www.1800petmeds.comYou’re 100% satisfied or your money back!PetMed Express, Inc.www.1800petmeds.comFast, Easy, Helpful Service with Great Savings!2016ANNUAL REPORT In fiscal 2016, the Company made progress in growing both top and bottom line results. For the fiscal year ended March 31, 2016 sales were $234.7 million compared to $229.4 million for the prior fiscal year, an increase of 2.3%. For the fiscal year ended March 31, 2016 net income was $20.6 million, or $1.02 diluted per share compared to, excluding a one-time charge for an IT-related discontinued project, $18.5 million, or $0.92 diluted per share a year ago, an increase to net income of 11%. We were encouraged with increases in new customer revenue during the second half of fiscal 2016 and we were also pleased with our advertising efficiency, as our new customer acquisition costs were reduced to $45 for fiscal 2016 compared to $48 for fiscal 2015. Online sales for the fiscal year were approximately 81% of all sales compared to 80% of all sales for the prior fiscal year, and the average purchase value was approximately $81 for fiscal 2016 compared to $77 for fiscal 2015.1-800-PetMeds remains committed to returning capital to our stockholders. During the fiscal year, we paid a quarterly dividend of $0.18 per share and in the first quarter of fiscal 2017, the quarterly dividend was raised to $0.19 per share. While the Company intends to continue to pay regular quarterly dividends, the declaration and payment of future dividends is discretion-ary and will be subject to a determination by our Board of Directors each quarter, following its review of the Company’s financial performance. Since fiscal 2010 the Company has paid a cumu-lative total of $5.13 per share in dividends. According to the American Pet Products Manufacturers Association, pet spending in the United States increased 3.9% to $60.3 billion in 2015. Pet supplies and medications represented $14.3 billion, or 24% of the total spending on pets in the United States. The pet medication market that we participate in is estimated to be approximately $4.2 billion, with veterinarians having the majority of the market share. The dog and cat population is approximately 164 million, with approximately 65% of all households having a pet.We are a licensed pharmacy to dispense prescription medications in all 50 states. We offer a wide selection of products, over 3,000 SKUs, including a variety of private label products. We regularly research new products, and select new products or the latest generation of existing products to become part of our product selection, so that we can offer our customers the best medications, supplements, and pet supplies for dogs and cats at affordable prices. Our customers can enjoy either the convenience of ordering online at our top-rated website www.1800petmeds.com, or over the telephone, where they can experience 1-800-PetMeds’ exceptional customer care. As the national brand leader and America’s Largest Pet Pharmacy, we continue to make it the goal of everyone at 1-800-PetMeds to provide “Fast, Easy, Helpful Service with Great Savings!” We have served over 9.0 million satisfied customers, with approximately 2.3 million customers having purchased from us within the last two years. We are proud that our customer service satisfaction rating, as measured by independent companies, continues to well exceed other online participants. In January 2016 we completed the acquisition of property in Delray Beach, FL, which will serve as our new corporate headquarters and distribution center. In fiscal 2017, we will be preparing to move into our new facility, which is expected to occur in our third fiscal quarter.As always, we remain thankful to our loyal customers, dedicated employees, and, you, our stockholders, for your ongoing support of 1-800-PetMeds.Sincerely, Menderes AkdagPresident, Chief Executive Officer, DirectorJune 13, 2016 www.1800petmeds.comCorporate Information:Directors, Executive Officers, and Corporate SecretaryRobert C. SchweitzerChairman of the Boardand Independent DirectorFinancial ConsultantMenderes AkdagDirector, Chief Executive Officerand President of the CompanyFrank J. FormicaIndependent DirectorLegal ConsultantRonald J. KornIndependent DirectorPresident of Ronald Korn ConsultingGian M. FulgoniIndependent DirectorCo-Founder and Executive Chairman Emeritus of comScore, Inc.Bruce S. Rosenbloom, CPAChief Financial Officer and Treasurerof the CompanyAlison Berges, Esq.Corporate Secretary andGeneral Counsel to the CompanyCorporate HeadquartersPetMed Express, Inc.1441 S.W. 29th AvenuePompano Beach, Florida 33069Independent Registered Public Accounting FirmRSM US LLPNew York, New YorkTransfer AgentContinental Stock Transfer & Trust CompanyNew York, New YorkStock Exchange ListingThe NASDAQ Stock Market LLCTrading Symbol: PETSAnnual MeetingThe Annual Meeting of Stockholders will be held at 1 p.m. Eastern Time,July 29, 2016.Investor RelationsPetMed Express, Inc. welcomes inquiries from stockholders and otherinterested investors. You may contact us by phone: (800) 738-6337 or(954) 979-5995 or by writing to the corporate headquarters address above.(all above fiscal years ended on March 31st)PERFORMANCE SUMMARYFirst QuarterFiscal 2016 High LowFiscal 2015 High Low$17.73$15.82$13.80$12.63Second QuarterFiscal 2016 High LowFiscal 2015 High Low$18.23$15.72$14.54$13.24Third QuarterFiscal 2016 High LowFiscal 2015 High Low$17.88$16.04$14.72$12.56Fourth QuarterFiscal 2016 High LowFiscal 2015 High Low$18.70$15.77$16.59$14.04QUARTERLYSTOCK PRICE RANGESales($ in millions) 2012 2013 2014 2015 2016Net Income($ in millions)Earnings per share EPS(Diluted)Dividends declared(Per share) 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016To My Fellow Stockholders:PetMed Express, Inc.PetMed Express, Inc.$229.4$233.4$238.3$227.8$234.7$20.6$17.5$18.0$16.7$17.2$1.02$0.87$0.90$0.80$0.86$0.72$0.68$0.66$0.525$1.60 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(cid:1)(cid:1)(cid:1)(cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
For the fiscal year ended March 31, 2016
OR
(cid:2)(cid:2)(cid:2)(cid:2) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 000-28827
_______________________________________________________
PETMED EXPRESS, INC.
(Exact name of registrant as specified in its charter)
FLORIDA
(State or other jurisdiction of
incorporation or organization)
65-0680967
(IRS Employer
Identification No.)
1441 S.W. 29th Avenue, Pompano Beach, Florida 33069
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (954) 979-5995
Securities registered under Section 12(b) of the Act:
Title of each class
COMMON STOCK, $.001 PAR VALUE
Name of each exchange on which
registered
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered under Section 12(g) of the Act:
NONE
___________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:2) No (cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:2) No (cid:3)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (cid:3) No (cid:2)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceeding12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes (cid:3) No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:2)
Non-accelerated filer (cid:2)
Accelerated filer
Smaller reporting company
(cid:3)
(cid:2)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:2) No (cid:3)
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant as of September 30, 2015, the last
business day of the registrant’s most recently completed second fiscal quarter, was $313.4 million based on the closing sales price of the
registrant’s Common Stock on that date, as reported on the NASDAQ Global Select Market.
The number of shares of the registrant’s Common Stock outstanding as of May 24, 2016 was 20,446,942.
DOCUMENTS INCORPORATED BY REFERENCE
Information to be set forth in our Proxy Statement relating to our 2016 Annual Meeting of Stockholders to be held on July 29, 2016 is
incorporated by reference in Items 10, 11, 12, 13, and 14 of Part III of this report.
PETMED EXPRESS, INC.
2016 Annual Report on Form 10-K
TABLE OF CONTENTS
PART I ........................................................................................................................................................................ 1
Item 1. Business ................................................................................................................................................. 1
Item 1A. Risk Factors ............................................................................................................................................ 6
Item 1B. Unresolved Staff Comments ................................................................................................................. 10
Item 2. Properties ............................................................................................................................................. 10
Item 3. Legal Proceedings ................................................................................................................................ 10
Item 4. Mine Safety Disclosures ....................................................................................................................... 10
Page
PART II ..................................................................................................................................................................... 11
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities ........................................................................................ 11
Item 6. Selected Financial Data........................................................................................................................ 14
Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations ..................................................................................................................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market RiskEEEEEEEE.. ................................. 22
Item 8. Financial Statements and Supplementary DataEEEEEEEE.. .................................................... 23
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure .......................................................................................................................................... 41
Item 9A. Controls and Procedures ...................................................................................................................... 41
Item 9B. Other Information .................................................................................................................................. 41
PART III ................................................................................................................................................................... 42
Item 10. Directors, Executive Officers, and Corporate Governance .................................................................. 42
Item 11. Executive Compensation ...................................................................................................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ........................................................................................................................... 42
Item 13. Certain Relationships and Related Transactions, and Director Independence ................................... 42
Item 14. Principal Accountant Fees and Services .............................................................................................. 42
PART IV ................................................................................................................................................................... 43
Item 15. Exhibits, Financial Statement Schedules ............................................................................................. 43
SIGNATURES .......................................................................................................................................................... 45
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain information in this Annual Report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
You can identify these forward-looking statements by the words "believes," "intends," "expects," "may," "will,"
"should," "plan," "projects," "contemplates," "intends," "budgets," "predicts," "estimates," "anticipates," or similar
expressions. These statements are based on our beliefs, as well as assumptions we have used based upon
information currently available to us. Because these statements reflect our current views concerning future
events, these statements involve risks, uncertainties and assumptions. Actual future results may differ
significantly from the results discussed in the forward-looking statements. A reader, whether investing in our
common stock or not, should not place undue reliance on these forward-looking statements, which apply only as
of the date of this Annual Report.
When used in this Annual Report on Form 10-K, "PetMed Express," "1-800-PetMeds," “PetMeds,” "PetMed,"
“PetMeds.com,” "PetMed Express.com," "the Company," "we," "our," and "us" refer to PetMed Express, Inc. and
our wholly-owned subsidiaries.
ITEM 1. BUSINESS
General
PetMed Express, Inc. and subsidiaries, d/b/a 1-800-PetMeds, is a leading nationwide pet pharmacy. The
Company markets prescription and non-prescription pet medications, and other health products for dogs and cats,
direct to the consumer. The Company offers consumers an attractive alternative for obtaining pet medications in
terms of convenience, price, and speed of delivery.
The Company markets its products through national television, online, and direct mail/print advertising
campaigns, which aim to increase the recognition of the “1-800-PetMeds” brand name, and “PetMeds” family of
trademarks, increase traffic on its website at www.1800petmeds.com, acquire new customers, and maximize
repeat purchases. Our fiscal year end is March 31, our executive offices are currently located at 1441 S.W. 29th
Avenue, Pompano Beach, Florida 33069, and our telephone number is (954) 979-5995. In the third quarter of
fiscal 2017 our executive offices will be located at 420 South Congress Avenue, Delray Beach, Florida 33445.
Our Products
We offer a broad selection of products for dogs and cats. Our current product line contains approximately
3,000 SKUs of the most popular pet medications, health products, and supplies. These products include a
majority of the well-known brands of medication, such as Frontline Plus®, K9 Advantix® II, Advantage® II,
Heartgard Plus®, Sentinel®, Revolution®, and Rimadyl®. Generally, our prices are competitive with the prices
for medications charged by veterinarians and retailers. In March 2010, we started offering for sale additional pet
supplies on our website, which are drop shipped to our customers by third parties. These pet supplies include:
food, beds, crates, stairs, strollers, and other popular pet supplies.
We research new products, and regularly select new products or the latest generation of existing products to
become part of our product selection. In addition, we also refine our current products to respond to changing
consumer-purchasing habits. Our website is designed to give us the flexibility to change featured products or
promotions. Our product line provides customers with a wide variety of selections across the most popular health
categories for dogs and cats. Our current products include:
Non-Prescription Medications (OTC) and supplies: Flea and tick control products, bone and joint care
products, vitamins, treats, nutritional supplements, hygiene products, and supplies.
Prescription Medications (Rx): Heartworm and flea and tick preventatives, arthritis, thyroid, diabetes, pain
medications, antibiotics, and other specialty medications, as well as generic substitutes.
1
Sales
We offer our products through three main sales channels: Internet through our website, telephone contact
center through our toll-free number, and direct mail/print through 1-800-PetMeds catalogs, brochures, and
postcards. We have designed our website and catalogs to provide a convenient, cost-effective, and informative
shopping experience that encourages consumers to purchase products important for a pet’s health and quality of
life. We believe that these multiple channels allow us to increase the visibility of our brand name and provide our
customers with increased shopping flexibility and excellent service.
Internet
We seek to combine our product selection and pet health information with the shopping ease of the Internet to
deliver a convenient and personalized shopping experience. Our website offers health and nutritional product
selections for dogs and cats, and relevant editorial and easily obtainable or retrievable resource information.
From our home page, customers can search our website for products and access resources on a variety of
information on dogs and cats. Customers can shop at our website by category, product line, individual product, or
symptom. We attracted approximately 33 million visitors to our website during fiscal 2016, approximately 8% of
those visitors placed an order, and our website generated approximately 81% of our total sales for the same time
period. On our website pet owners have access to health information covering pets’ behavior and illnesses, and
natural and pharmaceutical remedies specifically for a pet’s problem. The pet education content on our main
website is periodically updated with the latest research for pet owners.
Telephone Contact Center
Our customer care representatives receive and process inbound and outbound customer calls, facilitate our
live web chat, and process customer e-mails. Our telephone system is equipped with certain features including
pop-up screens and call blending capabilities that give us the ability to efficiently utilize our customer care
representatives’
Our customer care
representatives receive a base salary and are rewarded with commissions for sales, and bonuses and other
awards for achieving certain quality goals.
time, providing excellent customer care, service, and support.
Direct Mail/Print
The 1-800-PetMeds catalog is a full-color catalog that features our most popular products. The catalog is
produced by a combination of in-house writers, production artists, and independent contractors. We mail
catalogs, brochures, and postcards in response to requests generated from our advertising and as part of direct
mail campaigns to our customers.
Our Customers
Approximately 2.3 million customers have purchased from us within the last two years. We attracted
approximately 489,000 and 529,000 new customers in fiscal 2016 and 2015, respectively. Our customers are
located throughout the United States, with approximately 50% of customers residing in California, Florida, Texas,
New York, Pennsylvania, North Carolina, Virginia, and Georgia. Our primary focus has been on retail customers
and the average purchase was approximately $81 for fiscal 2016 compared to $77 for fiscal 2015.
Marketing
The goal of our marketing strategy is to build brand recognition, increase customer traffic, add new
customers, build strong customer loyalty, maximize reorders, and develop incremental revenue opportunities. We
have an integrated marketing campaign that includes television advertising, online marketing, direct mail/print and
e-mail.
Television Advertising
Our television advertising is designed to build brand equity, create brand awareness, and generate initial
purchases of products via the telephone and the Internet. We have used :30 and :15 second television
commercials to attract new customer orders. Our television commercials typically focus on our ability to rapidly
deliver to customers the same medications offered by veterinarians, but at reduced prices. We generally
purchase advertising to target our key demographic group – women, ages 30 to 65. We believe that television
advertising is particularly effective and instrumental in building brand awareness.
