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, 2007
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.
(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.
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:
24,184,312 Common Shares, $.001 par value per share at February
1, 2008.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2007 2007
------------ ------------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents $ 2,140,272 $ 316,470
Temporary investments 44,860,000 39,125,000
Accounts receivable, less allowance
for doubtful accounts of $16,000
and $28,000, respectively 788,746 1,369,521
Inventories - finished goods 20,112,153 16,086,207
Prepaid income taxes 213,750 -
Prepaid expenses and other
current assets 902,266 1,071,171
------------ ------------
Total current assets $ 69,017,187 $ 57,968,369
Property and equipment, net 1,907,580 1,990,578
Deferred income taxes 1,430,554 894,540
Intangible asset 365,000 365,000
------------ ------------
Total assets $ 72,720,321 $ 61,218,487
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 2,660,589 $ 5,859,756
Income taxes payable - 229,321
Accrued expenses and other
current liabilities 1,791,632 1,265,837
------------ ------------
Total liabilities 4,452,221 7,354,914
------------ ------------
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;
24,313,231 and 24,309,417 shares
issued, respectively 24,298 24,309
Additional paid-in capital 14,678,352 15,213,254
Retained earnings 53,735,904 38,617,112
Less treasury stock, at cost 14,764
and 0 shares, respectively (179,352) -
------------ ------------
Total shareholders' equity 68,268,100 53,863,573
------------ ------------
Total liabilities and shareholders' equity $ 72,720,321 $ 61,218,487
============ ============
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,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Sales $ 37,348,867 $ 31,352,277 $ 147,913,299 $ 125,838,384
Cost of sales 22,175,847 18,563,400 90,390,635 76,002,541
------------ ------------ ------------ ------------
Gross profit 15,173,020 12,788,877 57,522,664 49,835,843
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 4,542,522 4,022,852 15,502,308 12,792,177
Advertising 4,170,113 4,771,341 20,725,021 20,770,700
Depreciation and amortization 155,385 129,355 435,034 395,507
------------ ------------ ------------ ------------
Total operating expenses 8,868,020 8,923,548 36,662,363 33,958,384
------------ ------------ ------------ ------------
Income from operations 6,305,000 3,865,329 20,860,301 15,877,459
------------ ------------ ------------ ------------
Other income (expense):
Interest income 454,438 329,141 1,327,691 917,125
Other, net 110,416 94,964 535,346 332,129
Loss on disposal of property
and equipment - - - (1,250)
------------ ------------ ------------ ------------
Total other income (expense) 564,854 424,105 1,863,037 1,248,004
------------ ------------ ------------ ------------
Income before provision for
income taxes 6,869,854 4,289,434 22,723,338 17,125,463
Provision for income taxes 2,459,872 1,535,200 7,604,546 6,306,000
------------ ------------ ------------ ------------
Net income $ 4,409,982 $ 2,754,234 $ 15,118,792 $ 10,819,463
============ ============ ============ ============
Net income per common share:
Basic $ 0.18 $ 0.11 $ 0.63 $ 0.45
============ ============ ============ ============
Diluted $ 0.18 $ 0.11 $ 0.62 $ 0.44
============ ============ ============ ============
Weighted average number of
common shares outstanding:
Basic 24,162,552 24,213,937 24,175,567 24,132,289
============ ============ ============ ============
Diluted 24,386,821 24,382,861 24,396,653 24,316,117
============ ============ ============ ============
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,
2007 2006
------------ ------------
Cash flows from operating activities:
Net income $ 15,118,792 $ 10,819,463
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 435,034 395,507
Share based compensation 1,237,893 777,426
Deferred income taxes (536,014) (224,737)
Loss on disposal of property and equipment - 1,250
Bad debt expense 16,508 16,038
(Increase) decrease in operating assets
and increase (decrease) in liabilities:
Accounts receivable 564,267 218,592
Inventories - finished goods (4,025,946) 4,966,371
Prepaid income taxes (213,750) (846,045)
Prepaid expenses and other current
assets 168,905 (550,000)
Other assets - 14,167
