UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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: 23,518,690 Common Shares, $.001 par value per share at
August 5, 2005.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2005 2005
------------- ------------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents $ 20,707,737 $ 12,680,962
Accounts receivable, less allowance
for doubtful accounts of $39,000 and
$37,000, respectively 1,912,458 1,796,756
Inventories - finished goods 10,096,170 11,180,333
Prepaid expenses and other current assets 203,903 213,152
------------- ------------
Total current assets 32,920,268 25,871,203
Property and equipment, net 1,170,826 1,286,267
Deferred income taxes 595,936 582,846
Intangible asset 365,000 365,000
Other assets 14,167 14,167
------------- ------------
Total assets $ 35,066,197 $ 28,119,483
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 4,171,099 $ 2,724,990
Income taxes payable 1,806,365 601,535
Accrued expenses and other current liabilities 1,207,874 575,894
------------- ------------
Total liabilities 7,185,338 3,902,419
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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; 23,496,191 and 23,458,725 shares
issued and outstanding, respectively 23,496 23,459
Additional paid-in capital 12,196,783 12,074,611
Retained earnings 15,651,682 12,110,096
------------- ------------
Total shareholders' equity 27,880,859 24,217,064
------------- ------------
Total liabilities and shareholders' equity $ 35,066,197 $ 28,119,483
============= ============
See accompanying notes to condensed consolidated financial statements
-1-
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
June 30,
2005 2004
------------- ------------
Sales $ 43,631,758 $ 35,288,528
Cost of sales 26,773,172 21,426,719
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Gross profit 16,858,586 13,861,809
------------- ------------
Operating expenses:
General and administrative 3,852,894 3,221,905
Advertising 7,604,303 7,754,829
Depreciation and amortization 127,545 159,059
------------- ------------
Total operating expenses 11,584,742 11,135,793
------------- ------------
Income from operations 5,273,844 2,726,016
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Other income (expense)
Interest expense - (742)
Interest income 99,437 4,633
Other, net 40,287 (410)
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Total other income (expense) 139,724 3,481
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Income before provision for income taxes 5,413,568 2,729,497
Provision for income taxes 1,871,982 911,359
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Net income $ 3,541,586 $ 1,818,138
============= ============
Net income per common share:
Basic $ 0.15 $ 0.08
============= ============
Dilutive $ 0.15 $ 0.08
============= ============
Weighted average number of common shares
outstanding:
Basic 23,471,264 22,017,221
============= ============
Dilutive 23,969,197 23,882,936
============= ============
See accompanying notes to condensed consolidated financial statements
-2-
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
2005 2004
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Cash flows from operating activities:
Net income $ 3,541,586 $ 1,818,138
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 127,545 159,059
Tax benefit related to stock options exercised 38,110 32,763
Deferred income taxes (13,090) -
Bad debt expense 2,362 170
(Increase) decrease in operating assets
and liabilities:
Accounts receivable (118,064) 56,280
Inventories 1,084,163 (2,990,083)
Prepaid expenses and other current assets 9,249 9,121
Other assets - 7,655
Accounts payable 1,446,109 2,388,665
Income taxes payable 1,204,830 456,151
Accrued expenses and other current
liabilities 631,980 (196,498)
------------- ------------
Net cash provided by operating activities 7,954,780 1,741,421
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (12,104) (67,210)
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Net cash used in investing activities (12,104) (67,210)
------------- ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options,
warrants, and other transactions 84,099 226,727
Payments on the loan obligation - (17,110)
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Net cash provided by financing activities 84,099 209,617
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Net increase in cash and cash equivalents 8,026,775 1,883,828
Cash and cash equivalents, at beginning of period 12,680,962 3,278,926
------------- ------------
Cash and cash equivalents, at end of period $ 20,707,737 $ 5,162,754
============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 802
============= ============
Cash paid for income taxes $ 642,132 $ 422,445
============= ============
See accompanying notes to condensed consolidated financial statements
-3-
PETMED EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Summary of Significant Accounting Policies
Organization
PetMed Express, Inc. and subsidiaries, d/b/a 1-800-PetMeds, is
a leading nationwide pet pharmacy. The Company markets
prescription and non-prescription pet medications, and other
health products for dogs, cats, and horses 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 website 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 2006 or 2005 refer to the Company's fiscal years
ending March 31, 2006 and 2005, respectively.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the instructions
to Form 10-Q and, therefore, do not include all of the
information and footnotes required by accounting principles
generally accepted in the United States of America for complete
financial statements. In the opinion of management, the
accompanying condensed consolidated financial statements contain
all adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial position of the
Company, after elimination of intercompany accounts and
transactions, at June 30, 2005 and the statements of income for
the three months ended June 30, 2005 and 2004 and cash flows for
the three months ended June 30, 2005 and 2004. The results of
operations for the three months ended June 30, 2005 are not
necessarily indicative of the operating results expected for the
fiscal year ending March 31, 2006. 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, 2005. 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.
