UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-28827
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PETMED EXPRESS, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 65-0680967
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1441 S.W. 29th Avenue, Pompano Beach, Florida 33069
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(Address of principal executive offices, including zip code)
(954) 979-5995
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(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:
24,144,042 Common Shares, $.001 par value per share at July 28, 2006.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2006 2006
(UNAUDITED)
------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 33,122,948 $ 23,216,907
Accounts receivable, less allowance for doubtful
accounts of $28,000 and $23,000, respectively 1,385,615 1,155,781
Inventories - finished goods 13,738,142 14,997,675
Prepaid expenses and other current assets 689,589 583,038
------------ ------------
Total current assets 48,936,294 39,953,401
Property and equipment, net 1,565,265 1,497,589
Deferred income taxes 828,198 794,002
Intangible asset 365,000 365,000
Other assets 14,167 14,167
------------ ------------
Total assets $ 51,708,924 $ 42,624,159
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 4,931,812 $ 3,052,953
Income taxes payable 2,615,540 958,318
Accrued expenses and other current liabilities 1,167,061 973,359
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Total liabilities 8,714,413 4,984,630
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Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized;
2,500 convertible shares issued and outstanding with a
liquidation preference of $4 per share 8,898 8,898
Common stock, $.001 par value, 40,000,000 shares authorized;
24,043,208 and 23,967,390 shares issued and outstanding,
respectively 24,043 23,967
Additional paid-in capital 14,037,702 13,433,054
Retained earnings 28,923,868 24,173,610
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Total shareholders' equity 42,994,511 37,639,529
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Total liabilities and shareholders' equity $ 51,708,924 $ 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
June 30,
2006 2005
------------ ------------
Sales $ 50,673,353 $ 43,631,758
Cost of sales 30,549,028 26,773,172
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Gross profit 20,124,325 16,858,586
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Operating expenses:
General and administrative 4,448,622 3,852,894
Advertising 8,328,718 7,604,303
Depreciation and amortization 135,301 127,545
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Total operating expenses 12,912,641 11,584,742
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Income from operations 7,211,684 5,273,844
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Other income (expense):
Loss on disposal of property and equipment (1,250) -
Interest income 251,167 99,437
Other, net 100,402 40,287
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Total other income (expense) 350,319 139,724
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Income before provision for income taxes 7,562,003 5,413,568
Provision for income taxes 2,811,745 1,871,982
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Net income $ 4,750,258 $ 3,541,586
============ ============
Net income per common share:
Basic $ 0.20 $ 0.15
============ ============
Dilutive $ 0.20 $ 0.15
============ ============
Weighted average number of common shares outstanding:
Basic 24,009,276 23,471,264
============ ============
Dilutive 24,300,946 23,969,197
============ ============
See accompanying notes to condensed consolidated financial statements
2
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
2006 2005
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Cash flows from operating activities:
Net income $ 4,750,258 $ 3,541,586
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 135,301 127,545
Compensation expense relating to stock option issuances 223,146 -
Tax benefit related to stock options exercised - 38,110
Deferred income taxes (34,196) (13,090)
Loss on disposal of property and equipment 1,250 -
Bad debt expense 25,129 2,362
(Increase) decrease in operating assets
and increase (decrease) in liabilities:
Accounts receivable (254,963) (118,064)
Inventories - finished goods 1,259,533 1,084,163
Prepaid expenses and other current assets (106,551) 9,249
Accounts payable 1,878,859 1,446,109
Income taxes payable 1,657,222 1,204,830
Accrued expenses and other current liabilities 193,702 631,980
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Net cash provided by operating activities 9,728,690 7,954,780
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Cash flows from investing activities:
Purchases of property and equipment (204,627) (12,104)
Net proceeds from the sale of property and equipment 400 -
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Net cash used in investing activities (204,227) (12,104)
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Cash flows from financing activities:
Proceeds from the exercise of stock options 301,859 84,099
Tax benefit related to stock options exercised 79,719 -
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Net cash provided by financing activities 381,578 84,099
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Net increase in cash and cash equivalents 9,906,041 8,026,775
Cash and cash equivalents, at beginning of period 23,216,907 12,680,962
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Cash and cash equivalents, at end of period $ 33,122,948 $ 20,707,737
============ ============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 1,109,000 $ 642,132
============ ============
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 June 30, 2006 and the Statements of Income for
the three months ended June 30, 2006 and 2005 and Statements of
Cash Flows for the three months ended June 30, 2006 and 2005.
