closing conditions and certain state pharmacy license and permit filings related to the change of control of PetCareRx. The transaction has been approved by the Board of Directors of both the Company and PetCareRx, and the stockholders of PetCareRx, and is expected to closeVetster in the ~~fourth quarter~~amount of ~~fiscal year 2023. Upon completion~~$0.3 million. This increases the minority interest investment disclosed in Note 7 to $5.3 million. Following this round, it will change the Company’s minority ownership to approximately 4.8% of ~~the acquisition, PetCareRx will become a wholly-owned subsidiary of the Company.~~Vetster’s outstanding shares.

On February 6, 2023, the Board of Directors declared a quarterly dividend of $0.30 per share. The Board established a February 20, 2023 record date and a February 27, 2023 payment date. Based on the outstanding share balance as of February 7, 2023 the Company estimates the dividend payable to be approximately $6.3 million.

~~Subsequent to December 31, 2022, the Board of Directors approved and issued 1,200 restricted~~ ~~shares to employees pursuant to the 2016 Employee Plan.~~

~~Subsequent to December 31, 2022, the Board of Directors approved and issued 6,000 restricted shares to MZHCI, LLC pursuant to an Investor Relations Consulting Agreement.~~

1018

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the quarterly period ended ~~December 31, 2022~~September 30, 2023, and our Annual Report on Form 10-K for the year ended March 31, ~~2022.~~2023.

Certain information in this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act ~~of 1933~~ and Section 21E of the ~~Securities~~ Exchange ~~Act of 1934.~~Act. You can identify these forward-looking statements by the words "believes," "intends," "expects," "may," "will," "should," "plans," "projects," "contemplates," "intends," "budgets," "predicts," "estimates," "anticipates," or similar expressions. These statements are based on our beliefs, as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended March 31, ~~2022~~2023 under the heading “Risk Factors.” A reader, whether investing in our common stock or not, should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

When used in this Quarterly Report on Form 10-Q, unless otherwise stated or the context otherwise indicates, "PetMed Express,~~" "1-800-PetMeds,~~" "PetMeds," "PetMed,~~" "PetMeds.com," “1800PetMeds.com,” "PetMed.com," "PetMed Express.com,~~" "the Company," "we," "our," and "us" refers to PetMed Express, Inc. and ~~our subsidiaries.~~its direct and indirect wholly owned subsidiaries, taken as a whole.

Executive Summary

PetMed Express, ~~was incorporated in the state~~Inc. and subsidiaries, d/b/a PetMeds®, is a leading nationwide direct-to-consumer pet pharmacy and online provider of ~~Florida in January 1996. Our common stock is traded on the NASDAQ Global Select Market under the symbol “PETS”.~~prescription and non-prescription medications, food, supplements, supplies and vet services for dogs, cats and horses. PetMeds markets and sells directly to consumers through its websites, toll-free numbers, and mobile applications. We ~~began selling~~offer consumers an attractive option for obtaining pet medications, foods, and ~~other pet health products~~supplies in ~~September 1996. In~~terms of convenience, price, speed of delivery, and valued customer service.

Founded in 1996, our executive headquarters offices are located at 420 South Congress Avenue, Delray Beach, Florida 33445, and our telephone number is (561) 526-4444. We have a March ~~2010 we started offering for sale additional pet supplies on our website, and these additional items are drop shipped to customers by third party vendors.~~ 31 fiscal year end.

Presently, our product line includes approximately ~~4,350~~ ~~SKUs~~ 15,000 of the most popular pet medications, health products, food and supplies for dogs, cats, and horses. Approximately 9,000 of these items were part of the April 2023 acquisition of PetCareRx.

We market our products through national advertising campaigns and ~~promotional campaigns~~social media which aim to increase the recognition of the “PetMeds®” brand name, increase traffic on our ~~website~~websites at www.petmeds.com and www.petcarerx.com, acquire new customers, and maximize repeat purchases. ~~Approximately 87% of all sales were generated via the Internet for the quarter ended December 31, 2022, compared to 84% for the quarter ended December 31, 2021.~~ Our sales consist of products sold mainly to retail consumers. The average purchase was approximately ~~$90 and $89~~$94 for the ~~quarters~~quarter ended ~~December 31,~~September 30, 2023, approximately $93 for the quarter ended September 30, 2022, ~~and 2021, respectively,~~approximately $95 for the six months ended September 30, 2023 and approximately ~~$93 and $92~~$94 for the ~~nine~~six months ended ~~December 31, 2022 and 2021, respectively.~~September 30, 2022.

Critical Accounting Policies

Our discussion and analysis of our financial condition and the results of our operations contained herein are based upon our condensed consolidated financial statements and the data used to prepare them. Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. On an ongoing basis we re-evaluate our judgments and estimates including those related to product returns, bad debts, inventories, and income taxes. We base our estimates and judgments on our historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. Our estimates are guided by observing the following critical accounting policies.

Revenue recognition

We account for revenue under ~~ASC~~Accounting Standards Codification ("ASC") Topic 606 ("Revenue from Contracts with Customers") and generate revenue by selling pet medication products and pet supplies mainly to retail customers. Certain pet supplies offered on our website are drop shipped to customers. We ~~considers~~consider ourself the principal in the arrangement because we control the specified good before it is transferred to the customer. Revenue contracts contain one performance obligation, which is delivery of the product; customer care and support is deemed not to be a material right to the contract. The transaction price is adjusted at the date of sale for any applicable sales discounts and an estimate of product returns, which are estimated based on historical patterns, however this is not considered a key judgment. There are no amounts excluded from the variable

consideration. Revenue is recognized when control transfers to the customer at the point in time in which the shipment of the product occurs. This key judgment is determined as the shipping point, which represents the point in time where we have a present right to payment, title has transferred to the customer, and the customer has assumed the risks and rewards of ownership.

Outbound shipping and handling fees are an accounting policy election and are included in sales as we ~~considers~~consider ourself the principal in the arrangement given responsibility for supplier selection and discretion over pricing. Shipping costs associated with outbound freight after control over a product has transferred to a customer are an accounting policy election and are accounted for as fulfillment costs and are included in cost of sales. Virtually all of our sales are paid by credit cards and we usually receive the cash settlement in two to three banking days. Credit card sales minimize the accounts receivable balances relative to sales.