-4-
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123R, Share Based Payment, which is a revision of
SFAS No. 123. This Statement supersedes APB No. 25, which is the
basis for the Company's current policy on accounting for stock-
based compensation. SFAS No. 123R will require companies to
recognize as an expense in the Statement of Income the grant-date
fair value of stock options and other equity-based compensation
issued to employees. SFAS No. 123R is effective for the Company
as of April 1, 2006, the beginning of the first quarter in fiscal
2007. Under the methods of adoption allowed by the standard,
awards that are granted, modified, or settled after the date of
adoption should be measured and accounted for in accordance with
SFAS No. 123R. The fair value of unvested equity-classified
awards that were granted prior to the effective date should
continue to be accounted for in accordance with SFAS No. 123
except that compensation amounts must be recognized in the
Statement of Income. Previously reported amounts may be restated
(either to the beginning of the year of adoption or for all
periods presented) to reflect the SFAS No. 123R amounts in the
Statement of Income. Pro-forma disclosures about the fair value
method and the impact on net income and net income per common
share appear in Note 3 to the Condensed Consolidated Financial
Statements. The Company is evaluating the requirements of SFAS
No. 123R and expects that the adoption of SFAS No. 123R will have
a material impact on its consolidated statements of income and
earnings per share.
The Company does not believe that any other recently issued,
but not yet effective, accounting standard, if currently adopted,
will have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
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
June 30,
2005 2004
------------ -------------
Net income (numerator):
Net income $ 3,541,586 $ 1,818,138
============ =============
Shares (denominator):
Weighted average number of common shares
outstanding used in basic computation 23,471,264 22,017,221
Common shares issuable upon exercise
of stock options and warrants 487,808 1,855,590
Common shares issuable upon conversion
of preferred shares 10,125 10,125
------------ -------------
Shares used in diluted computation 23,969,197 23,882,936
============ =============
Net income per common share:
Basic $ 0.15 $ 0.08
============ =============
Diluted $ 0.15 $ 0.08
============ =============
For the periods ended June 30, 2005 and 2004, 481,500 and
250,000 shares of common stock options, with a weighted average
exercise price of $9.69 and $10.64, 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
June 30,
2005 2004
------------ -------------
Reported net income: $ 3,541,586 $ 1,818,138
Deduct: total stock-based employee
compensation expense determined under
fair-value based method for all awards,
net of related tax effects 219,016 159,406
------------ -------------
Pro forma net income: $ 3,322,570 $ 1,658,732
============ =============
Reported basic net income per share: $ 0.15 $ 0.08
============ =============
Pro forma basic net income per share: $ 0.14 $ 0.08
============ =============
Reported diluted net income per share: $ 0.15 $ 0.08
============ =============
Pro forma diluted net income per share: $ 0.14 $ 0.07
============ =============
Note 4: Line of Credit
The Company has a $6,000,000 line of credit with RBC Centura
Bank, which upon 30 days notice has a provision to increase the
line to $7,500,000. The line of credit is effective through
November 2, 2005, and the interest rate is at the published
thirty day London Interbank Offered Rates ("LIBOR") plus 1.50%
(4.84% at June 30, 2005), and contains various financial and
operating covenants. At June 30, 2005 and 2004, there was no
balance outstanding 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 is vigorously
defending, 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 commenced
shortly after the filing of the lawsuit, and at this stage of
the litigation it is difficult to assess any possible outcome or
estimate any potential loss in the event of an adverse outcome.
