PETMED EXPRESS INC - Quarter Report: 2021 September (Form 10-Q)

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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)

Note 1:   Summary of Significant Accounting Policies

Organization

PetMed Express, Inc. and subsidiaries, d/b/a 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 “PetMeds” brand name, 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 2022 or fiscal 2021 refer to the Company's fiscal years ending March 31, 2022 and 2021, 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 September 30, 2021, the Statements of Income for the three and six months ended September 30, 2021 and 2020, and Cash Flows for the six months ended September 30, 2021 and 2020. The results of operations for the three and six months ended September 30, 2021 are not necessarily indicative of the operating results expected for the fiscal year ending March 31, 2022. 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, 2021. 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 March 2020, the Financial Accounting Standards Board issued ASU 2020-03, “Codification Improvements to Financial Instruments” (“ASU 2020-03”). ASU 2020-03 improves and clarifies various financial instruments topics. ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The Company will adopt ASU 2020-03 on April 1, 2022. The Company does not expect the adoption of this new standard to have a material impact on our consolidated financial statements.

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.

Note 2:   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 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 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 September 30, 2021 or March 31, 2021.

Note 3:   Net Income Per Share

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 six months ended September 30, 2021, 115,219 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 six months ended September 30, 2020, 25,136 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.

Note 4:   Stock-Based Compensation

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 861,275 restricted common shares issued under the 2016 Employee Equity Compensation Restricted Stock Plan (“2016 Employee Plan”) and 203,880 restricted common shares issued under the 2015 Outside Director Equity Compensation Restricted Stock Plan (“2015 Director Plan”) at September 30, 2021, 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 three-year restriction period.

In July 2021, the Company issued 41,745 restricted shares to certain employees of the Company under the 2016 Employee Plan, with a fair value of $31.39 per share. In August 2021, the Company issued 90,000 restricted shares and 510,000 performance restricted shares to the Company’s CEO, in accordance with the CEO’s employment agreement, under the 2016 Employee Plan. The fair value of the 90,000 restricted shares issuance was valued at $28.70 per share. The value of the 510,000 performance restricted shares issuance was valued by a third party valuation firm, and these shares were valued at $9.7 million, or $19.06 per share. The valuation firm utilized a Monte Carlo model to value the 510,000 performance restricted shares and looked at several other factors such as historical stock price volatility. In July 2021, the Company issued 37,500 restricted shares to directors of the Company under the 2015 Director Plan, with a fair value of $31.39 per share. In September 2021, the Company issued 1,350 restricted shares to a certain employee of the Company under the 2016 Employee Plan, with a fair value of $26.87 per share.

For the quarters ended September 30, 2021 and 2020, the Company recognized $882,000 and $772,000, respectively, of compensation expense related to the 2016 Employee and 2015 Director Plans. For the six months ended September 30, 2021 and 2020, the Company recognized $1.6 million and $1.5 million, respectively, of compensation expense related to the 2016 Employee and 2015 Director Plans. At September 30, 2021 and 2020, there was $15.8 million and $4.4 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. All stock-based compensation expense is recognized as a payroll-related expense and it is included within the general and administrative expenses line item within the income statement, and the offset is included in the additional paid-in capital line item of the balance sheet. At September 30, 2021 and 2020 there were approximately 734,669 and 177,876 non-vested restricted shares, respectively.

Note 5:   Fair Value

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 September 30, 2021, the Company had invested virtually all of its $106.6 million cash and cash equivalents balance in money market funds which are classified within level 1.

Note 6:   Changes in Shareholders’ Equity

Changes in shareholders’ equity for the six months ended September 30, 2021 and 2020 are summarized below (in thousands):

Note 6:   Changes in Shareholders’ Equity (Continued)

During the six months ended September 30, 2021 and 2020, there were no shares of common stock that were purchased or retired. At September 30, 2021, the Company had approximately $28.7 million remaining under the Company’s share repurchase plan.

Note 7:   Commitments and Contingencies

Legal Matters and Routine Proceedings

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.

