<PAGE> 1
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
[ ] 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 small business issuer as specified in its charter)
Florida
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(State or other jurisdiction of incorporation or organization)
65-0680967
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(IRS Employer Identification No.)
1441 SW 29 Avenue, Pompano Beach, Florida 33069
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(Address of principal executive offices)
954-979-5995
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(Issuer's telephone number)
Not applicable
-------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [X] No [ ].
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. As of October 31, 2000, the
registrant had issued and outstanding 6,385,010 shares of common stock.
Transitional Small Business Disclosure Format (check one). Yes [ ] No [X]
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This discussion in this quarterly report regarding PetMed Express, Inc
and our business and operations contains "forward-looking statements." These
forward-looking statements use words such as "believes," "intends," "expects,"
"may," "will," "should," "plan," "projected," "contemplates," "anticipates," or
similar statements. 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-QSB, "PetMed Express,"
"we," "our," and "us" refers to PetMed Express, Inc. and our subsidiary
Southeastern Veterinary Exports, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
<S> <C>
Condensed Consolidated Balance Sheet at September 30, 2000 (unaudited) 1
Condensed Consolidated Statements of Operations for the three and six months
ended September 30, 2000 (unaudited) and 1999 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the six months
ended September 30, 2000 (unaudited) and 1999 (unaudited) 4
Notes to Condensed Consolidated Financial Statements (unaudited) 6
</TABLE>
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PETMED EXPRESS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 223,045
Accounts receivable, less allowance for doubtful accounts 102,922
of $46,807
Inventories 655,239
Prepaid expenses and other current assets 67,620
----------
Total current assets 1,048,826
Property and equipment, net 3,176,391
Other assets, net 109,285
----------
Total assets $4,334,502
==========
SEE ACCOMPANYING NOTES.
1
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<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,326,639
Line of credit 141,214
Current portion of capital lease obligations 217,120
Mortgage payable 1,600,506
Current portion of other liabilities 165,000
Accrued expenses 214,887
-----------
Total current liabilities 3,665,366
Deferred membership fee revenue 260,419
Capital lease obligations, less current portion 114,411
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized; 2,500
convertible shares issued and outstanding at September 30,
2000 with a liquidation preference of $4 per share 8,898
Common stock, $.001 par value, 20,000,000 shares authorized;
6,385,010 shares issued and outstanding at September 30, 2000 6,385
Additional paid-in capital 4,585,718
Accumulated deficit (4,306,695)
-----------
Total stockholders' equity 294,306
-----------
Total liabilities and stockholders' equity $ 4,334,502
===========
</TABLE>
2
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PETMED EXPRESS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
------------------------------- --------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 2,667,336 $ 4,170,077 $ 5,304,051 $ 8,365,067
Cost of sales 1,703,678 2,396,897 3,387,236 4,553,227
----------- ----------- ----------- -----------
Gross profit 963,658 1,773,180 1,916,815 3,811,840
----------- ----------- ----------- -----------
Operating expenses:
General and administrative 1,094,048 1,614,669 2,392,700 2,737,017
Advertising 29,298 553,518 548,520 940,240
Depreciation and amortization 88,524 73,828 184,644 151,916
----------- ----------- ----------- -----------
Total operating expenses 1,211,870 2,242,015 3,125,864 3,829,173
----------- ----------- ----------- -----------
Loss from operations (248,212) (468,835) (1,209,049) (17,333)
Other income (expense):
Interest expense (70,414) (55,293) (151,195) (111,436)
Interest income 19,628 9,510 23,844 16,855
Other, net 396 (8,926) (146) (34,358)
----------- ----------- ----------- -----------
Loss before provision for income taxes (298,602) (523,544) (1,336,546) (146,272)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (298,602) $ (523,544) $(1,336,546) $ (146,272)
=========== =========== =========== ===========
Basic and diluted loss per common
share $ (0.05) $ (0.08) $ (0.21) $ (0.02)
=========== =========== =========== ===========
Weighted average number of
common shares
outstanding 6,385,010 6,369,822 6,382,478 6,369,822
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
3
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PETMED EXPRESS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
September 30
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,336,546) $ (146,272)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 179,020 113,643
Amortization 5,624 38,273
Amortization of deferred membership fee revenue (233,063) (253,169)
Provision for doubtful accounts 18,060 59,001
In-kind services -- 50,000
Changes in operating assets and liabilities:
Accounts receivable 66,891 80,450
Inventories 1,097,457 (429,642)
Prepaid expenses and other current assets 282,924 (67,526)
Accounts payable 44,006 126,658
Other liabilities (45,000) --
Accrued expenses 119,839 347,894
Deferred membership fee revenue 220,084 228,642
----------- -----------
Net cash provided by operating activities 419,296 147,952
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (48,843) (262,065)
Certificate of deposit 300,000 --
Other assets 1,999 (13,769)
----------- -----------
Net cash provided by (used in) investing activities 253,156 (275,834)
----------- -----------
</TABLE>
CONTINUED ON NEXT PAGE.