Routine Proceedings
The Company is a party to routine litigation and administrative
complaints incidental to its business. Management does not
believe that the resolution of any or all of such routine
litigation and administrative complaints 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.
-6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Executive Summary
PetMed Express was incorporated in the state of Florida in
January 1996. The Company's common stock is traded on the Nasdaq
National Market ("NASDAQ") under the symbol "PETS." Prior to the
move to the NASDAQ, the Company's shares had been traded on the
over-the-counter-bulletin board. The Company began selling pet
medications and other 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 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. For
the quarter ended June 30, 2005, approximately 54% of all sales
were generated via the Internet compared to 52% for the same
period last year.
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
1.6% of sales for the quarters ended on June 30, 2005 and 2004
respectively. The twelve month average retail purchase was
approximately $76 and $74 per order, and the three month average
retail purchase was approximately $79 per order for both of the
quarters ended June 30, 2005 and 2004.
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 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 customers' inability to make required
payments, arising from either credit card charge-backs or
insufficient funds checks. The Company determines its estimates
of the uncollectibility of accounts receivable by analyzing
historical bad debts and current economic trends. At June 30,
2005 and 2004 the allowance for doubtful accounts was
approximately $39,000 and $22,000, respectively.
Valuation of inventory
Inventories consist of prescription and non-prescription pet
medications and pet supplies that are available for sale and are
priced at the lower of cost or market value using a weighted
average cost method. The Company writes down its inventory for
estimated obsolescence. At June 30, 2005 and 2004 the inventory
reserve was approximately $206,000 and $289,000, respectively.
-7-
Property and equipment
Property and equipment are stated at cost and depreciated using
the straight-line method over the estimated useful lives of the
assets. The furniture, fixtures, equipment and computer software
are depreciated over periods ranging from three to ten years.
Leasehold improvements and assets under capital lease agreements
are amortized over the shorter of the underlying lease agreement
or the useful life of the asset.
Long-lived assets
Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may
not be recoverable. Recoverability of assets is measured by a
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 expenses consist primarily of
television advertising, internet marketing, and direct mail/print
advertising. Television costs are expensed as the advertisements
are televised. Internet costs are expensed in the month incurred
and direct mail/print advertising costs are expensed when the
related print material is 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.
-8-
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
June 30,
2005 2004
------- -------
Sales 100.0 % 100.0 %
Cost of sales 61.4 60.7
------- -------
Gross profit 38.6 39.3
Operating expenses:
General and administrative 8.8 9.1
Advertising 17.4 22.0
Depreciation and amortization 0.3 0.5
------- -------
Total operating expenses 26.5 31.6
------- -------
Income from operations 12.1 7.7
------- -------
Other income (expense) 0.3 -
------- -------
Income before provision for
income taxes 12.4 7.7
Provision for income taxes 4.3 2.5
------- -------
Net income 8.1 % 5.2 %
======= =======
-9-
Three Months Ended June 30, 2005 Compared With Three Months Ended
June 30, 2004
Sales
- -----
Sales increased by approximately $8,343,000, or 23.6%, to
approximately $43,632,000 for the quarter ended June 30, 2005,
from approximately $35,289,000 for the quarter ended June 30,
2004. The increase in sales for the three months ended June 30,
2005 can be primarily attributed to increased retail new orders,
retail reorders and wholesale sales.
The Company has committed certain dollar amounts specifically
designated towards television, direct mail/print and on-line
advertising to stimulate sales, create brand awareness, and
acquire new customers. Retail new order sales have increased by
approximately $1,507,000, or 10.1%, to approximately $16,435,000
for the three months ended June 30, 2005, from approximately
$14,928,000 for the three months ended June 30, 2004. Retail
reorder sales have increased by approximately $5,816,000, or
29.2%, to approximately $25,762,000 for the three months ended
June 30, 2005, from approximately $19,946,000 for the three
months ended June 30, 2004. Wholesale sales have increased by
approximately $1,020,000, or 246.3%, to approximately $1,434,000
for the three months ended June 30, 2005, from approximately
$414,000 for the three months ended June 30, 2004. The Company
acquired approximately 217,000 new customers for the quarter
ended June 30, 2005, compared to approximately 191,000 new
customers for the same period prior year. The increase in retail
sales growth for the quarter ended June 30, 2005 compared to the
quarter ended June 30, 2004 can be attributed to increased
advertising efficiency and more effective advertising creatives.
