10-K 1 pets20200331_10k.htm FORM 10-K pets20200331_10k.htm
 

 



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

       For the fiscal year ended March 31, 2020

OR

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number 000-28827


PETMED EXPRESS, INC.

(Exact name of registrant as specified in its charter)

FLORIDA

65-0680967

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

   

420 South Congress Avenue, Delray Beach, Florida 33445

(Address of principal executive offices) (Zip Code)

 

 Registrant’s telephone number, including area code: (561) 526-4444

     Securities registered under Section 12(b) of the Act:

 

Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, PETS The NASDAQ Stock Market LLC
$.001 Par value per share   (NASDAQ Global Select Market)
Securities registered under Section 12(g) of the Act:
NONE
 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer  Accelerated filer 
  Non-accelerated filer  Smaller reporting company
      Emerging growth company  

                                            

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant as of September 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was $349.1 million based on the closing sales price of the registrant’s Common Stock on that date, as reported on the NASDAQ Global Select Market.

 

The number of shares of the registrant’s Common Stock outstanding as of May 26, 2020 was 20,166,382.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Information to be set forth in our Proxy Statement relating to our 2020 Annual Meeting of Stockholders to be held on July 31, 2020 is incorporated by reference in Items 10, 11, 12, 13, and 14 of Part III of this report.

 



 

 

 

 

PETMED EXPRESS, INC.

 

2020 Annual Report on Form 10-K

 

TABLE OF CONTENTS

 

    Page
PART I   1
Item 1. Business  1
Item 1A.   Risk Factors   6
Item 1B. Unresolved Staff Comments  12
Item 2.    Properties 12
Item 3. Legal Proceedings   12
Item 4. Mine Safety Disclosures  12
     
PART II   13
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 13
Item 6. Selected Financial Data  16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations  17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   45
Item 9A. Controls and Procedures   45
Item 9B. Other Information 45
     
PART III   46
Item 10. Directors, Executive Officers, and Corporate Governance    46
Item 11. Executive Compensation 46
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 46
Item 13. Certain Relationships and Related Transactions, and Director Independence  46
Item 14. Principal Accountant Fees and Services  46
     
PART IV   47
Item 15. Exhibits, Financial Statement Schedules   47
Item 16. Form 10-K Summary  48
     
SIGNATURES  49

 

 

 
 

 

PART I

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

Certain information in this Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the words "believes," "intends," "expects," "may," "will," "should," "plan," "projects," "contemplates," "intends," "budgets," "predicts," "estimates," "anticipates," or similar expressions. These statements are based on our beliefs, as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. A reader, whether investing in our common stock or not, should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report on Form 10-K. When used in this Annual Report on Form 10-K, "PetMed Express," "1-800-PetMeds," “PetMeds,” "PetMed," “PetMeds.com,” "PetMed Express.com," "the Company," "we," "our," and "us" refer to PetMed Express, Inc. and our wholly-owned subsidiaries.

 

ITEM 1. BUSINESS

 

General

 

PetMed Express, Inc. and subsidiaries, d/b/a 1-800-PetMeds, is a leading nationwide pet pharmacy. The Company markets prescription and non-prescription pet medications, and other health products for dogs, cats, and horses direct to the consumer. The Company offers consumers an attractive alternative for obtaining pet medications in terms of convenience, price, and speed of delivery.

 

The Company markets its products through national advertising campaigns, which aim to increase the recognition of the “1-800-PetMeds” brand name, and “PetMeds” family of trademarks, increase traffic on its website at www.1800petmeds.com, acquire new customers, and maximize repeat purchases. Our fiscal year end is March 31, our executive offices are currently located at 420 South Congress Avenue, Delray Beach, Florida 33445, and our telephone number is (561) 526-4444.

 

Our Products

 

We offer a broad selection of products for dogs, cats, and horses. Our current product line contains approximately 2,500 SKUs of the most popular pet medications, health products, and supplies. These products include a majority of the well-known brands of pet medications. Generally, our prices are competitive with the prices for medications charged by veterinarians, online retailers and other retailers. We also offer for sale additional pet supplies on our website, which are drop shipped to our customers by third parties. These pet supplies include: food, beds, crates, stairs, strollers, and other popular pet supplies. We research new products, and regularly select new products or the latest generation of existing products to become part of our product selection. In addition, we also refine our current products to respond to changing consumer-purchasing habits. Our website is designed to give us the flexibility to change featured products or promotions. Our product line provides customers with a wide variety of selections across the most popular health categories for dogs, cats, and horses. Our current products include:

 

Non-Prescription Medications (OTC) and supplies: Flea and tick control products, bone and joint care products, vitamins, treats, nutritional supplements, hygiene products, and supplies.

 

Prescription Medications (Rx): Heartworm and flea and tick preventatives, arthritis, dermatitis, thyroid, diabetes, pain medications, heart/blood pressure, and other specialty medications, as well as generic substitutes.

 

Sales

 

We offer our products through three main sales channels: Internet through our website, telephone contact center through our toll-free number, and direct mail/print through brochures and postcards. We have designed our website to provide a convenient, cost-effective, and informative shopping experience that encourages consumers to purchase products important for a pet’s health and quality of life. We believe that these multiple channels allow us to increase the visibility of our brand name and provide our customers with increased shopping flexibility and excellent service.

 

1

 

Internet

 

We seek to combine our product selection and pet health information with the shopping ease of the Internet to deliver a convenient and personalized shopping experience. Our website offers health and nutritional product selections for dogs, cats, and horses, and relevant editorial and easily obtainable or retrievable resource information. Customers can search our website for products and access resources on a variety of information on dogs, cats, and horses. Customers can shop at our website by category, product line, individual product, or symptom. We attracted approximately 30 million visits to our website during fiscal 2020, approximately 9% of those visits resulted in an order, and our website generated approximately 84% of our total sales for the same time period. On our website pet owners have access to health information covering pets’ behavior and illnesses, and natural and pharmaceutical remedies specifically for a pet’s problem. The pet education content on our main website is periodically updated with the latest research for pet owners. As part of our multichannel strategy, we also offer mobile versions of our website (www.1800petmeds.com) and an application for mobile phones, tablets, and other devices. In February 2017, we released our mobile application, which offers customers a more streamlined shopping experience. Mobile application features include: “ask-the-vet”; live web chat; easy refill medication reminders; local veterinarian finder; and express checkout to provide our customers with fast, easy, and helpful service from their mobile devices.

 

Telephone Contact Center

 

Our customer care representatives receive and process inbound and outbound customer calls, facilitate our live web chat, and process customer e-mails. Our telephone system is equipped with certain features including pop-up screens and call blending capabilities that give us the ability to efficiently utilize our customer care representatives’ time, providing excellent customer care, service, and support. Our customer care representatives receive a base salary and are rewarded with commissions for sales, and bonuses and other awards for achieving certain quality goals.

 

Direct Mail/Print

 

We mail brochures and postcards in response to requests generated from our advertising and as part of direct mail campaigns to our customers.

 

Our Customers

 

Approximately 2.3 million customers have purchased from us within the last two years. We attracted approximately 421,000 and 467,000 new customers in fiscal 2020 and 2019, respectively. Our customers are located throughout the United States, with approximately 50% of customers residing in California, Florida, Texas, New York, Pennsylvania, North Carolina, Georgia, and Virginia. Our primary focus has been on retail customers and the average purchase was approximately $87 for both fiscal 2020 and fiscal 2019.

 

Marketing

 

The goal of our marketing strategy is to build brand recognition, increase customer traffic, add new customers, build strong customer loyalty, maximize reorders, and develop incremental revenue opportunities. We have an integrated marketing campaign that includes online marketing, television advertising, and direct mail/print and e-mail.

 

Online Marketing

 

We advertise and market our products primarily online. We make our brand available to Internet consumers by purchasing targeted keywords and achieving prominent placement on the top search engines and search engine networks. We utilize Internet display and video advertisements, social media, and comparison shopping, and we are also members of an affiliate program with merchant clients and affiliate websites.

 

2

 

Television Advertising

 

Our television advertising is designed to build brand equity, create brand awareness, and generate initial purchases of products via the telephone and the Internet. Our television commercials typically focus on our ability to rapidly deliver to customers the same medications offered by veterinarians, but at reduced prices. We generally purchase advertising on national cable channels to target our key demographic group – women, ages 30 to 65. We believe that television advertising is particularly effective and instrumental in building brand awareness. Our most current television commercial, airing nationally, speaks to pet owners about the savings and convenience of purchasing the same exact pet medications from 1-800-PetMeds.

 

Direct Mail/Print and E-mail

 

We use direct mail/print and e-mail to acquire new customers and to remind our existing customers to reorder.

 

Operations

 

Order Processing

 

Our website allows customers to easily browse and purchase all of our products online. Our website is designed to be fast, secure, and easy to use with order and shipping confirmations, and with online order tracking capabilities. We provide our customers with toll-free telephone access to our customer care representatives. Our call center generally operates from 7:00 AM to 11:00 PM, Monday through Thursday, 7:00 AM to 9:00 PM on Friday, 9:00 AM to 6:00 PM on Saturday, and 9:00 AM to 5:00 PM on Sunday, Eastern Time. The process of customers purchasing products from 1-800-PetMeds consists of a few simple steps. A customer first places an order online or by calling our toll-free telephone number. The following information is needed to process prescription orders: pet information, prescription information, and the veterinarian’s name and phone number. This information is entered into our computer system. Then our pharmacists and pharmacy technicians verify all prescriptions. The order process system checks for the verification for prescription medication orders and a valid payment method for all orders. Verified orders are then sent to our fulfillment center, where items are picked, and then shipped via the United States Postal Service and Federal Express. Our customers enjoy the convenience of rapid home delivery, with the majority of all orders being shipped within 24 hours of ordering.

 

Customer Care and Support

 

We believe that a high level of customer care and support is critical in retaining and expanding our customer base. Customer care representatives participate in ongoing training programs under the supervision of our training managers. These training sessions include a variety of topics such as product knowledge, computer usage, customer service tips, and the relationship between our Company and veterinarians. Our customer care representatives respond to customers’ e-mails, calls, and live web chats that are related to products, order status, prices, and shipping. We believe our customer care representatives are a valuable source of feedback regarding customer satisfaction.

 

Warehousing and Shipping

 

We inventory our products and fill most customer orders from our corporate headquarters in Delray Beach, Florida. We have an in-house fulfillment and distribution operation, which is used to manage the entire supply chain, beginning with the placement of the order, continuing through order processing, and then fulfilling and shipping of the product to the customer. We offer a variety of shipping options, including next day delivery. We ship to anywhere in the United States served by the United States Postal Service or Federal Express. Priority orders are expedited in our fulfillment process. Our goal is to ship the products the same day that the order is received. For prescription medications, our goal is to ship the product immediately after the prescription has been authorized by the customer’s veterinarian.

 

3

 

Purchasing

 

We purchase our products from a variety of sources, including certain manufacturers, domestic distributors, and wholesalers. There were three suppliers from whom we purchased approximately 60% of all products in fiscal 2020. We believe having strong relationships with product manufacturers and distributors will ensure the availability of an adequate volume of products ordered by our customers. In the past some of the major manufacturers of prescription and non-prescription medications have declined to sell these products to direct marketing companies, such as our company. Part of our growth strategy included developing direct relationships with all of the leading pharmaceutical manufacturers of the more popular prescription and non-prescription medications. We now have direct relationships with all major manufacturers.

 

Technology

 

We utilize integrated technologies in our call centers, e-commerce, order entry, and inventory control/fulfillment operations. Our systems are custom configured by us to optimize our computer telephone integration and mail-order processing. The systems are designed to maintain a large database of specialized information and process a large volume of orders efficiently and effectively. Our systems provide our customer care representatives, and our customers on our website, including on our mobile application, with real time product availability information and updated customer information to enhance our customer care. We also have an integrated direct connection for processing credit cards to ensure that a valid credit card number and authorization have been received at the same time our customer care representatives are on the telephone with the customer or when a customer submits an order on our website. Our information systems provide our customer care representatives with records of all prior contact with a customer, including the customer’s address, telephone number, e-mail address, prescription information, order history, payment history, and notes.

 

Competition

 

The pet medications market is competitive and highly fragmented. Our competitors consist of veterinarians, and online and traditional retailers. We believe that the following are the principal competitive factors in our market:

 

 

Product selection and availability, including the availability of prescription and non-prescription medications;

 

Brand recognition;

 

Reliability and speed of delivery;

 

Personalized service and convenience;

 

Price; and

 

Website usability and content.

