UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
-----------------
or
[ ] 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.
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(Exact name of registrant as specified in its charter)
FLORIDA 65-0680967
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1441 S.W. 29th Avenue, Pompano Beach, Florida 33069
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(Address of principal executive offices)
(954) 979-5995
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(Issuer's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date: 19,648,558 Common Shares, $.001 par value per share at
February 6, 2003
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2003 2003
------------ ------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,326 $ 984,169
Accounts receivable, less allowance for doubtful
accounts of $8,684 and $16,644, respectively 433,516 651,883
Inventories - finished goods 13,614,280 4,268,146
Prepaid expenses and other current assets 229,677 478,108
------------ ------------
Total current assets 14,278,799 6,382,306
Property and equipment, net 1,425,280 1,496,979
Deferred income taxes 581,356 581,356
Intangible asset 365,000 365,000
Other assets 21,822 200,155
------------ ------------
Total assets $ 16,672,257 $ 9,025,796
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 2,535,937 $ 2,570,459
Income taxes payable 558,617 170,752
Accrued expenses and other current liabilities 445,269 555,012
Line of credit 1,300,000 -
Current portion of loan obligation 68,442 68,442
------------ ------------
Total current liabilities 4,908,265 3,364,665
Loan obligation, less current portion 17,111 68,443
------------ ------------
Total liabilities 4,925,376 3,433,108
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized; 2,500 convertible shares
issued and outstanding with a liquidation
preference of $4 per share 8,898 8,898
Common stock, $.001 par value, 40,000,000
shares authorized; 19,633,558 and 18,460,878
shares issued and outstanding, respectively 19,634 18,461
Additional paid-in capital 8,957,531 7,279,207
Retained earnings (accumulated deficit) 2,760,818 (1,713,878)
------------ ------------
Total shareholders' equity 11,746,881 5,592,688
------------ ------------
Total liabilities and shareholders' equity $ 16,672,257 $ 9,025,796
============ ============
See accompanying notes to condensed consolidated financial statements
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Sales $ 17,169,571 $ 11,050,124 $ 72,526,362 $ 40,110,581
Cost of sales 10,119,515 6,341,577 43,448,019 22,939,240
------------ ------------ ------------ ------------
Gross profit 7,050,056 4,708,547 29,078,343 17,171,341
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 2,318,094 1,801,081 8,057,719 5,858,693
Advertising 2,618,149 2,116,258 13,571,119 8,755,679
Depreciation and amortization 137,705 97,939 397,105 264,711
------------ ------------ ------------ ------------
Total operating expenses 5,073,948 4,015,278 22,025,943 14,879,083
------------ ------------ ------------ ------------
Income from operations 1,976,108 693,269 7,052,400 2,292,258
------------ ------------ ------------ ------------
Other income (expense):
Gain on disposal of property and
equipment - 15,000 - 15,000
Interest expense (4,213) (8,876) (8,420) (18,916)
Interest income 2,085 505 8,939 6,462
Other, net 90 1,247 1,076 4,534
------------ ------------ ------------ ------------
Total other income (expense) (2,038) 7,876 1,595 7,080
------------ ------------ ------------ ------------
Income before provision for
income taxes 1,974,070 701,145 7,053,995 2,299,338
Provision for income taxes 750,146 266,435 2,579,299 757,412
------------ ------------ ------------ ------------
Net income $ 1,223,924 $ 434,710 $ 4,474,696 $ 1,541,926
============ ============ ============ ============
Net income per common share:
Basic $ 0.06 $ 0.03 $ 0.23 $ 0.09
============ ============ ============ ============
Diluted $ 0.05 $ 0.02 $ 0.19 $ 0.07
============ ============ ============ ============
Weighted average number of common
shares outstanding:
Basic 19,631,732 17,658,010 19,339,370 17,142,763
============ ============ ============ ============
Diluted 23,739,336 21,662,154 23,333,622 20,999,411
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements
2
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
December 31,
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 4,474,696 $ 1,541,926
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 397,105 264,711
Tax benefit related to stock options exercised 486,151 78,660
Gain on disposal of property and equipment - (15,000)
Bad debt expense (7,959) 7,329
(Increase) decrease in operating assets
and liabilities:
Accounts receivable 226,327 (127,154)
Inventory (9,346,134) (4,337,101)
Prepaid expenses and other current assets 248,431 (42,307)
Other assets 178,333 (150,000)
Accounts payable (34,522) 1,799,333
Income taxes payable 387,865 650,752
Accrued expenses and other current
liabilities (109,743) (463,025)
------------ ------------