2
Online Marketing
We supplement our traditional advertising with online advertising and marketing efforts. We make our brand
available to Internet consumers by purchasing targeted keywords and achieving prominent placement on the top
search engines and search engine networks, including Google, Bing™, and Yahoo®. We utilize Internet display
and video advertisements, social media, and comparison shopping, and we are also members of the LinkShare
Network, which is an affiliate program with merchant clients and affiliate websites.
Direct Mail/Print and E-mail
We use direct mail/print and e-mail to acquire new customers and to remind our existing customers to
reorder.
Operations
Order Processing
Our website allows customers to easily browse and purchase all of our products online. Our website is
designed to be fast, secure, and easy to use with order and shipping confirmations, and with online order tracking
capabilities. We provide our customers with toll-free telephone access to our customer care representatives. Our
call center generally operates from 8:00 AM to 11:00 PM, Monday through Thursday, 8:00 AM to 9:00 PM on
Friday, 9:00 AM to 6:00 PM on Saturday, and 10:00 AM to 5:00 PM on Sunday, Eastern Time. The process of
customers purchasing products from 1-800-PetMeds consists of a few simple steps. A customer first places an
order online or a call to our toll-free telephone number. The following information is needed to process
prescription orders: pet information, prescription information, and the veterinarian’s name and phone number.
This information is entered into our computer system. Then our pharmacists and pharmacy technicians verify all
prescriptions. The order process system checks for the verification for prescription medication orders and a valid
payment method for all orders. An invoice is generated and printed in our fulfillment center, where items are
picked, and then shipped via United States Postal Service, Federal Express, or UPS. Our customers enjoy the
convenience of rapid home delivery, with the majority of all orders being shipped within 24 hours of ordering.
Customer Care and Support
We believe that a high level of customer care and support is critical in retaining and expanding our customer
base. Customer care representatives participate in ongoing training programs under the supervision of our
training managers. These training sessions include a variety of topics such as product knowledge, computer
usage, customer service tips, and the relationship between our Company and veterinarians. Our customer care
representatives respond to customers’ e-mails, calls, and live chats that are related to products, order status,
prices, and shipping. We believe our customer care representatives are a valuable source of feedback regarding
customer satisfaction.
Warehousing and Shipping
We inventory our products and fill most customer orders from our corporate headquarters in Pompano Beach,
Florida. We have an in-house fulfillment and distribution operation, which is used to manage the entire supply
chain, beginning with the placement of the order, continuing through order processing, and then fulfilling and
shipping of the product to the customer. We offer a variety of shipping options, including next day delivery. We
ship to anywhere in the United States served by the United States Postal Service or Federal Express. Priority
orders are expedited in our fulfillment process. Our goal is to ship the products the same day that the order is
received. For prescription medications, our goal is to ship the product immediately after the prescription has been
authorized by the customer’s veterinarian.
Purchasing
We purchase our products from a variety of sources, including certain manufacturers, domestic distributors,
and wholesalers. There were four suppliers from whom we purchased approximately 50% of all products in fiscal
2016. We purchase the majority of the health and nutritional supplements directly from manufacturers. We
believe having strong relationships with product manufacturers will ensure the availability of an adequate volume
of products ordered by our customers, and will enable us to provide more and better product information.
3
Historically, many of the major manufacturers of prescription and non-prescription medications have declined
to sell these products to direct marketing companies, such as our Company. (See Risk Factors.) Part of our
growth strategy includes developing direct relationships with the leading pharmaceutical manufacturers of the
more popular prescription and non-prescription medications.
Technology
integrated
We utilize
technologies
in our call centers, e-commerce, order entry, and
inventory
control/fulfillment operations. Our systems are custom configured by the Company to optimize our computer
telephone integration and mail-order processing. The systems are designed to maintain a large database of
specialized information and process a large volume of orders efficiently and effectively. Our systems provide our
customer care representatives, and our customers on our website, with real time product availability information
and updated customer information to enhance our customer care. We also have an integrated direct connection
for processing credit cards to ensure that a valid credit card number and authorization have been received at the
same time our customer care representatives are on the phone with the customer or when a customer submits an
order on our website. Our information systems provide our customer care representatives with records of all prior
contact with a customer, including the customer’s address, phone number, e-mail address, prescription
information, order history, payment history, and notes.
Competition
The pet medications market is competitive and highly fragmented. Our competitors consist of veterinarians,
and online and traditional retailers. We believe that the following are the principal competitive factors in our
market:
• Product selection and availability, including the availability of prescription and non-prescription
medications;
• Brand recognition;
• Reliability and speed of delivery;
• Personalized service and convenience;
• Price; and
• Quality of website content.
We compete with veterinarians for the sale of prescription and non-prescription pet medications and other
health products. Many pet owners may prefer the convenience of purchasing their pet medications or other
health products at the time of a veterinarian visit. In order to effectively compete with veterinarians, we must
continue to educate pet owners about the service, convenience, and savings offered by our Company.
According to the American Pet Products Manufacturers Association, pet spending in the United States
increased 3.9% to $60.3 billion in 2015. Pet supplies and medications represented $14.3 billion, or 24% of the
total spending on pets in the United States. The pet medication market that we participate in is estimated to be
approximately $4.2 billion, with veterinarians having the majority of the market share. The dog and cat population
is approximately 164 million, with approximately 65% of all households having a pet.
We believe that the following are the main competitive strengths that differentiate 1-800-PetMeds from the
competition:
“1-800-PetMeds” brand name;
• Channel leader, in an estimated $4.2 billion industry;
•
• Licensed pharmacy to conduct business in 50 states, and awarded Vet-VIPPSCM (Veterinary-Verified
Internet Pharmacy Practice Site) accreditation by the National Association of Boards of Pharmacy®;
• Exceptional customer care and support
Intellectual Property
We conduct our business under the trade name “1-800-PetMeds” and use a family of trade names all
containing the term “PetMeds” or “PetMed” in some form. We believe the “1-800-PetMeds” trade name, which is
also our toll-free telephone number, and the “PetMeds” family of trademarks, has added significant value and is
an important factor in the marketing of our products. We have also obtained the right to use and control the
www.petmedexpress.com,
Internet
www.petmed.com, and www.petmeds.com.
www.1800petmeds.com,
www.1888petmeds.com,
addresses
4
We also obtained the right to use and control the Internet addresses www.petmeds.pharmacy and
www.1800petmeds.pharmacy, through a National Association of Boards of Pharmacy® initiative to ensure high
standards for online pharmacies. We do not expect to lose the ability to use the Internet addresses; however,
there can be no assurance in this regard and the loss of these addresses may have a material adverse effect on
our financial position and results of operations. We are the exclusive owners of United States Trademark
Registrations for “PetMed Express and Design®,” “1888PetMeds and Design®,” “1-800-PetMeds and Design®,”
1-800-PetMeds®,” and “PetMeds®,” among numerous others.
Government Regulation
Dispensing prescription medications is governed at the state level by Boards of Pharmacy, or similar
regulatory agencies, of each state where prescription medications are dispensed. We are subject to regulation by
the State of Florida and are licensed as a community pharmacy by the Florida Board of Pharmacy. Our current
license is valid until February 28, 2017, and prior to that date a renewal application will be submitted to the Board
of Pharmacy. During fiscal 2015 we obtained a federal registration, and state registrations/permits as required, to
dispense Schedule IV controlled substances, Our pharmacy practice is also licensed and/or regulated by 49 other
state pharmacy boards, the District of Columbia Board of Pharmacy, and the United States Drug Enforcement
Administration, and with respect to our products, by other regulatory authorities including, but not necessarily
limited to, the United States Food and Drug Administration (“FDA”) and the United States Environmental
Protection Agency. As a licensed pharmacy in the State of Florida, we are subject to the Florida Pharmacy Act
and regulations promulgated thereunder. To the extent that we are unable to maintain our license as a
community pharmacy with the Florida Board of Pharmacy, or if we do not maintain the licenses granted by other
state pharmacy boards, or if we become subject to actions by the FDA, or other enforcement regulators, our
distribution of prescription medications to pet owners could cease, which could have a material adverse effect on
our financial condition and results of operations.
Employees
We currently have 178 full time employees, including: 110 in customer care and marketing; 27 in fulfillment
and purchasing; 30 in our pharmacy; 3 in information technology; 3 in administrative positions; and 5 in
management. None of our employees are represented by a labor union, or governed by any collective bargaining
agreements. We consider relations with our employees to be satisfactory.
Available Information
We file annual, quarterly, and current reports, proxy statements, and other information with the Securities and
Exchange Commission ("SEC"). Our SEC filings, including our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to the
Exchange Act are available free of charge over the Internet on our website at www.1800petmeds.com or at the
SEC's web site at www.sec.gov. Our SEC filings will be available through our website as soon as reasonably
practicable after we have electronically filed or furnished them to the SEC. Information contained on our website
is not incorporated by reference into this Annual Report on Form 10-K.
5
ITEM 1A. RISK FACTORS
You should carefully consider the risks and uncertainties described below, and all the other information
included in this Annual Report on Form 10-K before you decide to invest in our common stock. Any of the
following risks could materially adversely affect our business, financial condition, or operating results and could
result in a loss of your investment.
We may inadvertently fail to comply with various state or federal regulations covering the dispensing of
prescription pet medications which may subject us to reprimands, sanctions, probations, fines, suspensions, or
the loss of one or more of our pharmacy licenses.
The sale and delivery of prescription pet medications is generally governed by state laws and state
regulations, and with respect to controlled substances, by federal law. Since our pharmacy is located in the State
of Florida, the Company is governed by the laws and regulations of the State of Florida. Each prescription pet
medication sale we make is likely also to be covered by the laws of the state where the customer is located. The
laws and regulations relating to the sale and delivery of prescription pet medications vary from state to state, but
generally require that prescription pet medications be dispensed with the authorization from a prescribing
veterinarian. To the extent that we are unable to maintain our license as a community pharmacy with the Florida
Board of Pharmacy, or if we do not maintain the licenses granted by other state boards, or if we become subject
to actions by the FDA, or other enforcement regulators, our dispensing of prescription medications to pet owners
could cease, which could have a material adverse effect on our operations. The Company is a party to routine
litigation and administrative complaints incidental to its business. Management does not believe that the
resolution of any or all of such routine litigation and administrative complaints is likely to have a material adverse
effect on the Company’s financial condition or results of operations. While we make every effort to fully comply
with all applicable state rules, laws, and regulations, from time to time we have been the subject of administrative
complaints regarding the authorization of prescriptions prior to shipment. We cannot assure you that we will not
continue to be the subject of administrative complaints in the future. We cannot guarantee you that we will not be
subject to reprimands, sanctions, probations, or fines, or that one or more of our pharmacy licenses will not be
suspended or revoked. If we were unable to maintain our license as a community pharmacy in the State of
Florida, or if we are not granted licensure in a state that begins to require licensure, or if one or more of the
licenses granted by other state boards should be suspended or revoked, our ability to continue to sell prescription
medications and to continue our business as it is presently conducted could be in jeopardy.
We currently purchase a portion of our prescription and non-prescription medications from third party distributors
and we are not an authorized distributor of these products. We do not have any guaranteed supply of
medications at any pre-established prices.
The majority of our sales were attributable to sales of prescription and non-prescription medications.
Historically, many of the major pharmaceutical manufacturers have declined to sell prescription and non-
prescription pet medications directly to us. In order to assure a supply of these products, we purchase
medications from various secondary sources, including a variety of domestic distributors. Our business strategy
includes seeking to establish direct purchasing arrangements with major pet pharmaceutical manufacturing
companies. If we are not successful in achieving this goal, we will continue to rely upon secondary sources. We
cannot guarantee that if we continue to purchase prescription and non-prescription pet medications from
secondary sources that we will be able to purchase an adequate supply to meet our customers’ demands, or that
we will be able to purchase these products at competitive prices. As these products represent a significant
portion of our sales, our failure to fill customer orders for these products could adversely impact our sales. If we
are forced to pay higher prices for these products to ensure an adequate supply, we cannot guarantee that we will
be able to pass along to our customers any increases in the prices we pay for these medications. This inability to
pass along increased prices could materially adversely affect our gross margins, financial condition and results of
operations.
Our failure to properly manage our inventory may result in excessive inventory carrying costs, or inadequate
supply of products, which could materially adversely affect our financial condition and results of operations.
Our current product line contains approximately 3,000 SKUs. A significant portion of our sales is attributable
to products representing approximately 100 SKUs, including the most popular flea and tick, and heartworm
preventative brands. We need to properly manage our inventory to provide an adequate supply of these products
and avoid excessive inventory of the products representing the balance of the SKUs. We generally place orders
for products with our suppliers based upon our internal estimates of the amounts of inventory we will need to fill
future orders. These estimates may be significantly different from the actual orders we receive.
6
In the event that subsequent orders fall short of original estimates, we may be left with excess inventory.
Significant excess inventory could result in price discounts and increased inventory carrying costs. Similarly, if we
fail to have an adequate supply of some SKUs, we may lose sales opportunities. We cannot guarantee that we
will maintain appropriate inventory levels. Any failure on our part to maintain appropriate inventory levels may
have a material adverse effect on our financial condition and results of operations.
Resistance from veterinarians to authorize prescriptions, or attempts/efforts on their part to discourage pet owners
to purchase from internet mail-order pharmacies could cause our sales to decrease and could materially
adversely affect our financial condition and results of operations.
Since we began our operations some veterinarians have resisted providing our customers with a copy of their
pet’s prescription or authorizing the prescription to our pharmacy staff, thereby effectively preventing us from
filling such prescriptions under state law. We have also been informed by customers and consumers that
veterinarians have tried to discourage pet owners from purchasing from internet mail-order pharmacies. Although
veterinarians in some states are required by law to provide a pet owner with a prescription if medically
appropriate, if the number of veterinarians who refuse to authorize prescriptions should increase, or if
veterinarians are successful in discouraging pet owners from purchasing from internet mail-order pharmacies, our
sales could decrease and our financial condition and results of operations may be materially adversely affected.
Significant portions of our sales are made to residents of eight states. If we should lose our pharmacy license in
one or more of these states, our financial condition and results of operations would be materially adversely
affected.
While we ship pet medications to customers in all 50 states, approximately 50% of our sales for the fiscal year
ended March 31, 2016 were made to customers located in the states of California, Florida, Texas, New York,
Pennsylvania, North Carolina, Virginia, and Georgia. If for any reason our license to operate a pharmacy in one
or more of those states should be suspended or revoked, or if it is not granted or renewed, our ability to sell
prescription medications to residents of those states would cease and our financial condition and results of
operations in future periods would be materially adversely affected.
