U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number: 000-28827
PETMED EXPRESS, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
FLORIDA 65-0680967
------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1441 S.W. 29th Avenue, Pompano Beach, Florida 33069
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(Address of Principal Executive Offices)
(954) 979-5995
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(Issuer's Telephone Number, Including Area Code)
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court:
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 17,658,010
Common Shares, $.001 par value per share
Transitional Small Business Disclosure Form (check one):
Yes [ ] No [X]
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This discussion in this quarterly report regarding PetMed Express and
our business and operations contains "forward-looking statements."
These forward-looking statements use words such as "believes,"
"intends," "expects," "may," "will," "should," "plan," "projected,"
"contemplates," "anticipates," or similar statements. These
statements are based on our beliefs, as well as assumptions we have
used based upon information currently available to us. Because these
statements reflect our current views concerning future events, these
statements involve risks, uncertainties and assumptions. Actual
future results may differ significantly from the results discussed in
the forward-looking statements. A reader, whether investing in our
common stock or not, should not place undue reliance on these forward-
looking statements, which apply only as of the date of this quarterly
report.
When used in this quarterly report on Form 10-QSB, "PetMed Express,"
"PetMed Express.com," "PetMed," "1-800-PetMeds," "1-888-PetMeds," "the
Company," "we," "our," and "us" refers to PetMed Express, Inc. and our
subsidiaries.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
December 31,
2002
------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 131,273
Accounts receivable, less allowance for
doubtful accounts of $10,263 411,346
Inventories 6,643,721
Prepaid expenses and other current assets 190,915
------------
Total current assets 7,377,255
Property and equipment, net 1,520,589
Intangible asset 365,000
Other assets, net 200,155
------------
Total assets $ 9,462,999
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 4,712,055
Line of credit 1,000,000
Current portion of loan obligation 68,442
------------
Total current liabilities 5,780,497
Loan obligation, less current portion 85,553
------------
Total liabilities 5,866,050
------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized; 2,500 convertible shares
issued and outstanding with a liquidation
preference of $4 per share 8,898
Common stock, $.001 par value, 40,000,000 shares
authorized; 17,658,010 shares issued and
outstanding 17,658
Additional paid-in capital 6,999,910
Accumulated deficit (3,429,517)
------------
Total shareholders' equity 3,596,949
------------
Total liabilities and shareholders' equity $ 9,462,999
============
See accompanying notes to condensed consolidated financial statements
2
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001 2002 2001
-------------- ------------- -------------- --------------
Sales $ 11,050,124 $ 8,248,901 $ 40,110,581 $ 21,375,376
Cost of sales 6,341,577 4,666,066 22,939,240 12,798,334
-------------- ------------- -------------- --------------
Gross profit 4,708,547 3,582,835 17,171,341 8,577,042
-------------- ------------- -------------- --------------
Operating expenses:
General and administrative 1,801,081 1,589,912 5,858,693 4,240,019
Advertising 2,116,258 1,549,154 8,755,679 4,334,617
Severance charges - - - 195,000
Depreciation and amortization 97,939 75,336 264,711 263,492
-------------- ------------- -------------- --------------
Total operating expenses 4,015,278 3,214,402 14,879,083 9,033,128
-------------- ------------- -------------- --------------
Income (loss) from operations 693,269 368,433 2,292,258 (456,086)
-------------- ------------- -------------- --------------
Other income (expense):
Adjustment of estimate for legal
settlement - - - 345,000
Gain (loss) on disposal of property
and equipment 15,000 109 15,000 (185,265)
Interest expense (8,876) (4,333) (18,916) (45,378)
Interest income 505 2,734 6,462 15,183
Other, net 1,247 (13,595) 4,534 (17,412)
-------------- ------------- -------------- --------------
Total other income (expense) 7,876 (15,085) 7,080 112,128
-------------- ------------- -------------- --------------
Income (loss) before provision for
income taxes 701,145 353,348 2,299,338 (343,958)
Provision for income taxes 266,435 - 757,412 -
-------------- ------------- -------------- --------------
Net income (loss) $ 434,710 $ 353,348 $ 1,541,926 $ (343,958)
============== ============= ============== ==============
Net income (loss) per common share:
Basic $ 0.03 $ 0.02 $ 0.09 $ (0.02)
============== ============= ============== ==============
Diluted $ 0.02 $ 0.02 $ 0.07 $ (0.02)
============== ============= ============== ==============
Weighted average number of common
shares outstanding:
Basic 17,658,010 16,360,010 17,142,763 16,360,010
============== ============= ============== ==============
Diluted 21,662,154 18,263,436 20,999,411 16,360,010
============== ============= ============== ==============
See accompanying notes to condensed consolidated financial statements
3
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
December 31, December 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,541,926 $ (343,958)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 264,711 260,159
Stock option income tax benefit 78,660 -
Amortization of intangibles - 3,333
Amortization of deferred membership fee revenue - (118,570)
(Gain) loss on disposal of property and equipment (15,000) 185,265
Bad debt expense 7,329 7,181
(Increase) decrease in operating assets
and liabilities:
Accounts receivable (127,154) 6,428
Inventory (4,337,101) (1,192,042)
Prepaid expenses and other current assets (42,307) (67,773)
Other assets (150,000) (43,125)
Accounts payable and accrued expenses 1,987,060 1,293,948
------------ ------------
Net cash used in operating activities (791,876) (9,154)
