Pets at Home Group
Annual Report 2022

Plain-text annual report

Your Trusted Pet Health Expert 2022 ANNUAL REPORT PetMed Express, Inc. Dear Shareholders: Thank you for being an investor and key stakeholder of PetMed Express, Inc., or “PetMeds,” as we informally refer to ourselves. I am nine months into my journey with PetMeds, and I am more excited than ever about the business, its growth opportunities, and the transformation that the team and I are leading. PetMeds has unique assets and core advantages to the business that provide key differentiators in the pet industry. These include being a well-known brand that 55% of U.S. pet parents are aware of, our strong operational expertise in the pet pharmaceutical space, and our industry-leading Net Promoter Score of 81%. PetMeds’ mission is “to be the most trusted pet health expert by providing incredible care and services that are affordable to the broadest group of pet parents.” Working together with our pet parents, our vendor community, and our veterinarian partners, we are enabling pets to live longer, happier, and healthier lives. PetMeds operates in a very large and growing addressable market. The U.S. pet market is approximately $117 billion in annual sales, and it is expected to reach $120 billion by 2024. The pet medication market segment, where we participate today, is approximately $10 billion annually and it is growing rapidly. Today 7 out of 10 U.S. households have at least one pet. Now more than ever, pet parents are keenly attuned to their pets’ health needs and are actively seeking health and wellness care support and resources, provided by trusted brands. We believe PetMeds is uniquely positioned to be that trusted pet healthcare brand. PetMeds is one of the leading pet pharmacies in the United States, and we are ready for our next chapter of growth. Having first established a pioneering foothold in the online pet prescription market 26 years ago, today we see a broader opportunity where many players can participate. In being THE trusted pet health expert, we believe that PetMeds has exciting opportunities to address far more customer needs than just those on which we are focused today. Going forward, these opportunities will enable us to further expand our addressable market and, most impor- tantly, allow us to bring even greater value to our customers. PetMeds’ strategy is built upon four strategic pillars: nutrition, medications, wellness, and care. Underpinning those strategic pillars is data, which is both defining and at the heart of our services. We have taken important steps towards executing on our long-term strategy, starting with the recent announcement that we entered into the telemedicine space through our investment in and partner- ship with Vetster. We will be moving rapidly to fill in the strategic building blocks in the next several quarters and I look forward to sharing the progress with you. In early 2020, as a result of the pandemic, PetMeds experienced an unexpectedly large increase in sales due to the stay-at-home effect on both pet parents and veterinarian clinics. However, we also saw increased competition for new pet parents’ business in 2021, and as a result, our March 31, 2022 year-over-year fiscal comparison saw a deceleration of revenue and profitability. For the fiscal year ended March 31, 2022, our sales decreased by 11.6% to $273.4 million compared to $309.2 million for the prior fiscal year. In response to this trend, we took steps to solidify our long-term strategy and made positive contributions to our business model, such as migrating a signifi- cant portion of our business to a recurring, subscription business. As of March 2022, 37% of our sales are being generated by our AutoShip & Save subscription program. To enhance the financial information we already provide you, during the current fiscal year we introduced two new non-GAAP financial guidance metrics–adjusted EBITDA and adjusted EBITDA per share. We decided to include these new metrics because they are key measures used by management and by our Board of Directors to evaluate our operating performance. Adjusted EBITDA and adjusted EBITDA per share provide a more accurate picture of our underlying profitability and also highlight the more recent increases in non-cash stock-based compensation. Adjusted EBITDA for the fiscal year ended March 31, 2022 was $34.0 million, or $1.67 on a diluted per share basis, compared to $44.6 million, or $2.22 on a diluted per share basis, for the same period last year. At March 31, 2022, the Company had $111.1 million in cash and cash equivalents, and had no debt. During fiscal 2022, we paid $1.20 per share in dividends to our shareholders. Since fiscal 2009, PetMeds has returned almost $226 million in dividends to our shareholders and repurchased $81.3 million through share buy- backs. We are committed to delivering shareholder value and will continue to evaluate the payment of future dividends, subject to a determination by our Board of Directors each quarter, following its review of the Company’s financial performance and capital allocation strategy. We are incredibly proud of the long history of delivering empathetic care and service to millions of customers and their pets. We understand our position as a trusted care provider, and we are proud of our front-line team members that deliver exceptional service in the pharmacy, the customer care center, and in our distribution center. PetMeds is also committed to doing more for the broader environment, society and humanity, and this year we initiated our environmental, social and governance (ESG) commitment. Although we are in the early stages of our ESG strategy, we pledge to reduce our emissions footprint and will join the Science Based Target Initiative (SBTi) to solidify our commitment to be kinder to the environment. We are also committed to fostering, cultivating, and preserving a culture of diversity, equity, and inclusion. PetMeds firmly believes that we cannot consider ourselves successful as a business if our team members, our communities, and our planet do not thrive as well. Ultimately, we believe that the investments that we are making now, combined with our existing profitable direct- to-consumer e-commerce business and our strong balance sheet, position us well in the face of more challenging macroeconomic conditions. As we continue to make investments towards our future growth, we will strive to be measured and thoughtful in our capital allocation as well. We remain committed to, and optimistic about, our long-term strategy and the timing and our ability to execute on our transformation. As always, we remain grateful to you, our shareholders, as well as our dedicated employees, our suppliers, our partners, and our customers, without whom PetMeds could not exist. Thank you for your contin- ued confidence and support. PERFORMANCE SUMMARY Sales ($ in millions) $309.2 $283.4 $284.1 $273.8 $273.4 2018 2019 2020 2021 2022 Net Income ($ in millions) $37.3 $37.7 $30.6 $25.9 $21.1 2018 2019 2020 2021 2022 Earnings per share EPS (Diluted) $1.82 $1.84 $1.52 $1.29 $1.04 2018 2019 2020 2021 2022 Dividends declared (Per share) $1.06 $1.08 $1.12 $1.20 $0.85 2018 2019 2020 2021 2022 (all above fiscal years ended on March 31st) Mathew Hulett President, Chief Executive Officer, Director June 17, 2022 PetMed Express, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (cid:55)(cid:55) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2022 OR (cid:133)(cid:133) 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.) 420 South Congress Avenue, Delray Beach, Florida 33445 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (561) 526-4444 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol Name of each exchange on which registered Common Stock, PETS $.001 Par value per share 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:133) No (cid:54) 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:133) No (cid:54) 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:54) No (cid:133) Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes (cid:54) No (cid:133) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Non-accelerated filer (cid:133) (cid:133) Accelerated filer Smaller reporting company Emerging growth company (cid:54) (cid:133) (cid:133) If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:133) Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. (cid:54) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:133) No (cid:54) The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant as of September 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, was $540.1 million based on the closing sales price of the registrant’s Common Stock on that date, as reported on the NASDAQ Global Select Market. The number of shares of the registrant’s Common Stock outstanding as of May 24, 2022, was 20,988,237. DOCUMENTS INCORPORATED BY REFERENCE Information to be set forth in our Proxy Statement relating to our 2022 Annual Meeting of Stockholders to be held on July 28, 2022, is incorporated by reference in Items 10, 11, 12, 13, and 14 of Part III of this report. [This Page Intentionally Left Blank] PETMED EXPRESS, INC. 2022 Annual Report on Form 10-K TABLE OF CONTENTS Page PART I........................................................................................................................................................................ 1 Item 1. Business ................................................................................................................................................. 1 Item 1A. Risk Factors ............................................................................................................................................ 7 Item 1B. Unresolved Staff Comments ................................................................................................................. 14 Item 2. Properties ............................................................................................................................................. 14 Item 3. Legal Proceedings................................................................................................................................ 14 Item 4. Mine Safety Disclosures ....................................................................................................................... 14 PART II..................................................................................................................................................................... 15 Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities........................................................................................ 15 Item 6. [Reserved] ............................................................................................................................................ 17 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ..................................................................................................................................... 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk……………………................................... 27 Item 8. Financial Statements and Supplementary Data…………………….. .................................................... 28 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .......................................................................................................................................... 48 Item 9A. Controls and Procedures ...................................................................................................................... 48 Item 9B. Other Information .................................................................................................................................. 48 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections……………………………………48 PART III ................................................................................................................................................................... 49 Item 10. Directors, Executive Officers, and Corporate Governance .................................................................. 49 Item 11. Executive Compensation...................................................................................................................... 49 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........................................................................................................................... 49 Item 13. Certain Relationships and Related Transactions, and Director Independence ................................... 49 Item 14. Principal Accountant Fees and Services.............................................................................................. 49 PART IV ................................................................................................................................................................... 50 Item 15. Exhibit and Financial Statement Schedules ......................................................................................... 50 Item 16. Form 10-K Summary ............................................................................................................................ 51 SIGNATURES.......................................................................................................................................................... 52 [This Page Intentionally Left Blank] 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, as amended (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). 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. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.” A reader, whether investing in our common stock or not, should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report on Form 10-K. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. 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" refers collectively to PetMed Express, Inc. and its wholly owned subsidiaries. ITEM 1. BUSINESS General PetMed Express, Inc. and subsidiaries, d/b/a PetMeds®, is a leading nationwide pet pharmacy. The Company markets prescription and non-prescription pet medications, and other health products and supplies for dogs, cats, and horses direct to the consumer. The Company offers consumers an attractive alternative for obtaining pet medications in terms of convenience, price, speed of delivery, and valued customer service. The Company markets its products through national advertising campaigns, which aim to increase the recognition of the “PetMeds” brand name, increase traffic on its website at www.petmeds.com, acquire new customers, and maximize repeat purchases. Virtually all of the Company’s sales are to residents in the United States. Our fiscal year end is March 31, our executive offices are currently located at 420 South Congress Avenue, Delray Beach, Florida 33445, and our telephone number is (561) 526-4444. Our Products We offer a broad selection of products for dogs, cats, and horses. Our current product line contains approximately 3,000 SKUs of the most popular pet medications, health products, and supplies. These products include a majority of the well-known brands of pet medications. Generally, our prices are competitive with the prices for medications charged by veterinarians, online retailers and other retailers. We also offer additional pet supplies on our website for sale, which are drop shipped to our customers by third parties. These pet supplies include: food, beds, crates, stairs, and other popular pet supplies. We research new products, and regularly select new products or the latest generation of existing products to become part of our product selection. In addition, we also refine our current products to respond to changing consumer-purchasing habits. Our website is designed to give us the flexibility to change featured products or promotions. Our product line provides customers with a wide variety of selections across the most popular health categories for dogs, cats, and horses. Our current products include: Non-Prescription Medications (OTC) and supplies: Flea and tick control products, bone and joint care products, vitamins, treats, nutritional supplements, hygiene products, and supplies. Prescription Medications (Rx): Heartworm and flea and tick preventatives, arthritis, dermatitis, thyroid, diabetes, pain medications, heart/blood pressure, and other specialty medications, as well as generic substitutes. 1 Sales We offer our products through two main sales channels: (1) the Internet through our website and mobile app, and (2) the telephone contact center through our toll-free number. We have designed our website and mobile application 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 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, cats, and horses, and relevant editorial and easily obtainable or retrievable resource information. Customers can search our website for products and access resources on a variety of information on dogs, cats, and horses. Customers can shop at our website by category, product line, individual product, or symptom. We attracted approximately 28 million visits to our website (including our mobile app) during fiscal 2022, approximately 8.5% of those visits resulted in an order, and our website generated approximately 84% of our total sales for the same time period. On our website pet owners have access to health information covering pets’ behavior and illnesses, and natural and pharmaceutical remedies specifically for a pet’s problem. The pet education content on our main website is periodically updated with the latest research for pet owners. As part of our multichannel strategy, we also offer mobile versions of our website (www.petmeds.com) and an application for mobile phones, tablets, and other devices. Our website and mobile application features include: AutoShip & Save subscription (“AutoShip”); “ask-the-vet”; live web chat; easy refill medication reminders; local veterinarian finder; and express checkout to provide our customers with fast, easy, and helpful service from their mobile devices. In July 2021 we launched the new AutoShip program on our website. AutoShip is a new convenient way for our loyal customer base to have future pet medication orders delivered directly to them without the need to place an order each time. Currently, approximately 37% of our sales were generated via our AutoShip program in the month of March. The Company has set a goal of generating approximately 50% of its sales via the AutoShip program in FY 2023. Telephone Contact Center Our customer care representatives receive and process inbound and outbound customer calls, facilitate our live web chat, and process customer e-mails. Our telephone system is equipped with certain features including pop-up screens and call blending capabilities that give us the ability to efficiently utilize our customer care representatives’ time, providing excellent customer care, service, and support. Our customer care representatives receive a base salary and are rewarded with commissions for sales, and bonuses and other awards for achieving certain quality goals. Our Customers Approximately 2.0 million customers have purchased from us within the last two years. We attracted approximately 263,000 and 443,000 new customers in fiscal 2022 and 2021, respectively. Our customers are located throughout the United States, with approximately 50% of customers residing in California, Florida, Texas, New York, Pennsylvania, North Carolina, Georgia, and Virginia. Our primary focus has been on retail customers and the average purchase was approximately $93 and $89 for fiscal 2022 and fiscal 2021, respectively. 