UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
incorporation or organization) Identification No.)
1441 S.W. 29th Avenue, Pompano Beach, Florida 33069
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(Address of principal executive offices)
(954) 979-5995
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(Issuer's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date: 23,456,223 Common Shares, $.001 par value per share at
February 4, 2005.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2004 2004
(UNAUDITED)
------------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 7,826,020 $ 3,278,926
Accounts receivable, less allowance for
doubtful accounts of $5,998 and $22,987,
respectively 298,437 1,133,301
Inventories - finished goods 13,456,217 11,179,858
Prepaid expenses and other current assets 296,165 232,218
------------- ------------
Total current assets 21,876,839 15,824,303
Property and equipment, net 1,373,988 1,688,327
Deferred income taxes 658,811 581,356
Intangible asset 365,000 365,000
Other assets 14,167 21,822
------------- ------------
Total assets $ 24,288,805 $ 18,480,808
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,574,568 $ 3,273,062
Income taxes payable 545,934 422,445
Accrued expenses and other current liabilities 534,579 722,350
Loan obligation - 68,442
------------- ------------
Total liabilities 2,655,081 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; 23,418,723 and 21,860,057
shares issued and outstanding, respectively 23,419 21,860
Additional paid-in capital 11,914,777 9,864,025
Retained earnings 9,686,630 4,099,726
------------- ------------
Total shareholders' equity 21,633,724 13,994,509
------------- ------------
Total liabilities and shareholders' equity $ 24,288,805 $ 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 Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Sales $ 20,782,837 $ 17,169,571 $ 84,826,062 $ 72,526,362
Cost of sales 12,337,310 10,119,515 50,905,585 43,448,019
------------ ------------ ------------ ------------
Gross profit 8,445,527 7,050,056 33,920,477 29,078,343
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 2,541,197 2,318,094 8,734,370 8,057,719
Advertising 2,628,090 2,618,149 16,012,910 13,571,119
Depreciation and amortization 146,609 137,705 460,962 397,105
------------ ------------ ------------ ------------
Total operating expenses 5,315,896 5,073,948 25,208,242 22,025,943
------------ ------------ ------------ ------------
Income from operations 3,129,631 1,976,108 8,712,235 7,052,400
------------ ------------ ------------ ------------
Other income (expense)
Interest expense - (4,213) (880) (8,420)
Interest income 33,409 2,085 55,414 8,939
Other, net 906 90 2,317 1,076
------------ ------------ ------------ ------------
Total other income (expense) 34,315 (2,038) 56,851 1,595
------------ ------------ ------------ ------------
Income before provision for income taxes 3,163,946 1,974,070 8,769,086 7,053,995
Provision for income taxes 1,206,835 750,146 3,182,182 2,579,299
------------ ------------ ------------ ------------
Net income $ 1,957,111 $ 1,223,924 $ 5,586,904 $ 4,474,696
============ ============ ============ ============
Net income per common share:
Basic $ 0.08 $ 0.06 $ 0.25 $ 0.23
============ ============ ============ ============
Diluted $ 0.08 $ 0.05 $ 0.23 $ 0.19
============ ============ ============ ============
Weighted average number of
common shares outstanding:
Basic 23,266,549 19,631,732 22,670,044 19,339,370
============ ============ ============ ============
Diluted 23,903,297 23,739,336 23,867,698 23,333,622
============ ============ ============ ============
See accompanying notes to condensed
consolidated financial statements
2
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
December 31,
2004 2003
------------- ------------
Cash flows from operating activities:
Net income $ 5,586,904 $ 4,474,696
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 460,962 397,105
Tax benefit related to stock options exercised 826,476 486,151
Deferred income taxes (77,455) -
Bad debt expense (14,530) (7,959)
(Increase) decrease in operating assets and liabilities:
Accounts receivable 849,394 226,327
Inventory (2,276,359) (9,346,134)
Prepaid expenses and other current assets (63,947) 248,431
Other assets 7,655 178,333
Accounts payable (1,698,494) (34,522)
Income taxes payable 123,489 387,865
Accrued expenses and other current liabilities (187,771) (109,743)
------------- ------------
Net cash provided by (used in) operating activities 3,536,324 (3,099,450)
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (146,623) (325,407)
------------- ------------
Net cash used in investing activities (146,623) (325,407)
------------- ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options and
warrants and other transactions 1,225,835 1,193,346
Borrowings on the line of credit - 1,300,000
Payments on loan obligation (68,442) (51,332)
------------- ------------
Net cash provided by financing activities 1,157,393 2,442,014
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Net increase (decrease) in cash and cash equivalents 4,547,094 (982,843)
Cash and cash equivalents, at beginning of period 3,278,926 984,169
------------- ------------
Cash and cash equivalents, at end of period $ 7,826,020 $ 1,326
============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 802 $ 7,238
============= ============
Cash paid for income taxes $ 2,309,672 $ 1,659,141
============= ============
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/print 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 December 31, 2004 and the statements of income
for the three and nine months ended December 31, 2004 and 2003
and cash flows for the nine months ended December 31, 2004 and
2003. The results of operations for the three and nine months
ended December 31, 2004 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.
