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 June 30, 2004
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 Identification No.)
incorporation or organization)
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 CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 23,018,723 Common
Shares, $.001 par value per share at August 9, 2004.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2004 2004
----------- ------------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents $ 5,162,754 $ 3,278,926
Accounts receivable, less allowance for doubtful
accounts of $21,780 and $22,987, respectively 1,076,851 1,133,301
Inventories - finished goods 14,169,941 11,179,858
Prepaid expenses and other current assets 223,097 232,218
------------- -------------
Total current assets 20,632,643 15,824,303
Property and equipment, net 1,596,478 1,688,327
Deferred income taxes 581,356 581,356
Intangible asset 365,000 365,000
Other assets 14,167 21,822
------------- -------------
Total assets $ 23,189,644 $ 18,480,808
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 5,661,727 $ 3,273,062
Income taxes payable 878,596 422,445
Accrued expenses and other current liabilities 525,852 722,350
Loan obligation 51,332 68,442
------------- -------------
Total liabilities 7,117,507 4,486,299
------------- -------------
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; 22,058,723 and 21,860,057 shares
issued and outstanding, respectively 22,059 21,860
Additional paid-in capital 10,123,316 9,864,025
Retained earnings 5,917,864 4,099,726
------------- -------------
Total shareholders' equity 16,072,137 13,994,509
------------- -------------
Total liabilities and shareholders' equity $ 23,189,644 $ 18,480,808
============= =============
See accompanying notes to condensed consolidated financial statements
1
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
June 30,
2004 2003
------------- -------------
Sales $ 35,288,528 $ 30,387,563
Cost of sales 21,426,719 18,582,680
------------- -------------
Gross profit 13,861,809 11,804,883
------------- -------------
Operating expenses:
General and administrative 3,221,905 3,021,254
Advertising 7,754,829 6,508,990
Depreciation and amortization 159,059 127,351
Total operating expenses ------------- -------------
11,135,793 9,657,595
------------- -------------
Income from operations 2,726,016 2,147,288
------------- -------------
Other income (expense)
Interest expense (742) (2,681)
Interest income 4,633 2,149
Other, net (410) 608
------------- -------------
Total other income (expense) 3,481 76
------------- -------------
Income before provision for income taxes 2,729,497 2,147,364
Provision for income taxes 911,359 714,780
------------- -------------
Net Income $ 1,818,138 $ 1,432,584
============= =============
Net income per common share:
Basic $ 0.08 $ 0.08
============= =============
Dilutive $ 0.08 $ 0.06
============= =============
Weighted average number of common shares outstanding:
Basic 22,017,221 19,010,438
============= =============
Dilutive 23,882,936 23,012,611
============= =============
See accompanying notes to condensed consolidated financial statements
2
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 1,818,138 $ 1,432,584
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 159,059 127,351
Tax benefit related to stock options exercised 32,763 387,600
Bad debt expense 170 9,588
(Increase) decrease in operating assets and liabilities:
Accounts receivable 56,280 (655,314)
Inventory (2,990,083) (2,617,015)
Prepaid expenses and other current assets 9,121 19,713
Other assets 7,655 28,333
Accounts payable 2,388,665 932,964
Income taxes payable 456,151 248,538
Accrued expenses and other current liabilities (196,498) 22,803
------------ ------------
Net cash provided by (used in) operating activities 1,741,421 (62,855)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (67,210) (209,902)
------------ ------------
Net cash used in investing activities (67,210) (209,902)
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options, warrants
and other transactions 226,727 798,203
Payments on loan obligation (17,110) (17,111)
------------ ------------
Net cash provided by financing activities 209,617 781,092
------------ ------------
Net increase in cash and cash equivalents 1,883,828 508,335
Cash and cash equivalents, at beginning of period 3,278,926 984,169
------------ ------------
Cash and cash equivalents, at end of period $ 5,162,754 $ 1,492,504
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 802 $ 2,404
============ ============
Cash paid for income taxes $ 422,445 $ 32,500
============ ============
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 2005 or 2004 refer to the Company's fiscal years ending March 31,
2005 and 2004, respectively.
