At the discretion of the manufacturers, non-compliance with the MAPP can result in one or more of the following actions: (1) forfeiture of future rebates or discounts from the manufacturer, (2) suspension of future purchases from the manufacturer, (3) or termination of current or future business relationship. The Company has and will make every attempt to abide by the manufacturers MAPP. However, no assurances can be made that the Company will not violate MAPP inadvertently. A reduction or discontinuance of these rebates or discounts would increase our costs and could reduce our profitability. If any of these major pet medication manufacturers were to terminate our purchasing relationship it could materially adversely affect our business. If the manufacturers are not able to enforce their MAPP industry-wide, then our profit margins and results of operations may also be impacted negatively.
The loss of any of our key suppliers would negatively impact our business.
During fiscal 2020, the Company established direct purchasing relationships with all of the major pet medication manufacturers. We purchase significant quantities of pet medication products, with the majority from these major manufacturers. We do maintain annual purchasing contracts with these major manufacturers. While we believe that our vendor relationships are good, a vendor could discontinue selling to us at any time. The loss of any of our key vendors of pet medications offered by us would have a negative impact on our business, financial condition and results of operations.
The content of our website could expose us to various kinds of liability, which, if prosecuted successfully, could negatively impact our business.
Because we post product and pet health information and other content on our website, we face potential liability for negligence, copyright infringement, patent infringement, trademark infringement, defamation, and/or other claims based on the nature and content of the materials we post. Various claims have been brought, and sometimes successfully prosecuted, against Internet content distributors. We could be exposed to liability with respect to the unauthorized duplication of content or unauthorized use of other parties’ proprietary technology. Although we maintain general liability insurance, our insurance may not cover potential claims of this type, or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance, or is in excess of insurance coverage, could materially adversely affect our financial condition and results of operations.
We may not be able to protect our intellectual property rights, and/and/or we may be found to infringe on the proprietary rights of others.
We rely on a combination of trademarks, trade secrets, copyright laws, and contractual restrictions to protect our intellectual property rights. These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our non-prescription private label or generic equivalents, when and if developed, as well as aspects of our sales formats, or to obtain and use information that we regard as proprietary, including the technology used to operate our website and our content, and our trademarks. Litigation or proceedings before the United States Patent and Trademark Office or other bodies may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and domain names, or to determine the validity and scope of the proprietary rights of others. Any litigation or adverse proceeding could result in substantial costs and diversion of resources, and could seriously harm our business and operating results. Third parties may also claim infringement by us with respect to past, current, or future technologies. We expect that participants in our market will be increasingly involved in infringement claims as the number of services and competitors in our industry segment grows. Any claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause service upgrade delays, or require us to enter into royalty or licensing agreements. These royalty or licensing agreements might not be available on terms acceptable to us or at all.
If we are unable to protect our Internet addresses or to prevent others from using Internet addresses that are confusingly similar, our business may be adversely impacted.
Our Internet addresses,www.1800petmeds.com, www.1800petmeds.comwww.1888petmeds.com, www.petmedexpress.com,www.1888petmeds.comwww.petmed.com,www.petmedexpress.comwww.petmeds.com, www.petmeds.pharmacy,www.petmed.comwww.petmed.pharmacy,www.petmeds.com,www.petmeds.pharmacy,andwww.1800petmeds.www.1800petmeds.pharmacy, are critical to our brand recognition and our overall success. If we are unable to protect these Internet addresses, our competitors could capitalize on our brand recognition. There may be similar Internet addressesused by competitors. Governmental agencies and their designees generally regulate the acquisition and maintenance of Internet addresses. The regulation of Internet addresses in the United States and in foreign countries has changed, and may undergo further change in the near future. Furthermore, the relationship between regulations governing Internet addresses and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may not be able to protect our own Internet addresses, or prevent third parties from acquiring Internet addresses that are confusingly similar to, infringe upon, or otherwise decrease the value of our Internet addresses.
Since all of our operations are housed in a single location, we are more susceptible to business interruption in the event of damage to, or disruptions in, our facility.
Our headquarters and distribution center are currently located in one location in South Florida, and most of our shipments of products to our customers are made from this sole distribution center. We have no present plans to establish any additional distribution centers or offices. Because we consolidate our operations in one location, we are more susceptible to power and equipment failures, and business interruptions in the event of fires, floods, and other natural disasters than if we had additional locations. Furthermore, because we are located in South Florida, which is a hurricane-sensitive area, we are particularly susceptible to the risk of damage to, or total destruction of, our headquarters and distribution center and surrounding transportation infrastructure caused by a hurricane.
We cannot assure you that we are adequately insured to cover the amount of any losses relating to any of these potential events, business interruptions resulting from damage to or destruction of our headquarters and distribution center, or power and equipment failures relating to our call center or websites, or interruptions or disruptions to major transportation infrastructure, or other events that do not occur on our premises. The occurrence of one or more of these events could adversely impact our ability to generate revenues in future periods.
A failure of our information systems and customer-facing technology systems or any security breach or unauthorized disclosure of confidential information, or other cyber-attacks on our systems, could result in litigation and regulatory risk, harm our reputation and have a material adverse effect on our business.
Our business is dependent upon the efficient operation of our information systems. In particular, we rely on our information systems to effectively manage our business model strategy, with tools to track and manage sales, inventory, marketing, customer service efforts, the preparation of our consolidated financial and operating data, credit card information, and customer information. The failure of our information systems to perform as designed or the failure to maintain and enhance or protect the integrity of these systems could disrupt our business operations, adversely impact sales and the results of operations, expose us to customer or third-party claims, or result in adverse publicity.
Through our information technology, we are able to provide an improved overall shopping and interconnected retail experience that empowers our customers to shop and interact with us from computers, tablets, smartphones and other mobile devices. We use our websiteswebsite and our mobile appapplication both as sales channels for our products and also as methods of providing product and other relevant information to our customers to drive online sales. Our online programs, communities and knowledge center allow us to inform, assist and interact with our customers. We also continually seek to enhance all of our online properties to provide an attractive user-friendly interface for our customers, as evidenced by our recent redesign of our website.customers. Disruptions, failures or other performance issues with these customer-facing technology systems could impair the benefits that they provide to our online business and negatively affect our relationship with our customers.
Additionally, we collect, process, and retain sensitive and confidential customer information in the normal course of our business. Despite the security measures we have in place and any additional measures we may implement in the future, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism, or other events. Any security breach or event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential information, whether by us directly or our third-party service providers, could damage our reputation, expose us to the risks of litigation and liability, disrupt our business, or otherwise affect our results of operations.
Our operating results are difficult to predict and may fluctuate, and a portion of our sales are seasonal.
Factors that may cause our operating results to fluctuate include:
● | Our ability to obtain new customers at a reasonable cost, retain existing customers, or encourage reorders; |
● | Our ability to increase the number of visitors to our website, or our ability to convert visitors to our website into customers; |
● | The mix of medications and other pet products sold by us; |
● | Our ability to manage inventory levels or obtain an adequate supply of products; |
● | Our ability to adequately maintain, upgrade, and develop our website, the systems that we use to process customers’ orders and payments, or our computer network; |
● | Increased competition within our market niche; |
● | Price competition; |
● |
New products introduced to the market, including generics; |
● | Increases in the cost of advertising; |
● | The amount and timing of operating costs and capital expenditures relating to expansion of our product line or operations; |
● | Disruption of our toll-free telephone service, technical difficulties, or systems and Internet outages or slowdowns; |
● | The impact of COVID-19 on our business operations and generally on the economy, including the measures taken by governmental authorities to address it; and |
● | Unfavorable general economic trends. |
Because our operating results are difficult to predict, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. The majority of our product sales are affected by the seasons, due to the seasonality of mainly heartworm,flea, tick, and flea and tickheartworm medications. For the quarters ended June 30, 2016,2019, September 30, 2016,2019, December 31, 2016,2019, and March 31, 2017,2020, Company sales were 29%28%, 25%, 21%, and 25%26%, respectively. In addition to the seasonality of our sales, our annual and quarterly operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety of factors, including weather, many of which are out of our control. Any change in one or more of these factors could materially adversely affect our financial condition and results of operations in future periods.
We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and potentially disrupt our business.
We accept payments using a variety of methods, including credit and debit cards, PayPal, and checks, and we may offer new payment options over time. Acceptance of these payment options subjects us to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. These requirements may change over time or be reinterpreted, making compliance more difficult or costly. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs.
We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. As a result, our business and operating results could be adversely affected.
The recent outbreak of the COVID-19 global pandemic and related government, private sector and individual consumer responsive actions may adversely affect our business operations, employee availability, financial performance, liquidity and cash flow for an unknown period of time.
The outbreak of COVID-19 has been declared a pandemic by the World Health Organization and continues to spread in the United States, Canada, and in many other countries globally. Related government and private sector responsive actions may adversely affect our business operations. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic, as the situation is rapidly evolving. The COVID-19 pandemic may disrupt the global supply chain and may cause disruptions to our operations if a significant number of employees are quarantined or if they are otherwise limited in their ability to work at our fulfillment center. Additional federal or state mandates could also impact our ability to take or fulfill our customers’ orders and operate our business.
As an essential business, we have been open during our normal business hours without any material disruptions to our operations. We are dedicated to making every effort to ensure the health and safety of our employees. We have implemented working from home where possible and enhanced disinfection and social distancing within our work place. Many of our personnel are working remotely and it is possible that this could have a negative impact on the execution of our business plans and operations.
If a natural disaster, power outage, connectivity issue, or other event occurs that impacts our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The increase in remote working may also result in consumer privacy, IT security and fraud concerns as well as operational inefficiencies.
The operations of our fulfillment center may be substantially disrupted by additional federal or state mandates ordering shutdowns or by the inability of our employees to travel to work due to COVID-19. The inability to ship from our fulfillment center due to a COVID-19 outbreak, disruptions to the operations of our fulfillment center, or increased costs in fulfillment center capacity may negatively impact our financial performance or slow our future growth.
The uncertainty around the duration of business disruptions and the extent of the spread of the virus in the United States and to other areas of the world will likely continue to adversely impact the national or global economy and negatively impact consumer spending. Any of these outcomes could have a material adverse impact on our business, financial condition, operating results and ability to execute and capitalize on our strategies. The full extent of COVID-19’s impact on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic, its impact on capital and financial markets and any new information that may emerge concerning the severity of the virus, its spread to other regions as well as the actions taken to contain it, among others.
Our stock price fluctuates from time to time and may fall below expectations of securities analysts and investors, and could subject us to litigation, which may result in you suffering a loss on your investment.
The market price of our common stock may fluctuate significantly in response to a number of factors, many of which are out of our control. These factors include: quarterly variations in operating results; changes in accounting treatments or principles; announcements by us or our competitors of new products and services offerings; significant contracts, acquisitions, or strategic relationships; additions or departures of key personnel; any future sales of our common stock or other securities; stock market price and volume fluctuations of publicly-traded companies; and general political, economic, and market conditions. In some future quarter our operating results may fall below the expectations of securities analysts and investors, which could result in a decrease in the trading price of our common stock. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources, which could seriously harm our business and operating results.
We may issue additional shares of preferred stock that could defer a change of control or dilute the interests of our common stockholders.Our charter documents could defer a takeover effort which could inhibit your ability to receive an acquisition premium for your shares.
Our charter permits our Board of Directors to issue up to 5.0 million shares of preferred stock without stockholder approval. Currently there are 2,500 shares of our Convertible Preferred Stock issued and outstanding. This leaves slightly less than 5.0 million shares of preferred stock available for issuance at the discretion of our Board of Directors. These shares, if issued, could contain dividend, liquidation, conversion, voting, or other rights which could adversely affect the rights of our common stockholders and which could also be utilized, under some circumstances, as a method of discouraging, delaying, or preventing a change in control. Provisions of our articles of incorporation, bylaws and Florida law could make it more difficult for a third party to acquire us, even if many of our stockholders believe it is in their best interest.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Our facilities, including our principal executive offices and distribution center, are located at 420 South Congress Avenue, Delray Beach, Florida 33445. In January 2016, we completed the acquisition of this real property located at 420 South Congress Avenue, Delray Beach, Florida 33445, and improvements thereon (collectively referred to herein as the “Property”), the assignment and assumption of all leases and service agreements affecting the Property, and certain tangible and intangible personal property related to the Property, for a purchase price of $18.5 million, plus closing costs. The Property consists of approximately 634,000 square feet of land or 14.6 acres with two building complexes totaling approximately 185,000 square feet, with additional land for future use. The first building complex consists of approximately 125,000 square feet and the second building complex consists of approximately 60,000 square feet each consisting of both office and warehouse space. The Company occupies approximately 97,000 square feet of the first building for its principal offices and distribution center. As of March 31, 2017,2020, 48% of the Property was leased to two tenants with a remaining weighted average lease term of 3.04.8 years. We believe that our facilities are sufficient for our current needs and are in good condition in all material respects.
ITEM 3. LEGAL PROCEEDINGS
In January 2019, a putative class action complaint was filed in the United States District Court for the Southern District of New York alleging that the company’s website, www.1800petmeds.com, did not comply with the ADA, NYSHRL, and NYCHRL, and discriminated against visually impaired individuals. The Company denied any wrongdoing, and on July 24, 2019, the Company and the Plaintiff reached a confidential settlement. The Plaintiff and the Company entered into a consent decree and the matter was dismissed on March 23, 2020, when an order was issued by the court approving the parties joint proposed consent decree.
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. The Company initiates litigation to protect its trade or service marks. There can be no assurance that the Company will be successful in protecting its trade or service marks. Legal costs related to the above matters are expensed as incurred.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “PETS.” The prices set forth below reflect the high and low sale prices per share in each of the quarters of fiscal 20172020 and 20162019 as reported by the NASDAQ.
| Fiscal 2017: | High | Low | ||||||||||||
Fiscal 2020: | High | Low | ||||||||||||
| First Quarter | $ | 19.49 | $ | 17.31 | $23.65 | $15.32 | ||||||||
| Second Quarter | $ | 20.94 | $ | 18.76 | $18.47 | $15.01 | ||||||||
| Third Quarter | $ | 23.49 | $ | 19.28 | $27.37 | $17.87 | ||||||||
| Fourth Quarter | $ | 23.66 | $ | 19.26 | $28.78 | $22.18 | ||||||||
| Fiscal 2016: | High | Low | ||||||||||||
| First Quarter | $ | 17.73 | $ | 15.82 | ||||||||||
| Second Quarter | $ | 18.23 | $ | 15.72 | ||||||||||
| Third Quarter | $ | 17.88 | $ | 16.04 | ||||||||||
| Fourth Quarter | $ | 18.70 | $ | 15.77 | ||||||||||
Fiscal 2019: | High | Low | ||||
First Quarter | $46.17 | $33.46 | ||||
Second Quarter | $44.57 | $33.01 | ||||
Third Quarter | $32.67 | $22.42 | ||||
Fourth Quarter | $24.32 | $20.50 |
Holders
There were 8896 holders of record of our common stock at May 23, 2017,26, 2020, and approximately 22,50030,700 of our holders are “street name” or beneficial holders, whose shares are held by banks, brokers, or other financial institutions.
