PETMED EXPRESS INC - Quarter Report: 2020 December (Form 10-Q)

PETMED EXPRESS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for per share amounts)

See accompanying notes to condensed consolidated financial statements.

PETMED EXPRESS, INC. AND SUBSIDIARIES

condensed consolidated statementS of INCOME

(In thousands, except for per share amounts)(Unaudited)

See accompanying notes to condensed consolidated financial statements.

PETMED EXPRESS, INC. AND SUBSIDIARIES

condensed consolidated statementS of cash flows

(In thousands)(Unaudited)

See accompanying notes to condensed consolidated financial statements.

PETMED EXPRESS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 offers consumers an attractive alternative for obtaining pet medications in terms of convenience, price, speed of delivery, and valued customer service. 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.petmeds.com, acquire new customers, and maximize repeat purchases. Virtually all of the Company’s sales are to residents in the United States. The Company’s corporate headquarters and distribution facility is located in Delray Beach, Florida. The Company’s fiscal year end is March 31, and references herein to Fiscal 2021 or Fiscal 2020 refer to the Company's fiscal years ending March 31, 2021 and 2020, respectively.

Basis of Presentation and Consolidation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company at December 31, 2020, the Statements of Income for the three and nine months ended December 31, 2020 and 2019, and Cash Flows for the nine months ended December 31, 2020 and 2019. The results of operations for the three and nine months ended December 31, 2020 are not necessarily indicative of the operating results expected for the fiscal year ending March 31, 2021. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended March 31, 2020. The Condensed Consolidated Financial Statements include the accounts of PetMed Express, Inc. and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated upon consolidation.

Use of Estimates

The preparation of Condensed 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 Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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.

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board 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.

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 in 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:

Virtually all 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 the accounts receivable balances relative to sales. The Company had no material contract asset or contract liability balances as of December 31, 2020 or March 31, 2020.

In accordance with the provisions of Accounting Standards Codification (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 the 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):

For the three and nine months ended December 31, 2020, 130,326 shares of common restricted stock 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. For the three and nine months ended December 31, 2019, 72,120 shares of common restricted stock 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.

The Company records compensation expense associated with restricted stock in accordance with ASC Topic 718 (“Share Based Payment”) (ASU 2016-09). The compensation expense related to all of the Company’s stock-based compensation arrangements is recorded as a component of general and administrative expenses. The Company had 972,175 restricted common shares issued under the 2006 Employee Equity Compensation Restricted Stock Plan (“2006 Employee Plan”), 220,848 restricted common shares issued under the 2016 Employee Equity Compensation Restricted Stock Plan (“2016 Employee Plan” and collectively referred to with the 2006 Employee Plan as the “Employee Plans”), 272,000 restricted common shares issued under the 2006 Outside Director Equity Compensation Restricted Stock Plan (“2006 Director Plan”), and 172,500 restricted common shares issued under the 2015 Outside Director Equity Compensation Restricted Stock Plan (“2015 Director Plan”, and collectively referred to with the 2006 Director Plan as the “Director Plans”) at December 31, 2020, all shares of which were issued subject to a restriction or forfeiture period that 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 one to three-year restriction period.

For the quarters ended December 31, 2020 and 2019, the Company recognized $781,000 and $716,000, respectively, of compensation expense related to the Employee and Director Plans. For the nine months ended December 31, 2020 and 2019, the Company recognized $2.3 million and $2.1 million, respectively, of compensation expense related to the Employee and Director Plans. At December 31, 2020 and 2019, there was $3.6 million and $3.4 million of unrecognized compensation cost related to the non-vested restricted stock awards, respectively, which is expected to be recognized over the next three years. At December 31, 2020 and 2019, there were approximately 177,000 and 183,000 non-vested restricted shares, respectively.

The Company carries various assets and liabilities at fair value in the Condensed Consolidated Balance Sheets. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. ASC Topic 820 (“Fair Value Measurements”) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. At December 31, 2020, the Company had invested virtually all of its $106.5 million cash and cash equivalents balance in money market funds which are classified within level 1.

The Company has settled complaints that had been filed with various states’ regulatory 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.

Changes in shareholders’ equity for the nine months ended December 31, 2020 and 2019 are summarized below (in thousands):

During the nine months ended December 31, 2019, the Company purchased and retired approximately 613,000 shares of its common stock for approximately $11.5 million. There were no shares of common stock that were purchased or retired in the nine months ended December 31, 2020. At December 31, 2020, the Company had approximately $28.7 million remaining under the Company’s share repurchase plan.

