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, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number: 000-28827
______________________
PETMED EXPRESS, INC.
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(Exact name of registrant as specified in its charter)
______________________
FLORIDA 65-0680967
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1441 S.W. 29th Avenue, Pompano Beach, Florida 33069
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(954) 979-5995
----------------------------------------------------
(Registrant'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" or "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 (defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 24,219,317 Common Shares,
$.001 par value per share at February 2, 2007.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2006 2006
------------ ------------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents $ 38,169,594 $ 23,216,907
Accounts receivable, less allowance for doubtful
accounts of $19,000 and $23,000, respectively 921,151 1,155,781
Inventories - finished goods 10,031,304 14,997,675
Prepaid expenses and other current assets 1,979,083 583,038
------------ ------------
Total current assets 51,101,132 39,953,401
Property and equipment, net 1,924,848 1,497,589
Deferred income taxes 1,018,739 794,002
Intangible asset 365,000 365,000
Other assets - 14,167
------------ ------------
Total assets $ 54,409,719 $ 42,624,159
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 3,652,398 $ 3,052,953
Income taxes payable - 958,318
Accrued expenses and other current liabilities 854,802 973,359
------------ ------------
Total liabilities 4,507,200 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; 24,216,217 and 23,967,390
shares issued and outstanding, respectively 24,216 23,967
Additional paid-in capital 14,876,332 13,433,054
Retained earnings 34,993,073 24,173,610
------------ ------------
Total shareholders' equity 49,902,519 37,639,529
------------ ------------
Total liabilities and shareholders' equity $ 54,409,719 $ 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 Nine Months Ended
December 31, December 31,
2006 2005 2006 2005
----------- ----------- ------------ -----------
Sales $ 31,352,277 $ 25,890,095 $ 125,838,384 $ 108,174,527
Cost of sales 18,563,400 15,613,715 76,002,541 66,188,709
----------- ----------- ------------ -----------
Gross profit 12,788,877 10,276,380 49,835,843 41,985,818
----------- ----------- ------------ -----------
Operating expenses:
General and administrative 4,022,852 3,060,580 12,792,177 10,722,151
Advertising 4,771,341 3,189,099 20,770,700 17,716,234
Depreciation and amortization 129,355 135,638 395,507 394,928
----------- ----------- ------------ -----------
Total operating expenses 8,923,548 6,385,317 33,958,384 28,833,313
----------- ----------- ------------ -----------
Income from operations 3,865,329 3,891,063 15,877,459 13,152,505
----------- ----------- ------------ -----------
Other income (expense):
Interest income 329,141 215,590 917,125 467,742
Other, net 94,964 49,147 332,129 171,255
Loss on disposal of property
and equipment - - (1,250) -
----------- ----------- ------------ -----------
Total other income (expense) 424,105 264,737 1,248,004 638,997
----------- ----------- ------------ -----------
Income before provision
for income taxes 4,289,434 4,155,800 17,125,463 13,791,502
Provision for income taxes 1,535,200 1,483,708 6,306,000 4,866,998
----------- ----------- ------------ -----------
Net income $ 2,754,234 $ 2,672,092 $ 10,819,463 $ 8,924,504
=========== =========== ============ ===========
Net income per common share:
Basic $ 0.11 $ 0.11 $ 0.45 $ 0.38
=========== =========== ============ ===========
Diluted $ 0.11 $ 0.11 $ 0.44 $ 0.37
=========== =========== ============ ===========
Weighted average number of
common shares outstanding:
Basic 24,213,937 23,680,221 24,132,289 23,572,211
=========== =========== ============ ===========
Diluted 24,382,861 24,255,705 24,316,117 24,105,124
=========== =========== ============ ===========
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,
2006 2005
---------- ----------
Cash flows from operating activities:
Net income $ 10,819,463 $ 8,924,504
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 395,507 394,928
Stock based compensation relating to stock issuances 777,426 -
Tax benefit related to stock options exercised - 212,856
Deferred income taxes (224,737) (47,987)
Loss on disposal of property and equipment 1,250 -
Bad debt expense (recovery) 16,038 (16,144)
(Increase) decrease in operating assets
and increase (decrease) in liabilities:
Accounts receivable 218,592 1,154,174
Inventories - finished goods 4,966,371 (392,566)
Prepaid expenses and other current assets (1,396,045) (161,151)
Other assets 14,167 -
Accounts payable 599,445 (865,887)
Income taxes payable (958,318) 3,974,996
Accrued expenses and other current liabilities (118,557) 370,865
---------- ----------
Net cash provided by operating activities 15,110,602 13,548,588
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (824,416) (250,302)
Net proceeds from the sale of property and equipment 400 -
---------- ----------
Net cash used in investing activities (824,016) (250,302)
---------- ----------
Cash flows from financing activities:
Proceeds from the exercise of stock options 435,064 661,263
Tax benefit related to stock options exercised 231,037 -
---------- ----------
Net cash provided by financing activities 666,101 661,263