Accounts payable (3,199,167) 599,445
Income taxes payable (229,321) (958,318)
Accrued expenses and other current
liabilities 525,795 (118,557)
------------ ------------
Net cash provided by operating activities 9,862,996 15,110,602
------------ ------------
Cash flows from investing activities:
Net change in temporary investments (5,735,000) (15,250,000)
Purchases of property and equipment (352,036) (824,416)
Net proceeds from the sale of property
and equipment - 400
------------ ------------
Net cash used in investing activities (6,087,036) (16,074,016)
------------ ------------
Cash flows from financing activities:
Purchases of treasury stock (4,868,492) -
Proceeds from the exercise of stock options 2,648,703 435,064
Tax benefit related to stock options exercised 267,631 231,037
------------ ------------
Net cash (used in) provided by financing
activities (1,952,158) 666,101
------------ ------------
Net increase (decrease) in cash and
cash equivalents 1,823,802 (297,313)
Cash and cash equivalents, at beginning of period 316,470 366,907
------------ ------------
Cash and cash equivalents, at end of period $ 2,140,272 $ 69,594
============ ============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 8,316,000 $ 8,104,063
============ ============
Retirement of treasury stock $ 4,689,140 $ -
============ ============
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 2008 or 2007 refer to the Company's fiscal years ending
March 31, 2008 and 2007, 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
at December 31, 2007 and the Statements of Income for the three
and nine months ended December 31, 2007 and 2006 and Statements
of Cash Flows for the nine months ended December 31, 2007 and
2006. The results of operations for the three and nine months
ended December 31, 2007 are not necessarily indicative of the
operating results expected for the fiscal year ending March 31,
2008. These Condensed Consolidated 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, 2007. 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 Adopted Accounting Standards
The Company adopted the provisions of the Financial Accounting
Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109" ("FIN 48"), in the first quarter of fiscal
2008. Previously, the Company had accounted for tax
contingencies in accordance with SFAS No. 5, Accounting for
Contingencies. As required by FIN 48, which clarifies SFAS
No. 109, Accounting for Income Taxes, the Company recognizes the
financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely
than not sustain the position following an audit. For tax
positions meeting the more-likely-than-not threshold, the amount
recognized in the Condensed Consolidated Financial Statements is
the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the
relevant tax authority. At the adoption date, the Company
applied FIN 48 to all tax positions for which the statute of
limitations remained open. Upon implementing FIN 48, the
Company did not recognize any additional liabilities for
unrecognized tax positions. Other than the determination that
nexus was established in another state, resulting in a reduction
to the Company's effective tax rate, the adoption of FIN 48 had
no material impact on our condensed consolidated financial
position, results of operations, or cash flows.
4
In June 2006, the FASB's Emerging Issues Task Force ("EITF")
reached a consensus on Issue No. 06-3, "How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net
Presentation)." The scope of EITF 06-3 includes sales, use,
value added, and some excise taxes that are assessed by a
governmental authority on specific revenue-producing transactions
between a seller and customer. EITF 06-3 requires disclosure of
the method of accounting for the applicable assessed taxes and
the amount of assessed taxes that are included in revenues if
they are accounted for under the gross method. EITF 06-3 was
effective for the Company's fiscal year beginning April 1, 2007.
EITF 06-3 will not impact the method for recording these taxes in
the Company's Condensed Consolidated Financial Statements as the
Company historically has presented sales excluding these taxes.
The Company does not believe that any other recently issued,
but not yet effective, accounting standards, if currently
adopted, will have a material effect on the Company's
consolidated financial position, results of operations, or cash
flows.