Net cash used in operating activities (3,099,450) (791,876)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (325,407) (665,252)
Purchases of intangible asset - (365,000)
Net proceeds from the sale of property and
equipment - 15,000
------------ ------------
Net cash used in investing activities (325,407) (1,015,252)
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options
and warrants 1,193,346 393,663
Borrowings on the line of credit 1,300,000 858,786
Payments on loan obligation (51,332) (51,332)
------------ ------------
Net cash provided by financing activities 2,442,014 1,201,117
------------ ------------
Net decrease in cash and cash equivalents (982,843) (606,011)
Cash and cash equivalents, at beginning of period 984,169 737,284
------------ ------------
Cash and cash equivalents, at end of period $ 1,326 $ 131,273
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 7,238 $ 17,287
============ ============
Cash paid for income taxes $ 1,659,141 $ 28,000
============ ============
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 is a leading nationwide
pet pharmacy. The Company markets prescription and non-
prescription pet medications, and health and nutritional
supplements for dogs and cats direct to the consumer. The
Company offers consumers an attractive alternative for obtaining
pet medications in terms of convenience, price, and speed of
delivery.
The Company markets its products through national television,
on-line and direct mail advertising campaigns, which aim to
increase the recognition of the "1-800-PetMeds" brand name,
increase traffic on its web site at www.1800PetMeds.com , acquire
new customers, and maximize repeat purchases. The Company's
executive offices are located in Pompano Beach, Florida.
The Company's fiscal year end is March 31, and references
herein to fiscal 2004 or 2003 refer to the Company's fiscal years
ending March 31, 2004 and 2003, respectively.
Basis of Presentation and Consolidation
- ---------------------------------------
The Company is no longer eligible as a small business filer,
as of April 1, 2003 the Company holds the status of a regular
Securities Exchange Act filer. The accompanying unaudited
condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do
not include all of the information and footnotes required by
accounting principles generally accepted in the United States of
America 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, after elimination of intercompany
accounts and transactions, at December 31, 2003 and the
statements of income for the three and nine months ended December
31, 2003 and 2002 and cash flows for the nine months ended
December 31, 2003 and 2002. The results of operations for the
three and nine months ended December 31, 2003, are not
necessarily indicative of the operating results expected for the
fiscal year ending March 31, 2004. These financial statements
should be read in conjunction with the financial statements and
notes thereto contained in the Company's annual report on Form 10-
KSB for the fiscal year ended March 31, 2003. 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 generally accepted accounting principles 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.
Note 2: Net Income Per Share
In accordance with the provisions of SFAS No. 128, "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 share includes the dilutive effect of
potential stock options and warrants exercised and the effects of
the potential conversion of preferred shares, calculated using
the treasury stock method. Outstanding stock options, warrants,
and convertible preferred shares issued by the Company represent
the only dilutive effect reflected in diluted weighted average
shares outstanding.
4
The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share
computations for the periods presented:
Three Months Ended Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income (numerator):
Net income $ 1,223,924 $ 434,710 $ 4,474,696 $ 1,541,926
========== ========== ========== ==========
Shares (denominator):
Weighted average number of common shares
outstanding used in basic computation 19,631,732 17,658,010 19,339,370 17,142,763
Common shares issuable upon exercise
of stock options and warrants 4,097,479 3,994,019 3,984,127 3,846,523
Common shares issuable upon conversion
of preferred shares 10,125 10,125 10,125 10,125
---------- ---------- ---------- ----------
Shares used in diluted computation 23,739,336 21,662,154 23,333,622 20,999,411
========== ========== ========== ==========
Net income per common share:
Basic $ 0.06 $ 0.03 $ 0.23 $ 0.09
========== ========== ========== ==========
Diluted $ 0.05 $ 0.02 $ 0.19 $ 0.07
========== ========== ========== ==========
For the periods ended December 31, 2003 and 2002, 55,000 and
144,600 shares of common stock options and warrants, with a
weighted average exercise price of $7.95 and $2.52, respectively,
were excluded from the diluted net income per share computation
as their exercise prices were greater than the average market
price of the common shares for the period.