For the quarters ended December 31, 2020 and 2019, the Company recorded an income tax provision of approximately $2.1 million and $1.8 million, respectively, and for the nine months ended December 31, 2020 and 2019, the Company recorded an income tax provision of approximately $6.6 million and $5.9 million, respectively. The increase in the income tax provision for the three and nine months ended December 31, 2020 is related to an increase in operating income for both periods compared to the same periods in the prior year. The effective tax rate for the quarter ended December 31, 2020 was approximately 21.6% compared to 21.0% for the quarter ended December 31, 2019, and the effective tax rate for the nine months ended December 31, 2020 was approximately 21.7%, compared to 23.9% for the nine months ended December 31, 2019. The increase to the effective rate for the quarter ended December 31, 2020 was due to a one-time income tax benefit of $194,000 related to the reconciliation of the Company’s tax return for the fiscal year ending March 31, 2020, with the Company receiving a larger one-time income tax benefit in the prior year due to a reduction in the Florida state corporate income tax rate along with receiving a one-time income tax benefit of $93,000 related to the reconciliation of the Company’s tax return for the fiscal year ending March 31, 2019. The decrease to the effective rate for the nine months ended December 31, 2020 can be attributed to the Company receiving a one-time state income tax refund of $285,000 in the June 2020 quarter and a $106,000 income tax benefit related to restricted stock compensation in the September 2020 quarter, compared to a $322,000 income tax charge related to restricted stock compensation, which was recognized in the September 2019 quarter.

On January 19, 2021 our Board of Directors declared a quarterly dividend of $0.28 per share. The Board established a February 1, 2021 record date and a February 12, 2021 payment date. Based on the outstanding share balance as of January 26, 2021 the Company estimates the dividend payable to be approximately $5.7 million.

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 3,000 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.petmeds.com, acquire new customers, and maximize repeat purchases. Approximately 84% of all sales were generated via the Internet for both the quarters ended December 31, 2020 and 2019. The Company’s sales consist of products sold mainly to retail consumers. The three-month average purchase was approximately $88 and $85 per order for the quarters ended December 31, 2020 and 2019, respectively, and for the nine months ended December 31, 2020 and 2019, the average purchase was approximately $88 and $86 per order, respectively.

Critical Accounting Policies

Our discussion and analysis of our financial condition and the results of our operations contained herein are based upon our Condensed Consolidated Financial Statements and the data used to prepare them. The Company’s Condensed 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. Virtually all 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 un-collectability of accounts receivable by analyzing historical bad debts and current economic trends. The allowance for doubtful accounts was approximately $28,000 at December 31, 2020 compared to $59,000 at March 31, 2020.

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 $71,000 at December 31, 2020 compared to $45,000 at March 31, 2020.

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.

Accounting for income taxes

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

Results of Operations

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

Three Months Ended December 31, 2020 Compared With Three Months Ended December 31, 2019, and Nine Months Ended December 31, 2020 Compared With Nine Months Ended December 31, 2019

COVID-19

We are dedicated to making every effort to ensure our customers’ pets receive the medications they need. We are also dedicated to making every effort to ensure the health and safety of our employees. We have continued with working from home where possible and enhanced disinfection and social distancing within our work place. The Company has been open during our normal business hours without any material disruptions to our operations. We have not seen any major disruptions in our supply chain, however we have experienced some delays in the delivery of some inventory items. 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 time” in Part I, Item 1A of our Form 10-K.

Sales

Sales increased by approximately $6.0 million, or 10.0%, to approximately $65.9 million for the quarter ended December 31, 2020, from approximately $59.9 million for the quarter ended December 31, 2019. For the nine months ended December 31, 2020, sales increased by approximately $27.7 million, or 13.2%, to approximately $237.5 million compared to $209.8 million for the nine months ended December 31, 2019. The increase in sales for the quarter ended December 31, 2020 was primarily due to increased reorder sales offset by decreased new order sales, and the increase in sales for the nine months ended December 31, 2020 was primarily due to increased new order and reorder sales. Our reorder sales growth for the three and nine months ended December 31, 2020 likely improved due to the increased use of loyalty credits by our customers through our Loyalty Program, which was launched in September 2019, and due to our Easy Refill Program. The Company acquired approximately 73,000 new customers for the quarter ended December 31, 2020, compared to approximately 76,000 new customers for the same period the prior year. For the nine months ended December 31, 2020 the Company acquired approximately 356,000 new customers, compared to 313,000 new customers for the nine months ended December 31, 2019. The following chart illustrates sales by various sales classifications:

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 heartworm, and flea and tick 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, of the total fiscal year sales.

Cost of sales

Cost of sales increased by approximately $4.1 million, or 9.6%, to approximately $46.3 million for the quarter ended December 31, 2020, from approximately $42.2 million for the quarter ended December 31, 2019. For the nine months ended December 31, 2020, cost of sales increased by approximately $17.8 million, or 11.9%, to approximately $168.1 million compared to $150.3 million for the same period in the prior year. The cost of sales increases can be directly related to the increase in sales during the quarter and nine months ended December 31, 2020. Cost of sales as a percent of sales was 70.2% and 70.5% for the quarters ended December 31, 2020 and 2019, respectively, and for the nine months ended December 31, 2020 and 2019 the cost of sales was 70.8% and 71.6%, respectively. The cost of sales percentage decreases can be attributed to the benefit of having direct relationships with all major manufacturers, which helped reduce product costs, and these manufacturers having minimum advertised price policies.

