UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
------------------
or
[X] 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.
------------------------------------------------------
(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
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(954) 979-5995
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
----------------------------------------------------
(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. [X] Yes [ ] 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" or "large
accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
[ ] Large accelerated filer [X] Accelerated filer
[ ] Non-accelerated filer
Indicate by check mark whether the registrant is a shell company
(defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
24,212,501 Common Shares, $.001 par value per share at November
3, 2006.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2006 2006
------------- --------------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents $ 37,663,345 $ 23,216,907
Accounts receivable, less allowance
for doubtful accounts of $30,000
and $23,000, respectively 1,503,233 1,155,781
Inventories - finished goods 9,863,560 14,997,675
Prepaid expenses and other current assets 1,701,719 583,038
------------- --------------
Total current assets 50,731,857 39,953,401
Property and equipment, net 1,531,926 1,497,589
Deferred income taxes 873,663 794,002
Intangible asset 365,000 365,000
Other assets - 14,167
------------- --------------
Total assets $ 53,502,446 $ 42,624,159
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 5,798,892 $ 3,052,953
Income taxes payable - 958,318
Accrued expenses and other current
liabilities 1,008,076 973,359
------------- --------------
Total liabilities 6,806,968 4,984,630
------------- --------------
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; 24,212,501 and
23,967,390 shares issued and outstanding,
respectively 24,213 23,967
Additional paid-in capital 14,423,528 13,433,054
Retained earnings 32,238,839 24,173,610
------------- --------------
Total shareholders' equity 46,695,478 37,639,529
------------- --------------
Total liabilities and shareholders' equity $ 53,502,446 $ 42,624,159
============= ==============
See accompanying notes to condensed consolidated financial statements
1
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
September 30, September 30,
2006 2005 2006 2005
------------- -------------- ------------- --------------
Sales $ 43,812,754 $ 38,652,674 $ 94,486,107 $ 82,284,432
Cost of sales 26,890,113 23,801,822 57,439,141 50,574,994
------------- -------------- ------------- --------------
Gross profit 16,922,641 14,850,852 37,046,966 31,709,438
------------- -------------- ------------- --------------
Operating expenses:
General and administrative 4,320,703 3,808,677 8,769,325 7,661,571
Advertising 7,670,641 6,922,832 15,999,359 14,527,135
Depreciation and amortization 130,851 131,745 266,152 259,290
------------- -------------- ------------- --------------
Total operating expenses 12,122,195 10,863,254 25,034,836 22,447,996
------------- -------------- ------------- --------------
Income from operations 4,800,446 3,987,598 12,012,130 9,261,442
------------- -------------- ------------- --------------
Other income (expense):
Interest income 336,817 152,715 587,984 252,152
Other, net 136,763 81,821 237,165 122,108
Loss on disposal of
property and equipment - - (1,250) -
------------- -------------- ------------- --------------
Total other income (expense) 473,580 234,536 823,899 374,260
------------- -------------- ------------- --------------
Income before provision for
income taxes 5,274,026 4,222,134 12,836,029 9,635,702
Provision for income taxes 1,959,055 1,511,308 4,770,800 3,383,290
------------- -------------- ------------- --------------
Net income $ 3,314,971 $ 2,710,826 $ 8,065,229 $ 6,252,412
============= ============== ============= ==============
Net income per common share:
Basic $ 0.14 $ 0.12 $ 0.33 $ 0.27
============= ============== ============= ==============
Diluted $ 0.14 $ 0.11 $ 0.33 $ 0.26
============= ============== ============= ==============
Weighted average number of
common shares outstanding:
Basic 24,172,319 23,564,051 24,091,242 23,517,911
============= ============== ============= ==============
Diluted 24,240,345 24,111,210 24,223,267 24,032,552
============= ============== ============= ==============
See accompanying notes to condensed consolidated financial statements
2
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
September 30,
2006 2005
------------- -------------
Cash flows from operating activities:
Net income $ 8,065,229 $ 6,252,412
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 266,152 259,290
Compensation expense relating to stock issuances 489,488 -
Tax benefit related to stock options exercised - 38,110
Deferred income taxes (79,661) (18,353)
Loss on disposal of property and equipment 1,250 -
Bad debt expense (recovery) 27,565 (15,616)
(Increase) decrease in operating assets
and increase (decrease) in liabilities:
Accounts receivable (375,017) 817,099
Inventories - finished goods 5,134,115 2,812,609