Cash flows from investing activities:
Net proceeds from the sale of property and equipment 15,000 2,016,921
Purchases of property and equipment (665,252) (289,985)
Purchase of intangible asset (365,000) -
------------ ------------
Net cash (used in) provided by investing activities (1,015,252) 1,726,936
------------ ------------
Cash flows from financing activities:
Payments on capital lease obligations - (123,999)
Proceeds from the exercise of stock options and warrants 393,663 -
Payments on loan obligation (51,332) -
Borrowings on line of credit 858,786
Payments on mortgage payable - (1,566,833)
------------ ------------
Net cash provided by (used in) financing activities 1,201,117 (1,690,832)
------------ ------------
Net (decrease) increase in cash and cash equivalents (606,011) 26,950
Cash and cash equivalents, at beginning of period 737,284 408,699
------------ ------------
Cash and cash equivalents, at end of period $ 131,273 $ 435,649
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 17,287 $ 25,803
============ ============
Cash paid for income taxes $ 28,000 $ -
============ ============
See accompanying notes to condensed consolidated financial statements
4
PETMED EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Summary of Significant Accounting Policies
Organization
PetMed Express, Inc. and subsidiaries is a leading nationwide pet
pharmacy. The Company markets prescription and non-prescription pet
medications along with health and nutritional supplements for cats and
dogs direct to the consumer. The Company offers consumers an
attractive alternative for obtaining pet medications in terms of
convenience, price, and speed of delivery.
The Company markets its products through national television, on-line
and direct mail advertising campaigns, which aim to increase the
recognition of the "1-800-PetMeds" brand name, increase traffic on its
web site at www.1800PetMeds.com , acquire new customers, and maximize
repeat purchases. The Company's executive offices are located in
Pompano Beach, Florida.
The Company's fiscal year end is March 31, and references herein to
fiscal 2003 or 2002 refer to the Company's fiscal years ending March
31, 2003 and 2002, respectively.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-QSB
and, therefore, do not include all of the information and footnotes
required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion
of management, the accompanying condensed consolidated financial
statements contain all adjustments, consisting of normal recurring
accruals, necessary to present fairly the financial position of the
Company, after elimination of intercompany accounts and transactions,
at December 31, 2002, and the statements of operations for the three
and nine months ended December 31, 2002 and cash flows for the nine
months ended December 31, 2002. The results of operations for the
three and nine months ended December 31, 2002, are not necessarily
indicative of the operating results expected for the fiscal year
ending March 31, 2003. These financial statements should be read in
conjunction with the financial statements and notes thereto contained
in the Company's annual report on Form 10-KSB for the fiscal year
ended March 31, 2002. The condensed consolidated financial statements
include the accounts of PetMed Express, Inc. and its wholly owned
subsidiaries. All significant intercompany transaction has been
eliminated upon consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in
conformity with generally accepted accounting principles in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Earnings (Loss) Per Share
In accordance with the requirements of SFAS No. 128, basic earnings
per share is computed by dividing net income by the weighted average
number of shares outstanding and diluted earnings per share reflects
the dilutive effects of stock options (as calculated utilizing the
treasury stock method) and the equivalent common shares of outstanding
convertible preferred stock. Options and warrants and the effect of
convertible securities were not included in the calculation of diluted
loss per share for the nine months ended December 31, 2001, because
their effect would have been antidilutive.
5
Note 2: Line of Credit
On July 22, 2002, the Company executed an agreement which increased
the line of credit to $1,000,000, effective through June 22, 2003.
The line of credit is secured by substantially all of our assets,
interest is at the bank's base lending rate (4.25% at January 31,
2003), and contains various financial and operating covenants. In the
third quarter of fiscal 2003, the Company utilized the remaining
balance of its $1,000,000 line of credit. The line of credit proceeds
were used primarily to increase the Company's inventory levels, in
efforts to prepare for the upcoming flea and tick season. At December
31, 2002, there was $1,000,000 outstanding under the line of credit
agreement.
Note 3: Commitments and Contingencies
Legal Matters
Various complaints had been filed with the Florida Board of Pharmacy.
These complaints, the majority of which were filed by veterinarians
who are in competition with the Company for the sale of pet
prescription-required products, alleged violations of the Pharmacy
Practice Act and regulations promulgated thereunder. The vast
majority of the complaints alleged that the Company, through its
pharmacists, improperly dispensed prescription-required veterinary
medication based on prescriptions verified through the Company's
discontinued alternate veterinarian program. The alternate
veterinarian program used a veterinarian outside the state of Florida
to verify prescriptions for certain pets outside the state of Florida.
While the program was not used for pets residing in the state of
Florida, the complaints had, for the most part, been filed with the
Florida Board of Pharmacy. Other complaints alleged the dispensing of
medication without a valid prescription, the sale of non-conforming
products and that the Company's pharmacy was operating at the same
location as another pharmacy, with which it had a contractual
relationship. The Company contested all allegations and continued
discussions in an attempt to reach a resolution of these matters.
