NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary
of Significant Accounting Policies
Organization
PetMed Express, Inc. and subsidiaries,
d/b/a 1-800-PetMeds (the “Company”), is a leading nationwide pet pharmacy. The Company markets prescription and non-prescription
pet medications, health products, and supplies for dogs and cats, direct to the consumer. The Company markets its products through
national television, online, and direct mail/print advertising campaigns, which aim to increase the recognition of the “1-800-PetMeds”
brand name and “PetMeds” family of trademarks, increase traffic on its website at
www.1800petmeds.com
,
acquire new customers, and maximize repeat purchases. The majority of all of the Company's sales are to residents in the United
States. The Company’s executive offices are located in Pompano Beach, Florida. The Company's fiscal year end is March 31,
and references herein to fiscal 2016, 2015, or 2014 refer to the Company's fiscal years ended March 31, 2016, 2015, and 2014,
respectively.
Principles of Consolidation
The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated
in consolidation.
Revenue Recognition
The Company generates revenue
by selling pet medication products and pet supplies mainly to retail consumers. The Company’s policy is to recognize revenue
from product sales upon shipment, when the rights of ownership and risk of loss have passed to the customer. Outbound shipping
and handling fees are included in sales and are billed upon shipment. Shipping expenses are included in cost of sales. The majority
of the Company’s sales are paid by credit cards and the Company usually receives the cash settlement in two to three banking
days. Credit card sales minimize the accounts receivable balances relative to sales. The Company maintains an allowance for doubtful
accounts for losses that the Company estimates will arise from the customers’ inability to make required payments, arising
from either credit card charge-backs or insufficient funds checks. The Company determines its estimates of the uncollectibility
of accounts receivable by analyzing historical bad debts and current economic trends. At March 31, 2016 and 2015, the allowance
for doubtful accounts was approximately $13,000 and $8,000, respectively.
Cash and Cash Equivalents
The Company considers all highly
liquid investments with maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents at March
31, 2016 and 2015 consisted of the Company’s cash accounts and money market accounts with a maturity of three months or less.
The carrying amount of cash equivalents approximates fair value. The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Short Term Investments
The Company’s short term
investments balance consists of short term bond mutual funds. In accordance with ASC Topic 320 (“
Accounting for Certain
Investments in Debt and Equity Securities
”), short term investments are accounted for as available for sale securities
with any changes in fair value to be reflected in other comprehensive income (loss). The Company had a short term investments
balance of $0 and $15.6 million as of March 31, 2016 and March 31, 2015, respectively.
Use of Estimates
The preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(1) Summary
of Significant Accounting Policies (Continued)
Inventories
Inventories consist of prescription
and non-prescription pet medications and pet supplies that are available for sale and are priced at the lower of cost or market
value using a weighted average cost method. The Company writes down its inventory for estimated obsolescence. The inventory reserve
was approximately $64,000 and $63,000 at March 31, 2016 and 2015, respectively.
Property and Equipment
Property and equipment are stated
at cost and depreciated using the straight-line method over the estimated useful lives of the assets. The building is depreciated
over a period of thirty years. The furniture, fixtures, equipment, and computer software are depreciated over periods ranging from
three to seven years. Leasehold improvements and assets under capital lease agreements are amortized over the shorter of the underlying
lease agreement or the useful life of the asset.
On December 22, 2015, the Company,
by and through a wholly-owned subsidiary entered into an agreement of purchase and sale with an unaffiliated privately held Delaware
corporation for the purchase of real property located in Palm Beach County Florida, and improvements thereon (collectively referred
to herein as the “Property”), the assignment and assumption of all leases and service agreements affecting the property,
and certain tangible and intangible personal property related to the property, for a purchase price of $18.5 million, plus closing
costs. The transaction closed on January 19, 2016. The Property consists of approximately 634,000 square feet of land or 14.6 acres
with two building complexes totaling approximately 185,000 square feet, with additional land for future use. The first building
complex consists of approximately 125,000 square feet consisting of both office and warehouse. The second building complex consists
of approximately 60,000 square feet consisting of both office and warehouse space. Once the property is renovated to the Company’s
specifications and ready for its operation, expected in the third quarter of fiscal 2017, the Company intends to occupy approximately
97,000 square feet of the first building for its principal offices and distribution center, and to continue to operate the remaining
office and warehouse space pursuant to existing leases. As of March 31, 2016, 48% of the property was leased to two tenants with
a remaining weighted average lease term of 4.0 years.