---------- ----------
Net increase in cash and cash equivalents 14,952,687 13,959,549
Cash and cash equivalents, at beginning of period 23,216,907 12,680,962
---------- ----------
Cash and cash equivalents, at end of period $ 38,169,594 $ 26,640,511
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 8,104,063 $ 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 December 31, 2006 and the
Statements of Income for the three and nine months ended December 31, 2006
and 2005 and Statements of Cash Flows for the nine months ended December 31,
2006 and 2005. The results of operations for the three and nine months
ended December 31, 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
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 common 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 common 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.
Three Months Ended Nine Months Ended
December 31, December 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net income (numerator):
Net income $ 2,754,234 $ 2,672,092 $ 10,819,463 $ 8,924,504
========== ========== ========== ==========
Shares (denominator):
Weighted average number of
common shares outstanding
used in basic computation 24,213,937 23,680,221 24,132,289 23,572,211
Common shares issuable upon
exercise of stock options 158,799 565,359 173,703 522,788
Common shares issuable upon
conversion of preferred
shares 10,125 10,125 10,125 10,125
---------- ---------- ---------- ----------
Shares used in diluted
computation 24,382,861 24,255,705 24,316,117 24,105,124
========== ========== ========== ==========
Net income per common share:
Basic $ 0.11 $ 0.11 $ 0.45 $ 0.38
========== ========== ========== ==========
Diluted $ 0.11 $ 0.11 $ 0.44 $ 0.37
========== ========== ========== ==========
The following is a reconciliation of the numerators and denominators of
the basic and diluted net income per common share computations for the
periods presented:
For the three and nine months ended December 31, 2006, and for the three
months ended December 31, 2005, all common stock options were included in
the diluted net income per common share computation as their exercise prices
were less than the average market price of the common shares for the period.
For the nine months ended December 31, 2005, 250,000 shares issuable upon
the exercise of common stock options, with a weighted average exercise price
of $10.64, were excluded from the diluted net income per common 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 nine months ended December 31, 2006 includes $223,000 and
$669,000 of compensation expense, respectively. 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 December 31, 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 668,968
and 1,090,005 options outstanding under the Plan at December 31, 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 nine
month period ended December 31, 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 nine
months ended December 31, 2006, due to the fact that no stock options were
granted during the period. The risk free interest rate for the nine months
ended December 31, 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 December
31, 2006 is as follows:
Weighted-Average Weighted-Average
Exercise Remaining 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 (182,202) 2.39
Options forfeited or expired - -
-----------------------------------------------------------------
Options outstanding at
December 31, 2006 668,968 8.62 2.99 5,765,450
=================================================================
Options vested and exercisable
at December 31, 2006 376,467 8.94 2.10 3,364,622
=================================================================
A summary of the status of the Company's non-vested shares as of December
31, 2006 is presented below:
Weighted-Average Weighted-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 December 31, 2006 292,501 $ 8.21 3.73
====================================================
As of December 31, 2006, there was $1,288,000 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 3.25 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 Nine Months
Ended Ended
December 31, December 31,
2005 2005
------------- ------------
Reported net income: $ 2,672,092 $ 8,924,504
Deduct: total stock-based employee
compensation expense determined
under fair-value based method for
all awards, net of related tax
effects 152,818 443,616
------------- ------------
Pro forma net income: $ 2,519,274 $ 8,480,888
============= ============
Reported basic net income per share: $ 0.11 $ 0.38
============= ============
Pro forma basic net income per share: $ 0.11 $ 0.36
============= ============
Reported diluted net income per share: $ 0.11 $ 0.37
============= ============
Pro forma diluted net income per share: $ 0.10 $ 0.35
============= ============
Cash received from stock options exercised for the nine months ended
December 31, 2006 and 2005 was $435,000 and $661,000, respectively. The
income tax benefits from stock options exercised totaled $231,000 and
$213,000 for the nine months ended December 31, 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
forfeiture 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 December 31, 2006, the fair value of which
is being amortized over the three-year period. For the three and nine
months ended December 31, 2006 the Company recognized $65,000 and $108,000
of compensation expense related to the Employee and Director Plans,
respectively.
