{"url_path":"/sec/pets/10-k/2026/item-7","section_key":"item-7","section_title":"Item 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS","topic":"sec","document":{"doc_type":"10-K","doc_date":"2026-06-02","source_url":"https://www.sec.gov/Archives/edgar/data/1040130/0001040130-26-000019-index.html","accession_number":"0001040130-26-000019","cik":"0001040130","ticker":"PETS","issuer_name":"PETMED EXPRESS INC","edgar_url":"https://www.sec.gov/Archives/edgar/data/1040130/0001040130-26-000019-index.html","primary_entity_key":"0001040130","primary_entity_name":"PETMED EXPRESS INC"},"word_count":5082,"has_tables":true,"body_markdown":"ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\n\nExecutive Summary\n\nPetMed Express, Inc. and subsidiaries, d/b/a PetMeds® (the \"Company\", \"we\", \"us\", or \"our\") is a leading nationwide direct-to-consumer pet pharmacy and online provider of prescription and non-prescription medications, foods, supplements, supplies and vet services for dogs, cats, and horses. PetMeds markets and sells directly to consumers through its websites, toll-free numbers, and mobile application. We offer consumers an attractive alternative for obtaining pet medications, foods, and supplies in terms of convenience, price, speed of delivery, and valued customer service.\n\nFounded in 1996, our executive headquarters offices are currently located at 420 South Congress Avenue, Delray Beach, Florida 33445, and our telephone number is (561) 526-4444. We have a March 31 fiscal year end.\n\nPresently, our product line includes approximately 6,400 of the most popular pet medications, health products, and supplies for dogs, cats, and horses.\n\nWe market our products through national and local advertising campaigns which aim to increase the recognition of the “PetMeds” brand name and \"PetCareRx\" brand name, increase traffic on our websites at www.petmeds.com and www.petcarerx.com, acquire new customers, and maximize repeat purchases. Our sales consist of products sold mainly to retail consumers. The twelve-month average purchase increased slightly at approximately $98 and $97 per order for the fiscal years ended March 31, 2026, and March 31, 2025, respectively.\n\nCritical Accounting Policies and Estimates\n\nOur 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. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (\"GAAP\") which 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. We believe that the estimates, assumptions and judgments involved in the accounting policies described below involve a significant level of estimation uncertainty and have the greatest potential impact on our financial condition and results of operations and, therefore, we consider these to be our critical accounting policies.\n\nCritical Accounting Policies\n\nRevenue recognition\n\nWe account for revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers and generate revenue by selling prescription and non-prescription pet medication products, pet food, supplements, supplies, membership fees, and veterinary service mainly to retail customers. Certain pet supplies offered on our website are drop shipped to customers. We are the principal in the arrangement, as we control the goods prior to transfer and are responsible for supplier selection, pricing, and returns for damaged or missing products. Revenue contracts contain one performance obligation, which is delivery of the product. 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. Revenue is recognized when control transfers to the customer at the point in time in which the shipment of the product occurs. This key judgment is determined as the shipping point, which represents the point in time where we have a present right to payment, title has transferred to the customer, and the customer has assumed the risks and rewards of ownership.\n\nOutbound shipping and handling fees are an accounting policy election and are included in product sales upon shipment. 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.\n\nMembership fees revenue is recognized from two models: (1) PetPlus memberships for PetCareRx customers and (2) employer-sponsored partner memberships that provide access to the PetPlus program. These memberships offer discounted\n\n29\n\npricing, free standard shipping, veterinary telehealth services and along with other benefits, which together represent a single stand-ready performance obligation.