Basis of Presentation and Consolidation
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 June 30, 2004 and the statements
of income for the three months ended June 30, 2004 and 2003 and cash flows
for the three months ended June 30, 2004 and 2003. The results of
operations for the three months ended June 30, 2004 and 2003 are not
necessarily indicative of the operating results expected for the fiscal
year ending March 31, 2005. 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-K for the fiscal year ended March 31,
2004. 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
June 30,
2004 2003
------------ ------------
Net income (numerator):
Net income $ 1,818,138 $ 1,432,584
============ ============
Shares (denominator):
Weighted average number of common shares
outstanding used in basic computation 22,017,221 19,010,438
Common shares issuable upon exercise
of stock options and warrants 1,855,590 3,992,048
Common shares issuable upon conversion
of preferred shares 10,125 10,125
------------ ------------
Shares used in diluted computation 23,882,936 23,012,611
============ ============
Net income per common share:
Basic $ 0.08 $ 0.08
============ ============
Diluted $ 0.08 $ 0.06
============ ============
For the periods ended June 30, 2004 and 2003, 250,000 and 24,600 shares
of common stock options, with a weighted average exercise price of $10.64
and $4.12, 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
June 30,
2004 2003
------------ ------------
Reported net income: $ 1,818,138 $ 1,432,584
Deduct: total stock-based employee compensation
expense determined under fair-value based method
for all awards, net of related tax effects 159,406 44,859
------------ ------------
Pro forma net income: $ 1,658,732 $ 1,387,725
============ ============
Reported basic net income per share: $ 0.08 $ 0.08
============ ============
Pro forma basic net income per share: $ 0.08 $ 0.07
============ ============
Reported diluted net income per share: $ 0.08 $ 0.06
============ ============
Pro forma diluted net income per share: $ 0.07 $ 0.06
============ ============
5
Note 4: Line of Credit
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% (3.73% at June 30, 2004), and contains
various financial and operating covenants. At June 30, 2004, there was no
outstanding balance under the line of credit agreement.
Note 5: Commitments and Contingencies
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 administrative complaints
incidental to its business. Management does not believe that the resolution
of any or all of such routine litigation and administrative complaints are
likely to have a material adverse effect on the Company's financial condition
or results of operations. 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.
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Executive Summary
PetMed Express was incorporated in the state of Florida in January 1996.
The Company's common stock is traded on the Nasdaq National Market
("NASDAQ") under the symbol "PETS." Prior to the move to the 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 issued its first catalog in the fall of 1997. 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 markets its products through national
television, online, and direct mail advertising campaigns which direct the
consumers to order by phone or on the Internet, and aim to increase the
recognition of the "1-800-PetMeds" brand name. We currently generate
approximately 52% of all sales via the Internet.
The Company's sales consist of products sold mainly to retail consumers
and minimally to wholesale customers. Typically, the Company's customers
pay by credit card or check at the time the order is shipped. The Company
usually receives cash settlement in one to three banking days for sales paid
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. The
Company's sales returns average was approximately 1.6% and 1.5% of sales
for the quarters ended on June 30, 2004 and 2003 respectively. The twelve
month average purchase was approximately $74 and $73 per order, and the
three month average purchase was approximately $79 and $74 per order for the
quarters ended June 30, 2004 and 2003, respectively.
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 one 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 funds
checks. The Company determines its estimates of the uncollectibility of
accounts receivable by analyzing historical bad debts and current economic
trends. At June 30, 2004 and 2003 the allowance for doubtful accounts was
approximately $22,000 and $26,000, respectively.
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 June 30, 2004 and 2003 the
inventory reserve was approximately $289,000 and $141,000, respectively.
7
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.
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
June 30,
2004 2003
-------- --------
Sales 100.0 % 100.0 %
Cost of sales 60.7 61.1
------- -------
Gross profit 39.3 38.9
------- -------
Operating expenses:
General and administrative 9.1 9.9
Advertising 22.0 21.4
Depreciation and amortization 0.5 0.5
------- -------
Total operating expenses 31.6 31.8
------- -------
Income from operations 7.7 7.1
------- -------
Provision for income taxes 2.5 2.4
------- -------
Net income 5.2 % 4.7 %
======= =======
8
Three Months Ended June 30, 2004 Compared With Three Months Ended
June 30, 2003
Sales
- -----
Sales increased by approximately $4,901,000, or 16.1%, to approximately
$35,289,000 for the quarter ended June 30, 2004, from approximately
$30,388,000 for the quarter ended June 30, 2003. The increase in sales for
the three months ended June 30, 2004 can be primarily attributed to
increased retail reorders sales, offset with decreased new order sales.