4
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PETMED EXPRESS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
September 30
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
FINANCING ACTIVITIES
Net proceeds from sale of common stock -- 9,000
Payments on capital lease obligations (94,861) --
Exercise of stock options -- 247,998
Repayments under line of credit (634,986) --
Payments on mortgage payable (31,406) (20,091)
Repayments under note payable to related party -- (1,500,000)
Proceeds from mortgage payable -- 1,680,000
----------- -----------
Net cash (used in) provided by financing activities (761,253) 416,907
----------- -----------
Net (decrease) increase in cash and cash equivalents (88,801) 289,025
Cash and cash equivalents at beginning of fiscal year 311,846 685,749
----------- -----------
Cash and cash equivalents at end of quarter $ 223,045 $ 974,774
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 82,143 $ 111,436
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Equipment purchased through capital lease obligations $ -- $ 223,284
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
5
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PETMED EXPRESS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PetMed Express, Inc. and subsidiary (the Company) is a direct marketer of
household pet medications and other pet products and is located in the Ft.
Lauderdale, Florida area. The Company distributes catalogs to its customers and
potential customers and takes orders by telephone, internet and mail. Almost all
of the Company's sales are to residents of the United States. During fiscal
2000, the Company changed its name to PetMedExpress.com, Inc. and then
subsequently changed its name back to PedMed Express, Inc.
During April 1999, the Company acquired at nominal cost the outstanding common
stock of an affiliate that had an immaterial amount of assets and liabilities.
The Company had previously utilized the services of the affiliate for purchasing
purposes.
The Company's fiscal year end is March 31. References herein to fiscal 2001 or
2000 refer to the Company's fiscal years ended March 31, 2001 and 2000,
respectively.
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying condensed consolidated financial statements are unaudited.
These statements have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the condensed consolidated financial statements reflect
all adjustments (which include only normal recurring adjustments) necessary to
state fairly the consolidated financial position and consolidated results of
operations as of and for the periods indicated. These financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto for the year ended March 31, 2000, included in the
Company's Form 10-KSB as filed with the Securities and Exchange Commission.
6
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PETMED EXPRESS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's condensed consolidated financial statements include the accounts
of PetMed Express, Inc. and its wholly owned subsidiary. All significant
intercompany transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
SIGNIFICANT RISKS AND UNCERTAINTIES--PRODUCT SUPPLY
Two multi-national pharmaceutical companies which manufacture, among other
products, heartworm medication and flea and tick control products, two of the
best-selling products of the Company, have refused to sell these items directly
to the Company. Therefore, the Company must obtain its inventory of these items
through cooperating wholesale sources. To the extent that the Company is unable
to purchase these products from other sources or if they can only be purchased
at prices that make their resale uncompetitive in the marketplace, it could have
a materially adverse impact on the Company's sales. However, the multi-national
company's patent for the heartworm medication expired in June 1999 and the
Company anticipates being able to purchase generic forms of this medication from
other manufacturers.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, 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
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. There were no items
of comprehensive income for any periods presented herein.
7
<PAGE> 11
PETMED EXPRESS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 2000 statement of operations to
conform to the 2001 presentation.
2. GOING CONCERN AND MANAGEMENT'S PLANS
For the three and six months ended September 30, 2000, the Company has incurred
significant operating losses and a cash flow deficiency. These financial
statements have been prepared assuming that the Company will continue as a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company had a net loss of
$1,336,546 for the six months ended September 30, 2000 and negative working
capital of $2,616,540 at September 30, 2000. In addition, the Company was in
violation of certain of its debt covenants at September 30, 2000.