Note 2: Net Income Per Share
In accordance with the provisions of Statement 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, restricted stock awards 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 common share computations for the periods presented:
Three Months Ended Nine Months Ended
December 31, December 31,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net income (numerator):
Net income $ 4,409,982 $ 2,754,234 $ 15,118,792 $ 10,819,463
============ ============ ============ ============
Shares (denominator):
Weighted average number of
common shares outstanding
used in basic computation 24,162,552 24,213,937 24,175,567 24,132,289
Common shares issuable upon
exercise of stock options
and restricted stock 214,144 158,799 210,961 173,703
Common shares issuable upon
conversion of preferred
shares 10,125 10,125 10,125 10,125
------------ ------------ ------------ ------------
Shares used in diluted
computation 24,386,821 24,382,861 24,396,653 24,316,117
============ ============ ============ ============
Net income per common share:
Basic $ 0.18 $ 0.11 $ 0.63 $ 0.45
============ ============ ============ ============
Diluted $ 0.18 $ 0.11 $ 0.62 $ 0.44
============ ============ ============ ============
For the three and nine months ended December 31, 2007 and 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.
Note 3: Accounting for Stock-Based Compensation
The Company records compensation expense associated with stock
options in accordance with SFAS No. 123R, "Share Based Payment,"
which is a revision of SFAS No. 123. The Company adopted the
modified prospective transition method provided under SFAS
No. 123R. Under this transition method, compensation expense
associated with stock options recognized in the first quarter of
fiscal year 2007, and in subsequent quarters, includes expense
related to the remaining unvested portion of all stock option
awards granted prior to April 1, 2006, and the estimated fair
value of each option award granted was determined on the date of
grant using the Black-Scholes option valuation model, based on
the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123.
5
As a result of the adoption of SFAS No. 123R, the Company's
operating income for the three months ended December 31, 2007 and
2006 includes approximately $197,000 and $223,000 of stock option
compensation expense, respectively. Operating income for the
nine months ended December 31, 2007 and 2006 includes
approximately $592,000 and $669,000 of stock option 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.
As of December 31, 2007 and 2006, there was approximately
$465,000 and $1,288,000, respectively, 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 approximately 2 years. Cash received
from stock options exercised for the three months ended December
31, 2007 and 2006 was $63,000 and $14,000, respectively, and for
the nine months ended December 31, 2007 and 2006 was $2,649,000
and $435,000, respectively. The income tax benefits from stock
options exercised totaled $268,000 and $231,000 for the nine
months ended December 31, 2007 and 2006, respectively.
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 389,827 and 668,968 options outstanding under the
Plan at December 31, 2007 and 2006, 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/directors under the Plan. No options were issued
during the quarter. The 1998 Plan expires on July 31, 2008.
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 did not issue any shares of restricted stock
during the quarter. The Company had 195,025 restricted common
shares issued under the Employee Plan and 44,000 restricted
common shares issued under the Director Plan at December 31, 2007
all shares of which were issued subject to a restriction or
forfeiture period which will lapse ratably on the first, second
and third anniversaries of the date of grant, and the fair value
of which is being amortized over the three-year restriction
period. For the three months ended December 31, 2007 and 2006,
the Company recognized $248,000 and $65,000 of restricted stock
compensation expense related to the Employee and Director Plans,
respectively, and for the nine months ended December 31, 2007 and
2006, the Company recognized $646,000 and $108,000, respectively.
During the nine months ended December 31, 2007 and 2006, the
Company issued 84,650 and 66,625 restricted shares, respectively.
Note 4: Temporary Investments
During fiscal 2007 the Company had reclassified its auction
rate securities ("ARS") from cash and cash equivalents to
temporary investments on its balance sheet in accordance with
recent accounting pronouncements. This reclassification affected
both the balance sheet and cash flow statement in fiscal 2007,
but it did not affect net income or working capital in fiscal
2007. In accordance with Staff Accounting Bulletin ("SAB") No.
108, "Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements,"
no changes to financial statements issued in prior years were
deemed necessary. In accordance with "SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities," temporary
investments are accounted for as trading securities. Trading
securities are securities that are bought and held principally
for the purpose of selling in the near term. The Company
believes that notwithstanding the reclassification, the
investments in ARS are short term and highly liquid, and readily
convertible to known amounts of cash, and that they present an
insignificant risk of change in value due to market changes in
interest rates. At December 31, 2007 and 2006, the Company had
$44,860,000 and $38,100,000 of temporary investments,
respectively.
