[PART I - FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This section provides a comprehensive overview of the company's financial performance and position, including condensed financial statements and management's analysis [ITEM 1. CONDENSED FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20CONDENSED%20FINANCIAL%20STATEMENTS) This section presents the unaudited condensed consolidated financial statements for Q2 2023, including balance sheets, income statements, cash flows, and detailed notes on accounting policies and acquisition impacts [Condensed Consolidated Balance Sheets](index=4&type=section&id=CONDENSED%20CONSOLIDATED%20BALANCE%20SHEETS) This section presents the unaudited condensed consolidated balance sheets, detailing assets, liabilities, and equity as of June 30, 2023, and March 31, 2023 Condensed Consolidated Balance Sheets (In thousands) | Item | June 30, 2023 | March 31, 2023 | Change ($) | Change (%) | | :--------------------------------------- | :------------ | :------------- | :--------- | :--------- | | Cash and cash equivalents | $61,534 | $104,086 | $(42,552) | (40.9)% | | Inventories - finished goods | $32,324 | $19,023 | $13,301 | 69.9% | | Total current assets | $105,830 | $131,451 | $(25,621) | (19.5)% | | Goodwill | $20,735 | $– | $20,735 | N/A | | Total assets | $180,737 | $164,117 | $16,620 | 10.1% | | Total current liabilities | $57,322 | $36,497 | $20,825 | 57.1% | | Total liabilities | $62,415 | $40,322 | $22,093 | 54.8% | | Retained earnings | $98,255 | $105,488 | $(7,233) | (6.9)% | | Total shareholders' equity | $118,322 | $123,795 | $(5,473) | (4.4)% | - The significant increase in **goodwill to $20,735 thousand** as of June 30, 2023, from zero at March 31, 2023, is a direct result of the PetCareRx acquisition[11](index=11&type=chunk) [Condensed Consolidated Statements of (Loss) Income](index=6&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20%28LOSS%29%20INCOME) This section presents the unaudited condensed consolidated statements of (loss) income for the three months ended June 30, 2023 and 2022 Condensed Consolidated Statements of (Loss) Income (In thousands, unaudited) | Item | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | | :--------------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Sales | $78,244 | $70,187 | $8,057 | 11.5% | | Cost of sales | $55,718 | $50,244 | $5,474 | 10.9% | | Gross profit | $22,526 | $19,943 | $2,583 | 13.0% | | Total operating expenses | $24,654 | $16,453 | $8,201 | 49.8% | | (Loss) income from operations | $(2,128) | $3,490 | $(5,618) | (161.0)% | | Net (loss) income | $(887) | $2,775 | $(3,662) | (132.0)% | | Basic Net (loss) income per common share | $(0.04) | $0.14 | $(0.18) | (128.6)% | | Diluted Net (loss) income per common share | $(0.04) | $0.14 | $(0.18) | (128.6)% | - Despite an **11.5% increase in sales**, the company reported a **net loss of $(887) thousand** for Q2 2023, a significant decline from $2,775 thousand net income in Q2 2022, primarily due to a **49.8% increase in total operating expenses**[14](index=14&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) This section presents the unaudited condensed consolidated statements of cash flows for the three months ended June 30, 2023 and 2022 Condensed Consolidated Statements of Cash Flows (In thousands, unaudited) | Item | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | | :--------------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Net cash provided by operating activities | $562 | $6,380 | $(5,818) | (91.2)% | | Net cash used in investing activities | $(37,012) | $(5,982) | $(31,030) | 518.7% | | Net cash used in financing activities | $(6,102) | $(6,064) | $(38) | 0.6% | | Net decrease in cash and cash equivalents | $(42,552) | $(5,666) | $(36,886) | 651.0% | | Cash and cash equivalents, at end of period | $61,534 | $105,414 | $(43,880) | (41.6)% | - The substantial increase in **cash used in investing activities to $(37,012) thousand** in Q2 2023, primarily due to the PetCareRx acquisition, led to a significant net decrease in cash and cash equivalents[16](index=16&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=NOTES%20TO%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section provides detailed notes explaining significant accounting policies, acquisition impacts, revenue recognition, and other financial disclosures [Note 1: Summary of Significant Accounting Policies](index=8&type=section&id=Note%201%3A%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the company's key accounting policies, including business combinations, goodwill, and intangible asset treatment - PetMed Express operates as a direct-to-consumer pet pharmacy and online provider of various pet products and services, with its fiscal year ending on March 31[18](index=18&type=chunk)[19](index=19&type=chunk) - The company accounts for business combinations using the acquisition method, allocating the purchase price to fair value of acquired assets and assumed liabilities, with any excess recorded as goodwill[21](index=21&type=chunk) - Goodwill is not amortized but tested for impairment annually on January 1, or more frequently if circumstances indicate impairment, and definite-lived intangible assets are amortized over 3 to 7 years[26](index=26&type=chunk)[27](index=27&type=chunk) [Note 2: Revenue Recognition](index=9&type=section&id=Note%202%3A%20Revenue%20Recognition) This note details the company's revenue recognition policies for product sales and membership fees, including a breakdown by category - Revenue is generated from selling prescription and non-prescription pet products, food, supplements, supplies, and veterinary services, with product revenue recognized at the point of shipment when control transfers to the customer[31](index=31&type=chunk)[32](index=32&type=chunk) - Membership fees, including PetPlus and partner programs, provide discounted pricing, free shipping, and telehealth services, with revenue recognized ratably over the membership term, typically one year for PetPlus[34](index=34&type=chunk)[96](index=96&type=chunk) Revenue Breakdown (In thousands) for Three Months Ended June 30 | Revenue Category | 2023 ($) | 2023 (%) | 2022 ($) | 2022 (%) | $ Variance | % Variance | | :--------------- | :------- | :------- | :------- | :------- | :--------- | :--------- | | Reorder sales | 68,038 | 87.0% | 63,339 | 90.2% | 4,699 | 7.4% | | New order sales | 7,820 | 10.0% | 6,848 | 9.8% | 972 | 14.2% | | Membership fees | 2,386 | 3.0% | – | –% | 2,386 | –% | | Total net sales | 78,244 | 100.0% | 70,187 | 100.0% | 8,057 | 11.5% | [Note 3: Acquisition](index=10&type=section&id=Note%203%3A%20Acquisition) This note provides details on the PetCareRx acquisition, including the purchase price, strategic rationale, and preliminary purchase price allocation - On April 3, 2023, the company acquired **100% of PetCareRx, Inc. for $36.1 million in cash**, significantly expanding its product catalog, especially non-medication products like food, and increasing distribution capabilities[37](index=37&type=chunk)[38](index=38&type=chunk)[39](index=39&type=chunk)[104](index=104&type=chunk) - The acquisition resulted in the recognition of approximately **$20.7 million in preliminary goodwill**, representing synergies from an increased customer base, vendor relationships, a broader product catalog, and an assembled workforce[40](index=40&type=chunk) Purchase Price Allocation for PetCareRx Acquisition (In thousands) | Asset/Liability | Amount | | :--------------------------------------- | :----- | | Cash and cash equivalents | $220 | | Accounts receivable, net | $125 | | Other receivables | $506 | | Inventory | $3,116 | | Other current assets | $835 | | Property and equipment | $1,065 | | Deferred tax assets | $6,192 | | Goodwill | $20,735 | | Intangible assets, net | $12,300 | | Right of use assets | $2,220 | | **Total assets** | **$47,394** | | Accounts payable | $5,713 | | Accrued liabilities | $131 | | Deferred revenue | $2,993 | | Other current liabilities | $206 | | Lease liabilities | $2,272 | | **Total liabilities** | **$11,315** | | **Total purchase consideration** | **$36,079** | [Note 4: Net (Loss) Income Per Share](index=13&type=section&id=Note%204%3A%20Net%20%28Loss%29%20Income%20Per%20Share) This note presents the calculation of basic and diluted net (loss) income per common share, including anti-dilutive exclusions Net (Loss) Income Per Common Share (In thousands, except per share amounts) | Item | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--------------------------------------- | :------------------------------- | :------------------------------- | | Net (loss) income | $(887) | $2,775 | | Weighted average common shares outstanding (basic) | 20,333 | 20,208 | | Shares used in diluted computation | 20,333 | 20,291 | | Basic Net (loss) income per common share | $(0.04) | $0.14 | | Diluted Net (loss) income per common share | $(0.04) | $0.14 | - For the three months ended June 30, 2023, **418,386 shares** issuable upon vesting of restricted stock and **10,125 shares** issuable upon conversion of preferred shares were excluded from diluted EPS computation due to their anti-dilutive effect[49](index=49&type=chunk) [Note 5: Stock-Based Compensation](index=14&type=section&id=Note%205%3A%20Stock-Based%20Compensation) This note details stock-based compensation expense, unrecognized costs, and recent RSU and PSU grants to executives Stock-Based Compensation Expense (In millions) | Period | Compensation Expense | | :------------------------------- | :------------------- | | Three Months Ended June 30, 2023 | $1.8 | | Three Months Ended June 30, 2022 | $1.5 | - As of June 30, 2023, there was **$9.0 million of unrecognized compensation cost** related to non-vested restricted stock awards, expected to be recognized over the next one to three years[54](index=54&type=chunk) - In June 2023, the CFO was granted **11,750 RSUs and 8,000 PSUs**, with PSU vesting tied to the Company's Total Shareholder Return (TSR) relative to the S&P 600 Specialty Retail Index over a three-year performance period[53](index=53&type=chunk)[57](index=57&type=chunk) [Note 6: Fair Value](index=17&type=section&id=Note%206%3A%20Fair%20Value) This note defines fair value measurement and categorizes the company's cash and cash equivalents within the fair value hierarchy - The company's cash and cash equivalents, totaling **$61.5 million** at June 30, 2023, are primarily invested in money market funds and classified within Level 1 of the fair value hierarchy[64](index=64&type=chunk) - Fair value is defined as an exit price, determined based on assumptions market participants would use, and categorized into a three-tier hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[63](index=63&type=chunk) [Note 7: Intangible and Other Assets, Net](index=17&type=section&id=Note%207%3A%20Intangible%20and%20Other%20Assets%2C%20Net) This note provides a breakdown of intangible and other assets, including those acquired from PetCareRx, and related amortization expense Intangible and Other Assets, Net (In thousands) | Asset Category | June 30, 2023 (Net Carrying Value) | March 31, 2023 (Net Carrying Value) | | :--------------------------------------- | :--------------------------------- | :---------------------------------- | | Toll-free telephone number | $375 | $375 | | Internet domain names | $485 | $485 | | Trade Names - PetCareRx | $2,600 | $– | | Customer Relationships - PetCareRx | $6,461 | $– | | Developed Technology - PetCareRx | $2,750 | $– | | Initial minority interest investment in Vetster | $5,000 | $5,000 | | **Total Intangible and Other Assets, Net** | **$17,671** | **$5,860** | - The PetCareRx acquisition introduced new indefinite-lived intangible assets (Trade Names - PetCareRx) and definite-lived assets (Customer Relationships, Developed Technology) which are being amortized over 3 to 7 years[65](index=65&type=chunk) - Amortization expense for intangible assets was **$0.5 million** for the three months ended June 30, 2023, compared to zero in the prior year, reflecting the newly acquired amortizable assets[65](index=65&type=chunk) [Note 8: Leases](index=19&type=section&id=Note%208%3A%20Leases) This note describes the company's operating lease activities, primarily from the PetCareRx acquisition, and related lease metrics - The company's leasing activities primarily consist of real estate operating leases acquired during the PetCareRx acquisition, with remaining maturity dates ranging from 2024 to 2027[69](index=69&type=chunk) Operating Lease Metrics (June 30, 2023) | Metric | Value | | :--------------------------------------- | :------ | | Weighted average remaining lease term | 3.4 years | | Weighted average discount rate | 6.6% | | Total lease cost (Q2 2023) | $229k | | Right-of-use assets obtained from acquisition | $2,220k | | Present value of lease liabilities | $2,030k | [Note 9: Commitments and Contingencies](index=20&type=section&id=Note%209%3A%20Commitments%20and%20Contingencies) This note outlines the company's policies for recording legal liabilities and discloses an increase in potential sales tax exposure - The company records liabilities for legal matters when a loss is probable and reasonably estimable, and reviews the status of significant matters periodically[78](index=78&type=chunk) - Following an evaluation of sales tax filings related to the Wayfair decision, the company recorded an increase of **$7.8 million** for potential sales tax exposure, split between current and long-term liabilities[79](index=79&type=chunk) [Note 10: Changes in Shareholders' Equity](index=21&type=section&id=Note%2010%3A%20Changes%20in%20Shareholders%27%20Equity) This note details changes in shareholders' equity, including the impact of net loss, dividends, and remaining share repurchase authorization Changes in Shareholders' Equity (In thousands) | Item | March 31, 2023 Balance | Q2 2023 Activity | June 30, 2023 Balance | | :------------------------------- | :--------------------- | :--------------- | :-------------------- | | Common Stock | $21 | $– | $21 | | Additional Paid-In Capital | $18,277 | $1,760 | $20,037 | | Retained Earnings | $105,488 | $(6,346) (Dividends) | $98,255 | | | | $(887) (Net Loss) | | | **Total** | **$123,786** | **$(5,473)** | **$118,313** | - Retained earnings decreased by **$7.233 million** in Q2 2023 due to a net loss of $(887) thousand and **$6.346 million** in dividends declared[80](index=80&type=chunk) - As of June 30, 2023, the company had approximately **$28.7 million** remaining under its share repurchase plan[80](index=80&type=chunk) [Note 11: Income Taxes](index=21&type=section&id=Note%2011%3A%20Income%20Taxes) This note explains the income tax (benefit) provision and effective tax rate, including the impact of acquired net operating losses Income Tax (Benefit) Provision and Effective Tax Rate | Period | Income Tax (Benefit) Provision (In millions) | Effective Tax Rate | | :------------------------------- | :--------------------------------------- | :----------------- | | Three Months Ended June 30, 2023 | $(0.1) | 11.5% | | Three Months Ended June 30, 2022 | $1.0 | 27.1% | - The decrease in tax provision and effective tax rate for Q2 2023 is primarily due to the utilization of net operating losses (NOLs) made available by the PetCareRx acquisition and other deductible expenses[81](index=81&type=chunk) - A Section 382 analysis following the PetCareRx acquisition limited the acquired net operating losses and disallowed interest expense from approximately **$96.0 million to $35.0 million**[83](index=83&type=chunk) [Note 12: Subsequent Events](index=22&type=section&id=Note%2012%3A%20Subsequent%20Events) This note discloses significant events occurring after the reporting period, including dividend declarations and RSU grants - On July 31, 2023, the Board of Directors declared a quarterly dividend of **$0.30 per share**, estimated to be approximately **$6.4 million**[84](index=84&type=chunk) - Subsequent to June 30, 2023, the Board approved and granted **2,500 Restricted Stock Units (RSUs)** to employees[84](index=84&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=23&type=section&id=ITEM%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's analysis of financial condition and results of operations, covering key drivers, accounting policies, acquisition impacts, economic challenges, and liquidity for Q2 2023 [Executive Summary](index=23&type=section&id=Executive%20Summary) This section provides an overview of PetMed Express's business as a direct-to-consumer pet pharmacy, its expanded product line, and marketing strategies - PetMed Express is a leading direct-to-consumer pet pharmacy, offering a wide range of pet medications, food, and supplies, with its product line expanding to approximately **15,000 items**, including **10,000 from the PetCareRx acquisition**[89](index=89&type=chunk)[90](index=90&type=chunk) - The company markets through national advertising and social media to enhance brand recognition, drive website traffic, acquire new customers, and maximize repeat purchases[91](index=91&type=chunk) Average Purchase Value | Period | Average Purchase Value | | :------------------------------- | :--------------------- | | Quarter ended June 30, 2023 | $97 | | Quarter ended June 30, 2022 | $95 | [Critical Accounting Policies](index=23&type=section&id=Critical%20Accounting%20Policies) This section highlights key accounting policies requiring significant management judgment, including revenue recognition, business combinations, and income taxes - Key accounting policies requiring significant management judgment and estimates include revenue recognition (product sales at shipment, membership fees ratably), business combinations (acquisition method, fair value allocation, goodwill), use of estimates, and income taxes (deferred tax assets/liabilities, Section 382 analysis for NOLs)[92](index=92&type=chunk)[94](index=94&type=chunk)[96](index=96&type=chunk)[98](index=98&type=chunk)[100](index=100&type=chunk)[102](index=102&type=chunk)[103](index=103&type=chunk) - The allowance for doubtful accounts was approximately **$38 thousand** at June 30, 2023, compared to $35 thousand at March 31, 2023, reflecting estimated losses from customer inability to pay[97](index=97&type=chunk) [Acquisition](index=25&type=section&id=Acquisition_MD%26A) This section details the strategic rationale and financial impact of the PetCareRx acquisition, including the valuation of acquired intangible assets - The acquisition of PetCareRx on April 3, 2023, for **$36.1 million in cash**, was a strategic move to expand product offerings and distribution capabilities[104](index=104&type=chunk) - Fair values of acquired intangible assets (trade name, customer relationships, developed technology) were estimated using discounted cash flow models, with a **discount rate of 12%**[105](index=105&type=chunk) [Economic Conditions, Challenges, and Risks](index=25&type=section&id=Economic%20Conditions%2C%20Challenges%2C%20and%20Risks) This section discusses the impact of macroeconomic factors such as inflation, interest rates, and supply chain disruptions on the company's operations - Macroeconomic factors such as inflation, increased interest rates, capital market volatility, and supply chain disruptions are impacting the company's operations, customer demand, and revenue growth rates[106](index=106&type=chunk) - These challenges are expected to continue affecting the company's operations for the remainder of fiscal 2024, making future consumer spending patterns difficult to forecast[106](index=106&type=chunk) [Results of Operations](index=26&type=section&id=Results%20of%20Operations_MD%26A) This section provides a detailed analysis of the company's sales, cost of sales, gross profit, and operating expenses for the reporting period [Sales](index=28&type=section&id=Sales) This section analyzes sales performance, including total net sales, new customer acquisition, and the contribution of the AutoShip program Sales Performance (In thousands) for Three Months Ended June 30 | Metric | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------- | :----- | :----- | :--------- | :--------- | | Total net sales | $78,244 | $70,187 | $8,057 | 11.5% | | New customers acquired | 86,000 | 69,000 | 17,000 | 24.6% | | AutoShip percentage of net sales | 48.7% | 33.9% | 14.8 pp | 43.7% | | Sales as % of annual sales | 27% | 29% | (2 pp) | (6.9)% | - Sales increased by **11.5%** due to incremental sales from the PetCareRx acquisition and growth in new PetMeds customers, despite declines in PetMeds reorder sales[116](index=116&type=chunk) - The AutoShip program's contribution to net sales significantly increased to **48.7%** in Q2 2023, up from 33.9% in the prior year, with a fiscal 2024 goal of **50% of PetMeds net sales**[118](index=118&type=chunk) [Cost of Sales](index=29&type=section&id=Cost%20of%20Sales) This section examines the cost of sales, its increase in line with sales volume, and its percentage of total sales Cost of Sales (In thousands) for Three Months Ended June 30 | Metric | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------- | :----- | :----- | :--------- | :--------- | | Cost of sales | $55,718 | $50,244 | $5,474 | 10.9% | | Cost of sales as % of sales | 71.2% | 71.6% | (0.4 pp) | (0.6)% | - Cost of sales increased by **10.9% to $55.7 million**, primarily driven by higher sales volume, while as a percentage of sales, it slightly decreased to **71.2%**[120](index=120&type=chunk) [Gross Profit](index=29&type=section&id=Gross%20Profit) This section analyzes the increase in gross profit and the improvement in gross profit percentage, driven by favorable rebates Gross Profit (In thousands) for Three Months Ended June 30 | Metric | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------- | :----- | :----- | :--------- | :--------- | | Gross profit | $22,526 | $19,943 | $2,583 | 13.0% | | Gross profit as % of sales | 28.8% | 28.4% | 0.4 pp | 1.4% | - Gross profit increased by **13.0% to $22.5 million**, and the gross profit percentage improved to **28.8%**, mainly due to favorable rebates resulting from the PetCareRx acquisition[121](index=121&type=chunk) [General and Administrative Expenses](index=29&type=section&id=General%20and%20Administrative%20Expenses) This section details the significant increase in general and administrative expenses, primarily due to payroll, professional fees, and acquisition-related costs General and Administrative Expenses (In thousands) for Three Months Ended June 30 | Metric | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------- | :----- | :----- | :--------- | :--------- | | G&A expenses | $15,711 | $9,351 | $6,360 | 68.0% | | G&A expenses as % of sales | 20.2% | 13.3% | 6.9 pp | 51.9% | - The **68.0% increase in G&A expenses to $15.7 million** was primarily driven by a **$3.3 million increase in payroll** (including stock compensation