 

We compete with veterinarians, and online and traditional retailers for the sale of prescription and non-prescription pet medications and other health products. Many pet owners may prefer the convenience of purchasing their pet medications or other health products at the time of a veterinarian visit. In order to effectively compete with veterinarians, we must continue to educate pet owners about the service, convenience, and savings offered by our Company.

 

According to the American Pet Products Association, pet spending in the United States increased 5.7% to $95.7 billion in 2019. Veterinary care and Rx medications represented $29.3 billion, or 31% of the total spending on pets in the United States. The pet medication market that we participate in is estimated to be approximately $5.5 billion, with veterinarians having the majority of the market share. The dog and cat population is approximately 184 million, with approximately 67% of all households having a pet.

 

We believe that the following are the main competitive strengths that differentiate 1-800-PetMeds from the competition:

 

 

Channel leader, in an estimated $5.5 billion industry;

 

“1-800-PetMeds” brand name;

 

Licensed pharmacy to conduct business in 50 states, and a Pharmacy Verified website (a website verification program by the National Association of Boards of Pharmacy®, which identifies online pharmacies and pharmacy-related websites as safe and legitimate); and

 

Exceptional customer care and support.

 

4

 

Intellectual Property

 

We conduct our business under the trade name “1-800-PetMeds” and use a family of trade names all containing the term “PetMeds” or “PetMed” in some form. We believe the “1-800-PetMeds” trade name, which is also our toll-free telephone number, and the “PetMeds” family of trademarks, have added significant value and are important factors in the marketing of our products. We have also obtained the right to use and control the Internet addresses www.1800petmeds.com, www.1888petmeds.com, www.petmedexpress.com, www.petmed.com, and www.petmeds.com.

 

We also obtained the right to use and control the Internet addresses www.petmeds.pharmacy, www.petmed.pharmacy, and www.1800petmeds.pharmacy, through a National Association of Boards of Pharmacy® initiative to ensure high standards for online pharmacies. We do not expect to lose the ability to use the Internet addresses; however, there can be no assurance in this regard and the loss of these addresses may have a material adverse effect on our financial position and results of operations. We are the exclusive owners of United States Trademark Registrations for “America’s Largest Pet Pharmacy®,” “America’s Most Trusted Pet Pharmacy®,” “Trusted Pet Medication Experts®,” “PetMed Express and Design®,” “1888PetMeds and Design®,” “1-800-PetMeds and Design®,” 1-800-PetMeds®,” and “PetMeds®,” among numerous others.

 

Government Regulation

 

Dispensing prescription medications is governed at the state level by Boards of Pharmacy, or similar regulatory agencies, of each state where prescription medications are dispensed. We are subject to regulation by the State of Florida and are licensed as a community pharmacy by the Florida Board of Pharmacy. Our current license is valid until February 28, 2021, and prior to that date a renewal application will be submitted to the Board of Pharmacy. During fiscal 2015 we obtained a federal registration, and state registrations/permits as required, to dispense Schedule IV controlled substances. We also updated our federal registration and state registrations/permits as required to include the ability to dispense Schedule V controlled substances. Our pharmacy practice is also licensed and/or regulated by 49 other state pharmacy boards, the District of Columbia Board of Pharmacy, and the United States Drug Enforcement Administration, and with respect to our products, by other regulatory authorities including, but not necessarily limited to, the United States Food and Drug Administration (“FDA”) and the United States Environmental Protection Agency. As a licensed pharmacy in the State of Florida, we are subject to the Florida Pharmacy Act and regulations promulgated thereunder. To the extent that we are unable to maintain our license as a community pharmacy with the Florida Board of Pharmacy, or if we do not maintain the licenses granted by other state pharmacy boards, or if we become subject to actions by the FDA, or other enforcement regulators, our distribution of prescription medications to pet owners could cease, which could have a material adverse effect on our financial condition and results of operations.

 

Employees

 

We currently have 214 full time employees, including: 116 in customer care and marketing; 30 in fulfillment and purchasing; 54 in our pharmacy; 6 in information technology; 3 in administrative positions; and 5 in management. None of our employees are represented by a labor union, or governed by any collective bargaining agreements. We consider relations with our employees to be satisfactory.

 

Available Information

 

We file annual, quarterly, and current reports, proxy statements, and other information with the Securities and Exchange Commission ("SEC"). Our SEC filings, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to the Exchange Act are available free of charge over the Internet on our website at www.1800petmeds.com or at the SEC's web site at www.sec.gov. Our SEC filings will be available through our website as soon as reasonably practicable after we have electronically filed or furnished them to the SEC. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K.

 

5

 

ITEM 1A. RISK FACTORS

 

You should carefully consider the risks and uncertainties described below, and all the other information included in this Annual Report on Form 10-K before you decide to invest in our common stock. Any of the following risks could materially adversely affect our business, financial condition, or operating results and could result in a loss of your investment.

 

We may inadvertently fail to comply with various state or federal regulations covering the dispensing of prescription pet medications which may subject us to reprimands, sanctions, probations, fines, suspensions, or the loss of one or more of our pharmacy licenses.

 

The sale and delivery of prescription pet medications is generally governed by state laws and state regulations, and with respect to controlled substances, also by federal law. Since our pharmacy is located in the State of Florida, the Company is governed by the laws and regulations of the State of Florida. Each prescription pet medication sale we make is likely also to be covered by the laws of the state where the customer is located. The laws and regulations relating to the sale and delivery of prescription pet medications vary from state to state, but generally require that prescription pet medications be dispensed with the authorization from a prescribing veterinarian. To the extent that we are unable to maintain our license as a community pharmacy with the Florida Board of Pharmacy, or if we do not maintain the licenses granted by other state boards, or if we become subject to actions by the FDA, or other enforcement regulators, our dispensing of prescription medications to pet owners could cease, which could have a material adverse effect on our operations.

 

The Company is a party to routine litigation and administrative complaints incidental to its business. Management does not believe that the resolution of any or all of such routine litigation and administrative complaints is likely to have a material adverse effect on the Company’s financial condition or results of operations. While we make every effort to fully comply with all applicable state rules, laws, and regulations, from time to time we have been the subject of administrative complaints regarding the authorization of prescriptions prior to shipment. We cannot assure you that we will not be the subject of administrative complaints in the future. We cannot guarantee you that we will not be subject to reprimands, sanctions, probations, or fines, or that one or more of our pharmacy licenses will not be suspended or revoked. If we were unable to maintain our license as a community pharmacy in the State of Florida, or if we are not granted licensure in a state that begins to require licensure, or if one or more of the licenses granted by other state boards should be suspended or revoked, our ability to continue to sell prescription medications and to continue our business as it is presently conducted could be in jeopardy.

 

Our failure to properly manage our inventory may result in excessive inventory carrying costs, or inadequate supply of products, which could materially adversely affect our financial condition and results of operations.

 

Our current product line contains approximately 2,500 SKUs. A significant portion of our sales is attributable to products representing approximately 100 SKUs, including the most popular flea and tick, and heartworm preventative brands. We need to properly manage our inventory to provide an adequate supply of these products and avoid excessive inventory of the products representing the balance of the SKUs. We generally place orders for products with our suppliers based upon our internal estimates of the amounts of inventory we will need to fill future orders. These estimates may be significantly different from the actual orders we receive.

 

In the event that subsequent orders fall short of original estimates, we may be left with excess inventory. Significant excess inventory could result in price discounts and increased inventory carrying costs. Similarly, if we fail to have an adequate supply of some SKUs, we may lose sales opportunities. We cannot guarantee that we will maintain appropriate inventory levels. Any failure on our part to maintain appropriate inventory levels may have a material adverse effect on our financial condition and results of operations.

 

Resistance from veterinarians to authorize prescriptions, or attempts/efforts on their part to discourage pet owners from purchasing from internet mail-order pharmacies could cause our sales to decrease and could materially adversely affect our financial condition and results of operations.

 

Since we began our operations some veterinarians have resisted providing our customers with a copy of their pet’s prescription or authorizing the prescription to our pharmacy staff, thereby effectively preventing us from filling such prescriptions under state law. We have also been informed by customers and consumers that veterinarians have tried to discourage pet owners from purchasing from internet mail-order pharmacies.

 

6

 

Although veterinarians in some states are required by law to provide a pet owner with a prescription if medically appropriate, if the number of veterinarians who refuse to authorize prescriptions should increase, or if veterinarians are successful in discouraging pet owners from purchasing from internet mail-order pharmacies, our sales could decrease and our financial condition and results of operations may be materially adversely affected.

 

Significant portions of our sales are made to residents of eight states. If we should lose our pharmacy license in one or more of these states, our financial condition and results of operations would be materially adversely affected.

 

While we ship pet medications to customers in all 50 states, approximately 50% of our sales for the fiscal year ended March 31, 2020 were made to customers located in the states of California, Florida, Texas, New York, Pennsylvania, North Carolina, Georgia, and Virginia. If for any reason our license to operate a pharmacy in one or more of those states should be suspended or revoked, or if it is not renewed, our ability to sell prescription medications to residents of those states would cease and our financial condition and results of operations in future periods would be materially adversely affected.

 

We face significant competition from veterinarians and online and traditional retailers and may not be able to compete profitably with them.

 

We compete directly and indirectly with veterinarians for the sale of pet medications and other health products. Veterinarians hold a competitive advantage over us because many pet owners may find it more convenient or preferable to purchase these products directly from their veterinarians at the time of an office visit. We also compete directly and indirectly with both online and traditional retailers. Both online and traditional retailers may hold a competitive advantage over us because of longer operating histories, established brand names, greater resources, and/or an established customer base. Online retailers may have a competitive advantage over us because of established affiliate relationships to drive traffic to their website. Traditional retailers may hold a competitive advantage over us because pet owners may prefer to purchase these products from a store instead of online or through catalog or telephone methods. In addition, we face growing competition from online and multichannel retailers, some of whom may have a lower cost structure than ours, as customers now routinely use computers, tablets, smartphones, and other mobile devices and mobile applications to shop online and compare prices and products in real time. In order to effectively compete in the future, we may be required to offer promotions and other incentives, which may result in lower operating margins and adversely affect the results of operations. We also face a significant challenge from our competitors forming alliances with each other, such as those between online and traditional retailers. These relationships may enable both their online and retail stores to negotiate better pricing and better terms from suppliers by aggregating the demand for products and negotiating volume discounts, which could be a competitive disadvantage to us.

 

We now have direct buying relationships with all of the major pet medication manufacturers; the contractual relationship depends on our compliance with their minimum advertised pricing policies (MAPP).

 

During fiscal 2020, the Company established direct purchasing relationships with all of the major pet medication manufacturers. These relationships entitle the Company to buy directly from the manufacturer under the terms and conditions of a purchasing agreement which dictates purchase pricing of inventory and criteria to obtain additional discounts and rebates. The terms of these agreements also require the Company to comply with the manufacturers’ MAPP. Each advertisement and/or promotion of a product below the MAPP price will be a violation of the policy. This policy applies to all advertisements of products in all media including, without limitation, flyers, posters, coupons, mailers, inserts, newspapers, magazines, on-line catalogs, mail order catalogs, public signage and all Internet or similar electronic media, television, radio and public signage. on-line catalogs, mail order catalogs, television, radio, public signage, flyers, posters, coupons, mailers, inserts, newspapers, magazines, and all internet or similar electronic media, including websites, email newsletters, forums, and auction sites.

 

At the discretion of the manufacturers, non-compliance with the MAPP can result in one or more of the following actions: (1) forfeiture of future rebates or discounts from the manufacturer, (2) suspension of future purchases from the manufacturer, (3) or termination of current or future business relationship. The Company has and will make every attempt to abide by the manufacturers MAPP. However, no assurances can be made that the Company will not violate MAPP inadvertently. A reduction or discontinuance of these rebates or discounts would increase our costs and could reduce our profitability. If any of these major pet medication manufacturers were to terminate our purchasing relationship it could materially adversely affect our business. If the manufacturers are not able to enforce their MAPP industry-wide, then our profit margins and results of operations may also be impacted negatively.

 

7

 

The loss of any of our key suppliers would negatively impact our business.