\n\nPetPlus membership are billed annually upfront and automatically renew each year, with revenue recognized ratably over the subscription period. In addition to annual membership fees earned under the PetPlus program, PetCareRx partner memberships are earned on a month-to-month basis.\n\nVirtually all of our sales are paid by credit cards and we usually receive the cash settlement in two to three banking days. Credit card sales minimize accounts receivable balances relative to sales. We had no material contract asset or contract liability balances as of March 31, 2026 or March 31, 2025.\n\nWe maintain an allowance for credit losses that we estimate will arise from customers’ inability to make required payments, arising from either credit card chargebacks or insufficient funds checks. We determine our estimates of the uncollectability of accounts receivable by analyzing historical bad debts and current economic trends. The allowance for credit losses was approximately $25 thousand and $91 thousand as of March 31, 2026 and 2025, respectively.\n\nGoodwill and intangible Assets\n\nGoodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. The Company is required to assess goodwill for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs its annual impairment assessment in the fourth fiscal quarter of each year. An impairment test of goodwill consists of comparing the carrying amount of the single reporting unit to the fair value of the unit. An impairment loss is recognized by the amount that the carrying amount exceeds the fair value, limited to the amount of goodwill. The Company has concluded that it has one reporting unit and has assigned the entire balance of goodwill to this reporting unit.\n\nFor the three months ended June 30, 2025, the Company identified potential impairment triggering events indicating that the fair value of its reporting unit was more likely than not less than its carrying value. These triggering events included a downward revision to the Company’s forecast due to continued revenue declines and a decrease in the Company’s stock price and market capitalization that was sustained in the first quarter of fiscal 2026. In accordance with ASC 350, Intangibles - Goodwill and Other, the Company performed a quantitative goodwill impairment test as of June 30, 2025.\n\nThe fair value of the single reporting unit was estimated using an income approach, employing a discounted cash flow model. As part of the discounted cash flow model, the Company developed estimates, assumptions and judgments about future results. The discounted cash flow projections were based on estimates made by management of current and future strategic and operational plans and future financial performance. Valuation assumptions used in the Company's discounted cash flow valuation also include projected capital expenditures, earnings before interest expense, income taxes, depreciation and amortization expense (EBITDA), working capital, discount rates, tax rates and terminal growth rates. The Company perform sensitivity analyses around the assumptions in order to assess the reasonableness of the assumptions and the results of the testing. As a result of this impairment test, the Company determined the carrying value of the reporting unit exceeded its fair value, resulting in a goodwill impairment charge of $26.7 million during the three months ended June 30, 2025, which represented the entirety of the goodwill balance previously recorded. There was no tax impact to the impairment as goodwill is not tax deductible.\n\nConsistent with the indicators of impairment described above, during the first quarter of our fiscal year ending March 31, 2026, the Company performed the quantitative test which resulted in additional impairment related to the PCRx trade name of $0.6 million, due to a reduction in actual and forecasted revenues.\n\nIn accordance with ASC 820, Fair Value Measurement, the fair value measurement, on a non-recurring basis, for the goodwill and trade name impairments is categorized as a Level 3 fair value measurement. This is due to the significant unobservable inputs used in the valuation, including the forecasted revenues, discount rate, and terminal growth rate, which require significant management judgment and estimation.\n\n30\n\nAccounting for income taxes\n\nWe account for income taxes under the provisions of ASC Topic 740, Accounting for Income Taxes, which generally requires recognition of deferred tax assets and liabilities for the expected future tax benefits or consequences of events that have been included in our 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, we recognize 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.