The results of operations for the three months ended June 30,
2006 are not necessarily indicative of the operating results
expected for the fiscal year ending March 31, 2007. These
financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's
annual report on Form 10-K for the fiscal year ended March 31,
2006. The Condensed Consolidated Financial Statements include
the accounts of PetMed Express, Inc. and its wholly owned
subsidiaries. All significant intercompany transactions have
been eliminated upon consolidation.
Use of Estimates
The preparation of Condensed Consolidated Financial Statements
in conformity with generally accepted accounting principles in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the Condensed Consolidated Financial
Statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Recently Issued Accounting Standards
In 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 share is computed by dividing net income available to
common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income per
share includes the dilutive effect of potential stock options
exercised and the effects of the potential conversion of
preferred shares, calculated using the treasury stock method.
Outstanding stock options and convertible preferred shares issued
by the Company represent the only dilutive effect reflected in
diluted weighted average shares outstanding.
The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share
computations for the periods presented:
Three Months Ended
June 30,
2006 2005
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Net income (numerator):
Net income $ 4,750,258 $ 3,541,586
============ ============
Shares (denominator):
Weighted average number of common shares
outstanding used in basic computation 24,009,276 23,471,264
Common shares issuable upon exercise
of stock options 281,545 487,808
Common shares issuable upon conversion
of preferred shares 10,125 10,125
------------ ------------
Shares used in diluted computation 24,300,946 23,969,197
============ ============
Net income per common share:
Basic $ 0.20 $ 0.15
============ ============
Diluted $ 0.20 $ 0.15
============ ============
For the three months ended June 30, 2006 all common stock
options were included in the diluted net income per share
computation as their exercise prices were less than the average
market price of the common shares for the period. For the three
months ended June 30, 2005, 481,500 shares issuable upon the
exercise of common stock options, with a weighted average
exercise price of $9.69, were excluded from the diluted net
income per share computation as their exercise prices were
greater than the average market price of the common shares for
the period, therefore the effect would have been anti-dilutive.
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." Therefore, 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.
As a result of the adoption of SFAS No. 123R, the Company's
net income for the three months ended June 30, 2006 includes
$223,000 of compensation expense. The compensation expense
related to all of the Company's stock-based compensation
arrangements is recorded as a component of general and
administrative expenses.
5
At June 30, 2006, the Company had one stock option plan. The
PetMed Express, Inc. 1998 Stock Option Plan (the "Plan"),
provides for the issuance of qualified options to officers and
key employees, and nonqualified options to directors, consultants
and other service providers, to purchase the Company's common
stock. The Company had reserved 5,000,000 shares of common stock
for issuance under the Plan. The exercise prices of options
issued under the Plan must be equal to or greater than the market
price of the Company's common stock as of the date of issuance.
The Company had 775,352 and 1,322,369 options outstanding under
the Plan at June 30, 2006 and 2005, respectively. Options
generally vest ratably over a three-year period commencing on the
first anniversary of the grant with respect to options granted to
employees under the Plan. The 1998 Plan expires on July 31,
2008.
For stock options granted prior to April 1, 2006, the
estimated fair value of each option award granted was determined
on the date of grant using the Black-Scholes option valuation
model. For stock option grants on and after April 1, 2006, the
estimated fair value of each option award granted will be
determined on the date of grant using the Black Scholes option-
pricing model or a lattice based option valuation model. The
following weighted-average assumptions were used for option
grants during the three month periods ended June 30, 2005: risk-
free interest rates ranging from 4 percent, expected volatility
of 66 percent, no dividend yield, and expected lives of 4 years.