and severance), **$1.6 million in professional fees** (including acquisition costs), and higher software/systems and other overhead expenses related to the PetCareRx acquisition[122](index=122&type=chunk) [Advertising Expenses](index=29&type=section&id=Advertising%20Expenses) This section reviews advertising expenses, noting an increase in spend but a decrease in customer acquisition cost due to marketing efficiency Advertising Expenses (In thousands) for Three Months Ended June 30 | Metric | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------- | :----- | :----- | :--------- | :--------- | | Advertising expenses | $7,265 | $6,349 | $916 | 14.4% | | Advertising expenses as % of sales | 9.3% | 9.0% | 0.3 pp | 3.3% | | Customer acquisition cost | $84 | $91 | $(7) | (7.7)% | - Advertising expenses increased by **14.4%** due to higher media spend and agency fees, but the cost of acquiring a new customer decreased to **$84**, reflecting more efficient variable marketing and a broader product offering[123](index=123&type=chunk) [Depreciation and Amortization](index=29&type=section&id=Depreciation%20and%20Amortization) This section explains the substantial increase in depreciation and amortization expense, driven by new assets and acquired intangibles Depreciation and Amortization Expense (In thousands) for Three Months Ended June 30 | Metric | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------- | :----- | :----- | :--------- | :--------- | | D&A expense | $1,678 | $753 | $925 | 122.8% | | D&A expense as % of sales | 2.1% | 1.1% | 1.0 pp | 90.9% | - Depreciation and amortization expense more than doubled, increasing by **122.8% to $1.7 million**, primarily due to new property and equipment additions and the amortization of intangibles acquired from PetCareRx[125](index=125&type=chunk) [Other Income](index=30&type=section&id=Other%20Income) This section analyzes the significant increase in other income, primarily from higher interest income and rental income from the acquisition Other Income (In thousands) for Three Months Ended June 30 | Metric | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------- | :----- | :----- | :--------- | :--------- | | Total other income | $1,126 | $315 | $811 | 257.5% | | Total other income as % of sales | 1.4% | 0.4% | 1.0 pp | 250.0% | - Other income significantly increased to **$1.1 million**, primarily driven by higher interest income due to rising interest rates and increased rental income from PetCareRx[126](index=126&type=chunk) [Provision for Income Taxes](index=30&type=section&id=Provision%20for%20Income%20Taxes) This section details the income tax benefit recorded, primarily due to the utilization of net operating losses from the PetCareRx acquisition Income Tax (Benefit) Provision (In thousands) for Three Months Ended June 30 | Metric | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------- | :----- | :----- | :--------- | :--------- | | (Benefit) provision for income taxes | $(115) | $1,030 | $(1,145) | (111.2)% | | (Benefit) provision for income taxes as % of sales | (0.1)% | 1.4% | (1.5 pp) | (107.1)% | - The company recorded an income tax benefit of **$(0.1) million** for Q2 2023, a reversal from a $1.0 million provision in Q2 2022, primarily due to the utilization of net operating losses from the PetCareRx acquisition and deductible expenses[127](index=127&type=chunk) [Non-GAAP Financial Measures (Adjusted EBITDA)](index=26&type=section&id=Non-GAAP%20Financial%20Measures%20%28Adjusted%20EBITDA%29) This section reconciles GAAP net income to Adjusted EBITDA, explaining its use by management and the factors contributing to its decrease Reconciliation of GAAP Net Income to Adjusted EBITDA (In thousands) | Item | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | | :--------------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Net (loss) income | $(887) | $2,775 | $(3,662) | (132)% | | Add (subtract): | | | | | | Share-based Compensation | $1,760 | $1,536 | $224 | 15% | | Income Taxes | $(115) | $1,030 | $(1,145) | (111)% | | Depreciation and Amortization | $1,678 | $753 | $925 | 123% | | Interest (Income)/Expense | $(620) | $(117) | $(503) | 430% | | Acquisition/Partnership Transactions and Other Items | $1,126 | $355 | $771 | n/m | | Employee Severance | $393 | $– | $393 | n/m | | **Adjusted EBITDA** | **$3,335** | **$6,332** | **$(2,997)** | **(47)%** | - Adjusted EBITDA decreased by **47% to $3,335 thousand** in Q2 2023, reflecting the impact of increased operating expenses and acquisition-related costs, despite higher sales[115](index=115&type=chunk) - Adjusted EBITDA is used by management to evaluate operating performance by excluding non-cash charges (share-based compensation, D&A), income tax, interest, and other non-operational expenses like acquisition costs and severance[109](index=109&type=chunk)[110](index=110&type=chunk)[111](index=111&type=chunk) [Liquidity and Capital Resources](index=30&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's liquidity position, changes in working capital, cash flow activities, and capital allocation plans Liquidity and Cash Flow (In millions) | Metric | June 30, 2023 | March 31, 2023 | Change ($) | | :------------------------------- | :------------ | :------------- | :--------- | | Working capital | $48.5 | $95.0 | $(46.5) | | Net cash provided by operating activities (Q2) | $0.6 | N/A | N/A | | Net cash used in investing activities (Q2) | $(37.0) | N/A | N/A | | Net cash used in financing activities (Q2) | $(6.1) | N/A | N/A | - Working capital decreased significantly by **$46.4 million to $48.5 million**, primarily due to the **$36.1 million PetCareRx acquisition** and a **$10.2 million increase in inventory**[128](index=128&type=chunk) - The company has approximately **$28.7 million** remaining under its share repurchase plan and declared a **$0.30 per share quarterly dividend** on July 31, 2023[129](index=129&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=31&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section addresses the company's exposure to market risks, primarily interest rate risk affecting its cash and cash equivalents. The company manages this risk by investing in highly-liquid, short-maturity instruments and has no debt obligations or derivative financial instruments - The primary market risk for the company is interest rate risk, which impacts the return on its **$61.5 million** in cash and cash equivalents[131](index=131&type=chunk) - Cash and cash equivalents are managed within investment guidelines, primarily in federally-insured bank deposit accounts and highly-liquid investments with maturities of three months or less, to limit market risk[131](index=131&type=chunk) - The company has no debt obligations or derivative financial instruments, limiting its exposure to other market risks[131](index=131&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=31&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section details the evaluation of the company's disclosure controls and procedures, confirming their effectiveness as of June 30, 2023. It also addresses the remediation of a previously identified material weakness in internal control over financial reporting related to segregation of duties [Evaluation of Disclosure Controls and Procedures](index=31&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures as of June 30, 2023, as concluded by management - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, subject to external audit testing[132](index=132&type=chunk) [Changes in Internal Control Over Financial Reporting](index=31&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section reports the remediation of a material weakness in internal control over financial reporting related to segregation of duties - A material weakness identified in the fiscal year 2023 Form 10-K, concerning a lack of segregation of duties over journal entries, has been fully remediated through increased resources and modified processes[134](index=134&type=chunk)[135](index=135&type=chunk) - Management believes the remediation plan has addressed the material weakness, subject to external audit testing, and there were no other material changes to internal control over financial reporting during the quarter[135](index=135&type=chunk)[136](index=136&type=chunk) [PART II - OTHER INFORMATION](index=33&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) This section includes disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits [ITEM 1. LEGAL PROCEEDINGS](index=33&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section states that the company is not currently involved in any material legal proceedings - The company is not currently involved in any material legal proceedings[140](index=140&type=chunk) [ITEM 1A. RISK FACTORS](index=33&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section confirms that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended March 31, 2023 - There have been no material changes to the risk factors disclosed in the Annual Report on Form 10-K for the fiscal year ended March 31, 2023[141](index=141&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=33&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section indicates that there were no unregistered sales of equity securities or use of proceeds during the reporting period - No unregistered sales of equity securities or use of proceeds occurred during the three months ended June 30, 2023[142](index=142&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=33&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) This section states that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities occurred during the three months ended June 30, 2023[143](index=143&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=33&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[144](index=144&type=chunk) [ITEM 5. OTHER INFORMATION](index=33&type=section&id=ITEM%205.%20OTHER%20INFORMATION) This section reports that no director or officer adopted, modified, or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2023 - No director or officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2023[145](index=145&type=chunk) [ITEM 6. EXHIBITS](index=33&type=section&id=ITEM%206.%20EXHIBITS) This section lists the exhibits filed with the Form 10-Q, including certifications from executive officers, material contracts, and various Inline XBRL documents - The exhibits include certifications of the Principal Executive Officer and Principal Financial Officer (31.1, 31.2, 32.1) as required by the Securities Exchange Act and Sarbanes-Oxley Act[149](index=149&type=chunk) - Material contracts, such as Restricted Stock Agreements, are incorporated by reference[148](index=148&type=chunk)[149](index=149&type=chunk) - Inline XBRL documents, including the Instance Document, Schema, Calculation, Definition, Label, and Presentation Linkbase Documents, are filed[150](index=150&type=chunk)

NASDAQ: PETS Safe Harbor & Non-GAAP Measures PetMeds cautions that the foregoing list of important factors is not complete, and any forward-looking statements speak only as of the date they are made. PetMeds undertakes no duty to update publicly any forward-looking statement that it may make, whether as a result of new information, future events or otherwise, except as may be required by applicable law, regulation or other competent legal authority. 2 3 MISSION Additional products, higher LTV, expanded dist ...