Dividends
During fiscal 20162019 and 2017,2020, our Board of Directors declared the following dividends:
| Declaration Date | Per Share Dividend | Record Date | Total Amount (In thousands) | Payment Date | ||||||||
| May 4, 2015 | $ | 0.18 | May 15, 2015 | $ | 3,647 | May 22, 2015 | ||||||
| July 20, 2015 | $ | 0.18 | August 3, 2015 | $ | 3,660 | August 14, 2015 | ||||||
| October 19, 2015 | $ | 0.18 | November 2, 2015 | $ | 3,660 | November 13, 2015 | ||||||
| January 25, 2016 | $ | 0.18 | February 8, 2016 | $ | 3,659 | February 19, 2016 | ||||||
| May 9, 2016 | $ | 0.19 | May 20, 2016 | $ | 3,884 | May 27, 2016 | ||||||
| July 25, 2016 | $ | 0.19 | August 8, 2016 | $ | 3,900 | August 19, 2016 | ||||||
| October 24, 2016 | $ | 0.19 | November 7, 2016 | $ | 3,900 | November 18, 2016 | ||||||
| January 23, 2017 | $ | 0.19 | February 6, 2017 | $ | 3,900 | February 17, 2017 | ||||||
Declaration Date | Per Share Dividend | Record Date | Total Amount (In thousands) | Payment Date | |||||
May 7, 2018 | $0.25 | May 18, 2018 | $ | 5,150 | May 25, 2018 | ||||
July 23, 2018 | $0.27 | August 3, 2018 | $ | 5,584 | August 10, 2018 | ||||
October 22, 2018 | $0.27 | November 5, 2018 | $ | 5,582 | November 16, 2018 | ||||
January 21, 2019 | $0.27 | February 4, 2019 | $ | 5,582 | February 15, 2019 | ||||
May 6, 2019 | $0.27 | May 17, 2019 | $ | 5,518 | May 24, 2019 | ||||
July 22, 2019 | $0.27 | August 2, 2019 | $ | 5,447 | August 9, 2019 | ||||
October 21, 2019 | $0.27 | November 4, 2019 | $ | 5,447 | November 15, 2019 | ||||
January 21, 2020 | $0.27 | February 3, 2020 | $ | 5,445 | February 14, 2020 | ||||
On May 8, 2017, the Company’s Board of Directors declared an increased quarterly dividend of $0.20 per share, and then on January 22, 2018 the Company’s Board of Directors increased the quarterly dividend to $0.25 per share, on its common stock. On July 23, 2018 the Company’s Board of Directors increased the quarterly dividend to $0.27 per share, on its common stock. On May 4, 2020, the Company’s Board of Directors declared an increased quarterly dividend from $0.27 to $0.28 per share, on its common stock. The $4.1$5.6 million dividend will bewas paid on May 26, 2017,22, 2020, to shareholders of record at the close of business on May 19, 2017.15, 2020. The Company intends to continue to pay regular quarterly dividends; however the declaration and payment of future dividends is discretionary and will be subject to a determination by the Board of Directors each quarter following its review of the Company’s financial performance.
Issuer Purchases of Equity Securities
On November 8, 2006, the Company's Board of Directors approved a share repurchase plan of up to $20.0 million. On October 31, 2008, November 1, 2010, and August 1, 2011, the Company’s Board of Directors approved an increase under the share repurchase plan, each for an additional $20.0 million. The repurchase plan is intended to be implemented through purchases made from time to time in either the open market or through private transactions at the Company's discretion, subject to market conditions and other factors, in accordance with Securities and Exchange Commission requirements.
There can be no assurances as to the precise number of shares that will be repurchased under the share repurchase plan, and the Company may discontinue the share repurchase plan at any time subject to compliance with applicable regulatory requirements. Shares purchased pursuant to the share repurchase plan will either be cancelled or held in the Company's treasury. No shares have been repurchasedOn January 25, 2019 the Company’s Board of Directors authorized an additional $30.0 million under the share repurchase plan since September 2012.plan. During fiscal 2020 the Company purchased and retired approximately 613,000 shares of its common stock for approximately $11.5 million, averaging approximately $18.73 per share. As of March 31, 2017,2020, the Company had approximately $10.2$28.7 million remaining under the Company’s share repurchase plan. Since the inception of the share repurchase plan through September 2012,up to March 31, 2020, approximately 5.66.2 million shares have been repurchased under the plan for approximately $69.8$81.3 million, averaging approximately $12.54$13.11 per share.
Performance Graph
Set forth below is a line graph comparing the five year cumulative performance of our Common Stock with the Nasdaq Composite, the Russell 2000, and our SIC Code 5912 (pharmacy peer group) from March 31, 20122015 to March 31, 2017.2020. The graph assumes that $100 was invested on March 31, 20122014 in each of our Common Stock, the Nasdaq Composite, the Russell 2000, and the SIC Code 5912 (pharmacy peer group). Because we have historically paid dividends on a quarterly basis, the graph assumes that dividends were reinvested. The performance graph and related information below shall not be deemed “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
Performance graph data:
| Fiscal Year Ended March 31, | ||||||||||||||||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||||||
| PetMed Express, Inc. | 100.00 | 124.42 | 130.30 | 168.61 | 190.88 | 222.99 | ||||||||||||||||||
| Nasdaq Composite | 100.00 | 107.41 | 141.28 | 165.71 | 166.22 | 202.58 | ||||||||||||||||||
| SIC Code 5912 | 100.00 | 125.84 | 174.39 | 227.29 | 218.77 | 192.14 | ||||||||||||||||||
| Russell 2000 | 100.00 | 116.30 | 145.26 | 157.19 | 141.85 | 179.03 | ||||||||||||||||||
Fiscal Year Ended March 31, | ||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||
PetMed Express, Inc. | 100.00 | 113.21 | 132.25 | 280.04 | 158.29 | 210.77 | ||||||||||||
Nasdaq Composite | 100.00 | 100.55 | 123.56 | 149.21 | 165.07 | 166.22 | ||||||||||||
SIC Code 5912 | 100.00 | 101.25 | 87.24 | 70.02 | 65.40 | 62.61 | ||||||||||||
Russell 2000 | 100.00 | 90.24 | 113.90 | 127.33 | 129.94 | 98.77 | ||||||||||||
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under equity compensation plans, including individual compensation arrangements, by us under our Amended and Restated 2006 Employee Equity Compensation Restricted Stock Plan, Amended and Restated 2006 Outside Director Equity Compensation Restricted Stock Plan, 2015 Outside Director Equity Compensation Restricted Stock Plan and 2016 Employee Equity Compensation Restricted Stock Plan as of March 31, 2017:2020:
EQUITY COMPENSATION PLAN INFORMATION | |||||||||||
(In thousands) | |||||||||||
Number of securities | Number of securities | ||||||||||
to be issued upon | Weighted average | remaining available | |||||||||
exercise of outstanding | exercise price of | for future issuance | |||||||||
options, warrants | outstanding options, | under equity | |||||||||
Plan category | and rights | warrants and rights | compensation plans | ||||||||
2015 Outside Director Equity Compensation Restricted Stock Plan | 74 | - | 474 | (1) | |||||||
2016 Employee Equity Compensation Restricted Stock Plan | 109 | - | 846 | ||||||||
Total | 183 | 1,320 | |||||||||
EQUITY COMPENSATION PLAN INFORMATION
(In thousands)
| Number of securities | Number of securities | |||||||||||
| to be issued upon | Weighted average | remaining available | ||||||||||
| exercise of outstanding | exercise price of | for future issuance | ||||||||||
| options, warrants | outstanding options, | under equity | ||||||||||
| Plan category | and rights | warrants and rights | compensation plans | |||||||||
| 2006 Employee Restricted Stock Plan | 977 | - | - | |||||||||
| 2006 Director Restricted Stock Plan | 272 | - | - | |||||||||
| 2015 Director Restricted Stock Plan | 30 | - | 451 | |||||||||
| 2016 Employee Restricted Stock Plan | - | - | 1,000 | |||||||||
| Total | 1,279 | 1,451 | ||||||||||
(1) | The number of shares of common stock available for issuance under the 2015 Outside Director Equity Compensation Restricted Stock Plan automatically increase on the first trading day of January each calendar year during the term of the 2015 Outside Director Equity Compensation Restricted Stock Plan, by an amount equal to ten percent (10%) of the total number of shares of common stock authorized under the 2015 Outside Director Equity Compensation Restricted Stock Plan. |
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and notes thereto, and other financial information included elsewhere in this Annual Report on Form 10-K. The Consolidated Statements of Income data set forth below for the fiscal years ended March 31, 2017, 2016,2020, 2019, and 20152018 and the Consolidated Balance Sheet data as of March 31, 20172020 and 20162019 have been derived from our audited Consolidated Financial Statements which are included elsewhere in this Annual Report on Form 10-K. The Consolidated Statements of Income data set forth below for the fiscal years ended March 31, 20142017 and 20132016 and the Consolidated Balance Sheet data as of March 31, 2015, 20142018, 2017 and 20132016 have been derived from our audited Consolidated Financial Statements which are not included in this Annual Report on Form 10-K.
CONSOLIDATED STATEMENTS OF INCOME DATA
(In thousands, except for per share amounts)
CONSOLIDATED STATEMENTS OF INCOME DATA | ||||||||||||||||||||
(In thousands, except for per share amounts) | ||||||||||||||||||||
Fiscal Year Ended March 31, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Sales | $ | 284,125 | $ | 283,419 | $ | 273,800 | $ | 249,176 | $ | 234,684 | ||||||||||
Cost of sales | 202,879 | 188,105 | 175,993 | 169,862 | 158,388 | |||||||||||||||
Gross profit | 81,246 | 95,314 | 97,807 | 79,314 | 76,296 | |||||||||||||||
Operating expenses | 50,269 | 49,140 | 45,671 | 41,831 | 43,908 | |||||||||||||||
Net income | 25,851 | 37,740 | 37,283 | 23,819 | 20,567 | |||||||||||||||
Net income per common share: | ||||||||||||||||||||
Basic | 1.29 | 1.84 | 1.83 | 1.18 | 1.02 | |||||||||||||||
Diluted | 1.29 | 1.84 | 1.82 | 1.17 | 1.02 | |||||||||||||||
Weighted average number of common shares outstanding: | ||||||||||||||||||||
Basic | 20,041 | 20,461 | 20,346 | 20,232 | 20,124 | |||||||||||||||
Diluted | 20,055 | 20,491 | 20,433 | 20,378 | 20,254 | |||||||||||||||
Cash dividends declared per common share | 1.08 | 1.06 | 0.85 | 0.76 | 0.72 | |||||||||||||||
| Fiscal Year Ended March 31, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Sales | $ | 249,176 | $ | 234,684 | $ | 229,395 | $ | 233,391 | $ | 227,829 | ||||||||||
| Cost of sales | 169,862 | 158,388 | 153,125 | 155,774 | 150,708 | |||||||||||||||
| Gross profit | 79,314 | 76,296 | 76,270 | 77,617 | 77,121 | |||||||||||||||
| Operating expenses | 41,831 | 43,908 | 48,657 | 49,399 | 50,116 | |||||||||||||||
| Net income | 23,819 | 20,567 | 17,453 | 17,972 | 17,165 | |||||||||||||||
| Net income per common share: | ||||||||||||||||||||
| Basic | 1.18 | 1.02 | 0.87 | 0.90 | 0.86 | |||||||||||||||
| Diluted | 1.17 | 1.02 | 0.87 | 0.90 | 0.86 | |||||||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||||||
| Basic | 20,232 | 20,124 | 20,015 | 19,901 | 19,926 | |||||||||||||||
| Diluted | 20,378 | 20,254 | 20,136 | 20,043 | 20,049 | |||||||||||||||
| Cash dividends declared per common share | 0.76 | 0.72 | 0.68 | 0.66 | 1.60 | |||||||||||||||
CONSOLIDATED BALANCE SHEET DATA | ||||||||||||||||||||
(In thousands) | ||||||||||||||||||||
March 31, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Working capital | $ | 104,675 | $ | 107,805 | $ | 87,126 | $ | 63,430 | $ | 60,543 | ||||||||||
Total assets | 155,323 | 154,427 | 134,836 | 112,809 | 90,279 | |||||||||||||||
Total liabilities | 25,313 | 19,747 | 19,105 | 19,443 | 7,084 | |||||||||||||||
Shareholders' equity | 130,010 | 134,680 | 115,731 | 93,366 | 83,195 | |||||||||||||||
CONSOLIDATED BALANCE SHEET DATA
(In thousands)
NON FINANCIAL DATA (UNAUDITED) | ||||||||||||||||||||
(In thousands) | ||||||||||||||||||||
March 31, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
New customers acquired | 421 | 467 | 521 | 514 | 489 | |||||||||||||||
Total accumulated customers (1) | 10,998 | 10,577 | 10,110 | 9,589 | 9,075 | |||||||||||||||
| March 31, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Working capital | $ | 63,430 | $ | 60,543 | $ | 72,166 | $ | 66,116 | $ | 59,760 | ||||||||||
| Total assets | 112,809 | 90,279 | 82,852 | 78,375 | 73,179 | |||||||||||||||
| Total liabilities | 19,443 | 7,084 | 7,417 | 8,158 | 9,165 | |||||||||||||||
| Shareholders' equity | 93,366 | 83,195 | 75,435 | 70,217 | 64,014 | |||||||||||||||
NON FINANCIAL DATA (UNAUDITED)
(In thousands)
| March 31, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| New customers acquired | 514 | 489 | 529 | 597 | 630 | |||||||||||||||
| Total accumulated customers (1) | 9,589 | 9,075 | 8,586 | 8,057 | 7,460 | |||||||||||||||
(1) includes both active and inactive customers |
ITEM 7. 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 under the symbol “PETS.” The Company began selling pet medications and other pet health products in September 1996. In March 2010 the Company started offering for sale additional pet supplies on its website, and these items are drop shipped to customers by third party vendors. Presently, the Company’s product line includes approximately 3,000 SKUs2,500 of the most popular pet medications, health products, and supplies for dogs, cats, and cats.horses.
The Company markets its products through national advertising campaigns which aim to increase the recognition of the “1-800-PetMeds” brand name, and “PetMeds” family of trademarks, increase traffic on its website atwww.1800petmeds.com, acquire new customers, and maximize repeat purchases. Approximately 83%84% of all sales were generated via the Internet in fiscal 2017,2020, compared to 81%85% in fiscal 2016.2019. The Company’s sales consist of products sold mainly to retail consumers. The twelve-month average purchase was approximately $83 and $81$87 per order for both of the fiscal years ended March 31, 20172020 and 2016, respectively.2019.
Critical Accounting Policies
Our discussion and analysis of our financial condition and the results of our operations contained herein are based upon our Consolidated Financial Statements and the data used to prepare them. The Company’s 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, and income taxes. 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 and pet supplies primarilymainly to retail consumers.customers. Certain pet supplies offered on the Company’s website are drop shipped to customers. The Company’s policyCompany considers itself the principal in the arrangement because the Company controls the specified good before it is to recognize revenue from product sales upon shipment, when the rights of ownership and risk of loss have passedtransferred to the customer. Revenue contracts contain one performance obligation, which is delivery of the product; customer care and support is deemed not to be a material right to the contract. The transaction price is adjusted at the date of sale for any applicable sales discounts and an estimate of product returns, which are estimated based on historical patterns; however this is not considered a key judgment. There are no amounts excluded from variable consideration. Revenue is recognized when control transfers to the customer at the point in time in which shipment of the product occurs. This key judgment is determined as the shipping point represents the point in time in which the Company has a present right to payment, title has transferred to the customer, and the customer has assumed the risks and rewards of ownership.
Outbound shipping and handling fees are an accounting policy election, and are included in sales as the Company considers itself the principal in the arrangement given responsibility for supplier selection and discretion over pricing. Shipping costs associated with outbound freight after control over a product has transferred to a customer are an accounting policy election and are billed upon shipment. Shipping expensesaccounted for as fulfillment costs and 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. The allowance for doubtful accounts was approximately $27,000$59,000 at March 31, 2017,2020 compared to $13,000$39,000 at March 31, 2016.2019.
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 net realizable value using a weighted average cost method. The Company writes down its inventory for estimated obsolescence. The inventory reserve was approximately $51,000$45,000 and $64,000$54,000 at March 31, 20172020 and 2016,2019, respectively.
Advertising
The Company's advertising expense consists primarily of Internet marketing, and direct mail/print, and television advertising. Internet costs are expensed in the month incurred and direct mail/print advertising costs are expensed when the related catalogs, brochures and postcards are produced, distributed, or superseded. Television advertising costs are expensed as the advertisements are televised.
