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 September 30, 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.
------------------------------------------------------
(Exact Name of Registrant 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
---------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (954) 979-5995
-------------------
Indicate by check [X] whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such requirements for the past 90 days.
[X] [ ]
Yes No
17,658,010 Common Shares, $.001 par value per share
---------------------------------------------------
(number of common shares outstanding as of the
close of business on October 31, 2002)
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)
September 30,
2002
-------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,083,804
Accounts receivable, less allowance for
doubtful accounts of $14,530 575,860
Inventories 3,898,739
Prepaid expenses and other current assets 177,783
-------------
Total current assets 5,736,186
Property and equipment, net 1,504,622
Intangible asset 365,000
Other assets, net 200,155
-------------
Total assets $ 7,805,963
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 4,472,618
Current portion of loan obligation 68,442
-------------
Total current liabilities 4,541,060
Loan obligation, less current portion 102,664
-------------
Total liabilities 4,643,724
-------------
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 (3,864,227)
-------------
Total shareholders' equity 3,162,239
-------------
Total liabilities and shareholders' equity $ 7,805,963
=============
See accompanying notes to condensed consolidated financial statements
2
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------ ------------- ------------- -------------
Sales $ 14,229,702 $ 7,762,825 $ 29,060,457 $ 13,126,475
Cost of sales 8,029,410 4,681,379 16,597,663 8,132,268
------------ ------------- ------------- -------------
Gross profit 6,200,292 3,081,446 12,462,794 4,994,207
------------ ------------- ------------- -------------
Operating expenses:
General and administrative 1,974,189 1,497,590 4,057,612 2,650,107
Advertising 3,832,241 1,437,810 6,639,421 2,785,463
Severance charges - - - 195,000
Depreciation and amortization 86,108 89,800 166,772 188,156
------------ ------------- ------------- -------------
Total operating expenses 5,892,538 3,025,200 10,863,805 5,818,726
------------ ------------- ------------- -------------
Income (loss) from operations 307,754 56,246 1,598,989 (824,519)
------------ ------------- ------------- -------------
Other income (expense):
Adjustment of estimate for
legal settlement - 345,000 - 345,000
Loss on disposal of property
and equipment - - - (185,374)
Interest expense (4,450) (8,985) (10,040) (41,045)
Interest income 1,824 4,934 5,957 12,449
Other, net 952 (3,817) 3,287 (3,817)
------------ ------------- ------------- -------------
Total other income (expense) (1,674) 337,132 (796) 127,213
------------ ------------- ------------- -------------
Income (loss) before provision
for income taxes 306,080 393,378 1,598,193 (697,306)
Provision for income taxes 101,193 - 490,977 -
------------ ------------- ------------- -------------
Net income (loss) $ 204,887 $ 393,378 $ 1,107,216 $ (697,306)
============ ============= ============= =============
Net income (loss) per common
share:
Basic $ 0.01 $ 0.02 $ 0.07 $ (0.04)
============ ============= ============= =============
Diluted $ 0.01 $ 0.02 $ 0.05 $ (0.04)
============ ============= ============= =============
Weighted average number of
common shares outstanding:
Basic 17,173,499 16,360,010 16,883,731 16,360,010
============ ============= ============= =============
Diluted 21,356,196 18,101,946 20,655,407 16,360,010
============ ============= ============= =============
See accompanying notes to condensed consolidated financial statements
3
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
September 30, September 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 1,107,216 $ (697,306)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 166,772 185,448
Stock option income tax benefit 78,660 -
Amortization of intangibles - 2,708
Amortization of deferred membership fee
revenue - (95,570)
Loss on disposal of property and equipment - 185,374
Bad debt expense 11,596 6,831
(Increase) decrease in operating assets and
liabilities:
Accounts receivable (295,943) (158,612)
Inventory (1,592,119) (1,433,227)
Prepaid expenses and other current assets (29,175) (77,915)
Other assets (150,000) (42,500)
Accounts payable and accrued expenses 1,747,623 1,587,450
------------- -------------
Net cash provided by (used in) operating activities 1,044,630 (537,319)
------------- -------------
Cash flows from investing activities:
Net proceeds from the sale of property - 2,016,921
Purchases of property and equipment (551,338) (124,442)
Purchase of intangible asset (365,000) -
------------- -------------
Net cash (used in) provided by investing activities (916,338) 1,892,479
------------- -------------
Cash flows from financing activities:
Payments on capital lease obligations - (79,713)
Proceeds from the exercise of stock options
and warrants 393,663 -
Payments on loan obligation (34,221) -
Payments on line of credit (141,214)
Payments on mortgage payable - (1,566,833)
------------- -------------
Net cash provided by (used in) financing activities 218,228 (1,646,546)
------------- -------------
Net increase (decrease) in cash and cash equivalents 346,520 (291,386)
Cash and cash equivalents, at beginning of period 737,284 408,699
------------- -------------
Cash and cash equivalents, at end of period $ 1,083,804 $ 117,313
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,514 $ 21,378
============= =============
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 September 30, 2002, and the statements of operations for the three
and six months ended September 30, 2002 and cash flows for the six
months ended September 30, 2002. The results of operations for the
three and six months ended September 30, 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 six months ended September 30, 2001, because
their effect would have been antidilutive.