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.
7
The Company was 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 alleged that the Company was infringing on certain telephone
call manipulation technology-related patents owned by the plaintiff.
Without admitting any liability or wrongdoing, and with no finding or
admission as to the merit or lack of merit of any claim or defense asserted
in connection with the litigation, in January, 2007, the Company entered
into a licensing agreement for a confidential amount, and a Stipulation of
Dismissal with Prejudice was filed with the Court, dismissing the lawsuit
against the Company.
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 December 31, 2006,
approximately 63% of all sales were generated via the Internet compared to
57% 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 1.6% for the quarter ended
December 31, 2006, compared to 1.7% for the quarter ended on December 31,
2005. The three-month average retail purchase was approximately $75 per
order for the quarter ended December 31, 2006, compared to $74 per order for
the quarter ended December 31, 2005. The nine-month average retail purchase
was approximately $79 per order for the nine months ended December 31, 2006,
compared to $76 per order for the nine months ended December 31, 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 December 31, 2006 and 2005 the allowance for doubtful accounts
was approximately $19,000 and $13,000, 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 December 31, 2006
and 2005, the inventory reserve was approximately $205,000 and $236,000,
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 (on-line) 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 Nine Months Ended
December 31, December 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 59.2 60.3 60.4 61.2
----------- ----------- ----------- -----------
Gross profit 40.8 39.7 39.6 38.8
----------- ----------- ----------- -----------
Operating expenses:
General and administrative 12.8 11.8 10.2 9.9
Advertising 15.2 12.4 16.5 16.3
Depreciation and amortization 0.4 0.5 0.3 0.4
----------- ----------- ----------- -----------
Total operating expenses 28.4 24.7 27.0 26.6
----------- ----------- ----------- -----------
Income from operations 12.4 15.0 12.6 12.2
----------- ----------- ----------- -----------
Total other income 1.3 1.0 1.0 0.6
----------- ----------- ----------- -----------
Income before provision for
income taxes 13.7 16.0 13.6 12.8
Provision for income taxes 4.9 5.7 5.0 4.5
----------- ----------- ----------- -----------
Net income 8.8 % 10.3 % 8.6 % 8.3 %
=========== =========== =========== ===========
10
Three Months Ended December 31, 2006 Compared With Three Months Ended
December 31, 2005, and Nine Months Ended December 31, 2006 Compared With
Nine Months Ended December 31, 2005
Sales
- -----
Sales increased by approximately $5,462,000, or 21.1%, to approximately
$31,352,000 for the quarter ended December 31, 2006, from approximately
$25,890,000 for the quarter ended December 31, 2005. For the nine months
ended December 31, 2006, sales increased by approximately $17,663,000, or
16.3%, to approximately $125,838,000 compared to sales of approximately
$108,175,000 for the nine months ended December 31, 2005. The increase in
sales for the three and nine months ended December 31, 2006 can be primarily
attributed to increased retail reorders and new orders, 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 $3,969,000, or 21.9%, to approximately
$22,066,000 for the three months ended December 31, 2006, from approximately
$18,097,000 for the three months ended December 31, 2005. Retail reorder
sales have increased by approximately $17,364,000, or 26.0%, to
approximately $84,075,000 for the nine months ended December 31, 2006, from
approximately $66,711,000 for the nine months ended December 31, 2005.
Retail new order sales have increased by approximately $1,958,000, or 27.0%,
to approximately $9,214,000 for the three months ended December 31, 2006,
from approximately $7,256,000 for the three months ended December 31, 2005.