Accounting for income taxes
The Company accounts for income taxes under the provisions of ASC Topic 740, (“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 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 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 Consolidated Statements of Comprehensive Income:
| Fiscal Year Ended March 31, | Fiscal Year Ended March 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
| Sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
| Cost of sales | 68.2 | 67.5 | 66.8 | 71.4 | 66.4 | 64.3 | ||||||||||||||||||
| Gross profit | 31.8 | 32.5 | 33.2 | 28.6 | 33.6 | 35.7 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| General and administrative | 9.2 | 9.1 | 9.2 | 8.9 | 8.7 | 8.9 | ||||||||||||||||||
| Advertising | 7.1 | 9.3 | 11.0 | 8.0 | 7.8 | 7.0 | ||||||||||||||||||
| Discontinued project costs | - | - | 0.7 | |||||||||||||||||||||
| Depreciation | 0.5 | 0.3 | 0.3 | 0.8 | 0.8 | 0.8 | ||||||||||||||||||
| Total operating expenses | 16.8 | 18.7 | 21.2 | 17.7 | 17.3 | 16.7 | ||||||||||||||||||
| Income from operations | 15.0 | 13.8 | 12.0 | 10.9 | 16.3 | 19.0 | ||||||||||||||||||
| Total other income | 0.2 | 0.1 | 0.1 | 1.0 | 1.0 | 0.6 | ||||||||||||||||||
| Income before provision for income taxes | 15.2 | 13.9 | 12.1 | 11.9 | 17.3 | 19.6 | ||||||||||||||||||
| Provision for income taxes | 5.7 | 5.1 | 4.5 | 2.8 | 4.0 | 6.0 | ||||||||||||||||||
| Net income | 9.5 | % | 8.8 | % | 7.6 | % | 9.1 | % | 13.3 | % | 13.6 | % | ||||||||||||
Fiscal 20172020 Compared to Fiscal 20162019
COVID-19
As an essential business, 1-800-PetMeds has been open during our normal business hours without any material disruptions to our operations. Due to COVID-19, consumer demand has increased for the e-commerce channel with pet owners shifting their purchases to online. We are dedicated to making every effort to ensure the health and safety of our employees. We have implemented working from home where possible and enhanced disinfection and social distancing within our work place. We are also dedicated to making every effort to ensure our customers’ pets receive the medications they need. See risk factor “The recent outbreak of the COVID-19 global pandemic and related government, private sector and individual consumer responsive actions may adversely affect our business operations, employee availability, financial performance, liquidity and cash flow for an unknown period of time” in Part I, Item 1A of this Form 10-K.
Sales
Sales increased by approximately $14.5 million, or 6.2%,slightly to approximately $249.2$284.1 million for the fiscal year ended March 31, 2017,2020, from approximately $234.7$283.4 million for the fiscal year ended March 31, 2016.2019. The increase in sales for the fiscal year ended March 31, 20172020 was primarily due to increased reorder sales, offset by decreased new order and reorder sales. The Company acquired approximately 514,000421,000 new customers for the fiscal year ended March 31, 2017,2020, compared to approximately 489,000467,000 new customers for the same period the prior year.
The following chart illustrates sales by various sales classifications:
| Sales (In thousands) | 2017 | % | 2016 | % | $ Variance | % Variance | ||||||||||||||||||
| Reorder Sales | $ | 206,299 | 82.8 | % | $ | 195,569 | 83.3 | % | $ | 10,730 | 5.5 | % | ||||||||||||
| New Order Sales | $ | 42,877 | 17.2 | % | $ | 39,115 | 16.7 | % | $ | 3,762 | 9.6 | % | ||||||||||||
| Total Net Sales | $ | 249,176 | 100.0 | % | $ | 234,684 | 100.0 | % | $ | 14,492 | 6.2 | % | ||||||||||||
| Internet Sales | $ | 205,643 | 82.5 | % | $ | 190,781 | 81.3 | % | $ | 14,862 | 7.8 | % | ||||||||||||
| Contact Center Sales | $ | 43,533 | 17.5 | % | $ | 43,903 | 18.7 | % | $ | (370 | ) | -0.8 | % | |||||||||||
| Total Net Sales | $ | 249,176 | 100.0 | % | $ | 234,684 | 100.0 | % | $ | 14,492 | 6.2 | % | ||||||||||||
Year Ended March 31, | |||||||||||||||||||||||
Sales (In thousands) | 2020 | % | 2019 | % | $ Variance | % Variance | |||||||||||||||||
Reorder Sales | $ | 248,560 | 87.5 | % | $ | 241,780 | 85.3 | % | $ | 6,780 | 2.8% | ||||||||||||
New Order Sales | $ | 35,565 | 12.5 | % | $ | 41,639 | 14.7 | % | $ | (6,074 | ) | -14.6% | |||||||||||
Total Net Sales | $ | 284,125 | 100.0 | % | $ | 283,419 | 100.0 | % | $ | 706 | 0.2% | ||||||||||||
Internet Sales | $ | 238,054 | 83.8 | % | $ | 240,034 | 84.7 | % | $ | (1,980 | ) | -0.8% | |||||||||||
Contact Center Sales | $ | 46,071 | 16.2 | % | $ | 43,385 | 15.3 | % | $ | 2,686 | 6.2% | ||||||||||||
Total Net Sales | $ | 284,125 | 100.0 | % | $ | 283,419 | 100.0 | % | $ | 706 | 0.2% | ||||||||||||
Going forward sales may be adversely affected due to COVID-19, increased competition, and consumers giving more consideration to price. See risk factor “The recent outbreak of the COVID-19 global pandemic and related government, private sector and individual consumer responsive actions may adversely affect our business operations, employee availability, financial performance, liquidity and cash flow for an unknown period of time” in Part I, Item 1A of this Form 10-K. No guarantees can be made that sales will continue to grow in the future. The majority of our product sales are affected by the seasons, due to the seasonality of mainly heartworm,flea, tick, and flea and tickheartworm medications. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2017,2020, the Company’s sales were approximately 29%28%, 25%, 21%, and 25%26%, respectively. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2016,2019, the Company’s sales were approximately 30%31%, 24%25%, 22%21%, and 24%23%, respectively.
Cost of sales
Cost of sales increased by $11.5$14.8 million, or 7.2%7.9% to $169.9$202.9 million for the fiscal year ended March 31, 2017,2020, from $158.4$188.1 million for the fiscal year ended March 31, 2016. The increase in cost of sales in fiscal 2017 is directly related to the increase in sales during the fiscal year.2019. As a percentage of sales, cost of sales was 68.2%71.4% in fiscal 2017,2020, as compared to 67.5%66.4% in fiscal 2016.2019. The cost of sales increase and percentage increase can be mainly attributed to an increase in product costs on certain brands and additional discountsprice reductions given to customers to stimulate sales in response to increased online competition, and an increase salesto product costs during the fiscal year.year ended March 31, 2020. One of our long-term strategic initiatives and primary purchasing goals has always been to have direct purchasing relationships with all major manufacturers, which we now have.
Gross profit
Gross profit increaseddecreased by $3.0$14.1 million, or 4.0%14.8%, to $79.3$81.2 million for the fiscal year ended March 31, 2017,2020, from $76.3$95.3 million for the fiscal year ended March 31, 2016. The increase in gross profit in fiscal 2017 is directly related to the increase in sales during the fiscal year.2019. Gross profit as a percentage of sales for fiscal 20172020 was 31.8%28.6% compared to 32.5%33.6% for fiscal 2016.2019. The decrease in gross profit and percentage decrease in fiscal 2017 can be mainly attributed2020 is directly related to an increase in product costs on certain brands and additional discountsprice reductions given to customers to stimulate sales, and an increase sales duringto product costs. We now have direct relationships with all major manufacturers and these manufacturers have minimum advertised price policies, which should cause a general price discipline in the fiscal year.online market. Going forward gross profit may be adversely affected due to increased competition and consumers giving more consideration to price.
General and administrative expenses
General and administrative expenses increased by $1.5 million,$497,000, or 7.0%2.0%, to $22.8$25.3 million for the fiscal year ended March 31, 20172020 from $21.3$24.8 million for the fiscal year ended March 31, 2016.2019. The increase in general and administrative expenses for the fiscal year ended March 31, 20172020 was primarily due to the following: a $1.2 million$361,000 increase in payroll expenses relatedin the customer care, pharmacy, and information technology departments; a $107,000 increase to increased stock compensation expensebad debt expense; and additional expenses related to the move of our corporate headquarters in December 2016; a $347,000$92,000 increase in bank service fees due to increased sales; a $162,000 increase in bad debt expenses relating to increased credit card chargebacks for the year; and a $174,000 increase in other expenses which included professional fees, telephone, and office expenses.sales. Offsetting the increase was a $261,000net decrease of $63,000 to property expense; an $80,000 decrease to insurance expenses; and a $37,000 decrease in other expenses which included licenses,include travel and travel expenses.professional fees. General and administrative expenses as a percentage of sales were 9.2%was 8.9% for the fiscal year ended March 31, 2017,2020, compared to 9.1%8.7% for the fiscal year ended March 31, 2016.2019.
Advertising expenses
Advertising expenses decreasedincreased by approximately $4.1 million$600,000 to approximately $17.7$22.7 million for the fiscal year ended March 31, 2017,2020, from approximately $21.8$22.1 million for the fiscal year ended March 31, 2016.2019. The decreaseincrease in advertising expenses for fiscal 2017 can be attributed2020 was intended to the elimination of television advertising spendingstimulate sales and other less cost efficient advertising.acquire new customers. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $34$54 for the fiscal year ended March 31, 2017,2020, compared to $45$47 for the fiscal year ended March 31, 2016.2019. The increase to customer acquisition costs for the fiscal year ended March 31, 2020 can be attributed to increased advertising costs, primarily television advertising, and a lower-than-expected consumer response in the June 2019 and September 2019 quarters, which may be attributed to increased online competition. Advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, advertising spending, and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future sales, whereas a less favorable advertising environment may negatively impact future sales.
As a percentage of sales, advertising expense was 8.0% and 7.8% for the fiscal years ended March 31, 2020 and 2019, respectively. The increase in advertising expense as a percentage of total sales for the fiscal year ended March 31, 2020 can be mainly attributed to increased advertising to stimulate sales and acquire new customers. The Company currently anticipates advertising as a percentage of sales to be approximately 9% for fiscal 2021. However, the advertising percentage may fluctuate quarter to quarter due to seasonality and advertising availability.
Depreciation
Depreciation expense for the fiscal year ended March 31, 2020 increased slightly to approximately $2.3 million from approximately $2.2 million for the fiscal year ended March 31, 2019. This increase to depreciation expense for the fiscal year ended March 31, 2020 can be attributed to an increase in new property and equipment additions in fiscal 2020.
Other income
Other income remained relatively flat at $2.9 million for both the fiscal years ended March 31, 2020 and 2019. Other income includes interest income, advertising income, and rental income. Interest income may decrease in the future as the Company utilizes its cash balances on its share repurchase plan, with approximately $28.7 million remaining at March 31, 2020, on any quarterly dividend payment, on its operating activities, or with further decreases in interest rates.
Provision for income taxes
For the fiscal years ended March 31, 2020 and 2019, the Company recorded an income tax provision for approximately $8.0 million and $11.4 million, respectively. The decrease to the income tax provision for fiscal 2020 is related to a decrease in operating income, and reduction to the Florida state corporate income tax rate. The effective tax rate for the fiscal years ended March 31, 2020 and 2019 were 23.7% and 23.2%, respectively. The increase to the effective rate for the fiscal year ended March 31, 2020 can be attributed to a $322,000 income tax charge related to restricted stock compensation, which was recognized in September 2019. The Company estimates its effective tax rate will be approximately 23.5% for fiscal 2021.
Net income
Net income decreased by approximately $11.9 million, or 31.5%, to approximately $25.9 million for the fiscal year ended March 31, 2020 from approximately $37.7 million for the fiscal year ended March 31, 2019. The decrease to net income was primarily related to a decrease in gross profit due to price reductions given to customers to stimulate sales, and an increase to product costs.
Fiscal 2019 Compared to Fiscal 2018
Sales
Sales increased by approximately $9.6 million, or 3.5%, to approximately $283.4 million for the fiscal year ended March 31, 2019, from approximately $273.8 million for the fiscal year ended March 31, 2018. The increase in sales for the fiscal year ended March 31, 2019 was primarily due to increased reorder sales, offset by decreased new order sales. The Company acquired approximately 467,000 new customers for the fiscal year ended March 31, 2019, compared to approximately 521,000 new customers for the same period the prior year. The following chart illustrates sales by various sales classifications:
Year Ended March 31, | |||||||||||||||||||||||
Sales (In thousands) | 2019 | % | 2018 | % | $ Variance | % Variance | |||||||||||||||||
Reorder Sales | $ | 241,780 | 85.3 | % | $ | 227,513 | 83.1 | % | $ | 14,267 | 6.3% | ||||||||||||
New Order Sales | $ | 41,639 | 14.7 | % | $ | 46,287 | 16.9 | % | $ | (4,648 | ) | -10.0% | |||||||||||
Total Net Sales | $ | 283,419 | 100.0 | % | $ | 273,800 | 100.0 | % | $ | 9,619 | 3.5% | ||||||||||||
Internet Sales | $ | 240,034 | 84.7 | % | $ | 230,319 | 84.1 | % | $ | 9,715 | 4.2% | ||||||||||||
Contact Center Sales | $ | 43,385 | 15.3 | % | $ | 43,481 | 15.9 | % | $ | (96 | ) | -0.2% | |||||||||||
Total Net Sales | $ | 283,419 | 100.0 | % | $ | 273,800 | 100.0 | % | $ | 9,619 | 3.5% | ||||||||||||
Going forward sales may be adversely affected due to increased competition and consumers giving more consideration to price. No guarantees can be made that sales will grow in the future. The majority of our product sales are affected by the seasons, due to the seasonality of mainly flea, tick, and heartworm medications. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2019, the Company’s sales were approximately 31%, 25%, 21%, and 23%, respectively. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2018, the Company’s sales were approximately 29%, 24%, 22%, and 25%, respectively.
Cost of sales
Cost of sales increased by $12.1 million, or 6.9% to $188.1 million for the fiscal year ended March 31, 2019, from $176.0 million for the fiscal year ended March 31, 2018. As a percentage of sales, cost of sales was 66.4% in fiscal 2019, as compared to 64.3% in fiscal 2018. The cost of sales increase is due to increased sales and the percentage increase can be attributed to increases in discounts given to customers to stimulate sales in response to increased online competition, and an increase in product costs during the fiscal year.
Gross profit
Gross profit decreased by $2.5 million, or 2.6%, to $95.3 million for the fiscal year ended March 31, 2019, from $97.8 million for the fiscal year ended March 31, 2018. The decrease in gross profit in fiscal 2019 is directly related to increased discounts given to customers to stimulate sales. Gross profit as a percentage of sales for fiscal 2019 was 33.6% compared to 35.7% for fiscal 2018. The gross profit percentage decrease in fiscal 2019 can be mainly attributed to increases in discounts given to customers to stimulate sales in response to increased online competition, and an increase in product costs during the fiscal year. Going forward gross profit may be adversely affected due to increased competition and consumers giving more consideration to price.
General and administrative expenses
General and administrative expenses increased by $477,000, or 2.0%, to $24.8 million for the fiscal year ended March 31, 2019 from $24.3 million for the fiscal year ended March 31, 2018. The increase in general and administrative expenses for the fiscal year ended March 31, 2019 was primarily due to the following: a $291,000 increase in property expenses related to increased property taxes in fiscal 2019; a $257,000 increase in bank service fees due to increased sales; a $142,000 increase in professional fees which is related to increased legal and IT related expenses; and a $110,000 increase in travel and related expenses due to participating in a conference in fiscal 2019. Offsetting the increase was a $167,000 decrease in payroll expenses related to a decrease in stock compensation expense in fiscal 2019; a $79,000 decrease in insurance expense relating to reduced premiums; and a $78,000 net decrease to other expenses which include telephone, bad debt, and office expenses. General and administrative expenses as a percentage of sales were 8.7% for the fiscal year ended March 31, 2019, compared to 8.9% for the fiscal year ended March 31, 2018.
