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 September 30, 2021

2022

or

☐

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Commission file number: 000-28827

______________________

________________________
PETMED EXPRESS, INC.

(Exact name of registrant as specified in its charter)

______________________

________________________

Florida

65-0680967

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”,filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

o

☐

Accelerated filer

☒

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: 20,942,92921,075,677 shares of Common Shares,Stock, $.001 par value per share, at November 2, 2021.

8, 2022.


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PETMED EXPRESS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for per share amounts)

 

September 30,

 

March 31,

 
 

2021

  

2021

 September 30,
2022		March 31,
2022
 

(Unaudited)

    (Unaudited)

ASSETS

        ASSETS
 

Current assets:

 Current assets:

Cash and cash equivalents

 $106,562  $118,718 Cash and cash equivalents$96,546 $111,080 

Accounts receivable, less allowance for doubtful accounts of $28 and $39, respectively

 1,854  2,587 

Inventories - finished goods, net

 19,733  34,420 
Accounts receivable, less allowance for doubtful accounts of $32 and $39, respectivelyAccounts receivable, less allowance for doubtful accounts of $32 and $39, respectively1,590 1,913 
Inventories - finished goodsInventories - finished goods34,022 32,455 

Prepaid expenses and other current assets

 4,397  4,503 Prepaid expenses and other current assets5,463 4,866 

Prepaid income taxes

  899   959 Prepaid income taxes595 681 

Total current assets

 133,445  161,187 Total current assets138,216 150,995 
 

Noncurrent assets:

 Noncurrent assets:

Property and equipment, net

 25,081  25,450 Property and equipment, net25,189 24,464 

Intangible assets

  860   860 
Intangible and other assetsIntangible and other assets5,860 860 

Total noncurrent assets

  25,941   26,310 Total noncurrent assets31,049 25,324 
 

Total assets

 $159,386  $187,497 Total assets$169,265 $176,319 
 

LIABILITIES AND SHAREHOLDERS' EQUITY

        LIABILITIES AND SHAREHOLDERS' EQUITY
 

Current liabilities:

 Current liabilities:

Accounts payable

 $11,183  $39,548 Accounts payable$23,980 $27,500 

Accrued expenses and other current liabilities

  5,089   5,387 Accrued expenses and other current liabilities6,585 5,697 

Total current liabilities

 16,272  44,935 Total current liabilities30,565 33,197 
 

Deferred tax liabilities

  1,627   1,281 Deferred tax liabilities547 936 
 

Total liabilities

  17,899   46,216 Total liabilities31,112 34,133 
 

Commitments and contingencies

       Commitments and contingencies  
 

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; 20,943 and 20,269 shares issued and outstanding, respectively

 21  20 
Preferred stock, $.001 par value, 5,000 shares authorized; 3 convertible shares issued and outstanding with a liquidation preference of $4 per sharePreferred stock, $.001 par value, 5,000 shares authorized; 3 convertible shares issued and outstanding with a liquidation preference of $4 per share9 9 
Common stock, $.001 par value, 40,000 shares authorized; 21,077 and 20,979 shares issued and outstanding, respectivelyCommon stock, $.001 par value, 40,000 shares authorized; 21,077 and 20,979 shares issued and outstanding, respectively21 21 

Additional paid-in capital

 8,711  7,111 Additional paid-in capital14,877 11,660 

Retained earnings

  132,746   134,141 Retained earnings123,246 130,496 
 

Total shareholders' equity

  141,487   141,281 Total shareholders' equity138,153 142,186 
 

Total liabilities and shareholders' equity

 $159,386  $187,497 Total liabilities and shareholders' equity$169,265 $176,319 

See accompanying notes to condensed consolidated financial statements.

1

PETMED EXPRESS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

 

Three Months Ended

 

Six Months Ended

 
 

September 30,

 

September 30,

 Three Months Ended
September 30,		Six Months Ended
September 30,
 

2021

  

2020

  

2021

  

2020

 2022202120222021
 

Sales

 $67,386  $75,436  $146,698  $171,640 Sales$65,394 $67,386 $135,581 $146,698 

Cost of sales

  48,212   52,418   105,744   121,837 Cost of sales46,943 48,212 97,187 105,744 
 

Gross profit

  19,174   23,018   40,954   49,803 Gross profit18,451 19,174 38,394 40,954 
 

Operating expenses:

 Operating expenses:

General and administrative

 6,958  6,809  14,999  14,563 General and administrative10,753 6,958 20,104 14,999 

Advertising

 3,435  5,131  11,108  14,164 Advertising3,879 3,435 10,228 11,108 

Depreciation

  694   607   1,341   1,169 Depreciation858 694 1,611 1,341 

Total operating expenses

  11,087   12,547   27,448   29,896 Total operating expenses15,490 11,087 31,943 27,448 
 

Income from operations

  8,087   10,471   13,506   19,907 Income from operations2,961 8,087 6,451 13,506 
 

Other income:

 Other income:

Interest income, net

 74  66  159  156 Interest income, net388 74 505 159 

Other, net

  170   338   454   593 Other, net261 170 459 454 

Total other income

  244   404   613   749 Total other income649 244 964 613 
 

Income before provision for income taxes

 8,331  10,875  14,119  20,656 Income before provision for income taxes3,610 8,331 7,415 14,119 
 

Provision for income taxes

  1,982   2,463   3,342   4,476 Provision for income taxes1,031 1,982 2,061 3,342 
 

Net income

 $6,349  $8,412  $10,777  $16,180 Net income$2,579 $6,349 $5,354 $10,777 
 

Net income per common share:

 Net income per common share:

Basic

 $0.31  $0.42  $0.53  $0.81 Basic$0.13 $0.31 $0.26 $0.53 

Diluted

 $0.31  $0.42  $0.53  $0.81 Diluted$0.13 $0.31 $0.26 $0.53 
 

Weighted average number of common shares outstanding:

Weighted average number of common shares outstanding:

       Weighted average number of common shares outstanding:

Basic

  20,178   20,063   20,144   20,024 Basic20,26120,17820,23520,144

Diluted

  20,568   20,154   20,384   20,098 Diluted20,34420,56820,31820,384
 

Cash dividends declared per common share

 $0.30  $0.28  $0.60  $0.56 Cash dividends declared per common share$0.30 $0.30 $0.60 $0.60 

See accompanying notes to condensed consolidated financial statements.