Long-lived Assets
Long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability
of assets is measured by a comparison of the carrying amount of the asset to the undiscounted cash flows expected to be generated
from the asset.
Intangible Assets
The
intangible asset consists of a toll-free telephone number and an internet domain name. In accordance with the ASC Topic 350 (“
Goodwill
and Other Intangible Assets
”) the intangible assets are not being amortized, and are subject to an annual review for
impairment.
Fair Value
of Financial In
struments
The carrying amounts of the Company's
cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these
instruments.
Advertising
The Company's advertising expenses
consist primarily of television advertising, online marketing, and direct mail/print advertising. Television advertising costs
are expensed as the advertisements are televised. Internet costs are expensed in the month incurred and direct mail/print costs
are expensed when the related catalogs, brochures, and postcards are produced, distributed, or superseded.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary
of Significant Accounting Policies (Continued)
Business Concentrations
The Company purchases its products
from a variety of sources, including certain manufacturers, domestic distributors, and wholesalers. We have multiple suppliers
for each of our products to obtain the lowest cost. There were four suppliers from whom we purchased approximately 50% of all products
in fiscal 2016 and fiscal 2015.
Accounting for Share Based
Compensation
The Company records compensation
expense associated with restricted stock in accordance with ASC Topic 718 (
“Share Based Payment”
). The compensation
expense related to all of the Company’s stock-based compensation arrangements is recorded as a component of general and administrative
expenses.
Comprehensive Income
The Company applies ASC Topic
220 (“
Reporting Comprehensive Income
”) which requires that all items that are recognized under accounting standards
as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other
financial statements. The items of other comprehensive income that are typically required to be displayed are foreign currency
items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities.
For the years ended
March 31, 2016, 2015 and 2014 the Company recorded an unrealized gain of $54,000,
an unrealized loss of $17,000 and an unrealized loss of $35,000 on its short term investments, respectively.
The
following is a summary of our comprehensive income (in thousands):
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,567
|
|
|
$
|
17,453
|
|
|
$
|
17,972
|
|
Net change in unrealized gain (loss) on short term investments
|
|
|
54
|
|
|
|
(17
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
20,621
|
|
|
$
|
17,436
|
|
|
$
|
17,937
|
|
Income Taxes
The Company accounts for income
taxes under the provisions of ASC Topic 740 (“
Accounting for Income Taxes
”) which generally requires the recognition
of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in
the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based
on differences between the financial reporting carrying values and the tax bases of assets and liabilities, and are measured by
applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. As required by “Accounting
for Uncertainty in Income Taxes” guidance, which clarifies ASC Topic 740, the Company recognizes the financial statement
benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position
following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the Consolidated Financial
Statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with
the relevant tax authority. The Company applies “Accounting for Uncertainty in Income Taxes” guidance to all tax positions
for which the statute of limitations remained open. The Company files tax returns in the U.S. federal jurisdiction and Florida
and Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations
by tax authorities for years ending March 31, 2010. Any interest and penalties related to income taxes will be recorded to other
income (expenses).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary
of Significant Accounting Policies (Continued)
Reclassifications
Certain reclassifications have
been made to the prior years’ consolidated financial statements to conform to the fiscal 2016 presentation. These reclassifications
had no impact on net income, shareholders’ equity or cash flows as previously reported.
Recent Accounting
Pronouncements
On November 20, 2015, the FASB
issued Accounting Standards Update on Income Taxes (Topic 740) which requires an entity to present all deferred tax assets and
liabilities as noncurrent in a classified balance sheet. The update becomes effective April 1, 2017, however early adoption is
permitted. The Company chose early adoption for the periods presented.
In February 2016, the FASB issued
guidance on leases which supersedes the current lease guidance. The core principle requires lessees to recognize the assets and
liabilities that arise from nearly all leases in the statement of financial position. Accounting applied by lessors will remain
largely consistent with previous guidance, additional changes s
et to align lessor accounting with the
revised lessee model and the FASB’s revenue recognition guidance. The amendments are effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently
assessing the impact of this standard on its consolidated financial statements.