As a result, the Company is dependent upon capital from outside sources in order
to fund future operations. These matters raise substantial doubt about the
entity's ability to continue as a going concern. These financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
Management is actively seeking to raise additional capital through the sale of
equity securities and through the possible sale and leaseback of its land and
building. In addition, management has a plan whereby certain personnel and
administrative costs may be reduced so that the Company may continue to meet its
operating and financing obligations as they come due. No assurances can be given
that the Company will be successful in obtaining additional capital, or that
such capital will be available on terms acceptable to the Company. Further,
there can be no assurances that even if such additional capital is obtained or
the planned cost reductions are implemented that the Company will achieve
profitability or positive cash flow.
8
<PAGE> 12
PETMED EXPRESS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. MORTGAGE PAYABLE AND LINE OF CREDIT AGREEMENT
In September 1999, the Company entered into a $1,000,000 line of credit
agreement with SouthTrust Bank that matured on September 17, 2000. On February
24, 2000, the Company agreed to maintain a $300,000 Certificate of Deposit with
SouthTrust Bank, as additional collateral on the mortgage and line of credit, in
exchange for waivers and amendments to three financial covenants. When the line
of credit matured on September 17, 2000, the proceeds of the Certificate of
Deposit including interest earned were used to repay a portion of the
outstanding line of credit.
A new line of credit has been established which matures on December 17, 2000 and
borrowings under that line of credit are limited to $141,214 and accrue interest
at the lending institution's base rate plus 1% (10.5% at September 30, 2000).
The line of credit is secured by substantially all the assets of the Company. At
September 30, 2000, $141,214 was outstanding under the line of credit agreement.
Both the line of credit and mortgage payable contain various financial and
operating covenants.
At March 31, 2000 and September 30, 2000, the Company was in violation of
certain of its financial covenants, including those, which had been previously
amended. The Company obtained waivers/amendments in July 2000, which suspended
the fixed charge coverage, working capital and bank debt to adjusted net worth
requirements of the covenants through April 1, 2001. Since these covenants were
not suspended beyond April 1, 2001, the Company has classified its entire
mortgage obligation as current in the accompanying balance sheet. Had these
waivers not been obtained, the Company would have been in default of its
mortgage payable and line of credit agreement at September 30, 2000.
4. STOCKHOLDERS' EQUITY
IN-KIND CONTRIBUTION OF SERVICES
During the quarter ended September 30, 1999, the Company's President and Chief
Executive Officer (CEO) did not receive a salary for services performed on
behalf of the Company. The Company does not intend to pay the President and CEO
for these services but has recorded compensation expense for these contributed
services with an offsetting increase in additional paid-in capital. Several
factors were considered in estimating the amount of contributed services,
including the level and type of services
9
<PAGE> 13
PETMED EXPRESS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
provided as well as the amount of compensation received by other senior
executives of the Company. The CEO began receiving payment for his current
services in May 2000.
5. EARNINGS PER SHARE
The Company adopted SFAS No. 128, EARNINGS PER SHARE, effective March 31, 1998.
In accordance with the requirements of SFAS No. 128, basic earnings per share is
computed by dividing net income by the weighted average number of shares
outstanding and diluted earnings per share reflects the dilutive effects of
stock options (as calculated utilizing the treasury stock method) and the
equivalent common shares of outstanding convertible preferred stock. Options
were not included in the calculation of earnings per share for the three and six
months ended September 30, 1999 and 2000 because their effect would have been
antidilutive.
6. COMMITMENTS AND CONTINGENCIES
During fiscal 2000 and 2001, various complaints were filed against the company
with the Florida Board of Pharmacy and Florida Agency for Health Care
Administration for alleged violations of the Florida Pharmacy Act related to our
alleged failure to verify prescriptions. In addition, during fiscal 2001, a
complaint was filed by the Attorney General of Missouri alleging that the
Company failed to verify certain prescriptions. During fiscal 2000, three of
these complaints were settled for fines of $35,000 and costs of $10,671.
Management is continuing discussions in an attempt to reach a resolution of
these matters. Management is unable to determine what, if any, potential
liability may be incurred as a result of the ultimate outcome of the remaining
complaints.
10
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PETMED EXPRESS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In July 1999, the U.S. Food and Drug Administration (FDA) issued a warning
letter to the Company regarding an unspecified instance where the Company
allegedly dispensed prescription veterinary drugs without obtaining a lawful
written or oral order from a licensed veterinarian within the course of the
veterinarian's professional practice. In February 2000, the U.S. Environmental
Protection Agency (EPA) issued a Stop Sale, Use or Removal Order to the Company
regarding the alleged distribution or sale of misbranded medication in violation
of the Federal Insecticide, Fungicide and Rodenticide Act, as amended. The FDA
and EPA have not asserted claims for damages or penalties. The Company has
submitted written responses to both the letter and the order indicating that the
Company reviewed its internal procedures relating to the matters raised by these
regulatory agencies and the Company believes that it is in compliance with all
applicable rules and regulations.
