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, 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: 23,418,723
Common Shares, $.001 par value per share at November 5, 2004.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2004 2004
(UNAUDITED)
------------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 10,789,914 $ 3,278,926
Accounts receivable, less allowance for doubtful
accounts of $15,439 and $22,987, respectively 761,861 1,133,301
Inventories - finished goods 9,412,843 11,179,858
Prepaid expenses and other current assets 330,892 232,218
------------ ------------
Total current assets 21,295,510 15,824,303
Property and equipment, net 1,484,557 1,688,327
Deferred income taxes 581,356 581,356
Intangible asset 365,000 365,000
Other assets 14,167 21,822
------------ ------------
Total assets $ 23,740,590 $ 18,480,808
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 3,298,472 $ 3,273,062
Income taxes payable 584,835 422,445
Accrued expenses and other current liabilities 448,634 722,350
Loan obligation 0 68,442
------------ ------------
Total liabilities 4,331,941 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; 23,018,723 and 21,860,057 shares
issued and outstanding, respectively 23,019 21,860
Additional paid-in capital 11,647,213 9,864,025
Retained earnings 7,729,519 4,099,726
------------ ------------
Total shareholders' equity 19,408,649 13,994,509
------------ ------------
Total liabilities and shareholders' equity $ 23,740,590 $ 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 Six Months Ended
September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Sales $ 28,754,697 $ 24,969,228 $ 64,043,225 $ 55,356,791
Cost of sales 17,141,556 14,745,824 38,568,275 33,328,504
------------ ------------ ------------ ------------
Gross profit 11,613,141 10,223,404 25,474,950 22,028,287
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 2,971,268 2,718,371 6,193,173 5,739,625
Advertising 5,629,991 4,443,980 13,384,820 10,952,970
Depreciation and amortization 155,294 132,049 314,353 259,400
------------ ------------ ------------ ------------
Total operating expenses 8,756,553 7,294,400 19,892,346 16,951,995
------------ ------------ ------------ ------------
Income from operations 2,856,588 2,929,004 5,582,604 5,076,292
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (138) (1,526) (880) (4,207)
Interest income 17,372 4,705 22,005 6,854
Other, net 1,821 378 1,411 986
------------ ------------ ------------ ------------
Total other income (expense) 19,055 3,557 22,536 3,633
------------ ------------ ------------ ------------
Income before provision for income taxes 2,875,643 2,932,561 5,605,140 5,079,925
Provision for income taxes 1,063,988 1,114,373 1,975,347 1,829,153
------------ ------------ ------------ ------------
Net income $ 1,811,655 $ 1,818,188 $ 3,629,793 $ 3,250,772
============ ============ ============ ============
Net income per common share:
Basic $ 0.08 $ 0.09 $ 0.16 $ 0.17
============ ============ ============ ============
Diluted $ 0.08 $ 0.08 $ 0.15 $ 0.14
============ ============ ============ ============
Weighted average number of common shares
outstanding:
Basic 22,719,266 19,372,365 22,370,162 19,192,390
============ ============ ============ ============
Diluted 23,860,513 23,425,269 23,463,939 23,103,919
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements
2
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
September 30,
2004 2003
------------- ------------
Cash flows from operating activities:
Net income $ 3,629,793 $ 3,250,772
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 314,353 259,400
Tax benefit related to stock options exercised 690,512 486,151
Bad debt expense 5,852 (672)
(Increase) decrease in operating assets and
liabilities:
Accounts receivable 365,588 (116,753)
Inventories- finished goods 1,767,015 (2,708,838)
Prepaid expenses and other current assets (98,674) 52,097
Other assets 7,655 178,333
Accounts payable 25,410 498,049
Income taxes payable 162,390 760,194
Accrued expenses and other current liabilities (273,716) 131,697
------------- ------------
Net cash provided by operating activities 6,596,178 2,790,430