 

During fiscal 2020, the Company established direct purchasing relationships with all of the major pet medication manufacturers. We purchase significant quantities of pet medication products, with the majority from these major manufacturers. We do maintain annual purchasing contracts with these major manufacturers. While we believe that our vendor relationships are good, a vendor could discontinue selling to us at any time. The loss of any of our key vendors of pet medications offered by us would have a negative impact on our business, financial condition and results of operations.

 

The content of our website could expose us to various kinds of liability, which, if prosecuted successfully, could negatively impact our business.

 

Because we post product and pet health information and other content on our website, we face potential liability for negligence, copyright infringement, patent infringement, trademark infringement, defamation, and/or other claims based on the nature and content of the materials we post. Various claims have been brought, and sometimes successfully prosecuted, against Internet content distributors. We could be exposed to liability with respect to the unauthorized duplication of content or unauthorized use of other parties’ proprietary technology. Although we maintain general liability insurance, our insurance may not cover potential claims of this type, or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance, or is in excess of insurance coverage, could materially adversely affect our financial condition and results of operations.

 

We may not be able to protect our intellectual property rights, and/or we may be found to infringe on the proprietary rights of others.

 

We rely on a combination of trademarks, trade secrets, copyright laws, and contractual restrictions to protect our intellectual property rights. These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our non-prescription private label or generic equivalents, when and if developed, as well as aspects of our sales formats, or to obtain and use information that we regard as proprietary, including the technology used to operate our website and our content, and our trademarks. Litigation or proceedings before the United States Patent and Trademark Office or other bodies may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and domain names, or to determine the validity and scope of the proprietary rights of others. Any litigation or adverse proceeding could result in substantial costs and diversion of resources, and could seriously harm our business and operating results. Third parties may also claim infringement by us with respect to past, current, or future technologies. We expect that participants in our market will be increasingly involved in infringement claims as the number of services and competitors in our industry segment grows. Any claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause service upgrade delays, or require us to enter into royalty or licensing agreements. These royalty or licensing agreements might not be available on terms acceptable to us or at all.

 

If we are unable to protect our Internet addresses or to prevent others from using Internet addresses that are confusingly similar, our business may be adversely impacted.

 

Our Internet addresses, www.1800petmeds.com, www.1888petmeds.com, www.petmedexpress.com, www.petmed.com, www.petmeds.com, www.petmeds.pharmacy, www.petmed.pharmacy, and www.1800petmeds.pharmacy, are critical to our brand recognition and our overall success. If we are unable to protect these Internet addresses, our competitors could capitalize on our brand recognition. There may be similar Internet addresses used by competitors. Governmental agencies and their designees generally regulate the acquisition and maintenance of Internet addresses. The regulation of Internet addresses in the United States and in foreign countries has changed, and may undergo further change in the near future. Furthermore, the relationship between regulations governing Internet addresses and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may not be able to protect our own Internet addresses, or prevent third parties from acquiring Internet addresses that are confusingly similar to, infringe upon, or otherwise decrease the value of our Internet addresses.

 

8

 

Since all of our operations are housed in a single location, we are more susceptible to business interruption in the event of damage to, or disruptions in, our facility.

 

Our headquarters and distribution center are currently located in one location in South Florida, and most of our shipments of products to our customers are made from this sole distribution center. We have no present plans to establish any additional distribution centers or offices. Because we consolidate our operations in one location, we are more susceptible to power and equipment failures, and business interruptions in the event of fires, floods, and other natural disasters than if we had additional locations. Furthermore, because we are located in South Florida, which is a hurricane-sensitive area, we are particularly susceptible to the risk of damage to, or total destruction of, our headquarters and distribution center and surrounding transportation infrastructure caused by a hurricane. We cannot assure you that we are adequately insured to cover the amount of any losses relating to any of these potential events, business interruptions resulting from damage to or destruction of our headquarters and distribution center, or power and equipment failures relating to our call center or websites, or interruptions or disruptions to major transportation infrastructure, or other events that do not occur on our premises. The occurrence of one or more of these events could adversely impact our ability to generate revenues in future periods.

 

A failure of our information systems and customer-facing technology systems or any security breach or unauthorized disclosure of confidential information, or other cyber-attacks on our systems, could result in litigation and regulatory risk, harm our reputation and have a material adverse effect on our business.

 

Our business is dependent upon the efficient operation of our information systems. In particular, we rely on our information systems to effectively manage our business model strategy, with tools to track and manage sales, inventory, marketing, customer service efforts, the preparation of our consolidated financial and operating data, credit card information, and customer information. The failure of our information systems to perform as designed or the failure to maintain and enhance or protect the integrity of these systems could disrupt our business operations, adversely impact sales and the results of operations, expose us to customer or third-party claims, or result in adverse publicity.

 

Through our information technology, we are able to provide an improved overall shopping and interconnected retail experience that empowers our customers to shop and interact with us from computers, tablets, smartphones and other mobile devices. We use our website and our mobile application both as sales channels for our products and also as methods of providing product and other relevant information to our customers to drive online sales. Our online programs, communities and knowledge center allow us to inform, assist and interact with our customers. We also continually seek to enhance all of our online properties to provide an attractive user-friendly interface for our customers. Disruptions, failures or other performance issues with these customer-facing technology systems could impair the benefits that they provide to our online business and negatively affect our relationship with our customers.

 

Additionally, we collect, process, and retain sensitive and confidential customer information in the normal course of our business. Despite the security measures we have in place and any additional measures we may implement in the future, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism, or other events. Any security breach or event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential information, whether by us directly or our third-party service providers, could damage our reputation, expose us to the risks of litigation and liability, disrupt our business, or otherwise affect our results of operations.

 

Our operating results are difficult to predict and may fluctuate, and a portion of our sales are seasonal.

 

Factors that may cause our operating results to fluctuate include:

 

 

Our ability to obtain new customers at a reasonable cost, retain existing customers, or encourage reorders;

 

Our ability to increase the number of visitors to our website, or our ability to convert visitors to our website into customers;

 

The mix of medications and other pet products sold by us;

 

Our ability to manage inventory levels or obtain an adequate supply of products;

 

Our ability to adequately maintain, upgrade, and develop our website, the systems that we use to process customers’ orders and payments, or our computer network;

 

Increased competition within our market niche;

 

9

 

 

Price competition;

 

New products introduced to the market, including generics;

 

Increases in the cost of advertising;

 

The amount and timing of operating costs and capital expenditures relating to expansion of our product line or operations;

 

Disruption of our toll-free telephone service, technical difficulties, or systems and Internet outages or slowdowns;

 

The impact of COVID-19 on our business operations and generally on the economy, including the measures taken by governmental authorities to address it; and

 

Unfavorable general economic trends.

 

Because our operating results are difficult to predict, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. The majority of our product sales are affected by the seasons, due to the seasonality of mainly flea, tick, and heartworm medications. For the quarters ended June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, Company sales were 28%, 25%, 21%, and 26%, respectively. In addition to the seasonality of our sales, our annual and quarterly operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety of factors, including weather, many of which are out of our control. Any change in one or more of these factors could materially adversely affect our financial condition and results of operations in future periods.

 

We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and potentially disrupt our business.

 

We accept payments using a variety of methods, including credit and debit cards, PayPal, and checks, and we may offer new payment options over time. Acceptance of these payment options subjects us to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. These requirements may change over time or be reinterpreted, making compliance more difficult or costly. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs.

 

We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. As a result, our business and operating results could be adversely affected.

 

The recent outbreak of the COVID-19 global pandemic and related government, private sector and individual consumer responsive actions may adversely affect our business operations, employee availability, financial performance, liquidity and cash flow for an unknown period of time.

 

The outbreak of COVID-19 has been declared a pandemic by the World Health Organization and continues to spread in the United States, Canada, and in many other countries globally. Related government and private sector responsive actions may adversely affect our business operations. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic, as the situation is rapidly evolving. The COVID-19 pandemic may disrupt the global supply chain and may cause disruptions to our operations if a significant number of employees are quarantined or if they are otherwise limited in their ability to work at our fulfillment center. Additional federal or state mandates could also impact our ability to take or fulfill our customers’ orders and operate our business.

 

As an essential business, we have been open during our normal business hours without any material disruptions to our operations. We are dedicated to making every effort to ensure the health and safety of our employees. We have implemented working from home where possible and enhanced disinfection and social distancing within our work place. Many of our personnel are working remotely and it is possible that this could have a negative impact on the execution of our business plans and operations.

 

10

 

If a natural disaster, power outage, connectivity issue, or other event occurs that impacts our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The increase in remote working may also result in consumer privacy, IT security and fraud concerns as well as operational inefficiencies.

 

The operations of our fulfillment center may be substantially disrupted by additional federal or state mandates ordering shutdowns or by the inability of our employees to travel to work due to COVID-19. The inability to ship from our fulfillment center due to a COVID-19 outbreak, disruptions to the operations of our fulfillment center, or increased costs in fulfillment center capacity may negatively impact our financial performance or slow our future growth.

 

The uncertainty around the duration of business disruptions and the extent of the spread of the virus in the United States and to other areas of the world will likely continue to adversely impact the national or global economy and negatively impact consumer spending. Any of these outcomes could have a material adverse impact on our business, financial condition, operating results and ability to execute and capitalize on our strategies. The full extent of COVID-19’s impact on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic, its impact on capital and financial markets and any new information that may emerge concerning the severity of the virus, its spread to other regions as well as the actions taken to contain it, among others.

 

Our stock price fluctuates from time to time and may fall below expectations of securities analysts and investors, and could subject us to litigation, which may result in you suffering a loss on your investment.

 

The market price of our common stock may fluctuate significantly in response to a number of factors, many of which are out of our control. These factors include: quarterly variations in operating results; changes in accounting treatments or principles; announcements by us or our competitors of new products and services offerings; significant contracts, acquisitions, or strategic relationships; additions or departures of key personnel; any future sales of our common stock or other securities; stock market price and volume fluctuations of publicly-traded companies; and general political, economic, and market conditions. In some future quarter our operating results may fall below the expectations of securities analysts and investors, which could result in a decrease in the trading price of our common stock. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources, which could seriously harm our business and operating results.

 

We may issue additional shares of preferred stock that could defer a change of control or dilute the interests of our common stockholders. Our charter documents could defer a takeover effort which could inhibit your ability to receive an acquisition premium for your shares.

 

Our charter permits our Board of Directors to issue up to 5.0 million shares of preferred stock without stockholder approval. Currently there are 2,500 shares of our Convertible Preferred Stock issued and outstanding. This leaves slightly less than 5.0 million shares of preferred stock available for issuance at the discretion of our Board of Directors. These shares, if issued, could contain dividend, liquidation, conversion, voting, or other rights which could adversely affect the rights of our common stockholders and which could also be utilized, under some circumstances, as a method of discouraging, delaying, or preventing a change in control. Provisions of our articles of incorporation, bylaws and Florida law could make it more difficult for a third party to acquire us, even if many of our stockholders believe it is in their best interest.

 

11

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None

 

ITEM 2. PROPERTIES

 

Our facilities, including our principal executive offices and distribution center, are located at 420 South Congress Avenue, Delray Beach, Florida 33445. In January 2016, we completed the acquisition of this real property located at 420 South Congress Avenue, Delray Beach, Florida 33445, and improvements thereon (collectively referred to herein as the “Property”), the assignment and assumption of all leases and service agreements affecting the Property, and certain tangible and intangible personal property related to the Property, for a purchase price of $18.5 million, plus closing costs. The Property consists of approximately 634,000 square feet of land or 14.6 acres with two building complexes totaling approximately 185,000 square feet, with additional land for future use. The first building complex consists of approximately 125,000 square feet and the second building complex consists of approximately 60,000 square feet each consisting of both office and warehouse space. The Company occupies approximately 97,000 square feet of the first building for its principal offices and distribution center. As of March 31, 2020, 48% of the Property was leased to two tenants with a remaining weighted average lease term of 4.8 years. We believe that our facilities are sufficient for our current needs and are in good condition in all material respects.

 

ITEM 3. LEGAL PROCEEDINGS

 

In January 2019, a putative class action complaint was filed in the United States District Court for the Southern District of New York alleging that the company’s website, www.1800petmeds.com, did not comply with the ADA, NYSHRL, and NYCHRL, and discriminated against visually impaired individuals. The Company denied any wrongdoing, and on July 24, 2019, the Company and the Plaintiff reached a confidential settlement. The Plaintiff and the Company entered into a consent decree and the matter was dismissed on March 23, 2020, when an order was issued by the court approving the parties joint proposed consent decree.

