UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 (I.R.S. Employer
of 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
------------------------------------------------
(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 a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of "accelerated filer" and "large
accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell
company (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: 23,946,223 Common Shares, $.001 par value per share at
February 3, 2006.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2005 2005
------------ ------------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents $ 26,640,511 $ 12,680,962
Accounts receivable, less allowance for
doubtful accounts of $13,000 and
$37,000, respectively 658,726 1,796,756
Inventories - finished goods 11,572,899 11,180,333
Prepaid expenses and other current assets 374,303 213,152
------------ ------------
Total current assets 39,246,439 25,871,203
Property and equipment, net 1,141,641 1,286,267
Deferred income taxes 630,833 582,846
Intangible asset 365,000 365,000
Other assets 14,167 14,167
------------ ------------
Total assets $ 41,398,080 $ 28,119,483
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,859,103 $ 2,724,990
Income taxes payable 4,576,531 601,535
Accrued expenses and other current liabilities 946,759 575,894
------------ ------------
Total liabilities 7,382,393 3,902,419
------------ ------------
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; 23,728,555 and
23,458,725 shares issued and outstanding,
respectively 23,729 23,459
Additional paid-in capital 12,948,460 12,074,611
Retained earnings 21,034,600 12,110,096
------------ ------------
Total shareholders' equity 34,015,687 24,217,064
------------ ------------
Total liabilities and shareholders' equity $ 41,398,080 $ 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 Nine Months Ended
December 31, December 31,
2005 2004 2005 2004
----------- ----------- ------------ -----------
Sales $ 25,890,095 $ 20,782,837 $ 108,174,527 $ 84,826,062
Cost of sales 15,613,715 12,337,310 66,188,709 50,905,585
----------- ----------- ------------ -----------
Gross profit 10,276,380 8,445,527 41,985,818 33,920,477
----------- ----------- ------------ -----------
Operating expenses:
General and administrative 3,060,580 2,541,197 10,722,151 8,734,370
Advertising 3,189,099 2,628,090 17,716,234 16,012,910
Depreciation and amortization 135,638 146,609 394,928 460,962
----------- ----------- ------------ -----------
Total operating expenses 6,385,317 5,315,896 28,833,313 25,208,242
----------- ----------- ------------ -----------
Income from operations 3,891,063 3,129,631 13,152,505 8,712,235
----------- ----------- ------------ -----------
Other income (expense):
Interest expense - - - (880)
Interest income 215,590 33,409 467,742 55,414
Other, net 49,147 906 171,255 2,317
----------- ----------- ------------ -----------
Total other income (expense) 264,737 34,315 638,997 56,851
----------- ----------- ------------ -----------
Income before provision for
income taxes 4,155,800 3,163,946 13,791,502 8,769,086
Provision for income taxes 1,483,708 1,206,835 4,866,998 3,182,182
----------- ----------- ------------ -----------
Net income $ 2,672,092 $ 1,957,111 $ 8,924,504 $ 5,586,904
=========== =========== ============ ===========
Net income per common share:
Basic $ 0.11 $ 0.08 $ 0.38 $ 0.25
=========== =========== ============ ===========
Diluted $ 0.11 $ 0.08 $ 0.37 $ 0.23
=========== =========== ============ ===========
Weighted average number of
common shares outstanding:
Basic 23,680,221 23,266,549 23,572,211 22,670,044
=========== =========== ============ ===========
Diluted 24,255,705 23,903,297 24,105,124 23,867,698
=========== =========== ============ ===========
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,
2005 2004
----------- -----------
Cash flows from operating activities:
Net income $ 8,924,504 $ 5,586,904
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 394,928 460,962
Tax benefit related to stock options exercised 212,856 826,476
Deferred income taxes (47,987) (77,455)
Bad debt expense (recovery) (16,144) (14,530)
(Increase) decrease in operating assets
and increase (decrease) in liabilities:
Accounts receivable 1,154,174 849,394
Inventories - finished goods (392,566) (2,276,359)
Prepaid expenses and other current assets (161,151) (63,947)
Other assets - 7,655
Accounts payable (865,887) (1,698,494)
Income taxes payable 3,974,996 123,489
Accrued expenses and other current
liabilities 370,865 (187,771)
----------- -----------
Net cash provided by operating activities 13,548,588 3,536,324
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (250,302) (146,623)
----------- -----------
Net cash used in investing activities (250,302) (146,623)
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options,
warrants, and other transactions 661,263 1,225,835
Payments on the loan obligation - (68,442)
----------- -----------
Net cash provided by financing activities 661,263 1,157,393
----------- -----------
Net increase in cash and cash equivalents 13,959,549 4,547,094
Cash and cash equivalents, at beginning of period 12,680,962 3,278,926
----------- -----------
Cash and cash equivalents, at end of period $ 26,640,511 $ 7,826,020
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 802
=========== ===========
Cash paid for income taxes $ 727,132 $ 2,309,672
=========== ===========
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 and sells
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 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 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 December 31, 2005 and the Statements of Income
for the three and nine months ended December 31, 2005 and 2004
and Statements of Cash Flows for the nine months ended December
31, 2005 and 2004. The results of operations for the three and
nine months ended December 31, 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.