Gross profit

Gross profit increased by approximately $1.9 million, or 10.9%, to approximately $19.6 million for the quarter ended December 31, 2020, from approximately $17.7 million for the quarter ended December 31, 2019. For the nine months ended December 31, 2020 gross profit increased by approximately $9.9 million, or 16.6%, to approximately $69.4 million, compared to $59.6 million for the same period in the prior year. The increases in gross profit are directly related to an increase to sales during the quarter and nine months ended December 31, 2020. Gross profit as a percentage of sales was 29.8% and 29.5% for the three months ended December 31, 2020 and 2019, respectively, and for the nine months ended December 31, 2020 and 2019, gross profit as a percentage of sales was 29.2% and 28.4%, respectively. The gross profit percentage increases can be mainly attributed to the benefit of having direct relationships with all major manufacturers, which helped reduce product costs, and these manufacturers having minimum advertised price policies.

General and administrative expenses

General and administrative expenses increased by approximately $447,000, or 7.4%, to approximately $6.5 million for the quarter ended December 31, 2020, compared to $6.0 million for the quarter ended December 31, 2019. The increase in general and administrative expenses for the quarter ended December 31, 2020 was primarily due to the following: a $260,000 increase in payroll expense, a $158,000 increase in bank service fees, and a $70,000 net increase of other expenses which includes telephone and insurance expenses, offset by a $41,000 decrease in professional fees. For the nine months ended December 31, 2020, general and administrative expenses increased by approximately $2.2 million, or 11.7%, to approximately $21.1 million, compared to $18.9 million for the same period the prior year. The increase in general and administrative expenses for the nine months ended December 31, 2020 was primarily due to the following: a $1.4 million increase in payroll expense, a $584,000 increase in bank service fees, a $221,000 increase in computer related property expenses, a $167,000 increase in telephone expenses, and a $28,000 net increase of other expenses which includes insurance and other expenses, offset by a $174,000 decrease in professional fees.

Advertising expenses

Advertising expenses were approximately $3.2 million for both the quarters ended December 31, 2020 and 2019. For the nine months ended December 31, 2020, advertising expenses increased by approximately $842,000, or 5.1%, to approximately $17.4 million compared to advertising expenses of approximately $16.5 million for the nine months ended December 31, 2019. The Company received increased cooperative marketing funds from product manufacturers to offset our advertising expenses, within the terms of our contractual relationships, during the three and nine months ended December 31, 2020. The increase in advertising expenses for the nine months ended December 31, 2020 was consistent with the Company’s 2021 marketing plan. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, increased to $44 for the quarter ended December 31, 2020 compared to $42 for the quarter ended December 31, 2019. For the nine months ended December 31, 2020 and 2019 the advertising costs of acquiring a new customer were $49 and $53, respectively. 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 4.9% and 5.3% for the quarters ended December 31, 2020 and 2019, respectively, and for the nine months ended December 31, 2020 and 2019 advertising expense was 7.3% and 7.9%, respectively. The decreases in advertising expense as a percentage of total sales for the quarter and nine months ended December 31, 2020 can be attributed to an increase in sales as compared to the same periods in the prior year. The Company currently anticipates advertising as a percentage of sales to be approximately between 7.5% and 8.0% for fiscal 2021. However, the advertising percentage will fluctuate quarter to quarter due to seasonality and advertising availability.

Depreciation

Depreciation expense for the quarter ended December 31, 2020 increased slightly by approximately $60,000 to $622,000 compared to $562,000 for the quarter ended December 31, 2019. For the nine months ended December 31, 2020 and 2019 depreciation expense were approximately $1.8 million and $1.7 million, respectively. The increases to depreciation expense for the quarter and nine months ended December 31, 2020 can be attributed to increased new property and equipment additions during the current year.

Other income

Other income decreased by approximately $304,000, to approximately $418,000 for the quarter ended December 31, 2020 from approximately $722,000 for the quarter ended December 31, 2019. For the nine months ended December 31, 2020 other income decreased by approximately $1.1 million, to approximately $1.2 million compared to approximately $2.3 million for the same period in the prior year. The decrease to other income for the quarter and nine months ended December 31, 2020 was primarily related to decreased interest income due to decreased interest rates compared to the prior year. 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 as of December 31, 2020, on any quarterly dividend payment, on its operating activities, or with further decreases in interest rates.