 

The Company has settled complaints that had been filed with various states’ pharmacy boards in the past. There can be no assurances made that other states will not attempt to take similar actions against the Company in the future. The Company initiates litigation to protect its trade or service marks. There can be no assurance that the Company will be successful in protecting its trade or service marks. Legal costs related to the above matters are expensed as incurred.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable. 

 

12

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Price Range of Common Stock

 

Our common stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “PETS.” The prices set forth below reflect the high and low sale prices per share in each of the quarters of fiscal 2020 and 2019 as reported by the NASDAQ.

 

Fiscal 2020:

 

High

   

Low

 

First Quarter

  $23.65     $15.32  

Second Quarter

  $18.47     $15.01  

Third Quarter

  $27.37     $17.87  

Fourth Quarter

  $28.78     $22.18  

 

Fiscal 2019:

 

High

   

Low

 

First Quarter

  $46.17     $33.46  

Second Quarter

  $44.57     $33.01  

Third Quarter

  $32.67     $22.42  

Fourth Quarter

  $24.32     $20.50  

 

Holders

 

There were 96 holders of record of our common stock at May 26, 2020, and approximately 30,700 of our holders are “street name” or beneficial holders, whose shares are held by banks, brokers, or other financial institutions.

 

Dividends

 

During fiscal 2019 and 2020, our Board of Directors declared the following dividends:

 

Declaration Date

 

Per Share

Dividend

 

Record Date

 

Total Amount

(In thousands)

 

Payment Date

                   

May 7, 2018

  $0.25  

May 18, 2018

  $ 5,150  

May 25, 2018

July 23, 2018

  $0.27  

August 3, 2018

  $ 5,584  

August 10, 2018

October 22, 2018

  $0.27  

November 5, 2018

  $ 5,582  

November 16, 2018

January 21, 2019

  $0.27  

February 4, 2019

  $ 5,582  

February 15, 2019

                   

May 6, 2019

  $0.27  

May 17, 2019

  $ 5,518  

May 24, 2019

July 22, 2019

  $0.27  

August 2, 2019

  $ 5,447  

August 9, 2019

October 21, 2019

  $0.27  

November 4, 2019

  $ 5,447  

November 15, 2019

January 21, 2020

  $0.27  

February 3, 2020

  $ 5,445  

February 14, 2020

 

On May 8, 2017, the Company’s Board of Directors declared an increased quarterly dividend of $0.20 per share, and then on January 22, 2018 the Company’s Board of Directors increased the quarterly dividend to $0.25 per share, on its common stock. On July 23, 2018 the Company’s Board of Directors increased the quarterly dividend to $0.27 per share, on its common stock. On May 4, 2020, the Company’s Board of Directors declared an increased quarterly dividend from $0.27 to $0.28 per share, on its common stock. The $5.6 million dividend was paid on May 22, 2020, to shareholders of record at the close of business on May 15, 2020. The Company intends to continue to pay regular quarterly dividends; however the declaration and payment of future dividends is discretionary and will be subject to a determination by the Board of Directors each quarter following its review of the Company’s financial performance.

 

Issuer Purchases of Equity Securities

 

On November 8, 2006, the Company's Board of Directors approved a share repurchase plan of up to $20.0 million. On October 31, 2008, November 1, 2010, and August 1, 2011, the Company’s Board of Directors approved an increase under the share repurchase plan, each for an additional $20.0 million. The repurchase plan is intended to be implemented through purchases made from time to time in either the open market or through private transactions at the Company's discretion, subject to market conditions and other factors, in accordance with Securities and Exchange Commission requirements.

 

13

 

There can be no assurances as to the precise number of shares that will be repurchased under the share repurchase plan, and the Company may discontinue the share repurchase plan at any time subject to compliance with applicable regulatory requirements. Shares purchased pursuant to the share repurchase plan will either be cancelled or held in the Company's treasury. On January 25, 2019 the Company’s Board of Directors authorized an additional $30.0 million under the repurchase plan. During fiscal 2020 the Company purchased and retired approximately 613,000 shares of its common stock for approximately $11.5 million, averaging approximately $18.73 per share. As of March 31, 2020, the Company had approximately $28.7 million remaining under the Company’s share repurchase plan. Since the inception of the share repurchase plan up to March 31, 2020, approximately 6.2 million shares have been repurchased under the plan for approximately $81.3 million, averaging approximately $13.11 per share.

 

Performance Graph

 

Set forth below is a line graph comparing the five year cumulative performance of our Common Stock with the Nasdaq Composite, the Russell 2000, and our SIC Code 5912 (pharmacy peer group) from March 31, 2015 to March 31, 2020. The graph assumes that $100 was invested on March 31, 2014 in each of our Common Stock, the Nasdaq Composite, the Russell 2000, and the SIC Code 5912 (pharmacy peer group). Because we have historically paid dividends on a quarterly basis, the graph assumes that dividends were reinvested. The performance graph and related information below shall not be deemed “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

Performance graph data:

 

 

   

Fiscal Year Ended March 31,

 
   

2015

   

2016

   

2017

   

2018

   

2019

   

2020

 

PetMed Express, Inc.

  100.00     113.21     132.25     280.04     158.29     210.77  

Nasdaq Composite

  100.00     100.55     123.56     149.21     165.07     166.22  

SIC Code 5912

  100.00     101.25     87.24     70.02     65.40     62.61  

Russell 2000

  100.00     90.24     113.90     127.33     129.94     98.77  

 

14

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table sets forth securities authorized for issuance under equity compensation plans, including individual compensation arrangements, by us under our 2015 Outside Director Equity Compensation Restricted Stock Plan and 2016 Employee Equity Compensation Restricted Stock Plan as of March 31, 2020:

 

EQUITY COMPENSATION PLAN INFORMATION

(In thousands)

 
   

Number of securities

         

Number of securities

 
   

to be issued upon

   

Weighted average

   

remaining available

 
   

exercise of outstanding

   

exercise price of

   

for future issuance

 
   

options, warrants

   

outstanding options,

   

under equity

 

Plan category

 

and rights

   

warrants and rights

   

compensation plans

 
                       

2015 Outside Director Equity Compensation Restricted Stock Plan

    74     -       474  (1)
                       

2016 Employee Equity Compensation Restricted Stock Plan

    109     -       846  
                       

Total

    183             1,320  

 

 

 

(1)

The number of shares of common stock available for issuance under the 2015 Outside Director Equity Compensation Restricted Stock Plan automatically increase on the first trading day of January each calendar year during the term of the 2015 Outside Director Equity Compensation Restricted Stock Plan, by an amount equal to ten percent (10%) of the total number of shares of common stock authorized under the 2015 Outside Director Equity Compensation Restricted Stock Plan.

 

15

 

ITEM 6. SELECTED FINANCIAL DATA

 

The following selected financial data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and notes thereto, and other financial information included elsewhere in this Annual Report on Form 10-K. The Consolidated Statements of Income data set forth below for the fiscal years ended March 31, 2020, 2019, and 2018 and the Consolidated Balance Sheet data as of March 31, 2020 and 2019 have been derived from our audited Consolidated Financial Statements which are included elsewhere in this Annual Report on Form 10-K. The Consolidated Statements of Income data set forth below for the fiscal years ended March 31, 2017 and 2016 and the Consolidated Balance Sheet data as of March 31, 2018, 2017 and 2016 have been derived from our audited Consolidated Financial Statements which are not included in this Annual Report on Form 10-K.

 

CONSOLIDATED STATEMENTS OF INCOME DATA

 

(In thousands, except for per share amounts)

 
   

Fiscal Year Ended March 31,

 
   

2020

   

2019

   

2018

   

2017

   

2016

 
                                         

Sales

  $ 284,125     $ 283,419     $ 273,800     $ 249,176     $ 234,684  

Cost of sales

    202,879       188,105       175,993       169,862       158,388  

Gross profit

    81,246       95,314       97,807       79,314       76,296  

Operating expenses

    50,269       49,140       45,671       41,831       43,908  

Net income

    25,851       37,740       37,283       23,819       20,567  

Net income per common share:

                                       

Basic

    1.29       1.84       1.83       1.18       1.02  

Diluted

    1.29       1.84       1.82       1.17       1.02  

Weighted average number of common shares outstanding:

                                       

Basic

    20,041       20,461       20,346       20,232       20,124  

Diluted

    20,055       20,491       20,433       20,378       20,254  

Cash dividends declared per common share

    1.08       1.06       0.85       0.76       0.72  

 

CONSOLIDATED BALANCE SHEET DATA

 

(In thousands)

 
   

March 31,

 
   

2020

   

2019

   

2018

   

2017

   

2016

 
                                         

Working capital

  $ 104,675     $ 107,805     $ 87,126     $ 63,430     $ 60,543  

Total assets

    155,323       154,427       134,836       112,809       90,279  

Total liabilities

    25,313       19,747       19,105       19,443       7,084  

Shareholders' equity

    130,010       134,680       115,731       93,366       83,195  

 

NON FINANCIAL DATA (UNAUDITED)

 

(In thousands)

 
   

March 31,

 
   

2020

   

2019

   

2018

   

2017

   

2016

 
                                         

New customers acquired

    421       467       521       514       489  

Total accumulated customers (1)

    10,998       10,577       10,110       9,589       9,075  

 

(1) includes both active and inactive customers

 

16

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Executive Summary

 

PetMed Express was incorporated in the state of Florida in January 1996. The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “PETS.” The Company began selling pet medications and other pet health products in September 1996. In March 2010 the Company started offering for sale additional pet supplies on its website, and these items are drop shipped to customers by third party vendors. Presently, the Company’s product line includes approximately 2,500 of the most popular pet medications, health products, and supplies for dogs, cats, and horses.

 

The Company markets its products through national advertising campaigns which aim to increase the recognition of the “1-800-PetMeds” brand name, and “PetMeds” family of trademarks, increase traffic on its website at www.1800petmeds.com, acquire new customers, and maximize repeat purchases. Approximately 84% of all sales were generated via the Internet in fiscal 2020, compared to 85% in fiscal 2019. The Company’s sales consist of products sold mainly to retail consumers. The twelve-month average purchase was approximately $87 per order for both of the fiscal years ended March 31, 2020 and 2019.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and the results of our operations contained herein are based upon our Consolidated Financial Statements and the data used to prepare them. The Company’s Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. On an ongoing basis we re-evaluate our judgments and estimates including those related to product returns, bad debts, inventories, and income taxes. We base our estimates and judgments on our historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. Our estimates are guided by observing the following critical accounting policies.

 

Revenue recognition

 

The Company generates revenue by selling pet medication products and pet supplies mainly to retail customers. Certain pet supplies offered on the Company’s website are drop shipped to customers. The Company considers itself the principal in the arrangement because the Company controls the specified good before it is transferred to the customer. Revenue contracts contain one performance obligation, which is delivery of the product; customer care and support is deemed not to be a material right to the contract. The transaction price is adjusted at the date of sale for any applicable sales discounts and an estimate of product returns, which are estimated based on historical patterns; however this is not considered a key judgment. There are no amounts excluded from variable consideration. Revenue is recognized when control transfers to the customer at the point in time in which shipment of the product occurs. This key judgment is determined as the shipping point represents the point in time in which the Company has a present right to payment, title has transferred to the customer, and the customer has assumed the risks and rewards of ownership.

 

Outbound shipping and handling fees are an accounting policy election, and are included in sales as the Company considers itself the principal in the arrangement given responsibility for supplier selection and discretion over pricing. Shipping costs associated with outbound freight after control over a product has transferred to a customer are an accounting policy election and are accounted for as fulfillment costs and are included in cost of sales. The majority of the Company’s sales are paid by credit cards and the Company usually receives the cash settlement in two to three banking days. Credit card sales minimize accounts receivable balances relative to sales.

 

The Company maintains an allowance for doubtful accounts for losses that the Company estimates will arise from customers’ inability to make required payments, arising from either credit card charge-backs or insufficient funds checks. The Company determines its estimates of the uncollectibility of accounts receivable by analyzing historical bad debts and current economic trends. The allowance for doubtful accounts was approximately $59,000 at March 31, 2020 compared to $39,000 at March 31, 2019.