Note 3: Accounting for Stock-Based Compensation
The Company accounts for employee stock options using the
intrinsic value method as prescribed by Accounting Principles
Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees. The Company follows the disclosure provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, for employee
stock options. Had the Company determined employee compensation
cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have
been decreased to the pro forma amounts indicated below:
Three Months Ended Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Reported net income: $ 1,223,924 $ 434,710 $ 4,474,696 $ 1,541,926
Deduct: total stock-based employee
compensation expense determined under
fair-value based method for all awards,
net of related tax effects 77,070 65,768 198,999 219,489
---------- ---------- ---------- ----------
Pro forma net income: $ 1,146,854 $ 368,942 $ 4,275,697 $ 1,322,437
========== ========== ========== ==========
Reported basic net income per share: $ 0.06 $ 0.03 $ 0.23 $ 0.09
========== ========== ========== ==========
Pro forma basic net income per share: $ 0.06 $ 0.02 $ 0.22 $ 0.08
========== ========== ========== ==========
Reported diluted net income per share: $ 0.05 $ 0.02 $ 0.19 $ 0.07
========== ========== ========== ==========
Pro forma diluted net income per share: $ 0.05 $ 0.02 $ 0.18 $ 0.06
========== ========== ========== ==========
5
Note 4: Line of Credit
On August 28, 2003, the Company signed an amendment to their
existing line of credit agreement, which extended the line of
credit from $2,000,000 up to $5,000,000. The Company's
$5,000,000 line of credit is effective through August 28, 2004,
and the interest rate is at the published thirty day London
Interbank Offered Rates ("LIBOR") plus 2.40% (3.52% at December
31, 2003), and contains various financial and operating
covenants. At December 31, 2003, there was an outstanding
balance of $1,300,000 under the line of credit agreement.
Note 5: Commitments and Contingencies
Various complaints had been filed with the Florida Board of
Pharmacy. These complaints, the majority of which were filed by
veterinarians who are in competition with the Company for the
sale of pet prescription-required products, alleged violations of
the Pharmacy Practice Act and regulations promulgated there
under. The vast majority of the complaints alleged that the
Company, through its pharmacists, improperly dispensed
prescription-required veterinary medication based on
prescriptions verified through the Company's discontinued
alternate veterinarian program. The alternate veterinarian
program used a veterinarian outside the state of Florida to
verify prescriptions for certain pets outside the state of
Florida. While the program was not used for pets residing in the
state of Florida, the complaints had, for the most part, been
filed with the Florida Board of Pharmacy. Other complaints
alleged the dispensing of medication without a valid
prescription, the sale of non-conforming products and that the
Company's pharmacy was operating at the same location as another
pharmacy, with which it had a contractual relationship. The
Company contested all allegations and continued discussions in an
attempt to reach a resolution of these matters.
In February 2002, the Company voluntarily ceased the use of its
alternate veterinarian program, and in March 2002 a business
decision was made to enter into a settlement agreement with the
Florida Board of Pharmacy, rather than to proceed with costly and
lengthy litigation. In April 2002, the Florida Board of Pharmacy
approved the settlement agreement. The Florida Board of Pharmacy
did not reach any finding of fact or conclusion of law that the
Company committed any wrongdoing or violated any rules or laws
governing the practice of pharmacy. According to the settlement
agreement, the Company's pharmacy license was placed on probation
for a period of three years and the Company, the Company's
pharmacists and contracted pharmacy and pharmacist, paid
approximately $120,000 in fines and investigative costs, in July
2002. The Company remains licensed with the State of Florida and
continues to operate its principal business in Florida.