2

PETMED EXPRESS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

(Unaudited)
 

Six Months Ended

 
 

September 30,

 Six Months Ended
September 30,
 

2021

  

2020

 20222021

Cash flows from operating activities:

 Cash flows from operating activities:

Net income

 $10,777  $16,180 Net income$5,354 $10,777 

Adjustments to reconcile net income to net cash provided by operating activities:

 Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

 1,341  1,169 Depreciation1,611 1,341 

Share based compensation

 1,600  1,513 Share based compensation3,217 1,600 

Deferred income taxes

 346  408 Deferred income taxes(389)346 

Bad debt expense

 58  61 Bad debt expense66 58 

(Increase) decrease in operating assets and increase (decrease) in liabilities:

 (Increase) decrease in operating assets and increase (decrease) in liabilities:

Accounts receivable

 675  1,570 Accounts receivable257 675 

Inventories - finished goods

 14,687  (3,567)Inventories - finished goods(1,567)14,687 

Prepaid income taxes

 60  0 Prepaid income taxes86 60 

Prepaid expenses and other current assets

 106  916 Prepaid expenses and other current assets(597)106 

Accounts payable

 (28,365) (3,600)Accounts payable(3,520)(28,365)

Accrued expenses and other current liabilities

 (210) 391 Accrued expenses and other current liabilities590 (210)

Income taxes payable

  0   147 

Net cash provided by operating activities

  1,075   15,188 Net cash provided by operating activities5,108 1,075 
 

Cash flows from investing activities:

 Cash flows from investing activities:
Purchase of minority interest investment in VetsterPurchase of minority interest investment in Vetster(5,000)- 

Purchases of property and equipment

  (972)  (1,193)Purchases of property and equipment(2,336)(972)

Net cash used in investing activities

  (972)  (1,193)Net cash used in investing activities(7,336)(972)
 

Cash flows from financing activities:

 Cash flows from financing activities:

Dividends paid

  (12,259)  (11,413)Dividends paid(12,306)(12,259)

Net cash used in financing activities

  (12,259)  (11,413)Net cash used in financing activities(12,306)(12,259)
 

Net (decrease) increase in cash and cash equivalents

 (12,156) 2,582 
Net decrease in cash and cash equivalentsNet decrease in cash and cash equivalents(14,534)(12,156)

Cash and cash equivalents, at beginning of period

  118,718   103,762 Cash and cash equivalents, at beginning of period111,080 118,718 
 

Cash and cash equivalents, at end of period

 $106,562  $106,344 Cash and cash equivalents, at end of period$96,546 $106,562 
 

Supplemental disclosure of cash flow information:

 Supplemental disclosure of cash flow information:
 

Cash paid for income taxes

 $2,935  $4,206 Cash paid for income taxes$2,560 $2,935 
 

Dividends payable in accrued expenses

 $110  $126 Dividends payable in accrued expenses$856 $110 

See accompanying notes to condensed consolidated financial statements.

3

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 PetMedsPetMeds® (the “Company”), is a leading nationwide pet pharmacy.pharmacy and Your Trusted Pet Health ExpertTM. The Company markets prescription and non-prescription pet medications, health products, and supplies for dogs, cats, and horses, directdirectly to the consumer. The Company offers consumers an attractive alternative for obtaining pet medications in terms of expertise, convenience, price, speed of delivery and valued customer service. The Company markets its products through national advertising and promotional campaigns, which aim to increase the recognition of the “PetMeds”“PetMeds®” brand name, increase traffic on its website at www.petmeds.com, acquire new customers, and maximize repeat purchases. Virtually all of the Company’s sales are to residentscustomers 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 20222023 or fiscal 20212022 refer to the Company's fiscal years ending March 31, 2023 and 2022, and 2021,respectively.

Basis of Presentation and Consolidation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q10-Q and, therefore, do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company at September 30, 2021, 2022, the Statements of Income for the three and six months ended September 30, 2021 2022 and 2020,2021, and Cash Flows for the six months ended September 30, 2021 2022 and 2020.2021. The results of operations for the three and six months ended September 30, 2021 2022 are not necessarily indicative of the operating results expected for the fiscal year ending March 31, 2022. 2023. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s annual reportAnnual Report on Form 10-K10-K for the fiscal year ended March 31, 2021. 2022. The Condensed Consolidated Financial Statements include the accounts of PetMed Express, Inc. and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated upon consolidation.

Use of Estimates

The preparation of Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ 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.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board issued ASU 2020-03, “Codification Improvements to Financial Instruments” (“ASU 2020-03”). ASU 2020-03 improves and clarifies various financial instruments topics. ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The Company will adopt ASU 2020-03 on April 1, 2022.

The Company does not expect the adoption of this new standard to have a material impact on our consolidated financial statements.

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

4

Note 2:    Revenue Recognition

The Company generates revenue by selling pet medication products and pet supplies mainly to retail customers. 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; customerproduct. Customer care and support is deemed not to be a material right into 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
4

judgment. There are no amounts excluded from variable consideration. Revenue is recognized when control transfers to the customer at the point in time inat which the shipment of the product occurs. This key judgment is determined as the shipping point, which represents the point in time in whichwhen 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.

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.

The Company disaggregates revenue in the following two categories: (1) Reorder(1) reorder revenue vs new order revenue, and (2) Internet(2) internet revenue vs. contact center revenue. The following table illustrates revenue by various classifications:

Three Months Ended September 30,

 

Sales (In thousands)

 

2021

  

%

  

2020

  

%

  

$ Variance

  

% Variance

 
                         

Reorder Sales

 $62,016   92.0% $67,761   89.8% $(5,745)  -8.5%

New Order Sales

  5,370   8.0%  7,675   10.2%  (2,305)  -30.0%
                         

Total Net Sales

 $67,386   100.0% $75,436   100.0% $(8,050)  -10.7%
                         

Internet Sales

 $55,961   83.0% $62,697   83.1% $(6,736)  -10.7%

Contact Center Sales

  11,425   17.0%  12,739   16.9%  (1,314)  -10.3%
                         

Total Net Sales

 $67,386   100.0% $75,436   100.0% $(8,050)  -10.7%

Six Months Ended September 30,

 

Sales (In thousands)

 

2021

  

%

  

2020

  

%

  

$ Variance

  

% Variance

 
                         

Reorder Sales

 $132,953   90.6% $148,186   86.3% $(15,233)  -10.3%

New Order Sales

  13,745   9.4%  23,454   13.7%  (9,709)  -41.4%
                         

Total Net Sales

 $146,698   100.0% $171,640   100.0% $(24,942)  -14.5%
                         

Internet Sales

 $122,408   83.4% $144,208   84.0% $(21,800)  -15.1%

Contact Center Sales

  24,290   16.6%  27,432   16.0%  (3,142)  -11.5%
                         

Total Net Sales

 $146,698   100.0% $171,640   100.0% $(24,942)  -14.5%

Three Months Ended September 30,
Revenue (In thousands)2022%2021%$ Variance% Variance
Reorder Sales$59,729 91.3 %$60,646 90.0 %$(917)-1.5 %
New Order Sales5,665 8.7 %6,740 10.0 %(1,075)-15.9 %
Total Net Sales$65,394 100.0 %$67,386 100.0 %$(1,992)-3.0 %
Internet Sales$56,548 86.5 %$55,961 83.0 %$587 1.0 %
Contact Center Sales8,846 13.5 %11,425 17.0 %(2,579)-22.6 %
Total Net Sales$65,394 100.0 %$67,386 100.0 %$(1,992)-3.0 %
Six Months Ended September 30,
Revenue (In thousands)2022%2021%$ Variance% Variance
Reorder Sales$123,068 90.8 %$129,348 88.2 %$(6,280)-4.9 %
New Order Sales12,513 9.2 %17,350 11.8 %(4,837)-27.9 %
Total Net Sales$135,581 100.0 %$146,698 100.0 %$(11,117)-7.6 %
Internet Sales$116,843 86.2 %$122,408 83.4 %$(5,565)-4.5 %
Contact Center Sales18,738 13.8 %24,290 16.6 %(5,552)-22.9 %
Total Net Sales$135,581 100.0 %$146,698 100.0 %$(11,117)-7.6 %
The Company 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 the three and six months ended September 30, 2022, and the reorder and new order sales amounts for the three and six months ended September 30, 2021 reflect this new customer definition change.
Under the previous definition of a new customer, reorder and new order sales were $62.0 million and $5.4 million, respectively, for the three months ended September 30, 2021. Under the previous definition of a new customer, reorder and new order sales were $133.0 million and $13.7 million, respectively, for the six months ended September 30, 2021.
Virtually all of 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 contract liability balances as of September 30, 2021 2022 or March 31, 2021.