The
Company does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, will
have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.
(2) Property
and Equipment
Major
classifications of property and equipment consist of the following (in thousands):
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
14,988
|
|
|
$
|
-
|
|
Land
|
|
|
3,700
|
|
|
|
-
|
|
Leasehold improvements
|
|
|
1,123
|
|
|
|
1,119
|
|
Computer software
|
|
|
4,812
|
|
|
|
3,391
|
|
Furniture, fixtures and equipment
|
|
|
4,703
|
|
|
|
4,686
|
|
|
|
|
29,326
|
|
|
|
9,196
|
|
Less: accumulated depreciation
|
|
|
(8,397
|
)
|
|
|
(7,627
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
20,929
|
|
|
$
|
1,569
|
|
(3) Valuation
and Qualifying Accounts
Activity in the Company's
valuation and qualifying accounts consists of the following (in thousands):
|
|
Year Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
5
|
|
Provision for doubtful accounts
|
|
|
260
|
|
|
|
94
|
|
|
|
95
|
|
Write-off of uncollectible accounts receivable
|
|
|
(255
|
)
|
|
|
(93
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
13
|
|
|
$
|
8
|
|
|
$
|
7
|
|
NOTES TO CO
NSOLIDATED
FINANCIAL STATEMENTS
(4) Accrued
Expenses and Other Current Liabilities
Major
classifications of accrued expenses and other current liabilities consist of the following (in thousands):
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Accrued sales tax
|
|
$
|
459
|
|
|
$
|
465
|
|
Accrued credit card fees
|
|
|
335
|
|
|
|
285
|
|
Accrued salaries and benefits
|
|
|
482
|
|
|
|
741
|
|
Accrued professional expenses
|
|
|
255
|
|
|
|
225
|
|
Accrued sales return allowance
|
|
|
172
|
|
|
|
147
|
|
Accrued dividends payable
|
|
|
143
|
|
|
|
212
|
|
Accrued rent
|
|
|
111
|
|
|
|
-
|
|
Other accrued liabilities
|
|
|
123
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
2,080
|
|
|
$
|
2,214
|
|
(5) Income
Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows (in thousands):
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
537
|
|
|
$
|
545
|
|
Deferred stock compensation
|
|
|
302
|
|
|
|
246
|
|
Bad debt and inventory reserves
|
|
|
29
|
|
|
|
26
|
|
Property and equipment
|
|
|
-
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
868
|
|
|
|
840
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
5
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total net deferred taxes
|
|
$
|
863
|
|
|
$
|
840
|
|
At March 31, 2016, the Company
had no federal net operating loss carryforwards.
The components of the income
tax provision consist of the following (in thousands):
|
|
Year Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Current taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,982
|
|
|
$
|
9,303
|
|
|
$
|
9,689
|
|
State
|
|
|
1,041
|
|
|
|
885
|
|
|
|
921
|
|
Total current taxes
|
|
|
12,023
|
|
|
|
10,188
|
|
|
|
10,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(21
|
)
|
|
|
143
|
|
|
|
(167
|
)
|
State
|
|
|
(2
|
)
|
|
|
14
|
|
|
|
(16
|
)
|
Total deferred taxes
|
|
|
(23
|
)
|
|
|
157
|
|
|
|
(183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
12,000
|
|
|
$
|
10,345
|
|
|
$
|
10,427
|
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(5) Income
Taxes (Continued)
The
reconciliation of income tax provision computed at the U.S. federal statutory tax rates to income tax expense is as follows (in
thousands):
|
|
Year Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes at U.S. statutory rates
|
|
$
|
11,399
|
|
|
$
|
9,729
|
|
|
$
|
9,940
|
|
State income taxes, net of federal tax benefit
|
|
|
675
|
|
|
|
589
|
|
|
|
583
|
|
Permanent differences
|
|
|
(23
|
)
|
|
|
(29
|
)
|
|
|
(35
|
)
|
Other
|
|
|
(51
|
)
|
|
|
56
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
12,000
|
|
|
$
|
10,345
|
|
|
$
|
10,427
|
|
(6) Net
Income Per Share
In
accordance with the provisions of ASC Topic 260 (“
Earnings Per Share
”) basic net income per share is computed
by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the
period. Diluted net income per common share includes the dilutive effect of potential restricted stock and the effects of the
potential conversion of preferred shares, calculated using the treasury stock method. Unvested restricted stock, and convertible
preferred shares issued by the Company represent the only dilutive effect reflected in diluted
weighted average shares
outstanding.