No assumptions were necessary for the three months ended June 30,
2006, due to the fact that no stock options were granted during
the period. The risk free interest rate for the three months
ended June 30, 2005 was based on the prime interest rate at the
date of grant. The expected volatility was based on the
historical volatility of the Company's stock.
A summary of the status of the Company's stock option plan as
of June 30, 2006 is as follows:
Weighted- Weighted-
Average 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 (75,818) $ 3.98
Options forfeited or expired - $ -
-----------------------------------------------------
Options outstanding at June 30, 2006 775,352 $ 7.61 3.44 5,898,655
=====================================================
Options vested and exercisable at June 30, 2006 464,517 $ 7.22 2.58 3,352,155
=====================================================
A summary of the status of the Company's non-vested shares as
of June 30, 2006 is presented below:
Weighted- Weighted-
Average Average
Exercise Remaining
Number of Price per Contractural
Shares Share Term (years)
----------- ----------- -----------
Non-vested shares at March 31, 2006 460,336 $ 7.81
Options granted - $ -
Options vested (149,501) $ 7.00
Options forfeited or expired - $ -
--------------------------------------
Non-vested shares at June 30, 2006 310,835 $ 8.19 4.20
======================================
As of June 30, 2006, there was $1,734,000 of unrecognized
compensation cost related to non-vested stock option awards,
which is expected to be recognized over a remaining weighted
average vesting period of 3.44 years.
6
For stock options granted prior to the adoption of SFAS No,
123R, the following table illustrates the pro forma effect on net
income and earnings per common share as if the Company has
applied the fair value recognition provisions of SFAS 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 Ended
June 30,
2005
------------
Reported net income: $ 3,541,586
Deduct: total stock-based employee compensation
expense determined under fair-value based method
for all awards, net of related tax effects 219,016
------------
Pro forma net income: $ 3,322,570
============
Reported basic net income per share: $ 0.15
============
Pro forma basic net income per share: $ 0.14
============
Reported diluted net income per share: $ 0.15
============
Pro forma diluted net income per share: $ 0.14
============
Cash received from stock options exercised for the three
months ended June 30, 2006 and 2005 was $302,000 and $84,000,
respectively. The income tax benefits from stock options
exercised totaled $80,000 and $38,000 for the three months ended
June 30, 2006 and 2005, respectively.
Note 4: Commitments and Contingencies
The Company was a defendant in a lawsuit, filed in August
2002, in Texas state district court seeking injunctive and
monetary relief styled Texas State Board of Pharmacy and State
Board of Veterinary Medical Examiners v. PetMed Express, Inc.
Cause No.GN-202514, in the 201st Judicial District Court, Travis
County, Texas. The Company in its initial pleading denied the
allegations contained therein. The Company reached a settlement
in the matter and agreed to pay monetary penalties and reimburse
administrative, investigative and legal expenses, which have
already been accrued for in the Company's financial statements,
to the State of Texas Boards of Pharmacy and Veterinary Medical
Examiners. The Company also agreed to the imposition of
approximately a four (4) year term of probation to be
administered by the Board of Pharmacy originating from the time
of the initial filing of the lawsuit and running through one
year from the effective date of the agreement, June 13, 2006.
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.
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.
7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Executive Summary
PetMed Express was incorporated in the state of Florida in
January 1996. The Company's common stock is traded on the Nasdaq
National Market ("NASDAQ") under the symbol "PETS." The Company
began selling pet medications and other pet health products in
September 1996, and issued its first catalog in the fall of 1997.
This catalog displayed approximately 1,200 items, including
prescription and non-prescription pet medications, other pet
health products and pet accessories. In fiscal 2001, the Company
focused its product line on approximately 600 of the most popular
pet medications and other health products for dogs and cats.