Membership fees represent the amounts recognized periodically from the PetPlus memberships provided through PetCareRx. In addition to annual membership fees earned under the PetPlus program, we also earns membership fees on a month-to-month basis as earned under our monthly partner program. Memberships provide wholesale pricing, free standard shipping, veterinary telehealth services and local Caremark Pharmacy prescription pickup. The PetPlus membership fee is an annual charge and automatically renews one year from the initial enrollment date. We recognize the revenue ratably over the term of the membership which is generally one year.

We maintain an allowance for doubtful accounts for losses that we estimate will arise from customers’ inability to make required payments, arising from either credit card chargebacks or insufficient funds checks. We determine our estimates of the uncollectibility of accounts receivable by analyzing historical and current bad debts and economic ~~trends.~~ trends in compliance with the provisions of ASC Topic 326 ("Financial Instruments - Credit Losses"). The allowance for doubtful accounts was approximately ~~$40~~$44 thousand at ~~December 31, 2022,~~September 30, 2023, compared to ~~$39~~$35 thousand at March 31, ~~2022.~~2023.

~~Valuation~~Business Combinations

We account for our business combinations using the acquisition method of ~~inventory~~accounting in accordance with ASC Topic 805 ("Business Combinations"). The purchase price is allocated to the fair value of the assets acquired and liabilities assumed. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date. The excess of the purchase price of acquisition over the fair value of the identifiable net assets of the acquiree is recorded as goodwill. The results of businesses acquired in a business combination are included in our unaudited condensed consolidated financial statements from the date of acquisition.

~~Inventories consist~~

Determining the fair value of ~~prescription~~assets acquired and ~~non-prescription~~liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including market conditions, technological developments, economic conditions, and competition. In connection with the determination of fair values, we may engage a third-party valuation specialist to assist with the valuation of intangible and certain tangible assets acquired and certain obligations assumed. Acquisition-related transaction costs incurred by us are not included as a component of consideration transferred but are accounted for as an operating expense in the period in which the costs are incurred.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the attached unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Acquisition

On April 3, 2023, we acquired 100% of the issued and outstanding equity interests of PetCareRx, Inc. (“PetCareRx”), a New York corporation and a leading supplier of pet food, pet medications, and ~~pet supplies~~supplies. The acquisition was completed pursuant to an Agreement and Plan of Merger ("Merger Agreement") by and among us, Harry Merger Sub, Inc., a New York corporation and a wholly-owned subsidiary of the Company ("Merger Sub"), PetCareRx and Jeanette Loeb (as representative of the PetCareRx equity holders). The Merger Agreement provided for our acquisition of PetCareRx pursuant to the merger of Merger Sub with and into PetCareRx, with PetCareRx as the surviving corporation. The aggregate purchase price consideration was $36.1 million and was funded from our cash on hand.

The fair values of intangible assets acquired consist of a trade name, customer relationships, and developed technology, which were estimated by applying various discounted cash flow models such as the relief from royalty rate for the trade name, the multi-period excess earnings method for the customer relationships, and the cost to replace method for the developed technology. The fair value measurements were based on significant inputs that are ~~available for sale and are priced at~~not observable (Level 3). The assumptions made by management in determining the ~~lower~~fair value of ~~cost or net realizable value using~~intangible assets included a discount rate of 12% based on the weighted average cost ~~method. We write down our inventory for estimated obsolescence. The inventory reserve was approximately $56 thousand at December 31, 2022 compared to $81 thousand at March 31, 2022.~~of capital.

~~Advertising~~

Our advertising expense consists primarily of Internet marketing, direct mail/print, and television advertising. Internet costs are expensed in the month incurred and direct mail/print advertising costs are expensed when the related brochures and postcards are produced, distributed, or superseded. Television advertising costs are expensed in the month advertisements are televised.

~~Accounting for income~~Income taxes

We account for income taxes under the provisions of ASC Topic 740 (“Accounting for Income Taxes”), which generally requires recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in our condensed consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting carrying values and the tax bases of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse.

As a result of the acquisition, we performed an Internal Revenue Code Section 382 analysis to determine if the net operating losses carried forward will have a utilization limitation. Any limitation may result in the expiration of a portion of the federal net operating loss carryforward before utilization, which would reduce our gross deferred tax assets. As of April 3, 2023, and prior to the acquisition, PetCareRx had approximately $96.0 million of net operating losses and $1.9 million of disallowed interest expense. The results of the Section 382 analysis determined the net operating loss and disallowed interest expense in total, would be limited and reduced to $33.0 million.

Economic Conditions, Challenges, and Risks

Macroeconomic factors, including inflation, increased interest rates, significant capital market and supply chain volatility, and global economic and geopolitical developments, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify. In addition, rising fuel, utility, and food costs, rising interest rates, and recessionary fears may impact customer demand and our ability to forecast consumer spending patterns. We also expect the current macroeconomic environment and enterprise customer cost optimization efforts to impact our revenue growth rates. We expect some or all of these factors to continue to impact our operations for the remainder of fiscal 2024.

Results of Operations

The following should be read in conjunction with our ~~condensed consolidated financial statements~~unaudited Condensed Consolidated Financial Statements and the related notes thereto included elsewhere herein. The following table sets forth, as a percentage of sales, certain operating data appearing in our ~~condensed consolidated statements~~unaudited Condensed Consolidated Statements of ~~income:~~(Loss) Income:


		Three Months Ended December 31,				Nine Months Ended December 31,					Three Months Ended September 30,				Six Months Ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022

Sales	Sales	100.0	%	100.0	%	100.0	%	100.0	%	Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	Cost of sales	74.1		70.8		72.4		71.7		Cost of sales	71.7		71.8		71.5		71.7

Gross profit	Gross profit	25.9		29.2		27.6		28.3		Gross profit	28.3		28.2		28.5		28.3

Operating expenses:	Operating expenses:									Operating expenses:
General and administrative	General and administrative	17.8		12.4		15.8		10.9		General and administrative	18.7		16.5		19.4		14.9
Advertising	Advertising	7.9		7.1		7.6		7.5		Advertising	7.8		5.9		8.6		7.5
Depreciation		1.6		1.2		1.3		1.0
Depreciation and amortization										Depreciation and amortization	2.4		1.3		2.3		1.2
Total operating expenses	Total operating expenses	27.3		20.7		24.7		19.4		Total operating expenses	28.9		23.7		30.3		23.6

Income (loss) from operations		(1.4)		8.5		2.9		8.9
(Loss) income from operations										(Loss) income from operations	(0.6)		4.5		(1.8)		4.7

Total other income	Total other income	1.6		0.6		1.0		0.5		Total other income	1.2		1.0		1.3		0.7