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS")
No. 123R, Share Based Payment, which is a revision of SFAS No.
123. This Statement supersedes Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees,
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 quarter
ending June 30, 2006. 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 be measured in accordance with SFAS No. 123 and
recognized as compensation expense in the Statement of Income.
4
Previously reported amounts may be restated for all periods
presented or adopted at the beginning of the fiscal year 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 Nine Months Ended
December 31, December 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income (numerator):
Net income $ 2,672,092 $ 1,957,111 $ 8,924,504 $ 5,586,904
=========== =========== =========== ===========
Shares (denominator):
Weighted average number of
common shares outstanding
used in basic computation 23,680,221 23,266,549 23,572,211 22,670,044
Common shares issuable upon
exercise of stock options
and warrants 565,359 626,623 522,788 1,187,529
Common shares issuable upon
conversion of preferred
shares 10,125 10,125 10,125 10,125
------------ ----------- ----------- -----------
Shares used in diluted
computation 24,255,705 23,903,297 24,105,124 23,867,698
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.11 $ 0.08 $ 0.38 $ 0.25
=========== =========== =========== ===========
Diluted $ 0.11 $ 0.08 $ 0.37 $ 0.23
=========== =========== =========== ===========
For the three months ended December 31, 2005 all common stock
options were included in the diluted net income per share
computation as their exercise prices were less than the average
market price of the common shares for the period. For the three
months ended December 31, 2004 485,500 shares issuable upon the
exercise of common stock options, with a weighted average
exercise price of $9.69, and for the nine months ended December
31, 2005 and 2004, 250,000 and 485,500 shares issuable upon the
exercise of common stock options, with a weighted average
exercise price of $10.64 and $9.69, 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, therefore the effect would have
been anti-dilutive.
5
Note 3: Accounting for Stock-Based Compensation
The Company accounts for employee stock options using the
intrinsic value method as prescribed by 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,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Reported net income: $ 2,672,092 $ 1,957,111 $ 8,924,504 $ 5,586,904
Deduct: total stock-based
employee compensation expense
determined under fair-value
based method for all awards,
net of related tax effects 152,818 132,928 443,616 366,282
----------- ----------- ----------- -----------
Pro forma net income: $ 2,519,274 $ 1,824,183 $ 8,480,888 $ 5,220,622
=========== =========== =========== ===========
Reported basic net income
per share: $ 0.11 $ 0.08 $ 0.38 $ 0.25
=========== =========== =========== ===========
Pro forma basic net income
per share: $ 0.11 $ 0.08 $ 0.36 $ 0.23
=========== =========== =========== ===========
Reported diluted net income
per share: $ 0.11 $ 0.08 $ 0.37 $ 0.23
=========== =========== =========== ===========
Pro forma diluted net income
per share: $ 0.10 $ 0.08 $ 0.35 $ 0.22
=========== =========== =========== ===========
Note 4: Line of Credit
The Company has a $6,000,000 line of credit with RBC Centura
Bank ("RBC"), which upon 30 days notice has a provision to
increase the line to $7,500,000. On October 31, 2005, the
Company and RBC agreed to extend the maturity date of the
existing line of credit for a period of 90 days. On February 3,
2006, the Company and RBC agreed to extend the maturity date of
the existing line of credit for an additional 45 days. The
Company is currently determining whether it has a need for this
line of credit. The line of credit is effective through March
18, 2006, and the interest rate is at the published thirty day
London Interbank Offered Rates ("LIBOR") plus 1.50% (5.90% at
December 31, 2005), and contains various financial and operating
covenants. As of December 31, 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. We are currently negotiating a
settlement of the matter, although there can be no assurances
that the negotiations will be successful. Thus, at this stage it
is difficult to assess the outcome or estimate any potential loss
in the event of an adverse outcome.