Presently, the Company's product line includes approximately 750
of the most popular pet medications and other health products for
dogs, cats, and horses.
The Company markets its products through national television,
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. For
the quarter ended June 30, 2006, approximately 59% of all sales
were generated via the Internet compared to 54% for the same
period last year.
The Company's sales consist of products sold mainly to retail
consumers and minimally to wholesale customers. Typically, the
Company's customers pay by credit card or check at the time the
order is shipped. The Company usually receives cash settlement
in two to three banking days for sales paid by credit cards,
which minimizes the accounts receivable balances relative to the
Company's sales. Certain wholesale customers are extended credit
terms, which usually require payment within 30 days of delivery.
The Company's sales returns average was approximately 1.7% and
1.4% of sales for the quarters ended on June 30, 2006 and 2005,
respectively. The twelve-month average retail purchase was
approximately $79 and $76 per order, and the three-month average
retail purchase was approximately $84 and $79 per order for the
quarters ended June 30, 2006 and 2005, respectively.
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 June 30,
2006 and 2005 the allowance for doubtful accounts was
approximately $28,000 and $39,000, respectively.
Valuation of inventory
Inventories consist of prescription and non-prescription pet
medications and pet supplies that are available for sale and are
priced at the lower of cost or market value using a weighted
average cost method. The Company writes down its inventory for
estimated obsolescence. At June 30, 2006 and 2005 the inventory
reserve was approximately $280,000 and $206,000, respectively.
8
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 a
comparison of the carrying amount of the asset to net future cash
flows expected to be generated from the asset.
Advertising
The Company's advertising expenses consist primarily of
television advertising, internet marketing, and direct mail/print
advertising. Television costs are expensed as the advertisements
are televised. Internet costs are expensed in the month incurred
and direct mail/print advertising costs are expensed when the
related 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
June 30,
2006 2005
----------- -----------
Sales 100.0 % 100.0 %
Cost of sales 60.3 61.4
----------- -----------
Gross profit 39.7 38.6
----------- -----------
Operating expenses:
General and administrative 8.8 8.8
Advertising 16.4 17.4
Depreciation and amortization 0.3 0.3
----------- -----------
Total operating expenses 25.5 26.5
----------- -----------
Income from operations 14.2 12.1
----------- -----------
Other income (expense) 0.7 0.3
----------- -----------
Income before provision for income taxes 14.9 12.4
Provision for income taxes 5.5 4.3
----------- -----------
Net income 9.4 % 8.1 %
=========== ===========
9
Three Months Ended June 30, 2006 Compared With Three Months Ended
June 30, 2005
Sales
-----
Sales increased by approximately $7,041,000, or 16.1%, to
approximately $50,673,000 for the quarter ended June 30, 2006,
from approximately $43,632,000 for the quarter ended June 30,
2005. The increase in sales for the three months ended June 30,
2006 can be primarily attributed to increased retail reorders
offset by decreased wholesale sales.
The Company has committed certain dollar amounts specifically
designated towards television, direct mail/print and online
advertising to stimulate sales, create brand awareness, and
acquire new customers. Retail reorder sales have increased by
approximately $8,148,000, or 31.6%, to approximately $33,910,000
for the three months ended June 30, 2006, from approximately
$25,762,000 for the three months ended June 30, 2005. Retail new
order sales have increased by approximately $59,000, or 0.4%, to
approximately $16,494,000 for the three months ended June 30,
2006, from approximately $16,435,000 for the three months ended
June 30, 2005. Wholesale sales have decreased by approximately
$1,165,000, or 81.2%, to approximately $269,000 for the three
months ended June 30, 2006, from approximately $1,434,000 for the
three months ended June 30, 2005. The decrease in wholesale
sales for the quarter ended June 30, 2006 compared to the quarter
ended June 30, 2005 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 207,000 new customers for the
quarter ended June 30, 2006, compared to approximately 217,000
new customers for the same period the prior year. The decrease
in new customers acquired for the quarter ended June 30, 2006
compared to the quarter ended June 30, 2005 may be attributable
to increased price competition and increased advertising
costs to acquire a new customer.