In February 2002, the Company voluntarily ceased the use of its
alternate veterinarian program, and in March 2002 a business decision
was made to enter into a settlement agreement with the Florida Board
of Pharmacy, rather than to proceed with costly and lengthy
litigation. In April 2002, the Florida Board of Pharmacy approved the
settlement agreement. The Florida Board of Pharmacy did not reach any
finding of fact or conclusion of law that the Company committed any
wrongdoing or violated any rules or laws governing the practice of
pharmacy. According to the settlement agreement, the Company's
pharmacy license was placed on probation for a period of three years
and the Company, the Company's pharmacists and contracted pharmacy and
pharmacist, paid approximately $120,000 in fines and investigative
costs, in July 2002. The Company remains licensed with the State of
Florida and continues to operate its principal business in Florida.
Additional complaints have been filed with other states' Pharmacy
Boards. These complaints, the majority of which were filed by
veterinarians who are in competition with the Company for the sale of
pet prescription-required products, allege violations of the Pharmacy
Practice Act and regulations promulgated thereunder. The vast
majority of the complaints allege that the Company, through its
pharmacists, improperly dispensed prescription-required veterinary
medication based on prescriptions verified through the Company's
alternate veterinarian program. The Company contested all allegations
and continued discussions in an attempt to reach a resolution of these
matters.
In fiscal 2003, the Company reached settlement agreements with the
Louisiana, Missouri, New Mexico, and Ohio State Pharmacy Boards.
According to the settlement agreements, the Company was required to
terminate the alternate veterinarian program in the state and the
Company's permit was placed on probation. As of December 31, 2002,
the Company had paid all fines in full to cover any or all
administrative and investigative costs associated with these
settlements. At December 31, 2002, there was no accrual relating to
these settlements. There can be no assurances made that other states
will not attempt to take similar actions against the Company in the
future.
In February 2000, the United States Environmental Protection Agency
("EPA") issued a Stop Sale, Use or Removal Order to the Company
regarding the alleged distribution or sale of misbranded Advantage
products in violation of the Federal Insecticide, Fungicide, and
Rodenticide Act ("FIFRA"), as amended. The order provides that the
company shall not distribute, sell, use or remove the products listed
in the order, which are allegedly misbranded. The order further
provides that the Company shall not commence any sale or distribution
of those products without the prior written approval from the EPA.
The Stop Sale, Use or Removal Order does not assert any claim for
monetary damages; rather, it is in the nature of a cease and desist
order. The Company denied any alleged violations. On February 16,
2000, the Company submitted a written response to the order. The EPA
assessed a fine in the amount of $445,000. In fiscal 2001 the Company
accrued $445,000 of legal settlement expense.
6
In September 2001, the Company and the EPA entered into a Consent
Agreement and Final Order ("CAFO"). The settlement agreement required
the Company to pay a civil penalty of $100,000 plus interest,
requiring a payment of $56,000, which was paid in September 2002, and
$53,000 due on September 30, 2003, a reduction from the previously
assessed fine of $445,000. For the purpose of this CAFO, the Company
admitted to the jurisdictional allegations set forth, and neither
admitted nor denied the alleged violations. On September 28, 2001,
the CAFO was approved and ordered by the regional judicial officer.
On March 19, 2002, Novartis Animal Health U.S., Inc. ("Novartis")
filed a complaint against the Company and two other defendants in U.S.
District Court for the Southern District of Florida. Novartis
purports to assert seven (7) claims related to the Company's alleged
sale of pet medications produced for a Novartis Australian sister
company: Count I: Infringement of Registered Trademark Under Section
32 of the Lanham Act, 15 U.S.C. Sec. 1114; Count II: Infringement of
Unregistered Trademarks Under Section 43(a) of the Lanham Act, 15
U.S.C. Sec. 1125(a); Count III: False Advertising Under Section 43(a) of
the Lanham act, 15 U.S.C. Sec. 1125(a); Count IV: Misleading Advertising
Under Florida Statutory Law; Count V: Deceptive and Unfair Trade
Practices Under Florida Statutory Law; Count VI: Injury to Business
Reputation Under Florida Statutory Law; Count VII: Common Law Unfair
Competition.
The Company has answered the complaint and asserted defenses and
affirmative defenses. The court issued a scheduling order, which sets
the case for trial on the court's November 2003 trial calendar. No
discovery has been propounded, and no documents have been produced.
The parties have engaged in substantial settlement discussions and
agreed on the material terms of settlement; however, at this point, no
written settlement agreement has been executed. In the absence of a
settlement, the Company would defend itself vigorously, and would
likely assert counterclaims. Because the parties have not engaged in
substantial discovery, it is not possible at this time to evaluate the
likelihood of an unfavorable outcome or estimate any potential loss in
the event of an adverse outcome.