 

17

 

Valuation of inventory

 

Inventories consist of prescription and non-prescription pet medications and pet supplies that are available for sale and are priced at the lower of cost or net realizable value using a weighted average cost method. The Company writes down its inventory for estimated obsolescence. The inventory reserve was approximately $45,000 and $54,000 at March 31, 2020 and 2019, respectively.

 

Advertising

 

The Company's advertising expense consists primarily of Internet marketing, direct mail/print, and television advertising. Internet costs are expensed in the month incurred and direct mail/print advertising costs are expensed when the related brochures and postcards are produced, distributed, or superseded. Television advertising costs are expensed as the advertisements are televised.

 

Accounting for income taxes

 

The Company accounts for income taxes under the provisions of ASC Topic 740, (“Accounting for Income Taxes”), which generally requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the Consolidated Financial Statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting carrying values and the tax bases of assets and liabilities, and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse.

 

Results of Operations

 

The following should be read in conjunction with the Company’s Consolidated Financial Statements and the related notes thereto included elsewhere herein. The following table sets forth, as a percentage of sales, certain operating data appearing in the Company’s Consolidated Statements of Comprehensive Income:

 

   

Fiscal Year Ended March 31,

 
                         
   

2020

   

2019

   

2018

 
                         

Sales

    100.0

%

    100.0

%

    100.0

%

Cost of sales

    71.4       66.4       64.3  
                         

Gross profit

    28.6       33.6       35.7  
                         

Operating expenses:

                       

General and administrative

    8.9       8.7       8.9  

Advertising

    8.0       7.8       7.0  

Depreciation

    0.8       0.8       0.8  

Total operating expenses

    17.7       17.3       16.7  
                         

Income from operations

    10.9       16.3       19.0  
                         

Total other income

    1.0       1.0       0.6  
                         

Income before provision for income taxes

    11.9       17.3       19.6  
                         

Provision for income taxes

    2.8       4.0       6.0  
                         

Net income

    9.1

%

    13.3

%

    13.6

%

 

18

 

Fiscal 2020 Compared to Fiscal 2019

 

COVID-19

 

As an essential business, 1-800-PetMeds has been open during our normal business hours without any material disruptions to our operations. Due to COVID-19, consumer demand has increased for the e-commerce channel with pet owners shifting their purchases to online. We are dedicated to making every effort to ensure the health and safety of our employees. We have implemented working from home where possible and enhanced disinfection and social distancing within our work place. We are also dedicated to making every effort to ensure our customers’ pets receive the medications they need. See risk factor “The recent outbreak of the COVID-19 global pandemic and related government, private sector and individual consumer responsive actions may adversely affect our business operations, employee availability, financial performance, liquidity and cash flow for an unknown period of timein Part I, Item 1A of this Form 10-K.

 

Sales

 

Sales increased slightly to approximately $284.1 million for the fiscal year ended March 31, 2020, from approximately $283.4 million for the fiscal year ended March 31, 2019. The increase in sales for the fiscal year ended March 31, 2020 was primarily due to increased reorder sales, offset by decreased new order sales. The Company acquired approximately 421,000 new customers for the fiscal year ended March 31, 2020, compared to approximately 467,000 new customers for the same period the prior year. The following chart illustrates sales by various sales classifications:

 

 

Year Ended March 31,

 

Sales (In thousands)

 

2020

   

%

   

2019

   

%

   

$ Variance

   

% Variance

 
                                               

Reorder Sales

  $ 248,560       87.5 %   $ 241,780       85.3 %   $ 6,780     2.8%  

New Order Sales

  $ 35,565       12.5 %   $ 41,639       14.7 %   $ (6,074 )   -14.6%  

Total Net Sales

  $ 284,125       100.0 %   $ 283,419       100.0 %   $ 706     0.2%  
                                               

Internet Sales

  $ 238,054       83.8 %   $ 240,034       84.7 %   $ (1,980 )   -0.8%  

Contact Center Sales

  $ 46,071       16.2 %   $ 43,385       15.3 %   $ 2,686     6.2%  

Total Net Sales

  $ 284,125       100.0 %   $ 283,419       100.0 %   $ 706     0.2%  

 

Going forward sales may be adversely affected due to COVID-19, increased competition, and consumers giving more consideration to price. See risk factor “The recent outbreak of the COVID-19 global pandemic and related government, private sector and individual consumer responsive actions may adversely affect our business operations, employee availability, financial performance, liquidity and cash flow for an unknown period of timein Part I, Item 1A of this Form 10-K. No guarantees can be made that sales will continue to grow in the future. The majority of our product sales are affected by the seasons, due to the seasonality of mainly flea, tick, and heartworm medications. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2020, the Company’s sales were approximately 28%, 25%, 21%, and 26%, respectively. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2019, the Company’s sales were approximately 31%, 25%, 21%, and 23%, respectively.

 

Cost of sales

 

Cost of sales increased by $14.8 million, or 7.9% to $202.9 million for the fiscal year ended March 31, 2020, from $188.1 million for the fiscal year ended March 31, 2019. As a percentage of sales, cost of sales was 71.4% in fiscal 2020, as compared to 66.4% in fiscal 2019. The cost of sales increase and percentage increase can be attributed to price reductions given to customers to stimulate sales in response to increased online competition, and an increase to product costs during the fiscal year ended March 31, 2020. One of our long-term strategic initiatives and primary purchasing goals has always been to have direct purchasing relationships with all major manufacturers, which we now have.

 

19

 

Gross profit

 

Gross profit decreased by $14.1 million, or 14.8%, to $81.2 million for the fiscal year ended March 31, 2020, from $95.3 million for the fiscal year ended March 31, 2019. Gross profit as a percentage of sales for fiscal 2020 was 28.6% compared to 33.6% for fiscal 2019. The decrease in gross profit and percentage decrease in fiscal 2020 is directly related to price reductions given to customers to stimulate sales, and an increase to product costs. We now have direct relationships with all major manufacturers and these manufacturers have minimum advertised price policies, which should cause a general price discipline in the online market. Going forward gross profit may be adversely affected due to increased competition and consumers giving more consideration to price.

 

General and administrative expenses

 

General and administrative expenses increased by $497,000, or 2.0%, to $25.3 million for the fiscal year ended March 31, 2020 from $24.8 million for the fiscal year ended March 31, 2019. The increase in general and administrative expenses for the fiscal year ended March 31, 2020 was primarily due to the following: a $361,000 increase in payroll expenses in the customer care, pharmacy, and information technology departments; a $107,000 increase to bad debt expense; and a $92,000 increase in bank service fees due to increased sales. Offsetting the increase was a net decrease of $63,000 to other expenses which include travel and professional fees. General and administrative expenses as a percentage of sales was 8.9% for the fiscal year ended March 31, 2020, compared to 8.7% for the fiscal year ended March 31, 2019.

 

Advertising expenses

 

Advertising expenses increased by approximately $600,000 to approximately $22.7 million for the fiscal year ended March 31, 2020, from approximately $22.1 million for the fiscal year ended March 31, 2019. The increase in advertising expenses for fiscal 2020 was intended to stimulate sales and acquire new customers. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $54 for the fiscal year ended March 31, 2020, compared to $47 for the fiscal year ended March 31, 2019. The increase to customer acquisition costs for the fiscal year ended March 31, 2020 can be attributed to increased advertising costs, primarily television advertising, and a lower-than-expected consumer response in the June 2019 and September 2019 quarters, which may be attributed to increased online competition. Advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, advertising spending, and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future sales, whereas a less favorable advertising environment may negatively impact future sales.

 

As a percentage of sales, advertising expense was 8.0% and 7.8% for the fiscal years ended March 31, 2020 and 2019, respectively. The increase in advertising expense as a percentage of total sales for the fiscal year ended March 31, 2020 can be mainly attributed to increased advertising to stimulate sales and acquire new customers. The Company currently anticipates advertising as a percentage of sales to be approximately 9% for fiscal 2021. However, the advertising percentage may fluctuate quarter to quarter due to seasonality and advertising availability.

 

Depreciation

 

Depreciation expense for the fiscal year ended March 31, 2020 increased slightly to approximately $2.3 million from approximately $2.2 million for the fiscal year ended March 31, 2019. This increase to depreciation expense for the fiscal year ended March 31, 2020 can be attributed to an increase in new property and equipment additions in fiscal 2020.

 

Other income

 

Other income remained relatively flat at $2.9 million for both the fiscal years ended March 31, 2020 and 2019. Other income includes interest income, advertising income, and rental income. Interest income may decrease in the future as the Company utilizes its cash balances on its share repurchase plan, with approximately $28.7 million remaining at March 31, 2020, on any quarterly dividend payment, on its operating activities, or with further decreases in interest rates.

 

20

 

Provision for income taxes

 

For the fiscal years ended March 31, 2020 and 2019, the Company recorded an income tax provision for approximately $8.0 million and $11.4 million, respectively. The decrease to the income tax provision for fiscal 2020 is related to a decrease in operating income, and reduction to the Florida state corporate income tax rate. The effective tax rate for the fiscal years ended March 31, 2020 and 2019 were 23.7% and 23.2%, respectively. The increase to the effective rate for the fiscal year ended March 31, 2020 can be attributed to a $322,000 income tax charge related to restricted stock compensation, which was recognized in September 2019. The Company estimates its effective tax rate will be approximately 23.5% for fiscal 2021.

 

Net income

 

Net income decreased by approximately $11.9 million, or 31.5%, to approximately $25.9 million for the fiscal year ended March 31, 2020 from approximately $37.7 million for the fiscal year ended March 31, 2019. The decrease to net income was primarily related to a decrease in gross profit due to price reductions given to customers to stimulate sales, and an increase to product costs.

 

Fiscal 2019 Compared to Fiscal 2018

 

Sales

 

Sales increased by approximately $9.6 million, or 3.5%, to approximately $283.4 million for the fiscal year ended March 31, 2019, from approximately $273.8 million for the fiscal year ended March 31, 2018. The increase in sales for the fiscal year ended March 31, 2019 was primarily due to increased reorder sales, offset by decreased new order sales. The Company acquired approximately 467,000 new customers for the fiscal year ended March 31, 2019, compared to approximately 521,000 new customers for the same period the prior year. The following chart illustrates sales by various sales classifications:

 

Year Ended March 31,

 

Sales (In thousands)

 

2019

   

%

   

2018

   

%

   

$ Variance

   

% Variance

 
                                               

Reorder Sales

  $ 241,780       85.3 %   $ 227,513       83.1 %   $ 14,267     6.3%  

New Order Sales

  $ 41,639       14.7 %   $ 46,287       16.9 %   $ (4,648 )   -10.0%  

Total Net Sales

  $ 283,419       100.0 %   $ 273,800       100.0 %   $ 9,619     3.5%  
                                               

Internet Sales

  $ 240,034       84.7 %   $ 230,319       84.1 %   $ 9,715     4.2%  

Contact Center Sales

  $ 43,385       15.3 %   $ 43,481       15.9 %   $ (96 )   -0.2%  

Total Net Sales

  $ 283,419       100.0 %   $ 273,800       100.0 %   $ 9,619     3.5%  

 

Going forward sales may be adversely affected due to increased competition and consumers giving more consideration to price. No guarantees can be made that sales will grow in the future. The majority of our product sales are affected by the seasons, due to the seasonality of mainly flea, tick, and heartworm medications. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2019, the Company’s sales were approximately 31%, 25%, 21%, and 23%, respectively. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2018, the Company’s sales were approximately 29%, 24%, 22%, and 25%, respectively.

 

Cost of sales

 

Cost of sales increased by $12.1 million, or 6.9% to $188.1 million for the fiscal year ended March 31, 2019, from $176.0 million for the fiscal year ended March 31, 2018. As a percentage of sales, cost of sales was 66.4% in fiscal 2019, as compared to 64.3% in fiscal 2018. The cost of sales increase is due to increased sales and the percentage increase can be attributed to increases in discounts given to customers to stimulate sales in response to increased online competition, and an increase in product costs during the fiscal year.

 

21

 

Gross profit

 

Gross profit decreased by $2.5 million, or 2.6%, to $95.3 million for the fiscal year ended March 31, 2019, from $97.8 million for the fiscal year ended March 31, 2018. The decrease in gross profit in fiscal 2019 is directly related to increased discounts given to customers to stimulate sales. Gross profit as a percentage of sales for fiscal 2019 was 33.6% compared to 35.7% for fiscal 2018. The gross profit percentage decrease in fiscal 2019 can be mainly attributed to increases in discounts given to customers to stimulate sales in response to increased online competition, and an increase in product costs during the fiscal year. Going forward gross profit may be adversely affected due to increased competition and consumers giving more consideration to price.