6
On January 19, 2006, PetMed Express, Inc. was added as a
defendant in the matter of Yali Golan v. Marc Puleo (former
president and current Chairman of the Board of Directors of the
Company), filed in the Circuit Court of the Eleventh Judicial
Circuit in and for Miami-Dade County, Florida which had
originally been filed solely against Dr. Puleo in March 2003.
This action is based upon allegations by the plaintiff that
Dr. Puleo individually entered into a written agreement with the
plaintiff (the purported "General Agreement," of which the
plaintiff has not produced an original document) which in
pertinent part granted plaintiff 50% of any salary, stock or
stock options received by Dr. Puleo from the Company for so long
as the Company remains in business. The plaintiff now alleges
that the Company's past and continuing failure to disclose the
purported General Agreement in filings with the SEC has caused
the plaintiff to suffer damages. The plaintiff is seeking a
judgment against the Company for specific performance and
unspecified damages, pre- and post-judgment interest, court fees
and such other relief as the court deems appropriate. The
Company believes that, based on information currently available
to it, the claims being asserted against it are factually and
legally without merit, and the Company intends to vigorously
defend against such claims.
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." 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.
Presently, the Company's product line includes approximately 750
of the most popular pet medications and other health products for
dogs, cats, and horses.
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 December 31, 2005, approximately 57% of all
sales were generated via the Internet compared to 53% for the
same period last year. For the nine months ended December 31,
2005, approximately 55% of all sales were generated via the
Internet compared to 51% 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 1.7% and
1.4% of sales, respectively, for the quarters ended December 31,
2005 and 2004. The three month average retail purchase was
approximately $74 and $73, respectively, per order for the
quarters ended December 31, 2005 and 2004. The nine month
average retail purchase was approximately $76 and $75 per order,
respectively, for the quarters ended December 31, 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 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, 2005 and 2004 the allowance for doubtful accounts
was approximately $13,000 and $6,000, respectively.
8
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 December 31, 2005 and 2004 the
inventory reserve was approximately $236,000 and $275,000,
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.
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 expenses consists 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 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.
9
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,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 60.3 59.4 61.2 60.0
----------- ----------- ----------- -----------
Gross profit 39.7 40.6 38.8 40.0
----------- ----------- ----------- -----------
Operating expenses:
General and administrative 11.8 12.2 9.9 10.3
Advertising 12.4 12.6 16.3 18.9
Depreciation and amortization 0.5 0.7 0.4 0.5
----------- ----------- ----------- -----------
Total operating expenses 24.7 25.5 26.6 29.7
----------- ----------- ----------- -----------
Income from operations 15.0 15.1 12.2 10.3
----------- ----------- ----------- -----------
Total other income 1.0 0.1 0.6 -
----------- ----------- ----------- -----------
Income before provision for
income taxes 16.0 15.2 12.8 10.3
Provision for income taxes 5.7 5.8 4.5 3.7
----------- ----------- ----------- -----------
Net income 10.3 9.4 8.3 6.6
=========== =========== =========== ===========
10
Three Months Ended December 31, 2005 Compared With Three Months
Ended December 31, 2004, and Nine Months Ended December 31, 2005
Compared With Nine Months Ended December 31, 2004
Sales
- -----
Sales increased by approximately $5,107,000, or 24.6%, to
approximately $25,890,000 for the quarter ended December 31,
2005, from approximately $20,783,000 for the quarter ended
December 31, 2004. For the nine months ended December 31, 2005,
sales increased by approximately $23,349,000, or 27.5%, to
approximately $108,175,000 compared to sales of approximately
$84,826,000 for the nine months ended December 31, 2004. The
increase in sales for the three and nine months ended December