The majority of our product sales are affected by the seasons,
due to the seasonality of mainly heartworm and flea and tick
medications. For the quarters ended June 30, September 30,
December 31, and March 31 of fiscal 2006, the Company's sales
were approximately 32%, 28%, 19%, and 21%, respectively.
Cost of sales
-------------
Cost of sales increased by approximately $3,776,000, or 14.1%,
to approximately $30,549,000 for the quarter ended June 30, 2006,
from approximately $26,773,000 for the quarter ended June 30,
2005. The increase in cost of sales is directly related to the
increase in sales in the quarter ended June 30, 2006 compared to
the quarter ended June 30, 2005. As a percent of sales, the cost
of sales was 60.3% and 61.4% for the quarters ended June 30, 2006
and 2005, respectively. The percentage decrease can be
attributed to a decrease in our wholesale sales, which had a
higher cost of sales percentage; and due to a shift in our
product mix to items with lower product costs.
Gross profit
------------
Gross profit increased by approximately $3,266,000, or 19.4%,
to approximately $20,124,000 for the quarter ended June 30, 2006,
from approximately $16,859,000 for the quarter ended June 30,
2005. Gross profit as a percentage of sales was 39.7% and 38.6%
for the three months ended June 30, 2006 and 2005, respectively.
The percentage increase can be attributed to a decrease in our
wholesale sales, which had a lower gross profit percentage; and
due to a shift in our product mix to items with lower product
costs.
General and administrative expenses
-----------------------------------
General and administrative expenses increased by approximately
$596,000, or 15.5%, to approximately $4,449,000 for the quarter
ended June 30, 2006, from approximately $3,853,000 for the
quarter ended June 30, 2005. The increase in general and
administrative expenses for the three months ended June 30, 2006
was primarily due to the following: a $457,000 increase to
payroll expenses, $223,000 of the increase is due to the
recognition of stock option compensation expense during the
quarter, relating to the implementation of SFAS 123R, "Share
Based Payment", the remaining increase can also be attributed to
the addition of new employees in the customer care and pharmacy
departments enabling the company to sustain the Company's growth;
a $166,000 increase to bank service and credit card fees which
can be directly attributed to increased sales in the quarter; a
$77,000 increase to property expenses relating to additional rent
due to our warehouse expansion; a $76,000 increase to telephone
expenses resulting from receiving one time usage credits in the
same quarter during the prior year; and a $53,000 increase in
other expenses which includes mainly office expenses and bad
debt. Offsetting the increase was an $187,000 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
$46,000 decrease to professional fees, which was related to a
reduction in legal fees.
10
Advertising expenses
--------------------
Advertising expenses increased by approximately $724,000, or
9.5%, to approximately $8,329,000 for the quarter ended June 30,
2006, from approximately $7,604,000 for the quarter ended June
30, 2005. As a percentage of sales, advertising expense was
16.4% and 17.4% for the three months ended June 30, 2006 and
2005, respectively. The advertising costs of acquiring a new
customer, defined as total advertising costs divided by new
customers acquired, for the quarter ended June 30, 2006 was $40,
compared to $35 for the same period the prior year. The Company
estimates advertising as a percentage of sales to range from
approximately 15.0% to 16.0% in fiscal 2007. However, that
advertising percentage will fluctuate quarter to quarter due to
seasonality and advertising availability.
Depreciation and amortization expenses
--------------------------------------
Depreciation and amortization expenses increased by
approximately $7,000, or 6.1%, to approximately $135,000 for the
quarter ended June 30, 2006, from approximately $128,000 for the
quarter ended June 30, 2005. This increase to depreciation and
amortization expense for the quarter ended June 30, 2006 can be
attributed to increased property and equipment additions.