The Company is a defendant in a lawsuit in Texas state district court
seeking injunctive and monetary relief styled Texas State Board of
Pharmacy and State Board of Veterinary Medical Examiners v. PetMed
Express, Inc. Cause No. GN-202514, in the 201st Judicial District
Court, Travis County, Texas. The Company in its initial pleading
denied the allegations contained therein. The Company will vigorously
defend, is confident of its compliance with the applicable law, and
finds wrong-on-the-facts the vast majority of the allegations
contained in the Plaintiffs' supporting documentation attached to the
lawsuit. Discovery has recently commenced. At this early stage of
the litigation it is difficult to assess any possible outcome or
estimate any potential loss in the event of an adverse outcome.
Routine Proceedings
The Company is a party to routine litigation incidental to its
business. The Company's management does not believe that the
resolution of any or all of such routine litigation is likely to have
a material adverse effect on the Company's financial condition or
results of operations.
7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Overview
The Company's common shares are traded on the OTC Bulletin Board
("OTCBB") under the symbol "PETS". On October 3, 2002, the Company
submitted an application for listing on the American Stock Exchange.
The Company is presently in the review stage, no assurances can be
made that the Company will be accepted for listing.
PetMed Express was incorporated in the state of Florida in January
1996. The Company began selling pet medications and products in
September 1996, and in the fall of 1997 the Company issued its first
catalog. This catalog displayed approximately 1,200 items, including
prescription and non-prescription pet medications, pet health and
nutritional supplements and pet accessories. In fiscal 2001, the
Company focused its product line to approximately 600 of the most
popular pet medications for dogs and cats. The Company also markets
products on its web site. Since October 1997, the Company has
advertised its products on national television and through the direct
mailing of catalogs.
The Company's sales consist of products sold to mainly retail
consumers and minimal wholesale customers. Typically, the Company's
retail customers pay by credit card or check at the time the order is
shipped. The Company usually receives cash settlement in one to
three banking days for sales paid for by credit cards, which minimizes
the accounts receivable balances relative to the Company's sales.
Certain wholesale customers are extended credit terms, which usually
require payment within 30 days of delivery. For the quarter ended
December 31, 2002, the Company's sales returns average was
approximately 1.5% of sales, and the average purchase was
approximately $69.
Critical Accounting Policies
Our discussion and analysis of our financial condition and the results
of our operations are based upon our condensed consolidated financial
statements and the data used to prepare them. The Company's condensed
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America. On an ongoing basis we re-evaluate our judgements and
estimates including those related to product returns, bad debts,
inventories, long-lived assets, income taxes, litigation and
contingencies. We base our estimates and judgements 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
We generate our revenue by selling pet medication products to mainly
retail consumers and minimal wholesale customers. Our policy is to
recognize revenue from product sales upon shipment, when the rights
and risk of ownership have passed to the consumer. Outbound shipping
and handling fees are included in sales and are billed upon shipment.
Shipping and handling expenses are included in cost of sales.
The majority of our sales are paid by credit cards and we usually
receive the cash settlement in one to three banking days. Credit card
sales minimize our account receivable balances relative to our sales.
We maintain an allowance for doubtful accounts for losses that we
estimate will arise from our customers' inability to make required
payments. We make our estimates of the uncollectibility of our
accounts receivable by analyzing historical bad debts and current
economic trends. At December 31, 2002 the allowance for doubtful
accounts was approximately $10,000.
Valuation of inventory
Inventories consist of prescription and non-prescription pet
medications that are available for sale and are priced at the lower of
cost or market value using a weighted average cost method. We write
down our inventory for estimated obsolescence. At December 31, 2002
the inventory reserve was approximately $136,000.
Property and equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
The furniture, fixtures, equipment and computer software are
depreciated over periods ranging from three to ten 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.
8
Long-lived assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Recoverability of assets is measured by comparison of
the carrying amount of the asset to net future cash flows expected to
be generated from the asset.
Advertising
The Company's advertising expense consists primarily of television
advertising, internet marketing, catalog and postcard production, and
mailing costs. Television costs are expensed as the ads are televised
and catalog and postcard costs are expensed when the related catalog
and postcards are produced, distributed or superseded.
Accounting for income taxes
The Company accounts for income taxes under the provisions of SFAS No.
109, Accounting for Income Taxes, which generally requires recognition
of deferred tax assets and liabilities for the expected future tax
benefits or consequences of events that have been included in the
condensed consolidated financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting carrying values and the
tax bases of assets and liabilities, and are measured by applying
enacted tax rates and laws for the taxable years in which those
differences are expected to reverse.
Results of Operations
The following should be read in conjunction with the Company's
condensed consolidated financial statements and the related notes
thereto included elsewhere herein. The following table sets forth, as
a percentage of sales, certain items appearing in the Company's
condensed consolidated statements of operations.