Prepaid expenses and other current assets (1,118,681) (298,569)
Other assets 14,167 -
Accounts payable 2,745,939 (242,986)
Income taxes payable (958,318) 2,636,401
Accrued expenses and other current liabilities 34,717 440,690
------------- -------------
Net cash provided by operating activities 14,246,945 12,681,087
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (302,139) (30,915)
Net proceeds from the sale of property
and equipment 400 -
------------- -------------
Net cash used in investing activities (301,739) (30,915)
------------- -------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 421,513 285,962
Tax benefit related to stock options exercised 79,719 -
------------- -------------
Net cash provided by financing activities 501,232 285,962
------------- -------------
Net increase in cash and cash equivalents 14,446,438 12,936,134
Cash and cash equivalents, at beginning of period 23,216,907 12,680,962
------------- -------------
Cash and cash equivalents, at end of period $ 37,663,345 $ 25,617,096
============= =============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 6,364,063 $ 727,132
============= =============
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
(the "Company"), 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,
online 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 majority of
all of the Company's sales are to residents in the United States.
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 2007 or 2006 refer to the Company's fiscal years
ending March 31, 2007 and 2006, respectively.
Basis of Presentation and Consolidation
The accompanying unaudited Condensed Consolidated Financial
Statements have been prepared in accordance with the instructions
to Form 10-Q and, therefore, do not include all of the
information and footnotes required by accounting principles
generally accepted in the United States of America for complete
financial statements. In the opinion of management, the
accompanying Condensed Consolidated Financial Statements contain
all adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial position of the
Company, after elimination of intercompany accounts and
transactions, at September 30, 2006 and the Statements of Income
for the three and six months ended September 30, 2006 and 2005
and Statements of Cash Flows for the six months ended September
30, 2006 and 2005. The results of operations for the three and
six months ended September 30, 2006 are not necessarily
indicative of the operating results expected for the fiscal year
ending March 31, 2007. 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, 2006. 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 accounting principles generally accepted 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 June 2006, the Financial Accounting Standards Board
("FASB") issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement
No. 109" ("FIN 48"), which provides criteria for the recognition,
measurement, presentation and disclosure of uncertain tax
positions. A tax benefit from an uncertain position may be
recognized only if it is "more likely than not" that the position
is sustainable based on its technical merits. The provisions of
FIN 48 are effective for fiscal years beginning after
December 15, 2006. We do not expect FIN 48 will have a material
effect on our consolidated financial position, results of
operations or cash flows.
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.
4
PAGE>
Note 2: Net Income Per Share
In accordance with the provisions of Financial Accounting
Standards ("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
exercised and the effects of the potential conversion of
preferred shares, calculated using the treasury stock method.
Outstanding stock options 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 Six Months Ended
September 30, September 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net income (numerator):
Net income $ 3,314,971 $ 2,710,826 $ 8,065,229 $ 6,252,412
=========== =========== =========== ===========
Shares (denominator):
Weighted average number of common shares
outstanding used in basic computation 24,172,319 23,564,051 24,091,242 23,517,911
Common shares issuable upon exercise
of stock options 57,901 537,034 121,900 504,516
Common shares issuable upon conversion
of preferred shares 10,125 10,125 10,125 10,125
----------- ----------- ----------- -----------
Shares used in diluted computation 24,240,345 24,111,210 24,223,267 24,032,552
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.14 $ 0.12 $ 0.33 $ 0.27
=========== =========== =========== ===========
Diluted $ 0.14 $ 0.11 $ 0.33 $ 0.26
=========== =========== =========== ===========
For the three and six months ended September 30, 2006 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 September 30, 2005, 250,000 shares
issuable upon the exercise of common stock options, with a
weighted average exercise price of $10.64, and for the six months
ended September 30, 2005, 422,334 shares of common stock options,
with a weighted average exercise price of $9.93, 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 periods, therefore the effect would have
been anti-dilutive.
