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PetMed Express(PETS) - 2025 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements The Q2 2024 financial statements show decreased sales and gross profit, a net income turnaround from reduced G&A, negative operating cash flow, and restated prior period financials Condensed Consolidated Balance Sheets As of June 30, 2024, total assets decreased to $152.7 million, driven by reduced cash and cash equivalents, while total liabilities also declined due to lower accounts payable Balance Sheet Highlights (In thousands) | Balance Sheet Highlights (In thousands) | June 30, 2024 (Unaudited) | March 31, 2024 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $45,992 | $55,296 | | Total current assets | $77,624 | $93,648 | | Goodwill | $26,658 | $26,658 | | Total assets | $152,714 | $169,884 | | Liabilities & Equity | | | | Accounts payable | $24,467 | $37,024 | | Total current liabilities | $58,300 | $72,158 | | Total liabilities | $59,183 | $73,153 | | Total shareholders' equity | $93,531 | $96,731 | Condensed Consolidated Statements of Operations Q2 2024 sales decreased 13.2% to $68.0 million, but a net income of $3.8 million was achieved, primarily due to a significant reduction in G&A expenses from a stock-based compensation reversal Income Statement (In thousands, except per share data) | Income Statement (In thousands, except per share data) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | | :--- | :--- | :--- | | Sales | $67,952 | $78,244 | | Gross Profit | $17,971 | $22,526 | | General and administrative | $4,874 | $15,711 | | Income (loss) from operations | $4,386 | $(2,128) | | Net income (loss) | $3,754 | $(1,136) | | Diluted EPS | $0.18 | $(0.06) | - The significant improvement in net income was driven by a sharp reduction in General and Administrative expenses, which included a stock compensation reversal of $(8,204) thousand compared to an expense of $1,760 thousand in the prior year period8 Condensed Consolidated Statements of Cash Flows Q2 2024 saw net cash used in operating activities of $8.5 million, a decrease from prior year, while investing activities used $0.7 million, and financing activities used $0.1 million after dividend suspension Cash Flow Summary (In thousands) | Cash Flow Summary (In thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(8,517) | $562 | | Net cash used in investing activities | $(683) | $(37,012) | | Net cash used in financing activities | $(104) | $(6,102) | | Net decrease in cash and cash equivalents | $(9,304) | $(42,552) | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, restatement of Q2 2023 financials due to sales tax and deferred tax asset misstatements, revenue recognition, PetCareRx acquisition, stock compensation reversal, and NOL utilization limits - The financial statements for the three months ended June 30, 2023, have been restated to correct material misstatements related to sales tax obligations and the accounting for a deferred tax asset associated with the PetCareRx acquisition2526 - A significant reversal of stock-based compensation expense of $(8.5) million was recorded in Q1 FY25, compared to an expense of $1.6 million in Q1 FY24, primarily due to the cancellation of 510,000 performance restricted shares held by the former CEO, which resulted in an $8.8 million reduction of compensation expense4754 - Following the acquisition of PetCareRx, an IRC Section 382 analysis determined that the utilization of its $96.0 million of net operating losses would be limited and reduced to approximately $14.5 million79 Revenue by Type (In thousands) | Revenue by Type (In thousands) | Q1 2024 | Q1 2023 | % Change | | :--- | :--- | :--- | :--- | | Reorder sales | $60,025 | $68,038 | (11.8)% | | New order sales | $5,603 | $7,820 | (28.4)% | | Membership fees | $2,324 | $2,386 | (2.6)% | | Total net sales | $67,952 | $78,244 | (13.2)% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A attributes the 13.2% sales decrease to macroeconomic factors and promotions, with gross profit margin contracting, while a significant G&A expense reduction from a stock compensation reversal led to net income, and working capital decreased Results of Operations Q2 2024 sales decreased 13.2% to $68.0 million, gross profit dropped 20.2%, but operating expenses fell 69.0% due to a $10.0 million stock compensation reduction, leading to $4.4 million income from operations - Sales decreased by 13.2% to $68.0 million, reflecting declines in reorder sales (-11.8%) and new order sales (-28.4%) due to macroeconomic factors and higher promotional usage109110 - General and administrative expenses decreased by $10.8 million (69.0%), primarily due to a $10.0 million decrease in stock compensation expense, of which $8.7 million was from a reversal associated with an executive departure114 - The cost of acquiring a new customer increased to $93 from $84 in the prior year, attributed to less efficient variable marketing spend115 Non-GAAP Financial Measures Adjusted EBITDA, a non-GAAP measure, was negative $1.5 million in Q2 2024, a decline from $3.3 million last year, driven by lower gross profit and calculated after excluding a stock compensation reversal Reconciliation to Adjusted EBITDA (In thousands) | Reconciliation to Adjusted EBITDA (In thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net income (loss) | $3,754 | $(1,136) | | Share-based Compensation | $(8,204) | $1,760 | | Income Taxes | $958 | $(292) | | Depreciation and Amortization | $1,721 | $1,678 | | Interest Income, Net | $(95) | $(194) | | Other Items & Severance | $329 | $1,519 | | Adjusted EBITDA | $(1,537) | $3,335 | Liquidity and Capital Resources Working capital decreased to $19.3 million as of June 30, 2024, due to a larger reduction in current assets than liabilities, with the quarterly dividend remaining suspended to fund growth initiatives - Working capital decreased by $2.2 million during the quarter to $19.3 million119 - The Board of Directors suspended the quarterly dividend indefinitely in October 2023 to focus the use of cash on growth and other higher-return initiatives121 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on its $46.0 million cash and cash equivalents, held in liquid investments, with no derivative financial instruments or debt obligations as of June 30, 2024 - The company's main market risk is interest rate risk on its $46.0 million cash and cash equivalents balance123 - As of June 30, 2024, the company had no debt obligations and did not hold any derivative financial instruments123 Item 4. Controls and Procedures As of June 30, 2024, disclosure controls and procedures were deemed ineffective due to two material weaknesses: one in GAAP application for tax liabilities and acquisition accounting, and another in IT general controls, with remediation plans underway - Management concluded that disclosure controls and procedures were not effective as of June 30, 2024, due to identified material weaknesses124 - A material weakness was identified in the design of controls over the application of GAAP for the company's sales tax liability, executive compensation deductibility (IRC 162(m)), and the valuation of deferred tax assets and goodwill from the PetCareRx acquisition126 - A second material weakness was identified in IT general controls (ITGCs) related to user access, change management, and service organizations over IT systems supporting financial reporting127 PART II - OTHER INFORMATION Item 1. Legal Proceedings The company faces a class action lawsuit in Pennsylvania alleging violations of consumer protection law regarding pricing representations, denying liability and unable to estimate potential loss - The company is a defendant in a class action lawsuit in Pennsylvania alleging that it represented "reg." prices for products that it never actually charged, in violation of consumer protection laws72 - The company denies liability and cannot determine the materiality or estimate a range of potential loss at this time72 Item 1A. Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended March 31, 2024 - No material changes have been made to the risk factors disclosed in the 2024 Form 10-K135