We face significant competition from veterinarians and online and traditional retailers and may not be able to
compete profitably with them.
We compete directly and indirectly with veterinarians for the sale of pet medications and other health
products. Veterinarians hold a competitive advantage over us because many pet owners may find it more
convenient or preferable to purchase these products directly from their veterinarians at the time of an office visit.
We also compete directly and indirectly with both online and traditional retailers. Both online and traditional
retailers may hold a competitive advantage over us because of longer operating histories, established brand
names, greater resources, and/or an established customer base. Online retailers may have a competitive
advantage over us because of established affiliate relationships to drive traffic to their website. Traditional
retailers may hold a competitive advantage over us because pet owners may prefer to purchase these products
from a store instead of online or through catalog or telephone methods. In order to effectively compete in the
future, we may be required to offer promotions and other incentives, which may result in lower operating margins
and adversely affect the results of operations. We also face a significant challenge from our competitors forming
alliances with each other, such as those between online and traditional retailers. These relationships may enable
both their retail and online stores to negotiate better pricing and better terms from suppliers by aggregating the
demand for products and negotiating volume discounts, which could be a competitive disadvantage to us.
The content of our website could expose us to various kinds of liability, which, if prosecuted successfully, could
negatively impact our business.
Because we post product and pet health information and other content on our website, we face potential
liability for negligence, copyright infringement, patent infringement, trademark infringement, defamation, and/or
other claims based on the nature and content of the materials we post. Various claims have been brought, and
sometimes successfully prosecuted, against Internet content distributors. We could be exposed to liability with
respect to the unauthorized duplication of content or unauthorized use of other parties’ proprietary technology.
Although we maintain general liability insurance, our insurance may not cover potential claims of this type, or may
not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered
by insurance, or is in excess of insurance coverage, could materially adversely affect our financial condition and
results of operations.
7
We may not be able to protect our intellectual property rights, and/or we may be found to infringe on the
proprietary rights of others.
We rely on a combination of trademarks, trade secrets, copyright laws, and contractual restrictions to protect
our intellectual property rights. These afford only limited protection. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy our non-prescription private label generic equivalents, when and
if developed, as well as aspects of our sales formats, or to obtain and use information that we regard as
proprietary, including the technology used to operate our website and our content, and our trademarks. Litigation
or proceedings before the United States Patent and Trademark Office or other bodies may be necessary in the
future to enforce our intellectual property rights, to protect our trade secrets and domain names, or to determine
the validity and scope of the proprietary rights of others. Any litigation or adverse proceeding could result in
substantial costs and diversion of resources, and could seriously harm our business and operating results. Third
parties may also claim infringement by us with respect to past, current, or future technologies. We expect that
participants in our market will be increasingly involved in infringement claims as the number of services and
competitors in our industry segment grows. Any claim, whether meritorious or not, could be time-consuming,
result in costly litigation, cause service upgrade delays, or require us to enter into royalty or licensing agreements.
These royalty or licensing agreements might not be available on terms acceptable to us or at all.
If we are unable to protect our Internet addresses or to prevent others from using Internet addresses that are
confusingly similar, our business may be adversely impacted.
Our
Internet addresses, www.1800petmeds.com, www.1888petmeds.com, www.petmedexpress.com,
www.petmed.com, www.petmeds.com, www.petmeds.pharmacy, and www.1800petmeds.pharmacy, are critical to
our brand recognition and our overall success. If we are unable to protect these Internet addresses, our
competitors could capitalize on our brand recognition. There may be similar Internet addresses used by
competitors. Governmental agencies and their designees generally regulate the acquisition and maintenance of
Internet addresses. The regulation of Internet addresses in the United States and in foreign countries has
changed, and may undergo further change in the near future. Furthermore, the relationship between regulations
governing Internet addresses and laws protecting trademarks and similar proprietary rights is unclear. Therefore,
we may not be able to protect our own Internet addresses, or prevent third parties from acquiring Internet
addresses that are confusingly similar to, infringe upon, or otherwise decrease the value of our Internet
addresses.
Since all of our operations are housed in a single location, we are more susceptible to business interruption in the
event of damage to or disruptions in our facility.
Our headquarters and distribution center are currently located in two buildings in one location in South
Florida, and most of our shipments of products to our customers are made from this sole distribution center. We
have no present plans to establish any additional distribution centers or offices. Because we consolidate our
operations in one location, we are more susceptible to power and equipment failures, and business interruptions
in the event of fires, floods, and other natural disasters than if we had additional locations. Furthermore, because
we are located in South Florida, which is a hurricane-sensitive area, we are particularly susceptible to the risk of
damage to, or total destruction of, our headquarters and distribution center and surrounding transportation
infrastructure caused by a hurricane.
We cannot assure you that we are adequately insured to cover the amount of any losses relating to any of
these potential events, business interruptions resulting from damage to or destruction of our headquarters and
distribution center, or power and equipment failures relating to our call center or websites, or interruptions or
disruptions to major transportation infrastructure, or other events that do not occur on our premises. The
occurrence of one or more of these events could adversely impact our ability to generate revenues in future
periods.
8
Our operating results are difficult to predict and may fluctuate, and a portion of our sales are seasonal.
Factors that may cause our operating results to fluctuate include:
• Our ability to obtain new customers at a reasonable cost, retain existing customers, or encourage
reorders;
• Our ability to increase the number of visitors to our website, or our ability to convert visitors to our website
into customers;
• The mix of medications and other pet products sold by us;
• Our ability to manage inventory levels or obtain an adequate supply of products;
• Our ability to adequately maintain, upgrade, and develop our website, the systems that we use to process
customers’ orders and payments, or our computer network;
Increased competition within our market niche;
•
• Price competition;
• New products introduced to the market, including generics;
•
• The amount and timing of operating costs and capital expenditures relating to expansion of our product
Increases in the cost of advertising;
line or operations;
• Disruption of our toll-free telephone service, technical difficulties, or systems and Internet outages or
slowdowns; and
• Unfavorable general economic trends.
Because our operating results are difficult to predict, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. The majority of our product sales are
affected by the seasons, due to the seasonality of mainly heartworm, and flea and tick medications. For the
quarters ended June 30, 2015, September 30, 2015, December 31, 2015, and March 31, 2016, Company sales
were 30%, 24%, 22%, and 24%, respectively. In addition to the seasonality of our sales, our annual and quarterly
operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety of factors,
including weather, many of which are out of our control. Any change in one or more of these factors could
materially adversely affect our financial condition and results of operations in future periods.
Our stock price fluctuates from time to time and may fall below expectations of securities analysts and investors,
and could subject us to litigation, which may result in you suffering a loss on your investment.
The market price of our common stock may fluctuate significantly in response to a number of factors, many of
which are out of our control. These factors include: quarterly variations in operating results; changes in
accounting treatments or principles; announcements by us or our competitors of new products and services
offerings; significant contracts, acquisitions, or strategic relationships; additions or departures of key personnel;
any future sales of our common stock or other securities; stock market price and volume fluctuations of publicly-
traded companies; and general political, economic, and market conditions.
In some future quarter our operating results may fall below the expectations of securities analysts and
investors, which could result in a decrease in the trading price of our common stock. In the past, securities class
action litigation has often been brought against a company following periods of volatility in the market price of its
securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial
costs and divert management's attention and resources, which could seriously harm our business and operating
results.
We may issue additional shares of preferred stock that could defer a change of control or dilute the interests of
our common stockholders. Our charter documents could defer a takeover effort which could inhibit your ability to
receive an acquisition premium for your shares.
Our charter permits our Board of Directors to issue up to 5.0 million shares of preferred stock without
stockholder approval. Currently there are 2,500 shares of our Convertible Preferred Stock issued and
outstanding. This leaves a little less than 5.0 million shares of preferred stock available for issuance at the
discretion of our Board of Directors. These shares, if issued, could contain dividend, liquidation, conversion,
voting, or other rights which could adversely affect the rights of our common stockholders and which could also be
utilized, under some circumstances, as a method of discouraging, delaying, or preventing a change in control.
Provisions of our articles of incorporation, bylaws and Florida law could make it more difficult for a third party to
acquire us, even if many of our stockholders believe it is in their best interest.
9
A failure of our information systems or any security breach or unauthorized disclosure of confidential information
could have a material adverse effect on our business.
Our business is dependent upon the efficient operation of our information systems. In particular, we rely on
our information systems to effectively manage our business model strategy, with tools to track and manage sales,
inventory, marketing, customer service efforts, the preparation of our consolidated financial and operating
data, credit card information, and customer information. The failure of our information systems to perform as
designed or the failure to maintain and enhance or protect the integrity of these systems could disrupt our
business operations, adversely impact sales and the results of operations, expose us to customer or third-party
claims, or result in adverse publicity. Additionally, we collect, process, and retain sensitive and confidential
customer information in the normal course of our business. Despite the security measures we have in place and
any additional measures we may implement in the future, our facilities and systems, and those of our third-party
service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data,
programming errors, human errors, acts of vandalism, or other events. Any security breach or event resulting in
the misappropriation, loss, or other unauthorized disclosure of confidential information, whether by us directly or
our third-party service providers, could damage our reputation, expose us to the risks of litigation and liability,
disrupt our business, or otherwise affect our results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Our facilities, including our principal executive offices, are located at 1441 S.W. 29th Avenue and 2900
Gateway Drive, Pompano Beach, Florida 33069. The Company leases its 65,300 square foot executive offices,
warehouse facility and customer service and pharmacy contact centers under a non-cancelable operating lease,
through December 1, 2016. The Company is responsible for certain maintenance costs, taxes, and insurance
under this lease. The future minimum annual lease payments for the year ended March 31, 2017 is $519,000.
Rent expense was $781,000, $794,000, and $785,000 for the fiscal years ended March 31, 2016, 2015 and 2014,
respectively.
In January 2016 we completed the acquisition of real property located at 420 South Congress Avenue, Delray
Beach, Florida, and improvements thereon (collectively referred to herein as the “Property”), the assignment and
assumption of all leases and service agreements affecting the Property, and certain tangible and intangible
personal property related to the Property, for a purchase price of $18.5 million, plus closing costs. The Property
consists of approximately 634,000 square feet of land or 14.6 acres with two building complexes totaling
approximately 185,000 square feet, with additional land for future use. The first building complex consists of
approximately 125,000 square feet consisting of both office and warehouse. The second building complex
consists of approximately 60,000 square feet consisting of both office and warehouse space. Once the Property
is renovated to the Company’s specifications and ready for its operation, expected in the third quarter of fiscal
2017, the Company intends to occupy approximately 97,000 square feet of the first building for its principal offices
and distribution center, and to continue to operate the remaining office and warehouse space pursuant to existing
leases. As of March 31, 2016, 48% of the Property was leased to two tenants with a remaining weighted average
lease term of 4.0 years. We believe that our facilities will be sufficient for our current needs and are in good
condition in all material respects.
ITEM 3. LEGAL 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
10
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “PETS.”
The prices set forth below reflect the high and low sale prices per share in each of the quarters of fiscal 2016 and
2015 as reported by the NASDAQ.
Fiscal 2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2015:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
$17.73
$18.23
$17.88
$18.70
High
$13.80
$14.54
$14.72
$16.59
Low
$15.82
$15.72
$16.04
$15.77
Low
$12.63
$13.24
$12.56
$14.04
There were 93 holders of record of our common stock at May 24, 2016, and approximately 19,800 of our
holders are “street name” or beneficial holders, whose shares are held by banks, brokers, or other financial
institutions.
Dividends
During fiscal 2015 and 2016, our Board of Directors declared the following dividends:
Declaration Date
Per Share
Dividend
May 2, 2014
July 21, 2014
October 20, 2014
January 20, 2015
May 4, 2015
July 20, 2015
October 19, 2015
January 25, 2016
$0.17
$0.17
$0.17
$0.17
$0.18
$0.18
$0.18
$0.18
Record Date
May 14, 2014
August 4, 2014
November 3, 2014
February 3, 2015
May 1, 2015
August 3, 2015
November 2, 2015
February 8, 2016
Total Amount
(In thousands)
$
$
$
$
3,432
3,446
3,445
3,445
$
$
$
$
3,647
3,660
3,660
3,659
Payment Date
May 23, 2014
August 15, 2014
November 14, 2014
February 13, 2015
May 22, 2015
August 14, 2015
November 13, 2015
February 19, 2016
On May 9, 2016, the Company’s Board of Directors declared an increased quarterly dividend of $0.19 per
share on its common stock. The $3.9 million dividend will be paid on May 27, 2016, to shareholders of record at
the close of business on May 20 2016. The Company intends to continue to pay regular quarterly dividends;
however the declaration and payment of future dividends is discretionary and will be subject to a determination by
the Board of Directors each quarter following its review of the Company’s financial performance.
Issuer Purchases of Equity Securities
On November 8, 2006, the Company's Board of Directors approved a share repurchase plan of up to $20.0
million. On October 31, 2008, November 1, 2010, and August 1, 2011, the Company’s Board of Directors
approved an increase under the share repurchase plan, each for an additional $20.0 million. The repurchase plan
is intended to be implemented through purchases made from time to time in either the open market or through
private transactions at the Company's discretion, subject to market conditions and other factors, in accordance
with Securities and Exchange Commission requirements.
11
There can be no assurances as to the precise number of shares that will be repurchased under the share
repurchase plan, and the Company may discontinue the share repurchase plan at any time subject to compliance
with applicable regulatory requirements. Shares purchased pursuant to the share repurchase plan will either be
cancelled or held in the Company's treasury. During fiscal 2016 and fiscal 2015 the Company did not repurchase
any shares, and as of March 31, 2016, the Company had approximately $10.2 million remaining under the
Company’s share repurchase plan. Since the inception of the share repurchase plan, approximately 5.6 million
shares have been repurchased under the plan for approximately $69.8 million, averaging approximately $12.54
per share.
Performance Graph
Set forth below is a line graph comparing the five year cumulative performance of our Common Stock with the
Standard & Poor’s Composite-500 Stock Index (the “S&P 500”), the Nasdaq Composite, and the Russell 2000,
from March 31, 2011 to March 31, 2016. The graph assumes that $100 was invested on March 31, 2011 in each
of our Common Stock, the S&P 500, the Nasdaq Composite, and the Russell 2000. Because we have historically
paid dividends on a quarterly basis, the graph assumes that dividends were reinvested. The performance graph
and related information below shall not be deemed “filed” with the Securities and Exchange Commission, nor shall
such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into
such filing.
250
200
150
100
50
0
Nasdaq Composite
S&P
Russell 2000
PetMed Express, Inc.