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (110,583) (231,665)
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Net cash used in investing activities (110,583) (231,665)
------------- ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants
and other transactions 1,093,835 1,185,134
Payments on loan obligation (68,442) (34,222)
------------- ------------
Net cash provided by financing activities 1,025,393 1,150,912
------------- ------------
Net increase in cash and cash equivalents 7,510,988 3,709,677
Cash and cash equivalents, at beginning of period 3,278,926 984,169
------------- ------------
Cash and cash equivalents, at end of period $ 10,789,914 $ 4,693,846
============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 802 $ 3,984
============= ============
Cash paid for income taxes $ 1,122,445 $ 536,667
============= ============
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 other health products 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 September 30, 2004 and the
statements of income for the three and six months ended September 30, 2004
and 2003 and cash flows for the six months ended September 30, 2004 and
2003. The results of operations for the three and six months ended
September 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 Six Months Ended
September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (numerator):
Net income $ 1,811,655 $ 1,818,188 $ 3,629,793 $ 3,250,772
============ ============ ============ ============
Shares (denominator):
Weighted average number of common shares
outstanding used in basic computation 22,719,266 19,372,365 22,370,162 19,192,390
Common shares issuable upon exercise
of stock options and warrants 1,131,122 4,042,779 1,083,652 3,901,404
Common shares issuable upon conversion
of preferred shares 10,125 10,125 10,125 10,125
------------ ------------ ------------ ------------
Shares used in diluted computation 23,860,513 23,425,269 23,463,939 23,103,919
============ ============ ============ ============
Net income per common share:
Basic $ 0.08 $ 0.09 $ 0.16 $ 0.17
============ ============ ============ ============
Diluted $ 0.08 $ 0.08 $ 0.15 $ 0.14
============ ============ ============ ============
For the three and six months ended September 30, 2004 and 2003, 485,500
and 55,000 shares of common stock options, with a weighted average exercise
price of $9.69 and $7.95, 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 Six Months Ended
September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Reported net income: $ 1,811,655 $ 1,818,188 $ 3,629,793 $ 3,250,772
Deduct: total stock-based employee
compensation expense determined under
fair-value based method for all awards,
net of related tax effects 73,948 77,070 233,354 $ 121,929
------------ ------------ ------------ ------------
Pro forma net income: $ 1,737,707 $ 1,741,118 $ 3,396,439 $ 3,128,843
============ ============ ============ ============
Reported basic net income per share: $ 0.08 $ 0.09 $ 0.16 $ 0.17
============ ============ ============ ============
Pro forma basic net income per share: $ 0.08 $ 0.09 $ 0.15 $ 0.16
============ ============ ============ ============
Reported diluted net income per share: $ 0.08 $ 0.08 $ 0.15 $ 0.14
============ ============ ============ ============
Pro forma diluted net income per share: $ 0.07 $ 0.08 $ 0.14 $ 0.14
============ ============ ============ ============
5
Note 4: Line of Credit
The Company's $5,000,000 line of credit with SouthTrust Bank, N.A.
expired on August 28, 2004. On November 2, 2004 the Company signed a new
$6,000,000 line of credit agreement with RBC Centura Bank. The $6,000,000
line of credit, which upon 30 days notice has a provision to increase the
line to $7,500,000, is effective through November 2, 2005, and the interest
rate is at the published thirty day London Interbank Offered Rates
("LIBOR") plus 1.50% (3.34% at September 30, 2004), and contains various
financial and operating covenants. At September 30, 2004 and 2003, there
was no outstanding balance under the line of credit agreement.
Note 5: Commitments and Contingencies
The Company is a defendant in a lawsuit, filed in August 2002, 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.