During fiscal 2001, the Indiana Pharmacy Board advised the Company that its
application for non-resident pharmacy registration was denied based upon the
alleged discipline that was taken on the Company's license in Florida as
discussed above. The Company is contesting the denial and is continuing
discussions in an effort to reach a resolution of the matter. Management is
unable to determine at this time the result of the ultimate outcome of this
matter.
During fiscal 2001, the Company was notified that the Hawaii Regulated
Industries Complaints Office was prepared to file a petition for disciplinary
action against the Company for alleged violations of the Hawaii Administrative
Rules for purportedly failing to report a change of address within 10 days and
for alleged failing to report in writing the alleged disciplinary decision
issued in Florida within 30 days. The Company settled this matter in the second
quarter of fiscal 2001 for $500 in administrative costs.
LITIGATION
On October 12, 2000 the Circuit Court of Orange County, Virginia rendered a
judgment for approximately $59,192 plus interest, attorney's fees and costs
related to disputed costs with the Company's catalog printer. As of September
30, 2000 the Company had accrued $62,692 for this matter, which is included in
accounts payable and accrued expenses in the accompanying balance sheet.
11
<PAGE> 15
PETMED EXPRESS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is involved in litigation arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
these matters will be resolved without material adverse effect on the Company's
results of operations or financial position.
12
<PAGE> 16
ITEM 2.
Management's Discussion and Analysis or Plan of Operation
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Results of Operations
SALES
Sales decreased by $1,502,741, or 36.0%, for the three months ended September
30, 2000 from the three months ended September 30, 1999. This decrease was
primarily attributable to a decline in wholesale sales of $1,108,735, or 62.7%,
and a decline in retail sales of $394,006, or 16.5%, due to a decline in
television advertising and increased price competition. Membership fees remained
consistent as a proportionate share of sales.
The following table provides a breakdown of our sales by product category for
the three months ended September 30, 2000 and 1999:
Three Months Ended
September 30,
--------------------
2000 1999
----- ------
Prescription medications 25.9% 18.5%
Non-prescription medications 48.7 59.0
Health and nutritional supplements 3.0 2.0
Accessories 2.2 2.1
Memberships, shipping charges and other 20.2 18.4
----- -----
Total sales 100.0% 100.0%
===== =====
GROSS PROFIT
Gross profit as a percentage of sales decreased to approximately 36.1% for the
three months ended September 30, 2000 from approximately 42.5% for the three
months ended September 30, 1999. This decrease in gross profit as a percentage
of sales is the result of increased price competition and product costs.
13
<PAGE> 17
OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE. General and administrative expense decreased
$520,621, or approximately 32.2% for the three months ended September 30, 2000
from the three months ended September 30, 1999. The decrease in general and
administrative is primarily due to lower payroll and related costs and other
administrative costs. General and administrative expense as a percentage of
sales was 41.0% and approximately 38.7% for the three months ended September 30,
2000 and 1999, respectively. The increase in general and administrative expense
as a percentage of sales is primarily attributable to the decrease in sales for
the quarter ended September 30, 2000 compared with the three months ended
September 30, 1999.
ADVERTISING EXPENSE. Advertising expense decreased by $524,220, or approximately
94.7%, for the three months ended September 30, 2000 from the three months ended
September 30, 1999. The decrease in advertising expense was primarily due to
catalog production and distribution expense, which decreased to $14,465 during
the three months ended September 30, 2000 from $216,064 during the three months
ended September 30, 1999. Also, television advertising decreased to $8,170
during the three months ended September 30, 2000 from $304,267 for the three
months ended September 30, 1999.
OTHER INCOME (EXPENSE)
INTEREST EXPENSE. Interest expense increased $15,121, or approximately 27.3%,
for the three months ended September 30, 2000 from the three months ended
September 30, 1999, as a result of the increase in indebtedness in order to
finance the acquisition of our headquarters and distribution center and
subsequent capital improvements in April and May 1999, and borrowings under our
line of credit.
PROVISION FOR INCOME TAXES
We have incurred significant net losses since our inception in 1996. These
losses have resulted in net operating loss carryforwards and deferred tax
assets, which have been used by us to offset tax liabilities which may have been
incurred in prior periods. We have recorded a valuation allowance against the
deferred income tax assets since future utilization of these assets is subject
to our ability to generate taxable income.