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 digital marketing, television advertising, and direct mail/print and e- mail. 2 Digital Marketing We advertise and market our products primarily online. We make our brand available to Internet consumers by purchasing targeted keywords and achieving prominent placement on the top search engines and search engine networks. We utilize Internet display and video advertisements, social media, and comparison shopping, and we are also members of an affiliate program with merchant clients and affiliate websites. Television Advertising Our television advertising is designed to build brand equity, create brand awareness, and generate initial purchases of products via the telephone and the Internet. Our television commercials typically focus on our ability to rapidly deliver to customers the same medications offered by veterinarians. We believe that television advertising is particularly effective and instrumental in building brand awareness. Our most current television commercial, airing nationally, speaks to pet owners about the savings and convenience of purchasing the same exact pet medications from PetMeds. Direct Mail/Print and E-mail We use direct mail/print and e-mail to acquire new customers and to remind our existing customers to reorder. Operations Order Processing Our website allows customers to easily browse and purchase all of our products online. Our website is designed to be fast, secure, and easy to use with order and shipping confirmations, and with online order tracking capabilities. We provide our customers with toll-free telephone access to our customer care representatives. Our call center generally operates from 7:00 AM to 11:00 PM, Monday through Thursday, 7:00 AM to 9:00 PM on Friday, 9:00 AM to 6:00 PM on Saturday, and 9:00 AM to 5:00 PM on Sunday, Eastern Time. The process of customers purchasing products from PetMeds consists of a few simple steps. A customer first places an order online or by calling our toll- free telephone number. The following information is needed to process prescription orders: pet information, prescription information, and the veterinarian’s name and phone number. This information is entered into our order process system. Then our pharmacists and pharmacy technicians verify all prescriptions. The order process system checks for the verification for prescription medication orders and a valid payment method for all orders. Verified orders are then sent to our fulfillment center, where items are picked, and then shipped via the United States Postal Service and United Parcel Service. Our customers enjoy the convenience of rapid home delivery, with the majority of all orders being shipped within 24 hours of ordering. Customer Care and Support We believe that a high level of customer care and support is critical in retaining and expanding our customer base. Customer care representatives participate in ongoing training programs under the supervision of our training managers. These training sessions include a variety of topics such as product knowledge, computer usage, customer service tips, and the relationship between our Company and veterinarians. Our customer care representatives respond to customers’ e-mails, calls, and live web chats that are related to products, order status, prices, and shipping. We believe our customer care representatives are a valuable source of feedback regarding customer satisfaction. Warehousing and Shipping We inventory our products and fill most customer orders from our corporate headquarters in Delray Beach, Florida. We have an in-house fulfillment and distribution operation, which is used to manage the entire supply chain, beginning with the placement of the order, continuing through order processing, and then fulfilling and shipping of the product to the customer. We offer a variety of shipping options, including next day delivery. We ship to anywhere in the United States served by the United States Postal Service or United Parcel Service. 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. We currently offer free shipping to all customers whose order value is $49 or more. 3 Purchasing and Supply of Products We purchase our products from a variety of sources, including certain manufacturers, domestic distributors, and wholesalers. There were five suppliers from whom we purchased approximately 80% of all products in fiscal 2022. We believe having strong relationships with product manufacturers and distributors will ensure the availability of an adequate volume of products ordered by our customers. Part of our growth strategy included developing direct relationships with all of the leading pharmaceutical manufacturers of the more popular prescription and non- prescription medications. We now have direct relationships with all these major manufacturers. Technology We utilize integrated technologies in our call centers, e-commerce, order entry, and inventory control/fulfillment operations. Our systems are custom configured by us to optimize our computer telephone integration and mail- order processing. The systems are designed to maintain a large database of specialized information and process a large volume of orders efficiently and effectively. Our systems provide our customer care representatives, and our customers on our website, including on our mobile application, with real time product availability information and updated customer information to enhance our customer care. We also have an integrated direct connection for processing credit cards to ensure that a valid credit card number and authorization have been received at the same time our customer care representatives are on the telephone with the customer or when a customer submits an order on our website. Our information systems provide our customer care representatives with records of all prior contact with a customer, including the customer’s address, telephone number, e-mail address, prescription information, order history, payment history, and notes. Competition The pet medications market is competitive and highly fragmented. Our competitors consist of veterinarians, and online and traditional retailers. We believe that the following are the principal competitive factors in our market: (cid:120) Product selection and availability, including the availability of prescription and non-prescription medications; Brand recognition; (cid:120) (cid:120) Reliability and speed of delivery; (cid:120) (cid:120) (cid:120) Website and mobile application usability and content. Personalized service and convenience; Price; and We compete with veterinarians, and online and traditional retailers for the sale of prescription and non- prescription pet medications and other health products. Many pet owners may prefer the convenience of purchasing their pet medications or other health products at the time of a veterinarian visit. In order to effectively compete with veterinarians, we must continue to educate pet owners about the service, convenience, and savings offered by our Company. According to the American Pet Products Association, pet spending in the United States increased 19.3% to $123.6 billion in 2021. Veterinary care and Rx medications represented $34.3 billion, or 28% of the total spending on pets in the United States. The pet medication market, which included prescription and nonprescription medication, is estimated to be approximately $10.0 billion, with veterinarians having the majority of the prescription market share. The dog and cat population is approximately 184 million, with approximately 70% of all households having a pet. We believe that the following are the main competitive strengths that differentiate PetMeds from the competition: (cid:120) (cid:120) (cid:120) (cid:120) Pure Play Channel leader, in an estimated $10.0 billion industry; “1-800-PetMeds” brand name with 25 years of experience, consumers know us as the trusted pet medication experts; Licensed pharmacy to conduct business in 50 states, and a Pharmacy Verified website (a website verification program by the National Association of Boards of Pharmacy®, which identifies online pharmacies and pharmacy-related websites as safe and legitimate); and Exceptional customer care and support. 4 Intellectual Property We conduct our business under the trade name “PetMeds” and use a family of trade names all containing the term “PetMeds” or “PetMed” in some form. We believe the “1-800-PetMeds” trade name, which is also our toll-free telephone number, and the “PetMeds” family of trademarks, have added significant value and are important factors in the marketing of our products. We have also obtained the right to use and control the Internet addresses www.1800petmeds.com, and www.petmeds.com. www.petmedexpress.com, www.1888petmeds.com, www.petmed.com, the right We also obtained to use and control Internet addresses www.petmeds.pharmacy, www.petmed.pharmacy, and www.1800petmeds.pharmacy, through a National Association of Boards of Pharmacy® initiative to ensure high standards for online pharmacies. We do not expect to lose the ability to use the Internet addresses; however, there can be no assurance in this regard and the loss of these addresses may have a material adverse effect on our financial position and results of operations. We are the exclusive owners of United States Trademark Registrations for “America’s Largest Pet Pharmacy®,” “America’s Most Trusted Pet Pharmacy®,” “Trusted Pet Medication Experts®,” “PetMed Express and Design®,”1-800-PetMeds and Design®,” 1-800- PetMeds®,” and “PetMeds®,” among numerous others. the 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, 2023, 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, and we also updated our federal registration and state registrations/permits as required to include the ability to dispense Schedule V controlled substances. Our pharmacy practice is also licensed and/or regulated by 49 other state pharmacy boards, the District of Columbia Board of Pharmacy, and the United States Drug Enforcement Administration, and with respect to our products, by other regulatory authorities including, but not necessarily limited to, the United States Food and Drug Administration (“FDA”) and the United States Environmental Protection Agency. As a licensed pharmacy in the State of Florida, we are subject to the Florida Pharmacy Act and regulations promulgated thereunder. To the extent that we are unable to maintain our license as a community pharmacy with the Florida Board of Pharmacy, or if we do not maintain the licenses granted by other state pharmacy boards, or if we become subject to actions by the FDA, or other enforcement regulators, our distribution of prescription medications to pet owners could cease, which could have a material adverse effect on our financial condition and results of operations. We rely on legal and operational compliance programs, as well as outside counsel, to guide our business in complying with applicable laws and regulations in the areas in which we do business. In addition, regulatory regime changes may add cost and complexity to our compliance efforts. Based on information currently available, we believe that our compliance in general with federal and state regulations will not have a material effect on our earnings or financial condition. However, it is difficult to predict with certainty the potential impact of future compliance efforts and thus, future costs associated with such matters may exceed current reserves. As of March 31, 2022 we have no reserves related to federal and state regulations. Human Capital Resources We strive to create a high-performance culture that embraces diversity, inclusion, diverse perspectives and experiences, to ensure that employees have opportunities to develop the skills they need to grow and excel in their fields. Human capital management is a priority for our executives and Board of Directors, and we are committed to identifying and developing the talent necessary for our long-term success. We have a talent and succession planning process and have established programs to support the development of our talent pipeline for critical roles in our organization. We conduct an annual review with human resources and the departmental leadership teams, focusing on high performing and high potential talent, diverse talent and succession for our critical roles. We also recognize that it is important to develop our future leaders. We provide a variety of resources to help our employees build and develop their skills, including online development resources as well as individual development opportunities and projects for key talent. Additionally, we have leadership development resources for our future leaders as they continue to develop their skills. 5 We also foster a strong corporate culture that promotes high standards of ethics and compliance for our business, including policies that set forth principles to guide employee, officer, director, and vendor conduct, such as our Code of Business Conduct and Ethics. We also maintain a whistleblower policy and anonymous hotline for the confidential reporting of any suspected policy violations or unethical business conduct on the part of our employees, officers, directors, or vendors. We currently have 212 full time employees, including: 126 in customer care and marketing; 23 in fulfillment and purchasing; 46 in our pharmacy; 4 in information technology; 7 in accounting/human resources; and 6 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 in good standing. The majority of our employees work at our headquarters and distribution center located in Delray Beach, Florida. As a result of the COVID-19 pandemic many of our personnel are currently working remotely, and in the long term, we expect some personnel to transition into working remotely on a regular basis. In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees as well as the communities in which we operate. These measures include allowing most employees to work from home and implementing additional safety measures for employees continuing critical on-site work. We believe in supporting our employees’ health and well-being. Our goal is to help employees make informed decisions about their health by providing the tools and resources necessary to achieve a healthier lifestyle. We offer our employees a wide array of benefits such as life and health (medical, dental, and vision) insurance, paid time off and retirement benefits, as well as emotional well-being services through our health insurance program. We offer competitive compensation to attract and retain the best people, and we help care for our people so they can focus on our mission. Our employees' total compensation package includes market-competitive salary, bonuses or sales commissions, and equity. We generally offer annual equity grants to certain full-time employees, primarily management. Having compensation tied to annual equity grants helps ensure that our employees will be committed to the Company’s long-term success. We have conducted an annual pay equity analysis and continue to be committed to pay equity. Available Information Our website address is www.petmeds.com. The information on our website is not, and shall not be deemed to be, a part of or incorporated into this Annual Report on Form 10-K or any other filings we make with the Securities and Exchange Commission ("SEC"). We file annual, quarterly, and current reports, proxy statements, and other information with the 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 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. 6 ITEM 1A. RISK FACTORS Our operations and financial results are subject to various risks and uncertainties, including those described below, that could materially and adversely affect our business, financial condition, operating results and the trading price of our common stock. Because of the following factors, as well as other factors affecting the Company’s results of operations and financial condition, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. This discussion of risk factors contains forward-looking statements. This section should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Regulatory Risks We may inadvertently fail to comply with various state or federal regulations covering the dispensing of prescription pet medications which may subject us to reprimands, sanctions, probations, fines, suspensions, or the loss of one or more of our pharmacy licenses. The sale and delivery of prescription pet medications is generally governed by state laws and state regulations, and with respect to controlled substances, also by federal law. Since our pharmacy is located in the State of Florida, the Company is governed by the laws and regulations of the State of Florida. Each prescription pet medication sale we make is likely also to be covered by the laws of the state where the customer is located. The laws and regulations relating to the sale and delivery of prescription pet medications vary from state to state, but generally require that prescription pet medications be dispensed with the authorization from a prescribing veterinarian. Our current license is valid until February 28, 2023, and there is no guarantee that we will be able to renew it. To the extent that we are unable to maintain our license as a community pharmacy with the Florida Board of Pharmacy, or if we do not maintain the licenses granted by other state boards, or if we become subject to actions by the FDA, or other enforcement regulators, our dispensing of prescription medications to pet owners could cease, which could have a material adverse effect on our operations. The Company is a party to routine litigation and administrative complaints incidental to its business. Management does not believe that the resolution of any or all of such routine litigation and administrative complaints is likely to have a material adverse effect on the Company’s financial condition or results of operations. While we make every effort to fully comply with all applicable state rules, laws, and regulations, from time to time we have been the subject of administrative complaints regarding the authorization of prescriptions prior to shipment. We cannot assure you that we will not be the subject of administrative complaints in the future. We cannot guarantee you that we will not be subject to reprimands, sanctions, probations, or fines, or that one or more of our pharmacy licenses will not be suspended or revoked. If we were unable to maintain our license as a community pharmacy in the State of Florida, or if we are not granted licensure in a state that begins to require licensure, or if one or more of the licenses granted by other state boards should be suspended or revoked, our ability to continue to sell prescription medications and to continue our business as it is presently conducted could be in jeopardy. Business Risks 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. 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, increased inventory carrying costs, and obsolescence. 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. 7 Resistance from veterinarians to authorize prescriptions, or attempts/efforts on their part to discourage pet owners from purchasing from us 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, 2022, were made to customers located in the states of California, Florida, Texas, New York, Pennsylvania, North Carolina, Georgia, and Virginia. If for any reason our license to operate a pharmacy in one or more of those states should be suspended or revoked, or if it is not renewed, our ability to sell prescription medications to residents of those states would cease and our financial condition and results of operations in future periods would be materially adversely affected. We now have direct buying relationships with all the major pet medication manufacturers; the contractual relationship depends on our compliance with their minimum advertised pricing policies (MAPP). During fiscal 2020, the Company established direct purchasing relationships with all the major pet medication manufacturers. These relationships entitle the Company to buy directly from the manufacturer under the terms and conditions of a purchasing agreement which dictates purchase pricing of inventory and criteria to obtain additional discounts and rebates. The terms of these agreements also require the Company to comply with the manufacturers’ MAPP. Each advertisement and/or promotion of a product below the MAPP price, should they occur, would be a violation of the policy. This policy applies to all advertisements of products in all media including, without limitation, flyers, posters, coupons, mailers, inserts, newspapers, magazines, on-line catalogs, mail order catalogs, public signage and all Internet or similar electronic media, television, radio and public signage, including websites, email newsletters, forums, and auction sites. At the discretion of the manufacturers, non-compliance with the MAPP can result in one or more of the following actions: (1) forfeiture of future rebates or discounts from the manufacturer, (2) suspension of future purchases from the manufacturer, (3) or termination of current or future business relationship. The Company has and will continue to make every attempt to abide by the manufacturers MAPP. However, no assurances can be made that the Company will not violate MAPP inadvertently. A reduction or discontinuance of these rebates or discounts would increase our costs and could reduce our profitability. If any of these major pet medication manufacturers were to terminate our purchasing relationship it could materially adversely affect our business. If the manufacturers are not able to enforce their MAPP industry-wide, then our profit margins and results of operations may also be impacted negatively. The loss of any of our key suppliers would negatively impact our business. We have direct purchasing relationships with all of the major pet medication manufacturers, the majority of which we purchase significant quantities of pet medication products, with the majority from these major manufacturers. We do maintain annual purchasing contracts with these major manufacturers. While we believe that our supplier relationships are good, a supplier could discontinue selling to us at any time. The loss of any of our key suppliers of pet medications offered by us would have a negative impact on our business, financial condition, and results of operations. Shipping is a critical part of our business and any changes in, or disruptions to, our shipping arrangements could adversely affect our business, financial condition, and results of operations. 