6
Note 5: Commitments and Contingencies
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.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Executive Summary
PetMed Express was incorporated in the state of Florida in
January 1996. The Company's common stock is traded on the NASDAQ
Global Select Market ("NASDAQ") under the symbol "PETS." The
Company began selling pet medications and other pet health
products in September 1996. 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,
online, 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. 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. The Company's sales returns average was
approximately 1.4% for the quarter ended on December 31, 2007,
compared to 1.6% for the quarter ended December 31, 2006. The
three-month average retail purchase was approximately $76 per
order for the quarter ended December 31, 2007, compared to $75
per order for the quarter ended December 31, 2006. The nine-
month average retail purchase was approximately $80 per order
for the nine months ended December 31, 2007, compared to $79 per
order for the nine months ended December 31, 2006.
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 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, 2007 and 2006 the allowance for doubtful accounts was
approximately $16,000 and $19,000, 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, 2007 and 2006, the
inventory reserve was approximately $152,000 and $205,000,
respectively.
8
Advertising
The Company's advertising expenses consist primarily of
television advertising, internet marketing, and direct mail/print
advertising. Television costs are expensed as the advertisements
are televised. Internet costs are expensed in the month incurred
and direct mail/print 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 the 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 operating data appearing
in the Company's Condensed Consolidated Statements of Income:
Three Months Ended Nine Months Ended
December 31, December 31,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 59.4 59.2 61.1 60.4
------------ ------------ ------------ ------------
Gross profit 40.6 40.8 38.9 39.6
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 12.1 12.8 10.5 10.2
Advertising 11.2 15.2 14.0 16.5
Depreciation and amortization 0.4 0.4 0.3 0.3
------------ ------------ ------------ ------------
Total operating expenses 23.7 28.4 24.8 27.0
------------ ------------ ------------ ------------
Income from operations 16.9 12.4 14.1 12.6
------------ ------------ ------------ ------------
Other income 1.5 1.3 1.2 1.0
------------ ------------ ------------ ------------
Income before provision for
income taxes 18.4 13.7 15.3 13.6
Provision for income taxes 6.6 4.9 5.1 5.0
------------ ------------ ------------ ------------
Net income 11.8 % 8.8 % 10.2 % 8.6 %
============ ============ ============ ============
9
Three Months Ended December 31, 2007 Compared With Three Months
Ended December 31, 2006, and Nine Months Ended December 31, 2007
Compared With Nine Months Ended December 31, 2006
Sales
-----
Sales increased by approximately $5,997,000, or 19.1%, to
approximately $37,349,000 for the quarter ended December 31,
2007, from approximately $31,352,000 for the quarter ended
December 31, 2006. For the nine months ended December 31, 2007,
sales increased by approximately $22,075,000, or 17.5%, to
approximately $147,913,000 compared to sales of approximately
$125,838,000 for the nine months ended December 31, 2006.