Recently Issued Accounting Standards
- ------------------------------------
In December 2004, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123R, Share-Based Payment, which establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. A key
provision of this statement is the requirement of a public entity
to measure the cost of employee services received in exchange for
an award of equity instruments (including stock options) based on
the grant date fair value of the award. That cost will be
recognized over the period during which an employee is required
to provide service in exchange for the award (i.e., the requisite
service period or vesting period). This standard becomes
effective for the Company on July 1, 2005. The Company will
adopt SFAS 123R no later than the beginning of the Company's
second quarter ending September 30, 2005.
Management does not believe that any other recently issued,
but not yet effective, accounting standards if currently adopted
would have a material effect on the accompanying consolidated
financial statements.
4
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.
The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share
computations for the periods presented:
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (numerator):
Net income $ 1,957,111 $ 1,223,924 $ 5,586,904 $ 4,474,696
============ ============ ============ ============
Shares (denominator):
Weighted average number of common shares
outstanding used in basic computation 23,266,549 19,631,732 22,670,044 19,339,370
Common shares issuable upon exercise
of stock options and warrants 626,623 4,097,479 1,187,529 3,984,127
Common shares issuable upon conversion
of preferred shares 10,125 10,125 10,125 10,125
------------ ------------ ------------ ------------
Shares used in diluted computation 23,903,297 23,739,336 23,867,698 23,333,622
============ ============ ============ ============
Net income per common share:
Basic $ 0.08 $ 0.06 $ 0.25 $ 0.23
============ ============ ============ ============
Diluted $ 0.08 $ 0.05 $ 0.23 $ 0.19
============ ============ ============ ============
For the three and nine months ended December 31, 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.
5
Note 3: Accounting for Stock-Based Compensation
The Company accounts for employee stock options using the
intrinsic value method as prescribed by Accounting Principles
Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees. The Company follows the disclosure provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, for employee
stock options. Had the Company determined employee compensation
cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have
been decreased to the pro forma amounts indicated below:
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Reported net income: $ 1,957,111 $ 1,223,924 $ 5,586,904 $ 4,474,696
Deduct: total stock-based employee
compensation expense determined under
fair-value based method for all awards,
net of related tax effects 132,928 77,070 366,282 198,999
------------ ------------ ------------ ------------
Pro forma net income: $ 1,824,183 $ 1,146,854 $ 5,220,622 $ 4,275,697
============ ============ ============ ============
Reported basic net income per share: $ 0.08 $ 0.06 $ 0.25 $ 0.23
============ ============ ============ ============
Pro forma basic net income per share: $ 0.08 $ 0.06 $ 0.23 $ 0.22
============ ============ ============ ============
Reported diluted net income per share: $ 0.08 $ 0.05 $ 0.23 $ 0.19
============ ============ ============ ============
Pro forma diluted net income per share: $ 0.08 $ 0.05 $ 0.22 $ 0.18
============ ============ ============ ============
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% (3.90% at December 31, 2004), and contains various
financial and operating covenants. At December 31, 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, 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.
6
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.
These complaints alleged violations of the anti-fraud provision
contained in Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5, thereunder and asserted violations of
Section 20(a) of that act against the individual defendants as
controlling persons. The actions purported 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 alleged
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 alleged
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 sought unspecified monetary damages.
