PETMED EXPRESS INC

Previous wording

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 ended December 31, 2023, and our 2023 Form 10-K/A.

Current wording

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 ended June 30, 2024, and our 2024 Form 10-K.

Previous wording

Certain information in this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. 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 2023 Form 10-K/A 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.

Current wording

Certain information in this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. 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 2024 Form 10-K 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.

Previous wording

PetMed Express, Inc. and subsidiaries, d/b/a PetMeds®, is a leading nationwide direct-to-consumer pet pharmacy and online provider of prescription and non-prescription medications, food, supplements, supplies and vet services for dogs, cats and horses. PetMeds markets and sells directly to consumers through its websites, toll-free numbers, and mobile applications. We offer consumers an attractive option for obtaining pet medications, foods, and supplies in terms of convenience, price, speed of delivery, and valued customer service.

Current wording

PetMed Express, Inc. and subsidiaries, d/b/a PetMeds®, is a leading nationwide direct-to-consumer pet pharmacy and online provider of prescription and non-prescription medications, foods, supplements, supplies and vet services for dogs, cats and horses. PetMeds markets and sells directly to consumers through its websites, toll-free numbers, and mobile application. We offer consumers an attractive alternative for obtaining pet medications, foods, and supplies in terms of convenience, price, speed of delivery, and valued customer service.

Previous wording

Founded in 1996, our executive headquarters offices are located at 420 South Congress Avenue, Delray Beach, Florida 33445, and our telephone number is (561) 526-4444. We have a March 31 fiscal year end.

Current wording

Founded in 1996, our executive headquarters offices are currently located at 420 South Congress Avenue, Delray Beach, Florida 33445, and our telephone number is (561) 526-4444. We have a March 31 fiscal year end.

Previous wording

Presently, our product line includes approximately 15,000 of the most popular pet medications, health products, food and supplies for dogs, cats, and horses. Approximately 9,000 of these items were part of the April 2023 acquisition of PetCareRx.

Current wording

Presently, our product line includes approximately 15,000 of the most popular pet medications, health products, food and supplies for dogs, cats, and horses.

Previous wording

We market our products through national advertising campaigns and social media which aim to increase the recognition of the “PetMeds®” brand name, increase traffic on our websites atwww.petmeds.com andwww.petcarerx.com, acquire new customers, and maximize repeat purchases. Our sales consist of products sold mainly to retail consumers. The average purchase was approximately $93 for the quarter ended December 31, 2023, approximately $90 for the quarter ended December 31, 2022, approximately $95 for the nine months ended December 31, 2023 and approximately $93 for the nine months ended December 31, 2022.

Current wording

We market our products through national advertising campaigns which aim to increase the recognition of the “PetMeds®” brand name, and "PetCareRx" brand name, increase traffic on our websites atwww.petmeds.com andwww.petcarerx.com, acquire new customers, and maximize repeat purchases. Our sales consist of products sold mainly to retail consumers. The average purchase was approximately $97 for the quarters ended June 30, 2024, and June 30, 2023.

Previous wording

As described in the Note 1 of “Notes to Condensed Consolidated Financial Statements,” we have restated our consolidated financial statements and Item 2. Management’s Discussion of Financial Condition and Results of Operations for the three and nine months ended December 31, 2022.

Current wording

As described in the Note 1 of “Notes to Condensed Consolidated Financial Statements,” we have restated our consolidated financial statements and Item 2. Management’s Discussion of Financial Condition and Results of Operations for the three months ended June 30, 2023.

Previous wording

We account for revenue under Accounting Standards Codification ("ASC") Topic 606 ("Revenue from Contracts with Customers"). The Company generates revenue by selling prescription and non-prescription pet medication products, pet food, supplements, supplies, membership fees, and veterinary services. Certain pet supplies offered on our website are drop shipped to customers. We consider 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 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.

Current wording

We account for revenue under Accounting Standards Codification ("ASC") Topic 606 ("Revenue from Contracts with Customers"). The Company generates revenue by selling prescription and non-prescription pet medication products, pet food, supplements, supplies, membership fees, and veterinary services. Certain pet supplies offered on our websites are drop shipped to customers. We consider 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 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.

Previous wording

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 in compliance with the provisions of ASC Topic 326 ("Financial Instruments - Credit Losses"). The allowance for doubtful accounts was approximately $39 thousand at December 31, 2023, compared to $35 thousand at March 31, 2023.

Current wording

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 in compliance with the provisions of ASC Topic 326 ("Financial Instruments - Credit Losses"). The allowance for doubtful accounts was approximately $109 thousand at June 30, 2024, compared to $273 thousand at March 31, 2024.