From August 17, 2004 until October 12, 2004 six shareholder class action
lawsuits were filed in the United States District Court for the Southern
District of Florida against PetMed Express, Inc. and certain of the
Company's officers and directors for alleged violations of the federal
securities laws. Five of the class action shareholder complaints contain
substantive allegations identical to the complaint filed on August 17,
2004. These complaints allege violations of the anti-fraud provision
contained in Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5, thereunder and assert violations of Section 20(a) of that act
against the individual defendants as controlling persons. The actions
purport to be brought on behalf of purchasers of the Company's common
stock between June 18, 2003 and July 26, 2004, and the complaints
generally allege that the defendants made false or misleading statements
concerning the Company's business, prospects, and operations and failed to
disclose, among other things, (1) that the Company's business allegedly
depends on veterinarians, who are the Company's competitors, to authorize
prescriptions, (2) that the Company's business model, which, in part,
requires veterinarians to authorize prescriptions, caused veterinarians to
incur certain costs and burdens, which were supposedly shifted from the
Company to the veterinarians, (3) the existence of a supposed increase in
veterinarian refusals to comply with Company requests for prescription
authorization, (4) the Company's alleged inability to guarantee the
quality of, and maintain control over, pet medications and the negative
impact this was having on veterinarian willingness to authorize
prescriptions, and (5) that the foregoing allegations were adversely
impacting the Company. The complaints also allege that the individual
defendants were motivated to engage in the alleged violations so that they
could affect sales of their shares of the Company's common stock at
artificially inflated prices. The plaintiffs seek unspecified monetary
damages. The Company is reviewing and evaluating the allegations, but at
this juncture intends to defend vigorously against the allegations of
wrongdoing. 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.
The sixth class action shareholder complaint also alleges violations of
the anti-fraud provision contained in Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder, and asserts violations of
Section 20(a) of that act against the Company and the individual
defendants as controlling persons. The action has purportedly been
brought on behalf of purchasers of the Company's common stock between June
16, 2003 and July 26, 2004 and generally alleges that the defendants made
false or misleading statements concerning the Company's business,
prospects and operations and failed to disclose, among other things, (1)
that the Company supposedly diverted costs to veterinarians which would
ultimately cost the Company decreased sales in future periods, and (2)
that the defendants allegedly risked the quality, safety, or efficacy of
the Company's drugs, resulting in veterinarians declining to refill
prescriptions through the Company, which would ultimately cost the Company
decreased revenue. The complaint also alleges that the individual
defendants were motivated to engage in the alleged violations to obtain
financing for the Company and so that they could effect sales of their
shares of the Company's common stock at artificially inflated prices. The
plaintiff seeks unspecified monetary damages. The Company is reviewing
and evaluating the allegations, but at this juncture intends to defend
vigorously against the allegations of wrongdoing. 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.
6
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.
7
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 other pet health 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, other pet health products 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, on-line, 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 September 30, 2004 and 2003, respectively.
The twelve month average purchase was approximately $75 and $72 per order,
and the three month average purchase was approximately $74 and $71 per
order for the quarters ended September 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 September 30, 2004 and 2003 the allowance
for doubtful accounts was approximately $15,000 and $16,000, 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 September 30, 2004 and 2003 the
inventory reserve was approximately $192,000 and $142,000, respectively.
8
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 Six Months Ended
September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 59.6 59.1 60.2 60.2
------------ ------------ ------------ ------------
Gross profit 40.4 40.9 39.8 39.8
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 10.3 10.9 9.7 10.3
Advertising 19.6 17.8 20.9 19.8
Depreciation and amortization 0.5 0.5 0.5 0.5
------------ ------------ ------------ ------------
Total operating expenses 30.4 29.2 31.1 30.6
------------ ------------ ------------ ------------
Income from operations 10.0 11.7 8.7 9.2
------------ ------------ ------------ ------------
Provision for income taxes 3.7 4.4 3.0 3.3
------------ ------------ ------------ ------------
Net income 6.3 7.3 5.7 5.9
============ ============ ============ ============
9
Three Months Ended September 30, 2004 Compared With Three Months Ended
September 30, 2003, and Six Months Ended September 30, 2004 Compared With
Six Months Ended September 30, 2003
Sales
- -----
Sales increased by approximately $3,786,000, or 15.2%, to approximately
$28,755,000 for the quarter ended September 30, 2004, from approximately
$24,969,000 for the quarter ended September 30, 2003. For the six months
ended September 30, 2004, sales increased by approximately $8,686,000, or
15.7%, to approximately $64,043,000 compared to sales of approximately
$55,357,000 for the six months ended September 30, 2003. The increase in
sales for the three and six months ended September 30, 2004 can be
primarily attributed to increased retail reorders sales, offset by
decreased new order sales.