\n\nWe apply “Accounting for Uncertainty in Income Taxes” guidance to all tax positions for which the statute of limitations remains open. We had no liabilities for uncertain tax positions for either fiscal 2026 or fiscal 2025. We file tax returns in the U.S. federal jurisdiction and Florida, Arizona, California, Connecticut, Idaho, Maryland, Michigan, Oklahoma, South Carolina, Virginia, Wisconsin, New Jersey, Georgia, Indiana, New York and the District of Columbia. With few exceptions, we are no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years ending March 31, 2022, or earlier. Any interest and penalties related to income taxes will be recorded to other income (expenses).\n\nCritical Accounting Estimates\n\nOur critical accounting estimates are those estimates that involve a significant level of estimation uncertainty and have the greatest potential impact on our financial condition and results of operations. On an ongoing basis we re-evaluate our judgments and estimates including those related to inventory valuation, goodwill valuation and supplier rebates. 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.\n\nRecently Issued Accounting Pronouncements\n\nSee Note 1 Description of Business and Summary of Significant Accounting Policies for a discussion of recently issued accounting guidance.\n\nMacroeconomic Factors\n\nWe monitor the effects of the macroeconomic environment and take appropriate steps to mitigate the impact on our business, employees and financial condition; however, the nature and extent of this impact in future periods remains difficult to predict due to numerous uncertainties outside our control.\n\n31\n\nResults of Operations\n\nThe following should be read in conjunction with our 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 our consolidated statements of income:\n\nFiscal Year Ended March 31,\n\n202620252024\n\nSales100.0 %100.0 %100.0 %\n\nCost of sales70.8 69.5 69.1 \n\nInventory write-down1.2 — — \n\nGross profit28.0 30.5 30.9 \n\nOperating expenses:   \n\nGeneral and administrative28.3 17.0 20.2 \n\nAdvertising12.0 10.5 11.2 \n\nDepreciation and amortization5.2 3.1 2.6 \n\nImpairment of goodwill and intangible assets15.2 0.5 — \n\nTotal operating expenses 60.7 31.1 34.0 \n\n(Loss) income from operations\n(32.7)(0.6)(3.1)\n\nTotal other income0.7 0.4 0.7 \n\n(Loss) income before provision for income taxes\n(32.0)(0.2)(2.4)\n\n(Benefit) provision for income taxes— 2.5 0.4 \n\nNet loss(32.0)%(2.7)%(2.8)%\n\nNon-GAAP Financial Measures\n\nAdjusted EBITDA\n\nTo provide investors and the market with additional information regarding our financial results, we have disclosed (see below) adjusted EBITDA, a non-GAAP financial measure that we calculate as net income excluding share-based compensation expense (benefit); depreciation and amortization; income tax provision; interest income (expense); and other non-operational expenses. We have provided reconciliations below of net (loss) income to adjusted EBITDA, the most directly comparable GAAP financial measures.\n\nWe have included adjusted EBITDA, herein, because it is a key measure 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 and other expenses. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors.\n\nWe believe it is useful to exclude non-cash charges, such as share-based compensation expense (benefit) and depreciation and amortization from our adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. We believe it is useful to exclude income tax provision and interest income (expense), as neither are components of our core business operations. We also believe\n\n32\n\nthat it is useful to exclude other non-operational expenses, including the acquisition costs related to PetCareRx, employee severance, impairment of goodwill and intangible assets, and interest expense relating to an estimated unremitted prior period state sales tax accrual as these items are not indicative of our ongoing operations. Adjusted EBITDA has limitations as a financial measure, and these non-GAAP measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:\n\n•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 does not reflect capital expenditure requirements for such replacements or for new capital expenditures;\n\n•Adjusted EBITDA does not reflect net 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;\n\n•Adjusted EBITDA does not reflect interest income (expense), net; or changes in, or cash requirements for, our working capital;\n\n•Adjusted