Advertising expenses
Advertising expenses increased by approximately $2.8 million to approximately $22.1 million for the fiscal year ended March 31, 2019, from approximately $19.3 million for the fiscal year ended March 31, 2018. The increase in advertising expenses for fiscal 2019 was intended to stimulate sales and promote brand awareness. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $47 for the fiscal year ended March 31, 2019, compared to $37 for the fiscal year ended March 31, 2018.
Advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, increased advertising spending, and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future new order sales, whereas a less favorable advertising environment may negatively impact future new order sales.
As a percentage of sales, advertising expense was 7.1%7.8% and 9.3%7.0% for the fiscal years ended March 31, 20172019 and 2016,2018, respectively. The decreaseincrease in advertising expense as a percentage of total sales for the fiscal year ended March 31, 20172018 can be mainly attributed to the elimination ofincreased online and television advertising spending.to stimulate sales and promote brand awareness. The Company currently anticipates advertising as a percentage of sales to be between approximately 7% and 8%10% for fiscal 2018.2020. However, the advertising percentage may fluctuate quarter to quarter due to seasonality and advertising availability.
Depreciation
Depreciation increased by approximately $599,000, to approximately $1.4 million for the year ended March 31, 2017, from approximately $770,000 for the year ended March 31, 2016. This increase to depreciationexpense for the fiscal year ended March 31, 20172019 increased by approximately $99,000, to approximately $2.2 million from approximately $2.1 million for the fiscal year ended March 31, 2018. This increase to depreciation expense for the fiscal year ended March 31, 2019 can be attributed to an increase in new property and equipment additions related to the Company’s new corporate headquarters and distribution facility.in fiscal 2019.
Other income
Other income increased by approximately $262,000,$1.2 million, to approximately $441,000$2.9 million for the fiscal year ended March 31, 20172019 from approximately $179,000$1.7 million for the fiscal year ended March 31, 2016.2018. The increaseincreases to other income for the fiscal year ended March 31, 2017 is2018 are primarily related to advertising and rental revenue, offset by decreasedincreased interest income.income due to increased interest rates. Interest income may decrease in the future as the Company utilizes its cash balances on its share repurchase plan, with approximately $10.2$40.2 million remaining at March 31, 2017,2019, on any quarterly dividend payment, or on its operating activities.
Provision for income taxes
For the fiscal years ended March 31, 20172019 and 2016,2018, the Company recorded an income tax provision for approximately $14.1$11.4 million and $12.0$16.5 million, respectively. The increasedecrease to the income tax provision for fiscal 20172019 is related to an increase toa decrease in operating income foroffset by the period dueincome tax rate reduction pursuant to an increase in gross profit due to increased salesthe Tax Cuts and a reduction in operating expenses.Jobs Act of 2017 (“2017 Act”). The effective tax rate for the fiscal years ended March 31, 20172019 and 20162018 were 37.2%23.2% and 36.8%30.7%, respectively. The decrease to the effective tax rate increase for the fiscal year ended March 31, 2017 can be attributed2019 is due to a one-time charge related to a fiscal 2016 income tax under-accrual, which was recognizedreduction in the quarter ended December 31, 2016, comparedCompany’s corporate tax rate pursuant to a one-time benefit related to a fiscal 2015 income tax over-accrual, which was recognized in the quarter ended December 31, 2015.2017 Act. The Company estimates its effective tax rate will be approximately 37.0%24.0% for fiscal 2018.2020.
Net income
Net income increased by approximately $3.2 million,$457,000, or 15.8%1.2%, to approximately $23.8$37.7 million for the fiscal year ended March 31, 20172019 from approximately $20.6$37.3 million for the fiscal year ended March 31, 2016. The increase was primarily due to an increase to gross profit due to increased sales and a reduction in operating expenses, offset by an increased income tax provision during fiscal 2017.
Fiscal 2016 Compared to Fiscal 2015
Sales
Sales increased by approximately $5.3 million, or 2.3%, to approximately $234.7 million for the fiscal year ended March 31, 2016, from approximately $229.4 million for the fiscal year ended March 31, 2015. The increase in sales for the fiscal year ended March 31, 2016 was primarily due to increased reorder sales, offset by a slight decrease in new order sales. The Company acquired approximately 489,000 new customers for the year ended March 31, 2016, compared to approximately 529,000 new customers for the same period the prior year.
The following chart illustrates sales by various sales classifications:
| Sales (In thousands) | 2016 | % | 2015 | % | $ Variance | % Variance | ||||||||||||||||||
| Reorder Sales | $ | 195,569 | 83.3 | % | $ | 189,685 | 82.7 | % | $ | 5,884 | 3.1 | % | ||||||||||||
| New Order Sales | $ | 39,115 | 16.7 | % | $ | 39,710 | 17.3 | % | $ | (595 | ) | -1.5 | % | |||||||||||
| Total Net Sales | $ | 234,684 | 100.0 | % | $ | 229,395 | 100.0 | % | $ | 5,289 | 2.3 | % | ||||||||||||
| Internet Sales | $ | 190,781 | 81.3 | % | $ | 184,078 | 80.2 | % | $ | 6,703 | 3.6 | % | ||||||||||||
| Contact Center Sales | $ | 43,903 | 18.7 | % | $ | 45,317 | 19.8 | % | $ | (1,414 | ) | -3.1 | % | |||||||||||
| Total Net Sales | $ | 234,684 | 100.0 | % | $ | 229,395 | 100.0 | % | $ | 5,289 | 2.3 | % | ||||||||||||
Going forward sales may be adversely affected due to increased competition and consumers giving more consideration to price. No guarantees can be made that sales will grow in the future. 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 2016, the Company’s sales were approximately 30%, 24%, 22%, and 24%, respectively. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2015, the Company’s sales were approximately 32%, 25%, 21%, and 22%, respectively.
Cost of sales
Cost of sales increased by $5.3 million, or 3.4% to $158.4 million for the fiscal year ended March 31, 2016, from $153.1 million for the fiscal year ended March 31, 2015. The increase in cost of sales in fiscal 2016 is directly related to the increase in sales during the fiscal year. As a percentage of sales, cost of sales was 67.5% in fiscal 2016, as compared to 66.8% in fiscal 2015. The cost of sales percentage increase can be mainly attributed to an increase in product costs on certain brands and additional discounts given to customers to increase sales during the fiscal year.
Gross profit
Gross profit was $76.3 million for both of the fiscal years ended March 31, 2016 and 2015. Gross profit as a percentage of sales for fiscal 2016 was 32.5% compared to 33.2%, for fiscal 2015. The gross profit percentage decrease in fiscal 2016 can be mainly attributed to an increase in product costs on certain brands and additional discounts given to customers to increase sales during the fiscal year.
General and administrative expenses
General and administrative expenses increased by $200,000, or 1.0%, to $21.3 million for the fiscal year ended March 31, 2016 from $21.1 million for the fiscal year ended March 31, 2015. The increase in general and administrative expenses for the fiscal year ended March 31, 2016 was primarily due to the following: a $165,000 increase in bad debt expenses relating to increased credit card chargebacks in the period; a $139,000 increase in property expenses; and a $135,000 increase in bank service fees due to increased sales. Offsetting the increase was a $62,000 decrease in payroll expenses; a $53,000 decrease due to a one-time charge relating to state/county sales tax which was not collected on behalf of our customers in fiscal 2015; a $53,000 decrease in licenses and fees; a $39,000 decrease in insurance expenses; and a $32,000 net decrease in other expenses which included telephone, travel, and office expenses. General and administrative expenses as a percentage of sales were 9.1% for the fiscal year ended March 31, 2016, compared to 9.2% for the fiscal year ended March 31, and 2015, respectively. The decrease in general and administrative expenses as a percentage of sales was primarily due to an increase to sales for fiscal 2016.
Advertising expenses
Advertising expenses decreased by approximately $3.4 million to approximately $21.8 million for the year ended March 31, 2016, from approximately $25.2 million for the year ended March 31, 2015. The decrease in advertising expenses for fiscal 2016 can be attributed to a reduction in television advertising spending. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $45 for the fiscal year ended March 31, 2016, compared to $48 for the fiscal year ended March 31, 2015. The decrease in customer acquisition costs for fiscal 2016 can be attributed to increased response to our advertising.
Advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, increased advertising spending, and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future new order sales, whereas a less favorable advertising environment may negatively impact future new order sales.
As a percentage of sales, advertising expense was 9.3% and 11.0% for the fiscal years ended March 31, 2016 and 2015, respectively. The decrease in advertising expense as a percentage of total sales for the fiscal year ended March 31, 2016 can be attributed to a reduction in television advertising spending. The Company currently anticipates advertising as a percentage of sales to be approximately 9% for fiscal 2017. However, the advertising percentage will fluctuate quarter to quarter due to seasonality and advertising availability. For the fiscal year ended March 31, 2016, quarterly advertising expenses as a percentage of sales ranged between 7% and 11%.
Discontinued project costs
During the quarter ended September 30, 2014 the Company discontinued an information technology project related to a new software platform, which was intended to be put into service and capitalized during fiscal 2015. The Company expensed a one-time project charge of $1.7 million in the September 2014 quarter. The net after tax impact of this one-time charge was $1.1 million, or $0.05 diluted per share. The Company does not expect any additional future expenditures relating to the discontinued project. There was no financial impact related to the discontinued project during the fiscal year ended March 31, 2016.
Depreciation
Depreciation increased by approximately $110,000, to approximately $770,000 for the year ended March 31, 2016, from approximately $660,000 for the year ended March 31, 2015. This increase to depreciation for the fiscal year ended March 31, 2016 can be attributed to an increase in new property and equipment additions.
Other income
Other income decreased slightly, to approximately $179,000 for the year ended March 31, 2016 from approximately $185,000 for the year ended March 31, 2015. Other income mainly consists of interest income and rental income. Other income may increase in fiscal 2017 due to increased rental revenue and interest income may decrease in the future as the Company utilizes its cash balances on its share repurchase plan, with approximately $10.2 million remaining as of March 31, 2016, on any quarterly dividend payment, or on its operating activities.
Provision for income taxes
For the fiscal years ended March 31, 2016 and 2015, the Company recorded an income tax provision for approximately $12.0 million and $10.3 million, respectively. The increase to the income tax provision for fiscal 2016 is related to an increase to operating income for the period due to a reduction in operating expenses. The increase to the income tax provision is also related to the one-time discontinued project charge of $1.7 million which was recognized in fiscal 2015, the net after tax impact of this one-time charge was $1.1 million, which reduced the income tax provision by approximately $600,000. The effective tax rate for the fiscal years ended March 31, 2016 and 2015 were 36.8% and 37.2%, respectively. The effective tax rate decrease for the fiscal year ended March 31, 2016, can be attributed to a one-time benefit related to a fiscal 2015 income tax over-accrual, which was recognized in the quarter ended December 31, 2015, compared to a one-time charge related to a fiscal 2014 income tax under-accrual, which was recognized in the quarter ended December 31, 2014. The Company estimates its effective tax rate will be approximately 37.0% for fiscal 2017.
Net income
Net income increased by approximately $3.1 million, or 17.8%, to approximately $20.6 million for the fiscal year ended March 31, 2016 from approximately $17.5 million for the fiscal year ended March 31, 2015.2018. The increase was primarily due to a decrease in the tax provision due to a reduction in operating expenses during fiscal 2016the effective tax rate, which was offset by a decrease to gross profit due to increases in discounts given to customers to stimulate sales in response to increased online competition and the recognition of a one-time project charge of $1.7 million recognized in fiscal 2015. The net after tax impact of this one-time charge was $1.1 million.increased advertising.
Liquidity and Capital Resources
The Company’s working capital at March 31, 20172020 and 20162019 was approximately $63.4$104.7 million and approximately $60.5$107.8 million, respectively. The $2.9$3.1 million increasedecrease in working capital was primarily attributable to the share buyback and dividends paid in the period, offset by cash flow generated from operations, offset by purchases of property and equipment and dividends paid out in the fiscal year.operations. Net cash provided by operating activities was $47.2$38.8 million and $21.1$45.1 million for the fiscal years ended March 31, 20172020 and 2016,2019, respectively. This change can be mainly attributed to an increasea decrease in the Company’s net income and accounts payable balance andfor the fiscal year ended March 31, 2020, offset by a decrease in the Company’sto inventory balance at March 31, 2017, as compared to a reduction in the Company’s accounts payable and an increase into accounts payable compared to the Company’s inventory balances at March 31, 2016.prior year. Net cash used in investing activities was $10.6$2.3 million and $4.5$620,000 for the fiscal years ended March 31, 2020 and 2019, respectively. This change in investing activities is related to increased property and equipment additions acquired in fiscal 2020. The majority of the increase in investing activities relates primarily to the Company’s new e-commerce platform. Net cash used in financing activities was $33.3 million and $21.9 million for the fiscal years ended March 31, 20172020 and 2016,2019, respectively. This change can be attributedThe increase to a reduction in the Company’s short term investments offset by a decrease in property and equipment additions for the fiscal year ended March 31, 2017. Net cash used in financing activities was $15.5relates to the Company purchasing approximately 613,000 shares of its common stock for approximately $11.5 million and $14.5 million forduring the fiscal years ended March 31, 2017 and 2016, respectively. This change represented an increase in the dividends paid during fiscal 2017.June quarter. At March 31, 20172020, the Company had approximately $10.2$28.7 million remaining under the Company’s share repurchase plan, and no shares were repurchased in fiscal 2017.
plan. Subsequent to March 31, 2017,2020, the Company’s Board of Directors declared an increased quarterly dividend of $0.20from $0.27 to $0.28 per share on May 8, 2017.4, 2020. The Board established a May 19, 201715, 2020 record date and a May 26, 201722, 2020 payment date. Depending on future market conditions the Company may utilize its cash and cash equivalents on the remaining balance of its current share repurchase plan, on quarterly dividends, or on its operating activities.
At March 31, 20172020 the Company had no material outstanding lease commitments, and as of March 31, 2016 the Company had no outstanding lease commitments except for the lease for its 65,300 square foot facility.commitments. We are not currently bound by any long or short term agreements for the purchase or lease of capital expenditures. Any material amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately provide for any future increase in our business. To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future. Presently, we have approximately $1.0$4.5 million forecasted for capital expenditures in fiscal 2018,2021, which will be funded through cash from operations. The Company’s primary source of working capital is cash from operations. The Company presently has no need for alternative sources of working capital, and has no commitments or plans to obtain additional capital.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements at March 31, 2017.2020.
Contractual Obligations and Commitments (In thousands)
| Total | Less than 1 year | 1-2 years | 3-5 Years | More than 5 years | ||||||||||||||||
| Executive employment contract | $ | 1,200 | $ | 600 | $ | 600 | $ | - | $ | - | ||||||||||
| Total obligations | $ | 1,200 | $ | 600 | $ | 600 | $ | - | $ | - | ||||||||||
The table and information below presents the Company’s significant obligations and commitments at March 31, 2020:
Total | Less than 1 year | 1-2 years | 3-5 Years | More than 5 years | ||||||||||||||||
Executive employment contract | $ | 210 | $ | 210 | $ | - | $ | - | $ | - | ||||||||||
Total obligations | $ | 210 | $ | 210 | $ | - | $ | - | $ | - | ||||||||||
Recent Accounting Pronouncements
Other than disclosures included in note 1 of the Consolidated Financial Statements, the Company does not believe that any 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.