2022.
5

Note 3:    Net 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 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 income per share computations for the periods presented (in thousands, except for per share amounts):

  

Three Months Ended

September 30,

  

Six Months Ended

September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Net income (numerator):

                

Net income

 $6,349  $8,412  $10,777  $16,180 

Shares (denominator):

                

Weighted average number of common shares outstanding used in basic computation

  20,178   20,063   20,144   20,024 

Common shares issuable upon vesting of restricted stock

  380   81   230   64 

Common shares issuable upon conversion of preferred shares

  10   10   10   10 

Shares used in diluted computation

  20,568   20,154   20,384   20,098 

Net income per common share:

                

Basic

 $0.31  $0.42  $0.53  $0.81 

Diluted

 $0.31  $0.42  $0.53  $0.81 

Three Months Ended September 30,Six Months Ended
September 30,
2022202120222021
Net income (numerator):  
Net income$2,579 $6,349 $5,354 $10,777 
Shares (denominator):  
Weighted average number of common shares outstanding used in basic computation20,261 20,178 20,235 20,144 
Common shares issuable upon vesting of restricted stock73 380 73 230 
Common shares issuable upon conversion of preferred shares10 10 10 10 
Shares used in diluted computation20,344 20,568 20,318 20,384 
Net income per common share:
Basic$0.13 $0.31 $0.26 $0.53 
Diluted$0.13 $0.31 $0.26 $0.53 
For the three and six months ended September 30, 2022 and 2021, 261,228 and 115,219 shares of common restricted stock, respectively, were excluded from the computations of diluted net income per common share, as their inclusion would have had an anti-dilutive effect on diluted net income per common share. For the three and six months ended September 30, 2020, 25,136 shares of common restricted stock were excluded from the computations of diluted net income per common share, as their inclusion would have had an anti-dilutive effect on diluted net income per common share.

Note 4:    Accounting for Stock-Based Compensation

The Company records compensation expense associated with restricted stock in accordance with ASC Topic 718 (“Share Based Payment”) (ASU 2016-09)2016-09). The compensation expense related to all of the Company’s stock-based compensation arrangements is recorded as a component of general and administrative expenses. The Company had 861,275 restricted958,998 common shares issued under the 2016 Employee Equity Compensation Restricted Stock Plan (“(“2016 Employee Plan”), and 203,880 restricted240,755 common shares issued under the 2015 Outside Director Equity Compensation Restricted Stock Plan (“(“2015 Director Plan”) at September 30, 2021, 2022, all shares of which were issued subject to 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 over the threeone-year to three-year restriction period.

In July 2021, period, with the Company issued 41,745exception of performance restricted shares which were issued to certain employees of the Company under the 2016 Employee Plan, with a fair value of $31.39 per share. Chief Executive Officer and Chief Financial Officer.

In August 2021, the Company issued 90,000 restricted shares and 510,000 performance restricted shares to the Company’s CEO, in accordance with the CEO’s employment agreement, under the 2016 Employee Plan. The fair value of the 90,000 restricted shares issuance was valued at $28.70 per share. The value of the 510,000 performance restricted shares issuance was valued by a third party valuation firm, and these shares were valued at $9.7 million, or $19.06 per share. The valuation firm utilized a Monte Carlo model to value the 510,000 performance restricted shares and looked at several other factors such as historical stock price volatility. In July 2021, the Company issued 37,500 restricted shares to directors of the Company under the 2015 Director Plan, with aThe fair value of $31.39 per share. In September 2021, the Company issued 1,350 restricted performance shares to a certain employee ofis being amortized over the Company under the 2016 Employee Plan, with a fair value of $26.87 per share.

three-year restriction period.
6

Effective, August 3, 2022 Christine Chambers, the new Chief Financial Officer, received an initial equity award under the 2016 Employee Plan consisting of (i) an award of 13,000 restricted shares, and (ii) 3,000 performance restricted shares, which performance restricted shares will be based on the attainment of performance criteria equally weighted between adjusted EBITDA and revenue. The shares for each grant will be released from restriction equally over a three (3) year period on the anniversary of the grant date, subject to the attainment of performance criteria in the case of the performance restricted shares.

The Company issued 57,640 shares of restricted stock, net of forfeitures, to certain employees under the 2016 Employee Plan during the quarter ended September 30, 2022. The Company issued 30,000 shares of restricted stock, net of forfeitures, to board members under the 2015 Director Plan during the quarter ended September 30, 2022.For the quarters ended September 30, 2021 2022 and 2020,2021, the Company recognized $882,000$1.7 million and $772,000, respectively, of compensation expense related to the 2016 Employee and 2015 Director Plans. For the six months ended September 30, 2021 and 2020, the Company recognized $1.6 million and $1.5$0.9 million, respectively, of compensation expense related to the 2016 Employee Plan and 2015 Director Plans. At Plan. For the six months ended September 30, 2022 and 2021, the Company recognized $3.2 millionand 2020,$1.6 million, respectively, of compensation expense related to the 2016 Employee Plan and 2015 Director Plan. At September 30, 2022 and 2021 there was $15.8$12.2 million and $4.4$15.8 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 income statement, and the offset is included in the additional paid-in capital line item of the Company’s balance sheet. At On September 30, 2021 2022 and 20202021, there were approximately776,928 and 734,669 and 177,876 non-vested restricted shares issued and outstanding, respectively.

In July 2022, the Company’s 2022 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 shares of the Company's common stock available for issuance under the plan. The value of the restricted stock is determined based on the market value of the stock at the issuance date. The restriction period or forfeiture period is determined by the Company’s Board of Directors and is to be no less than 1 year and no more than ten years. No shares had been issued under the 2022 Employee Plan as of September 30, 2022.

Note 5:    Fair Value

The Company carries various assetscash and liabilitiescash equivalents at fair value in the 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”) establishes a three-tierthree-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 September 30, 2021, 2022, the Company had invested virtually allthe majority of its $106.6$96.5 million cash and cash equivalents balance in money market funds which are classified within level Level 1.

Note 6:   Changes in Shareholders’ Equity

Changes in shareholders’ equity for the six months ended September 30, 2021 and 2020 are summarized below (in thousands):

      

Additional

     
  

Common

  

Paid-In

  

Retained

 
  

Stock

  

Capital

  

Earnings

 
             

Beginning balance at March 31, 2021:

 $20  $7,111  $134,141 

Share based compensation

  0   718   0 

Dividends declared

  0   0   (6,080)

Net income

  0   0   4,428 
             

Ending balance at June 30, 2021:

 $20  $7,829  $132,489 
             

Shares Issued

  1   0   0 

Share based compensation

  0   882   0 

Dividends declared

  0   0   (6,092)

Net income

  0   0   6,349 
             

Ending balance at September 30, 2021:

 $21  $8,711  $132,746 

7

Note 6:   Changes in Shareholders’ Equity (Continued)

      

Additional

     
  

Common

  

Paid-In

  

Retained

 
  

Stock

  

Capital

  

Earnings

 
             

Beginning balance at March 31, 2020:

 $20  $3,804  $126,177 

Share based compensation

  0   740   0 

Dividends declared

  0   0   (5,647)

Net income

  0   0   7,768 
             

Ending balance at June 30, 2020:

 $20  $4,544  $128,298 
             

Share based compensation

  0   773   0 

Dividends declared

  0   0   (5,647)

Net income

  0   0   8,412 
             

Ending balance at September 30, 2020:

 $20  $5,317  $131,063 

During the six months ended September 30, 2021 and 2020, there were 0 shares of common stock that were purchased or retired. At September 30, 2021, the Company had approximately $28.7 million remaining under the Company’s share repurchase plan.