Three Months Ended Nine Months Ended
December 31 December 31 December 31 December 31
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 57.4 56.5 57.2 59.9
----------- ----------- ----------- -----------
Gross profit 42.6 43.5 42.8 40.1
----------- ----------- ----------- -----------
Operating expenses:
General and administrative 16.3 19.3 14.6 19.8
Advertising 19.1 18.8 21.8 20.3
Severance charges - - - 0.9
Depreciation and amortization 0.9 0.9 0.7 1.2
----------- ----------- ----------- -----------
Total operating expenses 36.3 39.0 37.1 42.2
----------- ----------- ----------- -----------
Income (loss) from operations 6.3 4.5 5.7 (2.1)
----------- ----------- ----------- -----------
Other income (expense):
Adjustment of estimate for legal
settlement - - - 1.6
Gain (loss) on disposal of
property and equipment 0.2 - - (0.9)
Interest expense (0.1) (0.1) - (0.2)
Interest income - - - -
Other, net - (0.1) - -
----------- ----------- ----------- -----------
Total other income (expense) 0.1 (0.2) - 0.5
----------- ----------- ----------- -----------
Income (loss) before provision for
income taxes 6.4 4.3 5.7 (1.6)
Provision for income taxes 2.4 - 1.9 -
----------- ----------- ----------- -----------
Net income (loss) 4.0 4.3 3.8 (1.6)
=========== =========== =========== ===========
9
Three Months Ended December 31, 2002 Compared With Three Months Ended
December 31, 2001, and Nine Months Ended December 31, 2002 Compared
With Nine Months Ended December 31, 2001
Sales
-----
Sales increased by approximately $2,801,000, or 34.0%, to
approximately $11,050,000 for the quarter ended December 31, 2002,
from approximately $8,249,000 for the quarter ended December 31, 2001.
For the nine months ended December 31, 2002, sales increased by
approximately $18,736,000, or 87.7%, to approximately $40,111,000
compared to sales of $21,375,000 for the nine months ended December
31, 2001. The increase in sales for the three months and nine months
ended December 31, 2002 is primarily due to the positive effects of
increased advertising and increased retail reorders, offset by a
decrease in wholesale sales.
The Company has committed certain amounts specifically designated
towards television advertising to stimulate sales, create brand
awareness, and acquire new customers. Retail new order sales have
increased by approximately $9,162,000, or 72.4%, to approximately
$21,810,000 for the nine months ended December 31, 2002, from
approximately $12,648,000 for the nine months ended December 31, 2001.
Retail reorder sales have increased by approximately $11,855,000, or
189.1%, to approximately $18,124,000 for the nine months ended
December 31, 2002, from approximately $6,269,000 for the nine months
ended December 31, 2001. Wholesale sales have decreased by
approximately $2,281,000, or 92.8%, to approximately $176,000 for the
nine months ended December 31, 2002, from approximately $2,457,000 for
the nine months ended December 31, 2001. The Company has discontinued
its wholesale operations to concentrate on retail sales.
The majority of our product sales are affected by the seasons, due to
the seasonality of mainly heartworm and flea and tick medications.
Industry seasonality trends, according to Fountain Agricounsel LLC,
Management Consultants to Agribusiness, are divided into percentage of
industry sales by quarter. For the quarters ended March 31, June 30,
September 30, and December 31 industry sales are 19%, 37%, 28%, and
16%, respectively. The Company cannot accurately predict future
sales, however, based on current circumstances the Company does not
expect a significant variance compared to the industry standards in
the fourth quarter of fiscal 2003.
Cost of sales
-------------
Cost of sales increased by approximately $1,676,000, or 35.9%, to
approximately $6,342,000 for the quarter ended December 31, 2002, from
approximately $4,666,000 for the quarter ended December 31, 2001. For
the nine months ended December 31, 2002, cost of sales increased by
approximately $10,141,000, or 79.2%, to approximately $22,939,000
compared to cost of sales of $12,798,000 for the nine months ended
December 31, 2001. The increase to cost of sales for the three months
and nine months ended December 31, 2002 is directly related to the
increase to retail sales. However, as a percent of sales, the cost of
sales was 57.2% for the nine months ended December 31, 2002, as
compared to 59.9% for the nine months ended December 31, 2001. This
percentage reduction can be attributed to the Company's continued
efforts to purchase medications in larger quantities, by bulk, to take
advantage of any and all purchasing discounts available.
Gross profit
------------
Gross profit increased by approximately $1,126,000, or 31.4%, to
approximately $4,709,000 for the quarter ended December 31, 2002 from
approximately $3,583,000 for the quarter ended December 31, 2001. For
the nine months ended December 31, 2002, gross profit increased by
approximately $8,594,000, or 100.2%, to approximately $17,171,000
compared to gross profit of $8,577,000 for the nine months ended
December 31, 2001. Gross profit as a percentage of sales for the nine
months ended December 31, 2002 and 2001 was 42.8% and 40.1%,
respectively.
General and administrative expenses
-----------------------------------
General and administrative expense increased by approximately
$211,000, or 13.3%, to approximately $1,801,000 for the quarter ended
December 31, 2002 from approximately $1,590,000 for the quarter ended
December 31, 2001. The increase in general and administrative expense
for the third quarter of fiscal 2003 is primarily attributable to a
$171,000 increase to payroll expenses, $43,000 increase to bank
service and credit card fees, $38,000 increase in property expenses,
which includes utilities and rental expenses, $18,000 increase to
insurance expenses, and a $18,000 increase to telephone expenses,
offset with a $70,000 reduction to professional fees due to the hiring
of full time pharmacists, and a $7,000 decrease to office and other
expenses. The increase to payroll expenses can be attributed to the
addition of new employees in the sales, customer service and pharmacy
departments, which enabled the company to sustain its continued
growth.