The increase in sales for the three months ended December 31,
2007 was primarily due to increased retail reorders and for the
nine months ended December 31, 2007, the increase in sales can be
attributed primarily to increased retail reorders and new orders,
offset by decreased wholesale sales. The Company has committed
certain dollars amounts specifically designated towards
television, direct mail/print and online advertising to stimulate
sales, create brand awareness, and acquire new customers. The
Company acquired approximately 127,000 new customers for the
quarter ended December 31, 2007, compared to approximately
130,000 new customers for the same period the prior year. The
decrease in new customer orders for the quarter ended December
31, 2007 can be directly related to a 13% reduction in
advertising expenses during the quarter. For the nine months
ended December 31, 2007, the Company acquired approximately
585,000 new customers, compared to approximately 549,000 new
customers for the same period the prior year. There can be no
assurances that this growth trend will continue, due to increased
price competition from veterinarians and traditional and online
retailers. The following chart illustrates sales by various
sales classifications:
Three Months Ended December 31,
2007 % 2006 % $ Variance % Variance
------------------------------------------------------------------------
Reorder Sales $ 28,352,000 75.9% $ 22,066,000 70.4% $ 6,286,000 28.4%
New Order Sales $ 8,954,000 24.0% $ 9,214,000 29.4% $ (260,000) -2.8%
Wholesale Sales $ 43,000 0.1% $ 72,000 0.2% $ (29,000) -40.2%
------------ ------ ------------ ------ ------------ -------
Total Net Sales $ 37,349,000 100.0% $ 31,352,000 100.0% $ 5,997,000 19.1%
============ ====== ============ ====== ============ =======
Internet Sales $ 24,416,000 65.4% $ 19,795,000 63.1% $ 4,621,000 23.3%
Contact Center Sales $ 12,933,000 34.6% $ 11,557,000 36.9% $ 1,376,000 11.9%
------------ ------ ------------ ------ ------------ -------
Total Net Sales $ 37,349,000 100.0% $ 31,352,000 100.0% $ 5,997,000 19.1%
============ ====== ============ ====== ============ =======
Nine Months Ended December 31,
2007 % 2006 % $ Variance % Variance
------------------------------------------------------------------------
Reorder Sales $103,353,000 69.9% $ 84,075,000 66.8% $ 19,278,000 22.9%
New Order Sales $ 44,384,000 30.0% $ 41,228,000 32.8% $ 3,156,000 7.7%
Wholesale Sales $ 176,000 0.1% $ 535,000 0.4% $ (359,000) -66.9%
------------ ------ ------------ ------ ------------ -------
Total Net Sales $147,913,000 100.0% $125,838,000 100.0% $ 22,075,000 17.5%
============ ====== ============ ====== ============ =======
Internet Sales $ 95,996,000 64.9% $ 77,388,000 61.5% $ 18,608,000 24.0%
Contact Center Sales $ 51,917,000 35.1% $ 48,450,000 38.5% $ 3,467,000 7.2%
------------ ------ ------------ ------ ------------ -------
Total Net Sales $147,913,000 100.0% $125,838,000 100.0% $ 22,075,000 17.5%
============ ====== ============ ====== ============ =======
Leading up to the 2004 presidential elections we experienced an
increase in the advertising cost of acquiring a new customer and
a decrease in new customer sales, which may have been attributed
to a shortage of television advertising inventory. There can be
no assurances that the 2008 presidential elections will not have
a similar impact on the advertising cost of acquiring a new
customer and new customer sales.
10
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 2007, the Company's sales
were approximately 31%, 27%, 19%, and 23%, respectively.
Cost of sales
-------------
Cost of sales increased by approximately $3,613,000, or 19.5%,
to approximately $22,176,000 for the quarter ended December 31,
2007, from approximately $18,563,000 for the quarter ended
December 31, 2006. For the nine months ended December 31, 2007,
cost of sales increased by approximately $14,388,000, or 18.9%,
to approximately $90,391,000 compared to cost of sales of
approximately $76,003,000 for the nine months ended December 31,
2006. The increase in cost of sales for the three and nine
months ended December 31, 2007 is directly related to the
increase in sales. As a percent of sales, the cost of sales was
59.4% and 59.2% for the three months ended December 31, 2007 and
2006, respectively, and for the nine months ended December 31,
2007 and 2006, cost of sales was 61.1% and 60.4%, respectively.
The percentage increases can be attributed to increases in our
product and freight costs.
Gross profit
------------
Gross profit increased by approximately $2,384,000, or 18.6%,
to approximately $15,173,000 for the quarter ended December 31,
2007, from approximately $12,789,000 for the quarter ended
December 31, 2006. For the nine months ended December 31, 2007,
gross profit increased by approximately $7,687,000, or 15.4%, to
approximately $57,523,000 compared to gross profit of
approximately $49,836,000 for the nine months ended December 31,
2006. Gross profit as a percentage of sales was 40.6% and 40.8%
for the three months ended December 31, 2007 and 2006,
respectively, and for the nine months ended December 31, 2007 and
2006 gross profit as a percentage of sales was 38.9% and 39.6%,
respectively. The percentage decreases can be attributed to
increases in our product and freight costs.