3/31/2011
3/31/2012
3/31/2013
3/31/2014
3/31/2015
3/31/2016
1
1
0
2
,
1
3
h
c
r
a
M
e
d
a
m
t
n
e
m
t
s
e
v
n
I
0
0
1
$
f
o
e
u
a
V
l
Nasdaq Composite
S&P 500
Russell 2000
PetMed Express, Inc.
Performance graph data:
Fiscal Year Ended March 31,
Nasdaq Composite
S&P 500
Russell 2000
PetMed Express, Inc.
2011
100.00
100.00
100.00
100.00
2012
114.03
108.54
99.82
81.87
2014
161.72
150.73
145.00
106.68
2015
188.56
169.92
156.90
138.04
2016
188.62
172.95
141.59
156.27
2013
123.04
123.69
116.09
101.86
12
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under equity compensation plans, including
individual compensation arrangements, by us under our 2006 Amended and Restated Employee Equity
Compensation Restricted Stock Plan, Amended and Restated 2006 Outside Director Equity Compensation
Restricted Stock Plan, and 2015 Outside Director Equity Compensation Restricted Stock Plan as of March 31,
2016:
EQUITY COMPENSATION PLAN INFORMATION
(In thousands, except for per share amounts)
Plan category
2006 Employee Restricted Stock Plan
2006 Director Restricted Stock Plan
2015 Director Restricted Stock Plan
Total
Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
928
272
-
1,200
-
-
-
515
305
400
1,220
13
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read together with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated Financial Statements and notes thereto, and
other financial information included elsewhere in this Annual Report on Form 10-K. The Consolidated Statements
of Income data set forth below for the fiscal years ended March 31, 2016, 2015, and 2014 and the Consolidated
Balance Sheet data as of March 31, 2016 and 2015 have been derived from our audited Consolidated Financial
Statements which are included elsewhere in this Annual Report on Form 10-K. The Consolidated Statements of
Income data set forth below for the fiscal years ended March 31, 2013 and 2012 and the Consolidated Balance
Sheet data as of March 31, 2014, 2013 and 2012 have been derived from our audited Consolidated Financial
Statements which are not included in this Annual Report on Form 10-K.
Sales
Cost of sales
Gross profit
Operating expenses
Net income
Net income per common share:
Basic
Diluted
Weighted average number of
common shares outstanding:
Basic
Diluted
Cash dividends declared per
common share
CONSOLIDATED STATEMENTS OF INCOME DATA
(In thousands, except for per share amounts)
Fiscal Year Ended March 31,
2016
2015
2014
2013
2012
$
234,684
158,388
76,296
43,908
20,567
$
229,395
153,125
76,270
48,657
17,453
$
233,391
155,774
77,617
49,399
17,972
$
227,829
150,708
77,121
50,116
17,165
$
238,250
158,085
80,165
54,143
16,659
1.02
1.02
0.87
0.87
0.90
0.90
0.86
0.86
0.81
0.80
20,124
20,254
20,015
20,136
19,901
20,043
19,926
20,049
20,613
20,708
0.720
0.680
0.660
1.600
0.525
CONSOLIDATED BALANCE SHEET DATA
(In thousands)
2016
2015
March 31,
2014
2013
2012
Working capital
Total assets
Total liabilities
Shareholders' equity
$
60,543
90,279
7,084
83,195
$
72,166
82,852
7,417
75,435
$
66,116
78,375
8,158
70,217
$
59,760
73,179
9,165
64,014
$
78,216
91,064
9,883
81,181
NON FINANCIAL DATA (UNAUDITED)
(In thousands)
2016
2015
March 31,
2014
2013
2012
New customers acquired
Total accumulated customers (1)
489
9,075
529
8,586
597
8,057
630
7,460
722
6,830
(1) includes both active and inactive customers
14
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Executive Summary
PetMed Express was incorporated in the state of Florida in January 1996. The Company’s common stock is
traded on the NASDAQ Global Select Market under the symbol “PETS.” The Company began selling pet
medications and other pet health products in September 1996. In March 2010 the Company started offering for
sale additional pet supplies on its website, and these items are drop shipped to customers by third party vendors.
Presently, the Company’s product line includes approximately 3,000 SKUs of the most popular pet medications,
health products, and supplies for dogs and cats.
The Company markets its products through national television, online, and direct mail/print advertising
campaigns which aim to increase the recognition of the “1-800-PetMeds” brand name, and “PetMeds” family of
trademarks, increase traffic on its website at www.1800petmeds.com, acquire new customers, and maximize
repeat purchases. Approximately 81% of all sales were generated via the Internet in fiscal 2016, compared to
80% in fiscal 2015. The Company’s sales consist of products sold mainly to retail consumers. The twelve-month
average purchase was approximately $81 and $77 per order for the fiscal years ended March 31, 2016 and 2015,
respectively.
Critical Accounting Policies
Our discussion and analysis of our financial condition and the results of our operations are based upon our
Consolidated Financial Statements and the data used to prepare them. The Company’s Consolidated Financial
Statements have been prepared in accordance with accounting principles generally accepted in the United States
of America. On an ongoing basis we re-evaluate our judgments and estimates including those related to product
returns, bad debts, inventories, and income taxes. We base our estimates and judgments on our historical
experience, knowledge of current conditions, and our beliefs of what could occur in the future considering
available information. Actual results may differ from these estimates under different assumptions or conditions.
Our estimates are guided by observing the following critical accounting policies.
Revenue recognition
The Company generates revenue by selling pet medication products and pet supplies primarily to retail
consumers. The Company’s policy is to recognize revenue from product sales upon shipment, when the rights of
ownership and risk of loss have passed to the customer. Outbound shipping and handling fees are included in
sales and are billed upon shipment. Shipping expenses are included in cost of sales. The majority of the
Company’s sales are paid by credit cards and the Company usually receives the cash settlement in two to three
banking days. Credit card sales minimize accounts receivable balances relative to sales. The Company
maintains an allowance for doubtful accounts for losses that the Company estimates will arise from customers’
inability to make required payments, arising from either credit card charge-backs or insufficient funds checks. The
Company determines its estimates of the uncollectibility of accounts receivable by analyzing historical bad debts
and current economic trends. The allowance for doubtful accounts was approximately $13,000 at March 31,
2016, compared to $8,000 at March 31, 2015.
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 $64,000 and
$63,000 as of March 31, 2016 and 2015, respectively.
Advertising
The Company's advertising expense consists primarily of television advertising, Internet marketing, and direct
mail/print advertising. Television advertising costs are expensed as the advertisements are televised. 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.
15
Accounting for income taxes
The Company accounts for income taxes under the provisions of ASC Topic 740, (“Accounting for Income
Taxes”), which generally requires the recognition of deferred tax assets and liabilities for the expected future tax
benefits or consequences of events that have been included in the Consolidated Financial Statements or tax
returns. Under this method, deferred tax assets and liabilities are determined based on differences between the
financial reporting carrying values and the tax bases of assets and liabilities, and are measured by applying
enacted tax rates and laws for the taxable years in which those differences are expected to reverse.
Results of Operations
The following should be read in conjunction with the Company’s Consolidated Financial Statements and the
related notes thereto included elsewhere herein. The following table sets forth, as a percentage of sales, certain
operating data appearing in the Company’s Consolidated Statements of Comprehensive Income:
Sales
Cost of sales
Gross profit
Operating expenses:
General and administrative
Advertising
Discontinued project costs
Depreciation
Total operating expenses
Income from operations
Total other income
Income before provision for income taxes
Provision for income taxes
Fiscal Year Ended March 31,
2016
2015
2014
100.0
%
100.0
%
100.0
%
67.5
32.5
9.1
9.3
-
0.3
18.7
13.8
0.1
13.9
5.1
66.8
33.2
9.2
11.0
0.7
0.3
21.2
12.0
0.1
12.1
4.5
66.7
33.3
9.2
11.6
-
0.4
21.2
12.1
0.1
12.2
4.5
Net income
8.8
%
7.6
%
7.7
%
Fiscal 2016 Compared to Fiscal 2015
Sales
Sales increased by approximately $5.3 million, or 2.3%, to approximately $234.7 million for the fiscal year
ended March 31, 2016, from approximately $229.4 million for the fiscal year ended March 31, 2015. The increase
in sales for the fiscal year ended March 31, 2016 was primarily due to increased reorder sales, offset by a slight
decrease in new order sales. The Company acquired approximately 489,000 new customers for the year ended
March 31, 2016, compared to approximately 529,000 new customers for the same period the prior year.
16
The following chart illustrates sales by various sales classifications:
Sales (In thousands)
2016
%
2015
%
$ Variance
% Variance
Reorder Sales
New Order Sales
$
$
195,569
39,115
83.3%
16.7%
$
$
189,685
39,710
82.7%
17.3%
$
$
5,884
(595)
Total Net Sales
$
234,684
100.0%
$
229,395
100.0%
$
5,289
Internet Sales
Contact Center Sales
$
$
190,781
43,903
81.3%
18.7%
$
$
184,078
45,317
80.2%
19.8%
$
$
6,703
(1,414)
Total Net Sales
$
234,684
100.0%
$
229,395
100.0%
$
5,289
3.1%
-1.5%
2.3%
3.6%
-3.1%
2.3%
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 2016, the Company’s sales
were approximately 30%, 24%, 22%, and 24%, respectively. For the quarters ended June 30, September 30,
December 31, and March 31 of fiscal 2015, the Company’s sales were approximately 32%, 25%, 21%, and 22%,
respectively.
Cost of sales
Cost of sales increased by $5.3 million, or 3.4% to $158.4 million for the fiscal year ended March 31, 2016,
from $153.1 million for the fiscal year ended March 31, 2015. The increase in cost of sales in fiscal 2016 is
directly related to the increase in sales during the fiscal year. As a percentage of sales, cost of sales was 67.5%
in fiscal 2016, as compared to 66.8% in fiscal 2015. The cost of sales percentage increase can be mainly
attributed to an increase in product costs on certain brands and additional discounts given to customers to
increase sales during the fiscal year.
Gross profit
Gross profit was $76.3 million for both of the fiscal years ended March 31, 2016 and 2015. Gross profit as a
percentage of sales for fiscal 2016 was 32.5% compared to 33.2%, for fiscal 2015. The gross profit percentage
decrease in fiscal 2016 can be mainly attributed to an increase in product costs on certain brands and additional
discounts given to customers to increase sales during the fiscal year.
General and administrative expenses
General and administrative expenses increased by $200,000, or 1.0%, to $21.3 million for the fiscal year
ended March 31, 2016 from $21.1 million for the fiscal year ended March 31, 2015. The increase in general and
administrative expenses for the fiscal year ended March 31, 2016 was primarily due to the following: a $165,000
increase in bad debt expenses relating to increased credit card chargebacks in the period; a $139,000 increase in
property expenses; and a $135,000 increase in bank service fees due to increased sales. Offsetting the increase
was a $62,000 decrease in payroll expenses; a $53,000 decrease due to a one-time charge relating to
state/county sales tax which was not collected on behalf of our customers in fiscal 2015; a $53,000 decrease in
licenses and fees; a $39,000 decrease in insurance expenses; and a $32,000 net decrease in other expenses
which included telephone, travel, and office expenses. General and administrative expenses as a percentage of
sales were 9.1% for the fiscal year ended March 31, 2016, compared to 9.2% for the fiscal year ended March 31,
and 2015, respectively. The decrease in general and administrative expenses as a percentage of sales was
primarily due to an increase to sales for fiscal 2016.
Advertising expenses
Advertising expenses decreased by approximately $3.4 million to approximately $21.8 million for the year
ended March 31, 2016, from approximately $25.2 million for the year ended March 31, 2015. The decrease in
advertising expenses for fiscal 2016 can be attributed to a reduction in television advertising spending. The
advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers
acquired, was $45 for the fiscal year ended March 31, 2016, compared to $48 for the fiscal year ended March 31,
2015. The decrease in customer acquisition costs for fiscal 2016 can be attributed to increased response to our
advertising.
17
Advertising cost of acquiring a new customer can be impacted by the advertising environment, the
effectiveness of our advertising creative, increased advertising spending, and price competition. Historically, the
advertising environment fluctuates due to supply and demand. A more favorable advertising environment may
positively impact future new order sales, whereas a less favorable advertising environment may negatively impact
future new order sales.
As a percentage of sales, advertising expense was 9.3% and 11.0% for the fiscal years ended March 31,
2016 and 2015, respectively. The decrease in advertising expense as a percentage of total sales for the fiscal
year ended March 31, 2016 can be attributed to a reduction in television advertising spending. The Company
currently anticipates advertising as a percentage of sales to be approximately 9% for fiscal 2017. However, the
advertising percentage will fluctuate quarter to quarter due to seasonality and advertising availability. For the
fiscal year ended March 31, 2016, quarterly advertising expenses as a percentage of sales ranged between 7%
and 11%.
Discontinued project costs
During the quarter ended September 30, 2014 the Company discontinued an information technology project
related to a new software platform, which was intended to be put into service and capitalized during fiscal 2015.
The Company expensed a one-time project charge of $1.7 million in the September 2014 quarter. The net after
tax impact of this one-time charge was $1.1 million, or $0.05 diluted per share. The Company does not expect
any additional future expenditures relating to the discontinued project. There was no financial impact related to
the discontinued project during the fiscal year ended March 31, 2016.
Depreciation
Depreciation increased by approximately $110,000, to approximately $770,000 for the year ended March 31,
2016, from approximately $660,000 for the year ended March 31, 2015. This increase to depreciation for the
fiscal year ended March 31, 2016 can be attributed to an increase in new property and equipment additions.
Other income
Other income decreased slightly, to approximately $179,000 for the year ended March 31, 2016 from
approximately $185,000 for the year ended March 31, 2015. Other income mainly consists of interest income and
rental income. Other income may increase in fiscal 2017 due to increased rental revenue and interest income
may decrease in the future as the Company utilizes its cash balances on its share repurchase plan, with
approximately $10.2 million remaining as of March 31, 2016, on any quarterly dividend payment, or on its
operating activities.
Provision for income taxes
For the fiscal years ended March 31, 2016 and 2015, the Company recorded an income tax provision for
approximately $12.0 million and $10.3 million, respectively. The increase to the income tax provision for fiscal
2016 is related to an increase to operating income for the period due to a reduction in operating expenses. The
increase to the income tax provision is also related to the one-time discontinued project charge of $1.7 million
which was recognized in fiscal 2015, the net after tax impact of this one-time charge was $1.1 million, which
reduced the income tax provision by approximately $600,000. The effective tax rate for the fiscal years ended
March 31, 2016 and 2015 were 36.8% and 37.2%, respectively. The effective tax rate decrease for the fiscal year
ended March 31, 2016, can be attributed to a one-time benefit related to a fiscal 2016 income tax over-accrual,
which was recognized in the quarter ended December 31, 2015, compared to a one-time charge related to a fiscal
2015 income tax under-accrual, which was recognized in the quarter ended December 31, 2014. The Company
estimates its effective tax rate will be approximately 37.0% for fiscal 2017.