31, 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 reorder sales have increased by
approximately $3,595,000, or 24.8%, to approximately $18,097,000
for the three months ended December 31, 2005, from approximately
$14,502,000 for the three months ended December 31, 2004. Retail
reorder sales have increased by approximately $15,038,000, or
29.1%, to approximately $66,711,000 for the nine months ended
December 31, 2005, from approximately $51,673,000 for the nine
months ended December 31, 2004. Retail new order sales have
increased by approximately $1,487,000, or 25.8%, to approximately
$7,256,000 for the three months ended December 31, 2005, from
approximately $5,769,000 for the three months ended December 31,
2004. Retail new order sales have increased by approximately
$6,796,000, or 21.5%, to approximately $38,387,000 for the nine
months ended December 31, 2005, from approximately $31,591,000
for the nine months ended December 31, 2004. Wholesale sales
have increased by approximately $25,000, or 5.0%, to
approximately $537,000 for the three months ended December 31,
2005, from approximately $512,000 for the three months ended
December 31, 2004. Wholesale sales have increased by
approximately $1,515,000, or 97.0%, to approximately $3,077,000
for the nine months ended December 31, 2005, from approximately
$1,562,000 for the nine months ended December 31, 2004. The
Company acquired approximately 105,000 new customers for the
quarter ended December 31, 2005, compared to approximately 85,000
new customers for the same period prior year. For the nine
months ended December 31, 2005 the Company acquired approximately
530,000 new customers, compared to approximately 430,000 new
customers for the same period in the prior year. The increase in
retail sales growth for the quarter and nine months ended
December 31, 2005 compared to the quarter and nine months ended
December 31, 2004 can be attributed to increased advertising
efficiency with more effective creatives, and discount offers.
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.
In October 2005, the Company's business was affected by
Hurricane Wilma. Due to a failed generator the Company lost
approximately two days of business on its website and four days
of business in its contact center. It's difficult to determine
how much of a negative impact this may have had on our sales
growth in the quarter ended on December 31, 2005.
Cost of sales
- -------------
Cost of sales increased by approximately $3,277,000, or 26.6%,
to approximately $15,614,000 for the quarter ended December 31,
2005, from approximately 12,337,000 for the quarter ended
December 31, 2004. For the nine months ended December 31, 2005,
cost of sales increased by approximately $15,283,000, or 30.0%,
to approximately $66,189,000 compared to cost of sales of
approximately $50,906,000 for the nine months ended December 31,
2004. The increase in cost of sales for the three and nine
months ended December 31, 2005 is directly related to the
increase in retail and wholesale sales. As a percent of sales,
the cost of sales was 60.3% and 59.4% for the three months ended
December 31, 2005 and 2004, respectively, and for the nine months
ended December 31, 2005 and 2004 cost of sales was 61.2% and
60.0%, respectively. The percentage increase can be attributed
to increases in our product and freight costs, discounts given to
our customers, and increases in our wholesale sales, which had a
lower gross profit percentage.
As a direct result of Hurricane Wilma, the Company wrote-off
approximately $60,000 of refrigeration-required inventory during
the quarter ended on December 31, 2005.
11
Gross profit
- ------------
Gross profit increased by approximately $1,830,000, or 21.7%,
to approximately $10,276,000 for the quarter ended December 31,
2005, from approximately $8,446,000 for the quarter ended
December 31, 2004. For the nine months ended December 31, 2005,
gross profit increased by approximately $8,066,000, or 23.8%, to
approximately $41,986,000 compared to gross profit of
approximately $33,920,000 for the nine months ended December 31,
2004. Gross profit as a percentage of sales was 39.7% and 40.6%
for the three months ended December 31, 2005 and 2004,
respectively, and for the nine months ended December 31, 2005 and
2004 gross profit as a percentage of sales was 38.8% and 40.0%,
respectively. The gross profit percentage decrease can be
attributed to increases in our product and freight costs,
discounts given to our customers, and increases in our wholesale
sales, which had a lower gross profit percentage.