8 We currently rely on third-party national, regional, and local logistics providers to deliver the products we offer on our website. If we are not able to negotiate acceptable pricing and other terms with these providers, or if these providers experience performance problems or other difficulties in processing our orders or delivering our products to customers, it could negatively impact our results of operations and our customers’ experience. In addition, our ability to receive inbound inventory efficiently and ship merchandise to customers may be negatively affected by factors beyond our and these providers’ control, including inclement weather, fire, flood, power loss, earthquakes, acts of war or terrorism or other events, such as labor shortages and disputes, financial difficulties, volatility in the prices of fuel, gasoline and commodities such as paper and packing supplies, system failures and other disruptions to the operations of the shipping companies on which we rely. We are also subject to risks of damage or loss during delivery by our shipping vendors. Further, due to the continuing spread of COVID-19 and its variant strains and related work and travel restrictions, there may be disruptions and delays in national, regional and local shipping, which may negatively impact our customers’ experience and our operations and financial results. The spread of COVID-19, and any future similar outbreak, may disrupt our suppliers and logistics providers and other third- party delivery agents, as their workers may be prohibited or otherwise unable to report to work and transporting products within regions may be limited due to factory closures, port closures and increased border controls and closures, among other things. If the products ordered by our customers are not delivered in a timely fashion or are damaged or lost during the delivery process, our customers could become dissatisfied and cease buying products through our website and mobile applications, which would adversely affect our business, financial condition, and results of operations. The content of our website could expose us to various kinds of liability, which, if prosecuted successfully, could negatively impact our business. Because we post product and pet health information and other content on our website, we face potential liability for negligence, copyright infringement, patent infringement, trademark infringement, defamation, and/or other claims based on the nature and content of the materials we post. Various claims have been brought, and sometimes successfully prosecuted, against Internet content distributors. We could be exposed to liability with respect to the unauthorized duplication of content or unauthorized use of other parties’ proprietary technology. Although we maintain general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance, or is in excess of insurance coverage, could materially adversely affect our financial condition and results of operations. We may not be able to protect our intellectual property rights, and/or we may be found to infringe on the proprietary rights of others. We rely on a combination of trademarks, trade secrets, copyright laws, and contractual restrictions to protect our intellectual property rights. These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our non-prescription private label or generic equivalents, when and if developed, as well as aspects of our sales formats, or to obtain and use information that we regard as proprietary, including the technology used to operate our website and our content, and our trademarks. Litigation or proceedings before the United States Patent and Trademark Office or other bodies may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and domain names, or to determine the validity and scope of the proprietary rights of others. Any litigation or adverse proceeding could result in substantial costs and diversion of resources and could seriously harm our business and operating results. Third parties may also claim infringement by us with respect to past, current, or future technologies. We expect that participants in our market will be increasingly involved in infringement claims as the number of services and competitors in our industry segment grows. Any claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause service upgrade delays, or require us to enter into royalty or licensing agreements. These royalty or licensing agreements might not be available on terms acceptable to us or at all. If we are unable to protect our Internet addresses or to prevent others from using Internet addresses that are confusingly similar, our business may be adversely impacted. Our www.petmeds.com, Internet addresses, www.1800petmeds.com, www.1888petmeds.com, www.petmedexpress.com, www.petmed.com, and www.petmeds.pharmacy, 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 www.petmed.pharmacy, 9 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 a business interruption in the event of damage to, or disruptions in, our facility. Our headquarters and distribution center are currently located in one location in South Florida, and most of our shipments of products to our customers are made from this sole distribution center. 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, including business interruptions resulting from damage to or destruction of our headquarters and distribution center, or power and equipment failures relating to our call center or websites, or interruptions or disruptions to major transportation infrastructure, or other events that do not occur on our premises. The occurrence of one or more of these events could adversely impact our ability to generate revenues in future periods. A failure of our information systems and customer-facing technology systems or any security breach or unauthorized disclosure of confidential information, or other cyber-attacks on our systems, could result in litigation and regulatory risk, harm our reputation and have a material adverse effect on our business. Our business is dependent upon the efficient operation of our information systems. In particular, we rely on our information systems to effectively manage our business model strategy, with tools to track and manage sales, inventory, marketing, customer service efforts, the preparation of our consolidated financial and operating data, credit card information, and customer information. The failure of our information systems to perform as designed or the failure to maintain and enhance or protect the integrity of these systems could disrupt our business operations, adversely impact sales and the results of operations, expose us to customer or third-party claims, or result in adverse publicity. Through our information technology, we are able to provide an improved overall shopping and interconnected retail experience that empowers our customers to shop and interact with us from computers, tablets, smartphones and other mobile devices. We use our website and our mobile application both as sales channels for our products and also as methods of providing product and other relevant information to our customers to drive online sales. Our online programs, communities and knowledge center allow us to inform, assist and interact with our customers. We also continually seek to enhance all of our online properties to provide an attractive user-friendly interface for our customers. Disruptions, failures or other performance issues with these customer-facing technology systems could impair the benefits that they provide to our online business and negatively affect our relationship with our customers. Additionally, we collect, process, and retain sensitive and confidential customer information in the normal course of our business. Despite the security measures we have in place and any additional measures we may implement in the future, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism, or other events. Any security breach or event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential information, whether by us directly or our third-party service providers, could damage our reputation, expose us to the risks of litigation and liability, disrupt our business, or otherwise affect our results of operations. Our operating results are difficult to predict and may fluctuate, and a portion of our sales are seasonal. Factors that may cause our operating results to fluctuate include: (cid:120) Our ability to obtain new customers at a reasonable cost, retain existing customers, or encourage reorders; (cid:120) 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; (cid:120) (cid:120) Our ability to manage inventory levels or obtain an adequate supply of products; (cid:120) 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; (cid:120) 10 Price competition; (cid:120) (cid:120) New products introduced to the market, including generics; (cid:120) (cid:120) Increases in the cost of advertising; The amount and timing of operating costs and capital expenditures relating to expansion of our product line or operations; (cid:120) Disruption of our toll-free telephone service, technical difficulties, or systems and Internet outages or (cid:120) slowdowns; The impact of COVID-19 on our business operations and generally on the economy, including the measures taken by governmental authorities to address it; and (cid:120) Unfavorable general economic trends. Because our operating results are difficult to predict, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. The majority of our product sales are affected by the seasons, due to the seasonality of mainly flea, tick, and heartworm medications. For the quarters ended June 30, 2021, September 30, 2021, December 31, 2021, and March 31, 2022, Company sales were 29%, 25%, 22%, In addition to the seasonality of our sales, our annual and quarterly operating results have and 24%, respectively. 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. Uncertainties in economic conditions and their impact on consumer spending patterns could adversely impact our business, financial condition, and results of operations. Our results of operations are sensitive to changes in certain macro-economic conditions that impact consumer spending on pet products and services. Some of the factors that may affect consumer spending on pet products and services include consumer confidence, levels of unemployment, inflation, interest rates, tax rates and general uncertainty regarding the overall future economic environment. We may experience declines in sales or changes in the types of products sold during economic downturns. Any material decline in the amount of consumer spending or other adverse economic changes could reduce our sales, and a decrease in the sales of higher-margin products could reduce profitability and, in each case, harm our business, financial condition, and results of operations. We may seek to grow our business through acquisitions of, or investments in, new or complementary businesses, facilities, technologies, offerings, or products, or through strategic alliances, and the failure to manage these acquisitions, investments, or other strategic alliances, or to integrate them with our existing business, could have a material adverse effect on us. We recently entered into, and made an investment in, a strategic alliance, and we may in the future consider opportunities to acquire or make investments in new or complementary businesses, facilities, technologies, offerings, or products, or enter into other strategic alliances, which may enhance our capabilities, complement our current products and services or expand the breadth of our markets. Acquisitions, investments and other strategic alliances involve numerous risks, including: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) problems integrating the acquired business, facilities, technologies or products, including issues maintaining uniform standards, procedures, controls and policies; unanticipated costs associated with acquisitions, investments or strategic alliances; losses we may incur as a result of declines in the value of an investment or as a result of incorporating an investee’s financial performance into our financial results; diversion of management’s attention from our existing business; risks associated with entering new markets in which we may have limited or no experience; the risks associated with businesses we acquire or invest in, which may differ from or be more significant than the risks our other businesses face; potential unknown liabilities associated with a business we acquire or in which we invest; and increased legal and accounting compliance costs. Our ability to successfully grow through strategic transactions depends upon our ability to identify, negotiate, complete and integrate suitable target businesses, facilities, technologies, products and services. These efforts could be expensive and time-consuming and may disrupt our ongoing business and prevent management from focusing on our operations. As a result of future strategic transactions, we might need to issue additional equity securities, spend our cash, or incur debt (which may only be available on unfavorable terms, if at all) or contingent liabilities, any of which could reduce our profitability and harm our business. If we are unable to identify suitable 11 acquisitions, investments or strategic relationships, or if we are unable to integrate any acquired businesses, facilities, technologies, offerings and products effectively, our business, financial condition, and results of operations could be materially and adversely affected. Also, while we employ several different methodologies to assess potential business opportunities, the new businesses or investments may not meet or exceed our expectations or desired objectives. Financial Risks We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and potentially disrupt our business. We accept payments using a variety of methods, including credit and debit cards, PayPal, and checks, and we may offer new payment options over time. Acceptance of these payment options subjects us to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. These requirements may change over time or be reinterpreted, making compliance more difficult or costly. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. As a result, our business and operating results could be adversely affected. Industry Risks 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. In addition, we face growing competition from online and multichannel retailers, some of whom may have a lower cost structure than ours, as customers now routinely use computers, tablets, smartphones, and other mobile devices and mobile applications to shop online and compare prices and products in real time. In order to effectively compete in the future, we may be required to offer promotions and other incentives, which may result in lower operating margins and adversely affect the results of operations. We also face a significant challenge from our competitors forming alliances with each other, such as those between online and traditional retailers. These relationships may enable both their online and retail stores to negotiate better pricing and better terms from suppliers by aggregating the demand for products and negotiating volume discounts, which could be a competitive disadvantage to us. Risks Related to COVID-19 The COVID-19 global pandemic and related government, private sector and individual consumer responsive actions may adversely affect our business operations, employee availability, financial performance, liquidity and cash flow for an unknown period of time. The outbreak of COVID-19 was declared a pandemic by the World Health Organization and continues to spread in the United States, Canada, and in many other countries globally. COVID-19 has had, and continues to have, a significant impact in the United States and around the world, prompting governments and businesses to take unprecedented measures in response. Such measures have included restrictions on travel and business operations, 12 temporary closures of businesses, and quarantine and shelter-in-place orders. The COVID-19 pandemic has at times significantly curtailed economic activity in the United States and globally, and caused significant volatility and disruption in global financial markets. The continued adverse public health developments, the related government and private sector responsive actions, and the economic effects of the COVID-19 pandemic may adversely affect our business operations. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic, as the situation is continually evolving. The COVID-19 pandemic may disrupt the global supply chain and may cause disruptions to our operations if a significant number of employees are quarantined or if they are otherwise limited in their ability to work at our fulfillment center. Additional federal or state mandates could also impact our ability to take or fulfill our customers’ orders and operate our business. As an essential business, we have been open during our normal business hours without any material disruptions to our operations. We are dedicated to making every effort to ensure the health and safety of our employees. We have implemented working from home where possible and enhanced disinfection and social distancing within our workplace. Many of our personnel are working remotely and it is possible that this could have a negative impact on the execution of our business plans and operations. If a natural disaster, power outage, connectivity issue, or other event occurs that impacts our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The increase in remote working may also result in consumer privacy, IT security and fraud concerns as well as operational inefficiencies. The operations of our fulfillment center may be substantially disrupted by additional federal or state mandates ordering shutdowns or by the inability of our employees to travel to work due to COVID-19. The inability to ship from our fulfillment center due to a COVID-19 outbreak, disruptions to the operations of our fulfillment center, or increased costs in fulfillment center capacity may negatively impact our financial performance or slow our future growth. The uncertainty around the duration of business disruptions and the extent of the spread of the virus and the emergence of new variants of the virus in the United States and to other areas of the world will likely continue to adversely impact the national and global economy and negatively impact consumer spending. Any of these outcomes could have a material adverse impact on our business, financial condition, operating results and ability to execute and capitalize on our strategies. The full extent of COVID-19’s impact on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic, its impact on capital and financial markets and any new information that may emerge concerning the severity and new variants of the virus, its spread to other regions as well as the actions taken to contain it, among others. Securities Risks 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 addition, if the Company fails to meet expectations related to future growth, profitability, dividends, or other market expectations, the price of the Company’s common stock may decline significantly, which could have a material adverse impact on investor confidence and employee retention. 