The Company has committed certain amounts specifically designated towards
television, direct mail/print and on-line advertising to stimulate sales,
create brand awareness, and acquire new customers. Retail reorder sales
have increased by approximately $4,333,000, or 33.6%, to approximately
$17,239,000 for the three months ended September 30, 2004, from
approximately $12,906,000 for the three months ended September 30, 2003.
Retail reorder sales have increased by approximately $11,773,000, or 46.3%,
to approximately $37,184,000 for the six months ended September 30, 2004,
from approximately $25,411,000 for the six months ended September 30, 2003.
Retail new order sales have decreased by approximately $1,065,000, or 8.9%,
to approximately $10,879,000 for the three months ended September 30, 2004,
from approximately $11,944,000 for the three months ended September 30,
2003. Retail new order sales have decreased by approximately $3,904,000,
or 13.1%, to approximately $25,808,000 for the six months ended September
30, 2004, from approximately $29,712,000 for the six months ended September
30, 2003. Wholesale sales have increased by approximately $518,000, or
435.0%, to approximately $637,000 for the three months ended September 30,
2004, from approximately $119,000 for the three months ended September 30,
2003. Wholesale sales have increased by approximately $817,000, or 349.4%,
to approximately $1,051,000 for the six months ended September 30, 2004,
from approximately $234,000 for the six months ended September 30, 2003.
The Company acquired approximately 154,000 new customers for the quarter
ended September 30, 2004, compared to approximately 166,000 new customers
for the same period prior year. For the six months ended September 30,
2004 the Company acquired approximately 345,000 new customers, compared to
approximately 400,000 new customers for the same period prior year.
We believe that the slowdown in sales growth for the three and six months
ended September 30, 2004, compared to the sales growth for the same period
in the prior year may be attributable to the change in advertising media
mix and increased competition from both veterinarians and traditional and
on-line retailers. During the six months ended September 30, 2004
television advertising accounted for 46% of our overall advertising
expenditures, with 40% spent on direct mail/print advertising and the
remainder spent on on-line advertising. In contrast during the six months
ended September 30, 2003 television advertising accounted for 64% of our
overall advertising expenditures, with 25% spent on direct mail/print
advertising and the remainder spent on on-line advertising. Management
attributes this change in the advertising media mix to a shortage of
television advertising due to a strengthening economy and a surge in
political advertising associated with the presidential elections. The
Company anticipates 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, the Company's sales were approximately 32%,
27%, 18%, and 23%, respectively.
Cost of sales
- -------------
Cost of sales increased by approximately $2,396,000, or 16.3%, to
approximately $17,142,000 for the quarter ended September 30, 2004, from
approximately $14,746,000 for the quarter ended September 30, 2003. For
the six months ended September 30, 2004, cost of sales increased by
approximately $5,239,000, or 15.7%, to approximately $38,568,000 compared
to cost of sales of approximately $33,329,000 for the six months ended
September 30, 2003. The increase in cost of sales for the three and six
months ended September 30, 2004 is directly related to the increase in
retail sales. As a percent of sales, the cost of sales was 59.6% and 59.1%
for the three months ended September 30, 2004 and 2003, respectively. The
percentage increase can be attributed to increases in our product pricing,
offset by greater increases to our product cost.