Note 3: Accounting for Stock-Based Compensation
Effective April 1, 2006, the Company began recording
compensation expense associated with stock options in accordance
with SFAS No. 123R, "Share Based Payment", which is a revision of
SFAS No. 123. Prior to April 1, 2006, the Company accounted for
stock-based compensation related to stock options under the
recognition and measurement principles of Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees." At that time the Company measured compensation
expense for its stock option plans using the intrinsic value
method, that is, as the excess, if any, of the fair market value
of the Company's stock at the grant date over the amount required
to be paid to acquire the stock, and provided the disclosures
required by SFAS Nos. 123 and 148. The Company has adopted the
modified prospective transition method provided under SFAS
No. 123R, and as a result, has not retroactively adjusted results
from prior periods. Under this transition method, compensation
expense associated with stock options recognized in the first
quarter of fiscal year 2007, and in subsequent quarters,
includes: 1) expense related to the remaining unvested portion of
all stock option awards granted prior to April 1, 2006, based on
the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123; and 2) expense related to
all stock option awards granted subsequent to April 1, 2006,
based on the grant date fair value estimated in accordance with
the provisions of SFAS No. 123R.
5
As a result of the adoption of SFAS No. 123R, the Company's
net income for the three and six months ended September 30, 2006
includes $223,000 and $446,000 of compensation expense. The
compensation expense related to all of the Company's stock-based
compensation arrangements is recorded as a component of general
and administrative expenses.
At September 30, 2006, the Company had one stock option plan.
The PetMed Express, Inc. 1998 Stock Option Plan (the "Plan"),
provides for the issuance of qualified options to officers and
key employees, and nonqualified options to directors, consultants
and other service providers, to purchase the Company's common
stock. The Company had reserved 5,000,000 shares of common stock
for issuance under the Plan. The exercise prices of options
issued under the Plan must be equal to or greater than the market
price of the Company's common stock as of the date of issuance.
The Company had 672,684 and 1,200,079 options outstanding under
the Plan at September 30, 2006 and 2005, respectively. Options
generally vest ratably over a three-year period commencing on the
first anniversary of the grant with respect to options granted to
employees under the Plan. The 1998 Plan expires on July 31,
2008.
For stock options granted prior to April 1, 2006, the
estimated fair value of each option award granted was determined
on the date of grant using the Black-Scholes option valuation
model. For stock option grants on and after April 1, 2006, the
estimated fair value of each option award granted will be
determined on the date of grant using the Black Scholes option-
pricing model or a lattice based option valuation model. The
following weighted-average assumptions were used for option
grants during the six month period ended September 30, 2005: risk-
free interest rates ranging from 4 percent, expected volatility
of 66 percent, no dividend yield, and expected lives of 4 years.
No assumptions were necessary for the six months ended September
30, 2006, due to the fact that no stock options were granted
during the period. The risk free interest rate for the six
months ended September 30, 2005 was based on the prime interest
rate at the date of grant. The expected volatility was based on
the historical volatility of the Company's stock.