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 shareholders. 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 shareholder approval. Currently there are 2,500 shares of our Convertible Preferred Stock issued and outstanding. This leaves slightly less than 5.0 million shares of preferred stock available for issuance at the discretion of our Board of Directors. These shares, if issued, could contain dividend, liquidation, conversion, voting, or other rights which could adversely affect the rights of our common shareholders and which could also be utilized, under some circumstances, 13 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 shareholders believe it is in their best interest. Our ability to pay regular dividends to our shareholders and the amounts of any such dividends are subject to the discretion of the Board and may be limited by our financial condition, or limitations under Florida law. We have paid dividends to our shareholders since 2009 and it is currently anticipated that we will continue to pay regular quarterly dividends, any such determination to pay dividends and the amounts thereof will be at the discretion of the Board and will be dependent on then-existing conditions, including our financial condition, income, legal requirements, including limitations under Florida law, and other factors the Board deems relevant. The Board has previously decided, and may in the future decide, in its sole discretion, to change the amount or frequency of dividends or discontinue the payment of dividends entirely. For these reasons, shareholders will not be able to rely on dividends to receive a return on investment. Accordingly, realization of any gain on shares of our common stock may depend on the appreciation of the price of our common stock, which may not occur. ITEM 1B. UNRESOLVED STAFF COMMENTS None ITEM 2. PROPERTIES We own our facilities, including our principal executive offices and distribution center, which are located at 420 South Congress Avenue, Delray Beach, Florida 33445 (the “Property”). The Property consists of approximately 634,000 square feet of land or 14.6 acres with two building complexes totaling approximately 185,000 square feet, with additional land for future use. The first building complex consists of approximately 125,000 square feet and the second building complex consists of approximately 60,000 square feet each consisting of both office and warehouse space. The Company occupies approximately 97,000 square feet of the first building for its principal offices and distribution center. As of March 31, 2022, 48% of the Property was leased to two tenants with a remaining weighted average lease term of 3.0 years. We believe that our facilities are sufficient for our current needs and are in good condition in all material respects. ITEM 3. LEGAL PROCEEDINGS The Company has settled complaints that had been filed with various states’ pharmacy boards in the past. There can be no assurances made 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. 14 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 2022 and 2021 as reported by the NASDAQ. Fiscal 2022: First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 2021: First Quarter Second Quarter Third Quarter Fourth Quarter Holders High $46.06 $34.00 $32.00 $29.18 High $40.96 $41.83 $33.77 $51.80 Low $27.73 $26.50 $25.26 $23.62 Low $27.94 $29.00 $28.96 $29.77 There were 105 holders of record of our common stock on May 24, 2022, and approximately 48,300 of our holders are “street name” or beneficial holders, whose shares are held by banks, brokers, or other financial institutions. Dividends During fiscal 2021 and 2022, our Board of Directors declared the following dividends: Declaration Date Per Share Dividend May 4, 2020 July 20, 2020 October 26, 2020 January 19, 2021 May 3, 2021 July 26, 2021 October 25, 2021 January 24, 2022 $0.28 $0.28 $0.28 $0.28 $0.30 $0.30 $0.30 $0.30 Record Date May 15, 2020 July 31, 2020 November 9, 2020 February 1, 2021 May 14, 2021 August 6, 2021 November 8, 2021 February 7, 2022 Total Amount (In thousands) $5,647 $5,647 $5,676 $5,676 $6,081 $6,102 $6,283 $6,294 Payment Date May 22, 2020 August 7, 2020 November 20, 2020 February 12, 2021 May 21, 2021 August 13, 2021 November 19, 2021 February 18, 2022 On May 3, 2021, the Company’s Board of Directors declared an increased quarterly dividend from $0.28 to $0.30 per share, on its common stock. The Company’s Board of Directors declared a quarterly dividend of $0.30 per share on May 9, 2022. The Board established a May 20, 2022 record date and a May 27, 2022 payment date. 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 SEC requirements. 15 There can be no assurances as to the precise number of shares that will be repurchased under the share repurchase plan, and the Company may discontinue the share repurchase plan at any time subject to compliance with applicable regulatory requirements. Shares purchased pursuant to the share repurchase plan will either be cancelled or held in the Company's treasury. On January 25, 2019, the Company’s Board of Directors authorized an additional $30.0 million under the repurchase plan. During fiscal 2020 the Company purchased and retired approximately 613,000 shares of its common stock for approximately $11.5 million, averaging approximately $18.73 per share. As of March 31, 2022, the Company had approximately $28.7 million remaining under the Company’s share repurchase plan. Since the inception of the share repurchase plan up to March 31, 2022, approximately 6.2 million shares have been repurchased under the plan for approximately $81.3 million, averaging approximately $13.11 per share. Performance Graph Set forth below is a line graph comparing the five-year cumulative performance of our Common Stock with the Nasdaq Composite, the Russell 2000, and our SIC Code 5912 (pharmacy peer group) from March 31, 2017, to March 31, 2022. The graph assumes that $100 was invested on March 31, 2017, in each of our Common Stock, the Nasdaq Composite, the Russell 2000, and the SIC Code 5912 (pharmacy peer group). Because we have historically paid dividends on a quarterly basis, the graph assumes that dividends were reinvested. The performance graph and related information below shall not be deemed “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act, each as amended, except to the extent that we specifically incorporate it by reference into such filing. 300.00 250.00 200.00 150.00 100.00 50.00 0.00 7 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 l a V PetMed Express, Inc. Nasdaq Composite Russell 2000 SIC Code 5912 3/31/2017 3/31/2018 3/31/2019 3/31/2020 3/31/2021 3/31/2022 Nasdaq Composite SIC Code 5912 Russell 2000 PetMed Express, Inc. Performance graph data: Fiscal Year Ended March 31, PetMed Express, Inc. Nasdaq Composite SIC Code 5912 Russell 2000 2017 100.00 100.00 100.00 100.00 2018 211.75 120.76 80.17 111.79 2020 159.37 134.52 70.52 86.72 2021 201.60 233.26 92.62 168.96 2022 155.76 252.05 108.31 159.19 2019 119.69 133.60 75.01 114.09 16 Securities Authorized for Issuance under Equity Compensation Plans The following table sets forth securities authorized for issuance under equity compensation plans, including individual compensation arrangements, by us under our 2015 Outside Director Equity Compensation Restricted Stock Plan and 2016 Employee Equity Compensation Restricted Stock Plan as of March 31, 2022: EQUITY COMPENSATION PLAN INFORMATION (In thousands) Number of securities Number of securities to be issued upon Weighted average remaining available exercise of outstanding exercise price of for future issuance options, warrants outstanding options, under equity Plan category and rights warrants and rights compensation plans 2015 Outside Director Equity Compensation Restricted Stock Plan 2016 Employee Equity Compensation Restricted Stock Plan Total (1) 65 706 771 - - 488 (1) 107 595 The number of shares of common stock available for issuance under the 2015 Outside Director Equity Compensation Restricted Stock Plan automatically increase on the first trading day of January each calendar year during the term of the 2015 Outside Director Equity Compensation Restricted Stock Plan, by an amount equal to ten percent (10%) of the total number of shares of common stock authorized under the 2015 Outside Director Equity Compensation Restricted Stock Plan. ITEM 6. [RESERVED] 17 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Summary PetMed Express (the “Company”) was incorporated in the state of Florida in January 1996, and since 2004 its common stock has 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, and in March 2010, the Company started offering additional pet supplies on its website for sale, and these items are drop shipped to customers by third party vendors. Presently, the Company’s product line includes approximately 3,000 of the most popular pet medications, health products, and supplies for dogs, cats, and horses. The Company markets its products through national advertising campaigns which aim to increase the recognition of the “PetMeds” brand name, increase traffic on its website at www.petmeds.com, acquire new customers, and maximize repeat purchases. Approximately 84% of all sales were generated via the Internet in both fiscal 2022 and fiscal 2021. The twelve-month average purchase was approximately $93 per order for the fiscal year ended March 31, 2022, compared to $89 for the fiscal year ended March 31, 2021. Critical Accounting Policies Our discussion and analysis of our financial condition and the results of our operations contained herein are based upon our Consolidated Financial Statements and the data used to prepare them. The Company’s Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. On an ongoing basis we re-evaluate our judgments and estimates including those related to product returns, bad debts, inventories, and income taxes. We base our estimates and judgments on our historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. Our estimates are guided by observing the following critical accounting policies. Revenue recognition The Company generates revenue by selling pet medication products and pet supplies mainly to retail customers. Certain pet supplies offered on the Company’s website are drop shipped to customers. The Company considers itself the principal in the arrangement because the Company controls the specified good before it is transferred to the customer. Revenue contracts contain one performance obligation, which is delivery of the product; customer care and support is deemed not to be a material right to the contract. The transaction price is adjusted at the date of sale for any applicable sales discounts and an estimate of product returns, which are estimated based on historical this is not considered a key judgment. There are no amounts excluded from variable patterns; however, consideration. Revenue is recognized when control transfers to the customer at the point in time in which the shipment of the product occurs. Outbound shipping and handling fees are an accounting policy election and are included in sales as the Company considers itself the principal in the arrangement given responsibility for supplier selection and discretion over pricing. Shipping costs associated with outbound freight after control over a product has transferred to a customer are an accounting policy election and are accounted for as fulfillment costs and are included in cost of sales. The Company disaggregates revenue in the following two categories: (1) reorder sales vs new order sales, and (2) internet sales vs contact center sales. The following table illustrates sales by various classifications: Sales (In thousands) 2022 % 2021 % $ Variance % Variance Year Ended March 31, Reorder Sales New Order Sales $ $ 250,401 23,016 91.6% 8.4% $ $ 272,648 36,567 88.2% 11.8% $ $ (22,247) (13,551) -8.2% -37.1% Total Net Sales $ 273,417 100.0% $ 309,215 100.0% $ (35,798) -11.6% Internet Sales Contact Center Sales $ $ 230,263 43,154 84.2% 15.8% $ $ 259,404 49,811 83.9% 16.1% $ $ (29,141) (6,657) -11.2% -13.4% Total Net Sales $ 273,417 100.0% $ 309,215 100.0% $ (35,798) -11.6% 18 Sales (In thousands) 2021 % 2020 % $ Variance % Variance Year Ended March 31, Reorder Sales New Order Sales $ $ 272,648 36,567 88.2% 11.8% $ $ 248,560 35,565 87.5% 12.5% $ $ 24,088 1,002 Total Net Sales $ 309,215 100.0% $ 284,125 100.0% $ 25,090 Internet Sales Contact Center Sales $ $ 259,404 49,811 83.9% 16.1% $ $ 238,054 46,071 83.8% 16.2% $ $ 21,350 3,740 Total Net Sales $ 309,215 100.0% $ 284,125 100.0% $ 25,090 9.7% 2.8% 8.8% 9.0% 8.1% 8.8% Virtually all of the Company’s sales are paid by credit cards and the Company usually receives the cash settlement in two to three banking days. Credit card sales minimize accounts receivable balances relative to sales. The Company had no material contract asset or contract liability balances as of March 31, 2022, or March 31, 2021. 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 chargebacks or insufficient funds checks. The Company determines its estimates of the un-collectability of accounts receivable by analyzing historical bad debts and current economic trends. The allowance for doubtful accounts was approximately $39,000 at both March 31, 2021, and March 31, 2022. Valuation of inventory Inventories consist of prescription and non-prescription pet medications and pet supplies that are available for sale and are priced at the lower of cost or net realizable value using a weighted average cost method. The Company writes down its inventory for estimated obsolescence. The inventory reserve was approximately $81,000 and $86,000 at March 31, 2022 and 2021, respectively. Advertising The Company's advertising expense consists primarily of Internet marketing, direct mail/print, and television advertising. Internet costs are expensed in the month incurred and direct mail/print advertising costs are expensed when the related brochures and postcards are produced, distributed, or superseded. Television advertising costs are expensed as the advertisements are televised. Accounting for income taxes The Company accounts for income taxes under the provisions of ASC Topic 740, (“Accounting for Income Taxes”), which generally requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the Consolidated Financial Statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting carrying values and the tax bases of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. 19 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 Income: Sales Cost of sales Gross profit Operating expenses: General and administrative Advertising 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, 2022 2021 2020 100.0 % 100.0 % 100.0 % 71.4 28.6 11.3 6.9 1.0 19.2 9.4 0.5 9.9 2.2 70.9 29.1 9.1 7.0 0.8 16.9 12.2 0.5 12.7 2.8 71.4 28.6 8.9 8.0 0.8 17.7 10.9 1.0 11.9 2.8 Net income 7.7 % 9.9 % 9.1 % Non-GAAP Financial Measures Adjusted EBITDA and Adjusted EBITDA per share To provide investors and the market with additional information regarding our financial results, we have disclosed (see below) adjusted EBITDA and adjusted EBITDA per share, non-GAAP financial measures that we calculate as net income excluding; share-based compensation expense; depreciation and amortization; income tax provision; and interest income (expense). We have provided reconciliations below of adjusted EBITDA to net income and adjusted EBITDA per share to diluted earnings per share, the most directly comparable GAAP financial measures. We have included adjusted EBITDA and adjusted EBITDA per share, herein, because they are key measures used by our management and Board of Directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates operating performance comparability across reporting periods by removing the effect of non-cash expenses. Accordingly, we believe that adjusted EBITDA and adjusted EBITDA per share provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. We believe it is useful to exclude non-cash charges, such as, share-based compensation expense, depreciation and amortization from our adjusted EBITDA and adjusted EBITDA per share because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. In addition, we believe it is useful to exclude in our adjusted EBITDA and adjusted EBITDA per share income tax provision and interest income (expense), as neither are components of our core business operations. Adjusted EBITDA and adjusted EBITDA per share have limitations as financial measures, these non-GAAP measures should not be 20 considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: (cid:120) (cid:120) (cid:120) Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA and adjusted EBITDA per share do not reflect capital expenditure requirements for such replacements or for new capital expenditures; Adjusted EBITDA and adjusted EBITDA per share do not reflect share-based compensation. Share-based compensation has been, and will continue to be for the foreseeable future, a material recurring expense in our business and an important part of our compensation strategy; Adjusted EBITDA and adjusted EBITDA per share do not reflect interest income (expense), net; or changes in, or cash requirements for, our working capital; and (cid:120) Other companies, including companies in our industry, may calculate adjusted EBITDA and adjusted EBITDA per share differently, which reduces these measures’ usefulness as comparative measures. Because of these and other limitations, you should consider adjusted EBITDA and adjusted EBITDA per share only as supplemental to, and alongside with other GAAP based financial performance measures, including various cash flow metrics, net income, net margin, and our other GAAP results. The following table presents a reconciliation of net income, the most directly comparable GAAP measure to adjusted EBITDA and adjusted EBITDA per share for each of the periods indicated: Reconciliation of Non-GAAP Measures PetMed Express, Inc. ($ in thousands, except percentages) 2022 2021 Change Change 2022 2021 Change Change Three Months Ended Year Ended March 31, March 31, $ % March 31, March 31, $ % Consolidated Reconciliation of GAAP Net Income to Adjusted EBITDA: Net income Add (subtract): $ 6,066 $ 6,812 $ (746) -11% $ 21,100 $ 30,603 $ (9,503) -31% Share-based compensation $ 1,509 $ 1,013 $ 496 49% $ 4,549 $ 3,307 $ 1,242 Income Taxes Depreciation Interest Income/Expense $ (92) $ (85) $ (7) $ 687 $ 636 $ 51 8% 8% $ 2,738 $ 2,427 $ 311 $ (335) $ (314) $ (21) $ 1,368 $ 2,037 $ (669) -33% $ 5,971 $ 8,613 $ (2,642) 38% -31% 13% 7% Adjusted EBITDA $ 9,538 $ 10,413 $ (875) -8% $ 34,023 $ 44,636 $ (10,613) -24% ($ in thousands, except percentages March 31, March 31, $ % March 31, March 31, $ % and per share amounts) 2022 2021 Change Change 2022 2021 Change Change Three Months Ended Year Ended Consolidated Reconciliation of GAAP Net Income Per Share to Adjusted EBITDA per share: Net income per share, diluted $ 0.30 $ 0.34 $ (0.04) -12% $ 1.04 $ 1.52 $ (0.48) -32% Add (subtract): Share-based compensation $ 0.07 $ 0.05 $ 0.02 40% $ 0.22 $ 0.16 $ 0.06 38% Income Taxes Depreciation $ 0.07 $ 0.10 $ (0.03) -30% $ 0.29 $ 0.43 $ (0.14) -33% $ 0.03 $ 0.03 $ - 0% $ 0.13 $ 0.12 $ 0.01 Interest Income/Expense $ - $ - $ - 0% $ (0.01) $ (0.01) $ - 8% 0% Adjusted EBITDA Per Share $ 0.47 $ 0.52 $ (0.05) -9% $ 1.67 $ 2.22 $ (0.55) -25% 21 Fiscal 2022 Compared to Fiscal 2021 COVID-19 We are dedicated to making every effort to ensure our customers’ pets receive the medications they need. We are also dedicated to making every effort to ensure the health and safety of our employees. We have continued with working from home where possible and enhanced disinfection and social distancing within our workplace. The Company has been open during our normal business hours without any material disruptions to our operations. We have not seen any major disruptions in our supply chain; however, we have experienced some delays in the delivery of some and related government, private sector and individual consumer responsive actions may adversely affect our business operations, employee availability, financial performance, liquidity and cash flow for an unknown period of time” in Part I, Item 1A of this Form 10-K. “The outbreak of items. See inventory factor risk the COVID-19 global pandemic Sales Sales decreased by approximately $35.8 million, or 11.6%, to $273.4 million for the fiscal year ended March 31, 2022, from approximately $309.2 million for the fiscal year ended March 31, 2021. The decrease in sales for the fiscal year ended March 31, 2022, was primarily due to decreases in reorder and new order sales. Sales for fiscal year 2022 were impacted by a much more competitive environment, and a crowded advertising market which had substantially higher advertising costs compared to the same period in the prior year. Veterinary visits increased during fiscal year 2022, compared to being down during the prior year. We believe the increase in veterinary visits was primarily due to pet owners needing to visit their veterinarian for their pets’ annual exam in order to renew their prescriptions, as many veterinarians were closed in the prior year due to the pandemic. The Company acquired approximately 263,000 new customers for the fiscal year ended March 31, 2022, compared to approximately 443,000 new customers for the same period the prior year. The following chart illustrates sales by various sales classifications: Sales (In thousands) 2022 % 2021 % $ Variance % Variance Year Ended March 31, Reorder Sales New Order Sales $ $ 250,401 23,016 91.6% 8.4% $ $ 272,648 36,567 88.2% 11.8% $ $ (22,247) (13,551) -8.2% -37.1% Total Net Sales $ 273,417 100.0% $ 309,215 100.0% $ (35,798) -11.6% Internet Sales Contact Center Sales $ $ 230,263 43,154 84.2% 15.8% $ $ 259,404 49,811 83.9% 16.1% $ $ (29,141) (6,657) -11.2% -13.4% Total Net Sales $ 273,417 100.0% $ 309,215 100.0% $ (35,798) -11.6% Going forward sales may be adversely affected due to increased competition and consumers giving more consideration to price. The changes in consumer behavior post pandemic makes future sales somewhat challenging to predict. No guarantees can be made that sales will continue to grow in the future. The majority of our product sales are affected by the seasons, due to the seasonality of mainly heartworm, and flea and tick medications. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal year 2022, the Company’s sales were approximately 29%, 25%, 22%, and 24%, respectively. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal year 2021, the Company’s sales were approximately 31%, 25%, 21%, and 23%, respectively. Cost of sales Cost of sales decreased by approximately $24.0 million, or 10.9% to $195.3 million for the fiscal year ended March 31, 2022, from $219.3 million for the fiscal year ended March 31, 2021. The cost of sales decrease can be directly related to the decrease in sales during fiscal year 2022. As a percentage of sales, cost of sales was 71.4% in fiscal year 2022, as compared to 70.9% in fiscal 2021. The cost of sales percentage increase was adversely impacted due to the major manufacturers, with whom we have a purchasing relationship, shifting their rebate funding from discounting product costs to more cooperative marketing rebates. 22 Gross profit Gross profit decreased by approximately $11.8 million, or 13.2%, to $78.1 million for the fiscal year ended March 31, 2022, from $89.9 million for the fiscal year ended March 31, 2021. The decrease in gross profit can be directly related to the decrease in sales during fiscal 2022. Gross profit as a percentage of sales for fiscal 2022 was 28.6% compared to 29.1% for fiscal 2021. The decrease in the gross profit percentage was adversely impacted due to the major manufacturers, with whom we have a purchasing relationship, shifting their rebate funding from discounting product costs to more cooperative marketing rebates. General and administrative expenses General and administrative expenses increased by approximately $2.5 million, or 9.0%, to $30.8 million for the fiscal year ended March 31, 2022, from $28.3 million for the fiscal year ended March 31, 2021. The increase in general and administrative expenses for the fiscal year ended March 31, 2022 was primarily due to the following: a $1.4 million increase in payroll expenses, the majority of which related to increased stock compensation expense; a $989,000 increase in professional fees related to brand and marketing consultation, legal, and investment banking; and a $514,000 increase in other expenses which include property expenses, travel related expense, insurance expense, and other expenses. Offsetting the increase was a decrease of $397,000 primarily related to decreased bank service fees due to the decrease in sales. General and administrative expenses as a percentage of sales was 11.3% for the fiscal year ended March 31, 2022, compared to 9.1% for the fiscal year ended March 31, 2021. The Company expects general and administrative expense as a percentage of sales to approximate 12.5% and expects stock compensation expense to approximate $6.4 million in fiscal 2023. Advertising expenses Advertising expenses decreased by approximately $2.8 million to $18.8 million for the fiscal year ended March 31, 2022, from $21.6 million for the fiscal year ended March 31, 2021. The decrease in advertising expenses for fiscal 2022 was due to the Company receiving increased cooperative marketing funds from product manufacturers to offset our advertising expenses, within the terms of our contractual relationships. Overall advertising spending was flat compared to fiscal 2021, yet total net advertising expenses decreased due to increased cooperative advertising rebates. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $72 for the fiscal year ended March 31, 2022, compared to $49 for the fiscal year ended March 31, 2021. The increase to customer acquisition costs for the fiscal year ended March 31, 2022, was due to an increase in overall advertising prices and a less efficient variable marketing spend. Advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, advertising spending, and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future sales, whereas a less favorable advertising environment may negatively impact future sales. As a percentage of sales, advertising expense was 6.9% and 7.0% for the fiscal years ended March 31, 2022, and 2021, respectively. The Company currently anticipates advertising as a percentage of sales to be approximately 7.0% for fiscal year 2023. However, the advertising percentage may fluctuate quarter to quarter due to seasonality and advertising availability. Depreciation Depreciation expense for the fiscal year ended March 31, 2022, increased to approximately $2.7 million from $2.4 million for the fiscal year ended March 31, 2021. This increase to depreciation expense for the fiscal year ended March 31, 2022, can be attributed to increased new property and equipment additions in fiscal 2022. Other income Other income decreased by approximately $268,000, to $1.4 million for the fiscal year ended March 31, 2022, from $1.6 million for the fiscal year ended March 31, 2021. The decrease was related to a reduction in advertising income in fiscal 2022. Interest income was flat compared to the prior year. Interest income may decrease in the future as the Company utilizes its cash balances on its share repurchase plan, with approximately $28.7 million remaining as of March 31, 2022, on any quarterly dividend payment, on future investment/partnerships, or on its operating activities. 23 Provision for income taxes For the fiscal years ended March 31, 2022 and 2021, the Company recorded an income tax provision of approximately $6.0 million and $8.6 million, respectively. The decrease to the income tax provision for fiscal 2022 is related to a decrease in operating income compared to fiscal 2021. The effective tax rate for the fiscal years ended March 31, 2022, and 2021 were 22.1% and 22.0%, respectively. The slight increase to the effective rate for the fiscal year ended March 31, 2022, can be attributed to the Company receiving more one-time tax benefits in fiscal 2021 than in fiscal 2022. The one-time tax benefits received in fiscal 2021 included a one-time state income tax refund of $285,000 in the June 2020 quarter and a $135,000 income tax benefit related to restricted stock compensation in the September 2020 and March 2021 quarters. This compared to a $196,000 one-time state income tax refund and a $131,000 benefit due to a state rate reduction in the March 2022 quarter. The Company estimates its effective tax rate will be approximately 23.0% for fiscal 2023. Net income Net income decreased by approximately $9.5 million, or 31%, to approximately $21.1 million for the fiscal year ended March 31, 2022, from approximately $30.6 million for the fiscal year ended March 31, 2021. The decrease to net income was primarily related to a decrease in sales and resulting gross profit, and an increase in general and administrative expenses, all partially offset by a decrease in advertising expenses, during the fiscal year. Fiscal 2021 Compared to Fiscal 2020 Sales Sales increased by approximately $25.1 million, or 8.8%, to $309.2 million for the fiscal year ended March 31, 2021, from approximately $284.1 million for the fiscal year ended March 31, 2020. The increase in sales for the fiscal year ended March 31, 2021 was primarily due to increased reorder sales and new order sales. Fiscal 2021 started out with greater than expected e-commerce demand due to COVID-19, with consumers shifting their purchases to online, which positively impacted our reorder and new order sales during the year. In the latter half of fiscal 2021, veterinarian clinics and retail stores re-opened. The Company acquired approximately 443,000 new customers for the fiscal year ended March 31, 2021, compared to approximately 421,000 new customers for the same period the prior year. The following chart illustrates sales by various sales classifications: Sales (In thousands) 2021 % 2020 % $ Variance % Variance Year Ended March 31, Reorder Sales New Order Sales $ $ 272,648 36,567 88.2% 11.8% $ $ 248,560 35,565 87.5% 12.5% $ $ 24,088 1,002 Total Net Sales $ 309,215 100.0% $ 284,125 100.0% $ 25,090 Internet Sales Contact Center Sales $ $ 259,404 49,811 83.9% 16.1% $ $ 238,054 46,071 83.8% 16.2% $ $ 21,350 3,740 Total Net Sales $ 309,215 100.0% $ 284,125 100.0% $ 25,090 9.7% 2.8% 8.8% 9.0% 8.1% 8.8% Going forward sales may be adversely affected due to increased competition and consumers giving more consideration to price. The changes in consumer behavior post pandemic makes future sales somewhat challenging to predict. No guarantees can be made that sales will continue to grow in the future. The majority of our product sales are affected by the seasons, due to the seasonality of mainly heartworm, and flea and tick medications. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2021, the Company’s sales were approximately 31%, 25%, 21%, and 23%, respectively. For the quarters ended June 30, September 30, December 31, and March 31 of fiscal 2020, the Company’s sales were approximately 28%, 25%, 21%, and 26%, respectively. Cost of sales Cost of sales increased by approximately $16.4 million, or 8.1% to $219.3 million for the fiscal year ended March 31, 2021, from $202.9 million for the fiscal year ended March 31, 2020. The cost of sales increase can be directly related to the increase in sales during fiscal 2021. As a percentage of sales, cost of sales was 70.9% in fiscal 2021, as compared to 71.4% in fiscal 2020. The cost of sales percentage decrease can be attributed to the benefit of having direct relationships with all major manufacturers, which helped reduce product costs, and these manufacturers having minimum advertised price policies. In the future, cost of sales may be adversely impacted 24 due to the major manufacturers shifting their rebate funding from discounting product costs to cooperative marketing rebates. Gross profit Gross profit increased by approximately $8.7 million, or 10.7%, to $89.9 million for the fiscal year ended March 31, 2021, from $81.2 million for the fiscal year ended March 31, 2020. The increase in gross profit can be directly related to the increase in sales during fiscal 2021. Gross profit as a percentage of sales for fiscal 2021 was 29.1% compared to 28.6% for fiscal 2020. The increase in gross profit percentage can be attributed to the benefit of having direct relationships with all major manufacturers, which helped reduce product costs, and these manufacturers having minimum advertised price policies. Going forward gross profit may be adversely affected due to increased competition and consumers giving more consideration to price. In the future, gross profit may also be adversely impacted due to the major manufacturers shifting their rebate funding from discounting product costs to cooperative marketing rebates. General and administrative expenses General and administrative expenses increased by approximately $3.0 million, or 12.0%, to $28.3 million for the fiscal year ended March 31, 2021 from $25.3 million for the fiscal year ended March 31, 2020. The increase in general and administrative expenses for the fiscal year ended March 31, 2021 was primarily due to the following: a $1.9 million increase in payroll expenses, due to increased sales and increased COVID-19 related work from home expenses, with $485,000 related to increased stock compensation expense due to the accelerated release of restrictions of the Company’s former Chairman Robert Schweitzer’s restricted stock upon his passing on February 23, 2021; a $619,000 increase in bank service fees due to increased sales; a $388,000 increase in property expenses related to the Company’s e-commerce platform; and a $207,000 increase in telephone expenses due to employees working from home in response to COVID-19. Offsetting the increase was a net decrease of $48,000 to other expenses which include insurance, professional fees, and bad debt expense. General and administrative expenses as a percentage of sales was 9.1% for the fiscal year ended March 31, 2021, compared to 8.9% for the fiscal year ended March 31, 2020. Advertising expenses Advertising expenses decreased by approximately $1.1 million to $21.6 million for the fiscal year ended March 31, 2021, from $22.7 million for the fiscal year ended March 31, 2020. The decrease in advertising expenses for fiscal 2021 was due to the Company receiving increased cooperative marketing funds from product manufacturers to offset our advertising expenses, within the terms of our contractual relationships. Overall advertising spending increased over the prior year, yet total net advertising expenses decreased due to increased cooperative advertising rebates. The advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, was $49 for the fiscal year ended March 31, 2021, compared to $54 for the fiscal year ended March 31, 2020. The decrease to customer acquisition costs for the fiscal year ended March 31, 2021 can also be attributed to receiving increased cooperative marketing funds from product manufacturers. Advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, advertising spending, and price competition. Historically, the advertising environment fluctuates due to supply and demand. A more favorable advertising environment may positively impact future sales, whereas a less favorable advertising environment may negatively impact future sales. As a percentage of sales, advertising expense was 7.0% and 8.0% for the fiscal years ended March 31, 2021 and 2020, respectively. The decrease in advertising expense as a percentage of total sales for the fiscal year ended March 31, 2021 can be attributed to a decrease in advertising expenses and an increase in sales as compared to the same period in the prior year. The Company currently anticipates advertising as a percentage of sales to be approximately 7% for fiscal 2022. However, the advertising percentage may fluctuate quarter to quarter due to seasonality and advertising availability. Depreciation Depreciation expense for the fiscal year ended March 31, 2021 increased slightly to approximately $2.4 million from $2.3 million for the fiscal year ended March 31, 2020. This increase to depreciation expense for the fiscal year ended March 31, 2021 can be attributed to increased new property and equipment additions in fiscal 2021. 25 Other income Other income decreased by approximately $1.3 million to $1.6 million for the fiscal year ended March 31, 2021, from $2.9 million for the fiscal year ended March 31, 2020. The decrease to other income was primarily related to decreased interest income due to decreased interest rates compared to the prior year. Interest income may decrease in the future as the Company utilizes its cash balances on its share repurchase plan, with approximately $28.7 million remaining at March 31, 2021, on any quarterly dividend payment, on its operating activities, or with further decreases in interest rates. Provision for income taxes For the fiscal years ended March 31, 2021 and 2020, the Company recorded an income tax provision of approximately $8.6 million and $8.0 million, respectively. The increase to the income tax provision for fiscal 2021 is related to an increase in operating income compared to fiscal 2020. The effective tax rate for the fiscal years ended March 31, 2021 and 2020 were 22.0% and 23.7%, respectively. The decrease to the effective rate for the fiscal year ended March 31, 2021 can be attributed to the Company receiving a one-time state income tax refund of $285,000 in the June 2020 quarter and a $135,000 income tax benefit related to restricted stock compensation in the September 2020 and March 2021 quarters, compared to a $322,000 income tax charge related to restricted stock compensation, which was recognized in the September 2019 quarter. The Company estimates its effective tax rate will be approximately 23.5% for fiscal 2022. Net income Net income increased by approximately $4.7 million, or 18.4%, to approximately $30.6 million for the fiscal year ended March 31, 2021 from approximately $25.9 million for the fiscal year ended March 31, 2020. The increase to net income was primarily related to an increase in gross profit, offset by an increase in operating expenses and a decrease to interest income during the fiscal year. Liquidity and Capital Resources The Company’s working capital at March 31, 2022 and 2021 was approximately $117.8 million and approximately $116.3 million, respectively. The $1.5 million increase in working capital was primarily attributable to income generated by operations and a reduction to accounts payable, offset by dividends paid in the period. Net cash provided by operating activities was $18.5 million and $40.1 million for the fiscal years ended March 31, 2022 and 2021, respectively. This change can be mainly attributed to a decrease in the Company’s net income for the fiscal year ended March 31, 2022 and a decrease to accounts payable compared to the prior year. Net cash used in investing activities was $1.8 million and $2.4 million for the fiscal years ended March 31, 2022 and 2021, respectively. This change in investing activities is related to decreased property and equipment additions acquired in fiscal 2022. Net cash used in financing activities was $24.4 million and $22.7 million for the fiscal years ended March 31, 2022 and 2021, respectively. The increase to financing activities relates to an increase in the dividend paid in fiscal 2022, compared to the dividend paid in fiscal 2021. At March 31, 2022, the Company had approximately $28.7 million remaining under the Company’s share repurchase plan. Subsequent to March 31, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.30 per share on May 9, 2022. The Board established a May 20, 2022 record date and a May 27, 2022 payment date. Depending on future market conditions the Company may utilize its cash and cash equivalents on the remaining balance of its current share repurchase plan, on quarterly dividends, or on its operating activities. At March 31, 2022 the Company had no material outstanding lease commitments. We are not currently bound by any long- or short-term agreements for the purchase or lease of capital expenditures. Any material amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately provide for any future increase in our business. To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future. Presently, we have approximately $5.0 million forecasted for capital expenditures in fiscal 2023, 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. Recent Accounting Pronouncements 26 Recent Accounting Pronouncements Other than disclosures included in Note 1 of the Consolidated Financial Statements, which are incorporated by reference as if fully set forth herein, the Company does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on the Company’s consolidated financial position, results of operations, or cash flows. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk generally represents the risk that losses may occur in the value of financial instruments as a result of movements in interest rates, foreign currency exchange rates, and commodity prices. Our financial instruments include cash and cash equivalents, accounts receivable, and accounts payable. The book values of cash equivalents, accounts receivable, and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. Interest rates affect our return on excess cash and cash equivalents. At March 31, 2022, we had $111.1 million in cash and cash equivalents, primarily money market accounts. A majority of our cash and cash equivalents generates interest income based on prevailing interest rates. A significant change in interest rates could impact the amount of interest income generated from our excess cash and cash equivalents. It would also impact the market value of our cash and cash equivalents. Our cash and cash equivalents are subject to market risk, primarily interest rate and credit risk. Our investments are managed by a limited number of outside professional managers within investment guidelines set by our Board of Directors. Such guidelines include security type, credit quality, and maturity, and are intended to limit market risk by restricting our investments to high-quality debt instruments with both short- and long-term maturities. We do not hold any derivative financial instruments that could expose us to significant market risk. At March 31, 2022, we had no debt obligations. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PETMED EXPRESS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID:49) Consolidated Balance Sheets as of March 31, 2022 and 2021 Consolidated Statements of Income for each of the three years in the period ended March 31, 2022 Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in the period ended March 31, 2022 Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2022 Notes to Consolidated Financial Statements Report of Management on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Page 29 30 31 32 33 34 46 47 28 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of PetMed Express, Inc. and subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of PetMed Express, Inc. and its subsidiaries (the Company) as of March 31, 2022 and 2021, the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2022, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022 and 2021, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2022, 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, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (i) relate to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ RSM US LLP We have served as the Company’s auditor since 2007. Fort Lauderdale, Florida May 24, 2022 29 PETMED EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except for per share amounts) ASSETS Current assets: Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $39 and $39, respectively Inventories - finished goods Prepaid expenses and other current assets Prepaid income taxes Total current assets Noncurrent assets: Property and equipment, net Intangible assets Total noncurrent assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable Accrued expenses and other current liabilities Total current liabilities Deferred tax liabilities 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; 20,979 and 20,269 shares issued and outstanding, respectively Additional paid-in capital Retained earnings Total shareholders' equity March 31, 2022 March 31, 2021 $ 111,080 $ 118,718 $ $ 1,913 32,455 4,866 681 2,587 34,420 4,503 959 150,995 161,187 24,464 860 25,324 25,450 860 26,310 176,319 $ 187,497 27,500 5,697 $ 33,197 936 34,133 9 21 11,660 130,496 142,186 39,548 5,387 44,935 1,281 46,216 9 20 7,111 134,141 141,281 Total liabilities and shareholders' equity $ 176,319 $ 187,497 See accompanying notes to consolidated financial statements. 30 PETMED EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except for per share amounts) Sales Cost of sales Gross profit Operating expenses: General and administrative Advertising Depreciation Total operating expenses Income from operations Other income (expense): Interest income, net Other, net Total other income 2022 Year Ended March 31, 2021 2020 $ 273,417 $ 195,341 309,215 $ 219,267 284,125 202,879 78,076 89,948 81,246 30,829 18,799 2,738 52,366 25,710 335 1,026 1,361 28,293 21,641 2,427 52,361 37,587 314 1,315 1,629 25,264 22,748 2,257 50,269 30,977 1,747 1,169 2,916 Income before provision for income taxes 27,071 39,216 33,893 Provision for income taxes 5,971 8,613 8,042 Net income Net income per common share: Basic Diluted Weighted average number of common shares outstanding: Basic Diluted Cash dividends declared per common share $ $ $ $ 21,100 $ 30,603 $ 25,851 1.05 $ 1.04 $ 1.53 $ 1.52 $ 1.29 1.29 20,176 20,358 20,060 20,119 20,041 20,055 1.20 $ 1.12 $ 1.08 See accompanying notes to consolidated financial statements. 31 PETMED EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended March 31, 2020, March 31, 2021, and March 31, 2022 (In thousands) Convertible Preferred Stock Common Stock Shares Amounts Shares Amounts Additional Paid-In Capital Retained Earnings Total Balance, March 31, 2019 3 9 20,674 21 12,478 122,172 134,680 Issuance of restricted stock, net Share based compensation Repurchased and retired shares Dividends declared Net income Balance, March 31, 2020 Issuance of restricted stock, net Share based compensation Dividends declared Net income Balance, March 31, 2021 Issuance of restricted stock, net Share based compensation Dividends declared Net income - - - - - - - - - - - - - 3 3 - - - - - - - - - - - - - 105 - (613) - - - - - - - 2,822 (1) (11,496) - - - - 2,822 (11,497) - - (21,846) (21,846) 25,851 25,851 9 20,166 20 3,804 126,177 130,010 103 - - - 9 20,269 710 - - - - - - - 20 1 - - - - 3,307 - - - - - 3,307 (22,639) (22,639) 30,603 30,603 7,111 134,141 141,281 - 4,549 - - - - 1 4,549 (24,745) (24,745) 21,100 21,100 Balance, March 31, 2022 3 $ 9 20,979 $ 21 $ 11,660 $ 130,496 $ 142,186 See accompanying notes to consolidated financial statements. 32 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 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: Purchases of property and equipment Net cash used in investing activities Cash flows from financing activities: Dividends paid Repurchase and retirement of common stock Net cash used in financing activities Year Ended March 31, 2021 2020 2022 $ 21,100 $ 30,603 $ 25,851 2,738 4,549 (345) 165 509 1,965 278 (363) (12,048) (50) - 18,498 2,427 3,307 311 130 1,126 (16,536) (959) (974) 19,890 1,221 (471) 40,075 (1,752) (1,752) (2,432) (2,432) 2,257 2,822 (151) 191 (1,492) 3,486 582 (376) 3,383 1,820 471 38,844 (2,311) (2,311) (24,384) - (24,384) (22,687) - (22,687) (21,803) (11,497) (33,300) Net (decrease) increase in cash and cash equivalents (7,638) 14,956 3,233 Cash and cash equivalents, at beginning of year 118,718 103,762 100,529 Cash and cash equivalents, at end of year Supplemental disclosure of cash flow information: Cash paid for income taxes Property and equipment in current assets Dividends payable in accrued expenses $ $ $ $ 111,080 $ 118,718 $ 103,762 6,085 $ 10,018 $ 7,140 - $ - $ 1,745 558 $ 198 $ 246 See accompanying notes to consolidated financial statements. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Organization PetMed Express, Inc. and subsidiaries, d/b/a PetMeds® (the “Company”), is a leading nationwide pet pharmacy. The Company markets prescription and non-prescription pet medications, health products, and supplies for dogs, cats, and horses, direct to the consumer. The Company markets its products through national advertising campaigns, which aim to increase the recognition of the “1-800-PetMeds” brand name and “PetMeds” family of trademarks, increase traffic on its website at www.petmeds.com, acquire new customers, and maximize repeat purchases. Virtually all of the Company's sales are to residents in the United States. The Company’s corporate headquarters and distribution facility are located in Delray Beach, Florida. The Company's fiscal year end is March 31, and references herein to fiscal 2022, 2021, or 2020 refer to the Company's fiscal years ended March 31, 2022, 2021, and 2020, respectively. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Revenue Recognition The Company generates revenue by selling pet medication products and pet supplies. Certain pet supplies offered on the Company’s website are drop shipped to customers. The Company considers itself the principal in the arrangement because the Company controls the specified good before it is transferred to the customer. Revenue contracts contain one performance obligation, which is delivery of the product; customer care and support is deemed not to be a material right to the contract. The transaction price is adjusted at the date of sale for any applicable sales discounts and an estimate of product returns, which are estimated based on historical patterns; however, this is not considered a key judgment. There are no amounts excluded from variable consideration. Revenue is recognized when control transfers to the customer at the point in time in which shipment of the product occurs. This key judgment is determined as the shipping point represents the point in time in which the Company has a present right to payment, title has transferred to the customer, and the customer has assumed the risks and rewards of ownership. Outbound shipping and handling fees are an accounting policy election and are included in sales as the Company considers itself the principal in the arrangement given responsibility for supplier selection and discretion over pricing. Shipping costs associated with outbound freight after control over a product has transferred to a customer are an accounting policy election and are accounted for as fulfillment costs and are included in cost of sales. The Company disaggregates revenue in the following two categories: (1) reorder sales vs new order sales, and (2) internet sales vs contact center sales. The following table illustrates s by various classifications: Sales (In thousands) 2022 % 2021 % $ Variance % Variance Year Ended March 31, Reorder Sales New Order Sales $ $ 250,401 23,016 91.6% 8.4% $ $ 272,648 36,567 88.2% 11.8% $ $ (22,247) (13,551) -8.2% -37.1% Total Net Sales $ 273,417 100.0% $ 309,215 100.0% $ (35,798) -11.6% Internet Sales Contact Center Sales $ $ 230,263 43,154 84.2% 15.8% $ $ 259,404 49,811 83.9% 16.1% $ $ (29,141) (6,657) -11.2% -13.4% Total Net Sales $ 273,417 100.0% $ 309,215 100.0% $ (35,798) -11.6% 34 (1) Summary of Significant Accounting Policies (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sales (In thousands) 2021 % 2020 % $ Variance % Variance Year Ended March 31, Reorder Sales New Order Sales $ $ 272,648 36,567 88.2% 11.8% $ $ 248,560 35,565 87.5% 12.5% $ $ 24,088 1,002 Total Net Sales $ 309,215 100.0% $ 284,125 100.0% $ 25,090 Internet Sales Contact Center Sales $ $ 259,404 49,811 83.9% 16.1% $ $ 238,054 46,071 83.8% 16.2% $ $ 21,350 3,740 Total Net Sales $ 309,215 100.0% $ 284,125 100.0% $ 25,090 9.7% 2.8% 8.8% 9.0% 8.1% 8.8% Virtually all of the Company’s sales are paid by credit cards and the Company usually receives the cash settlement in two to three banking days. Credit card sales minimize accounts receivable balances relative to sales. The Company had no material contract asset or liability balances as of March 31, 2022 and 2021. 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 chargebacks or insufficient funds checks. The Company determines its estimates of the un-collectability of accounts receivable by analyzing historical bad debts and current economic trends. The allowance for doubtful accounts was approximately $39,000 at March 31, 2022 and March 31, 2021. 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, 2022 and 2021 consisted of the Company’s cash accounts and money market accounts with a maturity of three months or less. The carrying amount of cash equivalents approximates fair value. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories Inventories consist of prescription and non-prescription pet medications and pet supplies that are available for sale and are priced at the lower of cost or net realizable value using a weighted average cost method. The Company writes down its inventory for estimated obsolescence. The inventory reserve was approximately $81,000 and $86,000 at March 31, 2022 and 2021, respectively. Property and Equipment Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Our building is being depreciated over a period of thirty years. The furniture, fixtures, equipment, and computer software are being depreciated over periods ranging from three to ten years. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies (Continued) Long-lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of the asset to the undiscounted cash flows expected to be generated from the asset. Intangible Assets The intangible assets consist of a toll-free telephone number and an internet domain name. In accordance with the Accounting Standards Codification (“ASC”) Topic 350 (“Goodwill and Other Intangible Assets”) the intangible assets are not being amortized and are subject to an annual review for impairment. Fair Value of Financial Instruments The carrying amounts of the Company's cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these instruments. Advertising The Company's advertising expense consists primarily of Internet marketing, direct mail/print, and television advertising. Internet costs are expensed in the month incurred and direct mail/print advertising costs are expensed when the related catalogs, brochures, and postcards are produced, distributed, or superseded. Television advertising costs are expensed as the advertisements are televised. Comprehensive Income The Company applies ASC Topic 220 (“Reporting Comprehensive Income”) which requires that all items that are recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The items of other comprehensive income that are typically required to be displayed are foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. For the fiscal years ended March 31, 2022, 2021 and 2020 the Company had no unrealized gains or losses. Income Taxes The Company accounts for income taxes under the provisions of ASC Topic 740 (“Accounting for Income Taxes”) which generally requires the recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting carrying values and the tax bases of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. As required by “Accounting for Uncertainty in Income Taxes” guidance, which clarifies ASC Topic 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the Consolidated Financial Statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applies “Accounting for Uncertainty in Income Taxes” guidance to all tax positions for which the statute of limitations remains open. The Company files tax returns in the U.S. federal jurisdiction and Florida and Arizona. 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, 2019, or earlier. Any interest and penalties related to income taxes will be recorded to other income (expenses). 36 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 five suppliers from which we purchased approximately 80% of all products in fiscal 2022 and 2021. Accounting for Share Based Compensation The Company records compensation expense associated with restricted stock in accordance with ASC Topic 718 (“Share Based Payment”). The compensation expense related to all of the Company’s stock- based compensation arrangements is recorded as a component of general and administrative expenses. Recent Accounting Pronouncements In March 2020, the Financial Accounting Standards Board issued ASU 2020-03, “Codification Improvements to Financial Instruments” (“ASU 2020-03”). ASU 2020-03 improves and clarifies various financial instruments topics. ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The Company will adopt ASU 2020-03 on April 1, 2022. The Company does not expect the adoption of this new standard to have a material impact on our consolidated financial statements. The Company does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on the Company’s consolidated financial position, results of operations, or cash flows. (2) Property and Equipment Major classifications of property and equipment consist of the following (in thousands): Building Land Building Improvements Computer Software Furniture, fixtures and equipment Less: accumulated depreciation Property and equipment, net March 31, 2022 2021 $ 14,997 $ 3,700 2,834 5,512 9,106 36,149 (11,685) 14,997 3,700 2,834 5,621 8,626 35,778 (10,328) $ 24,464 $ 25,450 (3) Valuation and Qualifying Accounts Activity in the Company's valuation and qualifying accounts consists of the following (in thousands): Year Ended March 31, 2021 2022 2020 Allowance for doubtful accounts: Balance at beginning of period Provision for doubtful accounts Write-off of uncollectible accounts receivable Balance at end of year $ $ 39 $ 59 $ 165 (165) 130 (150) 39 $ 39 $ 39 191 (171) 59 37 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 merchandise credits / reward program Accrued professional expenses Accrued sales return allowance Accrued dividends payable Accrued real estate taxes Other accrued liabilities Accrued expenses and other current liabilities $ March 31, 2022 2021 1,106 $ 428 1,134 1,623 459 190 558 111 88 5,697 $ 1,063 456 1,525 1,413 290 220 198 114 108 5,387 (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): March 31, 2022 2021 Deferred tax assets: Accrued expenses Deferred stock compensation Bad debt and inventory reserves Total deferred tax assets Deferred tax liabilities: Property and equipment $ 364 $ 662 27 1,053 (1,989) Total net deferred tax liabilities $ (936) $ At March 31, 2022, the Company had no federal net operating loss carryforwards. The components of the income tax provision consist of the following (in thousands): 406 321 29 756 (2,037) (1,281) Current taxes Federal State Total current taxes Deferred taxes Federal State Total deferred taxes 2022 Year Ended March 31, 2021 2020 $ 5,801 $ 515 6,316 7,446 $ 856 8,302 (317) (28) (345) 279 32 311 7,352 841 8,193 (135) (16) (151) Total provision for income taxes $ 5,971 $ 8,613 $ 8,042 38 (5) Income Taxes (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The reconciliation of income tax provision computed at the U.S. federal statutory tax rates to income tax expense is as follows (in thousands): Year Ended March 31, 2021 2022 2020 Income taxes at U.S. statutory rates State income taxes, net of federal tax benefit Restricted stock (windfall) shortfall adjustment Other Total provision for income taxes $ $ 5,685 $ 379 33 (126) 8,235 $ 708 (135) (195) 7,118 649 322 (47) 5,971 $ 8,613 $ 8,042 In fiscal 2022 the Company recognized a stock compensation shortfall charge of approximately $33,000 and recognized a one-time charge of approximately $29,000 related to a return to provision true up of the fiscal 2021 income tax provision. In fiscal 2021 the Company recognized a stock compensation windfall benefit of approximately $135,000, and recognized a one-time benefit of approximately $194,000, related to a return to provision true up of the fiscal 2020 income tax provision. In fiscal 2020 the Company recognized a stock compensation shortfall charge of approximately $322,000, and recognized a one-time benefit of approximately $93,000, related to a return to provision true up of the fiscal 2019 income tax provision. (6) Shareholders’ Equity Preferred Stock In April 1998, the Company issued 250,000 shares of its $.001 par value preferred stock at a price of $4.00 per share, less issuance costs of $112,187. Each share of the preferred stock is convertible into approximately 4.05 shares of common stock at the election of the shareholder. The shares have a liquidation value of $4.00 per share and may pay dividends at the sole discretion of the Company. The Company does not anticipate paying dividends to the preferred shareholders in the foreseeable future. Each share of preferred