The Company has committed certain amounts specifically designated towards
television, direct mail and on-line advertising to stimulate sales, create
brand awareness, and acquire new customers. Retail reorder sales have
increased by approximately $7,438,000, or 60.0%, to approximately
$19,946,000 for the three months ended June 30, 2004, from approximately
$12,508,000 for the three months ended June 30, 2003. Retail new order sales
have decreased by approximately $2,837,000, or 15.9%, to approximately
$14,928,000 for the three months ended June 30, 2004, from approximately
$17,765,000 for the three months ended June 30, 2003. Wholesale sales
have increased by approximately $299,000, or 260.8%, to approximately
$414,000 for the three months ended June 30, 2004, from approximately
$115,000 for the three months ended June 30, 2003. The Company acquired
approximately 191,000 new customers for the quarter ended June 30, 2004,
compared to approximately 234,000 new customers for the same period prior
year.
We believe that the decrease to new order sales is directly related to
television advertising availability and increased competition. During the
three months ended June 30, 2004 television advertising accounted for 46%
of our overall advertising expenditures, with 42% spent on direct mail/print
advertising and the remainder spent on on-line advertising. In contrast
during the three months ended June 30, 2003 television advertising accounted
for 74% of our overall advertising expenditures, with 17% spent on direct
mail/print advertising and the remainder spent on on-line advertising.
This shift from spending the majority of our advertising budget on
television advertising in the first quarter of fiscal year 2003 to spending
less than half of our advertising budget in the first quarter of fiscal year
2004 was the result of a cost benefit analysis. This indicated that such
a shift was necessary because of a shortage of television advertising
inventory and an increase in the cost of available television advertising
and that print media could be a viable alternative. Management believes
that this increased demand for television advertising is a result of the
strengthening economy and a surge in political advertising associated with
the upcoming elections. The Company expects this trend in advertising,
which has an effect on sales, to continue into our fiscal third quarter,
until the presidential elections are over.
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 June 30, September 30, December 31, and
March 31 industry sales are approximately 37%, 28%, 16%, and 19%,
respectively. For the quarters ended June 30, September 30, December 31,
and March 31 of fiscal 2004, Company's sales were approximately 32%, 27%,
18%, and 23%, respectively.
Cost of sales
- -------------
Cost of sales increased by approximately $2,844,000, or 15.3%, to
approximately $21,427,000 for the quarter ended June 30, 2004, from
approximately $18,583,000 for the quarter ended June 30, 2003. The increase
in cost of sales for the three months ended June 30, 2004 is directly related
to the increase in retail sales. As a percent of sales, the cost of sales
was 60.7% and 61.1% for the three months ended June 30, 2004 and 2003,
respectively. The percentage decrease can be attributed to increases in our
product pricing, slightly offset by increases to our product cost.
Gross profit
- ------------
Gross profit increased by approximately $2,057,000, or 17.4%, to
approximately $13,862,000 for the quarter ended June 30, 2004, from
approximately $11,805,000 for the quarter ended June 30, 2003. Gross profit
as a percentage of sales was 39.3% and 38.9% for the three months ended
June 30, 2004 and 2003, respectively. The percentage increase can be
attributed to increases in our product pricing, slightly offset by
increases to our product cost.
9
General and administrative expenses
- -----------------------------------
General and administrative expenses increased by approximately $201,000,
or 6.6%, to approximately $3,222,000 for the quarter ended June 30, 2004,
from approximately $3,021,000 for the quarter ended June 30, 2003. The
increase in general and administrative expenses for the three months ended
June 30, 2004 was primarily due to the following: a $237,000 increase to
payroll expenses which can be attributed to the addition of new employees
in the customer service and pharmacy departments enabling the company to
sustain its growth; a $93,000 increase to bank service and credit card
fees, which can be directly attributed to increased sales; a $39,000
increase to property expenses, relating to additional rent due to our
warehouse expansion; and a $35,000 increase to office expenses. Offsetting
the increase were an $119,000 reduction to professional fees, primarily
relating to a reduction in legal fees; a $70,000 reduction to telephone
expenses; and a $14,000 reduction to insurance expenses, travel expenses,
and bad debt expenses, collectively.