The Company has settled with various states 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 is a defendant in a lawsuit in Texas state
district court seeking injunctive and monetary relief styled
Texas State Board of Pharmacy and State Board of Veterinary
Medical Examiners v. PetMed Express, Inc. Cause No.GN-202514, in
the 201st Judicial District Court, Travis County, Texas. The
Company in its initial pleading denied the allegations contained
therein. The Company will vigorously defend, is confident of its
compliance with the applicable law, and finds wrong-on-the-facts
the vast majority of the allegations contained in the Plaintiffs'
supporting documentation attached to the lawsuit. Discovery has
commenced and at this stage of the litigation it is difficult to
assess any possible outcome or estimate any potential loss in the
event of an adverse outcome.
Routine Proceedings
- -------------------
The Company is a party to routine litigation and regulatory
complaints incidental to its business. The Company's management
does not believe that the resolution of any or all of such
routine litigation and regulatory complaints are likely to have a
material adverse effect on the Company's financial condition or
results of operations.
6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
- --------
PetMed Express was incorporated in the state of Florida in
January 1996. On January 21, 2004, the Company announced that
its application to list its common stock on the NASDAQ National
Market ("NASDAQ") was approved, with trading on NASDAQ beginning
on January 23, 2004 under the symbol "PETS." Prior to the move
to NASDAQ, the Company`s shares had been traded on the over-the-
counter-bulletin board. The Company began selling pet
medications and products in September 1996, and in the fall of
1997 it issued its first catalog. This catalog displayed
approximately 1,200 items, including prescription and non-
prescription pet medications, pet health and nutritional
supplements and pet accessories. In fiscal 2001, the Company
focused its product line on approximately 600 of the most popular
pet medications and health and nutritional supplements for dogs
and cats. The Company also markets products on its web site,
where it currently generates approximately 50% of all sales.
Since October 1997, the Company has advertised its products on
national television, on-line, and through direct mail
advertising.
The Company's sales consist of products sold to mainly retail
consumers and minimally to wholesale customers. Typically, the
Company's retail customers pay by credit card or check at the
time the order is shipped. The Company usually receives cash
settlement in two to three banking days for sales paid for by
credit cards, which minimizes the accounts receivable balances
relative to the Company's sales. Certain wholesale customers are
extended credit terms, which usually require payment within 30
days of delivery. For the quarters ended December 31, 2003 and
2002, the Company's sales returns average was approximately 1.5%
of sales, and the twelve month average purchase was approximately
$72 per order.
Critical Accounting Policies
- ----------------------------
Our discussion and analysis of our financial condition and the
results of our operations 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, long-lived assets, income taxes, litigation and
contingencies. 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 primarily to retail consumers and minimally to wholesale
customers. The Company's policy is to recognize revenue from
product sales upon shipment, when the rights of ownership and
risk of loss have passed to the consumer. Outbound shipping and
handling fees are included in sales and are billed upon shipment.
Shipping and handling expenses are included in cost of sales.
The majority 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 accounts
receivable balances relative to sales. The Company maintains an
allowance for doubtful accounts for losses that the Company
estimates will arise from the customers' inability to make
required payments, arising from either credit card charge-backs
or insufficient fund checks. The Company determines its
estimates of the uncollectibility of accounts receivable by
analyzing historical bad debts and current economic trends. At
December 31, 2003 the allowance for doubtful accounts was
approximately $9,000.
Valuation of inventory
- ----------------------
Inventories consist of prescription and non-prescription pet
medications that are available for sale and are priced at the
lower of cost or market value using a weighted average cost
method. The Company writes down its inventory for estimated
obsolescence. At December 31, 2003 the inventory reserve was
approximately $278,000.
Property and equipment
- ----------------------
Property and equipment are stated at cost and depreciated using
the straight-line method over the estimated useful lives of the
assets. The furniture, fixtures, equipment and computer software
are depreciated over periods ranging from three to ten years.
Leasehold improvements and assets under capital lease agreements
are amortized over the shorter of the underlying lease agreement
or the useful life of the asset.
7
Long-lived assets
- -----------------
Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may
not be recoverable. Recoverability of assets is measured by
comparison of the carrying amount of the asset to net future cash
flows expected to be generated from the asset.
Advertising
- -----------
The Company's advertising expense consists primarily of
television advertising, internet marketing, and direct mail
advertising. Television costs are expensed as the advertisements
are televised and direct mail costs are expensed when the related
print materials are produced, distributed or superseded.