stock is entitled to one vote on all matters submitted to a vote of shareholders of the Company. At March 31, 2022 and 2021, 2,500 shares of the convertible preferred stock remained unconverted and outstanding. Share Repurchase Plan On November 8, 2006, the Company's Board of Directors approved a share repurchase plan of up to $20.0 million. On October 31, 2008, November 1, 2010, and August 1, 2011, the Company’s Board of Directors approved an increase under the repurchase plan each for an additional $20.0 million. On January 25, 2019, the Company’s Board of Directors authorized an additional $30.0 million under the repurchase plan. The repurchase plan is intended to be implemented through purchases made from time to time in either the open market or through private transactions at the Company's discretion, subject to market conditions and other factors, in accordance with Securities and Exchange Commission requirements. There can be no assurances as to the precise number of shares that will be repurchased under the share repurchase plan, and the Company may discontinue the share repurchase plan at any time subject to compliance with applicable regulatory requirements. Shares purchased pursuant to the share repurchase plan will either be retired or held in the Company's treasury. During fiscal 2020 the Company purchased and retired approximately 613,000 shares of its common stock for approximately $11.5 million. During fiscal 2022 and 2021 the Company had no share repurchases. At March 31, 2022 the Company had approximately $28.7 million remaining under the Company’s share repurchase plan. Dividends On May 3, 2021, the Company’s Board of Directors increased the quarterly dividend to $0.30 per share, on its common stock. The Company intends to continue to pay regular quarterly dividends; however, the declaration and payment of future dividends is discretionary and will be subject to a determination by the Board of Directors each quarter following its review of the Company’s financial performance. During fiscal 2022, our Board of Directors declared the following dividends: 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) Shareholders’ Equity (Continued) Declaration Date May 3, 2021 July 26, 2021 October 25, 2021 January 24, 2022 Per Share Dividend $0.30 $0.30 $0.30 $0.30 Record Date May 14, 2021 August 6, 2021 November 8, 2021 February 7, 2022 Total Amount (In thousands) $6,081 $6,102 $6,283 $6,294 Payment Date May 21, 2021 August 13, 2021 November 19, 2021 February 18, 2022 (7) Restricted Stock In July 2015, the Company’s 2015 Outside Director Equity Compensation Restricted Stock Plan (“2015 Director Plan”) became effective upon the approval of the plan by the Company’s Shareholders. The 2015 Director Plan authorizes 400,000 shares of the Company's common stock available for issuance under the plan and provides for an automatic increase every year in the amount of shares available for issuance under the plan of 10% of the shares authorized under the plan. In July 2016, the Company’s 2016 Employee Equity Compensation Restricted Stock Plan (“2016 Employee Plan”) became effective upon the approval of the plan by the Company’s Shareholders. The 2016 Employee Plan authorizes 1,000,000 shares of the Company's Common stock available for issuance under the plan. The value of the restricted stock is determined based on the market value of the stock at the issuance date. The restriction period or forfeiture period is determined by the Company’s Board and is to be no less than 1 year and no more than ten years unless otherwise specified by the Board of Directors. At March 31, 2022, the Company had 893,258 restricted common shares issued under the 2016 Employee Plan and 208,880 restricted common shares issued under the 2015 Director Plan. The majority of shares were issued subject to a restriction and forfeiture period which lapses ratably on the first, second, and third anniversaries of the date of grant, and the fair value of which is being amortized over a one to three-year restriction period. For the fiscal years ended March 31, 2022, 2021, and 2020, the Company recognized compensation expense related to the Employee and Director Plans of $4.5 million, $3.3 million, and $2.8 million, respectively. A summary of the Company’s non-vested restricted stock at March 31, 2022 is as follows (in thousands): Non-vested restricted stock outstanding at March 31, 2021 Restricted stock granted Restricted stock vested Restricted stock forfeited or expired Non-vested restricted stock outstanding at March 31, 2022 Employee Plan Number of Shares Director Plan Number of Shares Both Plans Number of Shares 98 676 (69) (3) 702 62 44 (30) (7) 69 160 720 (99) (10) 771 At March 31, 2022 and 2021, there were 770,652 and 160,117, restricted shares subject to restriction and forfeiture outstanding, respectively. During the fiscal years ended March 31, 2022 and 2021, the Company issued, net of forfeitures, 709,599 and 102,931 restricted shares, respectively. At March 31, 2022 and 2021, there were $13.4 million and $2.5 million of unrecognized compensation costs related to the restricted stock subject to restriction and forfeiture awards, respectively, which is expected to be recognized over the remaining weighted average restriction and forfeiture period of 2.3 and 1.8 years for fiscal 2022 and 2021, respectively. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) 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: 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 are classified within Level 1. At March 31, 2022 and 2021 the Company had invested the majority of its cash and cash equivalents balance in money market funds (level 1). (9) 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): Net income (numerator): Net income 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: Year Ended March 31, 2021 2022 2020 $ 21,100 $ 30,603 $ 25,851 20,176 20,060 20,041 172 10 20,358 49 10 20,119 4 10 20,055 Basic Diluted $ $ 1.05 1.04 $ $ 1.53 1.52 $ $ 1.29 1.29 At March 31, 2022, 2021, and 2020, 220,727, 20,952, and 72,120 shares of common restricted stock, respectively, were excluded from the computations of diluted net income per common share, as their inclusion would have had an anti-dilutive effect on diluted net income per common share. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) 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. Operating Leases Upon acquisition of the Delray Beach property in January 2016, 48% of the property, approximately 88,000 square feet of the property was leased to two tenants. At March 31, 2022, the leases with these two tenants had a remaining weighted average lease term of 3.0 years. The Company recorded approximately $689,000 and $670,000 in rental revenue in fiscal 2022 and 2021, respectively, which was included in other income. The Company expects to receive the following future lease payments, under the current lease agreements, over the next five years: $710,000 in fiscal 2023; $731,000 in fiscal 2024, $566,000 in fiscal 2025, and $110,000 in fiscal 2026. Employment Agreements On July 12, 2019, the Company entered into Amendment No. 7 , with Menderes Akdag (“Mr. Akdag”), former CEO & President and Director, providing that in the event that a Change in Control (as was thereinafter defined) of the Company was to occur at any time, Mr. Akdag would have the right to terminate his employment for “Good Reason,” (as was thereinafter defined) upon thirty (30) days written notice given at any time within one (1) year after the occurrence of such event, and upon such termination Mr. Akdag would be entitled to a one-time payment of two times his salary as of the date of such termination. On July 31, 2020, the Company entered into Amendment No. 8 which extended Mr. Akdag’s contract for an additional year at an annual rate of $626,860 and granted Mr. Akdag 37,800 restricted shares, which were subject to restriction and forfeiture until July 31, 2021, in accordance with the parameters of his executive compensation plan. On May 28, 2021, the Board of Directors notified Mr. Akdag that the Company would not extend Mr. Akdag’s employment agreement with the Company, and the employment agreement would therefore end on July 30, 2021, in accordance with the scheduled end date of the agreement. Effective July 31, 2021, the Board of Directors appointed Bruce S. Rosenbloom (“Mr. Rosenbloom”), the Company’s Chief Financial Officer, as Interim Chief Executive Officer and President of the Company, until a permanent successor chief executive officer was appointed. Mr. Rosenbloom received an additional cash stipend of $10,000 for the additional responsibilities while serving as Interim Chief Executive Officer and President, which ended on August 30, 2021. On June 11, 2021, the Company and Mr. Akdag, entered into a CEO Separation Agreement and General Release setting forth certain matters relating to the expiration of Mr. Akdag’s employment with the Company (the “Separation Agreement”). The Separation Agreement provided that Mr. Akdag’s employment with the Company, and service as an officer and director of the Company, would terminate as of July 30, 2021. The Separation Agreement also documented Mr. Akdag’s agreement that, during his remaining period of employment through July 30, 2021, he would continue to provide his fulltime and attention to the business affairs of the Company and cooperate with the Company’s Board of Directors on the transition to a new chief executive officer. The Separation Agreement provided that Mr. Akdag would be paid two lump-sum severance payments of $325,000 each, with the first such payment to be paid, and was paid, on August 10, 2021, and the second to be paid, and was paid, on December 31, 2021, subject to his compliance with the terms and conditions of his then existing employment agreement, and the Separation Agreement. In exchange for the Company’s agreement to make the severance payments, Mr. Akdag granted the Company a full release of any and all claims that he may have against the Company and its affiliates and related parties. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) Commitments and Contingencies (Continued) In addition, as a part of the Separation Agreement, the Company confirmed that the 37,800 restricted shares held by Mr. Akdag will be, and were, released from restriction and forfeiture on July 31, 2021, and that the Company would, and did, cover the tax withholding obligations in connection with such release of shares from restriction and forfeiture. Under the Separation Agreement, Mr. Akdag agreed that he would continue to comply with his existing confidentiality, non-solicitation, and non-compete obligations, and he further agreed that until July 31, 2022, he would comply with certain “standstill” covenants relating to the Company. On August 25, 2021, the Board of Directors appointed Mathew N. Hulett (Mr. Hulett”) as Chief Executive Officer and President of the Company and as a member of the Board of Directors. These appointments were effective as of August 30, 2021. On August 25, 2021, the Company entered into an employment agreement with Mr. Hulett to serve as the Company’s Chief Executive Officer and President. The employment agreement is for an initial term of three (3) years commencing on August 30, 2021 and will automatically renew for successive one (1) year terms, or for longer periods as mutually agreed upon by the parties, unless the employment agreement is expressly cancelled by either Mr. Hulett or the Company sixty (60) days prior to the end of the then current term, or is otherwise terminated as provided in the agreement. The employment agreement provides that Mr. Hulett will receive an annual base salary of $500,000, subject to periodic review for increases with the approval of the Board of Directors, and will be eligible to participate in the standard employee benefit plans generally available to executives and employees of the Company, including health insurance, life and disability insurance, restricted stock under the Company’s equity compensation plan(s), 401(k) plan, and paid time off and paid holidays. The employment agreement also provides that the Company will reimburse Mr. Hulett for his documented business expenses incurred in connection with his employment pursuant to the Company's standard reimbursement expense policy and practices. The employment agreement contains certain rights of Mr. Hulett and the Company to terminate Mr. Hulett’s employment, including termination by the Company for “Cause” as defined in the employment agreement, and termination by Mr. Hulett for “Good Reason” as defined in the employment agreement within twelve (12) months of a Change in Control as defined in the employment agreement. Mr. Hulett is also entitled to severance pay equal to twelve (12) months of Mr. Hulett’s current base salary and eighteen (18) months of health insurance benefits in the event of his termination by the Company without Cause, or termination by Mr. Hulett for Good Reason within twelve (12) months of a Change in Control. The foregoing severance benefits are conditioned upon Mr. Hulett’s execution of a release of claims and compliance with certain restrictive covenants. The employment agreement contains customary non-disclosure and non- solicitation provisions as well as a one (1) year non-compete following the termination of the agreement. On August 30, 2021, Mr. Hulett also received an award of 90,000 shares of restricted stock under the Company’s 2016 Employee Plan, which stock restrictions will lapse pro rata on each of August 30, 2022, August 30, 2023, and August 30, 2024, which are subject to forfeiture in the event of termination of employment (except as provided in the restricted stock agreement). Mr. Hulett also received an award of 510,000 shares of performance restricted stock under the 2016 Employee Plan, which stock restrictions will lapse on the third anniversary of the date of grant based on (i) achieving absolute stock price hurdles within the three-year period from the date of grant, and (ii) continued employment through the performance period of three years from the date of grant, in accordance with the following schedule: 85,000 shares at the stock hurdle price of $40 per share, 107,000 shares at the stock hurdle price of $45 per share, 106,000 shares at the stock hurdle price of $50, 106,000 shares at the stock hurdle price of $55, and 106,000 shares at the stock hurdle price of $60. Should none of the absolute stock price hurdles be met during the three-year period from the date of grant no shares would vest (as defined in the performance restricted stock agreement). Once the absolute stock price hurdle is achieved, it will be considered to have met the absolute stock price hurdle, regardless of the stock price on the third anniversary of the date of grant. The absolute stock price hurdle would be considered to have been met if the average closing stock price of the Company is at or above the absolute stock price hurdle for a period of ninety (90) consecutive trading days. If the shares would be considered to have met the absolute stock price hurdle, they will only vest on the third anniversary of date of grant, subject to Mr. Hulett’s continued employment through the performance period of three years from the date of grant (except as provided in the performance restricted stock agreement). As of March 31, 2022, none of the performance restricted stock vested, as no performance stock price hurdles were met. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) 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 approved a matching contribution which is funded subsequent to the calendar year. During the fiscal years ended March 31, 2022, 2021, and 2020, the Company charged $238,000, $245,000, and $211,000, respectively, of 401(k) matching contribution and administration expense to general and administrative expenses. (12) COVID-19 On March 11, 2020, the World Health Organization declared that the novel coronavirus (COVID-19) had become a pandemic, and on March 13, 2020, the U.S. President declared a National Emergency concerning the disease. Additionally, in March 2020, state governments in the Company’s geographic operating area began instituting preventative shut down measures in order to combat the novel coronavirus pandemic. The coronavirus and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of the geographical area in which the Company operates. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to amongst other provisions, provide emergency assistance for individuals, families and businesses affected by the novel coronavirus pandemic. The Company’s business being deemed essential resulted in incremental financial performance that may not be indicative of future financial results and there remains uncertainty and increased risks concerning its employees, customers, supply chain and government regulation. During fiscal 2022, the Company has been open during our normal business hours without any material disruptions to our operations. We have not seen any major disruptions in our supply chain; however, we have experienced some delays in the delivery of some inventory items. We are dedicated to making every effort to ensure our customers’ pets receive the medications they need. We are also dedicated to making every effort to ensure the health and safety of our employees. We have continued with working from home where possible and enhanced disinfection and social distancing within our workplace. (13) Subsequent Events Subsequent to March 31, 2022 the Company issued 7,450 restricted shares to certain employees of the Company under the 2016 Employee Plan, with a fair value of $23.50 per share. In April 2022, the Company issued 1,875 restricted shares to Diana Garvis Purcell, a newly appointed director on our Board of Directors, with a fair value of $25.53 per share. In connection with Ms. Purcel’s appointment on the Board, the Board voted to increase the size of the Board by one director to seven persons effective April 4, 2022. On April 19, 2022, the Company engaged in a three-year partnership agreement with Vetster Inc. (“Vetster”), a veterinary telehealth Canadian company. The Company also purchased a 5% minority interest in Vetster in the amount of $5.0 million The Company also received warrants for additional equity in Vetster, which are tied to future performance milestones. Under the terms of the agreement, the Company becomes the exclusive e-commerce provider for Vetster, and Vetster becomes the exclusive provider of telehealth and telemedicine services to the Company. On May 9, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.30 per share on its common stock. The $6.3 million dividend will be payable on May 27, 2022, to shareholders of record at the close of business on May 20, 2022. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (14) Related Party Transaction The Company’s Board of Directors Chairman, Gian Fulgoni, serves on the board of directors of Prophet, a brand and marketing consulting company, which PetMed Express, Inc. engaged with in March 2021 for $292,000. The Company expensed $32,000 in fiscal 2021, with the remaining $260,000 expensed in fiscal 2022. This transaction was approved by the Company’s Board of Directors with terms that are comparable to those with an unrelated third party. (15) Quarterly Financial Data (Unaudited) Summarized unaudited quarterly financial data for fiscal 2022 and 2021 is as follows (in thousands, except for per share amounts): Quarter Ended: June 30, 2021 September 30, 2021 December 31, 2021 March 31, 2022 Sales Gross Profit Income from operations Net income Diluted net income per common share $ $ $ $ $ 79,312 21,780 5,419 4,428 0.22 $ $ $ $ $ 67,386 19,174 8,087 6,349 0.31 $ $ $ $ $ 60,717 17,725 5,147 4,257 0.21 $ $ $ $ $ 66,002 19,397 7,057 6,066 0.30 Quarter Ended: June 30, 2020 September 30, 2020 December 31, 2020 March 31, 2021 Sales Gross Profit Income from operations Net income Diluted net income per common share $ $ $ $ $ 96,204 26,785 9,436 7,768 0.39 $ $ $ $ $ 75,436 23,018 10,471 8,412 0.42 $ $ $ $ $ 65,896 19,623 9,293 7,611 0.38 $ $ $ $ $ 71,679 20,522 8,387 6,812 0.34 45 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. Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2022. 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 - 2013. Based on our assessment, management believes that the Company maintained effective internal control over financial reporting as of March 31, 2022. 