Retail new order sales have increased by approximately $2,841,000, or 7.4%,
to approximately $41,228,000 for the nine months ended December 31, 2006,
from approximately $38,387,000 for the nine months ended December 31, 2005.
Wholesale sales have decreased by approximately $465,000, or 86.5%, to
approximately $72,000 for the three months ended December 31, 2006, from
approximately $537,000 for the three months ended December 31, 2005.
Wholesale sales have decreased by approximately $2,542,000, or 82.6%, to
approximately $535,000 for the nine months ended December 31, 2006, from
approximately $3,077,000 for the nine months ended December 31, 2005. The
decrease in wholesale sales for the three and nine months ended December 31,
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 130,000 new customers for the quarter
ended December 31, 2006, compared to approximately 105,000 new customers for
the same period in the prior year. For the nine months ended December 31,
2006 the Company acquired approximately 549,000 new customers, compared to
approximately 530,000 new customers for the same period in the prior year.
The increase in new customers acquired for the three and nine months ended
December 31, 2006 compared to the three and nine months ended December 31,
2005 can be attributable to increased advertising spending in the quarter
ending December 31, 2006.
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 $2,949,000, or 18.9%, to
approximately $18,563,000 for the quarter ended December 31, 2006, from
approximately $15,614,000 for the quarter ended December 31, 2005. For the
nine months ended December 31, 2006, cost of sales increased by
approximately $9,814,000, or 14.8%, to approximately $76,003,000 compared to
cost of sales of approximately $66,189,000 for the nine months ended
December 31, 2005. The increase in cost of sales for the three and nine
months ended December 31, 2006 is directly related to the increase in sales.
As a percent of sales, the cost of sales was 59.2% and 60.3% for the three
months ended December 31, 2006 and 2005, respectively, and for the nine
months ended December 31, 2006 and 2005 cost of sales was 60.4% and 61.2%,
respectively. The cost of sales percentage decreases can be mainly
attributed to a decrease in our wholesales sales, which had a higher cost of
sales percentage, and a shift in our product mix to higher margin items.
11
Gross profit
- ------------
Gross profit increased by approximately $2,513,000, or 24.4%, to
approximately $12,789,000 for the quarter ended December 31, 2006, from
approximately $10,276,000 for the quarter ended December 31, 2005. For the
nine months ended December 31, 2006, gross profit increased by approximately
$7,850,000, or 18.7%, to approximately $49,836,000 compared to gross profit
of approximately $41,986,000 for the nine months ended December 31, 2005.
Gross profit as a percentage of sales was 40.8% and 39.7% for the three
months ended December 31, 2006 and 2005, respectively, and for the nine
months ended December 31, 2006 and 2005 gross profit as a percentage of
sales was 39.6% and 38.8%, respectively. The gross profit percentage
increases can mainly be attributed to a decrease in our wholesale sales,
which had a lower gross profit percentage, and a shift in our product mix to
higher margin items.
General and administrative expenses
- -----------------------------------
General and administrative expenses increased by approximately $962,000,
or 31.4%, to approximately $4,023,000 for the quarter ended December 31,
2006, from approximately $3,061,000 for the quarter ended December 31, 2005.
For the nine months ended December 31, 2006, general and administrative
expenses increased by approximately $2,070,000, or 19.3%, to approximately
$12,792,000 compared to general and administrative expenses of approximately
$10,722,000 for the nine months ended December 31, 2005. The increase in
general and administrative expenses for the three months ended December 31,
2006 was primarily due to the following: a $739,000 increase to payroll
expenses, with $223,000 of the increase due to the recognition of stock
option compensation expense during the quarter relating to the
implementation of SFAS 123R, "Share Based Payment," and the remaining
increase attributed to the addition of new employees in the customer care
and pharmacy departments enabling the company to sustain the Company's
growth; a $84,000 increase to insurance expenses due to increased premium on
general liability policy; a $70,000 increase to bank service and credit card
fees which can be directly attributed to increased sales in the quarter; and
a $69,000 increase in other expenses which includes mainly office expenses,
property expenses, telephone expenses, professional fees and bad debt
expense.