Financial Data and Key Metrics - Revenue for Q1 2024 was $78 million, an 11% YoY increase compared to $70 million in Q1 2023, driven by the acquisition of PetCareRx and stabilization of the core PetMed business [40][45] - Gross profit margin improved to 28.8% in Q1 2024, up from 28.4% in Q1 2023 and 27.9% in the prior quarter [22] - Adjusted EBITDA for Q1 2024 was $3.3 million, down from $6.3 million in Q1 2023, primarily due to higher operating expenses and advertising costs [23] - Reorder sales grew 7% YoY to $68 million, representing 87% of total revenue [15][21] - Net loss for Q1 2024 was $0.9 million, or $0.04 per diluted share, compared to net income of $2.8 million, or $0.14 per diluted share, in Q1 2023 [47] Business Line Performance - The company added 86,000 new customers in Q1 2024, a 25% YoY increase, marking the third consecutive quarter of net new customer growth [16][21] - Recurring revenue, including AutoShip and PetCareRx membership programs, accounted for 49% of total revenue, up from 34% in Q1 2023 [41][46] - The integration of PetCareRx has expanded the product catalog, particularly in consumables like Purina's prescription food line, which is now available to PetMed customers [11][36] Market and Strategic Direction - The company is transitioning from a pet medication retailer to a comprehensive pet healthcare provider, focusing on four key pillars: medication, care, nutrition, and wellness [42][44] - PetMed is leveraging its partnership with Vetster to offer telemedicine services in over 25 states, with plans to expand to Arizona, Florida, Colorado, and California by Q4 2023 [43] - The company is launching a pet insurance product in partnership with Pumpkin Insurance, targeting the underpenetrated pet insurance market, which currently covers less than 5% of the pet population [17][19] Management Commentary - Management highlighted the successful integration of PetCareRx, which has improved supplier terms and direct manufacturing relationships, driving synergies and margin improvements [22][37] - The company is focused on achieving operating leverage by scaling revenue while maintaining stable fixed costs, with a goal of delivering sustainable long-term growth and profitability [26][51] - Management emphasized the importance of customer lifetime value (LTV) over average order value (AOV) as a key metric for success, particularly as the company expands its product offerings [68] Other Key Information - The company ended Q1 2024 with $61.5 million in cash and no debt, despite paying $63 million for the PetCareRx acquisition [48] - A $0.30 cash dividend was declared in June 2023, consistent with prior quarters, though management noted potential future shifts in capital allocation toward growth investments [48][77] Q&A Session Summary Question: What was the revenue contribution from the legacy PetMed business excluding PetCareRx? - The company did not provide a specific breakdown but noted that the legacy PetMed business experienced YoY growth on a standalone basis [65][66] Question: How is the stabilization of the returning customer base progressing? - The returning customer base for the legacy PetMed business showed a slight decline but is stabilizing, with reorder sales growing 7% YoY on a consolidated basis [57][74] Question: What are the expected synergies from the PetCareRx acquisition? - Synergies are expected to improve SG&A as a percentage of revenue, with gross margins remaining stable across both businesses [75] Question: What is the outlook for the dividend? - Management is balancing the need for capital to fuel growth opportunities with dividend payments, suggesting potential future shifts in capital allocation [77]

PetMed Express, Inc. (NASDAQ:PETS) Q1 2022 Earnings Conference Call July 26, 2021 8:30 AM ET Company Participants Bruce Rosenbloom - Chief Financial Officer Gian Fulgoni - Chairman of the Board Conference Call Participants Ben Rose - Battle Road Research Erin Wright - Credit Suisse Anthony Lebiedzinski - Sidoti & Company Operator Welcome to the 1-800-PetMeds Conference Call to Review the Financial Results for the First Fiscal Quarter ended on June 30, 2021. At the request of the Company, this conference cal ...

Financial Data and Key Metrics Changes - For the first quarter of fiscal 2023, sales were $70.2 million, a decrease of 11.5% compared to $79.3 million for the same period last year [22][40] - Net income was $2.8 million or $0.14 diluted earnings per share, down from $4.4 million or $0.22 diluted earnings per share year-over-year [61] - Adjusted EBITDA for the first quarter was $6.3 million, or $0.31 on a diluted basis, compared to $7.1 million or $0.35 on a diluted basis for the same quarter last year [61] Business Line Data and Key Metrics Changes - Reorder sales decreased by 7.8% to $63.3 million for the quarter ended June 30, 2022, compared to $68.7 million for the same quarter the prior year [40] - The AutoShip subscription program saw an increase in adoption, with approximately 34% of revenue derived from this program during the June quarter [51][57] Market Data and Key Metrics Changes - The total U.S. pet market is over $100 billion in annual sales and is expected to reach $120 billion by 2024, with the addressable pet medication market at approximately $10 billion [25] - The company operates in a resilient market, with pet ownership in U.S. households increasing over time, currently at seven out of ten households [34] Company Strategy and Development Direction - The company is transitioning from a focus on existing customers to also generating new customer acquisition, particularly through the AutoShip program and telemedicine initiatives [50][64] - A strategic partnership with Vetster aims to enhance telemedicine capabilities, integrating virtual vet services into the company's offerings [26][45] Management's Comments on Operating Environment and Future Outlook - Management acknowledged a slow start to the flea and tick season due to colder temperatures but noted a rebound in sales as temperatures warmed [2][70] - The company remains optimistic about new customer acquisition initiatives and expects improvements in the upcoming quarters [88] Other Important Information - The company has a strong balance sheet with approximately $105.4 million in cash and cash equivalents and no debt as of June 30, 2022 [9][43] - The Board of Directors declared a quarterly dividend of $0.30 per share, payable on August 19, 2022 [15] Q&A Session Summary Question: What does the seasonal mix look like this year compared to historical trends? - Management noted a slow start to the quarter but observed a rebound in sales through May and June, indicating recovery in the parasiticide business [70] Question: How is the company addressing customer behavior in a tougher macro backdrop? - Management indicated that brand loyalty remains strong, with minimal evidence of customers trading down in prescription medications [84][85] Question: Can you provide details on new customer growth for the quarter? - The company reported acquiring approximately 69,000 new customers during the quarter [86] Question: How is the inventory situation given ongoing supply chain issues? - Management stated that inventory levels are normalized and that direct relationships with manufacturers help mitigate supply chain concerns [110]

Financial Data and Key Metrics Changes - Second quarter sales were $65.4 million, a decrease of 3% compared to $67.4 million in the same period last year [35] - Adjusted EBITDA was $7.1 million, down from $9.8 million year-over-year [38] - Net income was $2.6 million or $0.13 per diluted share, compared to $6.3 million or $0.31 per diluted share for the same quarter last year [37] - Gross profit as a percentage of sales was 28.2%, a decline of 20 basis points year-over-year [37] - Cash and cash equivalents were approximately $96.5 million, with no debt as of September 30, 2022 [41] Business Line Data and Key Metrics Changes - Repeat sales for the quarter were $59.7 million, a decrease of 1.5% compared to $60.6 million in the same period last year [36] - AutoShip & Save sales as a percentage of total sales increased to 39%, a 15% sequential increase from the previous quarter [36][21] - New customer count for the quarter was approximately 61,000, down from 69,000 in the prior quarter [36] Market Data and Key Metrics Changes - The U.S. pet market is over $120 billion in sales, with the addressable pet medication market exceeding $10 billion [23] - The pet healthcare industry is experiencing a shift towards digital services, with increasing demand for online purchasing [26][27] Company Strategy and Development Direction - The company is transitioning from a leading pet medication retailer to a pet health expert, focusing on digital transformation and expanding its service offerings [5][12] - The strategy includes enhancing the product catalog, particularly in nutrition and consumables, to increase customer lifetime value (LTV) [21][30] - The company aims to leverage its strong brand and market position to capture a larger share of the growing pet healthcare market [14][25] Management's Comments on Operating Environment and Future Outlook - Management noted a solid rebound in business during the second fiscal quarter due to warmer temperatures, which stimulated demand for flea and tick and heartworm medications [7] - The company is optimistic about the future, emphasizing the importance of digital transformation in pet healthcare [12][27] - Management highlighted the resilience of the pet care market, even during recessionary times, as pet parents prioritize spending on their pets [25] Other Important Information - The company has approximately $34 million in inventory, with higher levels attributed to the timing of inventory purchases [41] - A quarterly dividend of $0.30 per share was approved, to be paid on November 30, 2022 [41] Q&A Session Summary Question: Expansion of customer LTV initiatives - Management discussed the importance of expanding the product assortment and increasing LTV to CAC ratio, with a focus on growing the AutoShip program and adding more consumables [45][46] Question: Advertising spend and efficiency - Management indicated that advertising spend was flat year-over-year, with a focus on balancing awareness and performance marketing to improve efficiency [48] Question: Expanded product selection and SKU goals - Management stated there is no specific SKU goal but emphasized the importance of adding premium brands and improving sales capabilities outside of medications [52][53] Question: Impact of political ad campaigning on advertising efficiency - Management noted no significant impact from political ad campaigning on their advertising efficiency, although the current quarter is typically slower due to seasonality [55] Question: G&A expenses growth rate - Management explained that G&A expenses have increased due to strategic investments in people and technology, with expectations for continued investment to support growth [57][58]