 

General and administrative expenses

 

General and administrative expenses increased by $477,000, or 2.0%, to $24.8 million for the fiscal year ended March 31, 2019 from $24.3 million for the fiscal year ended March 31, 2018. The increase in general and administrative expenses for the fiscal year ended March 31, 2019 was primarily due to the following: a $291,000 increase in property expenses related to increased property taxes in fiscal 2019; a $257,000 increase in bank service fees due to increased sales; a $142,000 increase in professional fees which is related to increased legal and IT related expenses; and a $110,000 increase in travel and related expenses due to participating in a conference in fiscal 2019. Offsetting the increase was a $167,000 decrease in payroll expenses related to a decrease in stock compensation expense in fiscal 2019; a $79,000 decrease in insurance expense relating to reduced premiums; and a $78,000 net decrease to other expenses which include telephone, bad debt, and office expenses. General and administrative expenses as a percentage of sales were 8.7% for the fiscal year ended March 31, 2019, compared to 8.9% for the fiscal year ended March 31, 2018.

 

Advertising expenses

 

Advertising expenses increased by approximately $2.8 million to approximately $22.1 million for the fiscal year ended March 31, 2019, from approximately $19.3 million for the fiscal year ended March 31, 2018. The increase in advertising expenses for fiscal 2019 was intended to stimulate sales and promote brand awareness. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $47 for the fiscal year ended March 31, 2019, compared to $37 for the fiscal year ended March 31, 2018.

 

Advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, increased advertising spending, and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future new order sales, whereas a less favorable advertising environment may negatively impact future new order sales.

 

As a percentage of sales, advertising expense was 7.8% and 7.0% for the fiscal years ended March 31, 2019 and 2018, respectively. The increase in advertising expense as a percentage of total sales for the fiscal year ended March 31, 2018 can be mainly attributed to increased online and television advertising to stimulate sales and promote brand awareness. The Company currently anticipates advertising as a percentage of sales to be approximately 10% for fiscal 2020. However, the advertising percentage may fluctuate quarter to quarter due to seasonality and advertising availability.

 

Depreciation

 

Depreciation expense for the fiscal year ended March 31, 2019 increased by approximately $99,000, to approximately $2.2 million from approximately $2.1 million for the fiscal year ended March 31, 2018. This increase to depreciation expense for the fiscal year ended March 31, 2019 can be attributed to an increase in new property and equipment additions in fiscal 2019.

 

Other income

 

Other income increased by approximately $1.2 million, to approximately $2.9 million for the fiscal year ended March 31, 2019 from approximately $1.7 million for the fiscal year ended March 31, 2018. The increases to other income for the fiscal year ended March 31, 2018 are primarily related to increased interest income due to increased interest rates. Interest income may decrease in the future as the Company utilizes its cash balances on its share repurchase plan, with approximately $40.2 million remaining at March 31, 2019, on any quarterly dividend payment, or on its operating activities.

 

22

 

Provision for income taxes

 

For the fiscal years ended March 31, 2019 and 2018, the Company recorded an income tax provision for approximately $11.4 million and $16.5 million, respectively. The decrease to the income tax provision for fiscal 2019 is related to a decrease in operating income offset by the income tax rate reduction pursuant to the Tax Cuts and Jobs Act of 2017 (“2017 Act”). The effective tax rate for the fiscal years ended March 31, 2019 and 2018 were 23.2% and 30.7%, respectively. The decrease to the effective rate for the fiscal year ended March 31, 2019 is due to a reduction in the Company’s corporate tax rate pursuant to the 2017 Act. The Company estimates its effective tax rate will be approximately 24.0% for fiscal 2020.

 

Net income

 

Net income increased by approximately $457,000, or 1.2%, to approximately $37.7 million for the fiscal year ended March 31, 2019 from approximately $37.3 million for the fiscal year ended March 31, 2018. The increase was primarily due to a decrease in the tax provision due to a reduction in the effective tax rate, which was offset by a decrease to gross profit due to increases in discounts given to customers to stimulate sales in response to increased online competition and increased advertising.

 

Liquidity and Capital Resources

 

The Company’s working capital at March 31, 2020 and 2019 was approximately $104.7 million and approximately $107.8 million, respectively. The $3.1 million decrease in working capital was primarily attributable to the share buyback and dividends paid in the period, offset by cash flow generated from operations. Net cash provided by operating activities was $38.8 million and $45.1 million for the fiscal years ended March 31, 2020 and 2019, respectively. This change can be mainly attributed to a decrease in the Company’s net income for the fiscal year ended March 31, 2020, offset by a decrease to inventory and an increase to accounts payable compared to the prior year. Net cash used in investing activities was $2.3 million and $620,000 for the fiscal years ended March 31, 2020 and 2019, respectively. This change in investing activities is related to increased property and equipment additions acquired in fiscal 2020. The majority of the increase in investing activities relates primarily to the Company’s new e-commerce platform. Net cash used in financing activities was $33.3 million and $21.9 million for the fiscal years ended March 31, 2020 and 2019, respectively. The increase to financing activities relates to the Company purchasing approximately 613,000 shares of its common stock for approximately $11.5 million during the June quarter. At March 31, 2020, the Company had approximately $28.7 million remaining under the Company’s share repurchase plan. Subsequent to March 31, 2020, the Company’s Board of Directors declared an increased quarterly dividend from $0.27 to $0.28 per share on May 4, 2020. The Board established a May 15, 2020 record date and a May 22, 2020 payment date. Depending on future market conditions the Company may utilize its cash and cash equivalents on the remaining balance of its current share repurchase plan, on quarterly dividends, or on its operating activities.

 

At March 31, 2020 the Company had no material outstanding lease commitments. We are not currently bound by any long or short term agreements for the purchase or lease of capital expenditures. Any material amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately provide for any future increase in our business. To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future. Presently, we have approximately $4.5 million forecasted for capital expenditures in fiscal 2021, which will be funded through cash from operations. The Company’s primary source of working capital is cash from operations. The Company presently has no need for alternative sources of working capital, and has no commitments or plans to obtain additional capital.

 

Off-Balance Sheet Arrangements

 

The Company had no off-balance sheet arrangements at March 31, 2020.

 

23

 

Contractual Obligations and Commitments (In thousands)

 

The table and information below presents the Company’s significant obligations and commitments at March 31, 2020:

 

   

Total

   

Less than

1 year

   

1-2 years

   

3-5 Years

   

More than

5 years

 
                                         

Executive employment contract

  $ 210     $ 210     $ -     $ -     $ -  

Total obligations

  $ 210     $ 210     $ -     $ -     $ -  

 

Recent Accounting Pronouncements

 

Other than disclosures included in note 1 of the Consolidated Financial Statements, the Company does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk generally represents the risk that losses may occur in the value of financial instruments as a result of movements in interest rates, foreign currency exchange rates, and commodity prices. Our financial instruments include cash and cash equivalents, accounts receivable, and accounts payable. The book values of cash equivalents, accounts receivable, and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. Interest rates affect our return on excess cash and cash equivalents. At March 31, 2020, we had $103.8 million in cash and cash equivalents, primarily money market accounts. A majority of our cash and cash equivalents generates interest income based on prevailing interest rates.

 

A significant change in interest rates could impact the amount of interest income generated from our excess cash and cash equivalents. It would also impact the market value of our cash and cash equivalents. Our cash and cash equivalents are subject to market risk, primarily interest rate and credit risk. Our investments are managed by a limited number of outside professional managers within investment guidelines set by our Board of Directors. Such guidelines include security type, credit quality, and maturity, and are intended to limit market risk by restricting our investments to high-quality debt instruments with both short and long term maturities. We do not hold any derivative financial instruments that could expose us to significant market risk. At March 31, 2020, we had no debt obligations.

 

24

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

PETMED EXPRESS, INC. AND SUBSIDIARIES

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Report of Independent Registered Public Accounting Firm  26
   
Consolidated Balance Sheets as of March 31, 2020 and 2019  27
   
Consolidated Statements of Income for each of the three years in the period ended March 31, 2020 28
   
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in the period ended March 31, 2020 29
   
Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2020 30
   
Notes to Consolidated Financial Statements 31
   
Report of Management on Internal Control Over Financial Reporting 43
   
Report of Independent Registered Public Accounting Firm  44

 

25

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Shareholders and the Board of Directors of PetMed Express, Inc. and subsidiaries

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of PetMed Express, Inc. and its subsidiaries (the Company) as of March 31, 2020 and 2019, the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated May 26, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.  Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ RSM US LLP

 

We have served as the Company’s auditor since 2007.

 

West Palm Beach, Florida

May 26, 2020

 

26

 

 

 

PETMED EXPRESS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except for per share amounts)

 

   

March 31,

   

March 31,

 
   

2020

   

2019

 

ASSETS

               
                 

Current assets:

               

Cash and cash equivalents

  $ 103,762     $ 100,529  

Accounts receivable, less allowance for doubtful accounts of $59 and $39, respectively

    3,843       2,542  

Inventories - finished goods

    17,884       21,370  

Prepaid expenses and other current assets

    3,529       1,408  

Prepaid income taxes

    -       582  
                 

Total current assets

    129,018       126,431  
                 

Noncurrent assets:

               

Property and equipment, net

    25,445       27,136  

Intangible assets

    860       860  
                 

Total noncurrent assets

    26,305       27,996  
                 

Total assets

  $ 155,323     $ 154,427  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 19,658     $ 16,275  

Accrued expenses and other current liabilities

    4,214       2,351  

Income taxes payable

    471       -  
                 

Total current liabilities

    24,343       18,626  
                 

Deferred tax liabilities

    970       1,121  
                 

Total liabilities

    25,313       19,747  
                 

Commitments and contingencies

               
                 

Shareholders' equity:

               

Preferred stock, $.001 par value, 5,000 shares authorized; 3 convertible shares issued and outstanding with a liquidation preference of $4 per share

    9       9  

Common stock, $.001 par value, 40,000 shares authorized; 20,166 and 20,674 shares issued and outstanding, respectively

    20       21  

Additional paid-in capital

    3,804       12,478  

Retained earnings

    126,177       122,172  
                 

Total shareholders' equity

    130,010       134,680  
                 

Total liabilities and shareholders' equity

  $ 155,323     $ 154,427  

 

See accompanying notes to consolidated financial statements.

 

27

 

 

 PETMED EXPRESS, INC. AND SUBSIDIARIES 

 CONSOLIDATED STATEMENTS OF INCOME 

 (In thousands, except for per share amounts) 

 

   

Year Ended March 31,

 
   

2020

   

2019

   

2018

 
                         

Sales

  $ 284,125     $ 283,419     $ 273,800  

Cost of sales

    202,879       188,105       175,993  
                         

Gross profit

    81,246       95,314       97,807  
                         

Operating expenses:

                       

General and administrative

    25,264       24,767       24,290  

Advertising

    22,748       22,148       19,255  

Depreciation

    2,257       2,225       2,126  

Total operating expenses

    50,269       49,140       45,671  
                         

Income from operations

    30,977       46,174       52,136  
                         

Other income (expense):

                       

Interest income, net

    1,747       1,864       658  

Other, net

    1,169       1,083       995  

Total other income

    2,916       2,947       1,653  
                         

Income before provision for income taxes

    33,893       49,121       53,789  
                         

Provision for income taxes

    8,042       11,381       16,506  
                         

Net income

  $ 25,851     $ 37,740     $ 37,283  
                         

Net income per common share:

                       

Basic

  $ 1.29     $ 1.84     $ 1.83  

Diluted

  $ 1.29     $ 1.84     $ 1.82  
                         

Weighted average number of common shares outstanding:

                       

Basic

    20,041       20,461       20,346  

Diluted

    20,055       20,491       20,433  
                         

Cash dividends declared per common share

  $ 1.08     $ 1.06     $ 0.85  

 

See accompanying notes to consolidated financial statements.

