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 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 Delray Beach, Florida. The Company's fiscal year end is March 31, and references herein to fiscal 2017, 2016, or
2015 refer to the Company's fiscal years ended March 31, 2017, 2016, and 2015, 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, 2017 and 2016, the allowance
for doubtful accounts was approximately $27,000 and $13,000, 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, 2017 and 2016 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 $51,000 and $64,000 at March 31, 2017 and 2016, respectively.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
(1)
|
Summary of Significant Accounting
Policies (Continued)
|
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 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. The Company occupies approximately 97,000 square
feet of the first building for its principal offices and distribution center. At March 31, 2017, 48% of the property was leased
to two tenants with a remaining weighted average lease term of 3.0 years.
Long-lived Assets
Long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability
of assets is measured by a comparison of the carrying amount of the asset to the undiscounted cash flows expected to be generated
from the asset.
Intangible Assets
The intangible asset consists
of a toll-free telephone number and an internet domain name. In accordance with the ASC Topic 350 (“
Goodwill and Other
Intangible Assets”
) the intangible assets are not being amortized, and are subject to an annual review for impairment.
Fair Value of Financial
Instruments
The carrying amounts of the
Company's cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term nature
of these instruments.
Advertising
The Company's advertising expenses
consist primarily of online marketing and direct mail/print advertising. 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.
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 2017 and fiscal 2016.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(1)
|
Summary of Significant Accounting Policies (Continued)
|
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 fiscal year ended March 31, 2017 the Company had no unrealized gains or losses. For the fiscal years ended March 31, 2016
and 2015 the Company recorded an unrealized gain of $54,000 and an unrealized loss of $17,000, respectively, on its short term
investments.
The following
is a summary of our comprehensive income (in thousands):
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,819
|
|
|
$
|
20,567
|
|
|
$
|
17,453
|
|
Net change in unrealized gain (loss)
on short term investments
|
|
|
-
|
|
|
|
54
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
23,819
|
|
|
$
|
20,621
|
|
|
$
|
17,436
|
|
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, 2011. Any interest and penalties related to income taxes will be recorded
to other income (expenses).
Reclassifications
Certain reclassifications have
been made to the prior years’ consolidated financial statements to conform to the fiscal 2017 presentation. These reclassifications
had no impact on net income, shareholders’ equity or cash flows as previously reported.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(1)
|
Summary of Significant Accounting Policies (Continued)
|
Recent Accounting
Pronouncements
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This ASU clarifies the accounting
for revenue arising from contracts with customers and specifies the disclosures that an entity should include in its financial
statements. The standard is effective for annual reporting periods beginning after December 15, 2017. During 2016, the FASB
issued certain amendments to the standard relating to the principal versus agent guidance, accounting for licenses of intellectual
property and identifying performance obligations as well as the guidance on transition, collectability, noncash consideration
and the presentation of sales and other similar taxes. The effective date and transition requirements for these amendments are
the same as those of the original ASU. The guidance permits two methods of adoption: retrospectively to each prior reporting period
presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized
at the date of initial application (modified retrospective method). The Company currently anticipates adopting the standard using
the modified retrospective method. The Company has performed a high level analysis of its revenue streams and expects to complete
its evaluations in FY 2018, as well as an evaluation of the impact on its business processes, controls and systems. The Company
does not expect this standard to affect the Company materially, other than increased disclosures. We plan to complete our assessment
of the impact of adoption during fiscal 2018 and finalize the adoption of the new revenue standard by the end of fiscal 2019.
In February 2016, the FASB issued
guidance on leases which supersedes the current lease guidance. The core principle requires lessees to recognize the assets and
liabilities that arise from nearly all leases in the statement of financial position. Accounting applied by lessors will remain
largely consistent with previous guidance, additional changes set to align lessor accounting with the revised lessee model and
the FASB’s revenue recognition guidance. The amendments are effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact
of this standard on its consolidated financial statements.
In March 2016, the Financial
Accounting Standards Board (“FASB”) released Accounting Standards Update on Stock Compensation Improvements to Employee
Share-Based Payment Accounting (Topic 718) (
ASU 2016-09
).
ASU 2016-09
requires entities to recognize the income tax effects of share-based awards in the income statement when the awards vest or are
settled.
The objective of this update is to simplify several aspects of the accounting for employee share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows.