Advertising expenses
- --------------------
Advertising expenses increased by approximately $1,246,000, or 19.1%, to
approximately $7,755,000 for the quarter ended June 30, 2004, from
approximately $6,509,000 for the quarter ended June 30, 2003. The increase
in advertising expenses for the three months ended June 30, 2004 was due to
the Company's plan to commit certain amounts specifically designated towards
television, direct mail/print and on-line advertising to stimulate sales,
create brand awareness, and acquire new customers. As a percentage of
sales, advertising expense was 22.0% and 21.4% for the three month ended
June 30, 2004 and 2003, respectively. The Company expects advertising as a
percentage of sales to range from approximately 18.0% to 22.0% in fiscal
2005. However, that advertising percentage will fluctuate quarter to quarter
due to seasonality and advertising availability.
Depreciation and amortization expenses
- --------------------------------------
Depreciation and amortization expenses increased by approximately
$32,000, or 24.9%, to approximately $159,000 for the quarter ended June 30,
2004, from approximately $127,000 for the quarter ended June 30, 2003.
This increase to depreciation and amortization expense for three months
ended June 30, 2004 can be attributed to increased property and equipment
additions mainly related to the warehouse expansion since the first quarter
of fiscal 2003.
Interest expense
- ----------------
Interest expense decreased by approximately $2,000, or 72.3%, to
approximately $1,000 for the quarter ended June 30, 2004, from approximately
$3,000 for the quarter ended June 30, 2003. Interest expense may increase
in future quarters to meet demand as the Company utilizes its $5,000,000
line of credit to increase inventory levels.
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 June 30, 2004 and 2003, the Company recorded an income tax
provision for approximately $911,000 and $715,000, respectively, to provide
for taxable income as the utilization of net operating loss carryforwards
is limited.
Liquidity and Capital Resources
The Company's working capital at June 30, 2004 and March 31, 2004 was
$13,515,000 and $11,338,000, respectively. The $2,177,000 increase in
working capital was primarily attributable to cash flow generated from
operations and the exercise of stock options. For the three months ended
June 30, 2004 net cash provided by operating activities was $1,741,000, as
compared to net cash used in operating activities of $63,000 for the three
months ended June 30, 2003. Net cash used in investing activities was
$67,000 and $210,000 for the three months ended June 30, 2004 and 2003,
respectively. Net cash provided by financing was $210,000 and $781,000 for
the three months ended June 30, 2004 and 2003, respectively.
10
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% (3.73% at June 30, 2004), and
contains various financial and operating covenants. At June 30, 2004 and
2003, there was no 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 2005,
the Company has Xapproximately $280,000 planned for capital expenditure to
maintain existing capital assets and to add additional computer equipment
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.
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 $51,000 as of June 30, 2004.
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 August 9, 2004, there was no 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 August 9, 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.
11
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 June 30, 2004, 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 Principal 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 June 30,
2004, Commission File No. 000-28827).
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 June 30,
2004, Commission File No. 000-28827).
32.1 Certification 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 June 30, 2004, Commission File No. 000-28827).
(b) Reports on Form 8-K during the fiscal quarter ended June 30, 2004
(1) On May 10, 2004 the Company filed a report under Items 7 and 9
disclosing the press release date for reporting its financial results
for the year ended March 31, 2004.
(2) On May 17, 2004 the Company filed a report under Items 7 and 9
disclosing a press release reporting its financial results for the
year ended March 31, 2004.
(3) On May 17, 2004 the Company filed a report under Items 7 and 9
disclosing its conference call transcript for the year ended March
31, 2004.
(4) On June 29, 2004 the Company filed a report under Items 7 and 9
disclosing the announcement of its ranking in BusinessWeek Magazine's
Top 100 Hot Growth Companies.
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: August 9, 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:
JUNE 30, 2004
________________________
EXHIBITS
________________________
____________________________________________________________________________
____________________________________________________________________________
EXHIBIT INDEX
-------------
Exhibit Number of Pages Incorporated By
Number Description in Original Document Reference
31.1 Certification of Principal 1 **
Executive Officer Pursuant
to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Principal 1 **
Financial Officer Pursuant
to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 1 **
18 U.S.C. Section 1350, as
adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
** Filed herewith