The following is a reconciliation
of the numerators and denominators of the basic and diluted net income per share computations for the periods presented (in thousands,
except for per share amounts):
|
|
Year Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Net income (numerator):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,567
|
|
|
$
|
17,453
|
|
|
$
|
17,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in basic computation
|
|
|
20,124
|
|
|
|
20,015
|
|
|
|
19,901
|
|
Common shares issuable upon the vesting of restricted stock
|
|
|
120
|
|
|
|
111
|
|
|
|
132
|
|
Common shares issuable upon conversion of preferred shares
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
Shares used in diluted computation
|
|
|
20,254
|
|
|
|
20,136
|
|
|
|
20,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.02
|
|
|
$
|
0.87
|
|
|
$
|
0.90
|
|
Diluted
|
|
$
|
1.02
|
|
|
$
|
0.87
|
|
|
$
|
0.90
|
|
At March 31, 2016 and 2015, all
restricted stock was included in the diluted net income per common share computation.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(7) Discontinued
Project Costs
During
the quarter ended September 30, 2014 the Company discontinued an information technology project related to a new software platform,
which was intended to be put into service and capitalized during fiscal 2015. The Company expensed a one-time project charge of
$1.7 million in that September quarter. The net after tax impact of this one-time charge was $1.1 million, or $0.05 diluted per
share. The Company does not expect any additional future expenditures relating to this discontinued project.
(8) Shareholders’
Equity
Preferred
Stock
In
April 1998, the Company issued 250,000 shares of its $.001 par value preferred stock at a price of $4.00 per share, less issuance
costs of $112,187. Each share of the preferred stock is convertible into approximately 4.05 shares of common stock at the election
of the shareholder. The shares have a liquidation value of $4.00 per share and may pay dividends at the
sole discretion
of the Company. The Company does not anticipate paying dividends to the preferred shareholders in the foreseeable future. Each
share of preferred stock is entitled to one vote on all matters submitted to a vote of shareholders of the Company. As of March
31, 2016 and 2015, 2,500 shares of the convertible preferred stock remained unconverted and outstanding.
Share Repurchase Plan
On November 8, 2006, the Company's
Board of Directors approved a share repurchase plan of up to $20.0 million. On October 31, 2008, November 1, 2010, and August 1,
2011, the Company’s Board of Directors approved an increase under the repurchase plan each for an additional $20.0 million.
The repurchase plan is intended to be implemented through purchases made from time to time in either the open market or through
private transactions at the Company's discretion, subject to market conditions and other factors, in accordance with Securities
and Exchange Commission requirements. There can be no assurances as to the precise number of shares that will be repurchased under
the share repurchase plan, and the Company may discontinue the share repurchase plan at any time subject to compliance with applicable
regulatory requirements. Shares purchased pursuant to the share repurchase plan will either be cancelled or held in the Company's
treasury. During both fiscal 2015 and 2016 the Company had no share repurchases. As of March 31, 2016 the Company had approximately
$10.2 million remaining under the Company’s share repurchase plan.
Dividends
On August 3, 2009, the Company’s
Board of Directors declared its first quarterly dividend of $0.10 per share on its common stock. On August 2, 2010, the Company’s
Board of Directors increased the quarterly dividend to $0.125 per share, and then on January 27, 2012, the Company’s Board
of Directors increased the quarterly dividend to $0.15 per share. On December 3, 2012, the Company’s Board of Directors declared
a special dividend of $1.00 per share on its common stock. On July 26, 2013, the Company’s Board of Directors increased the
quarterly dividend to $0.17 per share, and then on May 4, 2015 the Company’s Board of Directors increased the quarterly dividend
to $0.18 per share. The Company intends to continue to pay regular quarterly dividends; however the declaration and payment of
future dividends is discretionary and will be subject to a determination by the Board of Directors each quarter following its review
of the Company’s financial performance.