A summary of the status of the Company's stock option plan as
of September 30, 2006 is as follows:
Weighted- Weighted-
Average Average
Exercise Remining Aggregate
Number of Price per Contractural Intrinsic
Shares Share Term (years) Value
--------- ----------- ------------ ------------
Options outstanding at March 31, 2006 851,170 $ 7.28
Options granted $ - -
Options exercised (178,486) $ 2.36
Options forfeited or expired $ - -
------------------------------------------------------
Options outstanding at September 30, 2006 672,684 $ 8.59 3.23 5,779,000
======================================================
Options vested and exercisable at
September 30, 2006 380,183 $ 8.89 2.37 3,378,173
======================================================
A summary of the status of the Company's non-vested shares as
of September 30, 2006 is presented below:
Weighted- Weighted-
Average Average
Exercise Remaining
Number of Price per Contractural
Shares Share Term (years
--------- ------------ -------------
Non-vested shares at March 31, 2006 460,336 $ 7.81
Options granted $ - -
Options vested (167,835) $ 7.11
Options forfeited or expired $ - -
-------------------------------------
Non-vested shares at September 30, 2006 292,501 $ 8.21 3.98
=====================================
As of September 30, 2006, there was $1,511,000 of unrecognized
compensation cost related to non-vested stock option awards,
which is expected to be recognized over a remaining weighted
average vesting period of 3.44 years.
6
For stock options granted prior to the adoption of SFAS No.
123R, the following table illustrates the pro forma effect on net
income and earnings per common share as if the Company has
applied the fair value recognition provisions of SFAS No. 123, as
amended by SFAS No. 148, and related interpretations in
accounting for its stock options in determining stock-based
compensation for awards under the plan:
Three Months Six Months
Ended Ended
September 30, September 30,
2005 2005
------------ ------------
Reported net income: $ 2,710,826 $ 6,252,412
Deduct: total stock-based employee
compensation expense determined under
fair-value based method for all awards,
net of related tax effects 71,782 290,798
------------ ------------
Pro forma net income: $ 2,639,044 $ 5,961,614
============ ============
Reported basic net income per share: $ 0.12 $ 0.27
============ ============
Pro forma basic net income per share: $ 0.11 $ 0.25
============ ============
Reported diluted net income per share: $ 0.11 $ 0.26
============ ============
Pro forma diluted net income per share: $ 0.11 $ 0.25
============ ============
Cash received from stock options exercised for the six months
ended September 30, 2006 and 2005 was $422,000 and $286,000,
respectively. The income tax benefits from stock options
exercised totaled $80,000 and $38,000 for the six months ended
September 30, 2006 and 2005, respectively.
On July 28, 2006, the Company received shareholder approval
for the adoption of the 2006 Employee Equity Compensation
Restricted Stock Plan (the "Employee Plan") and the 2006 Outside
Director Equity Compensation Restricted Stock Plan (the "Director
Plan.") The purpose of the plans is to promote the interests of
the Company by securing and retaining both employees and outside
directors. The Company has reserved 1,000,000 shares of common
stock for issuance under the Employee Plan. The Company has
reserved 200,000 shares of common stock for issuance under the
Director Plan. The value of the restricted stock is determined
based on the market value of the stock at the issuance date. The
restriction period or vesting period is determined by the
Company's Board, to be no less than 1 year and no more than ten
years. The Company had 46,625 restricted common shares issued
under the Employee Plan and 20,000 restricted common shares
issued under the Director Plan at September 30, 2006, the fair
value of which is being amortized over the three year vesting
period.
Note 4: Commitments and Contingencies
On January 19, 2006, PetMed Express, Inc. was added as a
defendant in the matter of Yali Golan v. Marc Puleo (former
President and 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.
The Company is a defendant in a multi-defendant lawsuit, filed
in August 2006 in the United States District Court For The
Eastern District of Texas, Marshall Division, seeking injunctive
and monetary relief styled Ronald A. Katz Technology Licensing,
L.P., v. Aetna Inc. et al., Cause No. 206CV 335. The lawsuit
alleges that the Company is infringing on certain telephone call
manipulation technology-related patents owned by the plaintiff.
In an effort to resolve this lawsuit, we anticipate negotiating
a licensing agreement, 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.
7
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. Legal costs related to the above matters
are expensed as incurred.