10
Gross profit
- ------------
Gross profit increased by approximately $1,390,000, or 13.6%, to
approximately $11,613,000 for the quarter ended September 30, 2004, from
approximately $10,223,000 for the quarter ended September 30, 2003. For
the six months ended September 30, 2004, gross profit increased by
approximately $3,447,000, or 15.7%, to approximately $25,475,000 compared
to gross profit of approximately $22,028,000 for the six months ended
September 30, 2003. Gross profit as a percentage of sales was 40.4% and
40.9% for the three months ended September 30, 2004 and 2003, respectively.
The percentage decrease can be attributed to increases in our product
pricing, offset by greater increases to our product cost.
General and administrative expenses
- -----------------------------------
General and administrative expenses increased by approximately $253,000,
or 9.3%, to approximately $2,971,000 for the quarter ended September 30,
2004, from approximately $2,718,000 for the quarter ended September 30,
2003. For the six months ended September 30, 2004, general and
administrative expenses increased by approximately $453,000, or 7.9%, to
approximately $6,193,000 compared to general and administrative expenses of
approximately $5,740,000 for the six months ended September 30, 2003. The
increase in general and administrative expenses for the three months ended
September 30, 2004 was primarily due to the following: a $124,000 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 $76,000 increase to insurance expense,
relating to increases to insurance policy limits; a $75,000 increase to
bank service and credit card fees, which can be directly attributed to
increased sales; a $41,000 increase to property expenses, relating to
additional rent due to our warehouse expansion; and a $7,000 increase to
other expenses. Offsetting the increase were a $35,000 reduction to
professional fees, primarily relating to a reduction in legal fees; and a
$35,000 reduction to telephone expenses.
The increase in general and administrative expenses for the six months
ended September 30, 2004 was primarily due to the following: a $361,000
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 $168,000 increase to bank service and
credit card fees, which can be directly attributed to increased sales; a
$79,000 increase to property expenses, relating to additional rent due to
our warehouse expansion; a $72,000 increase to insurance expense, relating
to increases to insurance policy limits; and a $32,000 increase to other
expenses. Offsetting the increase were a $154,000 reduction to
professional fees, primarily relating to a reduction in legal fees; and a
$105,000 reduction to telephone expenses.
Advertising expenses
- --------------------
Advertising expenses increased by approximately $1,186,000, or 26.7%, to
approximately $5,630,000 for the quarter ended September 30, 2004, from
approximately $4,444,000 for the quarter ended September 30, 2003. For the
six months ended September 30, 2004, advertising expenses increased by
approximately $2,432,000, or 22.2%, to approximately $13,385,000 compared
to advertising expenses of approximately $10,953,000 for the six months
ended September 30, 2003. The increase in advertising expenses for the
three and six months ended September 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. The advertising costs of acquiring a
new customer for the quarter ended September 30, 2004 was $37, compared to
$27 for the same quarter the prior year and for the six months ended
September 30, 2004, the advertising cost of acquiring a new customer was
$39, compared to $27 for the same period prior year. We attribute this
decrease in advertising efficiency to the change in the advertising media
mix caused by a shortage of television advertising due to the strengthening
economy and the presidential elections. The decrease in advertising
efficiency may also be attributable to increased competition from both
veterinarians and traditional and on-line retailers. As a percentage of
sales, advertising expense was 19.6% and 17.8% for the three months ended
September 30, 2004 and 2003 and 20.9% and 19.8% for the six months ended
September 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
$23,000, or 17.6%, to approximately $155,000 for the quarter ended
September 30, 2004, from approximately $132,000 for the quarter ended
September 30, 2003. For the six months ended September 30, 2004,
depreciation and amortization expenses increased by approximately $55,000,
or 21.2%, to approximately $314,000 compared to depreciation and
amortization expenses of approximately $259,000 for the six months ended
September 30, 2003. This increase to depreciation and amortization expense
for three and six months ended September 30, 2004 can be attributed to
increased property and equipment additions.