Financial Data and Key Metrics Changes - Third quarter sales were $58.9 million, a decrease of 3% compared to $60.7 million in the same period last year, which is an improvement from a double-digit decline in fiscal year 2022 [15][27] - Net income was breakeven for the third quarter, compared to $4.3 million or $0.21 per diluted share for the same quarter last year [31] - Adjusted EBITDA for the quarter was $2.7 million, down from $7.6 million in the same quarter last year, reflecting a decline in gross margin and targeted increases in G&A [31] Business Line Data and Key Metrics Changes - The new customer count for the quarter was approximately 72,000, up from 66,000 in the prior year, marking a 9% year-over-year increase [6][48] - Approximately 42% of revenue was recurring revenue derived from the AutoShip subscription program during the third quarter, which is an 8% increase on a sequential basis [26][36] - Repeat sales for the quarter decreased 4% to $53 million compared to $55 million in the same period last year [28] Market Data and Key Metrics Changes - The company operates in a growing addressable market, with expectations for revenues to become more diversified as it addresses a broader range of pet parents' needs [18][40] - The pet health services market is expected to become more digitally enabled, similar to trends seen in human health [24][40] Company Strategy and Development Direction - The company is transitioning from being a leading pet medication retailer to becoming a market leader in pet health care expertise, aiming to be the go-to destination for holistic health and wellness [7][14] - The pending acquisition of PetCareRx is seen as a significant opportunity to expand the product catalog and increase customer engagement in the non-medication space [8][21] - The focus on total wellness will allow the company to offer a wider range of products and services, including diet and health-focused items [10][37] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the growth opportunities in the pet space, which has proven resilient even during recessionary times [9][55] - The company is focused on closing and integrating the pending acquisition while driving returns on recent investments, believing these efforts will lead to long-term sustainable growth [52][53] - Management is encouraged by the performance of the business and the acceleration of long-term business drivers, emphasizing the importance of net new customer growth and subscription revenue [55][56] Other Important Information - The company maintains a strong balance sheet with over $102 million of unrestricted cash as of December 31, 2022 [25] - The company has a high Net Promoter Score (NPS) of over 80, indicating strong customer loyalty [26] Q&A Session Summary Question: How should we think about new customer growth in the coming quarters? - Management is excited about the net new customer growth for the first time in 2.5 years, attributing it to better engagement with lapsed customers and targeted offers [60][61] Question: What are the underlying demand trends across the customer base? - Management is cautiously optimistic about the upcoming flea and tick season, expecting it to be better than last year, and noted that there is no significant trade-down behavior among customers [65][67] Question: What factors impact customer growth and intent? - Management highlighted the opportunity to engage lapsed customers and the trend of customers preferring a one-stop shop for their pet needs [72][75] Question: How should we think about gross margin for Q4 and into next year? - Management indicated that gross margin was impacted by targeted promotions for customer acquisition but expects margins to align more with historical trends going forward [78][89] Question: How are you thinking about maintaining the repeat base of customers? - Management is focused on increasing engagement through the AutoShip program and expanding the product catalog to enhance customer loyalty [83][88]

NASDAQ: PETS Safe Harbor & Non-GAAP Measures 2 Your Trusted Pet Health Expert 3 VISION Every pet deserves to live a long, happy, healthy life Corporate Overview Vision: Founded in 1996, PetMeds is "Your Trusted Pet Health Expert" providing fast, easy and helpful service to over 11 million customers across the U.S. Company Highlights • Closed acquisition of PetCareRx in April 2023 • Strategic Initiatives in Pet Telemedicine (Vetster) and Pet insurance (Pumpkin) • AutoShip & Save increased to 44% of total rev ...

PetMed Express, Inc. (NASDAQ:PETS) Q4 2023 Earnings Conference Call May 22, 2023 4:30 PM ET Company Participants Brian Prenoveau - IR, MZ Group Matthew Hulett - President & CEO Christine Chambers - CFO Conference Call Participants Corey Grady - Jefferies Anthony Lebiedzinski - Sidoti & Company Operator Good afternoon, everyone, and thank you for joining the PetMed Express Third Quarter (sic) [Fourth Quarter] Earnings Conference Call. My name is Doug, the operator for today's call. I would now like to pass t ...

Part I [Business Overview](index=4&type=section&id=Item%201.%20Business) PetMed Express is a leading direct-to-consumer pet pharmacy, expanding its product and service offerings through acquisitions and strategic partnerships in pet insurance and telemedicine - PetMeds is a leading nationwide direct-to-consumer pet pharmacy and online provider of pet medications, food, supplements, supplies, and vet services for dogs, cats, and horses[13](index=13&type=chunk) Pet Spending in US (2022) | Metric | Value | | :----- | :---- | | Pet Spending in US (2022) | $136.8 billion (11% increase YoY) | | Veterinary Care & Rx Medications (2022) | $35.9 billion (26% of total pet spending) | | Estimated Pet Medication Market | ~$13 billion | | Dog & Cat Population | ~111.6 million | | Households with a Pet | ~66% | - Acquired PetCareRx in April 2023 for approximately **$36.0 million** in cash, adding a **10,000-item catalog** and **286,000 customers**[21](index=21&type=chunk) - Formed a strategic partnership with Pumpkin Insurance Services in February 2023 to offer co-branded pet insurance products, expected to be available in fiscal year ending March 31, 2024[22](index=22&type=chunk) - Entered a multi-year exclusive partnership with Vetster Inc. in April 2022 for veterinary telehealth services, becoming the exclusive e-commerce provider on Vetster's platform in the US and investing approximately **$5.0 million** in Vetster[23](index=23&type=chunk) - The company's growth strategy includes leveraging its brands, expanding product and service offerings, growing its customer base, and pursuing strategic partnerships and acquisitions[24](index=24&type=chunk)[25](index=25&type=chunk)[26](index=26&type=chunk)[27](index=27&type=chunk) Sales Channel Contribution | Sales Channel | Fiscal 2023 Contribution | | :------------ | :----------------------- | | Internet (website & mobile apps) | 86.4% of total sales | | Customer Support Center (toll-free) | 13.6% of total sales | - AutoShip subscription program generated approximately **44% of sales** in Q4 FY2023, up from **30.9%** in Q4 FY2022, with a goal of **50%** for FY2024[30](index=30&type=chunk)[177](index=177&type=chunk) Customer Metric | Customer Metric | Fiscal 2023 | Fiscal 2022 | | :-------------- | :---------- | :---------- | | New Customers Acquired | ~274,000 | ~325,000 | | Average Purchase Value | ~$93 | ~$93 | | PetCareRx Acquired Customers | ~286,000 (as of filing date) | N/A | - PetMeds holds numerous trademarks including "America's Largest Pet Pharmacy®" and "1-800-PetMeds®", and acquired the PetCareRx® trademark and domain name[47](index=47&type=chunk)[48](index=48&type=chunk) - The company is licensed as a community pharmacy by the Florida Board of Pharmacy and regulated by 49 other state pharmacy boards, the District of Columbia, U.S. Virgin Islands, DEA, FDA, and EPA[49](index=49&type=chunk)[50](index=50&type=chunk) - As of May 23, 2023, PetMeds had **302 full-time employees**, with **78 employees** added from the PetCareRx acquisition[58](index=58&type=chunk) [Risk Factors](index=11&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from regulatory non-compliance, veterinarian resistance, supply chain dependencies, cybersecurity threats, internal control weaknesses, and intense market competition - Regulatory risks include potential failure to comply with state/federal regulations, leading to sanctions or loss of pharmacy licenses, especially in key states where **50% of sales** are concentrated (CA, FL, TX, NY, PA, NC, GA, VA)[65](index=65&type=chunk)[66](index=66&type=chunk)[76](index=76&type=chunk) - Business risks encompass challenges in managing a **15,000 SKU inventory**, potential resistance from veterinarians discouraging online purchases, and dependence on **six key suppliers** for **68.5% of products** in fiscal 2023[71](index=71&type=chunk)[73](index=73&type=chunk)[74](index=74&type=chunk)[79](index=79&type=chunk)[253](index=253&type=chunk) - Operational risks include potential disruptions to shipping arrangements, the need to maintain high customer service quality, and liability exposure from website content[80](index=80&type=chunk)[81](index=81&type=chunk)[82](index=82&type=chunk) - Technology and data security risks involve potential failures or misuse of information systems, cybersecurity incidents (including lack of cyber insurance), and disruptions during migration to new IT platforms[88](index=88&type=chunk)[91](index=91&type=chunk)[94](index=94&type=chunk)[95](index=95&type=chunk) - Compliance risks related to privacy, data protection, marketing, and advertising laws (e.g., CCPA, CPRA) are evolving, potentially increasing costs and limiting customer acquisition strategies[96](index=96&type=chunk)[101](index=101&type=chunk) - Operating results are difficult to predict due to seasonality, economic conditions impacting consumer spending, and challenges in integrating acquisitions and strategic partnerships[104](index=104&type=chunk)[105](index=105&type=chunk)[106](index=106&type=chunk)[107](index=107&type=chunk)[109](index=109&type=chunk) - Financial risks include payment-related issues and a material weakness in internal control over financial reporting due to inadequate segregation of duties over manual journal entries[114](index=114&type=chunk)[116](index=116&type=chunk)[117](index=117&type=chunk) - Industry competition from veterinarians and online/traditional retailers, along with product recalls and health crises, could adversely affect business and financial performance[121](index=121&type=chunk)[123](index=123&type=chunk)[124](index=124&type=chunk) - Securities risks include stock price fluctuations, potential litigation, and the ability of the Board to issue preferred stock or change dividend policy, which could dilute common shareholders' interests or deter takeovers[127](index=127&type=chunk)[129](index=129&type=chunk)[131](index=131&type=chunk) [Unresolved Staff Comments](index=23&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reported no unresolved staff comments from the SEC - No unresolved staff comments were reported[132](index=132&type=chunk) [Properties](index=23&type=section&id=Item%202.