EBITDA does not reflect transaction related costs and other items which are either not representative of our underlying operations or are incremental costs that result from an actual or planned transaction and include litigation matters, integration consulting fees, internal salaries and wages (to the extent the individuals are assigned full-time to integration and transformation activities) and certain costs related to integrating and converging IT systems;\n\n•Adjusted EBITDA does not reflect certain non-operating expenses including the employee severance which reduces cash available to us;\n\n•Adjusted EBITDA does not reflect certain non-operating expenses (income) including sales tax expense (income) relating to recording a liability for sales tax we did not collect from our customers;\n\n•Other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces the measures usefulness as comparative measures.\n\nBecause of these and other limitations, Adjusted EBITDA should only be considered 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.\n\n33\n\nThe following tables present a reconciliation of net loss, the most directly comparable GAAP measure to Adjusted EBITDA for each of the periods indicated:\n\nReconciliation of Non-GAAP Measures\nPetMed Express, Inc.\n\nThree Months Ended\n\n($ in thousands, except percentages)March 31, 2026March 31, 2025$\nChange%\nChange\n\nConsolidated Reconciliation of GAAP Net Loss to Adjusted EBITDA:\n\nNet loss\n$(4,061)$(11,644)$7,583 (65)%\n\nAdd (subtract):\n\nShare-based compensation expense272 593 (321)(54)%\n\nIncome taxes(102)5,662 (5,764)(102)%\n\nDepreciation and amortization2,427 2,074 353 17 %\n\nInterest expense (income), net(1,256)123 (1,379)(1121)%\n\nAcquisition/Partnership transactions and other items— 26 (26)n/m\n\nEmployee severance— 75 (75)n/m\n\nProfessional fees (1)\n(65)— (65)n/m\n\nImpairment of goodwill and intangible assets— 1,200 (1,200)n/m\n\nAdjusted EBITDA$(2,785)$(1,891)$(894)47 %\n\nYear Ended\n\n($ in thousands, except percentages)March 31, 2026March 31, 2025$\nChange%\nChange\n\nConsolidated Reconciliation of GAAP Net Loss to Adjusted EBITDA:\n\nNet loss$(57,286)$(6,271)$(51,015)814 %\n\nAdd (subtract):\n\nShare-based compensation expense (reversal)1,365 (6,586)7,951 (121)%\n\nIncome taxes(73)5,684 (5,757)(101)%\n\nDepreciation and amortization9,387 7,039 2,348 33 %\n\nInterest (income), net(511)(185)(326)176 %\n\nAcquisition/Partnership transactions and other items— 231 (231)n/m\n\nEmployee severance1,328 738 590 80 %\n\nSales tax reversal (2)\n— (1,178)1,178 n/m\n\nProfessional fees (1)\n3,177 — 3,177 n/m\n\nImpairment of goodwill and intangible assets27,258 1,200 26,058 2172 %\n\nAdjusted EBITDA$(15,355)$672 $(16,027)(2385)%\n\n(1) Consists of professional fees related to the investigation as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2025.\n\n(2) Reversal consists of abatement of certain sales tax accruals.\n\n34\n\nFiscal 2026 Compared to Fiscal 2025 (refer to our 10-K for the fiscal year ended March 31, 2025 for Fiscal 2025 Compared to Fiscal 2024)\n\nSales\n\nSales decreased by approximately $48.0 million or 21.1%, to approximately $179.0 million for the fiscal year ended March 31, 2026, compared to approximately $227.0 for the fiscal year ended March 31, 2025. The decrease in sales for the fiscal year ended March 31, 2026 was primarily driven by a decline in prescription medication sales slightly offset by lower consumer promotional usage.\n\nReorder sales decreased by approximately $40.2 million, or 21.4%, to approximately $147.8 million for the fiscal year ended March 31, 2026, compared to approximately $188.0 million for the fiscal year ended March 31, 2025. The decrease in reorder sales for the fiscal year ended March 31, 2026 is primarily due to a decline in prescription medication sales.\n\nNew order sales decreased by approximately $6.4 million or 20.5%, to approximately $24.7 million for the fiscal year ended March 31, 2026, compared to $31.1 million for the fiscal year ended March 31, 2025. The decrease for the fiscal year ended March 31, 2026 in new order sales is primarily due to a strategic reduction in paid media advertising.