The majority of our product sales are affected by the seasons,
due to the seasonality of mainly heartworm and flea and tick
medications. For the quarters ended June 30, September 30,
December 31, and March 31 of fiscal 2005, the Company's sales
were approximately 33%, 26%, 19%, and 22%, respectively.
Cost of sales
- -------------
Cost of sales increased by approximately $5,346,000, or 25.0%,
to approximately $26,773,000 for the quarter ended June 30, 2005,
from approximately $21,427,000 for the quarter ended June 30,
2004. The increase in cost of sales is directly related to the
increase in retail and wholesale sales in the quarter ended June
30, 2005 compared to the quarter ended June 30, 2004. As a
percent of sales, the cost of sales was 61.4% and 60.7% for the
quarters ended June 30, 2005 and 2004, respectively. The
percentage increase can be attributed to an increase to our
wholesale sales, which had a lower gross profit percentage, and
increases to our product and freight costs.
Gross profit
- ------------
Gross profit increased by approximately $2,997,000, or 21.6%,
to approximately $16,859,000 for the quarter ended June 30, 2005,
from approximately $13,862,000 for the quarter ended June 30,
2004. Gross profit as a percentage of sales was 38.6% and 39.3%
for the three months ended June 30, 2005 and 2004, respectively.
The percentage decrease can be attributed to an increase to our
wholesale sales, which had a lower gross profit percentage, and
increases to our product and freight costs.
General and administrative expenses
- -----------------------------------
General and administrative expenses increased by approximately
$631,000, or 19.6%, to approximately $3,853,000 for the quarter
ended June 30, 2005, from approximately $3,222,000 for the
quarter ended June 30, 2004. The increase in general and
administrative expenses for the three months ended June 30, 2005
was primarily due to the following: a $189,000 increase to bank
service and credit card fees which can be directly attributed to
increased sales in the quarter; a $187,000 one-time charge
relating to state/county sales tax which was not collected on
behalf of our customers; a $175,000 increase to professional
fees, primarily relating to increased legal fees and pharmacist
fees; a $29,000 increase to insurance expenses, relating to
additional premiums paid; a $25,000 increase to property expenses
relating to additional rent due to our warehouse expansion; a
$24,000 increase to payroll expenses due to the addition of new
employees in the customer care and pharmacy departments enabling
the company to sustain its growth; and a $2,000 increase to
office expenses.
-10-
Advertising expenses
- --------------------
Advertising expenses decreased by approximately $151,000, or
1.9%, to approximately $7,604,000 for the quarter ended June 30,
2005, from approximately $7,755,000 for the quarter ended June
30, 2004. As a percentage of sales, advertising expense was
17.4% and 22.0% for the three months ended June 30, 2005 and
2004, respectively. The Company expects advertising as a
percentage of sales to range from approximately 17.0% to 19.0% in
fiscal 2006. However, that advertising percentage will fluctuate
quarter to quarter due to seasonality and advertising
availability.
The advertising costs of acquiring a new customer, defined as
total advertising costs divided by new customers acquired, for
the quarter ended June 30, 2005 was $35, compared to $41 for the
same period the prior year. We can attribute this to an increase
in advertising efficiency and effective advertising creatives.
Depreciation and amortization expenses
- --------------------------------------
Depreciation and amortization expenses decreased by
approximately $31,000, or 19.8%, to approximately $128,000 for
the quarter ended June 30, 2005, from approximately $159,000 for
the quarter ended June 30, 2004. This decrease to depreciation
and amortization expense for the quarter ended June 30, 2005 can
be attributed to decreased property and equipment additions since
the first quarter of fiscal 2005.
Other income
- ------------
Other income increased by approximately $137,000, or 3,914%, to
approximately $140,000 for the quarter ended June 30, 2005 from
approximately $3,000 for the quarter ended June 30, 2004. The
increase to other income can be primarily attributed to increased
interest income due to increases in the Company's cash balance,
which is swept into an interest bearing overnight account and tax-
free short term investment accounts, and advertising revenue
generated from our website.