14
<PAGE> 18
NET LOSS
Net loss was $298,602 for the three months ended September 30, 2000 as compared
to net loss of $523,544 for the three months ended September 30, 1999. The
decrease was attributable to the aforementioned.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE SIX MONTHS ENDED SEPTEMBER
30, 1999
SALES
Sales decreased by $3,061,016 or 36.6%, for the six months ended September 30,
2000 from the six months ended September 30, 1999. This decrease was primarily
attributable to a decline in wholesale sales of $1,863,025, or 59.5%, and a
decline in retail sales of $1,197,991, or 23.0%, due to a decline in television
advertising and increased price competition. Membership fees remained consistent
as a proportionate share of sales.
The following table provides a breakdown of our sales by product category for
the six months ended September 30, 2000 and: 1999
Six Months Ended
September 30,
--------------------
2000 1999
----- -----
Prescription medications 23.9% 22.0%
Non-prescription medications 48.9 52.7
Health and nutritional supplements 2.9 1.9
Accessories 2.6 2.2
Memberships, shipping charges and other 21.7 21.2
----- -----
Total sales 100.0% 100.0%
===== =====
GROSS PROFIT
Gross profit as a percentage of sales decreased to approximately 36.1% for the
six months ended September 30, 2000 from approximately 45.6% for the six months
ended September 30, 1999. This decrease in gross profit as a percentage of sales
is the result of increased price competition and product costs.
OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE. General and administrative expense decreased
$344,317, or approximately 12.6% for the six months ended September 30, 2000
from the six months ended September 30, 1999. The decrease in general and
administrative is primarily due to lower payroll and related costs. General and
administrative expense
15
<PAGE> 19
as a percentage of sales was approximately 45.1% and approximately 32.7% for the
six months ended September 30, 2000 and 1999, respectively. The significant
increase in general and administrative expense as a percentage of sales is
primarily attributable to the decrease in sales for the six months ended
September 30, 2000 compared with the six months ended September 30, 1999.
ADVERTISING EXPENSE. Advertising expense decreased by $391,720, or approximately
41.7%, for the six months ended September 30, 2000 from the six months ended
September 30, 1999. The decrease in advertising expense was primarily due to
catalog production and distribution expense, which increased to approximately
$488,692 during the six months ended September 30, 2000 from approximately
$427,491 during the six months ended September 30, 1999. Also, television
advertising decreased to $16,927 during the six months ended September 30, 2000
from $445,798 for the three months ended September 30, 1999.
OTHER INCOME (EXPENSE)
INTEREST EXPENSE. Interest expense increased $39,759, or approximately 35.7%,
for the six months ended September 30, 2000 from the six months ended September
30, 1999, as a result of the increase in indebtedness in order to finance the
acquisition of our headquarters and distribution center and subsequent capital
improvements in April and May 1999, and borrowings under our line of credit.
PROVISION FOR INCOME TAXES
We have incurred significant net losses since our inception in 1996. These
losses have resulted in net operating loss carryforwards and deferred tax
assets, which have been used by us to offset tax liabilities which may have been
incurred in prior periods. We have recorded a valuation allowance against the
deferred income tax assets since future utilization of these assets is subject
to our ability to generate taxable income.
NET LOSS
Net loss was $1,336,546 for the six months ended September 30, 2000 as compared
to a net loss of $146,272 for the six months ended September 30, 1999. The
increase was attributable to the aforementioned.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital deficiency at September 30, 2000 was $2,616,540 as compared
to working capital of $398,218 at March 31, 2000. The primary change in working
capital at September 30, 2000 is the result of classifying the Company's entire
mortgage obligation of $1,600,506 as a current liability at September 30, 2000.
The reclassification, which has not resulted in a change in the repayment
schedule of our mortgage, was required as a result of our violation of certain
debt covenants at
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<PAGE> 20
September 30, 2000 and our decision not to seek waivers beyond
April 1, 2001. The balance of the change in working capital at September 30,
2000 compared with March 31, 2000 was primarily attributable to:
o A decrease of $1,097,457 in our inventories as a result of a lower
investment in inventory, and
o A decrease in our prepaid and other current assets of $282,924 as a
result of a decrease in prepaid advertising and marketing.