11
Interest income
- ---------------
Interest income increased by approximately $12,000, or 269.2%, to
approximately $17,000 for the quarter ended September 30, 2004, from
approximately $5,000 for the quarter ended September 30, 2003. For the six
months ended September 30, 2004, interest income increased by approximately
$15,000, or 221.1%, to approximately $22,000 compared to interest income of
approximately $7,000 for the six months ended September 30, 2003. Interest
income may decrease in future quarters as the Company utilizes its cash
balances to increase inventory levels.
Provision for income taxes
- --------------------------
The Company had incurred significant net losses since its inception in
1996, through the quarter ended September 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 September 30, 2004 and
2003, the Company recorded an income tax provision for approximately
$1,064,000 and $1,114,000, 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 September 30, 2004 and March 31, 2004
was $16,964,000 and $11,338,000, respectively. The $5,626,000 increase in
working capital was primarily attributable to cash flow generated from
operations and the exercise of stock options. Net cash provided by
operating activities was $6,596,000 and $2,790,000 for the six months ended
September 30, 2004 and 2003, respectively. Net cash used in investing
activities was $111,000 and $232,000 for the six months ended September 30,
2004 and 2003, respectively. Net cash provided by financing was $1,025,000
and $1,151,000 for the six months ended September 30, 2004 and 2003,
respectively.
The Company maintains a $6,000,000 line of credit, which upon 30 days
notice has a provision to increase the line to $7,500,000, effective
through November 2, 2005. The interest rate is at the published thirty day
London Interbank Offered Rates ("LIBOR") plus 1.50% (3.34% at September 30,
2004), and contains various financial and operating covenants. At
September 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. As of September 30, 2004 the Company had
no other 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 approximately $170,000 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.
12
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. As of September 30, 2004 the Company had no outstanding debt
obligations.
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 November 5, 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 November 5, 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 September 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.
13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
We held our annual stockholders' meeting in Pompano Beach, Florida on
August 6, 2004. Stockholders voted:
1. To elect six directors to the board of directors, to serve until
the next annual meeting of stockholders or until the director is
succeeded by another director who has been elected;
2. To ratify the appointment of Goldstein Golub Kessler LLP, as
independent auditors.
With a majority of the outstanding shares voting either by proxy or in
person, the stockholders approved the proposals, voting as follows:
Proposal 1. For Against
- ----------- ------------ -------------
Election of directors:
Menderes Akdag 21,092,900 21,180
Frank J. Formica 14,258,193 6,862,631
Gian Fulgoni 14,263,900 6,855,200
Ronald J. Korn 14,263,900 6,854,874
Marc Puleo, M.D. 20,294,155 946,115
Robert C. Schweitzer 14,253,900 6,865,100
Proposal 2. For Against Abstain
- ----------- ------------ ------------- ------------
To ratify the appointment of
Goldstein, Golub Kessler LLP,
as independent auditors. 21,078,319 30,229 10,340
Item 5. Other Information.
None
14
Item 6. Exhibits.
(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 September
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 September
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 September 30, 2004, Commission File No. 000-28827).
10.12 New $6.0 million Line of Credit Agreement with RBC Centura Bank
(filed herewith to Exhibit 10.12 of the Registrant's Report on Form
10-Q for the quarter ended September 30, 2004, Commission File
No. 000-28827).
15
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: November 5, 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)
16
_________________________________________________________________
_________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC
_______________________
FORM 10-Q
FOR THE QUARTER ENDED:
SEPTEMBER 30, 2004
_______________________
EXHIBITS
_______________________
_________________________________________________________________
_________________________________________________________________
EXHIBIT INDEX
Number of Incorporated
Exhibit Description Pages By
Number in Original Reference
Document
Certification of Principal
31.1 Executive Officer Pursuant to 1 **
Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Principal
31.2 Financial Officer Pursuant to 1 **
Section 302 of the Sarbanes-Oxley
Act of 2002
Certification Pursuant to 18
32.1 U.S.C. Section 1350, as adopted 1 **
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
New $6.0 million Line of Credit
10.12 Agreement with RBC Centura Bank 29 **
** Filed herewith