On February 1, 2005, the six shareholder class action lawsuits
against PetMed Express, Inc. and certain of the Company's
officers and directors were voluntarily dismissed by the
plaintiffs without prejudice.
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 is 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
other health products for dogs and cats. The Company markets its
products through national television, on-line, and direct
mail/print advertising campaigns which direct consumers to order
by phone or on the Internet, and aim to increase the recognition
of the "1-800-PetMeds" brand name. Currently, approximately 53%
of all sales are generated 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 1.4% and
1.5% of sales for the quarters ended on December 31, 2004 and
2003, respectively. The twelve month average purchase was
approximately $75 and $72 per order, and the three month average
purchase was approximately $73 and $70 per order for the quarters
ended December 31, 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
December 31, 2004 and 2003 the allowance for doubtful accounts
was approximately $6,000 and $9,000, 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 December 31, 2004 and 2003 the inventory
reserve was approximately $275,000 and $278,000, respectively.
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.
8
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/print
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 income.
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 59.4 58.9 60.0 59.9
------------ ------------ ------------ ------------
Gross profit 40.6 41.1 40.0 40.1
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 12.2 13.5 10.3 11.1
Advertising 12.6 15.3 18.9 18.7
Depreciation and amortization 0.7 0.8 0.5 0.6
------------ ------------ ------------ ------------
Total operating expenses 25.5 29.6 29.7 30.4
------------ ------------ ------------ ------------
Income from operations 15.1 11.5 10.3 9.7
------------ ------------ ------------ ------------
Total other income 0.1 - - -
------------ ------------ ------------ ------------
Income before provision for income taxes 15.2 11.5 10.3 9.7
Provision for income taxes 5.8 4.4 3.7 3.5
------------ ------------ ------------ ------------
Net income 9.4 7.1 6.6 6.2
============ ============ ============ ============
9
Three Months Ended December 31, 2004 Compared With Three Months
Ended December 31, 2003, and Nine Months Ended December 31, 2004
Compared With Nine Months Ended December 31, 2003
- ----------------------------------------------------------------
Sales
- -----
Sales increased by approximately $3,613,000, or 21.0% to
approximately $20,783,000 for the quarter ended December 31,
2004, from approximately $17,170,000 for the quarter ended
December 31, 2003. For the nine months ended December 31, 2004,
sales increased by approximately $12,300,000, or 17.0%, to
approximately $84,826,000 compared to sales of approximately
$72,526,000 for the nine months ended December 31, 2003. The
increase in sales for the three and nine months ended December
31, 2004 can be primarily attributed to increased retail reorders
sales for the nine months, partially offset by decreased retail
new order sales during the first six months of the fiscal year.
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 $3,118,000, or 27.4%, to approximately $14,502,000
for the three months ended December 31, 2004, from approximately
$11,384,000 for the three months ended December 31, 2003. Retail
reorder sales have increased by approximately $14,876,000, or
40.4%, to approximately $51,673,000 for the nine months ended
December 31, 2004, from approximately $36,797,000 for the nine
months ended December 31, 2003. Retail new order sales have
increased by approximately $65,000, or 1.1%, to approximately
$5,769,000 for the three months ended December 31, 2004, from
approximately 5,704,000 for the three months ended December 31,
2003. Retail new order sales have decreased by approximately
$3,822,000, or 10.8%, to approximately $31,591,000 for the nine
months ended December 31, 2004, from approximately $35,413,000
for the nine months ended December 31, 2003. Wholesale sales
have increased by approximately $430,000, or 524.6%, to
approximately $512,000 for the three months ended December 31,
2004, from approximately $82,000 for the three months ended
December 31, 2003. Wholesale sales have increased by
approximately $1,246,000, or 394.6%, to approximately $1,562,000
for the nine months ended December 31, 2004, from approximately
$316,000 for the nine months ended December 31, 2003.
The Company acquired approximately 85,000 new customers for the
quarter ended December 31, 2004, compared to approximately 82,000
new customers for the same period prior year. For the nine
months ended December 31, 2004 the Company acquired approximately
430,000 new customers, compared to approximately 482,000 new
customers for the same period prior year.