During fiscal 2016, our Board
of Directors declared the following dividends:
Declaration Date
|
|
Per Share
Dividend
|
|
|
Record Date
|
|
Total Amount
(In thousands)
|
|
|
Payment Date
|
|
|
|
|
|
|
|
|
|
|
|
May 4, 2015
|
|
$
|
0.18
|
|
|
May 1, 2015
|
|
$
|
3,647
|
|
|
May 22, 2015
|
July 20, 2015
|
|
$
|
0.18
|
|
|
August 3, 2015
|
|
$
|
3,660
|
|
|
August 14, 2015
|
October 19, 2015
|
|
$
|
0.18
|
|
|
November 2, 2015
|
|
$
|
3,660
|
|
|
November 13, 2015
|
January 25, 2016
|
|
$
|
0.18
|
|
|
February 8, 2016
|
|
$
|
3,659
|
|
|
February 19, 2016
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Restricted
Stock
On July 28, 2006, the Company
received shareholder approval for the adoption of the 2006 Employee Equity Compensation Restricted Stock Plan (the “Employee
Plan”) and the 2006 Outside Director Equity Compensation Restricted Stock Plan (the “Director Plan”). The purpose
of the plans is to promote the interests of the Company by securing and retaining both employees and outside directors. The Company
had reserved 1.0 million shares of common stock for issuance under the Employee Plan, and 200,000 shares of common stock for issuance
under the Director Plan. In July 2012 the Company received shareholder approval to ratify the amendment to the Company’s
Director Plan passed by the Board of Directors to increase the number of shares available for issuance under the Director Plan
from 200,000 to 400,000. Additionally, the Company received shareholder approval to ratify the amendment passed by the Board of
Directors to provide for a 10% automatic increase every year in the amount of shares available for issuance under each of the plans.
In July 2015, the Company’s 2015 Outside Director Equity Compensation Restricted Stock Plan (“2015 Director Plan) became
effective upon the approval of the plan by the Company’s Shareholders. The 2015 Director Plan authorizes 400,000 shares of
the company's common stock available for issuance under the plan, and provides for an automatic increase every year in the amount
of shares available for issuance under the plan of 10% of the shares authorized under the plan. The value of the restricted stock
is determined based on the market value of the stock at the issuance date. The restriction period or forfeiture period is determined
by the Company’s Board and is to be no less than 1 year and no more than ten years. The Company had 928,296 restricted common
shares issued under the Employee Plan and 272,000 restricted common shares issued under the Director Plan at March 31, 2016, all
shares of which were issued subject to a restriction or forfeiture period which will lapse ratably on the first, second, and third
anniversaries of the date of grant, and the fair value of which is being amortized over the three-year restriction period. For
both the years ended March 31, 2016 and 2015, the Company recognized compensation expense related to the Employee and Director
Plans of $1.6 million and $1.5 million, respectively.
A summary of the Company’s
non-vested restricted stock as of March 31, 2016 is as follows:
|
|
Employee
Plan
Number of
Shares (In
thousands)
|
|
|
Director
Plan
Number of
Shares (In
thousands)
|
|
|
Both Plans
Number of
Shares (In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock outstanding at March 31, 2015
|
|
|
128
|
|
|
|
60
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
|
167
|
|
|
|
30
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock vested
|
|
|
(77
|
)
|
|
|
(30
|
)
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock forfeited or expired
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock outstanding at March
31, 2016
|
|
|
206
|
|
|
|
60
|
|
|
|
266
|
|
At
March 31, 2016 and 2015, there were 265,771 and 188,017 non-vested restricted stock shares outstanding, respectively. During the
fiscal years ended March 31, 2016 and 2015, the Company issued, net of forfeitures, 185,084 and 71,858 restricted shares, respectively.
At March 31, 2016 and 2015, there were $3.6 million and $2.0 million of unrecognized compensation cost related to the non-vested
restricted stock awards, respectively, which is expected to be recognized over the remaining weighted average vesting period of
2.3 years and 1.5 years for fiscal 2016 and 2015, respectively.