Provision for income taxes
- --------------------------
For the quarters ended June 30, 2005 and 2004, the Company
recorded an income tax provision for approximately $1,872,000 and
$911,000, respectively, which resulted in an effective tax rate
of 34.6% and 33.4%, respectively.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital at June 30, 2005 and March 31,
2005 was $25,735,000 and $21,969,000, respectively. The
$3,766,000 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
$7,955,000 and $1,741,000 for the three months ended June 30,
2005 and 2004, respectively. Net cash used in investing
activities was $12,000 and $67,000 for the three months ended
June 30, 2005 and 2004, respectively. Net cash provided by
financing activities was $84,000 and $210,000 for the three
months ended June 30, 2005 and 2004, respectively. This $126,000
decrease can be attributed to a decrease in the number of stock
options and warrants exercised in the quarter ended June 30, 2005
than in the quarter ended June 30, 2004.
The Company has a $6,000,000 line of credit with RBC Centura
Bank, which upon 30 days notice has a provision to increase the
line to $7,500,000. The line of credit is effective through
November 2, 2005, and the interest rate is at the published
thirty day London Interbank Offered Rates ("LIBOR") plus 1.50%
(4.84% at June 30, 2005), and contains various financial and
operating covenants. At June 30, 2005 and 2004, there was no
balance outstanding under the line of credit agreement.
On May 18, 2005 the Company signed an amendment to extend its
current lease agreement through May 31, 2009. The amendment
terms are similar to the existing lease agreement, and the
Company exercised its option to lease an additional 3,600 square
feet. This addition to the warehouse was necessary to increase
the Company's capacity to store additional inventory during our
peak season. Under the terms of the new amendment the Company
will be leasing 43,000 square feet.
The Company had financed certain equipment acquisitions with
capital leases. As of June 30, 2005 and 2004 the Company had no
outstanding lease commitments except for the lease for its
executive offices and warehouse. The Company's sources of
working capital include cash from operations, line of credit, and
the exercise of stock options. For the remainder of fiscal 2006,
the Company has approximately $280,000 planned for capital
expenditure to maintain existing
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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, has 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 on 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," "plans," "projects,"
"contemplates," "intends," "budgets," "predicts," "estimates,"
"anticipates," or similar expressions. These statements are
based on our beliefs, as well as assumptions we have used based
upon information currently available to us. Because these
statements reflect our current views concerning future events,
these statements involve risks, uncertainties and assumptions.
Actual future results may differ significantly from the results
discussed in the forward-looking statements. A reader, whether
investing in our common stock or not, should not place undue
reliance on these forward-looking statements, which apply only
as of the date of this quarterly report.
When used in this quarterly report on Form 10-Q, "PetMed
Express," "1-800-PetMeds," "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 June 30, 2005, 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 August 5, 2005,
there was no outstanding balance under the line of credit
agreement.
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, has conducted an evaluation
of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-14(c)
promulgated under the Securities Exchange Act of 1934, as
amended) as of the quarter ended June 30, 2005, 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.
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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
The following exhibits are filed as part of this report.
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under
the Securities Exchange Act of 1934, as amended (filed herewith
to Exhibit 31.1 of the Registrant's Report on Form 10-Q for the
quarter ended June 30, 2005, Commission File No. 000-28827).
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under
the Securities Exchange Act of 1934, as amended (filed herewith
to Exhibit 31.2 of the Registrant's Report on Form 10-Q for the
quarter ended June 30, 2005, Commission File No. 000-28827).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith to Exhibit 32.1 of the Registrant's
Report on Form 10-Q for the quarter ended June 30, 2005,
Commission File No. 000-28827).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PETMED EXPRESS, INC.
(The "Registrant")
Date: August 8, 2005
By: /s/ Menderes Akdag
----------------------------------------
Menderes Akdag
Chief Executive Officer and President
(principal executive officer)
By: /s/ Bruce S. Rosenbloom
----------------------------------------
Bruce S. Rosenbloom
Chief Financial Officer
(principal financial and accounting officer)
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___________________________________________________________________________
___________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC
_______________________
FORM 10-Q
FOR THE QUARTER ENDED:
JUNE 30, 2005
_______________________
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