The majority of our product sales are affected by the seasons,
due to the seasonality of mainly heartworm and flea and tick
medications. Industry seasonality trends, according to Fountain
Agricounsel LLC, Management Consultants to Agribusiness, reflect
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 $2,217,000, or 21.9%,
to approximately $12,337,000 for the quarter ended December 31,
2004, from approximately $10,120,000 for the quarter ended
December 31, 2003. For the nine months ended December 31, 2004,
cost of sales increased by approximately $7,458,000, or 17.2%, to
approximately $50,906,000 compared to cost of sales of
approximately $43,448,000 for the nine months ended December 31,
2003. The increase in cost of sales for the three and nine
months ended December 31, 2004 is directly related to the
increase in sales. As a percent of sales, the cost of sales was
59.4% and 58.9% for the three months ended December 31, 2004 and
2003, respectively. The percentage increase is attributed to
increases in our product pricing, offset by greater increases in
our product cost. The percentage increase was also affected by
the increase in wholesale sales which has a higher cost of sales
percentage.
Gross profit
- ------------
Gross profit increased by approximately $1,396,000, or 19.8%,
to approximately $8,446,000 for the quarter ended December 31,
2004, from approximately $7,050,000 for the quarter ended
December 31, 2003. For the nine months ended December 31, 2004,
gross profit increased by approximately $4,842,000, or 16.7%, to
approximately $33,920,000 compared to gross profit of
approximately $29,078,000 for the nine months ended December 31,
2003. Gross profit as a percentage of sales was 40.6% and 41.1%
for the three months ended December 31, 2004 and 2003,
respectively. The percentage decrease can be attributed to
increases to our product cost, partially offset by increases in
our product pricing. The percentage decrease was also affected
by the increase in wholesale sales which has a lower gross profit
percentage.
10
General and administrative expenses
- -----------------------------------
General and administrative expenses increased by approximately
$223,000, or 9.6%, to approximately $2,541,000 for the quarter
ended December 31, 2004, from approximately $2,318,000 for the
quarter ended December 31, 2003. The increase in general and
administrative expenses for the three months ended December 31,
2004 was primarily due to the following: a $125,000 increase to
bank service and credit card fees, which can be directly
attributed to increased sales; a $124,000 increase to
professional fees, primarily relating to increase in legal fees;
a $19,000 increase to office expenses and a $7,000 increase to
other expenses. Offsetting the increase were a $34,000 reduction
to telephone expenses; and an $18,000 reduction to property
expenses.
For the nine months ended December 31, 2004, general and
administrative expenses increased by approximately $676,000, or
8.4%, to approximately $8,734,000 compared to general and
administrative expenses of approximately $8,058,000 for the nine
months ended December 31, 2003. The increase in general and
administrative expenses for the nine months ended December 31,
2004 was primarily due to the following: a $367,000 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 $292,000 increase
to bank service and credit card fees, which can be directly
attributed to increased sales; a $77,000 increase to insurance
expense, relating to increases to insurance policy limits; a
$62,000 increase to property expenses, relating to additional
rent due to our warehouse expansion; and a $48,000 increase to
other expenses. Offsetting the increase were a $139,000
reduction to telephone expenses and a $31,000 reduction to
professional fees, primarily relating to a reduction in legal
fees.
Advertising expenses
- --------------------
Advertising expenses increased by approximately $10,000, or
0.4%, to approximately $2,628,000 for the quarter ended December
31, 2004, from approximately $2,618,000 for the quarter ended
December 31, 2003. For the nine months ended December 31, 2004,
advertising expenses increased by approximately $2,442,000, or
18.0%, to approximately $16,013,000 compared to advertising
expenses of approximately $13,571,000 for the nine months ended
December 31, 2003. The increase in advertising expenses for the
three and nine months ended December 31, 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 December 31, 2004 was $31, compared to $32 for
the same quarter the prior year and for the nine months ended
December 31, 2004, the advertising cost of acquiring a new
customer was $37, compared to $28 for the same period prior year.