Previous wording

The following should be read in conjunction with our unaudited 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 unaudited Condensed Consolidated Statements of (Loss) Income:

Current wording

The following should be read in conjunction with our unaudited 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 unaudited Condensed Consolidated Statements of Income (Loss):

Previous wording

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 non-operational expenses, including the investment banking fee related to the Vetster partnership, acquisition costs related 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:

Current wording

We believe it is useful to exclude non-cash charges, such as net 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 non-operational expenses, including acquisition costs related 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:

Previous wording

•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;

Current wording

•Adjusted EBITDA does not reflect net 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;

Previous wording

The following tables present a reconciliation of net income, the most directly comparable GAAP measure, to adjusted EBITDA for each of the periods indicated:

Current wording

The following tables present a reconciliation of net income (loss), the most directly comparable GAAP measure, to adjusted EBITDA for each of the periods indicated:

Previous wording

(1) Included in interest (income) expense is $423 thousand of interest expense related to the sales tax liability and $559 thousand of interest income for the three months ended December 31, 2023 and $409 thousand of interest expense related to the sales tax liability and $708 thousand of interest income for the three months ended December 31, 2022.

Current wording

(2) Included in interest income, net is $410 thousand of interest expense related to the sales tax liability and $505 thousand of interest income for the three months ended June 30, 2024. This compares to $426 thousand of interest expense related to the sales tax liability and $620 thousand of interest income for the three months ended June 30, 2023.

Previous wording

Three Months Ended December 31, 2023 Compared With Three Months Ended December 31, 2022 and Nine Months Ended December 31, 2023 Compared With Nine Months Ended December 31, 2022

Current wording

Three Months Ended June 30, 2024 Compared With Three Months Ended June 30, 2023

Previous wording

New order sales decreased by approximately $0.4 million or 6.6%, to approximately $5.2 millionfor the quarter ended December 31, 2023, compared to $5.6 millionfor the quarter ended December 31, 2022. The decrease in new order sales is primarily due to one time promotions in the same quarter last year that we did not repeat, partially offset by incremental new order sales from the integration of PetCareRx.

Current wording

New order sales decreased by approximately $2.2 million or 28.4%, to approximately $5.6 millionfor the quarter ended June 30, 2024, compared to $7.8 millionfor the quarter ended June 30, 2023. The decrease in new order sales is primarily due to the combination of lower gross media spend resulting in a decrease in new customers acquired.

Previous wording

We acquired approximately 67,000 new customers for the quarter ended December 31, 2023 compared to approximately 72,000 new customers for the quarter ended December 31, 2022. We acquired approximately 229,000 new customers for the nine months ended December 31, 2023 compared to approximately 202,000 new customers for the nine months ended December 31, 2022. The following tables illustrates sales by various sales classifications:

Current wording

We acquired approximately 75,000 new customers for the quarter ended June 30, 2024 compared to approximately 86,000 new customers for the quarter ended June 30, 2023. The following tables illustrates sales by various sales classifications:

Previous wording

We remain encouraged by the adoption of our AutoShip program and have seen an increasingly positive trend since we launched this program. For example, our quarterly AutoShip percentage was 52.2% of net sales for the most recent quarter ended December 31, 2023, up from 42.3% of net sales for the same period last year and up from 51.0% of net sales sequentially in the prior quarter.

Current wording

AutoShip & Save subscription sales as a percentage of total sales was 52.5% of net sales for the most recent quarter ended June 30, 2024, up from 48.7% of net sales for the same period last year and down from 53.5% of net sales sequentially in the prior quarter.

Previous wording

Cost of sales increased by approximately$3.8 million, or 8.7%, to approximately $47.4 million for the quarter ended December 31, 2023, from approximately $43.6 million for the quarter ended December 31, 2022. Cost of sales, as a percentage of sales, was 72.6% for the quarter ended December 31, 2023, compared to 74.1% for the quarter ended December 31, 2022. Cost of sales increased by approximately $13.3 million, or 9.4%, to approximately $154.1 million for the nine months ended December 31, 2023, from approximately $140.8 million for the nine months ended December 31, 2022. Cost of sales, as a percentage of sales, was 71.8% for the nine months ended December 31, 2023, and 72.5% for the the nine months ended December 31, 2022. The cost of sales increased for the three and nine months ended December 31, 2023 compared to the three and nine months ended December 31, 2022 was primarily due to higher sales over the same period. The cost of sales, as a percentage of sales, decreased for the three and nine months ended December 31, 2023 compared to the three and nine months ended December 31, 2022 primarily due to lower promotional activity in the most recent period and higher profit margins obtained by PetCareRx driven by membership fees.