Other income
------------
Other income increased by approximately $210,000, or 151%, to
approximately $350,000 for the quarter ended June 30, 2006 from
approximately $140,000 for the quarter ended June 30, 2005. The
increase to other income can be primarily attributed to increased
interest income due to increases in the Company's cash balance,
which is swept into an interest bearing overnight account and tax-
free short term investment accounts, and to advertising revenue
generated from our website.
Provision for income taxes
--------------------------
For the quarters ended June 30, 2006 and 2005, the Company
recorded an income tax provision for approximately $2,812,000 and
$1,872,000, respectively, which resulted in an effective tax rate
of 37.2% and 34.6%, respectively.
Liquidity and Capital Resources
The Company's working capital at June 30, 2006 and March 31,
2006 was $40,222,000 and $34,969,000, respectively. The
$5,253,000 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
$9,729,000 and $7,955,000 for the three months ended June 30,
2006 and 2005, respectively. Net cash used in investing
activities was $204,000 and $12,000 for the three months ended
June 30, 2006 and 2005, respectively. The $192,000 increase can
be attributed to increased property and equipment additions to
further the Company's growth and the addition of back-up
infrastructure in the quarter. Net cash provided by financing
activities was $382,000 and $84,000 for the three months ended
June 30, 2006 and 2005, respectively. This $298,000 increase can
be attributed to an increase in the number of stock options
exercised in the quarter ended June 30, 2006 as compared to the
quarter ended June 30, 2005.
The Company had financed certain equipment acquisitions with
capital leases. As of June 30, 2006 and 2005 the Company had no
outstanding lease commitments except for the lease for its
executive offices and warehouse. The Company's sources of
working capital include cash from operations and the exercise of
stock options. For the remainder of fiscal 2007, the Company has
approximately $300,000 planned for capital expenditure 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.
11
Cautionary Statement Regarding Forward-Looking Information
Certain information in this Quarterly Report on Form 10-Q
includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. You can identify these forward-
looking statements by the words "believes," "intends,"
"expects," "may," "will," "should," "plans," "projects,"
"contemplates," "intends," "budgets," "predicts," "estimates,"
"anticipates," or similar expressions. These statements are
based on our beliefs, as well as assumptions we have used based
upon information currently available to us. Because these
statements reflect our current views concerning future events,
these statements involve risks, uncertainties and assumptions.
Actual future results may differ significantly from the results
discussed in the forward-looking statements. A reader, whether
investing in our common stock or not, should not place undue
reliance on these forward-looking statements, which apply only
as of the date of this quarterly report.
When used in this quarterly report on Form 10-Q, "PetMed
Express," "1-800-PetMeds," "PetMed," "1-888-PetMeds," "PetMed
Express.com," "the Company," "we," "our," and "us" refers to
PetMed Express, Inc. and our subsidiaries.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk generally represents the risk that losses may
occur in the value of financial instruments as a result of
movements in interest rates, foreign currency exchange rates and
commodity prices. Our financial instruments include cash and
cash equivalents, accounts receivable, accounts payable, line of
credit, and debt obligations. The book values of cash
equivalents, accounts receivable, and accounts payable are
considered to be representative of fair value because of the
short maturity of these instruments. At June 30, 2006, we had no
debt obligations. We do not utilize financial instruments for
trading purposes and we do not hold any derivative financial
instruments that could expose us to significant market risk.
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 June 30, 2006, the end of the
period covered by this report (the "Evaluation Date"). Based
upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded, that our disclosure controls
and procedures are effective for timely gathering, analyzing and
disclosing the information we are required to disclose in our
reports filed under the Securities Exchange Act of 1934, as
amended. There have been no significant changes made in our
internal controls or in other factors that could significantly
affect our internal controls over financial reporting during the
period covered by this report.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
We held our Annual Meeting of Stockholders in Ft. Lauderdale,
Florida on July 28, 2006. Stockholders voted on the following
proposals:
1. To elect five Directors to the Board of Directors for a one-
year term expiring 2007;
2. To ratify the appointment of Goldstein Golub Kessler LLP,
as the independent registered public accounting firm for the
Company to serve for the 2007 fiscal year;
3. To approve the adoption of the PetMed Express, Inc. 2006
Employee Equity Compensation Restricted Stock Plan; and
4. To approve the adoption of the PetMed Express, Inc. 2006
Outside Director Equity Compensation Restricted Stock Plan.