Employment Agreement

On August 25, 2021, Mathew N. Hulett was appointed as Chief Executive Officer and President of the Company and as a member of the Board of Directors, and the Company entered into an employment agreement with Mr. Hulett to serve as the Company’s Chief Executive Officer and President, effective as of August 30, 2021. The employment agreement is for an initial term of three (3) years commencing on August 30, 2021 and will automatically renew for successive one (1) year terms, or for longer periods as mutually agreed upon by the parties, unless the employment agreement is expressly cancelled by either Mr. Hulett or the Company sixty (60) days prior to the end of the then current term, or is otherwise terminated as provided in the agreement. The employment agreement provides that Mr. Hulett will receive an annual base salary of $500,000, subject to periodic review for increases with the approval of the Board of Directors.

Mr. Hulett will be eligible to participate in the standard employee benefit plans generally available to executives and employees of the Company, including health insurance, life and disability insurance, restricted stock under the Company’s equity compensation plan(s), 401(k) plan, and paid time off and paid holidays. The Company will also reimburse Mr. Hulett for his documented business expenses incurred in connection with his employment pursuant to the Company's standard reimbursement expense policy and practices. The Company will not pay for any withholding taxes related to restricted stock compensation. The employment agreement contains certain rights of Mr. Hulett and the Company to terminate Mr. Hulett’s employment, including termination by the Company for “Cause” as defined in the employment agreement, and termination by Mr. Hulett for “Good Reason” as defined in the employment agreement within twelve (12) months of a Change in Control as defined in the employment agreement. Mr. Hulett is also entitled to severance pay equal to twelve (12) months of Mr. Hulett’s current base salary and eighteen (18) months of health insurance benefits in the event of his termination by the Company without Cause, or termination by Mr. Hulett for Good Reason within twelve (12) months of a Change in Control. The foregoing severance benefits are conditioned upon Mr. Hulett’s execution of a release of claims and compliance with certain restrictive covenants. The employment agreement contains customary non-disclosure and non-solicitation provisions as well as a one (1) year non-compete following the termination of the agreement.

On August 30, 2021, Mr. Hulett also received an award of 90,000 shares of restricted stock (“RSU”) under the Company’s 2016 Employee Plan, which stock restrictions will lapse pro rata on each of August 30, 2022, August 30, 2023 and August 30, 2024, which are subject to forfeiture in the event of termination of employment (except as provided in the RSU agreement). Mr. Hulett also received an award of 510,000 shares of performance restricted stock (“PSU”) under the 2016 Employee Plan, which stock restrictions will lapse on the third anniversary of the date of grant based on (i) achieving absolute stock price hurdles within the three-year period from the date of grant, and (ii) continued employment through the performance period of three years from the date of grant, in accordance with the following schedule:

Should none of the above absolute stock price hurdles be met during the three-year period from the date of grant no shares would vest. Once the absolute stock price hurdle is achieved, it will be considered to have met the absolute stock price hurdle, regardless of the stock price on the third anniversary of the date of grant. The absolute stock price hurdle would be considered to have been met if the average closing stock price of the Company is at or above the absolute stock price hurdle for a period of ninety (90) consecutive trading days. If the shares would be considered to have met the absolute stock price hurdle, they will only vest on the third anniversary of date of grant, subject to Mr. Hulett’s continued employment through the performance period of three years from the date of grant (except as provided in the PSU agreement).

In the event of Mr. Hulett’s termination of employment by the Company without Cause, or termination by Mr. Hulett for Good Reason within twelve (12) months of a Change in Control, or upon the executive’s Disability, Mr. Hulett would be entitled to the following:

Note 8:   Income Taxes

For the quarters ended September 30, 2021 and 2020, the Company recorded an income tax provision of approximately $2.0 million and $2.5 million, respectively, and for the six months ended September 30, 2021 and 2020, respectively, the Company recorded an income tax provision of approximately $3.3 million and $4.5 million, respectively. The decrease in the income tax provision for the three and six months ended September 30, 2021 is related to a decrease in operating income during the periods. The effective tax rate for the quarter ended September 30, 2021 was approximately 23.8%, compared to 22.6% for the quarter ended September 30, 2020, and the effective tax rate for the six months ended September 30, 2021 was approximately 23.7% compared to 21.7% for the six months ended September 30, 2020. The increase to the effective tax rate for the quarter ended September 30, 2021 can be attributed to more non-deductible expenses in the September quarter. The increase to the effective tax rate for the six months ended September 30, 2021 can be attributed to the Company receiving a one-time state income tax refund of $285,000 in the June 2020 quarter.

