PETMED EXPRESS, INC. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the quarterly period endedDecember 31, 2022 and our Annual Report on Form 10-K for the year endedMarch 31, 2022 . Certain information in this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the words "believes," "intends," "expects," "may," "will," "should," "plans," "projects," "contemplates," "intends," "budgets," "predicts," "estimates," "anticipates," or similar expressions. These statements are based on our beliefs, as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year endedMarch 31, 2022 under the heading "Risk Factors." 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 on Form 10-Q. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
When used in this Quarterly Report on Form 10-Q, "
Executive Summary
PetMed Express was incorporated in the state ofFlorida inJanuary 1996 . Our common stock is traded on the NASDAQ Global Select Market under the symbol "PETS". We began selling pet medications and other pet health products inSeptember 1996 . InMarch 2010 we started offering for sale additional pet supplies on our website, and these additional items are drop shipped to customers by third party vendors. Presently, our product line includes approximately 4,350 SKUs of the most popular pet medications, health products, and supplies for dogs, cats, and horses. We market our products through advertising and promotional campaigns which aim to increase the recognition of the "PetMeds®" brand name, increase traffic on our website at www.petmeds.com, acquire new customers, and maximize repeat purchases. Approximately 87% of all sales were generated via the Internet for the quarter endedDecember 31, 2022 , compared to 84% for the quarter endedDecember 31, 2021 . Our sales consist of products sold mainly to retail consumers. The average purchase was approximately$90 and$89 for the quarters endedDecember 31, 2022 and 2021, respectively, and approximately$93 and$92 for the nine months endedDecember 31, 2022 and 2021, respectively.
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. Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . On an ongoing basis we re-evaluate our judgments and estimates including those related to product returns, bad debts, inventories, and income taxes. We base our estimates and judgments on our historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. Our estimates are guided by observing the following critical accounting policies.
Revenue recognition
We account for revenue under ASC Topic 606 ("Revenue from Contracts with
Customers") and generate revenue by selling pet medication products and pet
supplies mainly to retail customers. Certain pet supplies offered on our website
are drop shipped to customers. We considers ourself the principal in the
arrangement because we control 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
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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 we
have 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 we considers ourself 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 our
sales are paid by credit cards and we usually receive the cash settlement in two
to three banking days. Credit card sales minimize the accounts receivable
balances relative to sales.
We maintain an allowance for doubtful accounts for losses that we estimate will
arise from customers' inability to make required payments, arising from either
credit card chargebacks or insufficient funds checks. We determine our estimates
of the uncollectibility of accounts receivable by analyzing historical and
current bad debts and economic trends. The allowance for doubtful accounts was
approximately $40 thousand at December 31, 2022 , compared to $39 thousand at
March 31, 2022 .
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. We write down our
inventory for estimated obsolescence. The inventory reserve was approximately
$56 thousand at December 31, 2022 compared to $81 thousand at March 31, 2022 .
Advertising
Our 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
We account 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 our 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.
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--------------------------------------------------------------------------------Results of Operations
The following should be read in conjunction with our 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 our condensed consolidated statements of income:
Three Months Ended Nine Months Ended
December 31, December 31,
2022 2021 2022 2021
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 74.1 70.8 72.4 71.7
Gross profit 25.9 29.2 27.6 28.3
Operating expenses:
General and administrative 17.8 12.4 15.8 10.9
Advertising 7.9 7.1 7.6 7.5
Depreciation 1.6 1.2 1.3 1.0
Total operating expenses 27.3 20.7 24.7 19.4
Income (loss) from operations (1.4) 8.5 2.9 8.9
Total other income 1.6 0.6 1.0 0.5
Income before provision for income taxes 0.2 9.1 3.9 9.4
Provision for income taxes 0.4 2.1 1.2 2.2
Net income (loss) (0.2) % 7.0 % 2.7 % 7.2 %
Non-GAAP Financial Measures
Adjusted EBITDA
To provide investors and the market with additional information regarding our
financial results, we have disclosed (see below) adjusted EBITDA, a non-GAAP
financial measure that we calculate as net income excluding share-based
compensation expense; depreciation and amortization; income tax provision;
interest income (expense); and other non-operational expenses. We have provided
reconciliations below of adjusted EBITDA to net income, the most directly
comparable GAAP financial measures.
We have included adjusted EBITDA, herein, because it is a key measure used by
our management and Board of Directors to evaluate our operating performance,
generate future operating plans, and make strategic decisions regarding the
allocation of capital. In particular, the exclusion of certain expenses in
calculating adjusted EBITDA facilitates operating performance comparability
across reporting periods by removing the effect of non-cash expenses and other
expenses. Accordingly, we believe that adjusted EBITDA provides useful
information to investors and others in understanding and evaluating our
operating results in the same manner as our management and Board of Directors.
We believe it is useful to exclude non-cash charges, such as share-based
compensation expense, depreciation and amortization from our adjusted EBITDA
because the amount of such expenses in any specific period may not directly
correlate to the underlying performance of our business operations. We believe
it is useful to exclude income tax provision and interest income (expense), as
neither are components of our core business operations. We also believe that it
is useful to exclude other expenses, including the investment banking fee
related to the Vetster partnership, acquisition costs related
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to PetCareRx, employee severance and estimated state sales tax accrual as these
items are not indicative of our ongoing operations. Adjusted EBITDA has
limitations as a financial measure, and these non-GAAP measures should not be
considered in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
•Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized may have to be replaced in the future and adjusted
EBITDA does not reflect capital expenditure requirements for such replacements
or for new capital expenditures;
•Adjusted EBITDA does not reflect share-based compensation. Share-based compensation has been, and will continue to be for the foreseeable future, a material recurring expense in our business and an important part of our compensation strategy;
•Adjusted EBITDA does not reflect interest income (expense), net; or changes in, or cash requirements for, our working capital;
•Adjusted EBITDA does not reflect transaction related costs and other items which are either not representative of our underlying operations or are incremental costs that result from an actual or planned transaction and include litigation matters, integration consulting fees, internal salaries and wages (to the extent the individuals are assigned full-time to integration and transformation activities) and certain costs related to integrating and converging IT systems;
•Adjusted EBITDA does not reflect certain non-operating expenses including the employee severance which reduces cash available to us;
•Adjusted EBITDA does not reflect certain expenses including the estimated state sales tax accrual which reduces cash available to us.
•Other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces the measures usefulness as comparative measures.
Because of these and other limitations, adjusted EBITDA should only be considered as supplemental to, and alongside with other GAAP based financial performance measures, including various cash flow metrics, net income, net margin, and our other GAAP results.
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--------------------------------------------------------------------------------The following table presents a reconciliation of net income, the most directly comparable GAAP measure to adjusted EBITDA for each of the periods indicated:
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