Net income
Net income increased by approximately $3.1 million, or 17.8%, to approximately $20.6 million for the fiscal
year ended March 31, 2016 from approximately $17.5 million for the fiscal year ended March 31, 2015. The
increase was primarily due to a reduction in operating expenses during fiscal 2016 and the recognition of a one-
time project charge of $1.7 million recognized in fiscal 2015. The net after tax impact of this one-time charge was
$1.1 million.
18
Fiscal 2015 Compared to Fiscal 2014
Sales
Sales decreased by approximately $4.0 million, or 1.7%, to approximately $229.4 million for the fiscal year
ended March 31, 2015, from approximately $233.4 million for the fiscal year ended March 31, 2014. The
decrease in sales for the fiscal year ended March 31, 2015 was primarily due to decreased new order and reorder
sales. Fiscal 2015 sales were negatively impacted primarily by the weakness in demand for flea and tick topical
pet medications. The Company acquired approximately 529,000 new customers for the year ended March 31,
2015, compared to approximately 597,000 new customers for the same period the prior year.
The following chart illustrates sales by various sales classifications:
Sales (In thousands)
2015
%
2014
%
$ Variance
% Variance
Reorder Sales
New Order Sales
$
$
189,685
39,710
82.7%
17.3%
$
$
191,205
42,186
81.9%
18.1%
$
$
(1,520)
(2,476)
Total Net Sales
$
229,395
100.0%
$
233,391
100.0%
$
(3,996)
Internet Sales
Contact Center Sales
$
$
184,078
45,317
80.2%
19.8%
$
$
184,356
49,035
79.0%
21.0%
$
$
(278)
(3,718)
Total Net Sales
$
229,395
100.0%
$
233,391
100.0%
$
(3,996)
-0.8%
-5.9%
-1.7%
-0.2%
-7.6%
-1.7%
Going forward sales may continue to be adversely affected due to increased competition and consumers
giving more consideration to price. The majority of our product sales were 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 2015, the Company’s sales were approximately 32%, 25%, 21%, and 22%,
respectively. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2014, the
Company’s sales were approximately 32%, 26%, 21%, and 21%, respectively.
Cost of sales
Cost of sales decreased by $2.7 million, or 1.7%, to $153.1 million for the fiscal year ended March 31, 2015,
from $155.8 million for the fiscal year ended March 31, 2014. The decrease in cost of sales is directly related to a
reduction in sales. As a percentage of sales, cost of sales was 66.8% in fiscal 2015, as compared to 66.7% in
fiscal 2014. The cost of sales percentage increase can be mainly attributed to a slight increase in product costs.
Gross profit
Gross profit decreased by $1.3 million, or 1.7%, to $76.3 million for the fiscal year ended March 31, 2015,
from $77.6 million for the fiscal year ended March 31, 2014. Gross profit as a percentage of sales for fiscal 2015
was 33.2% compared to 33.3%, for fiscal 2014. The gross profit percentage decrease can be mainly attributed to
a slight increase in product costs.
General and administrative expenses
General and administrative expenses decreased by $251,000, or 1.2%, to $21.1 million for the fiscal year
ended March 31, 2015 from $21.4 million for the fiscal year ended March 31, 2014. The decrease in general and
administrative expenses for the fiscal year ended March 31, 2015 was primarily due to the following: a $151,000
reduction in payroll expense; a $103,000 decrease in bank service fees due to a decrease in sales; a $84,000
decrease in property expenses related to computer maintenance expenses; and a $57,000 decrease in other
expenses including office expense, insurance expense, and licenses and fees. Offsetting the decrease was a
$67,000 increase in professional fees, with the majority of the increase relating to investor relations and
pharmacy; a $53,000 one-time charge relating to state/county sales tax which was not collected on behalf of our
customers; and a $24,000 increase in telephone expenses. General and administrative expenses as a
percentage of sales was 9.2% for both the fiscal years ended March 31, 2015 and 2014, respectively.
19
Advertising expenses
Advertising expenses decreased by approximately $2.0 million to approximately $25.2 million for the year
ended March 31, 2015, from approximately $27.2 million for the year ended March 31, 2014. The decrease in
advertising expenses for fiscal 2015 can be attributed to a reduction in television and print advertising. The
advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers
acquired, was $48 for the fiscal year ended March 31, 2015, compared to $46 for the fiscal year ended March 31,
2014. Advertising cost of acquiring a new customer can be impacted by the advertising environment, the
effectiveness of our advertising creative, increased advertising spending, and price competition. Historically, the
advertising environment fluctuates due to supply and demand. A more favorable advertising environment may
positively impact future new order sales, whereas a less favorable advertising environment may negatively impact
future new order sales.
As a percentage of sales, advertising expense was 11.0 % and 11.6% for the fiscal years ended March 31,
2015 and 2014, respectively. The decrease in advertising expense as a percentage of total sales for the fiscal
year ended March 31, 2015 can be attributed to a reduction in advertising expense. The Company currently
anticipates advertising as a percentage of sales to be approximately 11% for fiscal 2016. However, the
advertising percentage will fluctuate quarter to quarter due to seasonality and advertising availability. For the
fiscal year ended March 31, 2015, quarterly advertising expenses as a percentage of sales ranged between 8%
and 14%.
Discontinued project costs
During the quarter ended September 30, 2014 the Company discontinued an information technology project
related to a new software platform, which was intended to be put into service and capitalized during the
September quarter. The Company expensed a one-time project charge of $1.7 million in the September quarter.
The net after tax impact of this one-time charge was $1.1 million, or $0.05 diluted per share. The Company does
not expect any additional future expenditures relating to this discontinued project. Management determined that it
was not in the best interest of the Company to proceed with this project. The Company decided to continue with,
and upgrade, its current software platform.
Depreciation
Depreciation decreased by approximately $207,000, to approximately $660,000 for the year ended March 31,
2015, from approximately $867,000 for the year ended March 31, 2014. This decrease to depreciation for the
year ended March 31, 2015 can be attributed to more fixed assets becoming fully depreciated.
Other income
Other income increased slightly, to approximately $185,000 for the year ended March 31, 2015 from
approximately $181,000 for the year ended March 31, 2014. Interest income may decrease in the future as the
Company utilizes its cash balances on its share repurchase plan, with approximately $10.2 million remaining as of
March 31, 2015, on any quarterly dividend payment, or on its operating activities.
Provision for income taxes
For the fiscal years ended March 31, 2015 and 2014, the Company recorded an income tax provision for
approximately $10.3 million and $10.4 million, respectively. The decrease to the income tax provision for fiscal
2015 is related to a reduction in operating income for the period due to the one-time discontinued project charge
of $1.7 million. The net after tax impact of this one-time charge was $1.1 million, which reduced the income tax
provision by approximately $600,000. The effective tax rate for the fiscal years ended March 31, 2015 and 2014
were 37.2% and 36.7%, respectively. The effective tax rate increase for the fiscal year ended March 31, 2015,
can be attributed to a one-time charge related to a fiscal 2015 income tax under-accrual, which was recognized in
the quarter ended December 31, 2014, compared to a one-time benefit related to a fiscal 2014 income tax over-
accrual, which was recognized in the quarter ended December 31, 2013. The Company estimates its effective tax
rate will be approximately 37.0% for fiscal 2016.
20
Net income
Net income decreased by approximately $519,000, or 2.9%, to approximately $17.5 million for the fiscal year
ended March 31, 2015 from approximately $18.0 million for the fiscal year ended March 31, 2014. The decrease
was primarily due to a reduction in sales, and the recognition of one-time project charge of $1.7 million during the
fiscal year. The net after tax impact of this one-time charge was $1.1 million.
Liquidity and Capital Resources
The Company’s working capital at March 31, 2016 and 2015 was approximately $60.5 million and
approximately $72.2 million, respectively. The $11.7 million decrease in working capital was primarily attributable
to the $18.5 million real property purchase in January 2016, offset by cash flow generated from operations. Net
cash provided by operating activities was $21.1 million and $32.0 million for the fiscal years ended March 31,
2016 and 2015, respectively. This change can be attributed to a greater decrease in the Company’s inventory
balance at March 31, 2015, as compared to a slight increase at March 31, 2016. Net cash used in investing
activities was $4.5 million and $986,000 for the years ended March 31, 2016 and 2015, respectively. This change
can be attributed to increased property and equipment additions during fiscal 2016, offset by a reduction in the
Company’s short term investments. Net cash used in financing activities was $14.5 million and $13.7 million for
the years ended March 31, 2016 and 2015, respectively. This change represented an increase in the dividends
paid during fiscal 2016. As of March 31, 2016 the Company had approximately $10.2 million remaining under the
Company’s share repurchase plan, and no shares were repurchased in fiscal 2016.
In January 2016 we completed the acquisition of real property located at 420 South Congress Avenue, Delray
Beach, Florida, and improvements thereon, the assignment and assumption of all leases and service agreements
affecting the Property, and certain tangible and intangible personal property related to the Property, for a
purchase price of $18.5 million, plus closing costs. The Property consists of approximately 634,000 square feet of
land or 14.6 acres with two building complexes with additional land for future use. The first building complex
consists of approximately 125,000 square feet consisting of both office and warehouse. The second building
complex consists of approximately 60,000 square feet consisting of both office and warehouse space. Once the
Property is renovated to the Company’s specifications and ready for its operation, expected in the third quarter of
fiscal 2017, the Company intends to occupy the remaining approximately 97,000 square feet of the building for its
principal offices and distribution center, and to continue to operate the remaining office and warehouse space
pursuant to existing leases. As of March 31, 2016, 48% of the Property was leased to two tenants with a
remaining weighted average lease term of 4.0 years.
Subsequent to March 31, 2016, the Company’s Board of Directors declared an increased quarterly dividend
of $0.19 per share on May 9, 2016. The Board established a May 20, 2016 record date and a May 27, 2016
payment date. Depending on future market conditions the Company may utilize its cash and cash equivalents on
the remaining balance of its current share repurchase plan, on quarterly dividends, or on its operating activities.
As of both March 31, 2016 and 2015 the Company had no outstanding lease commitments except for the
lease for its 65,300 square foot facility. We are not currently bound by any long or short term agreements for the
purchase or lease of capital expenditures. Any material amounts expended for capital expenditures would be the
result of an increase in the capacity needed to adequately provide for any future increase in our business. To
date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and
anticipate this being the case in the future. Presently, we have approximately $9.0 million forecasted for capital
expenditures in fiscal 2017, primarily related to improvements of the new Property, upgrading the distribution
center infrastructure, and computer equipment, 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 as of March 31, 2016.
21
Contractual Obligations and Commitments (In thousands)
Less than
More than
Total
1 year
1-2 years
3-5 Years
5 years
Property lease
Executive employment contract
$
$
519
1,800
$
$
519
600
$
-
$
600
$
-
$
600
$
-
$
-
Total obligations
$
2,319
$
1,119
$
600
$
600
$
-
Recent Accounting Pronouncements
The Company does not believe that any recently issued, but not yet effective, accounting standards, if
currently adopted, will have a material effect on the Company’s consolidated financial position, results of
operations, or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the value of financial instruments as a result
of movements in interest rates, foreign currency exchange rates, and commodity prices. Our financial
instruments include cash and cash equivalents, short term investments, accounts receivable, and accounts
payable. The book values of cash equivalents, short term investments, 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 investments. At March 31, 2016, we had $37.6 million in cash
and cash equivalents. A majority of our cash and cash equivalents and investments generates 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 investments. It would also impact the market value of our investments. Our investments are subject to
market risk, primarily interest rate and credit risk. Our investments are managed by a limited number of outside
professional managers within investment guidelines set by our Board of Directors. Such guidelines include
security type, credit quality, and maturity, and are intended to limit market risk by restricting our investments to
high-quality debt instruments with both short and long term maturities. We do not hold any derivative financial
instruments that could expose us to significant market risk. At March 31, 2016, we had no debt obligations.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PETMED EXPRESS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of March 31, 2016 and 2015
Consolidated Statements of Comprehensive Income for each of the three years in the period
ended March 31, 2016
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in the period
ended March 31, 2016
Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2016
Notes to Consolidated Financial Statements
Report of Management on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Page
24
25
26
27
28
29
39
40
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
PetMed Express, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of PetMed Express, Inc. and subsidiaries as of
March 31, 2016 and 2015, and the related consolidated statements of comprehensive income, shareholders’
equity and cash flows for each of the three years in the period ended March 31, 2016. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of PetMed Express, Inc. and subsidiaries as of March 31, 2016 and 2015, and the results of their
operations and their cash flows for each of the three years in the period ended March 31, 2016, in conformity with
U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), PetMed Express, Inc. and subsidiaries' internal control over financial reporting as of March 31,
2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013, and our report dated May 24, 2016 expressed
an unqualified opinion on the effectiveness of PetMed Express, Inc. and subsidiaries’ internal control over
financial reporting.
/s/ RSM US LLP
RSM US LLP
Fort Lauderdale, Florida
May 24, 2016
24
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for per share amounts)
March 31,
2016
March 31,
2015
ASSETS
Current assets:
Cash and cash equivalents
Short term investments - available for sale
Accounts receivable, less allowance for doubtful
accounts of $13 and $8, respectively
Inventories - finished goods
Prepaid expenses and other current assets
Prepaid income taxes
Total current assets
Noncurrent assets:
Property and equipment, net
Intangible assets
Deferred tax assets
Total noncurrent assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Income taxes payable
Total liabilities
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 5,000 shares authorized;
3 convertible shares issued and outstanding with a
liquidation preference of $4 per share
Common stock, $.001 par value, 40,000 shares authorized;
20,447 and 20,262 shares issued and outstanding, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders' equity
$
37,639
-
$
1,724
25,586
2,435
243
67,627
20,929
860
863
22,652
35,613
15,591
1,931
25,068
1,380
-
79,583
1,569
860
840
3,269
$
$
90,279
$
82,852
$
5,004
2,080
-
7,084
5,153
2,214
50
7,417
9
20
4,871
78,295
-
83,195
9
20
3,117
72,343
(54)
75,435
82,852
Total liabilities and shareholders' equity
$
90,279
$
See accompanying notes to consolidated financial statements.