10
For the nine months ended December 31, 2002, general and
administrative expense increased by approximately $1,619,000, or
38.2%, to approximately $5,859,000 compared to general and
administrative expense of $4,240,000 for the nine months ended
December 31, 2001. The increase in general and administrative expense
for the nine months ended December 31, 2002 is primarily attributable
to a $1,242,000 increase to payroll expenses, $438,000 increase to
bank service and credit card fees, $106,000 increase in property
expenses, which includes utilities and rental expenses, $65,000
increase to insurance expenses, and a $21,000 increase to office and
other expenses, offset with a $160,000 reduction to professional fees
due to the hiring of full time pharmacists and reduced legal expenses
and a $93,000 decrease to telephone expenses due to a switch in local
and long distance carriers. The increase to payroll expenses can be
attributed to the addition of new employees in the sales, customer
service and pharmacy departments, which enabled the company to sustain
its continued growth.
Advertising expenses
--------------------
Advertising expenses increased by approximately $567,000, or
approximately 36.6%, to approximately $2,116,000 for the quarter ended
December 31, 2002 from approximately $1,549,000 for the quarter ended
December 31, 2001. For the nine months ended December 31, 2002,
advertising expense increased by approximately $4,421,000, or 102.0%,
to approximately $8,756,000 compared to advertising expense of
$4,335,000 for the nine months ended December 31, 2001. The increase
in advertising expense for the three months and nine months ended
December 31, 2002 was due to the Company's plan to commit certain
amounts specifically designated towards television advertising to
stimulate sales, create brand awareness, and acquire new customers.
The Company expects this trend in advertising to continue into the
fourth quarter of fiscal 2003.
Severance charges
-----------------
Severance charges for the nine months ended December 31, 2001 of
$195,000 relates to severance paid to two former executive officers,
the Chief Financial Officer and Chief Operating Officer, of the
Company. The Company had no comparable charges in the nine months
ended December 31, 2002.
Depreciation and amortization expenses
--------------------------------------
Depreciation and amortization expenses increased by approximately
$23,000, or 30.0%, to approximately $98,000 for the quarter ended
December 31, 2002 from approximately $75,000 for the quarter ended
December 31, 2001. For the nine months ended December 31, 2002,
depreciation and amortization expense increased by approximately
$1,000, or 0.5%, to approximately $265,000 compared to depreciation
and amortization expense of $264,000 for the nine months ended
December 31, 2001. The increase to depreciation and amortization
expense for the three months and nine months ended December 31, 2002
can be attributed to depreciation expense related to increased
property and equipment additions since the first quarter of fiscal
2002, offset with the sale of the corporate office building in the
first quarter of fiscal 2002.
Adjustment of estimate for legal settlement
-------------------------------------------
In the second quarter of fiscal 2002, the Company recognized income of
$345,000 on a reversal of a legal assessment estimate, which was
originally booked in the fourth quarter of the fiscal year ended March
31, 2001. In September 2001, the Company and the EPA entered into a
Consent Agreement and Final Order. The settlement agreement requires
the Company to pay a civil penalty of $100,000 plus interest, a
reduction from the original $445,000 fine.
Gain or loss on disposal of property and equipment
--------------------------------------------------
In the third quarter of fiscal 2003, the Company recorded a gain on
disposal of computer equipment of $15,000. The computer equipment was
sold to an unrelated third party and the Company received gross
proceeds of $15,000. In the first quarter of fiscal 2002, the Company
recorded a loss on disposal of land and building of $185,000. The
loss was a result of the sale of the corporate office building, which
includes the principal executive offices and warehouse, to an
unrelated third party. The Company received gross proceeds of
$2,150,000, of which approximately $1,561,000 was used to pay off the
mortgage.
11
Interest expense
----------------
Interest expense increased by approximately $5,000, or 104.9%, to
approximately $9,000 for the quarter ended December 31, 2002 from
approximately $4,000 for the quarter ended December 31, 2001. For the
nine months ended December 31, 2002, interest expense decreased by
approximately $26,000, or 58.3%, to approximately $19,000 compared to
interest expense of $45,000 for the nine months ended December 31,
2001. Interest expense may increase further in future quarters, due
to the Company utilizing its $1,000,000 line of credit to increase
inventory levels.
Provision for income taxes
--------------------------
The Company had incurred significant net losses since its inception in
1996. These losses have resulted in net operating loss carryforwards
and deferred tax assets, which have been used by the Company to offset
tax liabilities, which may have been incurred in prior periods. The
Company recorded a valuation allowance against the deferred income tax
assets, since future utilization of these assets is subject to the
Company's ability to generate taxable income. For the three and nine
months ended December 31, 2002, the Company established an income tax
provision for approximately $266,000 and $757,000, respectively, to
provide for taxable income as the utilization of net operating loss
carryforwards are limited.