General and administrative expenses
-----------------------------------
General and administrative expenses increased by approximately
$520,000, or 12.9%, to approximately $4,543,000 for the quarter
ended December 31, 2007, from approximately $4,023,000 for the
quarter ended December 31, 2006. For the nine months ended
December 31, 2007, general and administrative expenses increased
by approximately $2,710,000, or 21.2%, to approximately
$15,502,000 compared to approximately $12,792,000 for the nine
months ended December 31, 2006. The increase in general and
administrative expenses for the three months ended December 31,
2007 was primarily due to the following: a $363,000 increase to
payroll expenses, with $157,000 of the increase due to the
recognition of additional stock based compensation expense during
the quarter relating to the issuance of restricted stock and
stock options, with $67,000 of the increase due to withholding
tax expense relating to restricted stock issuances in fiscal 2007
and 2008, and the remaining amount attributed to the addition of
new employees in the customer care and pharmacy departments
enabling the Company to sustain its growth; a $210,000 increase
to bank service and credit card fees which can be directly
attributed to increased sales in the quarter; a $56,000 increase
to office expenses which can be directly attributed to increased
sales for the quarter; a $21,000 increase to licenses and fees
relating to a quarterly California mill assessment on flea and
tick products; and a $19,000 increase in other expenses which
includes mainly property expenses. Offsetting the increase was a
$62,000 decrease to insurance expenses relating to decreased
insurance premiums in the quarter; a $48,000 decrease to
professional fees relating to a decrease in legal fees in the
quarter; and a $39,000 decrease to telephone and travel-related
expenses.
The increase in general and administrative expenses for the
nine months ended December 31, 2007 was primarily due to the
following: a $1,527,000 increase to payroll expenses, with
$460,000 of the increase due to the recognition of additional
stock based compensation expense during the nine months relating
to the issuance of restricted stock and stock options, with
$228,000 of the increase due to withholding tax expense relating
to restricted stock issuances in fiscal 2007 and 2008, and the
remaining amount attributed to the addition of new employees in
the customer care and pharmacy departments enabling the Company
to sustain its growth; a $584,000 increase to bank service and
credit card fees which can be directly attributed to increased
sales for the nine months; a $386,000 one-time charge due to the
fact that nexus was established in another state, relating to
state/county sales tax which was not collected on behalf of our
customers in fiscal 2007; a $130,000 increase to office expenses
which can be directly attributed to increased sales for the nine
months; a $122,000 increase to licenses and fees relating to a
quarterly California mill assessment on flea and tick products;
and a $63,000 increase in other expenses which includes property
expenses and professional fees, with a $58,000 decrease to
11
telephone expenses, a $26,000 decrease to travel-related
expenses, and an $18,000 decrease to insurance expenses
offsetting the increase.
Advertising expenses
--------------------
Advertising expenses decreased by approximately $601,000, or
12.6%, to approximately $4,170,000 for the quarter ended December
31, 2007, from approximately $4,771,000 for the quarter ended
December 31, 2006. For the nine months ended December 31, 2007,
advertising expenses decreased slightly by approximately $46,000,
or 0.2%, to approximately $20,725,000 compared to advertising
expenses of approximately $20,771,000 for the nine months ended
December 31, 2006. As a percentage of sales, advertising expense
was 11.2% and 15.2% for the three months ended December 31, 2007
and 2006, respectively, and 14.0% and 16.5% for the nine months
ended December 31, 2007 and 2006, respectively. The decrease in
advertising expense for the quarter can be attributed to
decreased television advertising due to a shortage of television
advertising inventory as compared to last year for the same
quarter. The advertising cost of acquiring a new customer,
defined as total advertising costs divided by new customers
acquired, was $33 for the quarter ended December 31, 2007,
compared to $37 for the quarter ended December 31, 2006, and for
the nine months ended December 31, 2007, the advertising cost of
acquiring a new customer was $35 compared to $38 for the same
period in the prior year. The Company currently anticipates
advertising as a percentage of sales to be approximately 14.0%
for fiscal 2008. However, the advertising percentage will
fluctuate quarter to quarter due to seasonality and advertising
availability. For the fiscal year ended March 31, 2007,
quarterly advertising expenses as a percentage of sales ranged
between 12% and 18%.