Net cash provided by operating activities was $419,296 for the six months ended
September 30, 2000 as compared to net cash provided by operating activities of
$147,952 for the six months ended September 30, 1999. This change was primarily
the result of an increase in cash provided by a reduction in inventories of
$1,527,099 and prepaid expenses of $350,450, offset by our net loss of
$1,336,546 for the six months ended September 30, 2000 as compared to our net
loss of $146,272 for the three months ended September 30, 1999.
Net cash provided by investing activities increased to $253,156 for the six
months ended September 30, 2000 as compared to net cash used in investing
activities of $275,834 for the six months ended September 30, 1999. This change
was primarily attributable to a reduction of purchases of property and equipment
and proceeds from our previously restricted certificate of deposit at September
30, 2000, as compared to September 30, 1999.
Net cash used by financing activities for the six months ended September 30,
2000 was $761,253 as compared with net cash provided by financing activities of
$416,907 for the six months ended September 30, 1999. This change was primarily
attributable to a reduction of proceeds from exercised stock options, an
increase in payments of capital lease obligations and repayments under our line
which matured on September 17, 2000, as compared to September 30, 1999.
Since inception, we have primarily funded our growth through the private
placement of securities, bank borrowings and capital leases.
In March 1999, we purchased a 50,000 square foot building, which serves as our
headquarters and distribution center. In May 1999, we moved our operations to
this location following a renovation of the facility. We currently have a
$1,600,506 mortgage on the building and a line of credit from SouthTrust Bank.
Borrowings under the line of credit are limited to $141,214. The line of credit
is secured by substantially all of our assets, and interest is at the bank's
base lending rate plus 1%, which equaled 10.5% at September 30, 2000. As of
September 30, 2000, we had $141,214 outstanding under the line of credit.
We have been the subject of administrative complaints filed with the Florida
Board of Pharmacy and Florida Agency for Health Care Administration, as well as
similar
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agencies in other states in which we are licensed as a pharmacy, for allegedly
failing to verify prescriptions. See Note 6 Commitments and Contingencies to the
Condensed Consolidated Financial Statements (unaudited) appearing elsewhere in
this Quarterly Report, and Part II, Item 1. Legal Proceedings of this Quarterly
Report. In the past, we have settled some of these complaints, which resulted in
our payment of fines and costs. Other of these complaints are pending and we are
not able to estimate at this time the effect, if any, of the resolution of those
pending matters. We believe we are operating our business in accordance with the
rules of the various states in which we are licensed as a pharmacy, and that the
majority of these complaints are initiated by veterinarians with whom we compete
in the sale of prescription medications. We are attempting to resolve these
complaints with as little financial impact on us as possible; however, we cannot
predict at this time the likelihood of success on our part or what the short or
long term effect will be to PetMed as a result of these pending, or any future,
complaints which may be filed against us.
For the three and six months ended September 30, 2000, we have incurred
significant operating losses and cash flow deficiencies. This discussion has
been prepared assuming that we will continue as a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. We had a net loss of $1,336,546 for the six months
ended September 30, 2000 and negative working capital of $2,616,540 at September
30, 2000. In addition, we were in violation of certain of our debt covenants at
September 30, 2000, which resulted in classifying our entire mortgage payable as
a current liability. As a result, we are dependent upon capital from outside
sources in order to fund future operations. These matters raise substantial
doubt about our ability to continue as a going concern. This discussion
regarding our results of operations as well as our financial statements which
are included elsewhere herein do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
We are actively seeking to raise additional capital through the sale of equity
securities and through the sale and leaseback of our land and building. In
addition, we have a plan whereby certain non-essential personnel and
administrative costs may be reduced so that we may continue to meet our
operating and financing obligations as they come due. No assurances can be given
that we will be successful in obtaining additional capital, or that such capital
will be available in terms acceptable to us. Further, there can be no assurance
that even if such additional capital is obtained or the planned cost reductions
are implemented, that we will achieve profitability or positive cash flow.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item6. Exhibits and Reports on Form 8-K.
(a) Exhibits
No. Description
--- -----------
27 Financial Data Schedule
(b) Reports on Form 8K
On September 14, 2000 we filed a report on Form 8K regarding the
resignation of certain of our Board Directors.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PetMed Express, Inc.,
a Florida corporation
Date: November 6, 2000 /s/ Marc A. Puleo
--------------------------------
Marc A. Puleo, M.D.,
Chief Executive Officer
/s/ John S. Vermaaten
--------------------------------
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
20
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INDEX TO EXHIBITS
No. Description
--- -----------
27 Financial Data Schedule