Note 7:    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 initiates litigationalso intends to protectvigorously 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.

Employment Agreement

On August 25, 2021, Mathew N. Hulett was appointedincurred .From time to time, the Company may be involved in and subject to disputes and legal proceedings, as Chief Executive Officerwell as demands, claims and Presidentthreatened 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. 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

7

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 or 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.
The Company evaluates contingencies on an ongoing basis and has established loss provisions for matters in which losses are probable and the amount of 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. Estimated state sales tax assessment accruals in the amount of $0.9 million are included in the "Accrued expenses and other current liabilities" line item on the Condensed Consolidated Balance Sheets as of September 30, 2022 and the offsetting expense was recognized in the "General and administrative" line item within the Condensed Consolidated Statements of Income for the three months ended September 30, 2022. The Company believes the recorded reserves in the consolidated financial statements are adequate considering the probable and as a member ofestimable liabilities.
The Company continues to assess and evaluate sales tax contingencies. At this point, additional contingencies are not estimable.
Employment Agreements and Separation Agreement
On July 14, 2022, the Board of Directors and theof Company entered into an employment agreement with Mr. Hulettappointed Christine Chambers to serve as the Company’s Chief ExecutiveFinancial Officer and President,to assume the duties of principal financial officer and principal accounting officer effective asAugust 3, 2022 (“Effective Date”).
In connection with the separation of Augustthe Company's former Chief Financial Officer, the company has accrued $364 thousand with respect to the severance included in Accrued Expenses and Other Current Liabilities on the Balance Sheet.
Note 7:    Changes in Shareholders’ Equity:
Changes in Shareholders’ Equity for the three months ended September 30, 2021. The employment agreement2022 is summarized below (in thousands):
Common StockAdditional
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 
8

Changes in Shareholders’ Equity for an initial term of three (3) years commencing on Augustthe six months ended September 30, 2021 and will automatically renew for successive one (1) year terms,is summarized below (in thousands):
Common StockAdditional
Paid-In
Capital		Retained
Earnings
Beginning balance at March 31, 2021:$20 $7,111 $134,141 
Share based compensation— 718 — 
Dividends declared— — (6,080)
Net income— — 4,428 
Ending balance at June 30, 2021$20 $7,829 $132,489 
Shares Issued1 — — 
Share based compensation— 882 — 
Dividends declared— — (6,092)
Net income— — 6,349 
Ending balance at September 30, 2021:$21 $8,711 $132,746 
There were no shares of common stock that were purchased or for longer periods as mutually agreed upon byretired in the parties, unless the employment agreement is expressly cancelled by either Mr. Hulettsix months ended September 30, 2022 or 2021. At September 30, 2022, the Company sixty (60) days prior to the end of the then current term, or is otherwise terminated as provided in the agreement. The employment agreement provides that Mr. Hulett will receive an annual base salary of $500,000, subject to periodic review for increases with the approval of the Board of Directors.

Mr. Hulett will be eligible to participate in the standard employee benefit plans generally available to executives and employees of the Company, including health insurance, life and disability insurance, restricted stockhad approximately $28.7 million remaining under the Company’s equity compensation plan(s), 401(k) plan, and paid time off and paid holidays. The Company will also reimburse Mr. Hulett for his documented business expenses incurred in connection with his employment pursuant to the Company's standard reimbursement expense policy and practices. The Company will not pay for any withholding taxes related to restricted stock compensation. The employment agreement contains certain rights of Mr. Hulett and the Company to terminate Mr. Hulett’s employment, including termination by the Company for “Cause” as defined in the employment agreement, and termination by Mr. Hulett for “Good Reason” as defined in the employment agreement within twelve (12) months of a Change in Control as defined in the employment agreement. Mr. Hulett is also entitled to severance pay equal to twelve (12) months of Mr. Hulett’s current base salary and eighteen (18) months of health insurance benefits in the event of his termination by the Company without Cause, or termination by Mr. Hulett for Good Reason within twelve (12) months of a Change in Control. The foregoing severance benefits are conditioned upon Mr. Hulett’s execution of a release of claims and compliance with certain restrictive covenants. The employment agreement contains customary non-disclosure and non-solicitation provisions as well as a one (1) year non-compete following the termination of the agreement.

share repurchase plan.
8

On August 30, 2021, Mr. Hulett also received an award of 90,000 shares of restricted stock (“RSU”) under the Company’s 2016 Employee Plan, which stock restrictions will lapse pro rata on each of August 30, 2022, August 30, 2023 and August 30, 2024, which are subject to forfeiture in the event of termination of employment (except as provided in the RSU agreement). Mr. Hulett also received an award of 510,000 shares of performance restricted stock (“PSU”) under the 2016 Employee Plan, which stock restrictions will lapse on the third anniversary of the date of grant based on (i) achieving absolute stock price hurdles within the three-year period from the date of grant, and (ii) continued employment through the performance period of three years from the date of grant, in accordance with the following schedule:

Absolute Stock Price Hurdle

  

Shares

  

Cumulative Shares

 
$40   85,000   85,000 
$45   107,000   192,000 
$50   106,000   298,000 
$55   106,000   404,000 
$60   106,000   510,000 

Should none of the above absolute stock price hurdles be met during the three-year period from the date of grant no shares would vest. Once the absolute stock price hurdle is achieved, it will be considered to have met the absolute stock price hurdle, regardless of the stock price on the third anniversary of the date of grant. The absolute stock price hurdle would be considered to have been met if the average closing stock price of the Company is at or above the absolute stock price hurdle for a period of ninety (90) consecutive trading days. If the shares would be considered to have met the absolute stock price hurdle, they will only vest on the third anniversary of date of grant, subject to Mr. Hulett’s continued employment through the performance period of three years from the date of grant (except as provided in the PSU agreement).

In the event of Mr. Hulett’s termination of employment by the Company without Cause, or termination by Mr. Hulett for Good Reason within twelve (12) months of a Change in Control, or upon the executive’s Disability, Mr. Hulett would be entitled to the following:

(a)

a portion of the PSU award would vest to Mr. Hulett based on actual performance (absolute stock price hurdles) achieved up until the date of such termination; any PSU shares not having met the absolute stock price hurdles would be forfeited, and

(b)

the restrictions on the RSU award will lapse on a pro rata portion (number of days elapsed in vesting year/365) of the current year’s restricted stock (if not already lapsed) on the date of such event; any RSU shares related to the remainder of the current year’s restriction period, or to a future year’s restriction period, would be forfeited.