Income before provision for income taxes		0.2		9.1		3.9		9.4
Income (loss) before provision for income taxes										Income (loss) before provision for income taxes	0.6		5.5		(0.5)		5.4

Provision for income taxes	Provision for income taxes	0.4		2.1		1.2		2.2		Provision for income taxes	0.6		1.6		0.2		1.5

Net income (loss)		(0.2)	%	7.0	%	2.7	%	7.2	%
Net (loss) income										Net (loss) income	—	%	3.9	%	(0.7)	%	3.9	%

Non-GAAP Financial Measures

Adjusted EBITDA

To provide investors and the market with additional information regarding our financial results, we have disclosed (see below) adjusted EBITDA, a non-GAAP financial measure that we calculate as net income excluding share-based compensation ~~expense;~~expense, depreciation and ~~amortization;~~amortization, income tax ~~provision;~~provision, interest income (expense);, and other non-operational expenses. We have provided reconciliations below of net income to adjusted EBITDA, ~~to net income,~~ the most directly comparable GAAP financial measures.

We have included adjusted EBITDA herein because it is a key measure used by our management and Board of Directors to evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates operating performance comparability across reporting periods by removing the effect of non-cash expenses and other expenses. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors.

We believe it is useful to exclude non-cash charges, such as share-based compensation expense, depreciation and amortization from our adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. We believe it is useful to exclude income tax provision and interest income (expense), as neither are components of our core business operations. We also believe that it is useful to exclude other non-operational expenses, including the investment banking fee related to the Vetster partnership, ~~acquisition costs related~~

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acquisition costs related to PetCareRx, employee severance and estimated state sales tax accrual as these items are not indicative of our ongoing operations. Adjusted EBITDA has limitations as a financial measure, and these non-GAAP measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or for new capital expenditures;

•Adjusted EBITDA does not reflect share-based compensation. Share-based compensation has been, and will continue to be for the foreseeable future, a material recurring expense in our business and an important part of our compensation strategy;

•Adjusted EBITDA does not reflect interest income (expense), net; or changes in, or cash requirements for, our working capital;

•Adjusted EBITDA does not reflect transaction related costs and other items which are either not representative of our underlying operations or are incremental costs that result from an actual or planned transaction and include litigation matters, integration consulting fees, internal salaries and wages (to the extent the individuals are assigned full-time to integration and transformation activities) and certain costs related to integrating and converging IT systems;

•Adjusted EBITDA does not reflect certain non-operating expenses including the employee severance which reduces cash available to us;

•Adjusted EBITDA does not reflect certain expenses including the estimated state sales tax accrual which reduces cash available to us.

•Other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces the measures usefulness as comparative measures.

Because of these and other limitations, adjusted EBITDA should only be considered as supplemental to, and alongside with other GAAP based financial performance measures, including various cash flow metrics, net income, net margin, and our other GAAP results.

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The following ~~table presents~~tables present a reconciliation of net income, the most directly comparable GAAP measure, to adjusted EBITDA for each of the periods indicated:

~~Reconciliation of Non-GAAP Measures~~

~~PetMed Express, Inc.~~

~~(Unaudited)~~


		Three Months Ended									Three Months Ended				Increase (Decrease)
($ in thousands, except percentages)	($ in thousands, except percentages)	December 31, 2022		December 31, 2021		$ Change		% Change		($ in thousands, except percentages)	September 30, 2023		September 30, 2022		$		%
Consolidated Reconciliation of GAAP Net Income to Adjusted EBITDA:
Net income (loss)		$	(19)	$	4,257	$	(4,276)	(100)	%

Consolidated Reconciliation of GAAP Net (Loss) Income to Adjusted EBITDA:										Consolidated Reconciliation of GAAP Net (Loss) Income to Adjusted EBITDA:

Net (loss) income										Net (loss) income	$	(70)	$	2,579	$	(2,649)	(103)	%

Add (subtract):	Add (subtract):									Add (subtract):
Share-based Compensation	Share-based Compensation	1,770		1,440		330		23	%	Share-based Compensation	1,729		1,682		47		3	%
Income Taxes	Income Taxes	217		1,261		(1,044)		(83)	%	Income Taxes	453		1,031		(578)		(56)	%
Depreciation		941		710		231		33	%
Interest (Income)/Expense		(708)		(84)		(624)		743	%
Acquisition and Partnership Transactions		539		—		539		n/m
Depreciation and Amortization										Depreciation and Amortization	1,713		858		855		100	%
Interest Income, net										Interest Income, net	(570)		(388)		(182)		47	%
Acquisition/Partnership Transactions and Other Items										Acquisition/Partnership Transactions and Other Items	168		–		168		n/m
Employee Severance	Employee Severance	—		—		—		n/m		Employee Severance	15		364		(349)		(96)	%
State Sales Accrual		—		—		—		n/m
State Sales Tax Accrual										State Sales Tax Accrual	(268)		925		(1,193)		(129)	%

Adjusted EBITDA	Adjusted EBITDA	$	2,740	$	7,584	$	(4,844)	(64)	%	Adjusted EBITDA	$	3,170	$	7,051	$	(3,881)	(55)	%

Nine Months Ended
($ in thousands, except percentages) December 31,
2022 December 31,
2021 $
Change %
Change
Consolidated Reconciliation of GAAP Net Income to Adjusted EBITDA:
Net income $ 5,335 $ 15,034 $ (9,699) (65) %
Add (subtract):
Share-based Compensation 4,987 3,040 1,947 64 %
Income Taxes 2,278 4,603 (2,325) (51) %
Depreciation 2,552 2,051 501 24 %
Interest (Income)/Expense (1,213) (243) (970) 399 %
Acquisition and Partnership Transactions 894 — 894 n/m
Employee Severance 364 — 364 n/m
State Sales Accrual 925 — 925 n/m
Adjusted EBITDA $ 16,122 $ 24,485 $ (8,363) (34) %


	Six Months Ended				Increase (Decrease)
($ in thousands, except percentages)	September 30, 2023		September 30, 2022		$		%

Consolidated Reconciliation of GAAP Net (Loss) Income to Adjusted EBITDA:

Net (loss) income	$	(957)	$	5,354	$	(6,311)	n/m

Add (subtract):
Share-based Compensation	3,489		3,218		271		8	%
Income Taxes	338		2,061		(1,723)		(84)	%
Depreciation and Amortization	3,391		1,611		1,780		110	%
Interest Income, net	(1,190)		(505)		(685)		136	%
Acquisition/Partnership Transactions and Other Items	1,294		355		939		265	%
Employee Severance	408		364		44		12	%
State Sales Tax Accrual	(268)		925		(1,193)		n/m