With a majority of the outstanding shares voting either by proxy
or in person, PetMed Express stockholders approved proposals 1,
2, 3 and 4, with voting as follows:
Proposal 1. For Abstain/Withhold
---------- ---------- ----------
Election of directors:
Menderes Akdag 19,948,613 493,012
Frank J. Formica 19,555,438 886,187
Gian M. Fulgoni 19,452,980 988,645
Ronald J. Korn 19,451,080 990,545
Robert C. Schweitzer (1) 19,451,983 989,642
Proposal 2. For Against Abstain
---------- ---------- ---------- ----------
To ratify the appointment of 20,335,983 88,620 17,022
Goldstein Golub Kessler LLP,
as the independent registered
public accounting firm for the
Company.
Proposal 3. For Against Abstain
---------- ---------- ---------- ----------
To approve the adoption of 9,862,363 1,251,625 56,767
the PetMed Express, Inc.
2006 Employee Equity
Compensation Restricted
Stock Plan. (2)
Proposal 4. For Against Abstain
---------- ---------- ---------- ----------
To approve the adoption of 9,432,481 1,664,533 81,922
the PetMed Express, Inc.
2006 Outside Director Equity
Compensation Restricted
Stock Plan. (2)
(1) At a Board of Directors meeting held on July 28, 2006,
immediately following the Annual Meeting of Stockholders, Mr.
Schweitzer was elected as Chairman of the Board of Directors of
PetMed Express, Inc.
(2) A copy of the PetMed Express, Inc. 2006 Employee Equity
Compensation Restricted Stock Plan and the PetMed Express, Inc.
2006 Outside Director Equity Compensation Restricted Stock Plan
have previously been filed with the Securities and Exchange
Commission, and the terms thereof described, under cover of a
Proxy Statement on Schedule 14A filed on June 22, 2006.
13
Item 5. Other Information.
See item 4. above.
Item 6. Exhibits
The following exhibits are filed as part of this report.
10.1 PetMed Express, Inc. 2006 Employee Equity Compensation
Restricted Stock Plan (incorporated by reference in our
definitive Proxy Statement on Schedule 14A filed on
June 22, 2006).
10.2 PetMed Express, Inc. 2006 Outside Director Equity
Compensation Restricted Stock Plan (incorporated by
reference in our definitive Proxy Statement on Schedule
14A filed on June 22, 2006).
31.1 Certification of Principal Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated
under the Securities Exchange Act of 1934, as amended (filed
herewith to Exhibit 31.1 of the Registrant's Report on Form
10-Q for the quarter ended June 30, 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 June 30, 2006, Commission
File No. 000-28827).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith to Exhibit 32.1 of the Registrant's Report
on Form 10-Q for the quarter ended June 30, 2006, Commission
File No. 000-28827).
14
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: July 28, 2006
By: /s/ Menderes Akdag
--------------------------
Menderes Akdag
Chief Executive Officer and President
(principal executive officer)
By: /s/ Bruce S. Rosenbloom
-------------------------------
Bruce S. Rosenbloom
Chief Financial Officer
(principal financial and accounting officer)
15
______________________________________________________________________
______________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC
_______________________
FORM 10-Q
FOR THE QUARTER ENDED:
JUNE 30, 2006
_______________________
EXHIBITS
_______________________
______________________________________________________________________
______________________________________________________________________
EXHIBIT INDEX
-------------
Exhibit Number of Pages Incorporated By
Number Description in Original Document Reference
31.1 Certification of Principal Executive
Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 1 **
31.2 Certification of Principal Financial
Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 1 **
32.1 Certification Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 1 **
** Filed herewith