25
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except for per share amounts)
Sales
Cost of sales
Gross profit
Operating expenses:
General and administrative
Advertising
Discontinued project costs
Depreciation
Total operating expenses
Year Ended March 31,
2015
2016
2014
$
234,684
158,388
$
229,395
153,125
$
233,391
155,774
76,296
76,270
77,617
21,301
21,837
-
770
43,908
21,101
25,182
1,714
660
48,657
21,352
27,180
-
867
49,399
Income from operations
32,388
27,613
28,218
Other income (expense):
Interest income, net
Realized loss on sale of short term investments
Other, net
Total other income
190
(74)
63
179
184
-
1
185
185
-
(4)
181
Income before provision for income taxes
32,567
27,798
28,399
Provision for income taxes
12,000
10,345
10,427
Net income
Net change in unrealized gain (loss) on short term
investments
Comprehensive income
Net income per common share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
$
$
$
$
20,567
$
17,453
$
17,972
54
(17)
(35)
20,621
$
17,436
$
17,937
1.02
1.02
$
$
0.87
0.87
$
$
0.90
0.90
20,124
20,254
20,015
20,136
19,901
20,043
Cash dividends declared per common share
$
0.72
$
0.68
$
0.66
See accompanying notes to consolidated financial statements.
26
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Fiscal years ended March 31, 2014, March 31, 2015, and March 31, 2016
(In thousands)
Convertible
Preferred Stock
Common
Stock
Shares
Amounts
Shares
Amounts
Additional
Paid-In
Capital
Retained
Earnings
Other
Comprehensive
Gain (Loss)
Total
Balance, March 31, 2013
3
$
9
20,109
$
20
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3
3
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Issuance of restricted stock, net
Share based compensation
Dividends declared
Deferred tax adjustment related to
resticted stock
Net income
Other comprehensive loss:
Net Change in unrealized loss on
short term investments
Total comprehensive income
Balance, March 31, 2014
Issuance of restricted stock, net
Share based compensation
Dividends declared
Deferred tax adjustment related to
resticted stock
Net income
Other comprehensive loss:
Net Change in unrealized loss on
short term investments
Total comprehensive income
Balance, March 31, 2015
Issuance of restricted stock, net
Share based compensation
Dividends declared
Deferred tax adjustment related to
resticted stock
Net income
Other comprehensive gain:
Net Change in unrealized gain on
short term investments
Total comprehensive income
81
-
-
-
-
-
-
-
-
-
-
-
1,479
-
99
-
$
63,987
$
(2)
$
64,014
-
-
(13,312)
-
-
-
-
-
-
1,479
(13,312)
99
17,972
17,972
17,972
(35)
$
17,937
(35)
-
9
20,190
20
1,578
68,647
(37)
70,217
72
-
-
-
-
-
-
-
-
-
-
1,481
-
58
-
-
-
(13,757)
-
-
-
-
-
-
1,481
(13,757)
58
17,453
17,453
17,453
9
20,262
$
20
$
3,117
$
72,343
(17)
17,436
(17)
-
(54)
$
75,435
$
$
-
-
-
-
-
1,612
(14,615)
142
20,567
20,567
20,567
185
-
-
-
-
-
-
-
-
-
-
1,612
-
-
-
(14,615)
-
142
-
54
20,621
54
-
-
$
83,195
$
$
Balance, March 31, 2016
3
$
9
20,447
$
20
$
4,871
$
78,295
See accompanying notes to consolidated financial statements.
27
PETMED EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
Share based compensation
Discontinued project costs
Deferred income taxes
Bad debt expense
(Increase) decrease in operating assets
and increase (decrease) in liabilities:
Accounts receivable
Inventories - finished goods
Prepaid income taxes
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Income taxes payable
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sale of short term investments
Net change in investments
Purchases of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Dividends paid
Tax adjustment related to stock compensation
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, at beginning of year
Cash and cash equivalents, at end of year
Supplemental disclosure of cash flow information:
Cash paid for income taxes
Dividends payable in accrued expenses
See accompanying notes to consolidated financial statements.
Year Ended
March 31,
2015
2016
2014
$
20,567
$
17,453
$
17,972
770
1,612
-
(23)
260
(53)
(518)
(243)
(1,055)
(149)
(65)
(50)
21,053
15,591
54
(20,130)
(4,485)
(14,684)
142
(14,542)
2,026
35,613
660
1,481
1,714
157
94
(264)
10,659
54
662
(616)
(61)
50
32,043
-
(68)
(918)
(986)
(13,807)
58
(13,749)
17,308
18,305
867
1,479
-
(183)
95
(417)
(4,126)
(54)
(1,237)
(686)
(42)
(162)
13,506
-
(84)
(45)
(129)
(13,326)
99
(13,227)
150
18,155
$
$
$
37,639
$
35,613
$
18,305
12,173
143
$
$
10,026
212
$
$
10,727
262
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies
Organization
PetMed Express, Inc. and subsidiaries, d/b/a 1-800-PetMeds (the “Company”), is a leading nationwide
pet pharmacy. The Company markets prescription and non-prescription pet medications, health
products, and supplies for dogs and cats, direct to the consumer. The Company markets its products
through national television, online, and direct mail/print advertising campaigns, which aim to increase the
recognition of the “1-800-PetMeds” brand name and “PetMeds” family of trademarks, increase traffic on
its website at www.1800petmeds.com, acquire new customers, and maximize repeat purchases. The
majority of all of the Company's sales are to residents in the United States. The Company’s executive
offices are located in Pompano Beach, Florida. The Company's fiscal year end is March 31, and
references herein to fiscal 2016, 2015, or 2014 refer to the Company's fiscal years ended March 31,
2016, 2015, and 2014, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
Revenue Recognition
The Company generates revenue by selling pet medication products and pet supplies mainly to retail
consumers. The Company’s policy is to recognize revenue from product sales upon shipment, when the
rights of ownership and risk of loss have passed to the customer. Outbound shipping and handling fees
are included in sales and are billed upon shipment. Shipping expenses are included in cost of sales. The
majority of the Company’s sales are paid by credit cards and the Company usually receives the cash
settlement in two to three banking days. Credit card sales minimize the accounts receivable balances
relative to sales. The Company maintains an allowance for doubtful accounts for losses that the
Company estimates will arise from the customers’ inability to make required payments, arising from either
credit card charge-backs or insufficient funds checks. The Company determines its estimates of the
uncollectibility of accounts receivable by analyzing historical bad debts and current economic trends. At
March 31, 2016 and 2015, the allowance for doubtful accounts was approximately $13,000 and $8,000,
respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of three months or less when
purchased to be cash equivalents. Cash and cash equivalents at March 31, 2016 and 2015 consisted of
the Company’s cash accounts and money market accounts with a maturity of three months or less. The
carrying amount of cash equivalents approximates fair value. The Company maintains its cash in bank
deposit accounts which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts.
Short Term Investments
The Company’s short term investments balance consists of short term bond mutual funds. In accordance
with ASC Topic 320 (“Accounting for Certain Investments in Debt and Equity Securities”), short term
investments are accounted for as available for sale securities with any changes in fair value to be
reflected in other comprehensive income (loss). The Company had a short term investments balance of
$0 and $15.6 million as of March 31, 2016 and March 31, 2015, respectively.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies (Continued)
Inventories
Inventories consist of prescription and non-prescription pet medications and pet supplies that are
available for sale and are priced at the lower of cost or market value using a weighted average cost
method. The Company writes down its inventory for estimated obsolescence. The inventory reserve was
approximately $64,000 and $63,000 at March 31, 2016 and 2015, respectively.
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over the
estimated useful lives of the assets. The building is depreciated over a period of thirty years. The
furniture, fixtures, equipment, and computer software are depreciated over periods ranging from three to
seven years. Leasehold improvements and assets under capital lease agreements are amortized over
the shorter of the underlying lease agreement or the useful life of the asset.
On December 22, 2015, the Company, by and through a wholly-owned subsidiary entered into an
agreement of purchase and sale with an unaffiliated privately held Delaware corporation for the purchase
of real property located in Palm Beach County Florida, and improvements thereon (collectively referred to
herein as the “Property”), the assignment and assumption of all leases and service agreements affecting
the property, and certain tangible and intangible personal property related to the property, for a purchase
price of $18.5 million, plus closing costs. The transaction closed on January 19, 2016. The Property
consists of approximately 634,000 square feet of land or 14.6 acres with two building complexes totaling
approximately 185,000 square feet, with additional land for future use. The first building complex consists
of approximately 125,000 square feet consisting of both office and warehouse. The second building
complex consists of approximately 60,000 square feet consisting of both office and warehouse space.
Once the property is renovated to the Company’s specifications and ready for its operation, expected in
the third quarter of fiscal 2017, the Company intends to occupy approximately 97,000 square feet of the
first building for its principal offices and distribution center, and to continue to operate the remaining office
and warehouse space pursuant to existing leases. As of March 31, 2016, 48% of the property was
leased to two tenants with a remaining weighted average lease term of 4.0 years.
Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Recoverability of assets is measured by a comparison
of the carrying amount of the asset to the undiscounted cash flows expected to be generated from the
asset.
Intangible Assets
The intangible asset consists of a toll-free telephone number and an internet domain name. In
accordance with the ASC Topic 350 (“Goodwill and Other Intangible Assets”) the intangible assets are not
being amortized, and are subject to an annual review for impairment.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts receivable, and accounts
payable approximate fair value due to the short-term nature of these instruments.
Advertising
The Company's advertising expenses consist primarily of television advertising, online marketing, and
direct mail/print advertising. Television advertising costs are expensed as the advertisements are
televised. Internet costs are expensed in the month incurred and direct mail/print costs are expensed
when the related catalogs, brochures, and postcards are produced, distributed, or superseded.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies (Continued)
Business Concentrations
The Company purchases its products from a variety of sources, including certain manufacturers, domestic
distributors, and wholesalers. We have multiple suppliers for each of our products to obtain the lowest
cost. There were four suppliers from whom we purchased approximately 50% of all products in fiscal
2016 and fiscal 2015.
Accounting for Share Based Compensation
The Company records compensation expense associated with restricted stock in accordance with ASC
Topic 718 (“Share Based Payment”). The compensation expense related to all of the Company’s stock-
based compensation arrangements is recorded as a component of general and administrative expenses.
Comprehensive Income
The Company applies ASC Topic 220 (“Reporting Comprehensive Income”) which requires that all items
that are recognized under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other financial statements. The items
of other comprehensive income that are typically required to be displayed are foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt
and equity securities. For the years ended March 31, 2016, 2015 and 2014 the Company recorded an
unrealized gain of $54,000, an unrealized loss of $17,000 and an unrealized loss of $35,000 on its short
term investments, respectively.
The following is a summary of our comprehensive income (in thousands):
2016
March 31,
2015
2014
Net income
Net change in unrealized gain (loss) on short term
investments
$
20,567
$
17,453
$
17,972
54
(17)
(35)
Comprehensive income
$
20,621
$
17,436
$
17,937
Income Taxes
The Company accounts for income taxes under the provisions of ASC Topic 740 (“Accounting for Income
Taxes”) which generally requires the recognition of deferred tax assets and liabilities for the expected
future tax benefits or consequences of events that have been included in the consolidated financial
statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting carrying values and the tax bases of assets and liabilities, and
are measured by applying enacted tax rates and laws for the taxable years in which those differences are
expected to reverse. As required by “Accounting for Uncertainty in Income Taxes” guidance, which
clarifies ASC Topic 740, the Company recognizes the financial statement benefit of a tax position only
after determining that the relevant tax authority would more likely than not sustain the position following
an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the
Consolidated Financial Statements is the largest benefit that has a greater than 50 percent likelihood of
being realized upon ultimate settlement with the relevant tax authority. The Company applies
“Accounting for Uncertainty in Income Taxes” guidance to all tax positions for which the statute of
limitations remained open. The Company files tax returns in the U.S. federal jurisdiction and Florida and
Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax
examinations by tax authorities for years ending March 31, 2010. Any interest and penalties related to
income taxes will be recorded to other income (expenses).
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies (Continued)
Reclassifications
Certain reclassifications have been made to the prior years’ consolidated financial statements to conform
to the fiscal 2016 presentation. These reclassifications had no impact on net income, shareholders’
equity or cash flows as previously reported.
Recent Accounting Pronouncements
On November 20, 2015, the FASB issued Accounting Standards Update on Income Taxes (Topic 740)
which requires an entity to present all deferred tax assets and liabilities as noncurrent in a classified
balance sheet. The update becomes effective April 1, 2017, however early adoption is permitted. The
Company chose early adoption for the periods presented.
In February 2016, the FASB issued guidance on leases which supersedes the current lease guidance.
The core principle requires lessees to recognize the assets and liabilities that arise from nearly all leases
in the statement of financial position. Accounting applied by lessors will remain largely consistent with
previous guidance, additional changes set to align lessor accounting with the revised lessee model and
the FASB’s revenue recognition guidance. The amendments are effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The
Company is currently assessing the impact of this standard on its 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.
(2)
Property and Equipment
Major classifications of property and equipment consist of the following (in thousands):
Building
Land
Leasehold improvements
Computer software
Furniture, fixtures and equipment
Less: accumulated depreciation
$
March 31,
2016
2015
$
14,988
3,700
1,123
4,812
4,703
29,326
(8,397)
-
-
1,119
3,391
4,686
9,196
(7,627)
Property and equipment, net
$
20,929
$
1,569
(3)
Valuation and Qualifying Accounts
Activity in the Company's valuation and qualifying accounts consists of the following (in thousands):
Year Ended March 31,
2015
2014
2016
Allowance for doubtful accounts:
Balance at beginning of period
Provision for doubtful accounts
Write-off of uncollectible accounts receivable
Balance at end of year
$
$
$
8
260
(255)
13
$
$
7
94
(93)
8
$
5
95
(93)
7
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4)
Accrued Expenses and Other Current Liabilities
Major classifications of accrued expenses and other current liabilities consist of the following (in
thousands):
Accrued sales tax
Accrued credit card fees
Accrued salaries and benefits
Accrued professional expenses
Accrued sales return allowance
Accrued dividends payable
Accrued rent
Other accrued liabilities
$
March 31,
2016
2015
$
459
335
482
255
172
143
111
123
465
285
741
225
147
212
-
139
Accrued expenses and other current liabilities
$
2,080
$
2,214
(5)
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The
tax effects of temporary differences that give rise to significant portions of deferred tax assets and
deferred tax liabilities are as follows (in thousands):
Deferred tax assets:
Accrued expenses
Deferred stock compensation
Bad debt and inventory reserves
Property and equipment
Total deferred tax assets
Deferred tax liabilities:
Property and equipment
Total net deferred taxes
March 31,
2016
2015
$
$
537
302
29
-
868
5
$
863
$
545
246
26
23
840
-
840
At March 31, 2016, the Company had no federal net operating loss carryforwards.