Accounting for income taxes
- ---------------------------
The Company accounts for income taxes under the provisions of
SFAS No. 109, 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 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.
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 items appearing in the
Company's condensed consolidated statements of operations.
Three Months Ended Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 58.9 57.4 59.9 57.2
---------- ---------- ---------- ----------
Gross profit 41.1 42.6 40.1 42.8
---------- ---------- ---------- ----------
Operating expenses:
General and administrative 13.5 16.3 11.1 14.6
Advertising 15.3 19.1 18.7 21.8
Depreciation and amortization 0.8 0.9 0.6 0.7
---------- ---------- ---------- ----------
Total operating expenses 29.6 36.3 30.4 37.1
---------- ---------- ---------- ----------
Income from operations 11.5 6.3 9.7 5.7
---------- ---------- ---------- ----------
Other income (expense):
Gain on disposal of property and equipment - 0.2 - -
Interest expense - (0.1) - -
---------- ---------- ---------- ----------
Total other income - 0.1 - -
---------- ---------- ---------- ----------
Income before provision for income taxes 11.5 6.4 9.7 5.7
Provision for income taxes 4.4 2.4 3.5 1.9
---------- ---------- ---------- ----------
Net income 7.1 4.0 6.2 3.8
========== ========== ========== ==========
8
Three Months Ended December 31, 2003 Compared With Three Months
Ended December 31, 2002, and Nine Months Ended December 31, 2003
Compared With Nine Months Ended December 31, 2002
Sales
- -----
Sales increased by approximately $6,120,000, or 55.4%, to
approximately $17,170,000 for the quarter ended December 31,
2003, from approximately $11,050,000 for the quarter ended
December 31, 2002. For the nine months ended December 31, 2003,
sales increased by approximately $32,415,000, or 80.8%, to
approximately $72,526,000 compared to sales of $40,111,000 for
the nine months ended December 31, 2002. The increase in sales
for the three and nine months ended December 31, 2003 can be
primarily attributed to increased retail reorders and the
positive effects generated from our advertising campaign.
Additionally, the Company's free shipping promotion, which was
initiated in March 2003, had a positive impact on sales.
The Company has committed certain amounts specifically
designated towards television and direct mail advertising to
stimulate sales, create brand awareness, and acquire new
customers. Retail new order sales have increased by
approximately $718,000, or 14.4%, to approximately $5,704,000 for
the three months ended December 31, 2003, from approximately
$4,986,000 for the three months ended December 31, 2002. Retail
new order sales have increased by approximately $13,605,000, or
62.4%, to approximately $35,413,000 for the nine months ended
December 31, 2003, from approximately $21,808,000 for the nine
months ended December 31, 2002. Retail reorder sales have
increased by approximately $5,382,000, or 89.7%, to approximately
$11,384,000 for the three months ended December 31, 2003, from
approximately $6,002,000 for the three months ended December 31,
2002. Retail reorder sales have increased by approximately
$18,672,000, or 103.0%, to approximately $36,798,000 for the nine
months ended December 31, 2003, from approximately $18,126,000
for the nine months ended December 31, 2002. The Company
acquired approximately 82,000 new customers for the quarter ended
December 31, 2003, compared to approximately 74,000 new customers
for the same period prior year. For the nine months ended
December 31, 2003, the Company acquired approximately 482,000 new
customers, compared to 309,000 new customers for the same period
in the prior year.
The majority of our product sales are affected by the seasons,
due to the seasonality of mainly heartworm and flea and tick
medications. Industry seasonality trends, according to Fountain
Agricounsel LLC, Management Consultants to Agribusiness, are
divided into percentage of industry sales by quarter. For the
quarters ended March 31, June 30, September 30, and December 31
industry sales are approximately 19%, 37%, 28%, and 16%,
respectively. The Company cannot accurately predict future
sales; however, based on current circumstances the Company does
not expect a significant variance compared to the historical
industry trends in the fourth quarter of fiscal 2004.