\n\nWe acquired approximately 266,000 new customers for the fiscal year ended March 31, 2026, compared to approximately 351,000 new customers for the same period in the prior year. The following chart illustrates sales by various sales classifications:\n\nYear Ended March 31,Increase (Decrease)\n\nNet Sales (In thousands)\n2026%2025%$%\n\nReorder sales$147,788 82.6 %$188,017 82.8 %$(40,229)(21.4)%\n\nNew order sales24,733 13.8 %31,097 13.7 %(6,364)(20.5)%\n\nMembership fees6,500 3.6 %7,858 3.5 %(1,358)(17.3)%\n\nTotal net sales$179,021 100.0 %$226,972 100.0 %$(47,951)(21.1)%\n\nThe Company changed the definition of a new order sale on July 1, 2024, to include sales from customers who have not previously ordered from the Company over the past twelve months compared to the prior definition which was thirty-six months. The reorder and new order sales amounts for both periods presented reflect this new definition.\n\nThe Company offers an AutoShip & Save subscription program (“AutoShip”) on our website. AutoShip is a 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. We are encouraged by the adoption of our AutoShip program and have seen an increasingly positive trend since we launched this program. Recurring sales, which includes AutoShip and membership revenue, as a percentage of total gross sales was 62.6% for the most recent quarter ended March 31, 2026, up from 56.1% for the same period last year and up from 61.5% sequentially in the prior quarter.\n\nCost of sales\n\nCost of sales decreased by approximately $29.0 million, or 18.4% to $128.8 million for the fiscal year ended March 31, 2026, from $157.8 million for the fiscal year ended March 31, 2025. The cost of sales decrease can be directly related to the decrease in sales during fiscal year 2026. As a percentage of sales, cost of sales was 71.9% in fiscal year 2026, as compared to 69.5% in fiscal year 2025. The fiscal year ended March 31, 2026 includes the impact of the $2.1 million inventory write-down, primarily related to non-prescription medication products, pet food, and supplements, originally acquired for a wholesale transaction that did not materialize. The year over year increase for cost of sales, as a percentage of sales for the fiscal year ended March 31, 2026 compared to the fiscal year ended March 31, 2025 was primarily due to the impact of the inventory write-down.\n\nGross profit\n\nGross profit decreased by approximately $18.9 million, or 27.4%, to $50.2 million for the fiscal year ended March 31, 2026, from $69.1 million for the fiscal year ended March 31, 2025. The decrease in gross profit can be directly related to the decrease in sales and lower profit margins during fiscal 2026. Gross profit as a percentage of sales for fiscal 2026 was 28.0% compared to 30.5% for fiscal 2025. The decrease in gross profit and gross margin percentage for the fiscal year\n\n35\n\nended March 31, 2026 compared to the previous fiscal year was primarily due to the impact of the inventory write-down and lower sales.\n\nGeneral and administrative expenses\n\nGeneral and administrative expenses increased by approximately $12.1 million, or 31.3%, to $50.7 million for the fiscal year ended March 31, 2026, from $38.6 million for the fiscal year ended March 31, 2025. The increase in general and administrative expenses for the fiscal year ended March 31, 2026 was primarily due to a $8.0 million increase in stock-based compensation expense, driven by the non-recurrence of an $8.7 million one-time non-cash stock compensation reversal associated with executive departures in fiscal 2025, a $5.0 million increase in professional fees, of which $3.2 million were related to the whistleblower investigation, a $1.3 million increase in enterprise business system related expenses, a $0.6 million increase from payroll severance, offset by a $1.7 million decrease in payroll and payroll related expenses, $1.2 million decrease in bank services fees, $1.2 million decrease in other general and administrative expenses primarily related to the impact of sales tax settlements in the fiscal year ended March 31, 2026 compared to the fiscal year ended March 31, 2025, and $1.1 million decrease in other general and administrative expenses. General and administrative expenses as a percentage of sales was 28.3% for the fiscal year ended March 31, 2026, compared to 17.0% for the fiscal year ended March 31, 2025.\n\nAs previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2025, on October 7, 2025, the Company publicly reported the conclusion of the previously disclosed investigation by the Audit Committee of the Company’s Board of Directors. Total costs incurred during the fiscal year ended March 31, 2026, in connection with the investigation, were approximately $4.5 million, consisting of $3.2 million of legal and professional fees and $1.3 million of severance-related costs. These amounts were recorded within general and administrative expenses in the Consolidated Statements of Operations. The Company does not expect to incur additional material costs related to the investigation.