The new standard is effective for annual and interim periods
beginning January 1, 2017. We early adopted this standard as of March 31, 2017. As a result, during the fourth quarter we
reclassified the year-to-date fiscal 2017 excess tax benefit of $156,000 from paid-in capital (statements
of equity) into the income tax provision line on the statements of comprehensive income. Further, we reclassified the excess tax
benefits from the stock based compensation from financing activities into operating activities in the statement of cash flows
for the year ended March 31, 2017, as required by ASU 2016-09 (adopted prospectively). The adoption did not impact the
existing classification of the awards.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(2)
|
Property and Equipment
|
Major
classifications of property and equipment consist of the following (in thousands):
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
14,988
|
|
|
$
|
14,988
|
|
Land
|
|
|
3,700
|
|
|
|
3,700
|
|
Building improvements
|
|
|
2,592
|
|
|
|
-
|
|
Leasehold improvements
|
|
|
-
|
|
|
|
1,123
|
|
Computer software
|
|
|
5,068
|
|
|
|
4,812
|
|
Furniture, fixtures and equipment
|
|
|
7,863
|
|
|
|
4,703
|
|
|
|
|
34,211
|
|
|
|
29,326
|
|
Less: accumulated depreciation
|
|
|
(4,047
|
)
|
|
|
(8,397
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
30,164
|
|
|
$
|
20,929
|
|
|
(3)
|
Valuation and Qualifying Accounts
|
Activity in the Company's
valuation and qualifying accounts consists of the following (in thousands):
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
13
|
|
|
$
|
8
|
|
|
$
|
7
|
|
Provision for doubtful accounts
|
|
|
421
|
|
|
|
260
|
|
|
|
94
|
|
Write-off of uncollectible accounts receivable
|
|
|
(407
|
)
|
|
|
(255
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
27
|
|
|
$
|
13
|
|
|
$
|
8
|
|
|
(4)
|
Accrued Expenses and Other Current Liabilities
|
Major classifications
of accrued expenses and other current liabilities consist of the following (in thousands):
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accrued sales tax
|
|
$
|
450
|
|
|
$
|
459
|
|
Accrued credit card fees
|
|
|
364
|
|
|
|
335
|
|
Accrued salaries and benefits
|
|
|
639
|
|
|
|
482
|
|
Accrued professional expenses
|
|
|
245
|
|
|
|
255
|
|
Accrued sales return allowance
|
|
|
180
|
|
|
|
172
|
|
Accrued dividends payable
|
|
|
217
|
|
|
|
143
|
|
Accrued real estate taxes
|
|
|
236
|
|
|
|
65
|
|
Other accrued liabilities
|
|
|
144
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
2,475
|
|
|
$
|
2,080
|
|
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):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(5)
|
Income Taxes (Continued)
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
474
|
|
|
$
|
537
|
|
Deferred stock compensation
|
|
|
334
|
|
|
|
302
|
|
Bad debt and inventory reserves
|
|
|
29
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
837
|
|
|
|
868
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
1,925
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total net deferred taxes
|
|
$
|
(1,088
|
)
|
|
$
|
863
|
|
At March 31, 2017, 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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Current taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
11,095
|
|
|
$
|
10,982
|
|
|
$
|
9,303
|
|
State
|
|
|
1,059
|
|
|
|
1,041
|
|
|
|
885
|
|
Total current taxes
|
|
|
12,154
|
|
|
|
12,023
|
|
|
|
10,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,781
|
|
|
|
(21
|
)
|
|
|
143
|
|
State
|
|
|
170
|
|
|
|
(2
|
)
|
|
|
14
|
|
Total deferred taxes
|
|
|
1,951
|
|
|
|
(23
|
)
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
14,105
|
|
|
$
|
12,000
|
|
|
$
|
10,345
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes at U.S. statutory rates
|
|
$
|
13,274
|
|
|
$
|
11,399
|
|
|
$
|
9,729
|
|
State income taxes, net of federal tax benefit
|
|
|
858
|
|
|
|
675
|
|
|
|
589
|
|
Permanent differences
|
|
|
1
|
|
|
|
(23
|
)
|
|
|
(29
|
)
|
Other
|
|
|
(28
|
)
|
|
|
(51
|
)
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
14,105
|
|
|
$
|
12,000
|
|
|
$
|
10,345
|
|
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Net
Income Per Share (Continued)
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net income (numerator):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,819
|
|
|
$
|
20,567
|
|
|
$
|
17,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in basic computation
|
|
|
20,232
|
|
|
|
20,124
|
|
|
|
20,015
|
|
Common shares issuable upon the vesting of restricted stock
|
|
|
136
|
|
|
|
120
|
|
|
|
111
|
|
Common shares issuable upon conversion of preferred shares
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
Shares used in diluted computation
|
|
|
20,378
|
|
|
|
20,254
|
|
|
|
20,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
|
$
|
1.02
|
|
|
$
|
0.87
|
|
Diluted
|
|
$
|
1.17
|
|
|
$
|
1.02
|
|
|
$
|
0.87
|
|
At March 31, 2017 and 2016,
all restricted stock was included in the diluted net income per common share computation.
|
(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.
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, 2017 and 2016, 2,500 shares of the
convertible preferred stock remained unconverted and outstanding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(8)
|
Shareholders’ Equity (Continued)
|
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 2016 and 2017 the Company had no share repurchases. At March 31, 2017 the Company had approximately
$10.2 million remaining under the Company’s share repurchase plan.