Cost of sales
- -------------
Cost of sales increased by approximately $3,778,000, or 59.6%,
to approximately $10,120,000 for the quarter ended December 31,
2003, from approximately $6,342,000 for the quarter ended
December 31, 2002. For the nine months ended December 31, 2003,
cost of sales increased by approximately $20,509,000, or 89.4%,
to approximately $43,448,000 compared to cost of sales of
$22,939,000 for the nine months ended December 31, 2002. The
increase in cost of sales for the three and nine months ended
December 31, 2003 is directly related to the increase in retail
sales. As a percent of sales, the cost of sales was 58.9% and
59.9% for the three and nine months ended December 31, 2003, as
compared to 57.4% and 57.2% for the three and nine months ended
December 31, 2002. This percentage increase can be directly
attributed to the free shipping promotion, with a portion offset
by increases in our product pricing.
Gross profit
- ------------
Gross profit increased by approximately $2,341,000, or 49.7%,
to approximately $7,050,000 for the quarter ended December 31,
2003, from approximately $4,709,000 for the quarter ended
December 31, 2002. For the nine months ended December 31, 2003,
gross profit increased by approximately $11,907,000, or 69.3%, to
approximately $29,078,000 compared to gross profit of $17,171,000
for the nine months ended December 31, 2002. Gross profit as a
percentage of sales was 41.1% and 40.1% for the three and nine
months ended December 31, 2003, as compared to 42.6% and 42.8%
for the three and nine months ended December 31, 2002. This
percentage decrease can be attributed to the Company's free
shipping promotion, with a portion offset by increases in our
product pricing.
9
General and administrative expenses
- -----------------------------------
General and administrative expenses increased by approximately
$517,000, or 28.7%, to approximately $2,318,000 for the quarter
ended December 31, 2003, from approximately $1,801,000 for the
quarter ended December 31, 2002. For the nine months ended
December 31, 2003, general and administrative expenses increased
by approximately $2,199,000, or 37.5%, to approximately
$8,058,000 compared to general and administrative expenses of
$5,859,000 for the nine months ended December 31, 2002. The
increase in general and administrative expenses for the three
months ended December 31, 2003 was primarily due to the
following: a $278,000 increase to payroll expenses which can be
attributed to the addition of new employees in the customer
service and pharmacy departments which enabled the company to
sustain its continued growth; a $122,000 increase to bank service
and credit card fees, which can be directly attributed to
increased sales; a $65,000 increase to property expenses, which
relates to additional rent due to our warehouse expansion in
October; a $48,000 increase in insurance expenses, which relates
to additional premium paid for property insurance on our
increased inventory and directors and officer insurance; and a
$14,000 increase to office expenses, offset with a $10,000
reduction to professional fees, travel expenses, bad debt and
telephone expenses, collectively. The increase in general and
administrative expenses for the nine months ended December 31,
2003 was primarily due to the following: a $959,000 increase to
payroll expenses which can be attributed to the addition of new
employees in the customer service and pharmacy departments which
enabled the company to sustain its continued growth; a $663,000
increase to bank service and credit card fees, which can be
directly attributed to increased sales; a $233,000 increase to
professional fees; a $181,000 increase to telephone expenses
which is directly related to the increase in the nine month
sales; a $128,000 increase in insurance expenses, which relates
to additional premium paid for property insurance on our
increased inventory and directors and officer insurance and a
$35,000 increase in other expenses which includes mainly
property, and other related office expenses.
Advertising expenses
- --------------------
Advertising expenses increased by approximately $502,000, or
23.7%, to approximately $2,618,000 for the quarter ended December
31, 2003, from approximately $2,116,000 for the quarter ended
December 31, 2002. For the nine months ended December 31, 2003,
advertising expenses increased by approximately $4,815,000, or
55.0%, to approximately $13,571,000 compared to advertising
expenses of $8,756,000 for the nine months ended December 31,
2002. The increase in advertising expenses for the three and
nine months ended December 31, 2003 was due to the Company's plan
to commit certain amounts specifically designated towards
television and direct mail advertising to stimulate sales, create
brand awareness, and acquire new customers.