Liquidity and Capital Resources
The Company's working capital at December 31, 2002 was $1,597,000, as
compared to the $734,000 deficiency at December 31, 2001, an increase
of approximately $2,331,000 from the working capital at December 31,
2001. The increase in working capital at December 31, 2002 was
primarily attributable to cash flow generated from operations, which
resulted in an increase in inventory, offset with a smaller increase
in accounts payable. Net cash used in operating activities was
$792,000 for the nine months ended December 31, 2002 as compared to
net cash used in operating activities of $9,000 for the nine months
ended December 31, 2001. Net cash used in investing activities was
$1,015,000 for the nine months ended December 31, 2002 as compared to
net cash provided by investing activities of $1,727,000 for the nine
months ended December 31, 2001. This change can be attributed to the
receipt of proceeds from the sale of the corporate office building and
land in the first quarter of fiscal 2002. Net cash provided by
financing activities increased to $1,201,000 for the nine months ended
December 31, 2002 as compared to net cash used in financing activities
of $1,691,000 for the nine months ended December 31, 2001. This
increase relates directly to the satisfaction of the mortgage on the
corporate office building in fiscal 2002, additional borrowings under
the Company's line of credit agreement and the exercise of stock
options and warrants in fiscal 2003.
On May 31, 2001, the Company sold their 50,000 square foot office
building, which houses the Company's principal executive offices and
warehouse, to an unrelated third party. The Company received gross
proceeds of $2,150,000, of which approximately $1,561,000 was used to
pay off the mortgage, and the Company recognized a loss on the sale of
approximately $185,000. The Company then entered into a five-year
term lease agreement for 20,000 of the 50,000 square foot Pompano
Beach office building. Then on February 22, 2002, the Company entered
into a lease addendum which added approximately 12,000 square feet,
effective June 1, 2002, to accommodate the Company's warehouse
expansion. According to the lease addendum, all additional costs,
approximately $150,000, associated with tenant improvements related to
the warehouse expansion, will be paid by the lessee. These tenant
improvements of $153,000 were capitalized and paid in full in the
second quarter of fiscal 2003.
On March 12, 2002, the Company entered into a $205,000, three year
term loan agreement with SouthTrust Bank, with interest accruing at
the lending institution's base rate plus 1% (5.25% at January 31,
2003). The loan proceeds were used to purchase a $250,000 computer
server. The aggregate loan maturities are $68,000 per year for the
next three years.
On July 19, 2002 the new warehouse and fulfillment automation project
was completed. The Company believes this expansion project has
tripled its capacity. The Company had financed certain equipment
acquisitions with capital leases, as of December 31, 2002 the Company
had no outstanding lease commitments. Other than working capital,
credit line, and cash from operations, the Company presently has no
other alternative source of working capital. The Company has
approximately $100,000 planned for capital expenditure commitments for
various plant and computer equipment for the fourth quarter of fiscal
2003, which will be funded through cash from operations.
12
On July 22, 2002, the Company executed an agreement which increased
the line of credit to $1,000,000, effective through June 22, 2003.
The line of credit is secured by substantially all of our assets,
interest is at the bank's base lending rate (4.25% at January 31,
2003), and contains various financial and operating covenants. In the
third quarter of fiscal 2003, the Company utilized the remaining
balance of its $1,000,000 line of credit. The line of credit proceeds
were used primarily to increase the Company's inventory levels, in
efforts to prepare for the upcoming flea and tick season. At December
31, 2002, there was $1,000,000 outstanding under the line of credit
agreement.
For the year ended March 31, 2001, the Company had incurred
significant operating losses and cash flow deficiencies. However, for
the year ended March 31, 2002 the Company had net income of $825,000,
and for the nine months ended December 31, 2002 the Company had net
income of $1,542,000, and the Company has sustained profitability for
six consecutive quarters. Additionally, the Company has committed
certain amounts specifically designated towards advertising to
stimulate sales growth. However, increases to advertising may
negatively impact our short term profitability. The Company may seek
to raise additional capital in the future, through the sale of equity
securities. No assurances can be given that the Company will be
successful in obtaining additional capital, or that such capital will
be available in terms acceptable to the Company. At this time, the
Company has no commitments or plans to obtain additional capital.
Further, there can be no assurances that even if such additional
capital is obtained that the Company will sustain profitability or
positive cash flow.
13
Item 3. Controls and Procedures.
The Company's management, including our Chief Executive Officer and
Chief Financial Officer, have conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-14(c) promulgated under the Securities and Exchange Act of
1934, as amended) as of February 10, 2003 (the "Evaluation Date")
within 90 days prior to the filing date of this report. Based upon
that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded, that our disclosure controls and procedures
are effective for timely gathering, analyzing and disclosing the
information we are required to disclose in our reports filed under the
Securities Exchange Act of 1934, as amended. There have been no
significant changes made in our internal controls or in other factors
that could significantly affect our internal controls subsequent to
the Evaluation Date.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
On November 13, 2002, Messrs. Kenneth Jacobi and Huseyin Kizanlikli,
members of the Board of Directors of PetMed Express, Inc. (the
"Company") resigned. The resignations were not related to a
disagreement with the Company on any matter related to the Company's
operations, policies or practices. On November 14, 2002 through
November 19, 2002, the Company appointed four new board members to its
Board of Directors. Joining the Company's Board of Directors are
Messrs. Robert C. Schweitzer, Ronald J. Korn, Gian Fulgoni, and the
Company's Chief Executive Officer, Menderes Akdag. Each independent
Board of Director will be compensated $10,000 annually, and granted
30,000 stock options to purchase the Company's Common Stock, which
will vest equally over a three year period. PetMed Express Inc.'s
Independent Board of Directors includes:
Robert C. Schweitzer, age 56, was the Regional President of Union
Planters Bank for Broward and Palm Beach County Florida markets from
April 1999 to December 2002. Prior to joining Union Planters, Mr.