%20Properties) PetMed Express owns its main offices and distribution center in Florida and leases additional facilities in New York for operations after the PetCareRx acquisition - Owns principal executive offices and distribution center in Delray Beach, Florida, consisting of approximately **185,000 square feet** across two buildings[132](index=132&type=chunk) - Approximately **48%** of the Delray Beach property was leased to two tenants with a remaining weighted average lease term of **2 years** as of March 31, 2023[132](index=132&type=chunk) - Assumed leases for two PetCareRx facilities in Lynbrook, New York, totaling approximately **35,000 square feet**, used for shipping, fulfillment, and executive offices, with leases expiring in April 2027[133](index=133&type=chunk) [Legal Proceedings](index=23&type=section&id=Item%203.%20Legal%20Proceedings) The company is routinely involved in various legal claims and lawsuits, but management believes current proceedings will not materially affect operations or financial statements - Involved in routine claims and lawsuits concerning products, warranties, contracts, employment, intellectual property, consumer protection, and pharmacy/regulatory matters[134](index=134&type=chunk) - Management believes that none of the current claims and suits are reasonably likely to have a material adverse effect on operations or consolidated financial statements[134](index=134&type=chunk) - Legal costs related to these matters are expensed as incurred[134](index=134&type=chunk) [Mine Safety Disclosures](index=23&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to PetMed Express, Inc - Not applicable[135](index=135&type=chunk) Part II [Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities](index=24&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Shareholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) PetMed Express common stock trades on NASDAQ, consistently pays quarterly dividends, has a share repurchase program, and its stock performance lagged key indices over the past five years - Common stock is traded on the NASDAQ Global Select Market under the symbol "PETS"[138](index=138&type=chunk) Shareholder Information (as of May 23, 2023) | Metric | Value | | :----- | :---- | | Holders of Record | 134 | | Beneficial Holders | ~48,300 | | Common Stock Outstanding | 21,170,977 shares | - Paid regular cash dividends every quarter since August 2009, totaling **$25.3 million** (**$0.30 per share** per quarter) in fiscal 2023 and **$24.8 million** (**$0.30 per share** per quarter) in fiscal 2022[139](index=139&type=chunk) - The Board declared a quarterly dividend of **$0.30 per share** on May 22, 2023, payable June 12, 2023[140](index=140&type=chunk) - No shares were repurchased during the quarter and fiscal year ended March 31, 2023, with approximately **$28.7 million** remaining under the share repurchase program as of March 31, 2023[141](index=141&type=chunk) Five-Year Cumulative Stock Performance (March 31, 2018 = $100) | Index | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :------------------- | :----- | :----- | :----- | :----- | :----- | :----- | | PetMed Express, Inc. | 100.00 | 56.52 | 75.15 | 95.03 | 72.77 | 48.61 | | NASDAQ Composite | 100.00 | 109.43 | 109.01 | 187.54 | 201.33 | 173.03 | | SIC Code 5912 | 100.00 | 107.33 | 97.87 | 150.44 | 171.55 | 155.60 | | Russell 2000 | 100.00 | 100.67 | 75.39 | 145.19 | 135.35 | 117.85 | Equity Compensation Plan Information (as of March 31, 2023, in thousands) | Plan Category | Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price | Securities remaining available for future issuance | | :--------------------------------------------------- | :---------------------------------------------------------------- | :------------------------------ | :------------------------------------------------ | | 2015 Outside Director Equity Compensation Restricted Stock Plan | 69 | — | 502 | | 2016 Employee Equity Compensation Restricted Stock Plan | 684 | — | 40 | | 2022 Employee Equity Compensation Restricted Stock Plan | — | — | 1,000 | | **Total** | **753** | **—** | **1,542** | [Reserved](index=23&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved and contains no information [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Sales decreased by **6.1%** in fiscal 2023 to **$256.9 million**, with net income declining **98.9%** to **$0.2 million** due to higher costs and competitive pressures, despite maintaining strong liquidity - PetMeds is a leading nationwide direct-to-consumer pet pharmacy, marketing products through websites, toll-free numbers, and mobile applications[150](index=150&type=chunk) - Internet sales accounted for **86.4% of total sales** in fiscal 2023, up from **84.2%** in fiscal 2022[152](index=152&type=chunk)[156](index=156&type=chunk) - The company changed its definition of a new customer on April 1, 2022, to include anyone who has not ordered over the past thirty-six months[156](index=156&type=chunk) - Critical accounting policies include revenue recognition (control transfers at shipment), inventory valuation (lower of cost or net realizable value), and expensing advertising costs as incurred[154](index=154&type=chunk)[160](index=160&type=chunk)[162](index=162&type=chunk) - Adjusted EBITDA is a non-GAAP measure used by management to evaluate operating performance, excluding share-based compensation, depreciation, income tax, interest, and other non-operational expenses[167](index=167&type=chunk)[168](index=168&type=chunk)[169](index=169&type=chunk) Key Financial Performance Metrics (as % of Sales) | Metric | FY2023 | FY2022 | FY2021 | | :------------------------ | :----- | :----- | :----- | | Sales | 100.0% | 100.0% | 100.0% | | Cost of Sales | 72.4% | 71.4% | 70.9% | | Gross Profit | 27.6% | 28.6% | 29.1% | | General and Administrative | 19.3% | 11.3% | 9.1% | | Advertising | 7.6% | 6.9% | 7.0% | | Depreciation | 1.4% | 1.0% | 0.8% | | (Loss) Income from Operations | (0.7)% | 9.4% | 12.2% | | Net Income | 0.0% | 7.7% | 9.9% | Adjusted EBITDA Reconciliation (in thousands) | Metric | FY2023 | FY2022 | Change ($) | Change (%) | | :----------------------------------- | :----- | :----- | :--------- | :--------- | | Net Income | $233 | $21,100 | $(20,867) | -99% | | Share-based Compensation | $6,617 | $4,549 | $2,068 | 45% | | Income Taxes | $1,351 | $5,971 | $(4,620) | -77% | | Depreciation | $3,546 | $2,738 | $808 | 30% | | Interest Income | $(2,070) | $(335) | $(1,735) | 518% | | Acquisition/Partnership Transactions | $1,904 | — | $1,904 | n/m | | Employee Severance | $364 | — | $364 | n/m | | State Sales Tax Accrual | $7,825 | — | $7,825 | n/m | | **Adjusted EBITDA** | **$19,770** | **$34,023** | **$(14,253)** | **-42%** | Sales Performance (in thousands) | Category | FY2023 Sales | FY2023 % | FY2022 Sales | FY2022 % | $ Variance | % Variance | | :--------- | :----------- | :------- | :----------- | :------- | :--------- | :--------- | | Reorder Sales | $232,633 | 90.6% | $244,505 | 89.4% | $(11,872) | -4.9% | | New Order Sales | $24,225 | 9.4% | $28,912 | 10.6% | $(4,687) | -16.2% | | **Total Net Sales** | **$256,858** | **100.0%** | **$273,417** | **100.0%** | **$(16,559)** | **-6.1%** | | Internet Sales | $221,894 | 86.4% | $230,263 | 84.2% | $(8,369) | -3.6% | | Call Center Sales | $34,964 | 13.6% | $43,154 | 15.8% | $(8,190) | -19.0% | | **Total Net Sales** | **$256,858** | **100.0%** | **$273,417** | **100.0%** | **$(16,559)** | **-6.1%** | - New customer acquisition decreased from approximately **325,000** in FY2022 to **274,000** in FY2023, with advertising cost per new customer increasing from **$58** to **$71**[174](index=174&type=chunk)[183](index=183&type=chunk) - AutoShip program sales increased to **44.4% of net sales** in Q4 FY2023, up from **30.9%** in Q4 FY2022, with a goal of **50%** for FY2024[177](index=177&type=chunk) - Gross profit decreased by **$7.1 million** (**9.0%**) to **$71.0 million** in FY2023, with gross profit margin declining to **27.6%** from **28.6%** due to lower sales and increased per order freight expense[181](index=181&type=chunk) - General and administrative expenses increased by **$18.6 million** (**60.5%**) to **$49.5 million** in FY2023, driven by higher payroll (**$5.8 million**, including **$2.1 million** stock compensation and **$0.4 million** severance), professional fees (**$1.9 million**), software/systems (**$1.0 million**), a **$7.8 million** sales tax accrual, and **$1.9 million** in acquisition-related expenses[182](index=182&type=chunk) - Net income decreased by **$20.9 million** (**98.9%**) to **$0.2 million** in FY2023, primarily due to decreased sales, lower gross profit, and increased operating expenses[187](index=187&type=chunk) Liquidity and Capital Resources (in thousands) | Metric | March 31, 2023 | March 31, 2022 | Change ($) | | :-------------------------------- | :------------- | :------------- | :--------- | | Working Capital | $95,000 | $117,800 | $(22,800) | | Cash and Cash Equivalents | $104,086 | $111,080 | $(6,994) | | Net Cash from Operating Activities | $27,803 | $18,498 | $9,305 | | Net Cash Used in Investing Activities | $(10,260) | $(1,752) | $(8,508) | | Net Cash Used in Financing Activities | $(24,537) | $(24,384) | $(153) | - Working capital decreased by **$22.8 million**, primarily due to lower income and cash used for the **$5 million** Vetster investment and **$5.3 million** in property and equipment additions[202](index=202&type=chunk) - Acquisition of PetCareRx for approximately **$36.0 million** in cash closed on April 3, 2023[205](index=205&type=chunk) [Executive Summary](index=27&type=section&id=Executive%20Summary) PetMed Express is a leading nationwide direct-to-consumer pet pharmacy and online provider of prescription and non-prescription medications, food, supplements, supplies, and vet services - PetMed Express is a leading nationwide direct-to-consumer pet pharmacy and online