Note 2: Intangible Asset
----------------
In the second quarter of fiscal 2003, the Company obtained the rights
to a toll free phone number for $365,000.
5
Note 3: Equity
------
In the second quarter of fiscal 2003, the Company received net
proceeds of $234,663 upon the exercise of stock options and warrants
and issuance of 698,000 shares of common stock, of which 375,000
shares were exercised by the Company's Chief Executive Officer, and
300,000 shares were exercised by the Company's majority shareholder,
Tricon Holdings LLC.
Note 4: 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 the first quarter of 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. At September
30, 2002, the Company has accrued $16,000 to cover any or all
administrative fines and investigative costs associated with 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 has only recently filed in
the lawsuit its initial pleading, denying 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. 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. The Company has recently
focused its product line to approximately 600 of the most popular
items 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. To date, the Company's sales
returns average approximately 2% of sales, and the current average
purchase is approximately $70.
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 September 30, 2002 the allowance for doubtful
accounts was approximately $15,000.
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 September 30, 2002
the inventory reserve was approximately $80,000.
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, 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 Six Months Ended
---------------------------- -----------------------------
September 30 September 30 September 30 September 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 56.4 60.3 57.1 62.0
-------- -------- -------- --------
Gross profit 43.6 39.7 42.9 38.0
-------- -------- -------- --------
Operating expenses:
General and administrative 13.9 19.3 14.0 20.2
Advertising 26.9 18.5 22.8 21.2
Severance charges - - - 1.5
Depreciation and amortization 0.6 1.2 0.6 1.4
-------- -------- -------- --------
Total operating expenses 41.4 39.0 37.4 44.3
-------- -------- -------- --------
Income (loss) from operations 2.2 0.7 5.5 (6.3)
-------- -------- -------- --------
Other income (expense):
Adjustment of estimate for legal
settlement - 4.5 - 2.6
Loss on disposal of property and
equipment - - - (1.4)
Interest expense - (0.1) - (0.3)
Interest income - 0.1 - 0.1
Other, net - (0.1) - -
-------- -------- -------- --------
Total other income (expense) - 4.4 - 1.0
-------- -------- -------- --------
Income (loss) before provision
for income taxes 2.2 5.1 5.5 (5.3)
Provision for income taxes 0.8 - 1.7 -
-------- -------- -------- --------
Net income (loss) 1.4 5.1 3.8 (5.3)
======== ======== ======== ========
9
Three Months Ended September 30, 2002 Compared With Three Months Ended
September 30, 2001, and Six Months Ended September 30, 2002 Compared
With Six Months Ended September 30, 2001
Sales
-----
Sales for the second quarter of fiscal 2003 increased by approximately
$6,467,000, or 83.3%, to approximately $14,230,000 for the quarter
ended September 30, 2002, from approximately $7,763,000 for the
quarter ended September 30, 2001. For the six months ended September
30, 2002, sales increased by approximately $15,934,000, or 121.4%, to
approximately $29,060,000 compared to sales of $13,126,000 for the six
months ended September 30, 2001. The increase in sales for the three
months and six months ended September 30, 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 $9,225,000, or 121.4%, to approximately
$16,823,000 for the six months ended September 30, 2002, from
approximately $7,598,000 for the six months ended September 30, 2001.