Provision for income taxes

For the quarters ended December 31, 2020 and 2019, the Company recorded an income tax provision of approximately $2.1 million and $1.8 million, respectively, and for the nine months ended December 31, 2020 and 2019, the Company recorded an income tax provision of approximately $6.6 million and $5.9 million, respectively. The increase in the income tax provision for the three and nine months ended December 31, 2020 is related to an increase in operating income for both periods compared to the same periods in the prior year. The effective tax rate for the quarter ended December 31, 2020 was approximately 21.6% compared to 21.0% for the quarter ended December 31, 2019, and the effective tax rate for the nine months ended December 31, 2020 was approximately 21.7%, compared to 23.9% for the nine months ended December 31, 2019. The increase to the effective rate for the quarter ended December 31, 2020 was due to a one-time income tax benefit of $194,000 related to the reconciliation of the Company’s tax return for the fiscal year ending March 31, 2020, with the Company receiving a larger one-time income tax benefit in the prior year due to a reduction in the Florida state corporate income tax rate along with receiving a one-time income tax benefit of $93,000 related to the reconciliation of the Company’s tax return for the fiscal year ending March 31, 2019. The decrease to the effective rate for the nine months ended December 31, 2020 can be attributed to the Company receiving a one-time state income tax refund of $285,000 in the June 2020 quarter and a $106,000 income tax benefit related to restricted stock compensation in the September 2020 quarter, compared to a $322,000 income tax charge related to restricted stock compensation, which was recognized in the September 2019 quarter.

Liquidity and Capital Resources

The Company’s working capital at December 31, 2020 and March 31, 2020 was $114.1 million and $104.7 million, respectively. The $9.4 million increase in working capital was primarily attributable to income generated by operations, offset by dividends paid in the period. Net cash provided by operating activities was $21.6 million for both the nine months ended December 31, 2020 and 2019. Net cash used in investing activities was $1.8 million for both the nine months ended December 31, 2020 and 2019. Net cash used in financing activities was $17.0 million for the nine months ended December 31, 2020, compared to $27.9 million for the same period in the prior year. The change to financing activities relates to the Company purchasing approximately 613,000 shares of its common stock for approximately $11.5 million during the nine months ended December 31, 2019, compared to no share repurchases during the nine months ended December 31, 2020. The remaining change to financing activities related to an increase in the dividend paid in the nine months ended December 31, 2020, compared to the prior period.

At December 31, 2020, the Company had approximately $28.7 million remaining under the Company’s share repurchase plan. Subsequent to December 31, 2020, on January 19, 2021 our Board of Directors declared a quarterly dividend of $0.28 per share. The Board established a February 1, 2021 record date and a February 12, 2021 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 dividends, or on its operating activities.

At December 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 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 $500,000 forecasted for capital expenditures for the remainder of fiscal 2021, the majority of which will be invested in our e-commerce platform to better service our customers, 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 December 31, 2020.

Cautionary Statement Regarding Forward-Looking Information

Certain information in this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the words "believes," "intends," "expects," "may," "will," "should," "plans," "projects," "contemplates," "intends," "budgets," "predicts," "estimates," "anticipates," or similar expressions. These statements are based on our beliefs, as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. A reader, whether investing in our common stock or not, should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly report. When used in this quarterly report on Form 10-Q, "PetMed Express," "1-800-PetMeds," "PetMeds," "PetMed," "PetMeds.com," “1800PetMeds.com,” "PetMed.com," "PetMed Express.com," "the Company," "we," "our," and "us" refers to PetMed Express, Inc. and our subsidiaries.

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 investments. At December 31, 2020, we had $106.5 million in cash and cash equivalents, and a majority of our cash and cash equivalents generate interest income based on prevailing interest rates. A significant change in interest rates would 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 equivalents are subject to market risk, primarily interest rate and credit risk. Our cash equivalents 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 cash and cash equivalents 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 December 31, 2020, we had no debt obligations.

Evaluation of Disclosure Controls and Procedures

The Company’s management, including our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended) as of the quarter ended December 31, 2020, the end of the period covered by this report (the "Evaluation Date"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective such that the information relating to our Company, including our consolidated subsidiaries, required to be disclosed by the Company in reports that it files or submits under the Exchange Act: (1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

part ii  -  other information

None.

Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations, and trading price of our common stock. Please refer to our Annual Report on Form 10-K for Fiscal Year 2020 for additional information concerning these and other uncertainties that could negatively impact the Company.

The Company did not make any sales of unregistered securities during the third quarter of Fiscal 2021.

Issuer Purchases of Equity Securities

None.

None.

Not applicable.

None.

The following exhibits are filed as part of this report.

*     XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

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PETMED EXPRESS, INC

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FORM 10-Q

FOR THE QUARTER ENDED:

DECEMBER 31, 2020

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EXHIBITS

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