(10) Fair
Value Measurements
The
Company carries cash and cash equivalents and investments at fair value in the Consolidated Balance Sheets. Fair value is defined
as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or a liability. ASC To
pic 820 (“Fair Value Measurements”)
establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair
value:
NOTE
S TO
CONSOLIDATED FINANCIAL STATEMENTS
(10) Fair
Value Measurements (Continued)
Level 1
- Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2
- Include other inputs that are directly or indirectly observable in the marketplace.
Level 3
- Unobservable inputs which are supported by little or no market activity.
The
fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. The Company’s cash equivalents and short term investments are classified within Level 1. At March
31, 2016 the Company had invested the majority of its $37.6 million cash and cash equivalents balance in money market funds (level
1).
(11) Commitments
and Contingencies
Legal
Matters and Routine Proceedings
The
Company has settled complaints that had been filed with various states’ pharmacy boards in the past. There can be no assurances
made that other states will not attempt to take similar actions against the Company in the future. The Company initiates litigation
to protect its trade or service marks. There can be no assurance that the Company will be successful in protecting its trade or
service marks. Legal costs related to the above matters are expensed as incurred.
Employment
Agreements
On
January 29, 2016, the Company amended the existing Executive Employment Agreement of Menderes Akdag, the Company’s President,
Chief Executive Officer, and Director, and entered into Amendment No. 5 to the Executive Employment Agreement with Mr. Akdag.
The Agreement amended certain provisions of the Executive Employment Agreement as follows: the term
of the Agreement is for three years, commencing on March 16, 2016; Mr. Akdag’s salary was increased to $600,000 per year
throughout the term of the Agreement, and Mr. Akdag was granted 120,000 shares of restricted stock. The restricted stock was granted
on March 16, 2016, in accordance with the Company’s 2006 Employee Equity Compensation
Restricted
Stock Plan and the restrictions lapse ratably over a three-year period.
Operating
Leases
The
Company leases its 65,300 square foot executive offices, warehouse facility, and customer service and pharmacy contact centers
under a non-cancelable operating lease. On April 30, 2014, the Company entered into a seventh amendment of its operating lease
agreement to extend its existing lease until December 1, 2016. The Company is responsible for certain maintenance costs, taxes,
and insurance under this lease. The future minimum annual lease payments for the year ended March 31, 2017 is $519,000. Rent expense
was $781,000, $794,000, and $785,000 for the years ended March 31, 2016, 2015 and 2014, respectively. The Company intends to relocate
to the Palm Beach County property in the quarter ended December 31, 2016, therefore eliminating any future rent payments subsequent
to December 1, 2016.
Upon
acquisition of the property in January 2016, approximately 88,000 square feet of the property was leased to two tenants. The Company
recorded approximately $116,000 in rental revenue in fiscal 2016, which was included in other income. The Company expects to
receive the following future lease payments over the next five years: $586,000 in fiscal 2017; $604,000 in fiscal 2018; $622,000
in fiscal 2019; $484,000 in fiscal 2020; and $97,000 in fiscal 2021.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(12) Employee
Benefit Plan
The
Company maintains a 401(k) Savings Plan for eligible employees. The plan is a defined contribution plan that is administered
by the Company. All regular, full-time employees are eligible for voluntary participation upon completing one year of service
and having attained the age of 21. The plan provides for growth in savings through contributions and income from investments.
It is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. Plan participants are
allowed to contribute a specified percentage of their base salary. In 2006, the Company adopted a matching plan which is funded
subsequent to the calendar year. During the fiscal years ended March 31, 2016 and 2015, the Company charged $177,000 and
$187,000, respectively, of 401(k) matching contribution and administration expense to general and administrative expenses.