Adjusted EBITDA	$	6,505	$	13,383	$	(6,878)	(51)	%

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Three Months Ended ~~December 31, 2022~~September 30, 2023 Compared With Three Months Ended ~~December 31, 2021~~September 30, 2022 and ~~Nine~~Six Months Ended ~~December 31, 2022~~September 30, 2023 Compared With ~~Nine~~Six Months Ended ~~December 31, 2021~~

~~COVID-19~~

We are dedicated to making every effort to ensure our customers’ pets receive the medications they need. We are also dedicated to making every effort to ensure the health and safety of our employees. We have continued with working from home where possible and enhanced disinfection and social distancing within our workplace. We have been open during our normal business hours without any material disruptions to our operations. We have not seen any major disruptions in our supply chain; however, we have experienced some delays in the delivery of some inventory items. The COVID-19 pandemic or any future surges, including as a result of new variants and subvariants of the virus, may have adverse effects on our business, operations, and financial results and condition, including, among other things, as a result of adverse impacts on labor availability, our fulfillment center operations, supply chain and logistics disruptions, consumer behaviors, and on the overall economy, including recent high inflation levels impacting consumer spending. While most areas of the United States have reduced most or all COVID-19 restrictions, as the pandemic continues and if new outbreaks emerge, there is uncertainty regarding the magnitude and duration of the economic and social effects of the COVID-19 pandemic, and therefore, we cannot predict the COVID-19 pandemic full extent of impact on the broader economy or the positive or negative impacts the pandemic will have on our business, operations, and financial results and condition in future periods. See risk factors “The recent outbreak of the COVID-19 global pandemic and related government, private sector and individual consumer responsive actions may adversely affect our business operations, employee availability, financial performance, liquidity and cash flow for an unknown period of time~~” and “Shipping is a critical part of our business and any changes in, or disruptions to, our shipping arrangements could adversely affect our business, financial condition, and results of operations~~“~~in Part I, Item 1A of our Form 10-K for the year ended March 31,~~September 30, 2022 ~~for further discussion regarding risks associated with the COVID-19 pandemic.~~

Sales

Sales ~~decreased~~increased by approximately ~~$1.8~~$5.6 million, or ~~3.0%~~8.6%, to approximately ~~$58.9~~$71.0 million for the quarter ended ~~December 31, 2022,~~September 30, 2023, compared to approximately ~~$60.7~~$65.4 million for the quarter ended ~~December 31, 2021.~~September 30, 2022. Sales increased by approximately $13.7 million, or 10.1%, to approximately $149.2 million for the six months ended September 30, 2023, compared to approximately $135.6 million for the six months ended September 30, 2022. The ~~decrease~~increase in sales for the three and six months ended ~~December 31, 2022~~September 30, 2023 was ~~mainly~~ due to ~~higher seasonal discounts~~incremental sales and ~~competitive pressures.~~

~~Sales decreased~~membership fees from the integration of PetCareRx and growth in PetMeds new customer sales, partially offset by approximately $13.0 million, or 6.3%, to approximately $194.5 million for the nine months ended December 31, 2022, compared to approximately $207.4 million for the nine months ended December 31, 2021. The decreasedeclines in ~~sales for the nine months ended December 31, 2022 was mainly due to the increased cost to acquire new customers and competitive pressures.~~PetMeds reorder sales.

We acquired approximately ~~72,000~~76,000 new customers for the quarter ended ~~December 31, 2022~~September 30, 2023 compared to approximately ~~66,000~~61,000 new customers for the quarter ended ~~December 31, 2021.~~September 30, 2022. We acquired approximately ~~202,000~~162,000 new customers for the ~~nine~~six months ended ~~December 31, 2022,~~September 30, 2023 compared to approximately ~~260,000~~130,000 new customers for the ~~nine~~six months ended December 31, 2021. Financial data in the tables below reflects the new 36-month definition of new customers. Prior year new and reorder customers and sales have been recalculated utilizing the new 36-month definition of a new customer (described below).September 30, 2022. The following tables illustrates sales by various sales classifications:


		Three Months Ended December 31,													Three Months Ended September 30,								Increase (Decrease)
Revenue (In thousands)	Revenue (In thousands)	2022		%		2021		%		$ Variance		% Variance		Revenue (In thousands)	2023		%		2022		%		$		%

Reorder sales	Reorder sales	$	53,316	90.6	%	$	55,259	91.0	%	$	(1,943)	(3.5)	%	Reorder sales	$	62,403	87.9	%	$	59,729	91.3	%	$	2,674	4.5	%
New order sales	New order sales	5,554		9.4	%	5,458		9.0	%	96		1.8	%	New order sales	6,172		8.7	%	5,665		8.7	%	507		8.9	%
Membership fees														Membership fees	2,424		3.4	%	–		–	%	2,424		–	%

Total net sales	Total net sales	$	58,870	100.0	%	$	60,717	100.0	%	$	(1,847)	(3.0)	%	Total net sales	$	70,999	100.0	%	$	65,394	100.0	%	$	5,605	8.6	%

Internet sales		$	51,109	86.8	%	$	51,305	84.5	%	$	(196)	(0.4)	%
Contact center sales		7,761		13.2	%	9,412		15.5	%	(1,651)		(17.5)	%

Total net sales		$	58,870	100.0	%	$	60,717	100.0	%	$	(1,847)	(3.0)	%

Nine Months Ended December 31,
Revenue (In thousands) 2022 % 2021 % $ Variance % Variance
Reorder sales $ 176,384 90.7 % $ 184,607 89.0 % $ (8,223) (4.5) %
New order sales 18,067 9.3 % 22,808 11.0 % (4,741) (20.8) %
Total net sales $ 194,451 100.0 % $ 207,415 100.0 % $ (12,964) (6.3) %
Internet sales $ 167,952 86.4 % $ 173,713 83.8 % $ (5,761) (3.3) %
Contact center sales 26,499 13.6 % 33,702 16.2 % (7,203) (21.4) %
Total net sales $ 194,451 100.0 % $ 207,415 100.0 % $ (12,964) (6.3) %

Please note that we changed the definition of a new customer on April 1, 2022, to include anyone who has not ordered over the past thirty-six months. The reorder and new order sales amounts for three and nine months ended December 31, 2022 and reorder and new order sales for the three and nine months ended December 31, 2021 reflect this new customer definition change.