8
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 September 30, 2006, approximately 62% of all
sales were generated via the Internet compared to 55% 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 two 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% for
the quarter ended September 30, 2006, compared to 1.6% for the
quarter ended on September 30, 2005. The three month average
retail purchase was approximately $77 per order for the quarter
ended September 30, 2006, compared to $74 per order for the
quarter ended September 30, 2005. The six month average retail
purchase was approximately $80 per order for the six months ended
September 30, 2006, compared to $77 per order the for six months
ended September 30, 2005.
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 two to
three banking days. Credit card sales minimize accounts
receivable balances relative to sales. The Company maintains an
allowance for doubtful accounts for losses that the Company
estimates will arise from the customers' inability to make
required payments, arising from either credit card charge-backs
or insufficient funds checks. The Company determines its
estimates of the uncollectibility of accounts receivable by
analyzing historical bad debts and current economic trends. At
September 30, 2006 and 2005 the allowance for doubtful accounts
was approximately $30,000 and $20,000, 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 September 30, 2006 and 2005, the
inventory reserve was approximately $201,000 and $171,000,
respectively.
9
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 seven 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 catalog
and postcards are produced, distributed or superseded.
Accounting for income taxes
The Company accounts for income taxes under the provisions of
SFAS No. 109, Accounting for Income Taxes, which generally
requires recognition of deferred tax assets and liabilities for
the expected future tax benefits or consequences of events that
have been included in the Condensed Consolidated Financial
Statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on differences
between the financial reporting carrying values and the tax bases
of assets and liabilities, and are measured by applying enacted
tax rates and laws for the taxable years in which those
differences are expected to reverse.
Results of Operations
The following should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and the related notes
thereto included elsewhere herein. The following table sets
forth, as a percentage of sales, certain items appearing in the
Company's Condensed Consolidated Statements of Income.
Three Months Ended Six Months Ended
September 30, September 30,
2006 2005 2006 2005
------------------- -----------------
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 61.4 61.6 60.8 61.5
------- ------- ------- -------
Gross profit 38.6 38.4 39.2 38.5
------- ------- ------- -------
Operating expenses:
General and administrative 9.8 9.9 9.3 9.3
Advertising 17.5 17.9 16.9 17.6
Depreciation and amortization 0.3 0.3 0.3 0.3
------- ------- ------- -------
Total operating expenses 27.6 28.1 26.5 27.2
------- ------- ------- -------
Income from operations 11.0 10.3 12.7 11.3
------- ------- ------- -------
Other income 1.1 0.6 0.9 0.4
------- ------- ------- -------
Income before provision for income taxes 12.1 10.9 13.6 11.7
Provision for income taxes 4.5 3.9 5.1 4.1
------- ------- ------- -------
Net income 7.6 % 7.0 % 8.5 % 7.6 %
======= ======= ======= =======
10
Three Months Ended September 30, 2006 Compared With Three Months
Ended September 30, 2005, and Six Months Ended September 30, 2006
Compared With Six Months Ended September 30, 2005
Sales
- -----
Sales increased by approximately $5,160,000, or 13.3%, to
approximately $43,813,000 for the quarter ended September 30,
2006, from approximately $38,653,000 for the quarter ended
September 30, 2005. For the six months ended September 30, 2006,
sales increased by approximately $12,202,000, or 14.8%, to
approximately $94,486,000 compared to sales of approximately
$82,284,000 for the six months ended September 30, 2005. The
increase in sales for the three and six months ended September
30, 2006 can be primarily attributed to increased retail
reorders, offset by decreased 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 $5,240,000, or 22.9%, to approximately $28,108,000
for the three months ended September 30, 2006, from approximately
$22,868,000 for the three months ended September 30, 2005.