Note 8:    Income Taxes

For the quarters ended September 30, 2021 2022 and 2020,2021, the Company recorded an income tax provision of approximately $2.0$1.0 million and $2.5$2.0 million, respectively, and for the six months ended September 30, 2021 2022 and 2020, respectively,2021 the Company recorded an income tax provision of approximately $2.1 million and $3.3 million, and $4.5 million, respectively. The decrease in the income tax provision for the three and six months ended September 30, 2021 is related to a decrease in operating income during the periods. The effective tax rate for the quarter ended September 30, 2021 2022 was approximately 23.8%28.6%, compared to 22.6%approximately 23.8% for the quarter ended September 30, 2020, 2021, and the effective tax rate for the six months ended September 30, 2021 2022 was approximately 23.7%27.8% compared to 21.7%approximately 23.7% for the six months ended September 30, 2020. 2021. The increase toin the effective tax rate for the quarter and six months ended September 30, 2021 can be attributed2022 is due to more non-deductible expensesan increase in the September quarter. The increasestate tax due to the effective tax rate forextension of the six months ended September 30, 2021 can be attributed to the Company receiving a one-time state income tax refund of $285,000 in the June 2020 quarter.

Company's business operations.
9

Note 9:    Related Party Transaction

The Company’s Board of Directors' Chairman, Gian Fulgoni serves on the board of directors of Prophet, a brand and marketing consulting company, which the Company engaged with in March 2021 for $292,000.$292 thousand. The Company expensed $32,000$32 thousand in fiscal 2021 and $260,000$260 thousand in fiscal 2022. There was no related expense in the six months ended September 30, 2022. This transaction was approved by the Company’s Board of Directors with terms that are considered to be comparable to those with an unrelatedthird party.

Note 10:    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 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 becomes the exclusive e-commerce provider for Vetster, and Vetster becomes 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.
Note 11:    Subsequent Events

On October 25, 2021ourNovember 7, 2022, the Board of Directors declared a quarterly dividend of $0.30 per share. The Board of Directors established a November 8, 202118, 2022 record date and a November 19, 202130, 2022 payment date. Based on the outstanding share balance as of October 31, 2021 November 8, 2022 the Company estimates the dividend payable to be approximately $6.3 million.

10Subsequent to September 30, 2022, the Board of Directors approved and issued 1,000 restricted shares to employees pursuant to the 2016 Employee Plan.
9

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 September 30, 2022 and our Annual Report on Form 10-K for the year ended March 31, 2022.
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. 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 the Company’s Annual Report on Form 10-K for the year ended March 31, 2022 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. The Company assumes 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, "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.
Executive Summary

PetMed Express was incorporated in the state of Florida in January 1996. The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “PETS.”“PETS”. The Company began selling pet medications and other pet health products in September 1996. In March 2010 the Company started offering for sale additional pet supplies on its website, and these additional items are drop shipped to customers by third party vendors. Presently, the Company’s product line includes approximately 3,000 3,500 SKUs of the most popular pet medications, health products, and supplies for dogs, cats, and horses.

The Company markets its products through national advertising and promotional campaigns which aim to increase the recognition of the “PetMeds”“PetMeds®” brand name, increase traffic on its website at www.petmeds.com, acquire new customers, and maximize repeat purchases. Approximately 83%86% of all sales were generated via the Internet for both the quartersquarter ended September 30, 2021 and 2020.2022, compared to 83% for the quarter ended September 30, 2021. The Company’s sales consist of products sold mainly to retail consumers. The three-month average purchase was approximately $92$93 and $87 per order$92 for the quarters ended September 30, 20212022 and 2020,2021, respectively, and the six-month average purchase was approximately $93$94 and $88 per order$93 for the six months ended September 30, 2022 and 2021, and 2020, respectively.

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. The Company’s 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

The Company generates revenue by selling pet medication products and pet supplies mainly to retail customers. 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
10

discounts and an estimate of product returns, which are estimated based on historical patterns, however itthis 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 in whichwhere 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.

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 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 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 maintains an allowance for doubtful accounts for losses that the Company estimates will arise from customers’ inability to make required payments, arising from either credit card charge-backschargebacks or insufficient funds checks. The Company determines its estimates of the un-collectabilityuncollectibility of accounts receivable by analyzing historical and current bad debts and current economic trends. The allowance for doubtful accounts was approximately $28,000$32 thousand at September 30, 20212022, compared to $39,000$39 thousand at March 31, 2021.

2022.
11

Valuation of inventory

Inventories consist of prescription and non-prescription pet medications and pet supplies that are available for sale and are priced at the lower of cost or marketnet realizable value using a weighted average cost method. The Company writes down its inventory for estimated obsolescence. The inventory reserve was approximately $49,000$85 thousand at September 30, 20212022 compared to $86,000$81 thousand at March 31, 2021.

2022.

Advertising

The Company's 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 taxes

The Company accounts 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 the Company’s 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.

11

Results of Operations

The following should be read in conjunction with the Company’s 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 the Company’s Condensed Consolidated Statements of Income:

  

Three Months Ended

  

Six Months Ended

 
  

September 30,

  

September 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Sales

  100.0

%

  100.0

%

  100.0

%

  100.0

%

Cost of sales

  71.5   69.5   72.1   71.0 
                 

Gross profit

  28.5   30.5   27.9   29.0 
                 

Operating expenses:

                

General and administrative

  10.4   9.0   10.2   8.4 

Advertising

  5.1   6.8   7.6   8.3 

Depreciation

  1.0   0.8   0.9   0.7 

Total operating expenses

  16.5   16.6   18.7   17.4 
                 

Income from operations

  12.0   13.9   9.2   11.6 
                 

Total other income

  0.4   0.5   0.4   0.4 
                 

Income before provision for income taxes

  12.4   14.4   9.6   12.0 
                 

Provision for income taxes

  3.0   3.2   2.3   2.6 
                 

Net income

  9.4

%

  11.2

%

  7.3

%

  9.4

%

Three Months Ended
September 30,		Six Months Ended
September 30,
2022202120222021
Sales100.0 %100.0 %100.0 %100.0 %
Cost of sales71.8 71.5 71.7 72.1 
Gross profit28.2 28.5 28.3 27.9 
Operating expenses:
General and administrative16.5 10.4 14.9 10.2 
Advertising5.9 5.1 7.5 7.6 
Depreciation1.3 1.0 1.2 0.9 
Total operating expenses23.7 16.5 23.6 18.7 
Income from operations4.5 12.0 4.7 9.2 
Total other income1.0 0.4 0.7 0.4 
Income before provision for income taxes5.5 12.4 5.4 9.6 
Provision for income taxes1.6 3.0 1.5 2.3 
Net income3.9 %9.4 %3.9 %7.3 %
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; depreciation and amortization; income tax provision; interest income (expense); and other expenses. We have provided reconciliations below of 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 expenses, including the investment banking fee related to the Vetster partnership, which was executed in
12

the June quarter, and employee severance and estimated state sales tax assessment accrual, both were executed in the September quarter, as these items are not indicative of our ongoing operations. Adjusted EBITDA has limitations as a financial measure, 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 certain expenses including the investment banking fee related to the Vetster partnership, which was executed in the June quarter;
•Adjusted EBITDA does not reflect certain expenses including the employee severance, which was executed in the September quarter;
•Adjusted EBITDA does not reflect certain expenses including the estimated state sales tax assessment accrual, which was executed in the September quarter;
•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.
The following table presents 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
($ in thousands, except percentages)September 30,
2022		September 30,
2021
$
Change
%
Change
Consolidated Reconciliation of GAAP Net Income to Adjusted EBITDA:
Net income$2,579 $6,349 $(3,770)(59)%
Add (subtract):
Share-based Compensation$1,681 $882 $799 91 %
Income Taxes$1,031 $1,982 $(951)(48)%
Depreciation$858 $694 $164 24 %
Interest Income/Expense$(388)$(74)$(314)424 %
Investment Banking Fee (Vetster)$— $— $— n/m
Employee Severance$364 $— $364 n/m
State Sales Tax Assessment Accrual$925 $— $925 n/m
Adjusted EBITDA$7,050 $9,833 $(2,783)(28)%
13