Note 9:   Related Party Transaction

The Company’s Board Chairman, Gian Fulgoni serves on the board of directors of Prophet, a brand and marketing consulting company, which the Company engaged with in March 2021 for $292,000. The Company expensed $32,000 in fiscal 2021 and $260,000 in fiscal 2022. This transaction was approved by the Company’s Board of Directors with terms that are considered to be comparable to those with an unrelated third party.

Note 10:   Subsequent Events

On October 25, 2021 our Board of Directors declared a quarterly dividend of $0.30 per share. The Board of Directors established a November 8, 2021 record date and a November 19, 2021 payment date. Based on the outstanding share balance as of October 31, 2021 the Company estimates the dividend payable to be approximately $6.3 million.

ITEM 2.  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 3,000 SKUs 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 “PetMeds” brand name, increase traffic on its website at www.petmeds.com, acquire new customers, and maximize repeat purchases. Approximately 83% of all sales were generated via the Internet for both the quarters ended September 30, 2021 and 2020. The Company’s sales consist of products sold mainly to retail consumers. The three-month average purchase was approximately $92 and $87 per order for the quarters ended September 30, 2021 and 2020, respectively, and the six-month average purchase was approximately $93 and $88 per order for the six months ended September 30, 2021 and 2020, 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 it 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 September 30, 2021 compared to $39,000 at March 31, 2021.

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 market value using a weighted average cost method. The Company writes down its inventory for estimated obsolescence. The inventory reserve was approximately $49,000 at September 30, 2021 compared to $86,000 at March 31, 2021.

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 in the month 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 September 30, 2021 Compared With Three Months Ended September 30, 2020, and Six Months Ended September 30, 2021 Compared With Six Months Ended September 30, 2020

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 for the year ended March 31, 2021.

Sales

Sales decreased by approximately $8.1 million, or 10.7%, to approximately $67.4 million for the quarter ended September 30, 2021, from approximately $75.4 million for the quarter ended September 30, 2020. For the six months ended September 30, 2021, sales decreased by approximately $24.9 million, or 14.5%, to approximately $146.7 million compared to $171.6 million for the six months ended September 30, 2020. The decrease in sales for the quarter and six months ended September 30, 2021 was primarily due to decreased new orders and reorder sales. Sales for the quarter and six months ended September 30, 2021 were impacted by a much more competitive environment, and a crowded advertising market which had substantially higher advertising costs compared to the same periods in the prior year. Veterinary visits increased during the quarter compared to being down during the prior year, due to the pandemic. We believe the increase in veterinary visits was primarily due to pet owners needing to visit their veterinarian for their pets’ annual exam in order to renew their prescriptions, as many veterinarians were closed due to the pandemic. The Company acquired approximately 65,000 new customers for the quarter ended September 30, 2021, compared to approximately 96,000 new customers for the same period the prior year. For the six months ended September 30, 2021 the Company acquired approximately 157,000 new customers, compared to 282,000 new customers for the six months ended September 30, 2020. 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 2021, the Company’s sales were approximately 31%, 25%, 21%, and 23%, respectively as a percentage of annual sales.

Cost of sales

Cost of sales decreased by approximately $4.2 million, or 8.0%, to approximately $48.2 million for the quarter ended September 30, 2021, from approximately $52.4 million for the quarter ended September 30, 2020. For the six months ended September 30, 2021, cost of sales decreased by approximately $16.1 million, or 13.2%, to approximately $105.7 million compared to $121.8 million for the same period in the prior year. The cost of sales decreases can be directly related to the decreases to sales during the three and six months ended September 30, 2021. As a percentage of sales, cost of sales was 71.5% and 69.5% for the quarters ended September 30, 2021 and 2020, respectively, and for the six months ended September 30, 2021 and 2020 cost of sales was 72.1% and 71.0%, respectively. The cost of sales percentage for the quarter and six months were adversely impacted due to the major manufacturers shifting their rebate funding from discounting product costs to cooperative marketing rebates.