 

28

 

 

PETMED EXPRESS, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 

 Years ended March 31, 2018, March 31, 2019, and March 31, 2020 

 (In thousands) 

 

   

Convertible

   

Common

   

Additional

                 
   

Preferred Stock

   

Stock

   

Paid-In

   

Retained

         
   

Shares

   

Amounts

   

Shares

   

Amounts

   

Capital

   

Earnings

   

Total

 
                                                         

Balance, March 31, 2017

    3     $ 9       20,526     $ 21     $ 6,806     $ 86,530     $ 93,366  
                                                         

Issuance of restricted stock, net

    -       -       75       -       -       -       -  
                                                         

Share based compensation

    -       -       -       -       2,575       -       2,575  
                                                         

Dividends declared

    -       -       -       -       -       (17,493 )     (17,493 )
                                                         

Net income

    -       -       -       -       -       37,283       37,283  
                                                         

Balance, March 31, 2018

    3       9       20,601       21       9,381       106,320       115,731  
                                                         

Issuance of restricted stock, net

    -       -       73       -       -       -       -  
                                                         

Share based compensation

    -       -       -       -       3,097       -       3,097  
                                                         

Dividends declared

    -       -       -       -       -       (21,888 )     (21,888 )
                                                         

Net income

    -       -       -       -       -       37,740       37,740  
                                                         

Balance, March 31, 2019

    3       9       20,674       21       12,478       122,172       134,680  
                                                         

Issuance of restricted stock, net

    -       -       105       -       -       -       -  
                                                         

Share based compensation

    -       -       -       -       2,822       -       2,822  
                                                         

Repurchased and retired shares

    -       -       (613 )     (1 )     (11,496 )     -       (11,497 )
                                                         

Dividends declared

    -       -       -       -       -       (21,846 )     (21,846 )
                                                         

Net income

    -       -       -       -       -       25,851       25,851  
                                                         

Balance, March 31, 2020

    3     $ 9       20,166     $ 20     $ 3,804     $ 126,177     $ 130,010  

 

See accompanying notes to consolidated financial statements.

 

29

 

 

PETMED EXPRESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

   

Year Ended

 
   

March 31,

 
   

2020

   

2019

   

2018

 

Cash flows from operating activities:

                       

Net income

  $ 25,851     $ 37,740     $ 37,283  

Adjustments to reconcile net income to net cash provided by operating activities:

                       

Depreciation

    2,257       2,225       2,126  

Share based compensation

    2,822       3,097       2,575  

Deferred income taxes

    (151 )     125       (92 )

Bad debt expense

    191       85       112  

(Increase) decrease in operating assets and increase (decrease) in liabilities:

                       

Accounts receivable

    (1,492 )     (335 )     (596 )

Inventories - finished goods

    3,486       1,967       (3,109 )

Prepaid income taxes

    582       206       (788 )

Prepaid expenses and other current assets

    (376 )     (526 )     137  

Accounts payable

    3,383       1,001       53  

Accrued expenses and other current liabilities

    1,820       (447 )     337  

Income taxes payable

    471       -       (659 )

Net cash provided by operating activities

    38,844       45,138       37,379  
                         

Cash flows from investing activities:

                       

Purchases of property and equipment

    (2,311 )     (620 )     (703 )

Net cash used in investing activities

    (2,311 )     (620 )     (703 )
                         

Cash flows from financing activities:

                       

Dividends paid

    (21,803 )     (21,925 )     (17,470 )

Repurchase and retirement of common stock

    (11,497 )     -       -  

Net cash used in financing activities

    (33,300 )     (21,925 )     (17,470 )
                         

Net increase in cash and cash equivalents

    3,233       22,593       19,206  
                         

Cash and cash equivalents, at beginning of year

    100,529       77,936       58,730  
                         

Cash and cash equivalents, at end of year

  $ 103,762     $ 100,529     $ 77,936  
                         

Supplemental disclosure of cash flow information:

                       
                         

Cash paid for income taxes

  $ 7,140     $ 11,051     $ 18,046  
                         

Property and equipment in current assets

  $ 1,745     $ -     $ -  
                         

Dividends payable in accrued expenses

  $ 246     $ 203     $ 240  

 

See accompanying notes to consolidated financial statements.

 

30

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

(1)

Summary of Significant Accounting Policies

 

Organization

 

PetMed Express, Inc. and subsidiaries, d/b/a 1-800-PetMeds (the “Company”), is a leading nationwide pet pharmacy. The Company markets prescription and non-prescription pet medications, health products, and supplies for dogs, cats, and horses, direct to the consumer. The Company markets its products through national advertising campaigns, which aim to increase the recognition of the “1-800-PetMeds” brand name and “PetMeds” family of trademarks, increase traffic on its website at www.1800petmeds.com, acquire new customers, and maximize repeat purchases. The majority of all of the Company's sales are to residents in the United States. The Company’s corporate headquarters and distribution facility are located in Delray Beach, Florida. The Company's fiscal year end is March 31, and references herein to fiscal 2020, 2019, or 2018 refer to the Company's fiscal years ended March 31, 2020, 2019, and 2018, respectively.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

 

Revenue Recognition

 

The Company generates revenue by selling pet medication products and pet supplies. Certain pet supplies offered on the Company’s website are drop shipped to customers. The Company considers itself the principal in the arrangement because the Company controls the specified good before it is transferred to the customer. Revenue contracts contain one performance obligation, which is delivery of the product; customer care and support is deemed not to be a material right to the contract. The transaction price is adjusted at the date of sale for any applicable sales discounts and an estimate of product returns, which are estimated based on historical patterns; however this is not considered a key judgment. There are no amounts excluded from variable consideration. Revenue is recognized when control transfers to the customer at the point in time in which shipment of the product occurs. This key judgment is determined as the shipping point represents the point in time in which the Company has a present right to payment, title has transferred to the customer, and the customer has assumed the risks and rewards of ownership. Outbound shipping and handling fees are an accounting policy election, and are included in sales as the Company considers itself the principal in the arrangement given responsibility for supplier selection and discretion over pricing. Shipping costs associated with outbound freight after control over a product has transferred to a customer are an accounting policy election and are accounted for as fulfillment costs and are included in cost of sales.

 

The Company disaggregates revenue in the following two categories: (1) reorder revenue vs new order revenue, and (2) internet revenue vs contact center revenue. The following table illustrates revenue by various classifications:

 

Year Ended March 31,

 

Sales (In thousands)

 

2020

   

%

   

2019

   

%

   

$ Variance

   

% Variance

 
                                               

Reorder Sales

  $ 248,560       87.5 %   $ 241,780       85.3 %   $ 6,780     2.8%  

New Order Sales

  $ 35,565       12.5 %   $ 41,639       14.7 %   $ (6,074 )   -14.6%  
                                               

Total Net Sales

  $ 284,125       100.0 %   $ 283,419       100.0 %   $ 706     0.2%  
                                               

Internet Sales

  $ 238,054       83.8 %   $ 240,034       84.7 %   $ (1,980 )   -0.8%  

Contact Center Sales

  $ 46,071       16.2 %   $ 43,385       15.3 %   $ 2,686     6.2%  
                                               

Total Net Sales

  $ 284,125       100.0 %   $ 283,419       100.0 %   $ 706     0.2%  

 

31

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(1)

Summary of Significant Accounting Policies (Continued)

 

Year Ended March 31,

 

Sales (In thousands)

 

2019

   

%

   

2018

   

%

   

$ Variance

   

% Variance

 
                                               

Reorder Sales

  $ 241,780       85.3 %   $ 227,513       83.1 %   $ 14,267     6.3%  

New Order Sales

  $ 41,639       14.7 %   $ 46,287       16.9 %   $ (4,648 )   -10.0%  
                                               

Total Net Sales

  $ 283,419       100.0 %   $ 273,800       100.0 %   $ 9,619     3.5%  
                                               

Internet Sales

  $ 240,034       84.7 %   $ 230,319       84.1 %   $ 9,715     4.2%  

Contact Center Sales

  $ 43,385       15.3 %   $ 43,481       15.9 %   $ (96 )   -0.2%  
                                               

Total Net Sales

  $ 283,419       100.0 %   $ 273,800       100.0 %   $ 9,619     3.5%  

 

The majority of the Company’s sales are paid by credit cards and the Company usually receives the cash settlement in two to three banking days. Credit card sales minimize accounts receivable balances relative to sales. The Company had no material contract asset or liability balances as of March 31, 2020 and 2019.

 

The Company maintains an allowance for doubtful accounts for losses that the Company estimates will arise from customers’ inability to make required payments, arising from either credit card charge-backs or insufficient funds checks. The Company determines its estimates of the uncollectibility of accounts receivable by analyzing historical bad debts and current economic trends. The allowance for doubtful accounts was approximately $59,000 at March 31, 2020 compared to $39,000 at March 31, 2019.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents at March 31, 2020 and 2019 consisted of the Company’s cash accounts and money market accounts with a maturity of three months or less. The carrying amount of cash equivalents approximates fair value. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Inventories

 

Inventories consist of prescription and non-prescription pet medications and pet supplies that are available for sale and are priced at the lower of cost or net realizable value using a weighted average cost method. The Company writes down its inventory for estimated obsolescence. The inventory reserve was approximately $45,000 and $54,000 at March 31, 2020 and 2019, respectively.

 

Property and Equipment

 

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Our building is being depreciated over a period of thirty years. The furniture, fixtures, equipment, and computer software are being depreciated over periods ranging from three to ten years.

 

32

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(1)

Summary of Significant Accounting Policies (Continued)

 

Long-lived Assets

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of the asset to the undiscounted cash flows expected to be generated from the asset.

 

Intangible Assets

 

The intangible assets consist of a toll-free telephone number and an internet domain name. In accordance with the ASC Topic 350 (“Goodwill and Other Intangible Assets”) the intangible assets are not being amortized, and are subject to an annual review for impairment.

 

Fair Value of Financial Instruments

 

The carrying amounts of the Company's cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these instruments.

 

Advertising

 

The Company's advertising expense consists primarily of Internet marketing, direct mail/print, and television advertising. Internet costs are expensed in the month incurred and direct mail/print advertising costs are expensed when the related catalogs, brochures, and postcards are produced, distributed, or superseded. Television advertising costs are expensed as the advertisements are televised.

 

Comprehensive Income

 

The Company applies ASC Topic 220 (“Reporting Comprehensive Income”) which requires that all items that are recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The items of other comprehensive income that are typically required to be displayed are foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. For the fiscal years ended March 31, 2020, 2019 and 2018 the Company had no unrealized gains or losses.

 

Income Taxes

 

The Company accounts for income taxes under the provisions of ASC Topic 740 (“Accounting for Income Taxes”) which generally requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting carrying values and the tax bases of assets and liabilities, and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. As required by “Accounting for Uncertainty in Income Taxes” guidance, which clarifies ASC Topic 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the Consolidated Financial Statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

 

The Company applies “Accounting for Uncertainty in Income Taxes” guidance to all tax positions for which the statute of limitations remains open. The Company files tax returns in the U.S. federal jurisdiction and Florida and Virginia.  With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years ending March 31, 2013, or earlier. Any interest and penalties related to income taxes will be recorded to other income (expenses).

 

33

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(1)

Summary of Significant Accounting Policies (Continued)

 

Business Concentrations

 

The Company purchases its products from a variety of sources, including certain manufacturers, domestic distributors, and wholesalers. We have multiple suppliers for each of our products to obtain the lowest cost. There were three suppliers from whom we purchased approximately 60% of all products in fiscal 2020. There were four suppliers from whom we purchased approximately 50% of all products in fiscal 2019.

 

Accounting for Share Based Compensation

 

The Company records compensation expense associated with restricted stock in accordance with ASC Topic 718 (“Share Based Payment”). The compensation expense related to all of the Company’s stock-based compensation arrangements is recorded as a component of general and administrative expenses.

 

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance on leases which supersedes the current lease guidance. The core principle requires lessees to recognize the assets and liabilities that arise from nearly all leases in the statement of financial position. Accounting applied by lessors will remain largely consistent with previous guidance. Additional changes are set to align lessor accounting with the revised lessee model and the FASB’s revenue recognition guidance. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted this standard on April 1, 2019, using this effective date as the date of initial application. Consequently, on adoption, the Company recognized an additional current operating liability, with a corresponding right of use asset of approximately the same amount based on the present value of the remaining rental payments under current leasing standards for existing operating leases. As of March 31, 2020, the current operating liability and corresponding right of use asset was approximately $110,000. The lease liability and right of use asset is reflected in the consolidated balance sheet as part of accrued expenses and other current liabilities and as part of prepaid expenses and other current assets. The amended guidance did not have a material impact on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses on certain financial instruments. The Company is currently evaluating the impact of ASU 2016-13. The Company will adopt ASU 2016-13 on April 1, 2020. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

 

In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplification and reduce the cost of accounting for income taxes (“ASU 2019-12”). The Company is currently evaluating the impact of ASU 2019-12. The Company will adopt ASU 2019-12 on April 1, 2021.