General and administrative expenses
- -----------------------------------
General and administrative expenses increased by approximately
$520,000, or 20.4%, to approximately $3,061,000 for the quarter
ended December 31, 2005, from approximately $2,541,000 for the
quarter ended December 31, 2004. For the nine months ended
December 31, 2005, general and administrative expenses increased
by approximately $1,988,000, or 22.8%, to approximately
$10,722,000 compared to general and administrative expenses of
approximately $8,734,000 for the nine months ended December 31,
2004. The increase in general and administrative expenses for
the three months ended December 31, 2005 was primarily due to the
following: a $206,000 increase to payroll expenses which can be
attributed to the addition of new employees in the customer care
and pharmacy departments enabling the company to sustain its
growth; a $89,000 increase to credit card and bank service fees
which can be directly attributed to increased sales in the
quarter; a $89,000 increase to property expense which can be
directly attributed to unanticipated hurricane-related charges,
mainly generator and fuel expenses, during the quarter; a $44,000
increase to telephone expenses resulting from receiving one time
usage credits in the quarter ended December 31, 2004; a $39,000
increase to professional fees, primarily relating to increased
pharmacist, accounting, and legal fees; a $33,000 increase to
office expenses which can be directly attributed to increased
sales and unanticipated hurricane-related charges during the
quarter; and a $20,000 increase to other expenses, which includes
insurance and bad debt expense.
The increase in general and administrative expenses for the
nine months ended December 31, 2005 was primarily due to the
following: a $514,000 increase to credit card and bank service
fees which can be directly attributed to increased sales in the
period; a $513,000 increase to payroll expenses which can be
attributed to the addition of new employees in the customer care
and pharmacy departments enabling the company to sustain its
growth; a $326,000 increase to professional fees, primarily
relating to increased pharmacist, accounting, and legal fees; a
$265,000 one-time charge relating to state/county sales tax which
was not collected on behalf of our customers; a $144,000 increase
to property expenses, relating to unanticipated hurricane-related
charges, mainly generator and fuel expenses, during the third
quarter and additional rent due to our warehouse expansion; a
$101,000 increase to telephone expenses resulting from receiving
one time usage credits in the quarters ended September 30, 2004
and December 31, 2004; a $74,000 increase to office expenses
which can be directly attributed to increased sales and
unanticipated hurricane-related charges in the period; a $34,000
increase to insurance expenses, relating to additional premiums
paid; and a $17,000 increase to other expenses, which includes
travel related and licensing expenses.
Advertising expenses
- --------------------
Advertising expenses increased by approximately $561,000, or
21.3%, to approximately $3,189,000 for the quarter ended December
31, 2005, from approximately $2,628,000 for the quarter ended
December 31, 2004. For the nine months ended December 31, 2005,
advertising expenses increased by approximately $1,703,000, or
10.6%, to approximately $17,716,000 compared to advertising
expenses of approximately $16,013,000 for the nine months ended
December 31, 2004. The increase in advertising expenses for the
three and nine months ended December 31, 2005 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, defined as
total advertising costs divided by new customers acquired, for
the quarter ended December 31, 2005 was $30, compared to $31 for
the same period the prior year, and for the nine months ended
December 31, 2005, the advertising cost of acquiring a new
customer was $33 compared to $37 for the same period prior year.
We can attribute this to an increase in advertising efficiency
with more effective creative.
12
As a percentage of sales, advertising expense was 12.4% and
12.6% for the three months ended December 31, 2005 and 2004,
respectively, and 16.3% and 18.9% for the nine months ended
December 31, 2005 and 2004, respectively. The Company expects
advertising as a percentage of sales to range from approximately
16.0% to 17.0% in fiscal 2006. However, that advertising
percentage will fluctuate quarter to quarter due to seasonality
and advertising availability.
Depreciation and amortization expenses
- --------------------------------------
Depreciation and amortization expenses decreased by
approximately $11,000, or 7.5%, to approximately $136,000 for the
quarter ended December 31, 2005, from approximately $147,000 for
the quarter ended December 31, 2004. For the nine months ended
December 31, 2005, depreciation and amortization expenses
decreased by approximately $66,000, or 14.3%, to approximately
$395,000 compared to depreciation and amortization expenses of
approximately $461,000 for the nine months ended December 31,
2004. This decrease in depreciation and amortization expense for
three and nine months ended December 31, 2005 can be attributed
to decreased property and equipment additions since the first
quarter of fiscal 2005.
Other income
- ------------
Other income increased by approximately $230,000 to
approximately $265,000 for the quarter ended December 31, 2005,
from approximately $34,000 for the quarter ended December 31,
2004. For the nine months ended December 31, 2005, other income
increased by approximately $582,000 to approximately $639,000
compared to other income of approximately $57,000 for the nine
months ended December 31, 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 to advertising revenue generated from
our website.