Depreciation and amortization expenses
--------------------------------------
Depreciation and amortization expenses increased by
approximately $26,000, or 20.1%, to approximately $155,000 for
the quarter ended December 31, 2007, from approximately $129,000
for the quarter ended December 31, 2006. Depreciation and
amortization expenses increased by approximately $39,000, or
10.0%, to approximately $435,000 for the nine months ended
December 31, 2007, from approximately $396,000 for the nine
months ended December 31, 2006. This increase to depreciation
and amortization expense for the quarter and nine months ended
December 31, 2007 can be attributed to new property and equipment
additions in fiscal 2008.
Other income
------------
Other income increased by approximately $141,000 to
approximately $565,000 for the quarter ended December 31, 2007,
from approximately $424,000 for the quarter ended December 31,
2006. For the nine months ended December 31, 2007, other income
increased by approximately $615,000 to approximately $1,863,000
compared to other income of approximately $1,248,000 for the nine
months ended December 31, 2006. The increase to other income for
the three and nine months ended December 31, 2007 can be
attributed primarily to increased interest income due to
increases in the Company's cash balance, which is swept into an
interest-bearing overnight account and a tax-free short term
investment account. The increase can also be attributed to
additional advertising revenue generated from our website.
Interest income may decrease in the future if there is a decline
in interest rates or if the Company utilizes its cash balances on
its $20,000,000 share repurchase plan, with approximately
$15,131,000 remaining, or on its operating activities.
Provision for income taxes
--------------------------
For the quarters ended December 31, 2007 and 2006, the Company
recorded an income tax provision for approximately $2,460,000 and
$1,535,000, respectively, and for the nine months ended December
31, 2007 and 2006, the Company recorded an income tax provision
of approximately $7,605,000 and $6,306,000, respectively. The
income tax provision for the nine months ended December 31, 2007
includes a tax benefit of approximately $308,000 which relates to
an income tax over-accrual for the fiscal year ended March 31,
2007. During the first quarter of fiscal 2008, it was determined
that the Company was no longer a full tax payer in the state of
Florida, due to the fact that it established nexus in another
state. This event triggered a lower effective tax rate in the
year ended March 31, 2007 and for future quarters.
The Company also recognized a $155,000 income tax benefit due
to the disqualifying disposition of certain incentive stock
option exercises during the nine months ended December 31, 2007.
These events resulted in an effective tax rate of 35.8% for both
of the quarters ended December 31, 2007 and 2006, and an
effective tax rate of 33.5% and 36.8% for the nine months ended
December 31, 2007 and 2006, respectively. For the remainder of
fiscal 2008, the Company estimates its effective tax rate to be
approximately 1.5% less than it was in fiscal 2007.
12
Liquidity and Capital Resources
The Company's working capital at December 31, 2007 and March
31, 2007 was $64,565,000 and $50,613,000, respectively. The
$13,952,000 increase in working capital was primarily
attributable to cash flow generated from operations, the exercise
of stock options, and interest income earned on temporary
investments, offset by stock repurchased for the nine months
ended December 31, 2007. Net cash provided by operating
activities was $9,863,000 and $15,111,000 for the nine months
ended December 31, 2007 and 2006, respectively, and the
$5,248,000 decrease can be attributed to an increase in inventory
and a decrease in account payables. Net cash used in investing
activities was $6,087,000 and $16,074,000 for the nine months
ended December 31, 2007 and 2006, respectively. This $9,987,000
decrease can be attributed to a lesser amount of purchases of
temporary investments in fiscal 2008. Net cash used in financing
activities was $1,952,000 for the nine months ended December 31,
2007, and net cash provided by financing activities was $666,000
for the nine months ended December 31, 2006. During the nine
months ended December 31, 2007, the Company received
approximately $2,649,000 upon the exercise of 275,941 stock
option shares and the Company repurchased approximately 369,500
shares of its common stock for approximately $4,869,000.