Retail reorder sales have increased by approximately $8,496,000, or
234.2%, to approximately $12,123,000 for the six months ended September
30, 2002, from approximately $3,627,000 for the six months ended
September 30, 2001. Wholesale sales have decreased by approximately
$1,787,000, or 94.0%, to approximately $114,000 for the six months
ended September 30, 2002, from approximately $1,901,000 for the six
months ended September 30, 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 third
and fourth quarter of fiscal 2003.
Cost of sales
-------------
Cost of sales for the second quarter of fiscal 2003 increased by
approximately $3,348,000, or 71.5%, to approximately $8,029,000 for
the quarter ended September 30, 2002, from approximately $4,681,000
for the quarter ended September 30, 2001. For the six months ended
September 30, 2002, cost of sales increased by approximately
$8,466,000, or 104.1%, to approximately $16,598,000 compared to cost
of sales of $8,132,000 for the six months ended September 30, 2001.
The increase to cost of sales for the three months and six months
ended September 30, 2002 is directly related to the increase to retail
sales. However, as a percent of sales, the cost of sales was 56.4% in
the second quarter of fiscal 2003, as compared to 60.3% in the second
quarter of fiscal 2002. 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 $3,118,000, or 101.2%, to
approximately $6,200,000 for the quarter ended September 30, 2002 from
approximately $3,082,000 for the quarter ended September 30, 2001.
For the six months ended September 30, 2002, gross profit increased by
approximately $7,469,000, or 149.6%, to approximately $12,463,000
compared to gross profit of $4,994,000 for the six months ended
September 30, 2001. Gross profit as a percentage of sales for the
quarter ended September 30, 2002 and 2001 was 43.6% and 39.7%,
respectively.
General and administrative expenses
-----------------------------------
General and administrative expense increased by approximately
$477,000, or 31.8%, to approximately $1,974,000 for the quarter ended
September 30, 2002 from approximately $1,497,000 for the quarter ended
September 30, 2001. The increase in general and administrative
expense for the second quarter of fiscal 2003 is primarily
attributable to a $446,000 increase to payroll expenses, $131,000
increase to bank service and credit card fees, $47,000 increase in
property expenses, which includes utilities and rental expenses,
$39,000 increase to insurance expenses, and a $35,000 increase to
office and other expenses, offset with a $161,000 reduction to
professional fees due to the hiring of full time pharmacists, and a
$60,000 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.
10
For the six months ended September 30, 2002, general and
administrative expense increased by approximately $1,408,000, or
53.1%, to approximately $4,058,000 compared to general and
administrative expense of $2,650,000 for the six months ended
September 30, 2001. The increase in general and administrative
expense for the six months ended September 30, 2002 is primarily
attributable to a $1,071,000 increase to payroll expenses, $395,000
increase to bank service and credit card fees, $67,000 increase in
property expenses, which includes utilities and rental expenses,
$47,000 increase to insurance expenses, and a $28,000 increase to
office and other expenses, offset with a $111,000 decrease to
telephone expenses due to a switch in local and long distance carriers
and a $89,000 reduction to professional fees due to the hiring of full
time pharmacists. 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 $2,394,000, or
approximately 166.5%, to approximately $3,832,000 for the quarter
ended September 30, 2002 from approximately $1,438,000 for the quarter
ended September 30, 2001. For the six months ended September 30,
2002, advertising expense increased by approximately $3,854,000, or
138.4%, to approximately $6,639,000 compared to advertising expense of
$2,785,000 for the six months ended September 30, 2001. The
significant increase in advertising expense for the three months and
six months ended September 30, 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 third and fourth quarter of fiscal 2003.