The increase in general and administrative expenses for the nine months
ended December 31, 2006 was primarily due to the following: a $1,588,000
increase to payroll expenses, with $669,000 of the increase due to the
recognition of stock option compensation expense during the period relating
to the implementation of SFAS 123R, "Share Based Payment," and the remaining
increase attributed to the addition of new employees in the customer care
and pharmacy departments enabling the company to sustain the Company's
growth; a $357,000 increase to bank service and credit card fees which can
be directly attributed to increased sales in the period; a $172,000 increase
to property expenses relating to additional rent due to our warehouse
expansion; a $100,000 increase to telephone expenses resulting from
receiving one-time usage credits in the same period during the prior year; a
$95,000 increase in office expenses, and a $100,000 increase in other
expenses which includes insurance expenses, bad debt expense, travel and
licenses expenses. 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, and a $77,000 decrease to
professional fees, which was related to a reduction in legal fees.
Advertising expenses
- --------------------
Advertising expenses increased by approximately $1,582,000, or 49.6%, to
approximately $4,771,000 for the quarter ended December 31, 2006, from
approximately $3,189,000 for the quarter ended December 31, 2005. For the
nine months ended December 31, 2006, advertising expenses increased by
approximately $3,055,000, or 17.2%, to approximately $20,771,000 compared to
advertising expenses of approximately $17,716,000 for the nine months ended
December 31, 2005. As a percentage of sales, advertising expense was 15.2%
and 12.4% for the three months ended December 31, 2006 and 2005,
respectively, and 16.5% and 16.3% for the nine months ended December 31,
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 December 31, 2006 was $37,
compared to $30 for the same period the prior year, and for the nine months
ended December 31, 2006, the advertising cost of acquiring a new customer
was $38 compared to $33 for the same period the prior year. The increase in
the advertising costs of acquiring a new customer may be attributed to
increased advertising spending and increased price competition from both
veterinarians and retailers of pet medications. The Company estimates
advertising as a percentage of sales to average between 16.0% and 17.0% for
the year ending March 31, 2007. This is a 1 % increase to our original
estimate. However, the advertising percentage will fluctuate quarter to
quarter due to seasonality and advertising availability.
12
Other income
- ------------
Other income increased by approximately $159,000 to approximately
$424,000 for the quarter ended December 31, 2006, from approximately
$265,000 for the quarter ended December 31, 2005. For the nine months ended
December 31, 2006, other income increased by approximately $609,000 to
approximately $1,248,000 compared to other income of approximately $639,000
for the nine months ended December 31, 2005. The increase to other income
for the three and nine months ended December 31, 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.
Provision for income taxes
- --------------------------
For the quarters ended December 31, 2006 and 2005, the Company recorded
an income tax provision for approximately $1,535,000 and $1,484,000,
respectively, which resulted in an effective tax rate of 35.8% and 35.7%,
respectively. For the nine months ended December 31, 2006 and 2005, the
Company recorded an income tax provision of approximately $6,306,000 and
$4,867,000, respectively, which resulted in an effective tax rate of 36.8%
and 35.3%, respectively.
Liquidity and Capital Resources
The Company's working capital at December 31, 2006 and March 31, 2006 was
$46,594,000 and $34,969,000, respectively. The $11,625,000 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 $15,111,000 and $13,549,000 for the nine months
ended December 31, 2006 and 2005, respectively. Net cash used in investing
activities was $824,000 and $250,000 for the nine months ended December 31,
2006 and 2005, respectively. The $574,000 increase can be attributed to
increased property and equipment additions to further the Company's growth,
the addition of back-up infrastructure and an upgrade to its e-commerce
platform during the period. Net cash provided by financing activities was
$666,000 and $661,000 for the nine months ended December 31, 2006 and 2005,
respectively.
The Company had financed certain equipment acquisitions with capital
leases. As of December 31, 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 $400,000 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.
13
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 December 31, 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.
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 December 31, 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.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits
The following exhibits are filed as part of this report.
31.1 Certification of Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, promulgated under the
Securities Exchange Act of 1934, as amended (filed herewith to
Exhibit 31.1 of the Registrant's Report on Form 10-Q for the
quarter ended December 31, 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 December 31, 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 December 31, 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: February 2, 2007
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:
DECEMBER 31, 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