ITEM 7A. 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, and accounts payable. 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. Interest rates affect our return on excess cash and investments.cash equivalents. At March 31, 2017,2020, we had $58.7$103.8 million in cash and cash equivalents.equivalents, primarily money market accounts. A majority of our cash and cash equivalents and investments generates interest income based on prevailing interest rates.
A significant change in interest rates wouldcould impact the amount of interest income generated from our excess cash and investments.cash equivalents. It would also impact the market value of our investments.cash and cash equivalents. Our investmentscash and cash equivalents are subject to market risk, primarily interest rate and credit risk. Our 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 both short and long term maturities. We do not hold any derivative financial instruments that could expose us to significant market risk. At March 31, 2017,2020, we had no debt obligations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PETMED EXPRESS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |
| Report of Independent Registered Public Accounting Firm | |
| Consolidated Balance Sheets as of March 31, | |
| Consolidated Statements of | |
| Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in the period ended March 31, | |
| Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, | |
| Notes to Consolidated Financial Statements | |
| Report of Management on Internal Control Over Financial Reporting | |
| Report of Independent Registered Public Accounting Firm |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors and Shareholders
of PetMed Express, Inc. and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PetMed Express, Inc. and its subsidiaries (the Company) as of March 31, 20172020 and 2016, and2019, the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2017. These2020, and the related notes to the consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether(collectively, the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
statements). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PetMed Express, Inc. and subsidiariesthe Company as of March 31, 20172020 and 2016,2019, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2017,2020, in conformity with U.S.accounting principles generally accepted accounting principles. in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), PetMed Express, Inc. and subsidiaries'the Company’s internal control over financial reporting as of March 31, 2017,2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated May 23, 201726, 2020 expressed an unqualified opinion on the effectiveness of PetMed Express, Inc. and subsidiaries’the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company’s auditor since 2007.
West Palm Beach, Florida
May 23, 201726, 2020
PETMED EXPRESS, INC. AND SUBSIDIARIES | ||||
CONSOLIDATED BALANCE SHEETS | ||||
(In thousands, except for per share amounts) |
| March 31, | March 31, | March 31, | March 31, | |||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 58,730 | $ | 37,639 | $ | 103,762 | $ | 100,529 | ||||||||
| Accounts receivable, less allowance for doubtful accounts of $27 and $13, respectively | 1,808 | 1,724 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $59 and $39, respectively | 3,843 | 2,542 | ||||||||||||||
| Inventories - finished goods | 20,228 | 25,586 | 17,884 | 21,370 | ||||||||||||
| Prepaid expenses and other current assets | 1,019 | 2,435 | 3,529 | 1,408 | ||||||||||||
| Prepaid income taxes | - | 243 | - | 582 | ||||||||||||
| Total current assets | 81,785 | 67,627 | 129,018 | 126,431 | ||||||||||||
| Noncurrent assets: | ||||||||||||||||
| Property and equipment, net | 30,164 | 20,929 | 25,445 | 27,136 | ||||||||||||
| Intangible assets | 860 | 860 | 860 | 860 | ||||||||||||
| Deferred tax assets | - | 863 | ||||||||||||||
| Total noncurrent assets | 31,024 | 22,652 | 26,305 | 27,996 | ||||||||||||
| Total assets | $ | 112,809 | $ | 90,279 | $ | 155,323 | $ | 154,427 | ||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 15,221 | $ | 5,004 | $ | 19,658 | $ | 16,275 | ||||||||
| Accrued expenses and other current liabilities | 2,475 | 2,080 | 4,214 | 2,351 | ||||||||||||
| Income taxes payable | 659 | - | 471 | - | ||||||||||||
| Total liabilities | 18,355 | 7,084 | ||||||||||||||
Total current liabilities | 24,343 | 18,626 | ||||||||||||||
| Deferred tax liabilities | 1,088 | - | 970 | 1,121 | ||||||||||||
| 19,443 | 7,084 | |||||||||||||||
Total liabilities | 25,313 | 19,747 | ||||||||||||||
| Commitments and contingencies | ||||||||||||||||
| Shareholders' equity: | ||||||||||||||||
| Preferred stock, $.001 par value, 5,000 shares authorized; 3 convertible shares issued and outstanding with a liquidation preference of $4 per share | 9 | 9 | 9 | 9 | ||||||||||||
| Common stock, $.001 par value, 40,000 shares authorized; 20,526 and 20,447 shares issued and outstanding, respectively | 21 | 20 | ||||||||||||||
Common stock, $.001 par value, 40,000 shares authorized; 20,166 and 20,674 shares issued and outstanding, respectively | 20 | 21 | ||||||||||||||
| Additional paid-in capital | 6,806 | 4,871 | 3,804 | 12,478 | ||||||||||||
| Retained earnings | 86,530 | 78,295 | 126,177 | 122,172 | ||||||||||||
| Total shareholders' equity | 93,366 | 83,195 | 130,010 | 134,680 | ||||||||||||
| Total liabilities and shareholders' equity | $ | 112,809 | $ | 90,279 | $ | 155,323 | $ | 154,427 | ||||||||
See accompanying notes to consolidated financial statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except for per share amounts)
PETMED EXPRESS, INC. AND SUBSIDIARIES | ||||||
CONSOLIDATED STATEMENTS OF INCOME | ||||||
(In thousands, except for per share amounts) |
| Year Ended March 31, | Year Ended March 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
| Sales | $ | 249,176 | $ | 234,684 | $ | 229,395 | $ | 284,125 | $ | 283,419 | $ | 273,800 | ||||||||||||
| Cost of sales | 169,862 | 158,388 | 153,125 | 202,879 | 188,105 | 175,993 | ||||||||||||||||||
| Gross profit | 79,314 | 76,296 | 76,270 | 81,246 | 95,314 | 97,807 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| General and administrative | 22,799 | 21,301 | 21,101 | 25,264 | 24,767 | 24,290 | ||||||||||||||||||
| Advertising | 17,663 | 21,837 | 25,182 | 22,748 | 22,148 | 19,255 | ||||||||||||||||||
| Discontinued project costs | - | - | 1,714 | |||||||||||||||||||||
| Depreciation | 1,369 | 770 | 660 | 2,257 | 2,225 | 2,126 | ||||||||||||||||||
| Total operating expenses | 41,831 | 43,908 | 48,657 | 50,269 | 49,140 | 45,671 | ||||||||||||||||||
| Income from operations | 37,483 | 32,388 | 27,613 | 30,977 | 46,174 | 52,136 | ||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||
| Interest income, net | 141 | 190 | 184 | 1,747 | 1,864 | 658 | ||||||||||||||||||
| Realized loss on sale of short term investments | - | (74 | ) | - | ||||||||||||||||||||
| Other, net | 300 | 63 | 1 | 1,169 | 1,083 | 995 | ||||||||||||||||||
| Total other income | 441 | 179 | 185 | 2,916 | 2,947 | 1,653 | ||||||||||||||||||
| Income before provision for income taxes | 37,924 | 32,567 | 27,798 | 33,893 | 49,121 | 53,789 | ||||||||||||||||||
| Provision for income taxes | 14,105 | 12,000 | 10,345 | 8,042 | 11,381 | 16,506 | ||||||||||||||||||
| Net income | $ | 23,819 | $ | 20,567 | $ | 17,453 | $ | 25,851 | $ | 37,740 | $ | 37,283 | ||||||||||||
| Net change in unrealized gain (loss) on short term investments | - | 54 | (17 | ) | ||||||||||||||||||||
| Comprehensive income | $ | 23,819 | $ | 20,621 | $ | 17,436 | ||||||||||||||||||
| Net income per common share: | ||||||||||||||||||||||||
| Basic | $ | 1.18 | $ | 1.02 | $ | 0.87 | $ | 1.29 | $ | 1.84 | $ | 1.83 | ||||||||||||
| Diluted | $ | 1.17 | $ | 1.02 | $ | 0.87 | $ | 1.29 | $ | 1.84 | $ | 1.82 | ||||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||||||||||
| Basic | 20,232 | 20,124 | 20,015 | 20,041 | 20,461 | 20,346 | ||||||||||||||||||
| Diluted | 20,378 | 20,254 | 20,136 | 20,055 | 20,491 | 20,433 | ||||||||||||||||||
| Cash dividends declared per common share | $ | 0.76 | $ | 0.72 | $ | 0.68 | $ | 1.08 | $ | 1.06 | $ | 0.85 | ||||||||||||
See accompanying notes to consolidated financial statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
| |||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY | |||||||||||||
Years ended March 31, 2018, March 31, 2019, and March 31, 2020 | |||||||||||||
(In thousands) |
| Convertible | Common | Additional | Other | Convertible | Common | Additional | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Stock | Paid-In | Retained | Comprehensive | Preferred Stock | Stock | Paid-In | Retained | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amounts | Shares | Amounts | Capital | Earnings | Gain (Loss) | Total | Shares | Amounts | Shares | Amounts | Capital | Earnings | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2014 | 3 | $ | 9 | 20,190 | $ | 20 | $ | 1,578 | $ | 68,647 | $ | (37 | ) | $ | 70,217 | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net | - | - | 72 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share based compensation | - | - | - | - | 1,481 | - | - | 1,481 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | (13,757 | ) | - | (13,757 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Excess tax benefit related to stock compensation | - | - | - | - | 58 | - | - | 58 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 17,453 | 17,453 | 17,453 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss: Net Change in unrealized loss on short term investments | (17 | ) | (17 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | $ | 17,436 | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2015 | 3 | 9 | 20,262 | 20 | 3,117 | 72,343 | (54 | ) | 75,435 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net | - | - | 185 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share based compensation | - | - | - | - | 1,612 | - | - | 1,612 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | (14,615 | ) | - | (14,615 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Excess tax benefit related to stock compensation | - | - | - | - | 142 | - | - | 142 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 20,567 | 20,567 | 20,567 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive gain: Net Change in unrealized gain on short term investments | 54 | 54 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | $ | 20,621 | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2016 | 3 | 9 | 20,447 | 20 | 4,871 | 78,295 | - | 83,195 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2017 | 3 | $ | 9 | 20,526 | $ | 21 | $ | 6,806 | $ | 86,530 | $ | 93,366 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net | - | - | 79 | 1 | - | - | - | 1 | - | - | 75 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Share based compensation | - | - | - | - | 1,935 | - | - | 1,935 | - | - | - | - | 2,575 | - | 2,575 | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | (15,584 | ) | - | (15,584 | ) | - | - | - | - | - | (17,493 | ) | (17,493 | ) | |||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 23,819 | 23,819 | 23,819 | - | - | - | - | - | 37,283 | 37,283 | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2017 | 3 | $ | 9 | 20,526 | $ | 21 | $ | 6,806 | $ | 86,530 | $ | - | $ | 93,366 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2018 | 3 | 9 | 20,601 | 21 | 9,381 | 106,320 | 115,731 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock, net | - | - | 73 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Share based compensation | - | - | - | - | 3,097 | - | 3,097 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | - | - | - | - | - | (21,888 | ) | (21,888 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | 37,740 | 37,740 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2019 | 3 | 9 | 20,674 | 21 | 12,478 | 122,172 | 134,680 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock, net | - | - | 105 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Share based compensation | - | - | - | - | 2,822 | - | 2,822 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchased and retired shares | - | - | (613 | ) | (1 | ) | (11,496 | ) | - | (11,497 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | - | - | - | - | - | (21,846 | ) | (21,846 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | 25,851 | 25,851 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2020 | 3 | $ | 9 | 20,166 | $ | 20 | $ | 3,804 | $ | 126,177 | $ | 130,010 | ||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES | ||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||
(In thousands) |
| Year Ended | Year Ended | |||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||||||
| Net income | $ | 23,819 | $ | 20,567 | $ | 17,453 | $ | 25,851 | $ | 37,740 | $ | 37,283 | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||
| Depreciation | 1,369 | 770 | 660 | 2,257 | 2,225 | 2,126 | ||||||||||||||||||
| Share based compensation | 1,935 | 1,612 | 1,481 | 2,822 | 3,097 | 2,575 | ||||||||||||||||||
| Discontinued project costs | - | - | 1,714 | |||||||||||||||||||||
| Deferred income taxes | 1,951 | (23 | ) | 157 | (151 | ) | 125 | (92 | ) | |||||||||||||||
| Bad debt expense | 421 | 260 | 94 | 191 | 85 | 112 | ||||||||||||||||||
| (Increase) decrease in operating assets and increase (decrease) in liabilities: | ||||||||||||||||||||||||
| Accounts receivable | (505 | ) | (53 | ) | (264 | ) | (1,492 | ) | (335 | ) | (596 | ) | ||||||||||||
| Inventories - finished goods | 5,358 | (518 | ) | 10,659 | 3,486 | 1,967 | (3,109 | ) | ||||||||||||||||
| Prepaid income taxes | 243 | (243 | ) | 54 | 582 | 206 | (788 | ) | ||||||||||||||||
| Prepaid expenses and other current assets | 1,416 | (1,055 | ) | 662 | (376 | ) | (526 | ) | 137 | |||||||||||||||
| Accounts payable | 10,217 | (149 | ) | (616 | ) | 3,383 | 1,001 | 53 | ||||||||||||||||
| Accrued expenses and other current liabilities | 321 | (65 | ) | (61 | ) | 1,820 | (447 | ) | 337 | |||||||||||||||
| Income taxes payable | 659 | (50 | ) | 50 | 471 | - | (659 | ) | ||||||||||||||||
| Net cash provided by operating activities | 47,204 | 21,053 | 32,043 | 38,844 | 45,138 | 37,379 | ||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||||||
| Proceeds from sale of short term investments | - | 15,591 | - | |||||||||||||||||||||
| Net change in investments | - | 54 | (68 | ) | ||||||||||||||||||||
| Purchases of property and equipment | (10,604 | ) | (20,130 | ) | (918 | ) | (2,311 | ) | (620 | ) | (703 | ) | ||||||||||||
| Net cash used in investing activities | (10,604 | ) | (4,485 | ) | (986 | ) | (2,311 | ) | (620 | ) | (703 | ) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||||||
| Dividends paid | (15,509 | ) | (14,684 | ) | (13,807 | ) | (21,803 | ) | (21,925 | ) | (17,470 | ) | ||||||||||||
| Excess tax benefit related to stock compensation | - | 142 | 58 | |||||||||||||||||||||
Repurchase and retirement of common stock | (11,497 | ) | - | - | ||||||||||||||||||||
| Net cash used in financing activities | (15,509 | ) | (14,542 | ) | (13,749 | ) | (33,300 | ) | (21,925 | ) | (17,470 | ) | ||||||||||||
| Net increase in cash and cash equivalents | 21,091 | 2,026 | 17,308 | 3,233 | 22,593 | 19,206 | ||||||||||||||||||
| Cash and cash equivalents, at beginning of year | 37,639 | 35,613 | 18,305 | 100,529 | 77,936 | 58,730 | ||||||||||||||||||
| Cash and cash equivalents, at end of year | $ | 58,730 | $ | 37,639 | $ | 35,613 | $ | 103,762 | $ | 100,529 | $ | 77,936 | ||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||||||||||
| Cash paid for income taxes | $ | 11,373 | $ | 12,173 | $ | 10,026 | $ | 7,140 | $ | 11,051 | $ | 18,046 | ||||||||||||
Property and equipment in current assets | $ | 1,745 | $ | - | $ | - | ||||||||||||||||||
| Dividends payable in accrued expenses | $ | 217 | $ | 143 | $ | 212 | $ | 246 | $ | 203 | $ | 240 | ||||||||||||
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, health products, and supplies for dogs, cats, and cats,horses, direct to the consumer. The Company markets its products through national advertising campaigns, which aim to increase the recognition of the “1-800-PetMeds” brand name and “PetMeds” family of trademarks, increase traffic on its website atwww.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 officescorporate headquarters and distribution facility are located in Delray Beach, Florida. The Company's fiscal year end is March 31, and references herein to fiscal 2017, 2016,2020, 2019, or 20152018 refer to the Company's fiscal years ended March 31, 2017, 2016,2020, 2019, and 2015,2018, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
Revenue Recognition
The Company generates revenue by selling pet medication products and pet supplies. Certain pet supplies mainlyoffered on the Company’s website are drop shipped to retail consumers.customers. The Company’s policyCompany considers itself the principal in the arrangement because the Company controls the specified good before it is to recognize revenue from product sales upon shipment, when the rights of ownership and risk of loss have passedtransferred to the customer. Revenue contracts contain one performance obligation, which is delivery of the product; customer care and support is deemed not to be a material right to the contract. The transaction price is adjusted at the date of sale for any applicable sales discounts and an estimate of product returns, which are estimated based on historical patterns; however this is not considered a key judgment. There are no amounts excluded from variable consideration. Revenue is recognized when control transfers to the customer at the point in time in which shipment of the product occurs. This key judgment is determined as the shipping point represents the point in time in which the Company has a present right to payment, title has transferred to the customer, and the customer has assumed the risks and rewards of ownership. Outbound shipping and handling fees are an accounting policy election, and are included in sales as the Company considers itself the principal in the arrangement given responsibility for supplier selection and discretion over pricing. Shipping costs associated with outbound freight after control over a product has transferred to a customer are an accounting policy election and are billed upon shipment. Shipping expensesaccounted for as fulfillment costs and are included in cost of sales.