Retail reorder sales have increased by approximately $13,389,000,
or 27.5%, to approximately $62,020,000 for the six months ended
September 30, 2006, from approximately $48,631,000 for the six
months ended September 30, 2005. Retail new order sales have
increased by approximately $831,000, or 5.7%, to approximately
$15,511,000 for the three months ended September 30, 2006, from
approximately $14,680,000 for the three months ended September
30, 2005. Retail new order sales have increased by approximately
$888,000, or 2.9%, to approximately $32,003,000 for the six
months ended September 30, 2006, from approximately $31,115,000
for the six months ended September 30, 2005. Wholesale sales
have decreased by approximately $911,000, or 82.5%, to
approximately $193,000 for the three months ended September 30,
2006, from approximately $1,104,000 for the three months ended
September 30, 2005. Wholesale sales have decreased by
approximately $2,077,000, or 81.8%, to approximately $462,000 for
the six months ended September 30, 2006, from approximately
$2,539,000 for the six months ended September 30, 2005. The
decrease in wholesale sales for the three and six months ended
September 30, 2006 compared to the same period in the prior year
can be attributed to a strategic business decision to focus more
on retail customers and limit wholesale sales. We may continue
to limit our wholesale sales in the future to concentrate our
business on retail sales. The Company acquired approximately
212,000 new customers for the quarter ended September 30, 2006,
compared to approximately 208,000 new customers for the same
period in the prior year. For the six months ended September 30,
2006 the Company acquired approximately 419,000 new customers,
compared to approximately 425,000 new customers for the same
period in the prior year. The decrease in new customers acquired
for the six months ended September 30, 2006 compared to the six
months ended September 30, 2005 may be attributable to increased
price competition and increased advertising costs to acquire a
new customer.
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 2006, the Company's sales
were approximately 32%, 28%, 19%, and 21%, respectively.
Cost of sales
- -------------
Cost of sales increased by approximately $3,088,000, or 13.0%,
to approximately $26,890,000 for the quarter ended September 30,
2006, from approximately $23,802,000 for the quarter ended
September 30, 2005. For the six months ended September 30, 2006,
cost of sales increased by approximately $6,864,000, or 13.6%, to
approximately $57,439,000 compared to cost of sales of
approximately $50,575,000 for the six months ended September 30,
2005. The increase in cost of sales for the three and six months
ended September 30, 2006 is directly related to the increase in
sales. As a percent of sales, the cost of sales was 61.4% and
61.6% for the three months ended September 30, 2006 and 2005,
respectively, and for the six months ended September 30, 2006 and
2005 cost of sales was 60.8% and 61.5%, respectively. The
percentage decrease can be attributed to a decrease in our
wholesales sales, which had a higher cost of sales percentage.
Gross profit
- ------------
Gross profit increased by approximately $2,072,000, or 14.0%,
to approximately $16,923,000 for the quarter ended September 30,
2006, from approximately $14,851,000 for the quarter ended
September 30, 2005. For the six months ended September 30, 2006,
gross profit increased by approximately $5,338,000, or 16.8%, to
approximately $37,047,000 compared to gross profit of
approximately $31,709,000 for the six months ended September 30,
2005. Gross profit as a percentage of sales was 38.6% and 38.4%
for the three months ended September 30, 2006 and 2005,
respectively, and for the six months ended September 30, 2006 and
2005 gross profit as a percentage of sales was 39.2% and 38.5%,
respectively. The gross profit percentage increase can be
attributed to a decrease in our wholesale sales, which had a
lower gross profit percentage.