Gross profit

Gross profit decreased by approximately $3.8 million, or 16.7%, to approximately $19.2 million for the quarter ended September 30, 2021, from approximately $23.0 million for the quarter ended September 30, 2020. For the six months ended September 30, 2021 gross profit decreased by approximately $8.8 million, or 17.8%, to approximately $41.0 million, compared to $49.8 million for the same period in the prior year. The decrease in gross profit is directly related to a decrease in sales during the quarter and six months ended September 30, 2021. Gross profit as a percentage of sales was 28.5% and 30.5% for the three months ended September 30, 2021 and 2020, respectively, and for the six months ended September 30, 2021 and 2020, gross profit as a percentage of sales was 27.9% and 29.0%, respectively. The gross profit percentage decreases for the quarter and the six months can also be attributed to the major manufacturers shifting their rebate funding from discounting product costs to cooperative marketing rebates.

General and administrative expenses

General and administrative expenses increased by approximately $149,000, or 2.2%, to approximately $6.9 million for the quarter ended September 30, 2021, from approximately $6.8 million for the quarter ended September 30, 2020. The increase in general and administrative expenses for the quarter ended September 30, 2021 was primarily due to the following: a $114,000 increase to other expenses, relating to increasing a state sales tax related accrual during the period; an $80,000 increase in professional fees; and a $24,000 increase in travel related expenses, offset by a net decrease of $69,000 which included decreases in bank service fees and property expenses. For the six months ended September 30, 2021, general and administrative expenses increased by approximately $436,000, or 3.0%, to approximately $14.9 million, compared to $14.6 million for the same period the prior year. The increase in general and administrative expenses for the six months ended September 30, 2021 was primarily due to the following: a $418,000 increase in professional fees, with $260,000 related to brand and marketing consultation; a $114,000 increase to other expenses, relating to increasing a state sales tax related accrual during the period; offset by a net decrease of $96,000 primarily related to a reduction in bank service fees due to a decrease in sales.

Advertising expenses

Advertising expenses decreased by approximately $1.7 million, or 33%, to approximately $3.4 million for the quarter ended September 30, 2021, from approximately $5.1 million for the quarter ended September 30, 2020. For the six months ended September 30, 2021, advertising expenses decreased by approximately $3.1 million, or 22%, to approximately $11.1 million compared to advertising expenses of approximately $14.2 million for the six months ended September 30, 2020. The decrease in advertising expenses for the three months ended September 30, 2021 was due to management’s decision to reduce advertising spend in the quarter. During the quarter and six months ended September 30, 2021, while the pandemic was abating and many retail stores were re-opening, the advertising market was rapidly recovering with demand driving up advertising prices dramatically. As a result, our advertising for the three and six months ended September 30, 2021 was less effective in its ability to attract new customers.

The advertising costs of acquiring a new customer, defined as advertising expense divided by new customers acquired, was relatively flat, approximately $54 for the quarters ended September 30, 2021 and 2020, and $71 for the six months ended September 30, 2021 compared to $50 for the six months ended September 30, 2020. The increase for the six month ended September 30, 2021, was due to a substantial increase in advertising prices. The 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 new order sales, whereas a less favorable advertising environment may negatively impact future new order sales. As a percentage of sales, advertising expense was 5.1% and 6.8% for the quarters ended September 30, 2021 and 2020, and for the six months ended September 30, 2021 and 2020 advertising expense was 7.6% and 8.3%, respectively. The decrease in advertising expense as a percentage of total sales for the three and six months ended September 30, 2021 can be mainly attributed to decreased sales and a reduction in advertising expense. The advertising percentage will fluctuate quarter to quarter due to seasonality, advertising availability, and return on investment requirements.