provider of prescription and non-prescription medications, food, supplements, supplies, and vet services[150](index=150&type=chunk) - The company markets through its websites, toll-free numbers, and mobile applications, with approximately **86.4% of sales** generated via the Internet in fiscal 2023[150](index=150&type=chunk)[152](index=152&type=chunk) - The average purchase remained approximately **$93 per order** for fiscal years ended March 31, 2023, and March 31, 2022[152](index=152&type=chunk) [Critical Accounting Policies](index=27&type=section&id=Critical%20Accounting%20Policies) Critical accounting policies include revenue recognition at the shipping point, inventory valuation at the lower of cost or net realizable value, and expensing advertising costs as incurred - Revenue is recognized when control transfers to the customer at the shipping point, with outbound shipping and handling fees included in sales[154](index=154&type=chunk)[155](index=155&type=chunk) Sales Disaggregation (in thousands) | Category | FY2023 Sales | FY2023 % | FY2022 Sales | FY2022 % | | :--------- | :----------- | :------- | :----------- | :------- | | Reorder sales | $232,633 | 90.6% | $244,505 | 89.4% | | New order sales | $24,225 | 9.4% | $28,912 | 10.6% | | Internet sales | $221,894 | 86.4% | $230,263 | 84.2% | | Call center sales | $34,964 | 13.6% | $43,154 | 15.8% | - The definition of a new customer was changed on April 1, 2022, to include anyone who has not ordered over the past thirty-six months[156](index=156&type=chunk) - Inventory is valued at the lower of cost or net realizable value using a weighted average cost method, with an inventory reserve of **$48 thousand** at March 31, 2023 (down from **$81 thousand** in 2022)[160](index=160&type=chunk)[161](index=161&type=chunk) - Advertising costs (Internet, direct mail/print, television) are expensed as incurred or when distributed/televised[162](index=162&type=chunk) - Income taxes are accounted for under ASC Topic 740, recognizing deferred tax assets and liabilities based on temporary differences[163](index=163&type=chunk) [COVID-19 and Other Macroeconomic Factors](index=29&type=section&id=COVID-19%20and%20Other%20Macroeconomic%20Factors) The COVID-19 pandemic and macroeconomic factors like inflation and potential recession indicators continue to create volatility and uncertainty, impacting the global economy - The COVID-19 pandemic and macroeconomic factors like inflation and potential recession indicators continue to create volatility and uncertainty, impacting the global economy[164](index=164&type=chunk) - The company monitors these effects and takes steps to mitigate impact, but the future nature and extent of the impact remain difficult to predict[164](index=164&type=chunk) [Results of Operations](index=30&type=section&id=Results%20of%20Operations) The company's fiscal 2023 results show a **6.1%** sales decrease and a **98.9%** net income decline, driven by higher operating expenses and reduced gross profit margins Operating Data as a Percentage of Sales | Metric | 2023 | 2022 | 2021 | | :------------------------ | :----- | :----- | :----- | | Sales | 100.0% | 100.0% | 100.0% | | Cost of sales | 72.4% | 71.4% | 70.9% | | Gross profit | 27.6% | 28.6% | 29.1% | | General and administrative | 19.3% | 11.3% | 9.1% | | Advertising | 7.6% | 6.9% | 7.0% | | Depreciation | 1.4% | 1.0% | 0.8% | | (Loss) income from operations | (0.7)% | 9.4% | 12.2% | | Total other income | 1.2% | 0.5% | 0.5% | | Income before provision for income taxes | 0.5% | 9.9% | 12.7% | | Provision for income taxes | 0.5% | 2.2% | 2.8% | | Net income | 0.0% | 7.7% | 9.9% | Adjusted EBITDA Reconciliation (in thousands) | Metric | FY2023 | FY2022 | Change ($) | Change (%) | | :----------------------------------- | :----- | :----- | :--------- | :--------- | | Net Income | $233 | $21,100 | $(20,867) | -99% | | Share-based Compensation | $6,617 | $4,549 | $2,068 | 45% | | Income Taxes | $1,351 | $5,971 | $(4,620) | -77% | | Depreciation | $3,546 | $2,738 | $808 | 30% | | Interest Income | $(2,070) | $(335) | $(1,735) | 518% | | Acquisition/Partnership Transactions | $1,904 | — | $1,904 | n/m | | Employee Severance | $364 | — | $364 | n/m | | State Sales Tax Accrual | $7,825 | — | $7,825 | n/m | | **Adjusted EBITDA** | **$19,770** | **$34,023** | **$(14,253)** | **-42%** | - Sales decreased by **6.1%** to **$256.9 million** in FY2023 from **$273.4 million** in FY2022, driven by increased new customer acquisition costs and competitive pressures[173](index=173&type=chunk) - New customer acquisitions decreased from **325,000** in FY2022 to **274,000** in FY2023[174](index=174&type=chunk) - AutoShip program sales reached **44.4% of net sales** in Q4 FY2023, up from **30.9%** in Q4 FY2022, with a target of **50%** for FY2024[177](index=177&type=chunk) - Cost of sales decreased by **4.9%** to **$185.8 million** in FY2023, but increased as a percentage of sales to **72.4%** (from **71.4%**) due to higher per order freight expense[180](index=180&type=chunk) - Gross profit decreased by **9.0%** to **$71.0 million** in FY2023, with gross profit margin at **27.6%** (down from **28.6%**)[181](index=181&type=chunk) - General and administrative expenses increased by **60.5%** to **$49.5 million** in FY2023, primarily due to a **$5.8 million** increase in payroll (including stock compensation and severance), **$1.9 million** in professional fees, **$1.0 million** in software/systems, a **$7.8 million** sales tax accrual, and **$1.9 million** in acquisition-related expenses[182](index=182&type=chunk) - Advertising expenses increased by **$0.6 million** to **$19.4 million** in FY2023, with customer acquisition cost rising to **$71** (from **$58** in FY2022) due to higher advertising prices and less efficient marketing spend[183](index=183&type=chunk) - Depreciation expense increased to **$3.5 million** in FY2023 from **$2.7 million** in FY2022 due to new property and equipment additions[184](index=184&type=chunk) - Other income increased by **$1.7 million** to **$3.0 million** in FY2023, mainly from higher interest income due to increased interest rates[185](index=185&type=chunk) - Income tax provision decreased to **$1.4 million** in FY2023 from **$6.0 million** in FY2022, but the effective tax rate increased to **85.3%** (from **22.1%**) due to one-time non-deductible acquisition costs and restricted stock compensation[186](index=186&type=chunk) - Net income decreased by **98.9%** to **$0.2 million** in FY2023 from **$21.1 million** in FY2022[187](index=187&type=chunk) - Sales decreased by **11.6%** to **$273.4 million** in FY2022 from **$309.2 million** in FY2021, impacted by a more competitive environment, higher advertising costs, and increased veterinary visits post-pandemic[188](index=188&type=chunk) - New customer acquisitions decreased from **546,000** in FY2021 to **325,000** in FY2022[189](index=189&type=chunk) - Cost of sales increased as a percentage of sales to **71.4%** in FY2022 (from **70.9%**) due to manufacturers shifting rebate funding from product discounts to cooperative marketing[193](index=193&type=chunk) - Gross profit decreased by **13.2%** to **$78.1 million** in FY2022, with gross profit margin at **28.6%** (down from **29.1%**)[194](index=194&type=chunk) - General and administrative expenses increased by **9.0%** to **$30.8 million** in FY2022, mainly due to higher payroll (including stock compensation) and professional fees[195](index=195&type=chunk) - Advertising expenses decreased by **$2.8 million** to **$18.8 million** in FY2022 due to increased cooperative marketing funds, despite flat overall spending, with customer acquisition cost rising to **$58** (from **$40** in FY2021)[197](index=197&type=chunk) - Net income decreased by **31%** to **$21.1 million** in FY2022 from **$30.6 million** in FY2021[201](index=201&type=chunk) [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with **$104.1 million** in cash, despite a **$22.8 million** decrease in working capital due to lower income and strategic investments Liquidity and Capital Resources (in thousands) | Metric | March 31, 2023 | March 31, 2022 | Change ($) | | :-------------------------------- | :------------- | :------------- | :--------- | | Working Capital | $95,000 | $117,800 | $(22,800) | | Cash and Cash Equivalents | $104,086 | $111,080 | $(6,994) | | Net Cash Provided by Operating Activities | $27,803 | $18,498 | $9,305 | | Net Cash Used in Investing Activities | $(10,260) | $(1,752) | $(8,508) | | Net Cash Used in Financing Activities | $(24,537) | $(24,384) | $(153) | - The **$22.8 million** decrease in working capital was primarily due to lower income from operations and cash used for the **$5 million** Vetster investment and **$5.3 million** in property and equipment additions[202](index=202&type=chunk) - Net cash provided by operating activities increased to **$27.8 million** in FY2023 from **$18.5 million** in FY2022, driven by increased accounts payable/accrued expenses and decreased inventory, partially offset by lower net income[203](index=203&type=chunk) - Net cash used in investing activities increased to **$10.3 million** in FY2023 from **$1.8 million** in FY2022, mainly due to the Vetster investment and higher property/equipment additions[203](index=203&type=chunk) - Net cash used in financing activities remained stable at approximately **$24.5 million** in both FY2023 and FY2022, primarily for dividend payments[203](index=203&type=chunk) - As of March 31, 2023, **$28.7 million** remained under the share repurchase program[204](index=204&type=chunk) - The acquisition of PetCareRx for approximately **$36.0 million** in cash closed on April 3, 2023[205](index=205&type=chunk) [Recent Accounting Pronouncements](index=38&type=section&id=Recent%20Accounting%20Pronouncements) No recently issued, but not yet effective, accounting standards are expected to have a material effect on the company's consolidated financial position, results of operations, or cash flows - No recently issued, but not yet effective, accounting standards are expected to have a material effect on the company's consolidated financial position, results of operations, or cash flows[207](index=207&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate fluctuations on its **$104.1 million** cash and cash equivalents, with no exposure to derivatives or debt obligations - Primary market risk is interest rate risk, affecting returns on cash and cash equivalents[208](index=208&type=chunk) - As of March 31, 2023, the company had **$104.1 million** in cash and cash equivalents, managed within guidelines to limit market risk by holding federally-insured bank deposits and highly-liquid investments with maturities