Six Months Ended
($ in thousands, except percentages)September 30,
2022		September 30,
2021		$
Change		%
Change
Consolidated Reconciliation of GAAP Net Income to Adjusted EBITDA:
Net income$5,354 $10,777 $(5,423)(50)%
Add (subtract):
Share-based Compensation$3,217 $1,600 $1,617 101 %
Income Taxes$2,061 $3,342 $(1,281)(38)%
Depreciation$1,611 $1,341 $270 20 %
Interest Income/Expense$(505)$(159)$(346)218 %
Investment Banking Fee (Vetster)$355 $— $355 n/m
Employee Severance$364 $— $364 n/m
State Sales Tax Assessment Accrual$925 $— $925 n/m
Adjusted EBITDA$13,382 $16,901 $(3,519)(21)%


Three Months Ended September 30, 20212022 Compared With Three Months Ended September 30, 2020,2021 and Six Months Ended September 30, 20212022 Compared With Six Months Ended September 30, 2020

2021

COVID-19
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 work place.workplace. The Company has 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,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 factorfactors “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, 2021.

2022 for further discussion regarding risks associated with the COVID-19 pandemic.

Sales

Sales decreased by approximately $8.1$2.0 million, or 10.7%3.0%, to approximately $65.4 million for the quarter ended September 30, 2022, compared to approximately $67.4 million for the quarter ended September 30, 2021, from approximately $75.4 million2021. The decrease in
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sales for the quarter ended September 30, 2020. For the sixthree months ended September 30, 2021, sales2022 was mainly due to increased cost to acquire new customers and competitive pressures.
Sales decreased by approximately $24.9$11.1 million, or 14.5%7.6%, to approximately $146.7 million compared to $171.6$135.6 million for the six months ended September 30, 2020.2022, compared to approximately $146.7 million for the six months ended September 30, 2021. The decrease in sales for the quarter and six months ended September 30, 2021 was primarily due to decreased new orders and reorder sales. Sales for the quarter and six months ended September 30, 2021 were impacted by a much more competitive environment, and a crowded advertising market which had substantially higher advertising costs compared to the same periods in the prior year. Veterinary visits increased during the quarter compared to being down during the prior year,mainly due to the pandemic. We believe the increase in veterinary visits was primarily dueincreased cost to pet owners needing to visit their veterinarian for their pets’ annual exam in order to renew their prescriptions, as many veterinarians were closed due to the pandemic. acquire new customers and competitive pressures.
The Company acquired approximately 65,00061,000 new customers for the quarter ended September 30, 2022 compared to approximately 80,000 new customers for the quarter ended September 30, 2021, compared to approximately 96,000 new customers for the same period the prior year. For the six months ended September 30, 2021 theThe Company acquired approximately 157,000 new customers, compared to 282,000130,000 new customers for the six months ended September 30, 2020.2022, compared to approximately 195,000 new customers for the six months ended September 30, 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 utilized the new 36-month definition of a new customer (described below) . The following charttables illustrates sales by various sales classifications:

Three Months Ended September 30,

 

Sales (In thousands)

 

2021

  

%

  

2020

  

%

  

$ Variance

  

% Variance

 
                         

Reorder Sales

 $62,016   92.0% $67,761   89.8% $(5,745)  -8.5%

New Order Sales

  5,370   8.0%  7,675   10.2%  (2,305)  -30.0%
                         

Total Net Sales

 $67,386   100.0% $75,436   100.0% $(8,050)  -10.7%
                         

Internet Sales

 $55,961   83.0% $62,697   83.1% $(6,736)  -10.7%

Contact Center Sales

  11,425   17.0%  12,739   16.9%  (1,314)  -10.3%
                         

Total Net Sales

 $67,386   100.0% $75,436   100.0% $(8,050)  -10.7%

Six Months Ended September 30,

 

Sales (In thousands)

 

2021

  

%

  

2020

  

%

  

$ Variance

  

% Variance

 
                         

Reorder Sales

 $132,953   90.6% $148,186   86.3% $(15,233)  -10.3%

New Order Sales

  13,745   9.4%  23,454   13.7%  (9,709)  -41.4%
                         

Total Net Sales

 $146,698   100.0% $171,640   100.0% $(24,942)  -14.5%
                         

Internet Sales

 $122,408   83.4% $144,208   84.0% $(21,800)  -15.1%

Contact Center Sales

  24,290   16.6%  27,432   16.0%  (3,142)  -11.5%
                         

Total Net Sales

 $146,698   100.0% $171,640   100.0% $(24,942)  -14.5%

Three Months Ended September 30,
Revenue (In thousands)2022%2021%$ Variance% Variance
Reorder Sales$59,729 91.3 %$60,646 90.0 %$(917)(1.5)%
New Order Sales5,665 8.7 %6,74010.0 %(1,075)(15.9)%
Total Net Sales$65,394 100.0 %$67,386 100.0 %$(1,992)(3.0)%
Internet Sales$56,548 86.5 %$55,961 83.0 %$587 1.0 %
Contact Center Sales8,846 13.5 %11,425 17.0 %(2,579)(22.6)%
Total Net Sales$65,394 100.0 %$67,386 100.0 %$(1,992)(3.0)%
Six Months Ended September 30,
Revenue (In thousands)2022%2021%$ Variance% Variance
Reorder Sales$123,068 90.8 %$129,348 88.2 %$(6,280)(4.9)%
New Order Sales12,513 9.2 %17,35011.8 %(4,837)(27.9)%
Total Net Sales$135,581 100.0 %$146,698 100.0 %$(11,117)(7.6)%
Internet Sales$116,843 86.2 %$122,408 83.4 %$(5,565)(4.5)%
Contact Center Sales18,738 13.8 %24,290 16.6 %(5,552)(22.9)%
Total Net Sales$135,581 100.0 %$146,698 100.0 %$(11,117)(7.6)%
Please note that the Company 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 six months ended September 30, 2022 and reorder and new order sales for the three and six months ended September 30, 2021 reflect this new customer definition change.
Under the previous definition of a new customer, reorder and new order sales were $62.0 million and $5.4 million, respectively, and acquired new customers were approximately 65,000, for the three months ended September 30, 2021. Under the previous definition of a new customer, reorder and new order sales were $133.0 million and $13.7 million, respectively, and acquired new customers were approximately 157,000, for the six months ended September 30, 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
1315

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, 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 its performance.
We are 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 39% of net sales for the most recent quarter ended September 30, 2022, up from 15% of net sales for the same period last year and up from 34% of net sales sequentially. The Company has set a goal of generating approximately 50% of its 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 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 heartworm, and flea and tick and heartworm medications. For the quarters ended June 30, September 30, December 31, and March 31 of Fiscal 2021,fiscal 2022, the Company’s sales were approximately 31%29%, 25%, 21%22%, and 23%24%, respectively, as a percentage of annual sales.