(13) Quarterly
Financial Data (Unaudited)
Summarized
unaudited quarterly financial data for fiscal 2016 and 2015 is as follows (in thousands, except for per share amounts):
Quarter Ended:
|
|
June 30, 2015
|
|
|
September 30, 2015
|
|
|
December 31, 2015
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
71,634
|
|
|
$
|
56,725
|
|
|
$
|
50,933
|
|
|
$
|
55,392
|
|
Gross Profit
|
|
$
|
22,966
|
|
|
$
|
18,913
|
|
|
$
|
16,754
|
|
|
$
|
17,663
|
|
Income from operations
|
|
$
|
9,091
|
|
|
$
|
7,090
|
|
|
$
|
7,622
|
|
|
$
|
8,585
|
|
Net income
|
|
$
|
5,757
|
|
|
$
|
4,502
|
|
|
$
|
4,890
|
|
|
$
|
5,418
|
|
Diluted net income per common share
|
|
$
|
0.29
|
|
|
$
|
0.22
|
|
|
$
|
0.24
|
|
|
$
|
0.27
|
|
Quarter Ended:
|
|
June 30, 2014
|
|
|
September 30, 2014
|
|
|
December 31, 2014
|
|
|
March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
72,541
|
|
|
$
|
57,576
|
|
|
$
|
49,284
|
|
|
$
|
49,994
|
|
Gross Profit
|
|
$
|
23,772
|
|
|
$
|
18,459
|
|
|
$
|
17,100
|
|
|
$
|
16,939
|
|
Income from operations
|
|
$
|
7,838
|
|
|
$
|
4,290
|
|
|
$
|
7,666
|
|
|
$
|
7,819
|
|
Net income
|
|
$
|
4,973
|
|
|
$
|
2,732
|
|
|
$
|
4,797
|
|
|
$
|
4,951
|
|
Diluted net income per common share
|
|
$
|
0.25
|
|
|
$
|
0.14
|
|
|
$
|
0.24
|
|
|
$
|
0.25
|
|
(14) Subsequent
Events
On May 9, 2016, the Company’s
Board of Directors declared an increased quarterly dividend of $0.19 per share on its common stock. The $3.9 million dividend will
be paid on May 27, 2016, to shareholders of record at the close of business on May 20, 2016.
REPORT OF MANAGEMENT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible
for the preparation and integrity of the Consolidated Financial Statements appearing in our Annual Report on Form 10-K. The financial
statements were prepared in conformity with generally accepted accounting principles appropriate in the circumstances and, accordingly,
include certain amounts based on our best judgments and estimates. Financial information in the Annual Report on Form 10-K is consistent
with that in the financial statements.
Management of the Company is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f)
under the Securities Exchange Act of 1934 (“Exchange Act”). The Company’s internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Consolidated
Financial Statements. Our internal control over financial reporting is supported by a team of consultants and appropriate reviews
by management, written policies and guidelines, careful selection and training of qualified personnel, and a written Corporate
Code of Business Conduct and Ethics adopted by our Company’s Board of Directors, applicable to all Company Directors and
all officers and employees of our Company and subsidiaries.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide
reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
The Audit Committee (“Committee”)
of our Company’s Board of Directors, comprised solely of Directors who are independent in accordance with the requirements
of The NASDAQ Stock Market LLC listing standards, the Exchange Act and the Company’s Corporate Governance Guidelines, meets
with the independent auditors and management periodically to discuss internal control over financial reporting, and auditing and
financial reporting matters. The Committee reviews with the independent auditors the scope and results of the audit effort. The
Committee also meets periodically with the independent auditors without management present to ensure that the independent auditors
have free access to the Committee. Our Audit Committee’s Report can be found in the Company’s 2016 Proxy Statement.
Management assessed the effectiveness of
the Company’s internal control over financial reporting as of March 31, 2016. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control –
Integrated Framework.
Based on our assessment, management believes that the Company maintained effective internal control over
financial reporting as of March 31, 2016.
The Company’s independent auditors,
RSM US LLP, a registered public accounting firm, are appointed by the Audit Committee of the Company’s Board of Directors,
subject to ratification by our Company’s shareholders. RSM US LLP have audited and reported on the Consolidated Financial
Statements of PetMed Express, Inc. and subsidiaries, and issued a report on the Company’s internal control over financial
reporting. The reports of the independent auditors are contained in our Annual Report on Form 10-K.
/s/ Menderes Akdag
|
|
Menderes Akdag
|
|
President, Chief Executive Officer, Director
|
|
|
May 24, 2016
|
|
|
|
/s/ Bruce S. Rosenbloom
|
|
Bruce S. Rosenbloom
|
|
Chief Financial Officer
|
|
|
|
May 24, 2016
|
|