Under the previous definition of a new customer, reorder and new order sales were $56.3 million and $4.4 million, respectively, and acquired new customers were approximately 53,000, for the three months ended December 31, 2021. Under the previous definition of a new customer, reorder and new order sales were $189.3 million and $18.2 million, respectively, and acquired new customers were approximately 210,000, for the nine months ended December 31, 2021.

In July 2021 we launched the new AutoShip & Save subscription program (“AutoShip”) on our website. AutoShip is a new convenient way for our loyal customer base to have future pet medication orders delivered directly to them without the need to place an order each time. During the quarter ended June 30, 2022 we made a change to the methodology on how we calculate the percentage of our revenue that was generated by our AutoShip program. We now report AutoShip sales, as a percent of sales, net of discounts and credits for the entire quarter. Previously, we reported AutoShip sales as a percent of total sales on the last month in the quarter. This change to the calculation resulted in a decrease to the AutoShip percentage that was previously reported by only a few percentage points. We believe that this change reflects a more accurate representation of our subscription business for stakeholders to gauge our performance.


	Six Months Ended September 30,								Increase (Decrease)
Revenue (In thousands)	2023		%		2022		%		$		%

Reorder sales	$	130,441	87.4	%	$	123,068	90.8	%	$	7,373	6.0	%
New order sales	13,992		9.4	%	12,513		9.2	%	1,479		11.8	%
Membership fees	4,810		3.2	%	–		–	%	4,810		–	%

Total net sales	$	149,243	100.0	%	$	135,581	100.0	%	$	13,662	10.1	%

We ~~are~~remain encouraged by the adoption of our AutoShip program and have seen an increasingly positive trend over the last several quarters since we launched this program. For example, our quarterly AutoShip percentage was ~~42%~~51.0% of net sales for the most recent quarter ended ~~December 31, 2022,~~September 30, 2023, up from ~~20%~~38.9% of net sales for the same period last year and up from ~~39%~~48.7% of net sales sequentially in the prior quarter. ~~We have set a goal of generating approximately 50% of our net sales via the AutoShip program in fiscal 2023.~~

Going forward, sales may be adversely affected due to increased competition and consumers giving more consideration to price. The changes in consumer behavior ~~post pandemic~~due to macroeconomic factors makes future sales somewhat challenging to predict. No guarantees can be made that sales will grow in the future. The majority of our product sales are affected by the seasons, due to the seasonality of mainly flea and tick and heartworm medications. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2022, our sales were approximately 29%, 25%, 22%, and 24%, respectively, as a percentage of annual sales.

Cost of sales

Cost of sales increased by approximately ~~$0.6~~$4.0 million, or ~~1.5%~~8.5%, to approximately ~~$43.6~~$50.9 million for the quarter ended ~~December 31, 2022,~~September 30, 2023, from approximately ~~$43.0~~$46.9 million for the quarter ended ~~December 31, 2021.~~September 30, 2022. Cost of sales increased by approximately $9.5 million, or 9.7%, to approximately $106.7 million, from approximately $97.2 million for the six months ended September 30, 2022. Cost of sales, as a percentage of sales, was essentially flat for the quarter and six months ended September 30, 2023. The cost of sales ~~increase~~increases for the quarter and six months ended September 30, 2023 compared to the quarter and six months ended September 30, 2022 was primarily due to ~~changes in accrual from our rewards program of $0.5 million and~~ higher ~~freight expense, partially offset by~~sales over the ~~impact from lower sales. As a percentage of sales, cost of sales was 74.1% and 70.8% for the quarters ended December 31, 2022 and 2021, respectively.~~

For the nine months ended December 31, 2022, cost of sales decreased by approximately $7.9 million, or 5.3%, to approximately $140.8 million for the nine months ended December 31, 2022, from approximately $148.7 million for the nine months ended December 31, 2021. The cost of sales decrease can be directly related to the decrease in sales duringsame period.

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~~nine months ended December 31, 2022. As a percentage of sales, cost of sales was 72.4% and 71.7% for the nine months ended December 31, 2022 and 2021, respectively.~~

Gross profit

Gross profit ~~decreased~~increased by approximately ~~$2.5~~$1.6 million, or ~~14.0%~~8.7%, to approximately ~~$15.2~~$20.1 million for the quarter ended ~~December 31, 2022,~~September 30, 2023, from approximately ~~$17.7~~$18.5 million for the quarter ended ~~December 31, 2021. Gross~~September 30, 2022. For the six months ended September 30, 2023, gross profit ~~as a percentage of sales was 25.9% and 29.2%~~increased by approximately $4.2 million, or 10.9%, to approximately $42.6 million, from approximately $38.4 million for the ~~quarters~~six months ended ~~December 31, 2022 and 2021, respectively.~~September 30, 2022. The gross profit ~~and gross profit percentage decrease~~increases for the quarter ~~ended December 31, 2022 compared to previous period was primarily due~~ ~~to higher promotions~~ and ~~changes in our rewards program accrual.~~

~~For the nine~~six months ended December 31, 2022 gross profit decreased by approximately $5.0 million, or 8.6%, to approximately $53.6 million for the nine months ended December 31, 2022, from approximately $58.7 million for the nine months ended December 31, 2021. Gross profit as a percentage of sales for the nine months ended December 31, 2022 and 2021, respectively, was 27.6% and 28.3%. ~~The gross profit and gross profit percentage decreased for the nine months ended December 31, 2022~~September 30, 2023 compared to the ~~previous period~~quarter and six months ended September 30, 2022 was primarily due to ~~lower manufacturer rebates .~~higher sales and higher profit margins obtained by PetCareRx driven by membership fees.

General and administrative expenses

General and administrative expenses increased by approximately ~~$2.9~~$2.5 million, or ~~38.2%~~23.5%, to approximately ~~$10.4~~$13.3 million for the quarter ended ~~December 31, 2022,~~September 30, 2023, from approximately ~~$7.5~~$10.8 million for the quarter ended ~~December 31, 2021.~~September 30, 2022. The increase to general and administrative expenses for the quarter ended ~~December 31, 2022~~September 30, 2023 was due to a ~~$1.8~~$1.4 million increase in ~~purposeful investments~~payroll expenses, a $0.5 million increase of professional fees, of which $0.2 million were acquisition related costs, a $0.7 million increase of software and systems expense, and a $1.1 million increase of variable and other overhead expenses. The expense increases were partially attributed to the integration of PetCareRx. These increases were offset by $1.2 million related to sales tax settlements with states.