11
General and administrative expenses
- -----------------------------------
General and administrative expenses increased by approximately
$512,000, or 13.4%, to approximately $4,321,000 for the quarter
ended September 30, 2006, from approximately $3,809,000 for the
quarter ended September 30, 2005. For the six months ended
September 30, 2006, general and administrative expenses increased
by approximately $1,107,000, or 14.5%, to approximately
$8,769,000 compared to general and administrative expenses of
approximately $7,662,000 for the six months ended September 30,
2005. The increase in general and administrative expenses for
the three months ended September 30, 2006 was primarily due to
the following: a $392,000 increase to payroll expenses, $223,000
of the increase is due to the recognition of stock option
compensation expense during the quarter, relating to the
implementation of SFAS 123R, "Share Based Payment", the remaining
increase can also be attributed to the addition of new employees
in the customer care and pharmacy departments enabling the
company to sustain the Company's growth; a $120,000 increase to
bank service and credit card fees which can be directly
attributed to increased sales in the quarter; a $70,000 increase
to property expenses relating to additional rent due to our
warehouse expansion; and a $77,000 increase in other expenses
which includes mainly office expenses, telephone expenses and bad
debt expense. Offsetting the increase was a $77,000 one-time
charge relating to state/county sales tax which was not collected
on behalf of our customers in the first quarter of fiscal 2006
and a $70,000 decrease to other expenses which includes insurance
expenses, professional fees, and travel expenses.
The increase in general and administrative expenses for the six
months ended September 30, 2006 was primarily due to the
following: a $849,000 increase to payroll expenses, $446,000 of
the increase is due to the recognition of stock option
compensation expense during the quarter, relating to the
implementation of SFAS 123R, "Share Based Payment", the remaining
increase can also be attributed to the addition of new employees
in the customer care and pharmacy departments enabling the
company to sustain the Company's growth; a $286,000 increase to
bank service and credit card fees which can be directly
attributed to increased sales in the period; a $147,000 increase
to property expenses relating to additional rent due to our
warehouse expansion; a $82,000 increase to telephone expenses
resulting from receiving one time usage credits in the same
period during the prior year; a $66,000 increase in office
expenses, and a $54,000 increase in other expenses which includes
bad debt expense and professional licenses and fees. Offsetting
the increase was a $265,000 one-time charge relating to
state/county sales tax which was not collected on behalf of our
customers in the first quarter of fiscal 2006, a $58,000 decrease
to professional fees, which was related to a reduction in legal
fees, and a $54,000 decrease to other expenses which includes
insurance expenses and travel expenses.
Advertising expenses
- --------------------
Advertising expenses increased by approximately $748,000, or
10.8%, to approximately $7,671,000 for the quarter ended
September 30, 2006, from approximately $6,923,000 for the quarter
ended September 30, 2005. For the six months ended September 30,
2006, advertising expenses increased by approximately $1,472,000,
or 10.1%, to approximately $15,999,000 compared to advertising
expenses of approximately $14,527,000 for the six months ended
September 30, 2005. As a percentage of sales, advertising
expense was 17.5% and 17.9% for the three months ended September
30, 2006 and 2005, respectively, and 16.9% and 17.6% for the six
months ended September 30, 2006 and 2005, respectively. The
advertising costs of acquiring a new customer, defined as total
advertising costs divided by the number of new customers
acquired, for the quarter ended September 30, 2006 was $36,
compared to $33 for the same period the prior year, and for the
six months ended September 30, 2006, the advertising cost of
acquiring a new customer was $38 compared to $34 for the same
period prior year. The Company estimates advertising as a
percentage of sales to average between 15.0% and 16.0% for the
year ending March 31, 2007. However, that advertising percentage
will fluctuate quarter to quarter due to seasonality and
advertising availability.
Other income
- ------------
Other income increased by approximately $239,000 to
approximately $474,000 for the quarter ended September 30, 2006,
from approximately $235,000 for the quarter ended September 30,
2005. For the six months ended September 30, 2006, other income
increased by approximately $450,000 to approximately $824,000
compared to other income of approximately $374,000 for the six
months ended September 30, 2005. The increase to other income
for the three and six months ended September 30, 2006 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.
12
Provision for income taxes
- --------------------------
For the quarters ended September 30, 2006 and 2005, the Company
recorded an income tax provision for approximately $1,959,000 and
$1,511,000, respectively, which resulted in an effective tax rate
of 37.1% and 35.8%, respectively. For the six months ended
September 30, 2006 and 2005, the Company recorded an income tax
provision of approximately $4,771,000 and $3,383,000,
respectively, which resulted in an effective tax rate of 37.2%
and 35.1%, respectively.