Depreciation and amortization expenses
- --------------------------------------
Depreciation and amortization expenses increased by
approximately $40,000, or 40.6%, to approximately $138,000 for
the quarter ended December 31, 2003, from approximately $98,000
for the quarter ended December 31, 2002. For the nine months
ended December 31, 2003, depreciation and amortization expenses
increased by approximately $132,000, or 50.0%, to approximately
$397,000 compared to depreciation and amortization expenses of
$265,000 for the nine months ended December 31, 2002. This
increase to depreciation and amortization expense for three and
nine months ended December 31, 2003 can be attributed to
increased property and equipment additions mainly related to the
warehouse expansion, since the first quarter of fiscal 2003.
Gain on disposal of property and equipment
- ------------------------------------------
In the third quarter of fiscal 2003, the Company recorded a
gain on disposal of computer equipment of $15,000. The computer
equipment was sold to an unrelated third party and the Company
received gross proceeds of $15,000.
Interest expense
- ----------------
Interest expense decreased by approximately $5,000, or 52.5%,
to approximately $4,000 for the quarter ended December 31, 2003,
from approximately $9,000 for the quarter ended December 31,
2002. For the nine months ended December 31, 2003, interest
expense decreased by approximately $11,000, or 55.5%, to
approximately $8,000 compared to interest expense of $19,000 for
the nine months ended December 31, 2002. Interest expense may
increase in future quarters, due to the Company utilizing its
$5,000,000 line of credit to increase inventory levels.
10
Provision for income taxes
- --------------------------
The Company had incurred significant net losses since its
inception in 1996, through the quarter ended June 30, 2001.
These losses have resulted in net operating loss carryforwards,
which have been used by the Company to offset its tax
liabilities. For the fiscal year ended March 31, 2002, the
Company recorded a full valuation allowance against the deferred
income tax assets, created by net operating losses, since future
utilization of these assets was subject to the Company's ability
to generate taxable income. For the fiscal year ended March 31,
2003, the Company recognized a deferred income tax asset of
approximately $581,000, due to the fact that the Company had
demonstrated the ability to generate taxable income. There are
no guarantees that the Company will be able to utilize all future
net operating loss carryforwards unless the Company generates
taxable income. For the quarters ended December 31, 2003 and
2002, the Company recorded an income tax provision for
approximately $750,000 and $266,000, respectively; to provide for
taxable income as the utilization of net operating loss
carryforwards are limited.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital at December 31, 2003 and March
31, 2003 was $9,371,000 and $3,018,000, respectively. The
$6,353,000 increase in working capital was primarily attributable
to cash flow generated from operations and the exercise of stock
options. Net cash used in operating activities was $3,099,000
and $792,000 for the nine months ended December 31, 2003 and
2002, respectively. Net cash used in investing activities was
$325,000 and $1,015,000 for the nine months ended December 31,
2003 and 2002, respectively. Net cash provided by financing was
$2,442,000 and $1,201,000 for the nine months ended December 31,
2003 and 2002, respectively. This increase relates to the
exercise of stock options in the first and second quarter of
fiscal 2004, and increased borrowings on our revolving line of
credit in the third quarter of fiscal 2004.
The Company maintains a $5,000,000 line of credit, effective
through August 28, 2004. The interest rate is at the published
thirty day London Interbank Offered Rates ("LIBOR") plus 2.40%
(3.52% at December 31, 2003), and contains various financial and
operating covenants. At December 31, 2003, there was a
$1,300,000 outstanding balance under the line of credit
agreement.
On July 25, 2003 the Company signed an amendment to its current
lease agreement to obtain an additional 8,000 square feet, with
an option to add another 3,600 square feet, to its current 32,000
square foot facility, which became available on October 1, 2003.
This addition to the warehouse was necessary to increase the
Company's capacity to store additional inventory during our peak
season. The Company had financed certain equipment acquisitions
with capital leases. As of June 30, 2003 the Company had no
outstanding lease commitments. The Company's sources of working
capital include the line of credit, cash from operations, and the
exercise of stock options and warrants. For the remainder of
fiscal 2004, the Company has approximately $350,000 planned for
capital expenditure commitments for the warehouse expansion to
further the Company's growth. These capital expenditures will be
funded through cash from operations.