For the six months ended September 30, 2023 general and administrative expenses increased by approximately $8.9 million, or 44.2%, to approximately $29.0 million, from approximately $20.1 million for the six months ended September 30, 2022. The increase to general and administrative expenses for the six months ended September 30, 2023 was due to a $4.7 million increase in ~~people and systems,~~payroll expenses, of which $0.3 million is from increased stock compensation, ~~and an additional $1.0~~a $2.1 million increase of professional fees, of which ~~$0.5~~$0.9 million were ~~transaction~~acquisition related ~~expenses.~~

~~For the nine months ended December 31, 2022 general and administrative expenses increased by approximately $8.0~~costs, a $1.3 million ~~or 35.4%, to approximately $30.5 million for the nine months ended December 31, 2022, from approximately $22.5 million for the nine months ended December 31, 2021. The~~ increase to general and administrative expenses for the the nine months ended December 31, 2022 was due to a $4.5 million increase in payroll expenses, of which $1.9 million is from increased stock compensation and $0.4M from accrued severance, as well as a $1.0 million increase of professional fees, and $0.7 million of software and systems ~~investment. In addition, general~~expense, and ~~administrative expenses increased in~~a $1.9 million increase of variable and other overhead expenses. The expense increases were partially attributed to the ~~nine months ended December 31, 2022 due~~combination of PetCareRx. These increases were offset by $1.2 million related to ~~a $0.9 million~~ sales tax ~~accrual and $0.9 million of acquisition related expenses.~~settlements with states.

Advertising ~~expenses~~Expenses

Advertising expenses increased by approximately ~~$0.3~~$1.6 million, or ~~7.3%~~42.1%, to approximately ~~$4.6~~$5.5 million for the quarter ended ~~December 31, 2022,~~September 30, 2023, from approximately ~~$4.3~~$3.9 million for the quarter ended ~~December 31, 2021.~~ ~~Overall advertising spending~~September 30, 2022. The increase for the quarter ~~increased compared~~can be mainly attributed to ~~the same quarter the prior year, due~~media spend related to ~~increased media costs and increased agency fees.~~PetCareRx. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $73 for the quarter ended September 30, 2023 compared to $64 for the quarter ended ~~December 31, 2022 compared~~September 30, 2022. The increase to ~~$66~~customer acquisition costs for the quarter ended ~~December 31, 2021, per the new definition of new customers.~~ September 30, 2023, was due to a less efficient variable marketing spend. The ~~decrease in~~ advertising ~~costs~~cost of acquiring a new customer ~~for the quarter ended December 31, 2022~~ can be ~~mainly attributed to increased conversion~~impacted by the advertising environment, the effectiveness of our advertising creative, spending, and price competition. Historically, the advertising environment fluctuates due to ~~higher promotions.~~ supply and demand. A more favorable advertising environment may positively impact future sales, whereas a less favorable advertising environment may negatively impact future sales. AAss a percentage of sales, advertising expense was ~~7.9%~~7.8% and ~~7.1%~~5.9% for the quarters ended ~~December 31,~~September 30, 2023 and 2022, ~~and 2021,~~ respectively. The advertising percentage ~~will~~may fluctuate quarter to quarter due to seasonality and advertising availability.

For the ~~nine~~six months ended ~~December 31, 2022~~September 30, 2023 advertising expenses ~~decreased~~increased by approximately ~~$0.6~~$2.5 million, or ~~3.7%~~24.9%, to approximately ~~$14.9~~$12.8 million, from approximately $10.2 million for the ~~nine~~six months ended ~~December 31, 2022, from approximately $15.4 million for the nine months ended December 31, 2021.~~September 30, 2022. The ~~decrease~~increase was ~~primarily~~ due to ~~lower~~ media spend related to PetCareRx compared to the same period in the prior year. The advertising costs of acquiring a new customer was ~~$74~~flat at $79 and ~~$59~~$79 for the ~~nine~~six months ended ~~December 31,~~September 30, 2023 and 2022, ~~and 2021,~~ respectively. ~~The increase in advertising costs of acquiring a new customer for the period can be mainly attributed to increased media costs and competitive pressures.~~ As a percentage of sales, advertising expense was ~~relatively flat, at 7.6%~~8.6% and 7.5% for the ~~nine~~six months ended ~~December 31,~~September 30, 2023 and 2022 ~~and 2021,~~, respectively.

Depreciation and amortization

Depreciation and amortization expense was ~~$0.9~~$1.7 million and ~~$0.7~~$0.9 million for the quarters ended ~~December 31,~~September 30, 2023 and September 30, 2022, ~~and December 31, 2021,~~ respectively. Depreciation and amortization expense was ~~$2.6~~$3.4 million and ~~$2.1~~$1.6 million for the ~~nine~~six months ended ~~December 31,~~September 30, 2023 and 2022, respectively. This increase to depreciation and amortization expense for the

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~~and 2021, respectively. This increase to depreciation expense for the the~~ quarter and ~~nine~~the six months ended ~~December 31, 2022~~September 30, 2023 can be attributed to new property and equipment additions, ~~subsequent to~~as well as the ~~prior period.~~intangibles acquired from PetCareRx .

Other income

Other income increased to approximately ~~$1.0~~$0.8 million for the quarter ended ~~December 31, 2022~~September 30, 2023 compared to approximately ~~$0.4~~$0.6 million for the quarter ended ~~December 31, 2021.~~September 30, 2022. Other income increased to approximately ~~$1.9~~$2.0 million for the ~~nine~~six months ended ~~December 31, 2022~~September 30, 2023 compared to approximately $1.0 million for the ~~nine~~six months ended ~~December 31, 2021.~~September 30, 2022. The increase to other income for the quarter ~~and nine~~was due to higher interest rates which more than offset slightly lower invested balances. The increase to other income for the six months was primarily related to ~~increased~~additional interest income as a result of higher interest rates, as well as increased ~~interest rates.~~rental income from PetCareRx. Interest income may decrease in the future ~~as we utilize~~based on several factors, including utilization of our cash balances ~~on any quarterly dividend payment,~~ on future investments or partnerships, on our operating activities, towards quarterly dividend payments, or on our share repurchase plan, which has approximately $28.7 million remaining as of ~~December 31, 2022.~~September 30, 2023. Additionally, interest income could increase or decrease if the current interest rate environment changes.