Cost of sales

Cost of sales decreased by approximately $4.2$1.3 million, or 8.0%2.6%, to approximately $46.9 million for the quarter ended September 30, 2022, from approximately $48.2 million for the quarter ended September 30, 2021, from approximately $52.4 million for the quarter ended September 30, 2020.2021. For the six months ended September 30, 2021,2022, cost of sales decreased by approximately $16.1$8.6 million, or 13.2%8.1%, to approximately $105.7 million compared to $121.8$97.2 million for the same period insix months ended September 30, 2022, from approximately $105.7 million for the prior year.six months ended September 30, 2021. The cost of sales decreasesdecrease can be directly related to the decreases todecrease in sales during the three and six months ended September 30, 2021.2022. As a percentage of sales, cost of sales was 71.5%71.8% and 69.5%71.5% for the quarters ended September 30, 20212022 and 2020,2021, respectively, and for the six months ended September 30, 20212022 and 20202021 cost of sales was 71.7% and 72.1% and 71.0%, respectively. The cost of sales percentage for the quarter and six months were adversely impacted due to the major manufacturers shifting their rebate funding from discounting product costs to cooperative marketing rebates.

.

Gross profit

Gross profit decreased by approximately $3.8$0.7 million, or 16.7%3.8%, to approximately $18.5 million for the quarter ended September 30, 2022, from approximately $19.2 million for the quarter ended September 30, 2021. Gross profit as a percentage of sales was 28.2% and 28.5% for the quarters ended September 30, 2022 and 2021, from approximately $23.0 millionrespectively. The gross profit and gross profit percentage decrease for the quarter ended September 30, 2020. 2022 compared to previous period was primarily due to higher freight expense per order and lower gross margin for our OTC SKUs.
For the six months ended September 30, 20212022 gross profit decreased by approximately $8.8$2.6 million, or 17.8%6.3%, to approximately $41.0 million, compared to $49.8$38.4 million for the same period insix months ended September 30, 2022, from approximately $41.0 million for the prior year. The decrease in gross profit is directly related to a decrease in sales during the quarter and six months ended September 30, 2021. Gross profit as a percentage of sales was 28.5% and 30.5% for the three months ended September 30, 2021 and 2020, respectively, and for the six months ended September 30, 2022 and 2021, respectively, was 28.3% and 2020, gross profit as a percentage of sales was 27.9% and 29.0%, respectively.. The gross profit and gross profit percentage decreasesincreased for the quarter and the six months can also be attributedended September 30, 2022 compared to the major manufacturers shifting their rebate funding from discountingprevious period was primarily due to less product costs to cooperative marketing rebates.

discounts in the current period.

General and administrative expenses

General and administrative expenses increased by approximately $149,000,$3.8 million, or 2.2%54.5%, to approximately $6.9$10.8 million for the quarter ended September 30, 2021,2022, from approximately $6.8$7.0 million for the quarter ended September 30, 2020.2021. The increase into general and administrative expenses for the quarter ended September 30, 20212022 was primarily due to a $2.4 million increase in purposeful investments in people and systems, of which $0.8 million is from increased stock compensation, and $0.4 million from accrued severance, and increased professional fees. In addition, general and administrative expenses increased in the following:quarter due to a $114,000 increase to other expenses, relating to increasing a state$0.9 million sales tax related accrual during the period; an $80,000 increase in professional fees; and a $24,000 increase in travel related expenses, offset by a net decrease of $69,000 which included decreases in bank service fees and property expenses. accrual.
For the six months ended September 30, 2021,2022 general and administrative expenses increased by approximately $436,000,$5.1 million, or 3.0%34.0%, to approximately $14.9$20.1 million compared to $14.6 million for the same period the prior year. The increase in general and administrative expenses for the six months ended September 30, 2021 was primarily due to2022, from approximately $15.0 million for the following: a $418,000 increase in professional fees, with $260,000 related to brand and marketing consultation; a $114,000six months ended September 30, 2021. The increase to othergeneral and administrative expenses relating to increasing a state sales tax related accrual duringfor the period; offset by a net decrease of $96,000 primarily related to a reduction in bank service feesthe six months ended September 30, 2022 was due to a decrease$3.2 million increase in sales.

payroll expenses, of which $1.6 million is from increased stock compensation, $0.4 million of investment banking fees (Vetster), and increased professional fees. In

16

addition, general and administrative expenses increased in the period due to a $0.9 million sales tax accrual and $0.4 million from accrued severance
Advertising expenses
Advertising expenses

Advertising expenses decreased increased by approximately $1.7$0.4 million, or 33%12.9%, to approximately $3.9 million for the quarter ended September 30, 2022, from approximately $3.4 million for the quarter ended September 30, 2021, from approximately $5.1 million2021. Overall advertising spending for the quarter ended September 30, 2020. For the six months ended September 30, 2021, advertising expenses decreased by approximately $3.1 million, or 22%, to approximately $11.1 millionincreased compared to advertising expenses of approximately $14.2 million for the six months ended September 30, 2020. The decrease in advertising expenses forsame quarter the three months ended September 30, 2021 wasprior year, due to management’s decision to reduce advertising spend in the quarter. Duringdemand shift caused by the quarterdelayed start of flea and six months ended September 30, 2021, while the pandemic was abatingtick season and many retail stores were re-opening, the advertising market was rapidly recovering with demand driving up advertising prices dramatically. As a result, our advertising for the three and six months ended September 30, 2021 was less effective in its ability to attract new customers.

14

increased agency fees. The advertising costs of acquiring a new customer, defined as total advertising expensecosts divided by new customers acquired, was relatively flat, approximately $54$64 for the quartersquarter ended September 30, 2022 compared to $43 for the quarter ended September 30, 2021, and 2020, and $71 forper the six months ended September 30, 2021 compared to $50 for the six months ended September 30, 2020.new definition of new customers. The increase for the six month ended September 30, 2021, was due to a substantial increase in advertising prices. The advertising costcosts of acquiring a new customer for the quarter ended September 30, 2022 can be impacted by the advertising environment, the effectiveness of our advertising creative, advertising spending,mainly attributed to increased media costs and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future new order sales, whereas a less favorable advertising environment may negatively impact future new order sales.competitive pressures. As a percentage of sales, advertising expense was 5.1%5.9% and 6.8%5.1% for the quarters ended September 30, 2022 and 2021, and 2020, and for the six months ended September 30, 2021 and 2020 advertising expense was 7.6% and 8.3%, respectively. The decrease in advertising expense as a percentage of total sales for the three and six months ended September 30, 2021 can be mainly attributed to decreased sales and a reduction in advertising expense. Therespectively.The advertising percentage will fluctuate quarter to quarter due to seasonality and advertising availability, and return on investment requirements.

availability.

Depreciation

Depreciation expense increased by approximately $87,000 to approximately $694,000 for the quarter ended September 30, 2021, from approximately $607,000 for the quarter ended September 30, 2020. For the six months ended September 30, 2022 advertising expenses decreased by approximately $0.9 million, or 7.9%, to approximately $10.2 million for the six months ended September 30, 2022, from approximately $11.1 million for the six months ended September 30, 2021. The decrease was primarily due to lower media spend compared to the same period in the prior year. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $79 and $57 for the six months ended September 30, 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 2020 depreciationcompetitive pressures. As a percentage of sales, advertising expense was approximately7.5% and 7.6% for the quarters ended September 30, 2022 and 2021, respectively.

Depreciation
Depreciation expense was $0.9 million and $0.7 million for the quarters ended September 30, 2022 and September 30, 2021, respectively. Depreciation expense was $1.6 million and $1.3 million for the six months ended September 30, 2022 and $1.2 million,2021, respectively. TheThis increase to depreciation expense for the the quarter and six months ended September 30, 20212022 can be attributed to new property and equipment additions duringsubsequent to the same periods.

prior period.