As of both December 31, 2007 and 2006 the Company had no
outstanding lease commitments except for the lease for its
executive offices and warehouse. The Company had financed
certain equipment acquisitions with capital leases. The Company
has approximately $200,000 planned for capital expenditure
commitments to further the Company's growth during fiscal 2008,
which will be funded through cash from operations. The lease for
our corporate office and distribution facility in Pompano Beach
expires in May 2009. Therefore the Company expects to allocate
capital funds for new property leasehold and equipment additions
during fiscal 2009 to address growth needs for the next five
years. The Company's source of working capital includes cash
from operations, interest income on temporary investments, and
the exercise of stock options. The Company presently has no need
for other alternative sources of working capital, and has no
commitments or plans to obtain additional capital.
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," "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, temporary investments, accounts
receivable, and accounts payable. The book values of cash
equivalents, temporary investments, accounts receivable, and
accounts payable are considered to be representative of fair
value because of the short maturity of these instruments.
Interest rates affect our return on excess cash and temporary
investments. As of December 31, 2007, we had $2,140,000 in cash
and cash equivalents and $44,860,000 in temporary investments.
A majority of our cash and cash equivalents and investments
generate interest income based on prevailing interest rates.
A significant change in interest rates would impact the amount
of interest income generated from our excess cash and
investments. It would also impact the market value of our
temporary investments. Our temporary investments are subject to
market risk, primarily interest rate and credit risk. Our
temporary investments are managed by a limited number of outside
professional managers within investment guidelines set by our
Board of Directors. Such guidelines include security type,
credit quality, and maturity, and are intended to limit market
risk by restricting our investments to high-quality debt
instruments with relatively short-term maturities. We do not
utilize financial instruments for long term trading purposes and
we do not hold any derivative financial instruments that could
expose us to significant market risk. At December 31, 2007, we
had no debt obligations.
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 December 31, 2007, 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 of 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, or are reasonably likely to materially affect, our
internal controls over financial reporting during the period
covered by this report.
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 2007 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.
The Company did not make any sales of unregistered securities
during the first, second, or third quarters of fiscal year 2008.
Issuer Purchases of Equity Securities
This table provides information with respect to purchases by
the Company of shares of common stock during the three months
ended December 31, 2007:
Approximate Dollar
Total Number of Value of Shares
Shares Purchased That May Yet Be
Total Number of Average Price as Part of Publicly Purchased Under
Month / Year Shares Purchased (1) Paid Per Share Announced Program (1) the Program (1)
------------------------------- -------------------- -------------- --------------------- ------------------
October 2007 (October 1, 2007
to October 31, 2007) - - - $ 17,495,794
November 2007 (November 1, 2007
to November 30, 2007) 167,362 $ 13.06 167,362 $ 15,310,726
December 2007 (December 1, 2007
to December 31, 2007) 14,764 $ 12.15 14,764 $ 15,131,359
(1) In November 2006, the Company announced that the Board of
Directors authorized the repurchase of up to $20,000,000 of
the Company's common stock from time to time through
negotiated or open market transactions. The repurchase
program does not have an expiration date and the program did
not expire, nor did the Company terminate the program, during
the period covered by the table.
14
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, 2007, 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, 2007, 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, 2007,
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 1, 2008
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)
______________________________________________________________________
______________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC
_______________________
FORM 10-Q
FOR THE QUARTER ENDED:
DECEMBER 31, 2007
_______________________
EXHIBITS
_______________________
______________________________________________________________________
______________________________________________________________________
EXHIBIT INDEX
-------------
Number of Pages Incorporated
Exhibit in Original By
Number Description 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