Provision for income taxes

For the quarters ended ~~December 31,~~September 30, 2023 and 2022, ~~and 2021,~~ the Company recorded an income tax provision of approximately ~~$0.2~~$0.5 million and ~~$1.3~~a tax provision of approximately $1.0 million, respectively, and for the ~~nine~~six months ended ~~December 31,~~September 30, 2023 and 2022, ~~and 2021~~ the Company recorded an income tax provision of approximately ~~$2.3~~$0.3 million and ~~$4.6~~a tax provision of approximately $2.1 million, respectively. The decrease in the tax provision for the three and ~~nine~~six months ended ~~December 31, 2022~~September 30, 2023 is related to ~~a decrease in~~the utilization of net operating ~~income during~~losses made available due to the ~~periods.~~acquisition of PetCareRx. The effective tax rate for the quarter ended ~~December 31, 2022~~September 30, 2023 was approximately ~~109.6%~~118.3%, compared to approximately ~~22.9%~~28.6% for the quarter ended ~~December 31, 2021,~~September 30, 2022, and the effective tax rate for the ~~nine~~six months ended ~~December 31, 2022~~September 30, 2023 was approximately ~~29.9%~~(54.6)% compared to approximately ~~23.4%~~27.8% for the ~~nine~~six months ended ~~December 31, 2021.~~September 30, 2022. The increase to the effective tax rate for the three ~~and nine~~ months ended ~~December 31, 2022~~September 30, 2023 can be attributed to ~~more~~net operating losses offsetting taxable income partially offset by an increase in state income tax. The decrease to the effective tax rate for the six months ended September 30, 2023 can be attributed to non-deductible ~~expenses~~items and an increase in state ~~tax due to the extension of the Company's business operations.~~income tax.

Liquidity and Capital Resources

Our working capital at ~~December 31, 2022~~September 30, 2023 and March 31, ~~2022~~2023 was ~~$102.9~~$45.0 million and ~~$117.8~~$95.0 million, respectively. The ~~$14.9~~$50.0 million decrease in working capital was primarily attributable to a decrease in cash used to fund the ~~Vetster partnership~~$36.1 million PetCareRx acquisition, and ~~infrastructure investment, and $5~~a $3.2 million ~~ownership investment~~increase in ~~Vetster.~~inventory in part related to the acquisition of PetCareRx. Net cash ~~provided by~~used in operating activities was ~~$18.1~~$0.2 million for the ~~nine~~six months ended ~~December 31, 2022,~~September 30, 2023, compared to cash provided by operating activities of ~~$9.8~~$5.1 million for the ~~nine~~six months ended ~~December 31, 2021.~~September 30, 2022. This change is primarily due to ~~a greater reduction~~decreases in net income and accounts payable and an increase in inventory in the ~~nine~~six months ended ~~December 31, 2022 than in~~September 30, 2023 compared to the same period in the prior ~~year, partially offset by a decrease to net income.~~year. Net cash used in investing activities was ~~$8.3~~$38.0 million for the ~~nine~~six months ended ~~December 31, 2022,~~September 30, 2023, compared to ~~$1.3~~$7.3 million used in investing activities for the ~~nine~~six months ended ~~December 31, 2021. This~~September 30, 2022. The change in net cash used in investing activities is related to the ~~Vetster partnership and investment,~~PetCareRx acquisition, and increased property and equipment ~~additions~~ acquired induring the ~~nine~~six months ended ~~December 31, 2022.~~September 30, 2023. Net cash used in financing activities was ~~$18.4~~$12.4 million and $12.3 million for the ~~nine~~six months ended ~~December 31, 2022 compared to $18.3 million for~~September 30, 2023 and the ~~nine~~six months ended ~~December 31, 2021,~~September 30, 2022, respectively, due to the ~~declaration~~payment of an aggregate ~~of $0.90 and $0.90~~$0.60 per share dividend ~~during the nine months ended December 31, 2022 and 2021, respectively.~~.

As of ~~December 31, 2022,~~September 30, 2023, we had approximately $28.7 million remaining under our share repurchase plan. On ~~February 6,~~October 30, 2023, our Board of Directors ~~declared a $0.30 per share dividend. The Board of Directors established a February 20, 2023 record date and a February 27, 2023 payment date for~~ elected to suspend the quarterly dividend. ~~Depending~~This move is intended to focus use of the Company’s existing cash flow on growth initiatives and other, higher return initiatives. The declaration and payment of future ~~market conditions we may utilize our cash~~dividends is discretionary and ~~cash equivalents on quarterly dividends, on our operating activities, or on~~will be subject to the ~~remaining balance~~determination by the Board of ~~our current share repurchase plan.~~Directors.

As of ~~December 31, 2022,~~September 30, 2023, we had ~~no material~~$1.8 million in outstanding lease ~~commitments. We~~commitments assumed for the leases on two buildings occupied by PetCareRx. Other than the foregoing leases, we are not currently bound by any ~~long-~~material long-term or short-term ~~agreements~~commitments for the purchase or lease of capital expenditures. Any material amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately provide for any future increase in our business. To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future. Our primary source of working capital is cash from operations. We presently have no ~~need for~~ alternative sources of working capital and have no commitments.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk generally represents the risk that losses may occur in the value of financial instruments as a result of movements in interest rates, foreign currency exchange rates, and commodity prices. Our financial instruments include cash and cash equivalents, accounts receivable, and accounts payable. The book values of cash equivalents, accounts receivable, and accounts payable are considered to be representative of fair value because of the short maturity of these

instruments. Interest rates affect our return on excess cash and cash equivalents. At ~~December 31, 2022,~~September 30, 2023, we had ~~$102.4~~$53.5 million in cash and cash equivalents, and the majority of our cash and cash equivalents generate interest income based on prevailing interest rates. A significant change in interest rates would impact the amount of interest income generated from our excess cash and cash equivalents. It would also impact the market value of our cash and cash equivalents. Our cash and cash equivalents are subject to market risk, primarily interest rate and credit risk. Our cash and cash equivalents are managed by a limited number of outside professional managers within investment guidelines set by our Board of Directors. Such guidelines include security type, credit quality, and maturity, and are intended to limit market risk by ~~restricting our~~maintaining cash in federally-insured bank deposit accounts and restricting cash equivalents to ~~high-quality cash and cash equivalents~~highly-liquid investments with ~~both short- and long-term maturities.~~maturities of three months or less. We do not hold any derivative financial instruments that could expose us to significant market risk. At ~~December 31, 2022,~~September 30, 2023, we had no debt obligations.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer ~~(principal executive officer)~~ and Chief Financial Officer, ~~(principal financial and accounting officer), has~~ conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as(as defined in ~~Rules~~Rule 13a‑1515(e) and ~~15d-15~~15d-15(e) promulgated under the ~~Securities~~ Exchange ~~Act of 1934, as amended ("Exchange Act"),~~Act) as of ~~the quarter ended December 31, 2022,~~September 30, 2023, the end of the period covered by this report (the "Evaluation Date"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date, that our disclosure controls and procedures ~~are~~were effective as of September 30, 2023, subject to external audit testing.