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/ Mathew N. Hulett Mathew N. Hulett President, Chief Executive Officer, Director May 24, 2022 /s/ Bruce S. Rosenbloom Bruce S. Rosenbloom Chief Financial Officer May 24, 2022 46 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of PetMed Express, Inc. and subsidiaries Opinion on the Internal Control Over Financial Reporting We have audited PetMed Express, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the In our opinion, the Company Committee of Sponsoring Organizations of the Treadway Commission in 2013. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2022, 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) (PCAOB), the consolidated financial statements of the Company and our report dated May 24, 2022 expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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. Definition and Limitations of Internal Control Over Financial Reporting 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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. /s/ RSM US LLP Fort Lauderdale, Florida May 24, 2022 47 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 Exchange Act) as of March 31, 2022, 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 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, 2022 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, 2022, as stated in our report which is included herein. Our internal control over financial reporting as of March 31, 2022 has been audited by RSM US LLP, an independent registered public accounting firm, as stated in their report which is contained in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. 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, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION Not applicable. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS None. 48 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, 2022, relating to our 2022 Annual Meeting of Stockholders to be held on July 28, 2022, 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 is available on our website at www.petmeds.com under “About Us - Corporate Governance”. You may also obtain a copy of our Corporate 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, 2022, relating to our 2022 Annual Meeting of Stockholders to be held on July 28, 2022, 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, 2022, relating to our 2022 Annual Meeting of Stockholders to be held on July 28, 2022, 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, 2021, relating to our 2021 Annual Meeting of Stockholders to be held on July 28, 2022, 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, 2022, relating to our 2022 Annual Meeting of Stockholders to be held on July 28, 2022, and is incorporated herein by reference. 49 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this Annual Report on Form 10-K. (1) Consolidated Financial Statements – See the Index to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. The following exhibits are filed as part of this Annual Report on Form 10-K or hereby incorporated by reference to exhibits previously filed with the SEC. (3) Articles of Incorporation and By-Laws 3.1 3.2 3.4 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, filed May 22, 2015). Second Amended and Restated By-Laws of PetMed Express, Inc. (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K, filed March 26, 2020). (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). Description of Securities.* 4.2 (10) Material Contracts 10.1+ 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). 10.2+ 2015 Outside Director Equity Compensation Restricted Stock Plan (incorporated by reference to Exhibit B of our definitive Proxy Statement for our 2015 Annual Meeting of Stockholders filed June 8, 2015). 10.2.1 Form of Restricted Stock Agreement used for grants of restricted stock under the 2015 Outside Director Equity Compensation Restricted Stock Plan (incorporated by reference to Exhibit 10.10.1 of the Registrant’s Form 10-K for the year ended March 31, 2017 filed May 23, 2017). 10.3 Agreement of Purchase and Sale [420 South Congress Avenue] (incorporated by reference to Exhibit 10.11 of the Registrant’s Form 10-Q for the quarter ended December 31, 2015, filed February 2, 2016). 10.4+ 2016 Employee Equity Compensation Restricted Stock Plan, including form of Restricted Stock Agreement used for grants of restricted stock (incorporated by reference to Exhibit A of our definitive Proxy Statement for our 2016 Annual Meeting of Stockholders filed June 13, 2016). 10.5+ Amendment No. 1 to Offer Letter with Bruce Rosenbloom (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q for the quarter ended September 30, 2017, filed October 31, 2017). 10.6+ Form of Indemnification Agreement entered into with the Directors and Executive Officers of the Company (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q for the quarter ended June 30, 2019, filed July 30, 2019). 10.7+ CEO Separation Agreement and General Release with Menderes Akdag (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed June 15, 2021). 10.8+ Letter Agreement with Bruce Rosenbloom (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed July 6, 2021). 10.9+ Executive Employment Agreement with Mathew N. Hulett (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed August 30, 2021). 10.10+ Restricted Stock Agreement with Mathew N. Hulett (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed August 30, 2021). 10.11+ Restricted Performance Stock Agreement with Mathew N. Hulett (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed August 30, 2021). 50 (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 31.2 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)* 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 + Indicates a management contract or compensatory plan or arrangement 101.INS*** Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) 101.SCH*** Inline XBRL Taxonomy Extension Schema Document 101.CAL*** Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF*** Inline XBRL Taxonomy Extension Definition LInkbase Document 101.LAB*** Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE*** Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) *** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, as amended, is deemed not filed for purposes of section 18 of the Exchange Act, and otherwise is not subject to liability under these sections. ITEM 16. FORM 10–K SUMMARY None. 51 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, 2022 PETMED EXPRESS, INC. (the “registrant”) By: /s/ Mathew N. Hulett Mathew N. Hulett 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 indicated on May 24, 2022. SIGNATURE TITLE /s/ Mathew N. Hulett Mathew N. Hulett /s/ Gian M. Fulgoni Gian M. Fulgoni /s/ Bruce S. Rosenbloom Bruce S. Rosenbloom /s/ Ronald J. Korn Ronald J. Korn Chief Executive Officer, President and Director (principal executive officer) Chairman of the Board and Director Chief Financial Officer and Treasurer (principal financial and accounting officer) Director /s/ Leslie C.G. Campbell Director Leslie C.G. Campbell /s/ Jodi Watson Jodi Watson /s/ Peter S. Cobb Peter S. Cobb /s/ Diana Garvis Purcel Diana Garvis Purcel Director Director Director 52 DESCRIPTION OF THE COMPANY’S SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934 The following is a brief description of the common stock, $0.001 par value per share (the “Common Stock”), of PetMed Express, Inc., a Florida corporation (the “Company”), which is the only security of the Company registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended. Exhibit 4.2 Description of Common Stock General The following descriptions of our Common Stock and of certain provisions of Florida law do not purport to be complete and are subject to and qualified in their entirety by reference to our amended and restated articles of incorporation, our amended and restated bylaws and the Florida Business Corporation Act, as amended (the “Florida Act”). The Company has authorized 40,000,000 shares of Common Stock of which as of May 24, 2022, 20,988,237 shares of Common Stock are issued and outstanding. All of our outstanding shares of Common Stock are fully paid and non-assessable. Our Common Stock is listed on the NASDAQ Global Select Market under the symbol “PETS.” Common Stock Holders of the Common Stock have no pre-emptive, redemption, subscription or conversion rights. Each outstanding share of Common Stock is entitled to one vote on all matters submitted to a vote of the Company's shareholders. Subject to the dividend rights of the holders of any outstanding preferred stock, each share of Common Stock is entitled to participate equally with respect to dividends as may be declared by the board of directors out of funds legally available therefor. In the case of voluntary or involuntary liquidation, distribution or sale of assets, dissolution, or winding up of the Company, holders of our Common Stock are entitled to receive a pro rata share of the amount distributed after provisions for payment of all debts, other liabilities and any liquidation preferences of outstanding preferred stock. The Florida Act also may affect the terms of these securities. Limitations on Rights of Holders of Common Stock – Preferred Stock The rights of holders of Common Stock may be materially limited or qualified by the rights of holders of preferred stock that we may issue in the future. Set forth below is a description of the Company’s authority to issue preferred stock and the possible terms of that stock. Our amended and restated articles of incorporation authorizes our board of directors, without further shareholder action, to provide for the issuance of up to 5,000,000 shares of preferred stock, with a par value of $.001 per share, in one or more series, and to fix the designations, preferences, conversion rights, cumulative, relative, participating, optional or other rights, including voting rights, qualifications, limitations or restrictions, redemption and liquidation preferences of each of these series. Of the preferred stock, 250,000 shares have been designated Convertible Preferred Stock of which as of May 24, 2022, 2,500 shares of Convertible Preferred Stock are issued and outstanding. We may amend from time to time our amended and restated articles of incorporation to increase the number of authorized shares of preferred stock. Any such amendment would require the approval of the holders of a majority of our shares of Common Stock entitled to vote. Shareholder Action by Written Consent and Special Meeting Our amended and restated bylaws provide for action by our shareholders without a meeting with the written consent of shareholders holding the number of shares necessary to approve such action if it were taken at a meeting at which all shares entitled to vote thereon were present. Our amended and restated bylaws also provide that shareholder action can be taken at an annual meeting of the shareholders or at a special meeting which may be called, for any purpose or purposes, by the board of directors or the person or persons authorized to do so by the board of directors and must be called by the Secretary if the holders of not less than ten percent of all votes entitled to be cast on any issue proposed to be considered at such special meeting sign, date and deliver to the Secretary one or more written demands for a special meeting, describing the purpose or purposes for which it is to be held. Authorized but Unissued Shares Our authorized but unissued shares of Common Stock and preferred stock are available for future issuance without shareholder approval, subject to the requirements of applicable law or regulation, including any listing requirement of the principal stock exchange on which our Common Stock is then listed. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of Common Stock and preferred stock could render more difficult or discourage an attempt to obtain control of a majority of our Common Stock by means of a proxy contest, tender offer, merger or otherwise. Board Authority to Amend Bylaws Under our amended and restated bylaws, our board of directors has the authority to adopt, amend or repeal the bylaws without the approval of our shareholders unless the Florida Act reserves the power to amend a particular bylaw provision exclusively to the shareholders. Certain Anti-Takeover provisions of Florida Law and our Bylaws Florida Business Corporation Act We are subject to certain anti-takeover provisions that apply to public corporations under Florida law. Pursuant to Section 607.0901 of the Florida Act, a publicly held Florida corporation may not engage in a broad range of business combinations or other extraordinary corporate transactions with an “interested shareholder” without the approval of the holders of two-thirds of the voting shares of such corporation (excluding shares held by the interested shareholder), unless: (cid:120) (cid:120) (cid:120) (cid:120) the transaction is approved by a majority of disinterested directors before the shareholder becomes an interested shareholder; the interested shareholder has owned at least 80% of the corporation’s outstanding voting shares for at least five years preceding the announcement date of any such business combination; the interested shareholder is the beneficial owner of at least 90% of the outstanding voting shares of the corporation, exclusive of shares acquired directly from the corporation in a transaction not approved by a majority of the disinterested directors; or the consideration paid to the holders of the corporation’s voting stock is at least equal to certain fair price criteria. An “interested shareholder” is defined as a person who together with affiliates and associates beneficially owns more than 10% of a corporation’s outstanding voting shares. We have not made an election in our amended and restated articles of incorporation to opt out of Section 607.0901. In addition, we are subject to Section 607.0902 of the Florida Act which prohibits the voting of shares in a publicly held Florida corporation that are acquired in a “control share acquisition” unless (i) our board of directors approved such acquisition prior to its consummation or (ii) after such acquisition, in lieu of prior approval by our board of directors, the holders of a majority of the corporation’s voting shares, exclusive of shares owned by officers of the corporation, employee directors or the acquiring party, approve the granting of voting rights as to the shares acquired in the control share acquisition. A “control share acquisition” is defined as an acquisition that immediately thereafter entitles the acquiring party to 20% or more of the total voting power in an election of directors. These statutory provisions may prevent takeover attempts that might result in a premium over the market price for shares of our common stock. Advance Notice of Shareholder Proposals or Nominations Our amended and restated bylaws provide that shareholders at an annual meeting may only consider proposals or nominations (i) specified in the notice of meeting given by or at the direction of the Board, (ii) properly brought before the meeting by or at the direction of the Board or (iii) otherwise properly brought before the meeting by a shareholder of the Company who was a shareholder of record on (a) the date of the giving of timely notice to our Corporate Secretary and (b) the record date for the meeting, who is entitled to vote at the meeting and who has given our Corporate Secretary timely written notice, in proper form. In addition to certain other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, such shareholder generally must have given notice thereof in proper written form to our Corporate Secretary not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of shareholders. Our amended and restated bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed or may discourage or defer a potential acquiror from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of us. Proxy Access Our By-Laws permit a shareholder (or a group of up to 20 shareholders) owning three percent (3%) or more of our common stock continuously for at least three years to nominate and include in our proxy statement candidates for up to the greater of 2 of 20% of our Board. To be timely, a notice of a nomination under our proxy access bylaw provisions must be delivered to or mailed and received at the principal executive offices of the Company not less than one-hundred twenty (120) days nor more than one-hundred fifty (150) days prior to the anniversary of the date that the Company first distributed its proxy statement to shareholders for the immediately preceding annual meeting of shareholders. The notice must contain certain information specified in our amended and restated bylaws. Transfer Agent and Registrar The transfer agent and registrar for the Company's common stock is Continental Stock Transfer & Trust Company. Exhibit 21.1 SUBSIDIARIES OF PETMED EXPRESS, INC. PetMed Express, Inc. directly owns all of the outstanding interests in the following subsidiaries: 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 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in these Registration Statements (No. 333-218917, No. 333-145179, No. 333-145180) on Form S-8 and related Reoffer Prospectus of PetMed Express, Inc. of our reports dated May 24, 2022, relating to the consolidated financial statements of PetMed Express, Inc., and the effectiveness of internal control over financial reporting appearing in the Annual Report on Form 10-K of PetMed Express, Inc. for the year ended March 31, 2022. We also consent to the reference to our firm under the heading “Experts” in such Reoffer Prospectus. Exhibit 23.1 /s/ RSM US LLP West Palm Beach, Florida May 24, 2022 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Mathew N. Hulett, 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, 2022; 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, 2022 By: /s/ Mathew N. Hulett Mathew N. Hulett 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, 2022; 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, 2022 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, Mathew N. Hulett, 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, 2022 (the “Report”) of PetMed Express, Inc. (the “Registrant”), that: (1) (2) the Report fully complies with the requirements of Section 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, 2022 By:_/s/ Mathew N. Hulett Mathew N. Hulett Chief Executive Officer and President By:_/s/ Bruce S. Rosenbloom_______ Bruce S. Rosenbloom Chief Financial Officer Corporate Information: Directors, Executive Officers, and Corporate Secretary Dr. Gian M. Fulgoni Chairman of the Board and Independent Director Venture Partner, 4490 Ventures Executive Chairman, Varcode, Ltd. Leslie C.G. Campbell Independent Director Peter S. Cobb Independent Director Mathew N. Hulett Director, Chief Executive Officer and President of the Company Ronald J. Korn Independent Director President of Ronald Korn Consulting Diana Garvis Purcel Independent Director Jodi Watson Independent Director Bruce S. Rosenbloom, CPA Chief Financial Officer and Treasurer of the Company Wendy Zalai Corporate Secretary and Controller of the Company Corporate Headquarters PetMed Express, Inc. 420 South Congress Ave., Suite 100 Delray Beach, Florida 33445 Independent Registered Public Accounting Firm RSM US LLP Fort Lauderdale, Florida Transfer Agent Continental Stock Transfer & Trust Company New York, New York Stock Exchange Listing The NASDAQ Stock Market LLC Trading Symbol: PETS Annual Meeting The Annual Meeting of Stockholders will be held at 1 p.m. Eastern Time, July 28, 2022. Investor Relations PetMed Express, Inc. welcomes inquiries from shareholders and other interested investors. You may contact us by phone: (800) 738-6337 or (561) 526-4444 or email investor@petmeds.com. QUARTERLY STOCK PRICE RANGE First Quarter Fiscal 2022 High Low $46.06 $27.73 Fiscal 2021 High Low $40.96 $27.94 Second Quarter Fiscal 2022 High Low $34.00 $26.50 Fiscal 2021 High Low $41.83 $29.00 Third Quarter Fiscal 2022 High Low $32.00 $25.26 Fiscal 2021 High Low $33.77 $28.96 Fourth Quarter Fiscal 2022 High Low $29.18 $23.62 Fiscal 2021 High Low $51.80 $29.77 PetMed Express, Inc. Your Trusted Pet Health Expert You’re 100% satisfied or your money back! 

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