Provision for income taxes
- --------------------------
For the quarters ended December 31, 2005 and 2004, the Company
recorded an income tax provision of approximately $1,484,000 and
$1,207,000, respectively, which resulted in an effective tax rate
of 35.7% and 38.1%, respectively. For the nine months ended
December 31, 2005 and 2004, the Company recorded an income tax
provision of approximately $4,867,000 and $3,182,000,
respectively, which resulted in an effective tax rate of 35.3%
and 36.3%, respectively. The effective tax rates decreased due
to the fact that the majority of interest income earned by the
Company in the quarter and nine months ended December 31, 2005,
was a result of investments in tax-free securities.
Liquidity and Capital Resources
The Company's working capital at December 31, 2005 and March
31, 2005 was $31,864,000 and $21,969,000, respectively. The
$9,895,000 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
$13,549,000 and $3,536,000 for the nine months ended December 31,
2005 and 2004, respectively. Approximately, $4.0 million of the
net cash provided by operating activities can be attributed to an
increase in income taxes payable. The Company was granted an
estimated payment extension due to Hurricane Wilma. The Company
intends to pay the entire balance in February 2006. Net cash
used in investing activities was $250,000 and $147,000 for the
nine months ended December 31, 2005 and 2004, respectively. Net
cash provided by financing was $661,000 and $1,157,000 for the
nine months ended December 31, 2005 and 2004, respectively. This
$496,000 decrease can be attributed to a decrease in the number
of stock options and warrants exercised in the nine months ended
December 31, 2005 as compared to the nine months ended December
31, 2004.
The Company has a $6,000,000 line of credit with RBC Centura
Bank ("RBC"), which upon 30 days notice has a provision to
increase the line to $7,500,000. On October 31, 2005, the
Company and RBC agreed to extend the maturity date of the
existing line of credit for a period of 90 days. On February 3,
2006, the Company and RBC agreed to extend the maturity date of
the existing line of credit for an additional 45 days. The
Company is currently determining whether it has a need for this
line of credit. The line of credit is effective through March
18, 2006, and the interest rate is at the published thirty day
London Interbank Offered Rates ("LIBOR") plus 1.50% (5.90% at
December 31, 2005), and contains various financial and operating
covenants. As of December 31, 2005 and 2004, there was no
balance outstanding under the line of credit agreement.
13
On November 28, 2005 the Company signed an amendment to its
current lease agreement. The Company agreed to lease an
additional 7,000 square feet to expand its warehouse and
pharmacy. This addition to the warehouse and pharmacy was
necessary to increase the Company's capacity to store additional
inventory and expand its fulfillment operations. Under the terms
of the new amendment the Company will be leasing 50,000 square
feet through May 31, 2009.
The Company had previously financed certain equipment
acquisitions with capital leases. As of December 31, 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 $500,000 planned for
capital expenditures to expand the Company's warehouse, pharmacy
and fulfillment operations, to add additional computer equipment
to further the Company's growth and add back-up infrastructure,
and to maintain existing capital assets. 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, 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 December 31, 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 February 3,
2006, 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.
14
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 December 31, 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.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 1A. Risk Factors.
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.
10.13 Third Addendum to Lease Agreement (filed herewith to Exhibit
10.13 of the Registrant's Report on Form 10-Q for the quarter
ended December 31, 2005, Commission File No. 000-28827).
10.14 Fourth Addendum to Lease Agreement (filed herewith to Exhibit
10.14 of the Registrant's Report on Form 10-Q for the quarter
ended December 31, 2005, Commission File No. 000-28827).
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, 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 December 31, 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 December 31, 2005, Commission
File No. 000-28827).
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PETMED EXPRESS, INC.
(The "Registrant")
Date: February 6, 2006
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)
17
___________________________________________________________________
___________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
PETMED EXPRESS, INC.
______________________
FORM 10-Q
FOR THE QUARTER ENDED:
DECEMBER 31, 2005
______________________
EXHIBITS
______________________
___________________________________________________________________
___________________________________________________________________
EXHIBIT INDEX
-------------
Exhibit Number of Pages Incorporated By
Number Description in Original Document Reference
10.13 Third Addendum to Lease Agreement 2 **
10.14 Fourth Addendum to Lease Agreement 2 **
31.1 Certification of Principal Executive
Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 1 **
31.2 Certification of Principal Financial
Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 1 **
32.1 Certification Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 1 **
** Filed herewith