Depreciation

Depreciation expense increased by approximately $87,000 to approximately $694,000 for the quarter ended September 30, 2021, from approximately $607,000 for the quarter ended September 30, 2020. For the six months ended September 30, 2021 and 2020 depreciation expense was approximately $1.3 and $1.2 million, respectively. The increase to depreciation expense for the quarter and six months ended September 30, 2021 can be attributed to new property and equipment additions during the same periods.

Other income

Other income decreased by approximately $160,000 to approximately $244,000 for the quarter ended September 30, 2021 from approximately $404,000 for the quarter ended September 30, 2020. For the six months ended September 30, 2021 other income decreased by approximately $136,000 to approximately $613,000 compared to approximately $749,000 for the same period in the prior year. The decrease to other income for the quarter and six months ended September 30, 2021 is primarily related to decrease in advertising 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 as of September 30, 2021, on any quarterly dividend payment or on its operating activities.

Provision for income taxes

For the quarters ended September 30, 2021 and 2020, the Company recorded an income tax provision of approximately $2.0 million and $2.5 million, respectively, and for the six months ended September 30, 2021 and 2020, the Company recorded an income tax provision of approximately $3.3 million and $4.5 million, respectively. The decrease in the income tax provision for the three and six months ended September 30, 2021 is related to a decrease in operating income during the periods. The effective tax rate for the quarter ended September 30, 2021 was approximately 23.8%, compared to 22.6% for the quarter ended September 30, 2020, and the effective tax rate for the six months ended September 30, 2021 was approximately 23.7% compared to 21.7% for the six months ended September 30, 2020. The increase to the effective tax rate for the quarter ended September 30, 2021 can be attributed to more non-deductible expenses in the September quarter. The increase to the effective tax rate for the six months ended September 30, 2021 can be attributed to the Company receiving a one-time state income tax refund of $285,000 in the June 2020 quarter.

Liquidity and Capital Resources

The Company’s working capital at September 30, 2021 and March 31, 2021 was $117.2 million and $116.3 million, respectively. The approximately $900,000 increase in working capital was primarily attributable to income generated by operations and a reduction to accounts payable, offset by dividends paid in the period. Net cash provided by operating activities was $1.1 million and $15.2 million for the six months ended September 30, 2021 and 2020, respectively. This change is primarily due to a reduction in net income and a decrease in accounts payable, offset by a decrease in inventories. Net cash used in investing activities was $972,000 for the six months ended September 30, 2021, compared to net cash used in investing activities of $1.2 million for the six months ended September 30, 2020. This change in investing activities is related to an increase in property and equipment additions in the six months ended September 30, 2021. Net cash used in financing activities was $12.3 million for the six months ended September 30, 2021, compared to $11.4 million for the same period in the prior year. The change to financing activities relates to an increase in the dividend paid in the six months ended September 30, 2021, compared to the prior period. At September 30, 2021, the Company had approximately $28.7 million remaining under the Company’s share repurchase plan.

Subsequent to September 30, 2021, on October 25, 2021 our Board of Directors declared a $0.30 per share dividend. The Board of Directors established a November 8, 2021 record date and a November 19, 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 September 30, 2021, 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 $1.0 million forecasted for capital expenditures for the remainder of fiscal 2022, 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 September 30, 2021.

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.

ITEM 3.  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 and 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 September 30, 2021, we had $106.6 million in cash and cash equivalents, and the 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 and cash equivalents are subject to market risk, primarily interest rate and credit risk. Our cash and 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 cash and cash equivalents with both short- and long-term maturities. We do not hold any derivative financial instruments that could expose us to significant market risk. At September 30, 2021, we had no debt obligations.

ITEM 4.  CONTROLS AND PROCEDURES.

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 September 30, 2021, 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 Control 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

ITEM 1.  LEGAL PROCEEDINGS.

None.

ITEM 1A.  RISK FACTORS.

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 2021 for additional information concerning these and other uncertainties that could negatively impact the Company.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The Company did not make any sales of unregistered securities during the second quarter of Fiscal 2022.

Issuer Purchases of Equity Securities

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.  MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.  OTHER INFORMATION.

None.

ITEM 6.  EXHIBITS

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:

SEPTEMBER 30, 2021

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EXHIBITS

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