Liquidity and Capital Resources
The Company's working capital at September 30, 2006 and March
31, 2006 was $43,925,000 and $34,969,000, respectively. The
$8,956,000 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
$14,247,000 and $12,681,000 for the six months ended September
30, 2006 and 2005, respectively. Net cash used in investing
activities was $302,000 and $31,000 for the six months ended
September 30, 2006 and 2005, respectively. The $271,000 increase
can be attributed to increased property and equipment additions
to further the Company's growth and the addition of back-up
infrastructure in the period. Net cash provided by financing
activities was $501,000 and $286,000 for the six months ended
September 30, 2006 and 2005, respectively. This $215,000
increase can be attributed to an increase in the number of stock
options exercised in the six months ended September 30, 2006 as
compared to the six months ended September 30, 2005.
The Company had financed certain equipment acquisitions with
capital leases. As of September 30, 2006 and 2005, 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 and the exercise of
stock options. For the remainder of fiscal 2007, the Company has
approximately $1,000,000 planned for capital expenditures, the
majority of which will be used to upgrade its e-commerce
platform, and to maintain existing capital assets and to add
additional computer equipment to further the Company's growth.
These capital expenditures will be funded through cash from
operations.
The Company presently has no need for other alternative
sources of working capital and at this time, 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. At September 30, 2006, we
had no 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.
13
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-15
promulgated under the Securities Exchange Act of 1934, as
amended) as of the quarter ended September 30, 2006, 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.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks
and uncertainties that could adversely affect our business,
financial condition, results of operations, and trading price of
our common stock. Please refer to our annual report on Form 10-K
for fiscal year 2006 for additional information concerning these
and other uncertainties that could negatively impact the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the second quarter of fiscal 2007 we issued 46,625 shares
of our common stock to 25 employees, one of whom was an officer
of our company, under our 2006 Employee Equity Compensation
Restricted Stock Plan valued at $544,114. The recipients were
either accredited investors, sophisticated investors or non-
accredited investors who had such knowledge and experience in
financial, investment and business matters that they were capable
of evaluating the merits and risks of the prospective investment
in our securities. The participants received and had access to
business and financial information concerning our company. The
issuances were exempt from registration under the Securities Act
of 1933, as amended, in reliance on an exemption provided by
Section 4(2) of that act.
During the second quarter of fiscal 2007 we issued 20,000 shares
of our common stock to four outside directors under our 2006
Outside Director Equity Compensation Restricted Stock Plan valued
at $233,400. The recipients were either accredited investors or
sophisticated investors who had such knowledge and experience in
financial, investment and business matters that they were capable
of evaluating the merits and risks of the prospective investment
in our securities. The participants received and had access to
business and financial information concerning our company. The
issuances were exempt from registration under the Securities Act
of 1933, as amended, in reliance on an exemption provided by
Section 4(2) of that act.
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 September 30, 2006, Commission File No. 000-28827).
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under
the Securities Exchange Act of 1934, as amended (filed herewith
to Exhibit 31.2 of the Registrant's Report on Form 10-Q for the
quarter ended September 30, 2006, Commission File No. 000-28827).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith to Exhibit 32.1 of the Registrant's
Report on Form 10-Q for the quarter ended September 30, 2006,
Commission File No. 000-28827).
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PETMED EXPRESS, INC.
(The "Registrant")
Date: November 3, 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)
16
______________________________________________________________________
______________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC
_______________________
FORM 10-Q
FOR THE QUARTER ENDED:
SEPTEMBER 30, 2006
_______________________
EXHIBITS
_______________________
______________________________________________________________________
______________________________________________________________________
EXHIBIT INDEX
-------------
Exhibit Number of Pages Incorporated By
Number Description in Original Document Reference
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