The components of the income tax provision consist of the following (in thousands):
Current taxes
Federal
State
Total current taxes
Deferred taxes
Federal
State
Total deferred taxes
Total provision for income taxes
2016
Year Ended March 31,
2015
2014
$
10,982
1,041
12,023
$
9,303
885
10,188
9,689
921
10,610
(21)
(2)
(23)
143
14
157
(167)
(16)
(183)
12,000
$
10,345
$
10,427
$
$
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5)
Income Taxes (Continued)
The reconciliation of income tax provision computed at the U.S. federal statutory tax rates to income tax
expense is as follows (in thousands):
2016
Year Ended March 31,
2015
2014
Income taxes at U.S. statutory rates
State income taxes, net of federal tax benefit
Permanent differences
Other
Total provision for income taxes
$
$
$
11,399
675
(23)
(51)
$
9,729
589
(29)
56
9,940
583
(35)
(61)
12,000
$
10,345
$
10,427
(6)
Net Income Per Share
In accordance with the provisions of ASC Topic 260 (“Earnings Per Share”) basic net income per share is
computed by dividing net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted net income per common share includes the
dilutive effect of potential restricted stock and the effects of the potential conversion of preferred shares,
calculated using the treasury stock method. Unvested restricted stock, and convertible preferred shares
issued by the Company represent the only dilutive effect reflected in diluted weighted average shares
outstanding.
The following is a reconciliation of the numerators and denominators of the basic and diluted net income
per share computations for the periods presented (in thousands, except for per share amounts):
Year Ended March 31,
2015
2014
2016
Net income (numerator):
Net income
$
20,567
$
17,453
$
17,972
Shares (denominator)
Weighted average number of common shares
outstanding used in basic computation
Common shares issuable upon the vesting
of restricted stock
Common shares issuable upon conversion
of preferred shares
Shares used in diluted computation
Net income per common share:
20,124
20,015
19,901
120
111
132
10
20,254
10
20,136
10
20,043
Basic
Diluted
$
$
1.02
1.02
$
$
0.87
0.87
$
$
0.90
0.90
At March 31, 2016 and 2015, all restricted stock was included in the diluted net income per common
share computation.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7)
Discontinued Project Costs
During the quarter ended September 30, 2014 the Company discontinued an information technology
project related to a new software platform, which was intended to be put into service and capitalized
during fiscal 2015. The Company expensed a one-time project charge of $1.7 million in that September
quarter. The net after tax impact of this one-time charge was $1.1 million, or $0.05 diluted per share.
The Company does not expect any additional future expenditures relating to this discontinued project.
(8)
Shareholders’ Equity
Preferred Stock
In April 1998, the Company issued 250,000 shares of its $.001 par value preferred stock at a price of
$4.00 per share, less issuance costs of $112,187. Each share of the preferred stock is convertible into
approximately 4.05 shares of common stock at the election of the shareholder. The shares have a
liquidation value of $4.00 per share and may pay dividends at the sole discretion of the Company. The
Company does not anticipate paying dividends to the preferred shareholders in the foreseeable future.
Each share of preferred stock is entitled to one vote on all matters submitted to a vote of shareholders of
the Company. As of March 31, 2016 and 2015, 2,500 shares of the convertible preferred stock remained
unconverted and outstanding.
Share Repurchase Plan
On November 8, 2006, the Company's Board of Directors approved a share repurchase plan of up to
$20.0 million. On October 31, 2008, November 1, 2010, and August 1, 2011, the Company’s Board of
Directors approved an increase under the repurchase plan each for an additional $20.0 million. The
repurchase plan is intended to be implemented through purchases made from time to time in either the
open market or through private transactions at the Company's discretion, subject to market conditions
and other factors, in accordance with Securities and Exchange Commission requirements. There can be
no assurances as to the precise number of shares that will be repurchased under the share repurchase
plan, and the Company may discontinue the share repurchase plan at any time subject to compliance
with applicable regulatory requirements. Shares purchased pursuant to the share repurchase plan will
either be cancelled or held in the Company's treasury. During both fiscal 2015 and 2016 the Company
had no share repurchases. As of March 31, 2016 the Company had approximately $10.2 million
remaining under the Company’s share repurchase plan.
Dividends
On August 3, 2009, the Company’s Board of Directors declared its first quarterly dividend of $0.10 per
share on its common stock. On August 2, 2010, the Company’s Board of Directors increased the
quarterly dividend to $0.125 per share, and then on January 27, 2012, the Company’s Board of Directors
increased the quarterly dividend to $0.15 per share. On December 3, 2012, the Company’s Board of
Directors declared a special dividend of $1.00 per share on its common stock. On July 26, 2013, the
Company’s Board of Directors increased the quarterly dividend to $0.17 per share, and then on May 4,
2015 the Company’s Board of Directors increased the quarterly dividend to $0.18 per share. The
Company intends to continue to pay regular quarterly dividends; however the declaration and payment of
future dividends is discretionary and will be subject to a determination by the Board of Directors each
quarter following its review of the Company’s financial performance.
During fiscal 2016, our Board of Directors declared the following dividends:
Declaration Date
May 4, 2015
July 20, 2015
October 19, 2015
January 25, 2016
Per Share
Dividend
Record Date
Total Amount
(In thousands)
Payment Date
$0.18
$0.18
$0.18
$0.18
May 1, 2015
August 3, 2015
November 2, 2015
February 8, 2016
$
$
$
$
3,647
3,660
3,660
3,659
May 22, 2015
August 14, 2015
November 13, 2015
February 19, 2016
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9)
Restricted Stock
On July 28, 2006, the Company received shareholder approval for the adoption of the 2006 Employee
Equity Compensation Restricted Stock Plan (the “Employee Plan”) and the 2006 Outside Director Equity
Compensation Restricted Stock Plan (the “Director Plan”). The purpose of the plans is to promote the
interests of the Company by securing and retaining both employees and outside directors. The Company
had reserved 1.0 million shares of common stock for issuance under the Employee Plan, and 200,000
shares of common stock for issuance under the Director Plan. In July 2012 the Company received
shareholder approval to ratify the amendment to the Company’s Director Plan passed by the Board of
Directors to increase the number of shares available for issuance under the Director Plan from 200,000 to
400,000. Additionally, the Company received shareholder approval to ratify the amendment passed by
the Board of Directors to provide for a 10% automatic increase every year in the amount of shares
available for issuance under each of the plans. In July 2015, the Company’s 2015 Outside Director
Equity Compensation Restricted Stock Plan (“2015 Director Plan) became effective upon the approval of
the plan by the Company’s Shareholders. The 2015 Director Plan authorizes 400,000 shares of the
company's common stock available for issuance under the plan, and provides for an automatic increase
every year in the amount of shares available for issuance under the plan of 10% of the shares authorized
under the plan. The value of the restricted stock is determined based on the market value of the stock at
the issuance date. The restriction period or forfeiture period is determined by the Company’s Board and
is to be no less than 1 year and no more than ten years. The Company had 928,296 restricted common
shares issued under the Employee Plan and 272,000 restricted common shares issued under the Director
Plan at March 31, 2016, all shares of which were issued subject to a restriction or forfeiture period which
will lapse ratably on the first, second, and third anniversaries of the date of grant, and the fair value of
which is being amortized over the three-year restriction period. For both the years ended March 31, 2016
and 2015, the Company recognized compensation expense related to the Employee and Director Plans
of $1.6 million and $1.5 million, respectively.
A summary of the Company’s non-vested restricted stock as of March 31, 2016 is as follows:
Non-vested restricted stock outstanding at March 31, 2015
Restricted stock granted
Restricted stock vested
Restricted stock forfeited or expired
Non-vested restricted stock outstanding at March 31, 2016
Employee
Plan
Number of
Shares (In
thousands)
Director
Plan
Number of
Shares (In
thousands)
Both Plans
Number of
Shares (In
thousands)
128
167
(77)
(12)
206
60
30
(30)
-
60
188
197
(107)
(12)
266
At March 31, 2016 and 2015, there were 265,771 and 188,017 non-vested restricted stock shares
outstanding, respectively. During the fiscal years ended March 31, 2016 and 2015, the Company issued,
net of forfeitures, 185,084 and 71,858 restricted shares, respectively. At March 31, 2016 and 2015, there
were $3.6 million and $2.0 million of unrecognized compensation cost related to the non-vested restricted
stock awards, respectively, which is expected to be recognized over the remaining weighted average
vesting period of 2.3 years and 1.5 years for fiscal 2016 and 2015, respectively.
(10)
Fair Value Measurements
The Company carries cash and cash equivalents and investments at fair value in the 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:
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10)
Fair Value Measurements (Continued)
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. The Company’s cash equivalents and short term
investments are classified within Level 1. At March 31, 2016 the Company had invested the majority of
its $37.6 million cash and cash equivalents balance in money market funds (level 1).
(11)
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 Agreements
On January 29, 2016, the Company amended the existing Executive Employment Agreement of
Menderes Akdag, the Company’s President, Chief Executive Officer, and Director, and entered into
Amendment No. 5 to the Executive Employment Agreement with Mr. Akdag. The Agreement amended
certain provisions of the Executive Employment Agreement as follows: the term of the Agreement is for
three years, commencing on March 16, 2016; Mr. Akdag’s salary was increased to $600,000 per year
throughout the term of the Agreement, and Mr. Akdag was granted 120,000 shares of restricted stock.
The restricted stock was granted on March 16, 2016, in accordance with the Company’s 2006 Employee
Equity Compensation Restricted Stock Plan and the restrictions lapse ratably over a three-year period.
Operating Leases
The Company leases its 65,300 square foot executive offices, warehouse facility, and customer service
and pharmacy contact centers under a non-cancelable operating lease. On April 30, 2014, the Company
entered into a seventh amendment of its operating lease agreement to extend its existing lease until
December 1, 2016. The Company is responsible for certain maintenance costs, taxes, and insurance
under this lease. The future minimum annual lease payments for the year ended March 31, 2017 is
$519,000. Rent expense was $781,000, $794,000, and $785,000 for the years ended March 31, 2016,
2015 and 2014, respectively. The Company intends to relocate to the Palm Beach County property in the
quarter ended December 31, 2016, therefore eliminating any future rent payments subsequent to
December 1, 2016.
Upon acquisition of the property in January 2016, approximately 88,000 square feet of the property was
leased to two tenants. The Company recorded approximately $116,000 in rental revenue in fiscal 2016,
which was included in other income. The Company expects to receive the following future lease
payments over the next five years: $586,000 in fiscal 2017; $604,000 in fiscal 2018; $622,000 in fiscal
2019; $484,000 in fiscal 2020; and $97,000 in fiscal 2021.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12)
Employee Benefit Plan
The Company maintains a 401(k) Savings Plan for eligible employees. The plan is a defined contribution
plan that is administered by the Company. All regular, full-time employees are eligible for voluntary
participation upon completing one year of service and having attained the age of 21. The plan provides
for growth in savings through contributions and income from investments. It is subject to the provisions of
the Employee Retirement Income Security Act of 1974, as amended. Plan participants are allowed to
contribute a specified percentage of their base salary. In 2006, the Company adopted a matching plan
which is funded subsequent to the calendar year. During the fiscal years ended March 31, 2016 and
2015, the Company charged $177,000 and $187,000, respectively, of 401(k) matching contribution and
administration expense to general and administrative expenses.
(13)
Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data for fiscal 2016 and 2015 is as follows (in thousands,
except for per share amounts):
Quarter Ended:
June 30, 2015
September 30, 2015
December 31, 2015 March 31, 2016
Sales
Gross Profit
Income from operations
Net income
Diluted net income per common share
$
$
$
$
$
71,634
22,966
9,091
5,757
0.29
$
$
$
$
$
56,725
18,913
7,090
4,502
0.22
$
$
$
$
$
50,933
16,754
7,622
4,890
0.24
$
$
$
$
$
55,392
17,663
8,585
5,418
0.27
Quarter Ended:
June 30, 2014
September 30, 2014
December 31, 2014 March 31, 2015
Sales
Gross Profit
Income from operations
Net income
Diluted net income per common share
$
$
$
$
$
72,541
23,772
7,838
4,973
0.25
$
$
$
$
$
57,576
18,459
4,290
2,732
0.14
$
$
$
$
$
49,284
17,100
7,666
4,797
0.24
$
$
$
$
$
49,994
16,939
7,819
4,951
0.25
(14)
Subsequent Events
On May 9, 2016, the Company’s Board of Directors declared an increased quarterly dividend of $0.19 per
share on its common stock. The $3.9 million dividend will be paid on May 27, 2016, to shareholders of
record at the close of business on May 20, 2016.
38
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for the preparation and integrity of the Consolidated Financial
Statements appearing in our Annual Report on Form 10-K. The financial statements were prepared in conformity
with generally accepted accounting principles appropriate in the circumstances and, accordingly, include certain
amounts based on our best judgments and estimates. Financial information in the Annual Report on Form 10-K is
consistent with that in the financial statements.
Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934
(“Exchange Act”). The Company’s internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Consolidated Financial
Statements. Our internal control over financial reporting is supported by a team of consultants and appropriate
reviews by management, written policies and guidelines, careful selection and training of qualified personnel, and
a written Corporate Code of Business Conduct and Ethics adopted by our Company’s Board of Directors,
applicable to all Company Directors and all officers and employees of our Company and subsidiaries.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements and even when determined to be effective, can only provide reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
The Audit Committee (“Committee”) of our Company’s Board of Directors, comprised solely of Directors who are
independent in accordance with the requirements of The NASDAQ Stock Market LLC listing standards, the
Exchange Act and the Company’s Corporate Governance Guidelines, meets with the independent auditors and
management periodically to discuss internal control over financial reporting, and auditing and financial reporting
matters. The Committee reviews with the independent auditors the scope and results of the audit effort. The
Committee also meets periodically with the independent auditors without management present to ensure that the
independent auditors have free access to the Committee. Our Audit Committee’s Report can be found in the
Company’s 2016 Proxy Statement.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of March
31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our
assessment, management believes that the Company maintained effective internal control over financial reporting
as of March 31, 2016.
The Company’s independent auditors, RSM US LLP, a registered public accounting firm, are appointed by the
Audit Committee of the Company’s Board of Directors, subject to ratification by our Company’s shareholders.
RSM US LLP have audited and reported on the Consolidated Financial Statements of PetMed Express, Inc. and
subsidiaries, and issued a report on the Company’s internal control over financial reporting. The reports of the
independent auditors are contained in our Annual Report on Form 10-K.
/s/ Menderes Akdag
Menderes Akdag
President, Chief Executive Officer, Director
May 24, 2016
/s/ Bruce S. Rosenbloom
Bruce S. Rosenbloom
Chief Financial Officer
May 24, 2016
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
PetMed Express, Inc. and subsidiaries:
We have audited PetMed Express, Inc. and subsidiaries’ internal control over financial reporting as of March 31,
2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013. PetMed Express, Inc. and subsidiaries’
management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Report
of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (c) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, PetMed Express, Inc. and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of March 31, 2016, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements of PetMed Express, Inc. and subsidiaries and our report
dated May 24, 2016 expressed an unqualified opinion.