of three months or less[208](index=208&type=chunk)[209](index=209&type=chunk) - The company does not hold derivative financial instruments and had no debt obligations at March 31, 2023[209](index=209&type=chunk) [Financial Statements and Supplementary Data](index=40&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section provides audited consolidated financial statements for fiscal years 2021-2023, with an unqualified audit opinion on financials but a noted material weakness in internal control over financial reporting - The independent registered public accounting firm issued an unqualified opinion on the consolidated financial statements for the periods ended March 31, 2023, 2022, and 2021[213](index=213&type=chunk) - The auditor expressed an opinion that the company had not maintained effective internal control over financial reporting as of March 31, 2023, due to a material weakness related to inappropriate segregation of duties over manual journal entries[214](index=214&type=chunk) Consolidated Balance Sheets (in thousands) | ASSETS | March 31, 2023 | March 31, 2022 | | :---------------------------------------------------------------- | :------------- | :------------- | | Cash and cash equivalents | $104,086 | $111,080 | | Accounts receivable, net | $1,740 | $1,913 | | Inventories - finished goods | $19,023 | $32,455 | | Prepaid expenses and other current assets | $4,719 | $4,866 | | Prepaid income taxes | $1,883 | $681 | | **Total current assets** | **$131,451** | **$150,995** | | Property and equipment, net | $26,178 | $24,464 | | Intangible and other assets | $5,860 | $860 | | Deferred tax assets | $628 | — | | **Total noncurrent assets** | **$32,666** | **$25,324** | | **Total assets** | **$164,117** | **$176,319** | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Accounts payable | $25,208 | $27,500 | | Accrued expenses and other current liabilities | $11,289 | $5,697 | | **Total current liabilities** | **$36,497** | **$33,197** | | Deferred tax liabilities | — | $936 | | Other long-term liabilities | $3,825 | — | | **Total liabilities** | **$40,322** | **$34,133** | | Total shareholders' equity | $123,795 | $142,186 | | **Total liabilities and shareholders' equity** | **$164,117** | **$176,319** | Consolidated Statements of Income (in thousands, except per share amounts) | Metric | FY2023 | FY2022 | FY2021 | | :----------------------------------- | :----- | :----- | :----- | | Sales | $256,858 | $273,417 | $309,215 | | Cost of sales | $185,844 | $195,341 | $219,267 | | Gross profit | $71,014 | $78,076 | $89,948 | | General and administrative expenses | $49,474 | $30,829 | $28,293 | | Advertising expenses | $19,424 | $18,799 | $21,641 | | Depreciation | $3,546 | $2,738 | $2,427 | | (Loss) income from operations | $(1,430) | $25,710 | $37,587 | | Total other income | $3,014 | $1,361 | $1,629 | | Income before provision for income taxes | $1,584 | $27,071 | $39,216 | | Provision for income taxes | $1,351 | $5,971 | $8,613 | | **Net income** | **$233** | **$21,100** | **$30,603** | | Basic Net income per common share | $0.01 | $1.05 | $1.53 | | Diluted Net income per common share | $0.01 | $1.04 | $1.52 | | Cash dividends declared per common share | $1.20 | $1.20 | $1.12 | Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | FY2023 | FY2022 | FY2021 | | :----------------------------------- | :----- | :----- | :----- | | Net cash provided by operating activities | $27,803 | $18,498 | $40,075 | | Net cash used in investing activities | $(10,260) | $(1,752) | $(2,432) | | Net cash used in financing activities | $(24,537) | $(24,384) | $(22,687) | | Net (decrease) increase in cash and cash equivalents | $(6,994) | $(7,638) | $14,956 | | Cash and cash equivalents, at end of year | $104,086 | $111,080 | $118,718 | - The company's allowance for doubtful accounts was **$35 thousand** at March 31, 2023, down from **$39 thousand** in 2022[236](index=236&type=chunk) - The inventory reserve for estimated obsolescence was **$48 thousand** at March 31, 2023, down from **$81 thousand** in 2022[240](index=240&type=chunk) - Deferred tax assets increased to **$3.155 million** in FY2023 from **$1.053 million** in FY2022, while deferred tax liabilities decreased to **$2.527 million** from **$1.989 million**[261](index=261&type=chunk) - The effective tax rate for FY2023 was **85.3%**, significantly higher than **22.1%** in FY2022, primarily due to non-deductible acquisition costs and restricted stock compensation, and a one-time true-up for new state filings[265](index=265&type=chunk) - Unrecognized compensation costs related to restricted stock were **$9.1 million** at March 31, 2023, expected to be recognized over a weighted average period of **1.6 years**[281](index=281&type=chunk) - The company recorded a **$7.8 million** increase for potential sales tax exposure in FY2023, with **$4.0 million** in current liabilities and **$3.8 million** in long-term liabilities[291](index=291&type=chunk) - The company made a **$5.0 million** minority interest investment in Vetster Inc. in April 2022 as part of a three-year partnership agreement[307](index=307&type=chunk) - The acquisition of PetCareRx, Inc. for approximately **$36.0 million** in cash closed on April 3, 2023, making it a wholly-owned subsidiary[308](index=308&type=chunk)[309](index=309&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=66&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) PetMed Express reported no changes in or disagreements with its accountants on accounting and financial disclosure matters - No changes in or disagreements with accountants on accounting and financial disclosure[332](index=332&type=chunk) [Controls and Procedures](index=66&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that internal controls were ineffective as of March 31, 2023, due to a material weakness in segregation of duties over manual journal entries, though no financial misstatement occurred - Management concluded that disclosure controls and procedures were not effective as of March 31, 2023[333](index=333&type=chunk) - A material weakness was identified due to inadequate segregation of duties over the preparation, approval, and posting of manual journal entries[335](index=335&type=chunk) - Management believes the material weakness did not result in a misstatement of the financial statements[318](index=318&type=chunk)[335](index=335&type=chunk) - A remediation plan is being developed to increase resources and modify processes to address the segregation of duties issue[319](index=319&type=chunk)[336](index=336&type=chunk) - No other material changes in internal control over financial reporting occurred during the fourth quarter ended March 31, 2023[337](index=337&type=chunk) [Other Information](index=68&type=section&id=Item%209B.%20Other%20Information) This item is not applicable to PetMed Express, Inc - Not applicable[340](index=340&type=chunk) [Disclosure Regarding Foreign Jurisdictions That Prevent Inspections](index=68&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20That%20Prevent%20Inspections) PetMed Express reported no disclosures regarding foreign jurisdictions that prevent inspections - No disclosures regarding foreign jurisdictions that prevent inspections[341](index=341&type=chunk) Part III [Directors, Executive Officers, and Corporate Governance](index=69&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%2C%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement, and the company maintains a Code of Business Conduct and Ethics - Information is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Shareholders[344](index=344&type=chunk) - The company has a Corporate Code of Business Conduct and Ethics applicable to all officers, directors, and employees, available on its website[345](index=345&type=chunk) [Executive Compensation](index=69&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation for PetMed Express is incorporated by reference from the company's 2023 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Shareholders[346](index=346&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters](index=69&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Shareholder%20Matters) Information regarding security ownership of certain beneficial owners and management, and related shareholder matters (excluding equity compensation plan details already in Item 5), is incorporated by reference from the company's 2023 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Shareholders[347](index=347&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=69&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding certain relationships, related transactions, and director independence for PetMed Express is incorporated by reference from the company's 2023 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Shareholders[348](index=348&type=chunk) [Principal Accountant Fees and Services](index=69&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services for PetMed Express is incorporated by reference from the company's 2023 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Shareholders[349](index=349&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=70&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section details all exhibits and financial statement schedules filed with the Form 10-K, including corporate documents, material contracts, and certifications - Includes consolidated financial statements, articles of incorporation, by-laws, and instruments defining security holders' rights[352](index=352&type=chunk)[353](index=353&type=chunk)[354](index=354&type=chunk) - Lists material contracts, including various equity compensation plans (2015 Outside Director, 2016 Employee, 2022 Employee) and executive employment agreements (Mathew N. Hulett, Christine Chambers)[355](index=355&type=chunk)[356](index=356&type=chunk) - Also includes subsidiaries of the registrant, consents of experts, and certifications (CEO/CFO pursuant to Rule 13a-14(a)/15d-14(a) and Section 1350)[356](index=356&type=chunk) [Form 10–K Summary](index=72&type=section&id=Item%2016.%20Form%2010%E2%80%93K%20Summary) This item indicates that no Form 10-K Summary is provided - No Form 10-K Summary is provided[358](index=358&type=chunk) Signatures [Signatures](index=73&type=section&id=SIGNATURES) The report is duly signed by the principal executive and financial officers, along with the Board of Directors, as of May 23, 2023 - The report is signed by Mathew N. Hulett (CEO, President, Director) and Christine Chambers (CFO, Treasurer), along with the Chairman of the Board and other directors[362](index=362&type=chunk)[363](index=363&type=chunk) - The signing date for the report is May 23, 2023[362](index=362&type=chunk)