Current wording

Cost of sales decreased by approximately$5.7 million, or 10.3%, to approximately $50.0 million for the quarter ended June 30, 2024, from approximately $55.7 million for the quarter ended June 30, 2023. Cost of sales, as a percentage of sales, was 73.6% for the quarter ended June 30, 2024, compared to 71.2% for the quarter ended June 30, 2023. The cost of sales, as a percentage of sales, increased for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily due to an increase in discount activity in the most recent period.

Previous wording

Advertising expenses increased by approximately $1.1 million, or 24.2%, to approximately $5.8 million for the quarter ended December 31, 2023, from approximately $4.6 million for the quarter ended December 31, 2022. The increase for the quarter can be mainly attributed to media spend related to PetCareRx. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $86 for the quarter ended December 31, 2023 and includes PetCareRx compared to $64 for the quarter ended December 31, 2022. The increase to customer acquisition costs for the quarter ended December 31, 2023, was due to a less efficient variable marketing spend. The advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, spending, and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future sales, whereas a less favorable advertising environment may negatively impact future sales. As a percentage of sales, advertising expense was 8.8% and 7.9% for the quarters ended December 31, 2023 and 2022, respectively. The advertising percentage may fluctuate quarter to quarter due to seasonality and advertising availability.

Current wording

Advertising expenses decreased by approximately $0.3 million, or 3.8%, to approximately $7.0 million for the quarter ended June 30, 2024, from approximately $7.3 million for the quarter ended June 30, 2023. The decrease for the quarter can be mainly attributed to lower gross media spend partially offset by lower marketing funded by manufacturers. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $93 for the quarter ended June 30, 2024 compared to $84 for the quarter ended June 30, 2023. The increase to customer acquisition costs for the quarter ended June 30, 2024, was due to a less efficient variable marketing spend. The advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, spending, and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future sales, whereas a less favorable advertising environment may negatively impact future sales. As a percentage of sales, advertising expense was 10.3% and 9.3% for the quarters ended June 30, 2024 and 2023, respectively. The advertising percentage may fluctuate quarter to quarter due to seasonality and advertising availability.

Previous wording

Other income decreased to approximately $0.4 million for the quarter ended December 31, 2023 compared to approximately $0.6 million for the quarter ended December 31, 2022. Other income increased to approximately $1.5 million for the nine months ended December 31, 2023 compared to approximately $0.7 million for the nine months ended December 31, 2022. The decrease to other income for the quarter was due to slightly lower invested balances. The increase to other income for the nine months was primarily related to additional interest income as a result of higher interest rates, as well as increased rental income from PetCareRx. Interest income may decrease in the future based on several factors, including utilization of our cash balances on future investments or partnerships, on our operating activities, towards quarterly dividend payments, or on our share repurchase plan, which has approximately $28.7 million remaining as of December 31, 2023. Additionally, interest income could increase or decrease if the current interest rate environment changes.

Current wording

Other income decreased to approximately $0.3 million for the quarter ended June 30, 2024 compared to approximately $0.7 million for the quarter ended June 30, 2023. The decrease to other income for the quarter was due to slightly lower invested balances, and a one time payment received in prior year. Interest income may decrease in the future based on several factors, including utilization of our cash balances on future investments or partnerships, or on our operating activities. Additionally, interest income could increase or decrease if the current interest rate environment changes.

Previous wording

For the quarters ended December 31, 2023 and 2022, the Company recorded an income tax benefit of approximately $0.6 million and a tax provision of approximately $1.0 thousand, respectively, and for the nine months ended December 31, 2023 and 2022, the Company recorded an income tax benefit of approximately $0.3 million and a tax provision of approximately $1.6 million, respectively. The decrease in the tax provision for the three and nine months ended December 31, 2023 is related to the gain on settlement of sales tax liability cases. The effective tax rate for the quarter ended December 31, 2023 was approximately 23.4%, compared to approximately (0.5)% for the quarter ended December 31, 2022, and the effective tax rate for the nine months ended December 31, 2023 was approximately 12.4% compared to approximately 23.4% for the nine months ended December 31, 2022. The decrease in the effective tax rate for the three and nine months ended December 31, 2023 is related to the deduction of permanent differences from the gain on settlement of sales tax liability cases.