/s/ RSM US LLP
RSM US LLP
Fort Lauderdale, Florida
May 24, 2016
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. 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(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended) as of March 31, 2016, the end of the period covered by this report (the "Evaluation Date"). Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date,
that our disclosure controls and procedures were effective such that the information relating to PetMed Express,
Inc., including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission
(“SEC”) reports (i) is recorded, processed, summarized, and reported within the time periods specified in SEC
rules and forms, and (ii) is accumulated and communicated to our management including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2016 based on
the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated
Framework, management concluded that our internal control over financial reporting was effective, as of March
31, 2016, as stated in our report which is included herein. Our internal control over financial reporting as of
March 31, 2016 has been audited by RSM US LLP, an independent registered public accounting firm, as stated in
their report which is included herein.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal controls over financial reporting during the fourth quarter ended
March 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
41
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this item will be set forth in our Proxy Statement, to be filed with the SEC within
120 days after the end of the fiscal year ended March 31, 2016, relating to our 2016 Annual Meeting of
Stockholders to be held on July 29, 2016, and is incorporated herein by reference.
We adopted a Corporate Code of Business Conduct and Ethics applicable to all officers, directors, and
employees. The Company’s Corporate Code of Business Conduct and Ethics may be found in our Proxy
Statement for our 2004 Annual Meeting of Stockholders which was filed on June 30, 2004. You may also obtain a
copy of our Code of Business Conduct and Ethics free of charge by contacting Investor Relations at 1-800-738-
6337.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in our Proxy Statement, to be filed with the SEC within
120 days after the end of the fiscal year ended March 31, 2016, relating to our 2016 Annual Meeting of
Stockholders to be held on July 29, 2016, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item (other than information required by Item 201(d) of Regulation S-K with
respect to equity compensation plans, which is set forth under Item 5. in this Annual Report on Form 10-K) will be
set forth in our Proxy Statement, to be filed with the SEC within 120 days after the end of the fiscal year ended
March 31, 2016, relating to our 2016 Annual Meeting of Stockholders to be held on July 29, 2016, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in our Proxy Statement, to be filed with the SEC within
120 days after the end of the fiscal year ended March 31, 2016, relating to our 2016 Annual Meeting of
Stockholders to be held on July 29, 2016, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be set forth in our Proxy Statement, to be filed with the SEC within
120 days after the end of the fiscal year ended March 31, 2016, relating to our 2016 Annual Meeting of
Stockholders to be held on July 29, 2016, and is incorporated herein by reference.
42
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report on Form 10-K.
(1) Consolidated Financial Statements
The following exhibits are filed as part of this report on Form 10-K.
(3) Articles of Incorporation and By-Laws
3.1
3.2
3.3
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form 10-SB, File No. 000-28827, filed January 10, 2000).
Articles of Amendment to the Amended and Restated Articles of Incorporation filed June 6,
2001(incorporated by reference to Exhibit 3.2 of the Registrant’s Form 10-K for the year ended March
31, 2015).
By-Laws (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form 10-SB, File
No. 000-28827, filed January 10, 2000).
(4) Instruments Defining the Rights of Security Holders
4.1
Specimen common stock certificate (incorporated by reference to Exhibit 4.2 to the Registration
Statement on Form 10-SB, File No. 000-28827, filed January 10, 2000).
(10) Material Contracts
10.1
10.2
10.3
10.4
10.5
Employment Agreement with Menderes Akdag (incorporated by reference to Exhibit 10 of the
Registrant’s Form 8-K filed March 30, 2001).
Agreement for the Sale and Leaseback of the Land and Building (incorporated by reference to Exhibit
99.1 of the Registrant’s Form 8-K filed June 14, 2001).
Amendment Number 1 to Executive Employment Agreement with Menderes Akdag (incorporated by
reference to Exhibit 99.1 of the Registrant’s Form 8-K filed March 18, 2004).
Amendment Number 2 to Executive Employment Agreement with Menderes Akdag (incorporated by
reference to Exhibit 10.1 of the Registrant’s Form 8-K filed February 28, 2007).
Amended and Restated 2006 Employee Equity Compensation Restricted Stock Plan (incorporated by
reference to our definitive Proxy Statement for our 2012 Annual Meeting of Stockholders filed June
15, 2012).
10.5.1 Form of Restricted Stock Agreement used for grants of restricted stock under the Amended and
Restated 2006 Employee Equity Compensation Restricted Stock Plan.*
10.6
Amended and Restated 2006 Outside Director Equity Compensation Restricted Stock Plan
(incorporated by reference to our definitive Proxy Statement for our 2012 Annual Meeting of
Stockholders filed June 15, 2012).
10.6.1 Form of Restricted Stock Agreement used for grants of restricted stock under the Amended and
Restated 2006 Outside Director Equity Compensation Restricted Stock Plan.*
10.7
10.8
10.9
Employment Letter with Bruce Rosenbloom dated May 30, 2001 (incorporated by reference to Exhibit
10.9 of the Registrant’s Form 8-K filed April 7, 2009).
Amendment Number 3 to Executive Employment Agreement with Menderes Akdag (incorporated by
reference to Exhibit 10.1 of the Registrant’s Form 8-K filed February 8, 2010).
Amendment Number 4 to Executive Employment Agreement with Menderes Akdag (incorporated by
reference to Exhibit 10.1 of the Registrant’s Form 8-K filed January 28, 2013).
10.10 2015 Outside Director Equity Compensation Restricted Stock Plan (incorporated by reference to our
definitive Proxy Statement for our 2015 Annual Meeting of Stockholders filed June 8, 2015).
10.10.1 Form of Restricted Stock Agreement used for grants of restricted stock under the Amended and
Restated 2015 Outside Director Equity Compensation Restricted Stock Plan.*
10.11 Agreement of Purchase and Sale [420 South Congress Avenue] (incorporated by reference to Exhibit
10.11 of the Registrant’s Report on Form 10-Q for the quarter ended December 31, 2015, filed
February 2, 2016).
10.12 Amendment Number 5 to Executive Employment Agreement with Menderes Akdag (incorporated by
reference to Exhibit 10.1 of the Registrant’s Form 8-K filed February 2, 2016).
43
(14) Corporate Code of Ethics
14.1 Corporate Code of Business Conduct and Ethics (incorporated by reference to our definitive Proxy
Statement for our 2004 Annual Meeting of Stockholders filed June 30, 2004).
(21) Subsidiaries of Registrant
21.1
Subsidiaries of Registrant*
(23) Consents of Experts and Counsel
23.1 Consent of RSM US LLP
(31) Certifications
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).*
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).*
(32) Certifications
32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 1350.**
___________
*Filed herewith **Furnished herewith
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 24, 2016
PETMED EXPRESS, INC.
(the “registrant”)
By: /s/ Menderes Akdag
Menderes Akdag
Chief Executive Officer and President
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities on May 24, 2016.
SIGNATURE
TITLE
/s/ Menderes Akdag
Menderes Akdag
Chief Executive Officer and President
(principal executive officer)
Officer and Director
/s/ Robert C. Schweitzer
Chairman of the Board
Robert C. Schweitzer
Director
/s/ Bruce S. Rosenbloom
Bruce S. Rosenbloom
/s/ Ronald J. Korn
Ronald J. Korn
/s/ Gian M. Fulgoni
Gian M. Fulgoni
/s/ Frank J. Formica
Frank J. Formica
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
Officer
Director
Director
Director
45
SUBSIDIARIES OF PETMED EXPRESS, INC.
PetMed Express, Inc. directly owns all of the outstanding interests in the following subsidiaries:
Exhibit 21.1
Southeastern Veterinary Exports, Inc., a Florida Corporation
First Image Marketing, Inc., a Florida Corporation
Global Veterinary Supply, Inc., a Florida Corporation
420 South Congress Avenue LLC, a Florida Limited Liability Company
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Menderes Akdag, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of PetMed Express, Inc. for the fiscal year ended
March 31, 2016;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of the
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
May 24, 2016
By: /s/ Menderes Akdag
Menderes Akdag
Chief Executive Officer and President
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bruce S. Rosenbloom, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of PetMed Express, Inc. for the fiscal year ended
March 31, 2016;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of the
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
May 24, 2016
By: /s/ Bruce S. Rosenbloom
Bruce S. Rosenbloom
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Menderes Akdag, and I, Bruce S. Rosenbloom, each certify to the best of our knowledge, based upon a review
of the Annual Report on Form 10-K for the year ended March 31, 2016 (the “Report”) of PetMed Express, Inc. (the
“Registrant”), that:
(1)
(2)
the Report fully complies with the requirements of S ection 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended; and
the information contained in the Report, fairly presents, in all material respects, the financial condition
and results of operations of the Registrant.
Date: May 24, 2016
By:_/s/ Menderes Akdag__________
Menderes Akdag
Chief Executive Officer and President
By:_/s/ Bruce S. Rosenbloom_______
Bruce S. Rosenbloom
Chief Financial Officer
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In fiscal 2016, the Company made progress in growing both top and bottom line results. For the fiscal year ended March 31, 2016 sales were $234.7 million compared to $229.4 million for the prior fiscal year, an increase of 2.3%. For the fiscal year ended March 31, 2016 net income was $20.6 million, or $1.02 diluted per share compared to, excluding a one-time charge for an IT-related discontinued project, $18.5 million, or $0.92 diluted per share a year ago, an increase to net income of 11%. We were encouraged with increases in new customer revenue during the second half of fiscal 2016 and we were also pleased with our advertising efficiency, as our new customer acquisition costs were reduced to $45 for fiscal 2016 compared to $48 for fiscal 2015. Online sales for the fiscal year were approximately 81% of all sales compared to 80% of all sales for the prior fiscal year, and the average purchase value was approximately $81 for fiscal 2016 compared to $77 for fiscal 2015.1-800-PetMeds remains committed to returning capital to our stockholders. During the fiscal year, we paid a quarterly dividend of $0.18 per share and in the first quarter of fiscal 2017, the quarterly dividend was raised to $0.19 per share. While the Company intends to continue to pay regular quarterly dividends, the declaration and payment of future dividends is discretion-ary and will be subject to a determination by our Board of Directors each quarter, following its review of the Company’s financial performance. Since fiscal 2010 the Company has paid a cumu-lative total of $5.13 per share in dividends. According to the American Pet Products Manufacturers Association, pet spending in the United States increased 3.9% to $60.3 billion in 2015. Pet supplies and medications represented $14.3 billion, or 24% of the total spending on pets in the United States. The pet medication market that we participate in is estimated to be approximately $4.2 billion, with veterinarians having the majority of the market share. The dog and cat population is approximately 164 million, with approximately 65% of all households having a pet.We are a licensed pharmacy to dispense prescription medications in all 50 states. We offer a wide selection of products, over 3,000 SKUs, including a variety of private label products. We regularly research new products, and select new products or the latest generation of existing products to become part of our product selection, so that we can offer our customers the best medications, supplements, and pet supplies for dogs and cats at affordable prices. Our customers can enjoy either the convenience of ordering online at our top-rated website www.1800petmeds.com, or over the telephone, where they can experience 1-800-PetMeds’ exceptional customer care. As the national brand leader and America’s Largest Pet Pharmacy, we continue to make it the goal of everyone at 1-800-PetMeds to provide “Fast, Easy, Helpful Service with Great Savings!” We have served over 9.0 million satisfied customers, with approximately 2.3 million customers having purchased from us within the last two years. We are proud that our customer service satisfaction rating, as measured by independent companies, continues to well exceed other online participants. In January 2016 we completed the acquisition of property in Delray Beach, FL, which will serve as our new corporate headquarters and distribution center. In fiscal 2017, we will be preparing to move into our new facility, which is expected to occur in our third fiscal quarter.As always, we remain thankful to our loyal customers, dedicated employees, and, you, our stockholders, for your ongoing support of 1-800-PetMeds.Sincerely, Menderes AkdagPresident, Chief Executive Officer, DirectorJune 13, 2016 www.1800petmeds.comCorporate Information:Directors, Executive Officers, and Corporate SecretaryRobert C. SchweitzerChairman of the Boardand Independent DirectorFinancial ConsultantMenderes AkdagDirector, Chief Executive Officerand President of the CompanyFrank J. FormicaIndependent DirectorLegal ConsultantRonald J. KornIndependent DirectorPresident of Ronald Korn ConsultingGian M. FulgoniIndependent DirectorCo-Founder and Executive Chairman Emeritus of comScore, Inc.Bruce S. Rosenbloom, CPAChief Financial Officer and Treasurerof the CompanyAlison Berges, Esq.Corporate Secretary andGeneral Counsel to the CompanyCorporate HeadquartersPetMed Express, Inc.1441 S.W. 29th AvenuePompano Beach, Florida 33069Independent Registered Public Accounting FirmRSM US LLPNew York, New YorkTransfer AgentContinental Stock Transfer & Trust CompanyNew York, New YorkStock Exchange ListingThe NASDAQ Stock Market LLCTrading Symbol: PETSAnnual MeetingThe Annual Meeting of Stockholders will be held at 1 p.m. Eastern Time,July 29, 2016.Investor RelationsPetMed Express, Inc. welcomes inquiries from stockholders and otherinterested investors. You may contact us by phone: (800) 738-6337 or(954) 979-5995 or by writing to the corporate headquarters address above.(all above fiscal years ended on March 31st)PERFORMANCE SUMMARYFirst QuarterFiscal 2016 High LowFiscal 2015 High Low$17.73$15.82$13.80$12.63Second QuarterFiscal 2016 High LowFiscal 2015 High Low$18.23$15.72$14.54$13.24Third QuarterFiscal 2016 High LowFiscal 2015 High Low$17.88$16.04$14.72$12.56Fourth QuarterFiscal 2016 High LowFiscal 2015 High Low$18.70$15.77$16.59$14.04QUARTERLYSTOCK PRICE RANGESales($ in millions) 2012 2013 2014 2015 2016Net Income($ in millions)Earnings per share EPS(Diluted)Dividends declared(Per share) 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016To My Fellow Stockholders:PetMed Express, Inc.PetMed Express, Inc.$229.4$233.4$238.3$227.8$234.7$20.6$17.5$18.0$16.7$17.2$1.02$0.87$0.90$0.80$0.86$0.72$0.68$0.66$0.525$1.60 www.1800petmeds.comYou’re 100% satisfied or your money back!PetMed Express, Inc.www.1800petmeds.comFast, Easy, Helpful Service with Great Savings!2016ANNUAL REPORT