We attribute this decrease in advertising efficiency for the nine
months ended December 31, 2004 compared to 2003 to the change in
the advertising media mix caused by a shortage of television
advertising inventory due to increased advertiser demand
resulting from the strengthening economy and the presidential
election. 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 12.6% and 15.3% for the three months
ended December 31, 2004 and 2003 and 18.9% and 18.7% for the nine
months ended December 31, 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 $9,000, or 6.5%, to approximately $147,000 for the
quarter ended December 31, 2004, from approximately $138,000 for
the quarter ended December 31, 2003. For the nine months ended
December 31, 2004, depreciation and amortization expenses
increased by approximately $64,000, or 16.1%, to approximately
$461,000 compared to depreciation and amortization expenses of
approximately $397,000 for the nine months ended December 31,
2003. This increase to depreciation and amortization expenses
for three and nine months ended December 31, 2004 can be
attributed to increased property and equipment additions.
Interest income
- ---------------
Interest income increased by approximately $31,000, or 1502%,
to approximately $33,000 for the quarter ended December 31, 2004,
from approximately $2,000 for the quarter ended December 31,
2003. For the nine months ended December 31, 2004, interest
income increased by approximately $46,000, or 519.9%, to
approximately $55,000 compared to interest income of
approximately $9,000 for the nine months ended December 31, 2003.
The increase in interest income can be attributed to increases in
the Company's cash balance, which is swept into an interest
bearing overnight account. Interest income may decrease in
future quarters as the Company utilizes its cash balances to
increase inventory levels.
11
Provision for income taxes
- --------------------------
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. In the quarter ended December 31, 2004
the Company increased the deferred income tax asset to
approximately $659,000. For the quarters ended December 31, 2004
and 2003, the Company recorded an income tax provision for
approximately $1,207,000 and $750,000, and for the nine months
ended December 31, 2004 and 2003, the Company recorded an income
tax provision for approximately $3,182,000 and $2,579,000,
respectively to provide for taxable income as the utilization of
net operating loss carryforwards is limited. For the quarters
ended December 31, 2004 and 2003, the Company's effective tax
rate was 38.1% and 38.0%, and for the nine months ended December
31, 2004 and 2003 the effective tax rate was 36.3% and 36.6%,
respectively.
Liquidity and Capital Resources
The Company's working capital at December 31, 2004 and March
31, 2004 was $19,222,000 and $11,338,000, respectively. The
$7,884,000 increase in working capital was primarily attributable
to cash flow generated from operations and the exercise of stock
options and warrants. For the nine months ended December 31,
2004 net cash provided by operating activities was $3,536,000, as
compared to net cash used in operating activities of $3,099,000
for the nine months ended December 31, 2003. Net cash used in
investing activities was $147,000 and $325,000 for the nine
months ended December 31, 2004 and 2003, respectively. Net cash
provided by financing was $1,157,000 and $2,442,000 for the nine
months ended December 31, 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% (3.90% at December 31, 2004), and
contains various financial and operating covenants. At December
31, 2004, there was no outstanding balance under the line of
credit agreement. However, as of December 31, 2003, there was a
$1,300,000 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 December 31, 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 $134,000 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 and at this time, have no commitments
or plans to obtain additional capital. If in the future, the
Company seeks 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.
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" refer to
PetMed Express, Inc. and our subsidiaries.
12
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 December 31, 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 February 4,
2005, 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 February 4, 2005
would not have a material impact on our quarterly interest
expense, assuming the amount of debt outstanding remains
constant.
The above sensitivity analysis for interest rate risk excludes
accounts receivable, accounts payable and accrued liabilities
because of the short-term maturity of such instruments. The
analysis does not consider the effect this movement may have on
other variables including changes in revenue volumes that could
be indirectly attributed to changes in interest rates. The
actions that management would take in response to such a change
are also not considered. If it were possible to quantify this
impact, the results could well be different than the sensitivity
effects shown above.
Item 4. Controls and Procedures.
-----------------------
The Company's management, including our Chief Executive Officer
and Chief Financial Officer, have conducted an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) promulgated
under the Securities Exchange Act of 1934, as amended) as of the
quarter ended December 31, 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.
---------------------------------------------------
None
Item 5. Other Information.
-----------------
None
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 December 31, 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 December 31, 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 December 31, 2004,
Commission File No. 000-28827).
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PETMED EXPRESS, INC.
(The "Registrant")
Date: February 4, 2005
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)
15
_________________________________________________________________
_________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC
_______________________
FORM 10-Q
FOR THE QUARTER ENDED:
DECEMBER 31, 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
** Filed herewith