Dividends
On July 26, 2013, the Company’s
Board of Directors increased the quarterly dividend to $0.17 per share, then on May 4, 2015 the Company’s Board of Directors
increased the quarterly dividend to $0.18 per share, and then on May 9, 2016 the Company’s Board of Directors increased
the quarterly dividend to $0.19 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 2017, our Board
of Directors declared the following dividends:
Declaration Date
|
|
Per Share
Dividend
|
|
|
Record Date
|
|
Total Amount
(In thousands)
|
|
|
Payment Date
|
|
|
|
|
|
|
|
|
|
|
|
May 9, 2016
|
|
$
|
0.19
|
|
|
May 20, 2016
|
|
$
|
3,884
|
|
|
May 27, 2016
|
July 25, 2016
|
|
$
|
0.19
|
|
|
August 8, 2016
|
|
$
|
3,900
|
|
|
August 19, 2016
|
October 24, 2016
|
|
$
|
0.19
|
|
|
November 7, 2016
|
|
$
|
3,900
|
|
|
November 18, 2016
|
January 23, 2017
|
|
$
|
0.19
|
|
|
February 6, 2017
|
|
$
|
3,900
|
|
|
February 17, 2017
|
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. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(9)
|
Restricted Stock (Continued)
|
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.
The Company had 976,878 restricted
common shares issued under the Employee Plans and 302,000 restricted common shares issued under the Director Plans at March 31,
2017, 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 the fiscal years ended March 31, 2017, 2016, and 2015, the Company recognized compensation expense related to the Employee
and Director Plans of $1.9 million, $1.6 million, and $1.5 million, respectively.
A summary of the Company’s
non-vested restricted stock at March 31, 2017 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, 2016
|
|
|
206
|
|
|
|
60
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
|
50
|
|
|
|
30
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock vested
|
|
|
(83
|
)
|
|
|
(30
|
)
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock forfeited or expired
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock outstanding at March 31, 2017
|
|
|
172
|
|
|
|
60
|
|
|
|
232
|
|
At March 31, 2017 and 2016,
there were 232,253 and 265,771, non-vested restricted stock shares outstanding, respectively. During the fiscal years ended March
31, 2017 and 2016, the Company issued, net of forfeitures, 78,582 and 185,084 restricted shares, respectively. At March 31, 2017
and 2016, there were $3.3 million and $3.6 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 1.8 years and 2.3
years for fiscal 2017 and 2016, respectively.
|
(10)
|
Fair Value Measurements
|
The Company carries cash and
cash equivalents and investments at fair value in the Consolidated Balance Sheets. Fair value is defined as an exit price, representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would
use in pricing an asset or a liability. ASC Topic 820 (“Fair Value Measurements”) establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
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, 2017 the Company had invested the majority of
its $58.7 million cash and cash equivalents balance in money market funds (level 1).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(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 leased its 65,300
square foot executive offices, warehouse facility, and customer service and pharmacy contact centers under a non-cancelable operating
lease in Pompano Beach, Florida. The Company was responsible for certain maintenance costs, taxes, and insurance under this lease.
Rent expense was $519,000, $781,000, and $794,000 for the years ended March 31, 2017, 2016 and 2015, respectively. The Company
relocated to the Delray Beach property in the quarter ended December 31, 2016, therefore eliminating any future rent payments
subsequent to December 1, 2016.
Upon acquisition of the Delray
Beach property in January 2016, approximately 88,000 square feet of the property was leased to two tenants. The Company recorded
approximately $586,000 and $116,000 in rental revenue in fiscal 2017 and 2016, respectively, which was included in other income.
The Company expects to receive the following future lease payments over the next four years: $604,000 in fiscal 2018; $622,000
in fiscal 2019; $484,000 in fiscal 2020; and $97,000 in fiscal 2021.
|
(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, 2017, 2016, and 2015, the Company charged $181,000, $177,000, and $187,000, respectively,
of 401(k) matching contribution and administration expense to general and administrative expenses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(13)
|
Quarterly Financial Data (Unaudited)
|
Summarized unaudited
quarterly financial data for fiscal 2017 and 2016 is as follows (in thousands, except for per share amounts):
Quarter Ended:
|
|
June 30, 2016
|
|
|
September 30, 2016
|
|
|
December 31, 2016
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
72,487
|
|
|
$
|
60,791
|
|
|
$
|
52,866
|
|
|
$
|
63,032
|
|
Gross Profit
|
|
$
|
22,452
|
|
|
$
|
18,064
|
|
|
$
|
16,643
|
|
|
$
|
22,155
|
|
Income from operations
|
|
$
|
10,400
|
|
|
$
|
7,731
|
|
|
$
|
7,655
|
|
|
$
|
11,697
|
|
Net income
|
|
$
|
6,594
|
|
|
$
|
4,899
|
|
|
$
|
4,823
|
|
|
$
|
7,503
|
|
Diluted net income per common share
|
|
$
|
0.32
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
On May 8, 2017, the Company’s
Board of Directors declared an increased quarterly dividend of $0.20 per share on its common stock. The $4.1 million dividend
will be paid on May 26, 2017, to shareholders of record at the close of business on May 19, 2017.
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 2017 Proxy Statement.
Management assessed the effectiveness
of the Company’s internal control over financial reporting as of March 31, 2017. 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, 2017.
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 23, 2017
|
|
|
|
/s/ Bruce S. Rosenbloom
|
|
Bruce S. Rosenbloom
|
Chief Financial Officer
|
|
|
May 23, 2017
|