Background

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

In our fiscal year end 2023 Form 10-K filed with the ~~information relating~~SEC we identified and disclosed a material weakness due to ~~us, including~~a lack of segregation of duties over the preparation, approval and posting of certain journal entries. Notwithstanding the foregoing, management believes, that the material weakness did not result in a material misstatement of our ~~consolidated subsidiaries, required~~financial statements.

We immediately developed a remediation plan that included increasing resources and modifying processes to eliminate the lack of segregation of duties over the preparation, approval and posting of journal entries. This plan has been fully implemented as of the quarter ended June 30, 2023. Subject to external audit testing of such plan, we believe this plan has remediated the material weakness mentioned above. We continue to be ~~disclosed by us in reports that we file or submit under the Exchange Act: (1) is recorded, processed, summarized,~~committed to maintaining a strong internal control environment and ~~reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated~~implementing measures designed to ~~our management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.~~ensure a strong control environment.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and our Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are

resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by the collusion of two or more people or by management override of controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations, and trading price of our common stock. Please refer to our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2022~~2023 for additional information concerning these and other uncertainties that could negatively impact the Company.

~~Additional risk factor disclosure~~

~~Taxing authorities may successfully assert that we should~~ There have ~~collected, or in the future should collect, sales and use, value added, or similar taxes, and any such assessments could adversely affect our business, financial condition, and results of operations.~~

In the past several years states have adopted laws that attempt to impose tax collection obligations on out-of-state companies. Additionally, the Supreme Court of the United States ("Supreme Court") ruled in South Dakota v. Wayfair, Inc. et al, or Wayfair, that online sellers can be required to collect sales and use tax despite not having a physical presence in the buyer’s state. In response to Wayfair, or otherwise, states or local governments may adopt, or begin to enforce, laws requiring us to calculate, collect, and remit taxes on sales in their jurisdictions. While we currently collect and remit applicable sales taxesbeen no material changes to the ~~extent required~~risk factors disclosed in ~~all states in which we sell, a successful assertion by one or more states seeing to tax us~~our Annual Report on sales that occurred in prior tax years, or to collect more taxes in a jurisdiction in which we currently do collect some taxes, could result in substantial tax liabilities, including taxes on past sales, as well as penalties and interest. The imposition by state governments or local governments of sales tax collection obligations on out-of-state sellers could also create additional administrative burdensForm 10-K for us, put us at a competitive disadvantage if they do not impose similar obligations on our competitors, and decrease our future sales, which could have a material adverse effect on our business and results of operations. New legislation or regulations, the application of laws and regulations from jurisdictions, or the application of existing laws and regulations to the Internet and commercial online services could similarly result in significant additional taxes on our business. For instance, the Supreme Court’s decision and the enactment and enforcement of laws resulting therefrom could also impact where we are required to file state income taxes. As a result, our effective income tax rate as well as the cost and growth of our business could be materially and adversely affected, which could in turn have a material adverse effect on our financial condition and results of operations. In addition, because the Company’s products and services are available over the Internet, states may claim that the Company is required to do business as a foreign corporation in one or more of those jurisdictions. Failure to qualify as a foreign corporation in a jurisdiction where the Company is required to do so could subject it to taxes and penalties, and such jurisdictions may charge the Company with violations of local laws.fiscal year ended March 31, 2023.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

~~None.~~

During the three months ended September 30, 2023, no director or officer (as defined in Rule 16a-1(f) of the Exchange Act) of the Company adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

ITEM 6. EXHIBITS


31.1*			Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002).

31.2*			Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002).

32.1**			Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


101.INS*			Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH*			Inline XBRL Taxonomy Extension Schema Document
101.CAL*			Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*			Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*			Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*			Inline XBRL Taxonomy Extension Presentation Linkbase Document
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Filed ~~herewith..~~herewith.

** Furnished herewith.

*** Correcting a previously provided inaccurate exhibit hyperlink.

+ Indicates a management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PETMED EXPRESS, INC.

Date: ~~February 7,~~October 31, 2023


By:			/s/ Mathew N. Hulett
			Mathew N. Hulett

			Chief Executive Officer and President
			(Principal Executive Officer)

By:			/s/ Christine Chambers
			Christine Chambers

			Chief Financial Officer and Treasurer
			(Principal Financial and Accounting Officer)

2331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

PETMED EXPRESS, INC

________________________

FORM 10-Q

FOR THE QUARTER ENDED:

~~DECEMBER 31, 2022~~SEPTEMBER 30, 2023

________________________

EXHIBITS

________________________


	Nine Months Ended December 31,
Revenue (In thousands)	2022		%		2021		%		$ Variance		% Variance

Reorder sales	$	176,384	90.7	%	$	184,607	89.0	%	$	(8,223)	-4.5	%
New order sales	18,067		9.3	%	22,808		11.0	%	(4,741)		-20.8	%

Total net sales	$	194,451	100.0	%	$	207,415	100.0	%	$	(12,964)	-6.3	%

Internet sales	$	167,952	86.4	%	$	173,713	83.8	%	$	(5,761)	-3.3	%
Contact center sales	26,499		13.6	%	33,702		16.2	%	(7,203)		-21.4	%

Total net sales	$	194,451	100.0	%	$	207,415	100.0	%	$	(12,964)	-6.3	%


	Nine Months Ended
($ in thousands, except percentages)	December 31, 2022		December 31, 2021		$ Change		% Change
Consolidated Reconciliation of GAAP Net Income to Adjusted EBITDA:
Net income	$	5,335	$	15,034	$	(9,699)	(65)	%

Add (subtract):
Share-based Compensation	4,987		3,040		1,947		64	%
Income Taxes	2,278		4,603		(2,325)		(51)	%
Depreciation	2,552		2,051		501		24	%
Interest (Income)/Expense	(1,213)		(243)		(970)		399	%
Acquisition and Partnership Transactions	894		—		894		n/m
Employee Severance	364		—		364		n/m
State Sales Accrual	925		—		925		n/m

Adjusted EBITDA	$	16,122	$	24,485	$	(8,363)	(34)	%