The Company disaggregates revenue in the following two categories: (1) reorder revenue vs new order revenue, and (2) internet revenue vs contact center revenue. The following table illustrates revenue by various classifications:
Year Ended March 31, | |||||||||||||||||||||||
Sales (In thousands) | 2020 | % | 2019 | % | $ Variance | % Variance | |||||||||||||||||
Reorder Sales | $ | 248,560 | 87.5 | % | $ | 241,780 | 85.3 | % | $ | 6,780 | 2.8% | ||||||||||||
New Order Sales | $ | 35,565 | 12.5 | % | $ | 41,639 | 14.7 | % | $ | (6,074 | ) | -14.6% | |||||||||||
Total Net Sales | $ | 284,125 | 100.0 | % | $ | 283,419 | 100.0 | % | $ | 706 | 0.2% | ||||||||||||
Internet Sales | $ | 238,054 | 83.8 | % | $ | 240,034 | 84.7 | % | $ | (1,980 | ) | -0.8% | |||||||||||
Contact Center Sales | $ | 46,071 | 16.2 | % | $ | 43,385 | 15.3 | % | $ | 2,686 | 6.2% | ||||||||||||
Total Net Sales | $ | 284,125 | 100.0 | % | $ | 283,419 | 100.0 | % | $ | 706 | 0.2% | ||||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) | Summary of Significant Accounting Policies (Continued) |
Year Ended March 31, | |||||||||||||||||||||||
Sales (In thousands) | 2019 | % | 2018 | % | $ Variance | % Variance | |||||||||||||||||
Reorder Sales | $ | 241,780 | 85.3 | % | $ | 227,513 | 83.1 | % | $ | 14,267 | 6.3% | ||||||||||||
New Order Sales | $ | 41,639 | 14.7 | % | $ | 46,287 | 16.9 | % | $ | (4,648 | ) | -10.0% | |||||||||||
Total Net Sales | $ | 283,419 | 100.0 | % | $ | 273,800 | 100.0 | % | $ | 9,619 | 3.5% | ||||||||||||
Internet Sales | $ | 240,034 | 84.7 | % | $ | 230,319 | 84.1 | % | $ | 9,715 | 4.2% | ||||||||||||
Contact Center Sales | $ | 43,385 | 15.3 | % | $ | 43,481 | 15.9 | % | $ | (96 | ) | -0.2% | |||||||||||
Total Net Sales | $ | 283,419 | 100.0 | % | $ | 273,800 | 100.0 | % | $ | 9,619 | 3.5% | ||||||||||||
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 the accounts receivable balances relative to sales. The Company had no material contract asset or liability balances as of March 31, 2020 and 2019.
The Company maintains an allowance for doubtful accounts for losses that the Company estimates will arise from the customers’ inability to make required payments, arising from either credit card charge-backs or insufficient funds checks. The Company determines its estimates of the uncollectibility of accounts receivable by analyzing historical bad debts and current economic trends. At March 31, 2017 and 2016, theThe allowance for doubtful accounts was approximately $27,000 and $13,000, respectively.$59,000 at March 31, 2020 compared to $39,000 at March 31, 2019.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents at March 31, 20172020 and 20162019 consisted of the Company’s cash accounts and money market accounts with a maturity of three months or less. The carrying amount of cash equivalents approximates fair value. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Use of Estimates
The preparation of 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Inventories
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 net realizable value using a weighted average cost method. The Company writes down its inventory for estimated obsolescence. The inventory reserve was approximately $51,000$45,000 and $64,000$54,000 at March 31, 20172020 and 2016,2019, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Our building is being depreciated over a period of thirty years. The furniture, fixtures, equipment, and computer software are being depreciated over periods ranging from three to seventen 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.
On December 22, 2015, the Company, by and through a wholly-owned subsidiary entered into an agreement of purchase and sale with an unaffiliated privately held Delaware corporation for the purchase of real property located in Palm Beach County, Florida, and improvements thereon (collectively referred to herein as the “Property”), the assignment and assumption of all leases and service agreements affecting the property, and certain tangible and intangible personal property related to the property, for a purchase price of $18.5 million, plus closing costs. The transaction closed on January 19, 2016. The Property consists of approximately 634,000 square feet of land or 14.6 acres with two building complexes totaling approximately 185,000 square feet, with additional land for future use. The first building complex consists of approximately 125,000 square feet consisting of both office and warehouse. The second building complex consists of approximately 60,000 square feet consisting of both office and warehouse space. The Company occupies approximately 97,000 square feet of the first building for its principal offices and distribution center. At March 31, 2017, 48% of the property was leased to two tenants with a remaining weighted average lease term of 3.0 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) | Summary of Significant Accounting Policies (Continued) |
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 the undiscounted cash flows expected to be generated from the asset.
Intangible Assets
The intangible asset consistsassets consist of a toll-free telephone number and an internet domain name. In accordance with the ASC Topic 350 (“Goodwill and Other Intangible Assets”) the intangible assets are not being amortized, and are subject to an annual review for impairment.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these instruments.
Advertising
The Company's advertising expenses consistexpense consists primarily of onlineInternet marketing, and direct mail/print, and television advertising. Internet costs are expensed in the month incurred and direct mail/print advertising costs are expensed when the related catalogs, brochures, and postcards are produced, distributed, or superseded.
Business Concentrations
The Company purchases its products from a variety of sources, including certain manufacturers, domestic distributors, and wholesalers. We have multiple suppliers for each of our products to obtain Television advertising costs are expensed as the lowest cost. There were four suppliers from whom we purchased approximately 50% of all products in fiscal 2017 and fiscal 2016.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting for Share Based Compensation
The Company records compensation expense associated with restricted stock in accordance with ASC Topic 718 (“Share Based Payment”). The compensation expense related to all of the Company’s stock-based compensation arrangements is recorded as a component of general and administrative expenses.advertisements are televised.
Comprehensive Income
The Company applies ASC Topic 220 (“Reporting Comprehensive Income”) which requires that all items that are recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The items of other comprehensive income that are typically required to be displayed are foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. For the fiscal yearyears ended March 31, 20172020, 2019 and 2018 the Company had no unrealized gains or losses. For the fiscal years ended March 31, 2016 and 2015 the Company recorded an unrealized gain of $54,000 and an unrealized loss of $17,000, respectively, on its short term investments.
The following is a summary of our comprehensive income (in thousands):
| March 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net income | $ | 23,819 | $ | 20,567 | $ | 17,453 | ||||||
| Net change in unrealized gain (loss) on short term investments | - | 54 | (17 | ) | ||||||||
| Comprehensive income | $ | 23,819 | $ | 20,621 | $ | 17,436 | ||||||
Income Taxes
The Company accounts for income taxes under the provisions of ASC Topic 740 (“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 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. As required by “Accounting for Uncertainty in Income Taxes” guidance, which clarifies ASC Topic 740, 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 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.
The Company applies “Accounting for Uncertainty in Income Taxes” guidance to all tax positions for which the statute of limitations remainedremains open. The Company files tax returns in the U.S. federal jurisdiction and Florida and Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years ending March 31, 2011.2013, or earlier. Any interest and penalties related to income taxes will be recorded to other income (expenses).
Reclassifications
Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the fiscal 2017 presentation. These reclassifications had no impact on net income, shareholders’ equity or cash flows as previously reported.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) | Summary of Significant Accounting Policies (Continued) |
Business Concentrations
The Company purchases its products from a variety of sources, including certain manufacturers, domestic distributors, and wholesalers. We have multiple suppliers for each of our products to obtain the lowest cost. There were three suppliers from whom we purchased approximately 60% of all products in fiscal 2020. There were four suppliers from whom we purchased approximately 50% of all products in fiscal 2019.
Accounting for Share Based Compensation
The Company records compensation expense associated with restricted stock in accordance with ASC Topic 718 (“Share Based Payment”). The compensation expense related to all of the Company’s stock-based compensation arrangements is recorded as a component of general and administrative expenses.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This ASU clarifies the accounting for revenue arising from contracts with customers and specifies the disclosures that an entity should include in its financial statements. The standard is effective for annual reporting periods beginning after December 15, 2017. During 2016, the FASB issued certain amendments to the standard relating to the principal versus agent guidance, accounting for licenses of intellectual property and identifying performance obligations as well as the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. The effective date and transition requirements for these amendments are the same as those of the original ASU. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company currently anticipates adopting the standard using the modified retrospective method. The Company has performed a high level analysis of its revenue streams and expects to complete its evaluations in FY 2018, as well as an evaluation of the impact on its business processes, controls and systems. The Company does not expect this standard to affect the Company materially, other than increased disclosures. We plan to complete our assessment of the impact of adoption during fiscal 2018 and finalize the adoption of the new revenue standard by the end of fiscal 2019.
In February 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued guidance on leases which supersedes the current lease guidance. The core principle requires lessees to recognize the assets and liabilities that arise from nearly all leases in the statement of financial position. Accounting applied by lessors will remain largely consistent with previous guidance, additionalguidance. Additional changes are set to align lessor accounting with the revised lessee model and the FASB’s revenue recognition guidance. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact ofadopted this standard on itsApril 1, 2019, using this effective date as the date of initial application. Consequently, on adoption, the Company recognized an additional current operating liability, with a corresponding right of use asset of approximately the same amount based on the present value of the remaining rental payments under current leasing standards for existing operating leases. As of March 31, 2020, the current operating liability and corresponding right of use asset was approximately $110,000. The lease liability and right of use asset is reflected in the consolidated balance sheet as part of accrued expenses and other current liabilities and as part of prepaid expenses and other current assets. The amended guidance did not have a material impact on the Company’s consolidated financial statements.
In MarchJune 2016, the Financial Accounting Standards Board (“FASB”) releasedFASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Stock Compensation ImprovementsFinancial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses on certain financial instruments. The Company is currently evaluating the impact of ASU 2016-13. The Company will adopt ASU 2016-13 on April 1, 2020. The Company does not expect this ASU to Employee Share-Based Paymenthave a material impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 718) (ASU 2016-09).ASU 2016-09 requires entities to recognize740): Simplification and reduce the income tax effectscost of share-based awards in the income statement when the awards vest or are settled.The objective of this update is to simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.The new standard is effective for annual and interim periods beginning January 1, 2017. We early adopted this standard as of March 31, 2017. As a result, during the fourth quarter we reclassified the year-to-date fiscal 2017 excess tax benefit of $156,000 from paid-in capital (statements of equity) into the income tax provision line on the statements of comprehensive income. Further, we reclassified the excess tax benefits from the stock based compensation from financing activities into operating activities in the statement of cash flows for the year ended March 31, 2017, as required by taxes (“ASU 2016-09 (adopted prospectively)2019-12”). The adoption did notCompany is currently evaluating the impact the existing classification of the awards.ASU 2019-12. The Company will adopt ASU 2019-12 on April 1, 2021.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) | Property and Equipment |
Major classifications of property and equipment consist of the following (in thousands):
| March 31, | March 31, | |||||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||||
| Building | $ | 14,988 | $ | 14,988 | $ | 14,997 | $ | 14,997 | ||||||||
| Land | 3,700 | 3,700 | 3,700 | 3,700 | ||||||||||||
| Building improvements | 2,592 | - | ||||||||||||||
| Leasehold improvements | - | 1,123 | ||||||||||||||
| Computer software | 5,068 | 4,812 | ||||||||||||||
Building Improvements | 2,823 | 2,817 | ||||||||||||||
Computer Software | 6,043 | 5,891 | ||||||||||||||
| Furniture, fixtures and equipment | 7,863 | 4,703 | 8,536 | 8,128 | ||||||||||||
| 34,211 | 29,326 | 36,099 | 35,533 | |||||||||||||
| Less: accumulated depreciation | (4,047 | ) | (8,397 | ) | (10,654 | ) | (8,397 | ) | ||||||||
| Property and equipment, net | $ | 30,164 | $ | 20,929 | $ | 25,445 | $ | 27,136 | ||||||||
(3) | Valuation and Qualifying Accounts |
Activity in the Company's valuation and qualifying accounts consists of the following (in thousands):
| Year Ended March 31, | Year Ended March 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
| Allowance for doubtful accounts: | ||||||||||||||||||||||||
| Balance at beginning of period | $ | 13 | $ | 8 | $ | 7 | $ | 39 | $ | 35 | $ | 27 | ||||||||||||
| Provision for doubtful accounts | 421 | 260 | 94 | 191 | 85 | 112 | ||||||||||||||||||
| Write-off of uncollectible accounts receivable | (407 | ) | (255 | ) | (93 | ) | (171 | ) | (81 | ) | (104 | ) | ||||||||||||
| Balance at end of year | $ | 27 | $ | 13 | $ | 8 | $ | 59 | $ | 39 | $ | 35 | ||||||||||||
(4) | Accrued Expenses and Other Current Liabilities |
Major classifications of accrued expenses and other current liabilities consist of the following (in thousands):
| March 31, | March 31, | |||||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||||
| Accrued sales tax | $ | 450 | $ | 459 | $ | 627 | $ | 323 | ||||||||
| Accrued credit card fees | 364 | 335 | 494 | 404 | ||||||||||||
| Accrued salaries and benefits | 639 | 482 | 1,242 | 685 | ||||||||||||
Accrued merchandise credits / reward program | 674 | 70 | ||||||||||||||
| Accrued professional expenses | 245 | 255 | 267 | 281 | ||||||||||||
| Accrued sales return allowance | 180 | 172 | 244 | 184 | ||||||||||||
| Accrued dividends payable | 217 | 143 | 246 | 203 | ||||||||||||
| Accrued real estate taxes | 236 | 65 | 112 | 87 | ||||||||||||
| Other accrued liabilities | 144 | 169 | 308 | 114 | ||||||||||||
| Accrued expenses and other current liabilities | $ | 2,475 | $ | 2,080 | $ | 4,214 | $ | 2,351 | ||||||||
(5) | Income Taxes |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) | Income Taxes (Continued) |
| March 31, | March 31, | |||||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||||
| Deferred tax assets: | ||||||||||||||||
| Accrued expenses | $ | 474 | $ | 537 | $ | 287 | $ | 298 | ||||||||
| Deferred stock compensation | 334 | 302 | 469 | 412 | ||||||||||||
| Bad debt and inventory reserves | 29 | 29 | 24 | 22 | ||||||||||||
| Total deferred tax assets | 837 | 868 | 780 | 732 | ||||||||||||
| Deferred tax liabilities: | ||||||||||||||||
| Property and equipment | 1,925 | 5 | (1,750 | ) | (1,853 | ) | ||||||||||
| Total net deferred taxes | $ | (1,088 | ) | $ | 863 | |||||||||||
Total net deferred tax liabilities | $ | (970 | ) | $ | (1,121 | ) | ||||||||||
At March 31, 2017,2020, the Company had no federal net operating loss carryforwards.