 

The Company does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

 

34

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

(2)

Property and Equipment

 

Major classifications of property and equipment consist of the following (in thousands):

 

   

March 31,

 
   

2020

   

2019

 
                 

Building

  $ 14,997     $ 14,997  

Land

    3,700       3,700  

Building Improvements

    2,823       2,817  

Computer Software

    6,043       5,891  

Furniture, fixtures and equipment

    8,536       8,128  
      36,099       35,533  

Less: accumulated depreciation

    (10,654 )     (8,397 )

Property and equipment, net

  $ 25,445     $ 27,136  

 

 

(3)

Valuation and Qualifying Accounts

 

Activity in the Company's valuation and qualifying accounts consists of the following (in thousands):

 

   

Year Ended March 31,

 
   

2020

   

2019

   

2018

 
                         

Allowance for doubtful accounts:

                       

Balance at beginning of period

  $ 39     $ 35     $ 27  

Provision for doubtful accounts

    191       85       112  

Write-off of uncollectible accounts receivable

    (171 )     (81 )     (104 )
                         

Balance at end of year

  $ 59     $ 39     $ 35  

 

 

(4)

Accrued Expenses and Other Current Liabilities

 

Major classifications of accrued expenses and other current liabilities consist of the following (in thousands):

 

   

March 31,

 
   

2020

   

2019

 
                 

Accrued sales tax

  $ 627     $ 323  

Accrued credit card fees

    494       404  

Accrued salaries and benefits

    1,242       685  

Accrued merchandise credits / reward program

    674       70  

Accrued professional expenses

    267       281  

Accrued sales return allowance

    244       184  

Accrued dividends payable

    246       203  

Accrued real estate taxes

    112       87  

Other accrued liabilities

    308       114  
                 

Accrued expenses and other current liabilities

  $ 4,214     $ 2,351  

 

 

(5)

Income Taxes

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows (in thousands):

 

35

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(5)

Income Taxes (Continued)

 

   

March 31,

 
   

2020

   

2019

 

Deferred tax assets:

               

Accrued expenses

  $ 287     $ 298  

Deferred stock compensation

    469       412  

Bad debt and inventory reserves

    24       22  
                 

Total deferred tax assets

    780       732  
                 

Deferred tax liabilities:

               

Property and equipment

    (1,750 )     (1,853 )
                 

Total net deferred tax liabilities

  $ (970 )   $ (1,121 )

 

At March 31, 2020, the Company had no federal net operating loss carryforwards.

 

The components of the income tax provision consist of the following (in thousands):

 

   

Year Ended March 31,

 
   

2020

   

2019

   

2018

 
                         

Current taxes

                       

Federal

  $ 7,352     $ 9,718     $ 15,012  

State

    841       1,538       1,586  

Total current taxes

    8,193       11,256       16,598  
                         

Deferred taxes

                       

Federal

    (135 )     108       (83 )

State

    (16 )     17       (9 )

Total deferred taxes

    (151 )     125       (92 )
                         

Total provision for income taxes

  $ 8,042     $ 11,381     $ 16,506  

 

The reconciliation of income tax provision computed at the U.S. federal statutory tax rates to income tax expense is as follows (in thousands):

 

   

Year Ended March 31,

 
   

2020

   

2019

   

2018

 
                         

Income taxes at U.S. statutory rates

  $ 7,118     $ 10,315     $ 16,943  

State income taxes, net of federal tax benefit

    649       1,233       1,078  

Restricted stock windfall adjustment

    322       (176 )     (1,086 )

Reduction of deferred tax liability due to rate reduction

    -       -       (430 )

Other

    (47 )     9       1  

Total provision for income taxes

  $ 8,042     $ 11,381     $ 16,506  

 

The 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law on December 22, 2017.  The 2017 Tax Act made a significant number of changes to the existing U.S. Internal Revenue Code, including a permanent reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. In accordance with SEC Staff Bulletin No. 118, fiscal year end companies were required to determine the appropriate blended rate to apply based on their respective fiscal year end dates. Therefore, instead of applying a 35.0% federal tax rate for the fiscal year ended March 31, 2018, the Company applied a blended federal rate of 31.5%. This blended rate was applied to fiscal 2018, resulting in a tax benefit of approximately $1.9 million. As a result, the Company recorded a provisional income tax benefit of approximately $430,000 related to the re-measurement of deferred tax assets and liabilities resulting from the reduction of the federal corporate tax rate for the year ended March 31, 2018, which was reconciled during the year ended March 31, 2019. 

 

36

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(5)

Income Taxes (Continued)

 

In fiscal 2020 the Company recognized a stock compensation shortfall charge of approximately $322,000, and recognized a one-time benefit of approximately $93,000, related to a return to provision true up of the fiscal 2019 income tax provision. In fiscal 2019 the Company recognized a stock compensation windfall benefit of approximately $176,000, and recognized a one-time charge of approximately $8,000 related to a return to provision true up of the fiscal 2018 income tax provision. In fiscal 2018 the Company also recognized a stock compensation windfall benefit of approximately $1.1 million, and recognized a one-time net benefit of approximately $150,000 related to a return to provision true up of the fiscal 2017 income tax provision.

 

 

(6)

Shareholders’ Equity

 

Preferred Stock

 

In April 1998, the Company issued 250,000 shares of its $.001 par value preferred stock at a price of $4.00 per share, less issuance costs of $112,187. Each share of the preferred stock is convertible into approximately 4.05 shares of common stock at the election of the shareholder. The shares have a liquidation value of $4.00 per share and may pay dividends at the sole discretion of the Company. The Company does not anticipate paying dividends to the preferred shareholders in the foreseeable future. Each share of preferred stock is entitled to one vote on all matters submitted to a vote of shareholders of the Company. At March 31, 2020 and 2019, 2,500 shares of the convertible preferred stock remained unconverted and outstanding.

 

Share Repurchase Plan

 

On November 8, 2006, the Company's Board of Directors approved a share repurchase plan of up to $20.0 million. On October 31, 2008, November 1, 2010, and August 1, 2011, the Company’s Board of Directors approved an increase under the repurchase plan each for an additional $20.0 million. On January 25, 2019 the Company’s Board of Directors authorized an additional $30.0 million under the repurchase plan. The repurchase plan is intended to be implemented through purchases made from time to time in either the open market or through private transactions at the Company's discretion, subject to market conditions and other factors, in accordance with Securities and Exchange Commission requirements. There can be no assurances as to the precise number of shares that will be repurchased under the share repurchase plan, and the Company may discontinue the share repurchase plan at any time subject to compliance with applicable regulatory requirements. Shares purchased pursuant to the share repurchase plan will either be retired or held in the Company's treasury. During fiscal 2020 the Company purchased and retired approximately 613,000 shares of its common stock for approximately $11.5 million. During fiscal 2019 the Company had no share repurchases. At March 31, 2020 the Company had approximately $28.7 million remaining under the Company’s share repurchase plan.

 

Dividends

 

On May 8, 2017 the Company’s Board of Directors increased the quarterly dividend to $0.20 per share, then on January 22, 2018 the Company’s Board of Directors increased the quarterly dividend to $0.25 per share, and then on July 23, 2018 the Company’s Board of Directors increased the quarterly dividend to $0.27 per share, on its common stock. The Company intends to continue to pay regular quarterly dividends; however the declaration and payment of future dividends is discretionary and will be subject to a determination by the Board of Directors each quarter following its review of the Company’s financial performance. During fiscal 2020, our Board of Directors declared the following dividends:

 

Declaration Date

 

Per Share

Dividend

 

Record Date

 

Total Amount

(In thousands)

 

Payment Date

                   

May 6, 2019

  $0.27  

May 17, 2019

  $ 5,518  

May 24, 2019

July 22, 2019

  $0.27  

August 2, 2019

  $ 5,447  

August 9, 2019

October 21, 2019

  $0.27  

November 4, 2019

  $ 5,447  

November 15, 2019

January 21, 2020

  $0.27  

February 3, 2020

  $ 5,445  

February 14, 2020

 

 

37

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

(7)

Net Income Per Share

 

In accordance with the provisions of ASC Topic 260 (“Earnings Per Share”) basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share includes the dilutive effect of potential restricted stock and the effects of the potential conversion of preferred shares, calculated using the treasury stock method. Unvested restricted stock, and convertible preferred shares issued by the Company represent the only dilutive effect reflected in diluted weighted average shares outstanding. The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented (in thousands, except for per share amounts):

 

   

Year Ended March 31,

 
   

2020

   

2019

   

2018

 
                         

Net income (numerator):

                       

Net income

  $ 25,851     $ 37,740     $ 37,283  

Shares (denominator)

                       

Weighted average number of common shares outstanding used in basic computation

    20,041       20,461       20,346  

Common shares issuable upon the vesting of restricted stock

    4       20       77  

Common shares issuable upon conversion of preferred shares

    10       10       10  

Shares used in diluted computation

    20,055       20,491       20,433  

Net income per common share:

                       

Basic

  $ 1.29     $ 1.84     $ 1.83  

Diluted

  $ 1.29     $ 1.84     $ 1.82  

 

At March 31, 2020, 2019, and 2018, 72,120, 126,751 and 77,350 shares of common restricted stock, respectively, were excluded from the computations of diluted net income per common share, as their inclusion would have had an anti-dilutive effect on diluted net income per common share.

 

 

(8)

Restricted Stock

 

On July 28, 2006, the Company received shareholder approval for the adoption of the 2006 Employee Equity Compensation Restricted Stock Plan (the “2006 Employee Plan”) and the 2006 Outside Director Equity Compensation Restricted Stock Plan (the “2006 Director Plan”). The purpose of the plans was to promote the interests of the Company by securing and retaining both employees and outside directors. The Company had reserved 1.0 million shares of common stock for issuance under the Employee Plan, and 200,000 shares of common stock for issuance under the Director Plan. In July 2012, the Company received shareholder approval to ratify the amendment to the Company’s Director Plan passed by the Board of Directors to increase the number of shares available for issuance under the Director Plan from 200,000 to 400,000. Additionally, the Company received shareholder approval to ratify the amendment passed by the Board of Directors to provide for a 10% automatic increase every year in the amount of shares available for issuance under both of the plans. In July 2015, the Company’s 2015 Outside Director Equity Compensation Restricted Stock Plan (“2015 Director Plan”) became effective upon the approval of the plan by the Company’s Shareholders. The 2015 Director Plan authorizes 400,000 shares of the Company's common stock available for issuance under the plan, and provides for an automatic increase every year in the amount of shares available for issuance under the plan of 10% of the shares authorized under the plan. In July 2016, the Company’s 2016 Employee Equity Compensation Restricted Stock Plan (“2016 Employee Plan”) became effective upon the approval of the plan by the Company’s Shareholders. The 2016 Employee Plan authorizes 1,000,000 shares of the Company's Common stock available for issuance under the plan. The value of the restricted stock is determined based on the market value of the stock at the issuance date. The restriction period or forfeiture period is determined by the Company’s Board and is to be no less than 1 year and no more than ten years.

 

38

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(8)

Restricted Stock (Continued)

 

At March 31, 2020, the Company had 972,175 restricted common shares issued under the 2006 Employee Plan, 153,608 restricted common shares issued under the 2016 Employee Plan, 272,000 restricted common shares issued under the 2006 Director Plan, and 135,000 restricted common shares issued under the 2015 Director Plan. The majority of shares were issued subject to a restriction or forfeiture period which lapses ratably on the first, second, and third anniversaries of the date of grant, and the fair value of which is being amortized over the three-year restriction period. For the fiscal years ended March 31, 2020, 2019, and 2018, the Company recognized compensation expense related to the Employee and Director Plans of $2.8 million, $3.1 million, and $2.6 million, respectively. A summary of the Company’s non-vested restricted stock at March 31, 2020 is as follows (in thousands):

 

   

Employee

Plan

Number of

Shares

   

Director

Plan

Number of

Shares

   

Both Plans

Number of

Shares

 

Non-vested restricted stock outstanding at March 31, 2019

    82