Current wording

For the quarters ended June 30, 2024 and 2023, the Company recorded an income tax provision of approximately $1.0 million and a tax benefit of approximately $0.3 million, respectively. The increase in the tax provision for the three months ended June 30, 2024 is related to the cancellation of the former CEO’s performance stock units resulting in additional $8.7 million of income during the quarter. The effective tax rate for the quarter ended June 30, 2024 was approximately 20.3%, compared to approximately 20.4% for the quarter ended June 30, 2023.

Previous wording

Our working capital at December 31, 2023 and March 31, 2023 was $23.1 million and $72.9 million, respectively. The $49.8 million decrease in working capital was primarily attributable to a decrease in cash used to fund the $36.1 million PetCareRx acquisition, and a $12.4 million increase in inventory in part related to the acquisition of PetCareRx. Net cash used in operating activities was $2.8 million for the nine months ended December 31, 2023, compared to cash provided by operating activities of $18.1 million for the nine months ended December 31, 2022. This change is primarily due to decreases in net income and accounts payable and an increase in inventory in the nine months ended December 31, 2023 compared to the same period in the prior year. Net cash used in investing activities was $39.4 million for the nine months ended December 31, 2023, compared to $8.3 million used in investing activities for the nine months ended December 31, 2022. The change in net cash used in investing activities is related to the PetCareRx acquisition, an additional investment in Vetster, and increased property and equipment acquired during the nine months ended December 31, 2023. Net cash used in financing activities was $12.4 million and $18.4 million for the nine months ended December 31, 2023 and the nine months ended December 31, 2022, respectively, due to the payment of an aggregate $0.60 per share dividend for the nine months ended December 31, 2023, and an aggregate $0.90 per share dividend for the nine months ended December 31, 2022.

Current wording

Our working capital at June 30, 2024 and March 31, 2024 was $19.3 million and $21.5 million, respectively. The $2.2 million decrease in working capital was attributable to the $13.8 million decrease in current liabilities, primarily accounts payable, offset by the $16.0 million decrease in current assets, primarily cash and inventory. Net cash used in operating activities was $8.5 million for the three months ended June 30, 2024, compared to cash provided by operating activities of $0.6 million for the three months ended June 30, 2023. The $9.1 million decrease in cash provided by operating activities is due to the $4.9 million increase in net income reduced by $9.2 million of non-cash operating adjustments and offset by the $4.8 million increase in current liabilities net of current assets excluding cash. Net cash used in investing activities was $0.7 million for the three months ended June 30, 2024, compared to $37.0 million used in investing activities for the three months ended June 30, 2023. The change in net cash used in investing activities is primarily related to the PetCareRx acquisition and an additional investment in Vetster in the prior year. Net cash used in financing activities was $0.1 million and $6.1 million for the three months ended June 30, 2024 and the three months ended June 30, 2023, respectively, due to the payment of an aggregate $0.00 per share dividend for the three months ended June 30, 2024, and an aggregate $0.30 per share dividend for the three months ended June 30, 2023.

Previous wording

As of December 31, 2023, we had approximately $28.7 million remaining under our share repurchase plan. On February 1, 2024, our Board of Directors elected to suspend the quarterly dividend indefinitely. This move is intended to focus use of the Company’s existing cash flow on growth initiatives and other, higher return initiatives. The board reviews and discusses the capital allocation needs of the Company on a quarterly basis and as part of that review, has determined to suspend the dividend indefinitely.The declaration and payment of future dividends is discretionary and will be subject to a determination by the Board of Directors.

Current wording

On October 26, 2023, our Board of Directors elected to suspend the quarterly dividend indefinitely. This move is intended to focus use of the Company’s existing cash flow on growth initiatives and other, higher return initiatives. The board reviews and discusses the capital allocation needs of the Company on a quarterly basis and as part of that review, has determined to suspend the dividend indefinitely.The declaration and payment of future dividends is discretionary and will be subject to a determination by the Board of Directors.

Previous wording

As of December 31, 2023, we had $1.6 million in outstanding lease commitments assumed in the PetCarerRx acquisition for the leases on two buildings. Other than the foregoing leases, we are not currently bound by any material long-term or short-term commitments for the purchase or lease of capital expenditures. Any material amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately provide for any future increase in our business. To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future. Our primary source of working capital is cash from operations. We presently have no alternative sources of working capital and have no commitments.

Current wording

As of June 30, 2024, we had $1.3 million in outstanding lease commitments assumed in the PetCarerRx acquisition for the leases on two buildings. Other than the foregoing leases, we are not currently bound by any material long-term or short-term commitments for the purchase or lease of capital expenditures. Any material amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately provide for any future increase in our business. To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future. Our primary source of working capital is cash from operations. We presently have no alternative sources of working capital and have no commitments.