The components of the income tax provision consist of the following (in thousands):
| Year Ended March 31, | Year Ended March 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
| Current taxes | ||||||||||||||||||||||||
| Federal | $ | 11,095 | $ | 10,982 | $ | 9,303 | $ | 7,352 | $ | 9,718 | $ | 15,012 | ||||||||||||
| State | 1,059 | 1,041 | 885 | 841 | 1,538 | 1,586 | ||||||||||||||||||
| Total current taxes | 12,154 | 12,023 | 10,188 | 8,193 | 11,256 | 16,598 | ||||||||||||||||||
| Deferred taxes | ||||||||||||||||||||||||
| Federal | 1,781 | (21 | ) | 143 | (135 | ) | 108 | (83 | ) | |||||||||||||||
| State | 170 | (2 | ) | 14 | (16 | ) | 17 | (9 | ) | |||||||||||||||
| Total deferred taxes | 1,951 | (23 | ) | 157 | (151 | ) | 125 | (92 | ) | |||||||||||||||
| Total provision for income taxes | $ | 14,105 | $ | 12,000 | $ | 10,345 | $ | 8,042 | $ | 11,381 | $ | 16,506 | ||||||||||||
The reconciliation of income tax provision computed at the U.S. federal statutory tax rates to income tax expense is as follows (in thousands):
| Year Ended March 31, | Year Ended March 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
| Income taxes at U.S. statutory rates | $ | 13,274 | $ | 11,399 | $ | 9,729 | $ | 7,118 | $ | 10,315 | $ | 16,943 | ||||||||||||
| State income taxes, net of federal tax benefit | 858 | 675 | 589 | 649 | 1,233 | 1,078 | ||||||||||||||||||
| Permanent differences | 1 | (23 | ) | (29 | ) | |||||||||||||||||||
Restricted stock windfall adjustment | 322 | (176 | ) | (1,086 | ) | |||||||||||||||||||
Reduction of deferred tax liability due to rate reduction | - | - | (430 | ) | ||||||||||||||||||||
| Other | (28 | ) | (51 | ) | 56 | (47 | ) | 9 | 1 | |||||||||||||||
| Total provision for income taxes | $ | 14,105 | $ | 12,000 | $ | 10,345 | $ | 8,042 | $ | 11,381 | $ | 16,506 | ||||||||||||
The 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law on December 22, 2017. The 2017 Tax Act made a significant number of changes to the existing U.S. Internal Revenue Code, including a permanent reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. In accordance with SEC Staff Bulletin No. 118, fiscal year end companies were required to determine the appropriate blended rate to apply based on their respective fiscal year end dates. Therefore, instead of applying a 35.0% federal tax rate for the fiscal year ended March 31, 2018, the Company applied a blended federal rate of 31.5%. This blended rate was applied to fiscal 2018, resulting in a tax benefit of approximately $1.9 million. As a result, the Company recorded a provisional income tax benefit of approximately $430,000 related to the re-measurement of deferred tax assets and liabilities resulting from the reduction of the federal corporate tax rate for the year ended March 31, 2018, which was reconciled during the year ended March 31, 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) | Income |
In accordance with the provisions of ASC Topic 260 (“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 common share includes the dilutive effect of potential restricted stock and the effects of the potential conversion of preferred shares, calculated using the treasury stock method. Unvested restricted stock, and convertible preferred shares issued byfiscal 2020 the Company represent the only dilutive effect reflected in diluted weighted average shares outstanding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Net Income Per Share (Continued)
The following isrecognized a reconciliationstock compensation shortfall charge of the numeratorsapproximately $322,000, and denominatorsrecognized a one-time benefit of the basic and diluted net income per share computations for the periods presented (in thousands, except for per share amounts):
| Year Ended March 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net income (numerator): | ||||||||||||
| Net income | $ | 23,819 | $ | 20,567 | $ | 17,453 | ||||||
| Shares (denominator) | ||||||||||||
| Weighted average number of common shares outstanding used in basic computation | 20,232 | 20,124 | 20,015 | |||||||||
| Common shares issuable upon the vesting of restricted stock | 136 | 120 | 111 | |||||||||
| Common shares issuable upon conversion of preferred shares | 10 | 10 | 10 | |||||||||
| Shares used in diluted computation | 20,378 | 20,254 | 20,136 | |||||||||
| Net income per common share: | ||||||||||||
| Basic | $ | 1.18 | $ | 1.02 | $ | 0.87 | ||||||
| Diluted | $ | 1.17 | $ | 1.02 | $ | 0.87 | ||||||
At March 31, 2017 and 2016, all restricted stock was included in the diluted net income per common share computation.
During the quarter ended September 30, 2014 the Company discontinued an information technology projectapproximately $93,000, related to a new software platform, which was intendedreturn to be put into serviceprovision true up of the fiscal 2019 income tax provision. In fiscal 2019 the Company recognized a stock compensation windfall benefit of approximately $176,000, and capitalized during fiscal 2015. The Company expensedrecognized a one-time project charge of $1.7 million in that September quarter. The net afterapproximately $8,000 related to a return to provision true up of the fiscal 2018 income tax impactprovision. In fiscal 2018 the Company also recognized a stock compensation windfall benefit of this one-time charge wasapproximately $1.1 million, or $0.05 diluted per share. The Company does not expect any additional future expenditures relatingand recognized a one-time net benefit of approximately $150,000 related to this discontinued project.a return to provision true up of the fiscal 2017 income tax provision.
(6) | Shareholders’ Equity |
Preferred Stock
In April 1998, the Company issued 250,000 shares of its $.001 par value preferred stock at a price of $4.00 per share, less issuance costs of $112,187. Each share of the preferred stock is convertible into approximately 4.05 shares of common stock at the election of the shareholder. The shares have a liquidation value of $4.00 per share and may pay dividends at the sole discretion of the Company. The Company does not anticipate paying dividends to the preferred shareholders in the foreseeable future. Each share of preferred stock is entitled to one vote on all matters submitted to a vote of shareholders of the Company. At March 31, 20172020 and 2016,2019, 2,500 shares of the convertible preferred stock remained unconverted and outstanding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share Repurchase Plan
On November 8, 2006, the Company's Board of Directors approved a share repurchase plan of up to $20.0 million. On October 31, 2008, November 1, 2010, and August 1, 2011, the Company’s Board of Directors approved an increase under the repurchase plan each for an additional $20.0 million. On January 25, 2019 the Company’s Board of Directors authorized an additional $30.0 million under the repurchase plan. The repurchase plan is intended to be implemented through purchases made from time to time in either the open market or through private transactions at the Company's discretion, subject to market conditions and other factors, in accordance with Securities and Exchange Commission requirements. There can be no assurances as to the precise number of shares that will be repurchased under the share repurchase plan, and the Company may discontinue the share repurchase plan at any time subject to compliance with applicable regulatory requirements. Shares purchased pursuant to the share repurchase plan will either be cancelledretired or held in the Company's treasury. During both fiscal 20162020 the Company purchased and 2017retired approximately 613,000 shares of its common stock for approximately $11.5 million. During fiscal 2019 the Company had no share repurchases. At March 31, 20172020 the Company had approximately $10.2$28.7 million remaining under the Company’s share repurchase plan.
Dividends
On July 26, 2013,May 8, 2017 the Company’s Board of Directors increased the quarterly dividend to $0.17$0.20 per share, then on May 4, 2015January 22, 2018 the Company’s Board of Directors increased the quarterly dividend to $0.18$0.25 per share, and then on May 9, 2016July 23, 2018 the Company’s Board of Directors increased the quarterly dividend to $0.19$0.27 per share.share, on its common stock. The Company intends to continue to pay regular quarterly dividends; however the declaration and payment of future dividends is discretionary and will be subject to a determination by the Board of Directors each quarter following its review of the Company’s financial performance.
During fiscal 2017,2020, our Board of Directors declared the following dividends:
| Declaration Date | Per Share Dividend | Record Date | Total Amount (In thousands) | Payment Date | ||||||||
| May 9, 2016 | $ | 0.19 | May 20, 2016 | $ | 3,884 | May 27, 2016 | ||||||
| July 25, 2016 | $ | 0.19 | August 8, 2016 | $ | 3,900 | August 19, 2016 | ||||||
| October 24, 2016 | $ | 0.19 | November 7, 2016 | $ | 3,900 | November 18, 2016 | ||||||
| January 23, 2017 | $ | 0.19 | February 6, 2017 | $ | 3,900 | February 17, 2017 | ||||||
Declaration Date | Per Share Dividend | Record Date | Total Amount (In thousands) | Payment Date | |||||
May 6, 2019 | $0.27 | May 17, 2019 | $ | 5,518 | May 24, 2019 | ||||
July 22, 2019 | $0.27 | August 2, 2019 | $ | 5,447 | August 9, 2019 | ||||
October 21, 2019 | $0.27 | November 4, 2019 | $ | 5,447 | November 15, 2019 | ||||
January 21, 2020 | $0.27 | February 3, 2020 | $ | 5,445 | February 14, 2020 | ||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) | Net Income Per Share |
In accordance with the provisions of ASC Topic 260 (“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 common share includes the dilutive effect of potential restricted stock and the effects of the potential conversion of preferred shares, calculated using the treasury stock method. Unvested restricted stock, 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 (in thousands, except for per share amounts):
Year Ended March 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Net income (numerator): | ||||||||||||
Net income | $ | 25,851 | $ | 37,740 | $ | 37,283 | ||||||
Shares (denominator) | ||||||||||||
Weighted average number of common shares outstanding used in basic computation | 20,041 | 20,461 | 20,346 | |||||||||
Common shares issuable upon the vesting of restricted stock | 4 | 20 | 77 | |||||||||
Common shares issuable upon conversion of preferred shares | 10 | 10 | 10 | |||||||||
Shares used in diluted computation | 20,055 | 20,491 | 20,433 | |||||||||
Net income per common share: | ||||||||||||
Basic | $ | 1.29 | $ | 1.84 | $ | 1.83 | ||||||
Diluted | $ | 1.29 | $ | 1.84 | $ | 1.82 | ||||||
At March 31, 2020, 2019, and 2018, 72,120, 126,751 and 77,350 shares of common restricted stock, respectively, were excluded from the computations of diluted net income per common share, as their inclusion would have had an anti-dilutive effect on diluted net income per common share.
(8) | Restricted Stock |
On July 28, 2006, the Company received shareholder approval for the adoption of the 2006 Employee Equity Compensation Restricted Stock Plan (the “Employee“2006 Employee Plan”) and the 2006 Outside Director Equity Compensation Restricted Stock Plan (the “Director“2006 Director Plan”). The purpose of the plans iswas to promote the interests of the Company by securing and retaining both employees and outside directors. The Company had reserved 1.0 million shares of common stock for issuance under the Employee Plan, and 200,000 shares of common stock for issuance under the Director Plan. In July 2012, the Company received shareholder approval to ratify the amendment to the Company’s Director Plan passed by the Board of Directors to increase the number of shares available for issuance under the Director Plan from 200,000 to 400,000. Additionally, the Company received shareholder approval to ratify the amendment passed by the Board of Directors to provide for a 10% automatic increase every year in the amount of shares available for issuance under eachboth of the plans.
In July 2015, the Company’s 2015 Outside Director Equity Compensation Restricted Stock Plan (“2015 Director Plan”) became effective upon the approval of the plan by the Company’s Shareholders. The 2015 Director Plan authorizes 400,000 shares of the company'sCompany's common stock available for issuance under the plan, and provides for an automatic increase every year in the amount of shares available for issuance under the plan of 10% of the shares authorized under the plan. In July 2016, the Company’s 2016 Employee Equity Compensation Restricted Stock Plan (“2016 Employee Plan”) became effective
upon the approval of the plan by the Company’s Shareholders.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2016 Employee Plan authorizes 1,000,000 shares of the Company's Common stock available for issuance under the 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 and is to be no less than 1 year and no more than ten years.
The
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) | Restricted Stock (Continued) |
At March 31, 2020, the Company had 976,878972,175 restricted common shares issued under the 2006 Employee Plans and 302,000Plan, 153,608 restricted common shares issued under the 2016 Employee Plan, 272,000 restricted common shares issued under the 2006 Director Plans at March 31, 2017, allPlan, and 135,000 restricted common shares issued under the 2015 Director Plan. The majority of whichshares were issued subject to a restriction or forfeiture period which will lapselapses 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 fiscal years ended March 31, 2017, 2016,2020, 2019, and 2015,2018, the Company recognized compensation expense related to the Employee and Director Plans of $1.9$2.8 million, $1.6$3.1 million, and $1.5$2.6 million, respectively.
A summary of the Company’s non-vested restricted stock at March 31, 20172020 is as follows:follows (in thousands):
| Employee Plan Number of Shares (In thousands) | Director Plan Number of Shares (In thousands) | Both Plans Number of Shares (In thousands) | Employee Plan Number of Shares | Director Plan Number of Shares | Both Plans Number of Shares | |||||||||||||||||||
| Non-vested restricted stock outstanding at March 31, 2016 | 206 | 60 | 266 | |||||||||||||||||||||
Non-vested restricted stock outstanding at March 31, 2019 | 82 | 68 | 150 | |||||||||||||||||||||
| Restricted stock granted | 50 | 30 | 80 | 77 | 38 | 115 | ||||||||||||||||||
| Restricted stock vested | (83 | ) | (30 | ) | (113 | ) | (41 | ) | (32 | ) | (73 | ) | ||||||||||||
| Restricted stock forfeited or expired | (1 | ) | - | (1 | ) | (9 | ) | - | (9 | ) | ||||||||||||||
| Non-vested restricted stock outstanding at March 31, 2017 | 172 | 60 | 232 | |||||||||||||||||||||
Non-vested restricted stock outstanding at March 31, 2020 | 109 | 74 | 183 | |||||||||||||||||||||
At March 31, 20172020 and 2016,2019, there were 232,253182,695 and 265,771,150,017, non-vested restricted stock shares outstanding, respectively. During the fiscal years ended March 31, 20172020 and 2016,2019, the Company issued, net of forfeitures, 78,582105,925 and 185,08472,899 restricted shares, respectively. At March 31, 20172020 and 2016,2019, there were $3.3$2.6 million and $3.6$3.9 million of unrecognized compensation cost related to the non-vested restricted stock awards, respectively, which is expected to be recognized over the remaining weighted average vesting period of 1.8 years and 2.31.7 years for fiscal 20172020 and 2016,2019, respectively.
(9) | Fair Value Measurements |
The Company carries cash and cash equivalents and investments at fair value in the Consolidated Balance Sheets. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. ASC Topic 820 (“Fair Value Measurements”) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company’s cash equivalents are classified within Level 1. At March 31, 20172020 and 2019 the Company had invested the majority of its $58.7 million cash and cash equivalents balance in money market funds (level 1).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) | Commitments and Contingencies |
Legal Matters and Routine Proceedings
In January 2019, a putative class action complaint was filed in the United States District Court for the Southern District of New York alleging that company’s website, www.1800petmeds.com, did not comply with the ADA, NYSHRL, and NYCHRL, and discriminated against visually impaired individuals. The Company denied any wrongdoing, and on July 24, 2019, the Company and the Plaintiff reached a confidential settlement. The Plaintiff and the Company entered into a consent decree and the matter was dismissed on March 23, 2020, when an order was issued by the court approving the parties joint proposed consent decree.
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. The Company initiates litigation to protect its trade or service marks. There can be no assurance that the Company will be successful in protecting its trade or service marks. Legal costs related to the above matters are expensed as incurred.