The Company presently has no need for other alternative
sources of working capital. The Company may seek to raise
additional capital through the sale of equity securities. No
assurances can be given that the Company will be successful in
obtaining additional capital, or that such capital will be
available in terms acceptable to the Company. At this time, the
Company has no commitments or plans to obtain additional capital.
Further, there can be no assurances that even if such additional
capital is obtained that the Company will sustain profitability
or positive cash flow.
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," "plan," "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," "PetMed," "1-888-PetMeds," "PetMed
Express.com," "the Company," "we," "our," and "us" refers to
PetMed Express, Inc. and our subsidiaries.
11
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, accounts payable, line of
credit, and debt obligations. The book values of cash
equivalents, accounts receivable, and accounts payable are
considered to be representative of fair value because of the
short maturity of these instruments. We estimate that the fair
value of all of our debt obligations approximate $1,385,000 as of
December 31, 2003, of which $1,300,000 relates to our revolving
line of credit.
We do not utilize financial instruments for trading purposes
and we do not hold any derivative financial instruments that
could expose us to significant market risk. Our exposure to
market risk for changes in interest rates relates primarily to
our obligations under our line of credit. As of February 6,
2004, there was a $650,000 outstanding balance under the line of
credit agreement. A ten percent increase in short-term interest
rates on the variable rate debts outstanding as of February 6,
2004 would not have a material impact on our quarterly interest
expense, assuming the amount of debt outstanding remains
constant.
The above sensitivity analysis for interest rate risk excludes
accounts receivable, accounts payable and accrued liabilities
because of the short-term maturity of such instruments. The
analysis does not consider the effect this movement may have on
other variables including changes in revenue volumes that could
be indirectly attributed to changes in interest rates. The
actions that management would take in response to such a change
are also not considered. If it were possible to quantify this
impact, the results could well be different than the sensitivity
effects shown above.
Item 4. Controls and Procedures.
The Company's management, including our Chief Executive
Officer and Chief Financial Officer, have conducted an evaluation
of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-14(c)
promulgated under the Securities Exchange Act of 1934, as
amended) as of the quarter ended December 31, 2003, 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, that our disclosure controls
and procedures are effective for timely gathering, analyzing and
disclosing the information we are required to disclose in our
reports filed under the Securities Exchange Act of 1934, as
amended. There have been no significant changes made in our
internal controls or in other factors that could significantly
affect our internal controls over financial reporting during the
period covered by this report.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report.
31.1 Certification of Chief Executive 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 31.1 of the Registrant's Report on Form 10-Q for the
quarter ended December 31, 2003, Commission File No. 000-28827).
31.2 Certification of Chief 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 December 31, 2003, Commission File No. 000-28827).
32.1 Certification of Chief Executive 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 December 31, 2003, Commission File No. 000-28827).
32.2 Certification of Chief 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
32.2 of the Registrant's Report on Form 10-Q for the quarter
ended December 31, 2003, Commission File No. 000-28827).
(b) Reports on Form 8-K during the fiscal quarter ended
December 31, 2003
(1) On October 27, 2003 the Company filed a report under Items 7
and 9 disclosing a press release reporting its financial results
for the quarter ended September 30, 2003.
(2) On November 12, 2003 the Company filed a report under Items 7
and 9 disclosing a quarterly conference call transcript reporting
its financial results for the quarter ended September 30, 2003.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PETMED EXPRESS, INC.
(The "Registrant")
Date: February 6, 2004
By: /s/ Menderes Akdag
--------------------------------
Menderes Akdag
Chief Executive Officer
(principal executive officer)
By: /s/ Bruce S. Rosenbloom
--------------------------------
Bruce S. Rosenbloom
Chief Financial Officer
(principal financial and accounting officer)
14
_________________________________________________________________
_________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC
_______________________
FORM 10-Q
FOR THE QUARTER ENDED:
DECEMBER 31, 2003
_______________________
EXHIBITS
_______________________
_________________________________________________________________
_________________________________________________________________
EXHIBIT INDEX
-------------
Number of Incorporated
Pages By
Exhibit in Original Reference
Number Description Document +
31.1 Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 1 **
31.2 Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 1 **
32.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350 1 **
32.2 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 1 **
** Filed herewith