Severance charges
-----------------
Severance charges for the six months ended September 30, 2001 of
$195,000 relates to severance paid to two former executive officers,
the Chief Financial Officer ("CFO") and Chief Operating Officer
("COO"), of the Company. The Company had no comparable charges in the
six months ended September 30, 2002.
Depreciation and amortization expenses
--------------------------------------
Depreciation and amortization expenses decreased by approximately
$4,000, or 4.1%, to approximately $86,000 for the quarter ended
September 30, 2002 from approximately $90,000 for the quarter ended
September 30, 2001. For the six months ended September 30, 2002,
depreciation and amortization expense decreased by approximately
$21,000, or 11.4%, to approximately $167,000 compared to depreciation
and amortization expense of $188,000 for the six months ended
September 30, 2001. The slight decrease to depreciation and
amortization expense for the three months and six months ended
September 30, 2002 can be attributed to the sale of the corporate
office building in the first quarter of fiscal 2002, offset with
depreciation expense related to increased property additions since 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 ("CAFO"). The settlement agreement
requires the Company to pay a civil penalty of $100,000 plus interest,
a reduction from the original $445,000 fine.
Loss on disposal of property and equipment
------------------------------------------
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 decreased by approximately $5,000, or 50.5%, to
approximately $4,000 for the quarter ended September 30, 2002 from
approximately $9,000 for the quarter ended September 30, 2001. For
the six months ended September 30, 2002, interest expense decreased by
approximately $31,000, or 75.5%, to approximately $10,000 compared to
interest expense of $41,000 for the six months ended September 30,
2001. Interest expense may increase in future quarters, due to the
Company utilizing its 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 six
months ended September 30, 2002, the Company established an income tax
provision for approximately $101,000 and $491,000, 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 September 30, 2002 was $1,195,000, as
compared to the $965,000 deficiency at September 30, 2001, an increase
of approximately $2,160,000 from the deficiency at September 30, 2001.
The increase in working capital at September 30, 2002 was primarily
attributable to a significant increase in cash and inventory, offset
with a smaller increase in accounts payable, due to cash flows
generated from operations. Net cash provided by operating activities
was $1,045,000 for the six months ended September 30, 2002 as compared
to net cash used in operating activities of $537,000 for the six
months ended September 20, 2001. Net cash used in investing
activities was $916,000 for the six months ended September 30, 2002 as
compared to net cash provided by investing activities of $1,892,000
for the six months ended September 30, 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 $218,000 for the
six months ended September 30, 2002 as compared to net cash used in
financing activities of $1,647,000 for the six months ended September
30, 2001. This increase relates directly to the satisfaction of the
mortgage on the corporate office building in fiscal 2002 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% (5.75% at October 31,
2002). 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 22, 2002, the Company executed an agreement which increased
the line of credit to $1,000,000, effective through June 22, 2003.
The new line of credit is secured by substantially all of our assets,
interest is at the bank's base lending rate plus 1% (4.75% at October
31, 2002), and contains various financial and operating covenants.
During the quarter ended September 30, 2002, the Company paid down the
$141,000 balance of the line of credit. At September 30, 2002, there
was no balance outstanding under the line of credit agreement.
12
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 September 30, 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 $150,000 planned for capital expenditure commitments for
various plant and computer equipment for the third and fourth quarters
of fiscal 2003, which will be funded through cash from operations.
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 six months ended September 30, 2002 the Company had net
income of $1,107,000, and the Company has sustained profitability for
five 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
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 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.
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 September 30, 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
September 30, 2002, Commission File No. 000-28827).
(b) Reports on Form 8-K during the fiscal quarter ended September
30, 2002
None
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PETMED EXPRESS, INC.
(The "Registrant")
Date: November 5, 2002
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)
15
______________________________________________________________________
______________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
PETMED EXPRESS, INC.
_______________________
FORM 10-QSB QUARTERLY REPORT
FOR THE QUARTER ENDED:
SEPTEMBER 30, 2002
_______________________
EXHIBITS
_______________________
______________________________________________________________________
______________________________________________________________________
EXHIBIT INDEX
-------------
Number of Pages Incorporated
Exhibit in Original By
Number Description 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