PETMED EXPRESS, INC. Executive Summary
The Company markets its products through advertising and promotional campaigns
which aim to increase the recognition of the "PetMeds®" brand name, increase
traffic on its website at www.petmeds.com, acquire new customers, and maximize
repeat purchases. Approximately 86% of all sales were generated via the Internet
for the quarter ended
Critical Accounting Policies
Our discussion and analysis of our financial condition and the results of our
operations contained herein 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
Revenue recognition
The Company generates revenue by selling pet medication products and pet supplies mainly to retail customers. Certain pet supplies offered on the Company's website are drop shipped to customers. The Company considers itself the principal in the arrangement because the Company controls the specified good before it is transferred to the customer. Revenue contracts contain one performance obligation, which is delivery of the product; customer care and support is deemed not to be a material right to the contract. The transaction price is adjusted at the date of sale for any applicable sales discounts and an estimate of product returns, which are estimated based on historical patterns, however this is not considered a key judgment. There are no amounts excluded from the variable consideration. Revenue is recognized when control transfers to the customer at the point in time in which the shipment of the product occurs. This key judgment is determined as the shipping point, which represents the point in time where the Company has a present right to payment, title has transferred to the customer, and the customer has assumed the risks and rewards of ownership.
Outbound shipping and handling fees are an accounting policy election and are included in sales as the Company considers itself the principal in the arrangement given responsibility for supplier selection and discretion over pricing. Shipping costs associated with outbound freight after control over a product has transferred to a customer are an accounting policy election and are accounted for as fulfillment costs and are included in cost of sales. Virtually all of the Company's sales are paid by credit cards and the Company usually receives the cash settlement in two to three banking days. Credit card sales minimize the accounts receivable balances relative to sales.
The Company maintains an allowance for doubtful accounts for losses that the
Company estimates will arise from customers' inability to make required
payments, arising from either credit card chargebacks or insufficient funds
checks. The Company determines its estimates of the un-collectability of
accounts receivable by analyzing historical and current bad debts and economic
trends. The allowance for doubtful accounts was approximately
9
--------------------------------------------------------------------------------Valuation of inventory
Inventories consist of prescription and non-prescription pet medications and pet
supplies that are available for sale and are priced at the lower of cost or net
realizable value using a weighted average cost method. The Company writes down
its inventory for estimated obsolescence. The inventory reserve was
approximately
Advertising
The Company's advertising expense consists primarily of Internet marketing, direct mail/print, and television advertising. Internet costs are expensed in the month incurred and direct mail/print advertising costs are expensed when the related brochures and postcards are produced, distributed, or superseded. Television advertising costs are expensed in the month advertisements are televised.
Accounting for income taxes
The Company accounts for income taxes under the provisions of ASC Topic 740 ("Accounting for Income Taxes"), which generally requires recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the Company's Condensed Consolidated Financial Statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting carrying values and the tax bases of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse.
Results of Operations
The following should be read in conjunction with the Company's Condensed Consolidated Financial Statements and the related notes thereto included elsewhere herein. The following table sets forth, as a percentage of sales, certain operating data appearing in the Company's Condensed Consolidated Statements of Income:
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