Schweitzer served as the Executive VP and Head of Commercial Banking
for Barnett Bank/NationsBank in Jacksonville, Florida from 1993 to
1999. Other positions held include Director and Head of Real Estate
Consulting for Coopers & Lybrand in Washington, D.C.; Senior VP and
Manager of Central North America Real Estate for the First National
Bank of Chicago, and Manager of Domestic Credit Process Review; Senior
VP & Manager of Central North American Banking for Wachovia Bank. Mr.
Schweitzer holds an MBA from the University of North Carolina, and a
Bachelor of Science degree from the United States Naval Academy.
Ronald J. Korn, age 62, has been the President of Ronald Korn
Consulting since 1991. He served as the Managing Partner of KPMG,
LLP's Miami office from 1985 to 1991. Mr. Korn held various positions
including Partner with KPMG from 1961 until 1991. He has served as a
Director and Chairman of the Audit Committee of Engle Homes, Inc.
since 1992, and a Director, Chairman of the Audit Committee, and
member of the Loan Committee of Horizon Bank, FSB since 1999. Mr. Korn
previously served as a Director and Chairman of the Audit Committee of
Vacation Break U.S.A., Inc. and Magicworks Entertainment Corporation,
and Non-Executive Chairman of Carole Korn Interiors, Inc. He is an
Associate Member of the American Institute of Certified Public
Accountants. Mr. Korn holds a Juris Doctor degree from the New York
University Law School and a Bachelor of Science degree in Economics
from the University of Pennsylvania, Wharton School.
Gian Fulgoni, age 54, has been the Executive Chairman of ComScore
Networks, Inc. since 1999. From 1981 until 1998, Mr. Fulgoni served
as president and chief executive officer of Information Resources,
Inc. (IRIC: NASDAQ). He was a member of our Board of Directors from
August 1999 through November 2000. Mr. Fulgoni currently serves as a
member of the Board of Directors of Easter Seals, Chicago. Mr.
Fulgoni served on the Board of Directors of Platinum Technology, Inc.
from 1990 to 1999, U.S. Robotics, Inc. from 1991 to 1994, and
Yesmail.com, Inc. in 1999. Educated in the U.K., Mr. Fulgoni holds a
Masters degree in Marketing from the University of Lancaster and a
Bachelor of Science degree in Physics from the University of
Manchester.
15
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report.
99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350 (filed herewith to Exhibit 99.1 of the Registrant's
Report on Form 10-QSB for the quarter ended December 31, 2002,
Commission File No. 000-28827).
99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350 (filed herewith to Exhibit 99.2 of the Registrant's
Report on Form 10-QSB for the quarter ended December 31, 2002,
Commission File No. 000-28827).
(b) Reports on Form 8-K during the fiscal quarter ended December
31, 2002
(1) On November 20, 2002 the Company filed a report under Item 5
disclosing other events relating to the addition and resignation
on certain members of the Board of Directors.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PETMED EXPRESS, INC.
(The "Registrant")
Date: February 10, 2003
By:_/s/ Menderes Akdag__________
Menderes Akdag
Chief Executive Officer
(principal executive officer)
By:_/s/ Bruce S. Rosenbloom_____
Bruce S. Rosenbloom
Chief Financial Officer
(principal financial and accounting officer)
17
CERTIFICATION
I, MENDERES AKDAG, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of PetMed
Express, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
February 10, 2003
By: /s/ Menderes Akdag
-------------------------------
Menderes Akdag
Chief Executive Officer
18
CERTIFICATION
I, BRUCE S. ROSENBLOOM, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of PetMed
Express, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officers and I are
responsible for establishing for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
February 10, 2003
By: /s/ Bruce S. Rosenbloom
----------------------------
Bruce S. Rosenbloom
Chief Financial Officer
19
______________________________________________________________________
______________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC.
_______________________
FORM 10-QSB QUARTERLY REPORT
FOR THE QUARTER ENDED:
DECEMBER 31, 2002
_______________________
EXHIBITS
_______________________
______________________________________________________________________
______________________________________________________________________
EXHIBIT INDEX
-------------
Exhibit Number of Pages Incorporated
Number Description in Original By
Document + Reference
99.1 Certification of Principal Executive
Officer Pursuant to 18 U.S.C. Section
1350 1 **
99.2 Certification of Principal Financial
Officer Pursuant to 18 U.S.C. Section
1350 1 **
** Filed herewith