Other income

Other income decreased by approximately $160,000increased to approximately $244,000$0.6 million for the quarter ended September 30, 2021 from2022 compared to approximately $404,000$0.2 million for the quarter ended September 30, 2020. For2021. Other income increased to approximately $1.0 million for the six months ended September 30, 2021 other income decreased by approximately $136,000 to approximately $613,0002022 compared to approximately $749,000$0.6 million for the same period in the prior year.six months ended September 30, 2021. The decreaseincrease to other income for the quarter and six months ended September 30, 2021 iswas primarily related to decreaseincreased interest income as a result of increased interest rates in advertising income.the current period. Interest income may decrease in the future as the Company utilizes its cash balances on any quarterly dividend payment, on future investments or partnerships, on its operating activities, or on its share repurchase plan, with approximately $28.7 million remaining as of September 30, 2021, on any quarterly dividend payment or on its operating activities.

2022.

Provision for income taxes

For the quarters ended September 30, 20212022 and 2020,2021, the Company recorded an income tax provision of approximately $2.0$1.0 million and $2.5$2.0 million, respectively, and for the six months ended September 30, 20212022 and 2020,2021 the Company recorded an income tax provision of approximately $2.1 million and $3.3 million, and $4.5 million, respectively. The decrease in the income tax provision for the three and six months ended September 30, 2021 is related to a decrease in operating income during the periods. The effective tax rate for the quarter ended September 30, 20212022 was approximately 23.8%28.6%, compared to 22.6%approximately 23.8% for the quarter ended September 30, 2020,2021, and the effective tax rate for the six months ended September 30, 20212022 was approximately 23.7%27.8% compared to 21.7%approximately 23.7% for the six months ended September 30, 2020.2021. The increase toin the effective tax rate for the quarter ended September 30, 2021 can be attributed to more non-deductible expenses in the September quarter. The increase to the effective tax rate for theand six months ended September 30, 2021 can be attributed2022 is due to an increase in state tax due to the Company receiving a one-time state income tax refundextension of $285,000 in the June 2020 quarter.

Company's business operations.

Liquidity and Capital Resources

The Company’s working capital at September 30, 20212022 and March 31, 20212022 was $117.2$107.7 million and $116.3$117.8 million, respectively. The approximately $900,000 increase$10.1 million decrease in working capital was primarily attributable to income generated by operationsa decrease in cash to fund the Vetster partnership and a reduction to accounts payable, offset by dividends paid in the period.infrastructure investment. Net cash provided by operating activities was $1.1 million and $15.2$5.1 million for the six months ended September 30, 2021 and 2020, respectively. This change is primarily due to a reduction in net income and a decrease in accounts payable, offset by a decrease in inventories. Net cash used in investing activities was $972,000 for the six months ended September 30, 2021,2022, compared to net cash used in investingprovided by operating activities of $1.2$1.1 million for the six months ended September 30, 2020.2021. This change is due to a greater reduction in accounts payable and inventory in the six months
17

ended September 30, 2022 than in the same period the prior year, partially offset by a decrease to net income. Net cash used in investing activities was $7.3 million for the six months ended September 30, 2022, compared to $1.0 million used in investing activities for the six months ended September 30, 2021. This change in investing activities is related to an increase inthe Vetster partnership and investment, and increased property and equipment additions acquired in the six months ended September 30, 2021.2022. Net cash used in financing activities was $12.3 million for the six months ended September 30, 2021,2022 compared to $11.4$12.3 million for the same period in the prior year. The change to financing activities relates to an increase in the dividend paid in the six months ended September 30, 2021, compareddue to the prior period. Atdeclaration of the $0.60 and $0.60 per share dividend during the six months ended September 30, 2022, and 2021, respectively.
As of September 30, 2022, the Company had approximately $28.7 million remaining under the Company’s share repurchase plan.

15

Subsequent to September 30, 2021, on October 25, 2021 On November 7, 2022 our Board of Directors declared a $0.30 per share dividend. The Board of Directors established aan November 8, 202118, 2022 record date and aan November 19, 202130, 2022 payment date.date for the quarterly dividend. Depending on future market conditions the Company may utilize its cash and cash equivalents on quarterly dividends, on its operating activities, or on the remaining balance of its current share repurchase plan, on dividends, or on its operating activities.

Atplan.

As of September 30, 2021,2022, the Company had no material outstanding lease commitments. We are not currently bound by any long- or short-term agreements 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 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. Presently, we have approximately $1.0 million forecasted for capital expenditures for the remainder of fiscal 2022, the majority of which will be invested in our e-commerce platform to better service our customers, which will be funded through cash from operations. The Company’s primary source of working capital is cash from operations. The Company presently has no need for alternative sources of working capital and has no commitments or plans to obtain additional capital.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements at September 30, 2021.

Cautionary Statement Regarding Forward-Looking 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 and Section 21E of the Securities Exchange Act of 1934. 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. 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. When used in this quarterly report on Form 10-Q, "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.

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 and 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 September 30, 2021,2022, we had $106.6$96.5 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 cash and cash equivalents to high-quality cash and cash equivalents with both short- and long-term maturities. We do not hold any derivative financial instruments that could expose us to significant market risk. At September 30, 2021,2022, we had no debt obligations.

16

ITEM 4.    CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

The Company’s management, including our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, (asas defined in RuleRules 13a‑15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended)amended ("Exchange Act"), as of the quarter ended September 30, 2021,2022, the end of the period covered by this report (the "Evaluation Date"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded as of the Evaluation Date, that our disclosure controls and procedures are effective such that the information relating to our Company, including our consolidated subsidiaries, required to be disclosed by the Company in reports that it files or submits under the Exchange Act: (1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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 hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

18

PART II - OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.

None.

ITEM1A.    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 Fiscal Year 2021fiscal 2022 for additional information concerning these and other uncertainties that could negatively impact the Company.

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

The Company did not make any sales of unregistered securities during the second quarter of Fiscal 2022.

Issuer Purchases of Equity Securities

None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.    MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.    OTHER INFORMATION.

None.

17

ITEM 6.EXHIBITS

The following exhibits are filed as part of this report.


31.1

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, promulgated under the Securities Exchange Act of 1934, as amended (filed herewith to Exhibit 31.1 of the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2021, Commission File No. 000-28827)2002).

31.2

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities Exchange Act of 1934, as amended (filed herewith to Exhibit 31.2 of the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2021, Commission File No. 000-28827).

32.1

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 (filed herewith to Exhibit 32.1 of the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2021, Commission File No. 000-28827).

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)

*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

Filed herewith..

**    Furnished herewith.
19

SIGNATURES

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

PETMED EXPRESS, INC.

Date: November 8, 2022

PETMED EXPRESS, INC.

(The “Registrant”)

By:

Date: November 2, 2021

By:

/s/ /s/ Mathew N. Hulett

Mathew N. Hulett

Chief Executive Officer and President

(principal executive officer)

Principal Executive Officer)

By:

/s/   Bruce S. Rosenbloom

 /s/ Christine Chambers

Bruce S. Rosenbloom

Christine Chambers

Chief Financial Officer

(principal financialPrincipal Financial and accounting officer)

Accounting Officer)

1820

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

_______________________

D.C. 20549

________________________
PETMED EXPRESS, INC

_______________________

________________________
FORM 10-Q

FOR THE QUARTER ENDED:

SEPTEMBER 30, 2021

_______________________

2022

________________________
EXHIBITS

_______________________

________________________