Employment Agreements
On January 29, 2016, the Company amended the existing Executive Employment Agreement of Menderes Akdag, the Company’s President, Chief Executive Officer, and Director, and entered into Amendment No. 5 to the Executive Employment Agreement with Mr. Akdag. The Agreement amended certain provisions of the Executive Employment Agreement as follows: the term of the Agreement is for three years, commencing on March 16, 2016; Mr. Akdag’s salary was increased to $600,000 per year throughout the term of the Agreement, and Mr. Akdag was granted 120,000 shares of restricted stock. The restricted stock was granted on March 16, 2016, in accordance with the Company’s 2006 Employee Equity Compensation Restricted Stock Plan and the restrictions lapse ratably over a three-year period.
Operating Leases
The Company leased its 65,300 square foot executive offices, warehouse facility, and customer service and pharmacy contact centers under a non-cancelable operating lease in Pompano Beach, Florida. The Company was responsible for certain maintenance costs, taxes, and insurance under this lease. Rent expense was $519,000, $781,000, and $794,000 for the years ended March 31, 2017, 2016 and 2015, respectively. The Company relocated to the Delray Beach property in the quarter ended December 31, 2016, therefore eliminating any future rent payments subsequent to December 1, 2016.
Upon acquisition of the Delray Beach property in January 2016, 48% of the property, approximately 88,000 square feet of the property was leased to two tenants. At March 31, 2020, the leases with these two tenants had a remaining weighted average lease term of 4.8 years. The Company recorded approximately $586,000$645,000 and $116,000$622,000 in rental revenue in fiscal 20172020 and 2016,2019, respectively, which was included in other income. The Company expects to receive the following future lease payments over the next fourfive years: $604,000$670,000 in fiscal 2018; $622,0002021; $689,000 in fiscal 2019; $484,0002022; $710,000 in fiscal 2023; $731,000 in fiscal 2024, and $566,000 in fiscal 2025.
Employment Agreements
On January 29, 2016, the Company entered into Amendment No. 5 to the Executive Employment Agreement with Menderes Akdag, the Company’s President and Chief Executive Officer, as well as a Director, effective March 16, 2016. The term of the Agreement was for three years, with an increase in salary to $600,000 per year throughout the term of the Agreement, and a grant of 120,000 shares of restricted stock in accordance with the Company’s 2006 Employee Equity CompensationRestricted Stock Plan, with the restrictions lapsing ratably over a three-year period. On March 15, 2019, the day before Mr. Akdag’s Agreement was set to expire, the Company entered into Amendment No. 5a extending the term to May 13, 2019 at his then-current salary. Following the Compensation Committee of the Board of Directors having worked with a nationally recognized compensation consulting firm to ensure executive pay to the Chief Executive Officer of the Company was consistent with a selected peer group and contained appropriate performance bench marks, on May 13, 2019, the Company entered into Amendment No. 6 to the Agreement. That Agreement amended certain provisions of the Executive Employment Agreement as follows: the term of the Executive Employment Agreement was extended until the earlier of (i) the date of the Company’s 2020 Annual Stockholders Meeting, or (ii) August 1, 2020; and $97,000 inMr. Akdag’s salary remained at $600,000 per year throughout the term of the Agreement subject to a percentage increase adjustment, if any, commencing on the pay period ending on May 17, 2019, based on pre-determined individual and corporate performance goals and objectives for fiscal 2021.2019 approved by the Board. According to the Agreement, on July 26, 2019 Mr. Akdag was also to be granted 40,000 restricted shares of the Company’s common stock to vest on July 26, 2020, with the Company paying Mr. Akdag an additional amount (“Gross-Up Payment”) to cover Mr. Akdag’s withholding taxes which are required to be paid as a result of the issuance of the restricted shares.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) | Commitments and Contingencies (Continued) |
On July 12, 2019, the Company entered into Amendment No. 7 providing that in the event that a Change in Control (as was thereinafter defined) of the Company was to occur at any time, Mr. Akdag would have the right to terminate his employment for “Good Reason,” (as was thereinafter defined) upon thirty (30) days written notice given at any time within one (1) year after the occurrence of such event, and upon such termination Mr. Akdag would be entitled to a one-time payment of two times his salary as of the date of such termination.
(11) | Employee Benefit Plan |
The Company maintains a 401(k) Savings Plan for eligible employees. The plan is a defined contribution plan that is administered by the Company. All regular, full-time employees are eligible for voluntary participation upon completing one year of service and having attained the age of 21. The plan provides for growth in savings through contributions and income from investments. It is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. Plan participants are allowed to contribute a specified percentage of their base salary. In 2006, the Company adoptedapproved a matching plancontribution which is funded subsequent to the calendar year. During the fiscal years ended March 31, 2017, 2016,2020, 2019, and 2015,2018, the Company charged $181,000, $177,000,$211,000, $192,000, and $187,000,$166,000, respectively, of 401(k) matching contribution and administration expense to general and administrative expenses.
(12) | COVID-19 |
On March 11, 2020, the World Health Organization declared that the novel coronavirus (COVID-19) had become a pandemic, and on March 13, 2020, the U.S. President declared a National Emergency concerning the disease. Additionally, in March 2020, state governments in the Company’s geographic operating area began instituting preventative shut down measures in order to combat the novel coronavirus pandemic. The coronavirus and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of the geographical area in which the Company operates. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to amongst other provisions, provide emergency assistance for individuals, families and businesses affected by the novel coronavirus pandemic. The Company’s business being deemed essential resulted in incremental financial performance that may not be indicative of future financial results and there remains uncertainty and increased risks concerning its employees, customers, supply chain and government regulation. Going forward sales may be adversely affected due to COVID-19, increased competition, and consumers giving more consideration to price.
(13) | Subsequent Events |
On May 4, 2020, the Company’s Board of Directors declared an increased quarterly dividend from $0.27 to $0.28 per share on its common stock. The $5.6 million dividend was paid on May 22, 2020, to shareholders of record at the close of business on May 15, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) | Quarterly Financial Data (Unaudited) |
Summarized unaudited quarterly financial data for fiscal 20172020 and 20162019 is as follows (in thousands, except for per share amounts):
| Quarter Ended: | June 30, 2016 | September 30, 2016 | December 31, 2016 | March 31, 2017 | ||||||||||||
| Sales | $ | 72,487 | $ | 60,791 | $ | 52,866 | $ | 63,032 | ||||||||
| Gross Profit | $ | 22,452 | $ | 18,064 | $ | 16,643 | $ | 22,155 | ||||||||
| Income from operations | $ | 10,400 | $ | 7,731 | $ | 7,655 | $ | 11,697 | ||||||||
| Net income | $ | 6,594 | $ | 4,899 | $ | 4,823 | $ | 7,503 | ||||||||
| Diluted net income per common share | $ | 0.32 | $ | 0.24 | $ | 0.24 | $ | 0.37 | ||||||||
| Quarter Ended: | June 30, 2015 | September 30, 2015 | December 31, 2015 | March 31, 2016 | ||||||||||||
| Sales | $ | 71,634 | $ | 56,725 | $ | 50,933 | $ | 55,392 | ||||||||
| Gross Profit | $ | 22,966 | $ | 18,913 | $ | 16,754 | $ | 17,663 | ||||||||
| Income from operations | $ | 9,091 | $ | 7,090 | $ | 7,622 | $ | 8,585 | ||||||||
| Net income | $ | 5,757 | $ | 4,502 | $ | 4,890 | $ | 5,418 | ||||||||
| Diluted net income per common share | $ | 0.29 | $ | 0.22 | $ | 0.24 | $ | 0.27 | ||||||||
On May 8, 2017, the Company’s Board of Directors declared an increased quarterly dividend of $0.20 per share on its common stock. The $4.1 million dividend will be paid on May 26, 2017, to shareholders of record at the close of business on May 19, 2017.
Quarter Ended: | June 30, 2019 | September 30, 2019 | December 31, 2019 | March 31, 2020 | ||||||||||||
Sales | $ | 79,988 | $ | 69,936 | $ | 59,915 | $ | 74,286 | ||||||||
Gross Profit | $ | 21,861 | $ | 20,002 | $ | 17,697 | $ | 21,686 | ||||||||
Income from operations | $ | 6,161 | $ | 8,371 | $ | 7,932 | $ | 8,513 | ||||||||
Net income | $ | 5,343 | $ | 6,665 | $ | 6,840 | $ | 7,003 | ||||||||
Diluted net income per common share | $ | 0.26 | $ | 0.33 | $ | 0.34 | $ | 0.35 | ||||||||
Quarter Ended: | June 30, 2018 | September 30, 2018 | December 31, 2018 | March 31, 2019 | ||||||||||||
Sales | $ | 87,390 | $ | 71,396 | $ | 60,068 | $ | 64,565 | ||||||||
Gross Profit | $ | 29,954 | $ | 25,255 | $ | 19,381 | $ | 20,724 | ||||||||
Income from operations | $ | 15,757 | $ | 13,203 | $ | 9,413 | $ | 7,802 | ||||||||
Net income | $ | 12,582 | $ | 10,752 | $ | 7,787 | $ | 6,620 | ||||||||
Diluted net income per common share | $ | 0.62 | �� | $ | 0.52 | $ | 0.38 | $ | 0.32 | |||||||
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for the preparation and integrity of the Consolidated Financial Statements appearing in our Annual Report on Form 10-K. The financial statements were prepared in conformity with generally accepted accounting principles appropriate in the circumstances and, accordingly, include certain amounts based on our best judgments and estimates. Financial information in the Annual Report on Form 10-K is consistent with that in the financial statements.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934 (“Exchange Act”). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Consolidated Financial Statements. Our internal control over financial reporting is supported by a team of consultants and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel, and a written Corporate Code of Business Conduct and Ethics adopted by our Company’s Board of Directors, applicable to all Company Directors and all officers and employees of our Company and subsidiaries.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Audit Committee (“Committee”) of our Company’s Board of Directors, comprised solely of Directors who are independent in accordance with the requirements of The NASDAQ Stock Market LLC listing standards, the Exchange Act and the Company’s Corporate Governance Guidelines, meets with the independent auditors and management periodically to discuss internal control over financial reporting, and auditing and financial reporting matters. The Committee reviews with the independent auditors the scope and results of the audit effort. The Committee also meets periodically with the independent auditors without management present to ensure that the independent auditors have free access to the Committee. Our Audit Committee’s Report can be found in the Company’s 20172020 Proxy Statement.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2017.2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control – Integrated Framework - 2013.Based on our assessment, management believes that the Company maintained effective internal control over financial reporting as of March 31, 2017.2020.
The Company’s independent auditors, RSM US LLP, a registered public accounting firm, are appointed by the Audit Committee of the Company’s Board of Directors, subject to ratification by our Company’s shareholders. RSM US LLP have audited and reported on the Consolidated Financial Statements of PetMed Express, Inc. and subsidiaries, and issued a report on the Company’s internal control over financial reporting. The reports of the independent auditors are contained in our Annual Report on Form 10-K.
/s/ Menderes Akdag
Menderes Akdag
President, Chief Executive Officer, Director
May 26, 2020
/s/ Bruce S. Rosenbloom
Bruce S. Rosenbloom
Chief Financial Officer
May 26, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors and Shareholders
of PetMed Express, Inc. and subsidiaries:subsidiaries
Opinion on the Internal Control Over Financial Reporting
We have audited PetMed Express, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2017,2020, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. PetMed Express, Inc.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company and subsidiaries’our report dated May 26, 2020 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report of Management on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the company'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, PetMed Express, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of March 31, 2017, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of PetMed Express, Inc. and subsidiaries and our report dated May 23, 2017 expressed an unqualified opinion.
/s/ RSM US LLP
West Palm Beach, Florida
May 23, 201726, 2020
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure 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(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of March 31, 2017,2020, the end of the period covered by this report (the "Evaluation Date"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date, that our disclosure controls and procedures were effective such that the information relating to PetMed Express, Inc., including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on InternalInternal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 20172020 based on the framework inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control — Integrated Framework,management concluded that our internal control over financial reporting was effective, as of March 31, 2017,2020, as stated in our report which is included herein. Our internal control over financial reporting as of March 31, 20172020 has been audited by RSM US LLP, an independent registered public accounting firm, as stated in their report which is included herein.contained in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal controls over financial reporting during the fourth quarter ended March 31, 2017,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PARTIII
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this item will be set forth in our Proxy Statement, to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2017,2020, relating to our 20172020 Annual Meeting of Stockholders to be held on July 28, 2017,31, 2020, and is incorporated herein by reference.
We adopted a Corporate Code of Business Conduct and Ethics applicable to all officers, directors, and employees. The Company’s Corporate Code of Business Conduct and Ethics is available on our website atwww.1800petmeds.com under “About Us - Corporate Governance”. You may also obtain a copy of our Corporate Code of Business Conduct and Ethics free of charge by contacting Investor Relations at 1-800-738-6337.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in our Proxy Statement, to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2017,2020, relating to our 20172020 Annual Meeting of Stockholders to be held on July 28, 2017,31, 2020, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item (other than information required by Item 201(d) of Regulation S-K with respect to equity compensation plans, which is set forth under Item 5. in this Annual Report on Form 10-K) will be set forth in our Proxy Statement, to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2017,2020, relating to our 20172020 Annual Meeting of Stockholders to be held on July 28, 2017,31, 2020, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in our Proxy Statement, to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2017,2020, relating to our 20172020 Annual Meeting of Stockholders to be held on July 28, 2017,31, 2020, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANTACCOUNTANT FEES AND SERVICES
The information required by this item will be set forth in our Proxy Statement, to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2017,2020, relating to our 20172020 Annual Meeting of Stockholders to be held on July 28, 2017,31, 2020, and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this reportAnnual Report on Form 10-K.
(1) Consolidated Financial Statements – See the Index to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
The following exhibits are filed as part of this reportAnnual Report on Form 10-K.10-K or hereby incorporated by reference to exhibits previously filed with the SEC.
(3) ArticlesArticles of Incorporation and By-Laws
3.1 |
3.2 |
3.4 |
(4) Instruments Defining the Rights of Security Holders
4.1 |
4.2 |
(10) Material Contracts
10.1+ |
10.2+ |
10.3+ |
10.3.1 |
10.4+ |
10.5+ |
10.6+ |
10.7+ |
10.8+ |
10.9+ |
10.10+ |
(21) Subsidiaries of Registrant
21.1 |
(23) (23) Consents of Experts and Counsel
23.1 |
(31) Certifications |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).* |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).* |
(32) Certifications |
32.1 |
*Filed herewith **
**Furnished herewith
+ Indicated a management contract or compensatory plan or arrangement
101.INS*** XBRL Instance
101.SCH*** XBRL Taxonomy Extension Schema
101.CAL*** XBRL Taxonomy Extension Calculation
101.DEF*** XBRL Taxonomy Extension Definition
101.LAB*** XBRL Taxonomy Extension Labels
101.PRE*** XBRL Taxonomy Extension Presentation
*** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
ITEM 16. FORM 10–K SUMMARY.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 23, 201726, 2020
| PETMED EXPRESS, INC. | ||
| (the “registrant”) | ||
By: /s/ Menderes Akdag | ||
Menderes Akdag | ||
Chief Executive Officer and President | ||
(principal executive officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on May 23, 2017.26, 2020.
SIGNATURE | TITLE | |
| Chief Executive Officer and President (principal executive officer) | |
Menderes Akdag | Officer and Director | |
/s/ Robert C. Schweitzer | Chairman of the Board | |
Robert C. Schweitzer | Director | |
/s/ Bruce S. Rosenbloom | Chief Financial Officer and Treasurer (principal financial and accounting officer) | |
Bruce S. Rosenbloom | Officer | |
/s/ Ronald J. Korn | Director | |
Ronald J. Korn | ||
/s/ Gian M. Fulgoni | Director | |
Gian M. Fulgoni | ||
/s/ Frank J. Formica | Director | |
Frank J. Formica | ||
| /s/ Leslie C.G. Campbell | Director | |
Leslie C.G. Campbell | ||