\n\nAdvertising expenses\n\nAdvertising expenses, which is net of manufacturer funded advertising, decreased by approximately $2.3 million to $21.5 million for the fiscal year ended March 31, 2026, from $23.8 million for the fiscal year ended March 31, 2025. This decrease for the fiscal year ended March 31, 2026, can be mainly attributed to lower gross media spend. As a percentage of sales, advertising expense was 12.0% and 10.5% for the fiscal years ended March 31, 2026, and 2025, respectively.\n\nThe advertising costs of acquiring a new customer, defined as total advertising costs divided by new customers acquired, were $81 for the fiscal year ended March 31, 2026, compared to $68 for the fiscal year ended March 31, 2025. The increase in customer acquisition costs for the year ended March 31, 2026, was primarily attributed to higher digital advertising costs, including increase cost-per-click rates during peak flea and tick season, as well as lower organic traffic.\n\nThe advertising cost of acquiring a new customer can be impacted by the advertising environment, the effectiveness of our advertising creative, 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.\n\nDepreciation and amortization\n\nDepreciation and amortization expense was approximately $9.4 million and $7.0 million for the fiscal years ended March 31, 2026 and March 31, 2025, respectively.\n\nOther (expense) income, net\n\nOther (expense) income increased by approximately $0.4 million, to $1.3 million for the fiscal year ended March 31, 2026, from $0.9 million for the fiscal year ended March 31, 2025. The increase was primarily due to lower invested balances, and higher interest expense accruals on sales tax liabilities. Interest income may decrease in the future based on several factors, including utilization of our cash balances on future investments or partnerships, or on our operating activities. Additionally, interest income could increase or decrease if the current interest rate environment changes.\n\n36\n\nProvision for income taxes\n\nFor the fiscal years ended March 31, 2026 and 2025, we recorded an income tax benefit of approximately $73.0 thousand and a tax provision of $5.7 million, respectively. The decrease to the income tax provision for fiscal 2026 is primarily due to the Company establishing a full valuation allowance against its net deferred tax assets in the prior fiscal year. Our effective tax rate for the fiscal year ended March 31, 2026 was approximately 0.1%, compared to approximately (968.3)% for the fiscal year ended March 31, 2025. The Company's effective tax rate of (968.3)% differs from the U.S. statutory rate primarily due to the increase of valuation allowance against its net deferred tax assets, partially offset with the benefit related to the cancellation of the former CEO’s performance stock units during the period ended March 31, 2025.\n\nNet loss\n\nNet loss increased by approximately $51.0 million, to a loss of approximately $57.3 million for the fiscal year ended March 31, 2026, from a loss of approximately $6.3 million for the fiscal year ended March 31, 2025. The increase to net loss was primarily driven by the goodwill impairment charge of $26.7 million recorded in the first quarter of fiscal 2026 as well as the afore-mentioned decline in prescription medication sales, partially offset by a decrease in cost of sales directly related to the decrease in sales during fiscal 2026.\n\nLiquidity and Capital Resources\n\nThe Company’s liquidity position at March 31, 2026 has been impacted by declining cash balances, declining net sales, recurring operating losses and for fiscal 2026, negative operating cash flows. When considered in the aggregate, these conditions raised substantial doubt about the Company's ability to continue as a going concern within the assessment period, defined as twelve months after the date that our consolidated financial statements are issued. Management evaluated the significance of these conditions in relation to the Company’s ability to meet its obligations within the assessment period and has developed a plan intended to alleviate substantial doubt. The primary elements of the plan include, among other things, advertising and media spend optimization, strategic reductions in operating expenses, including decreases in professional fees following the resolution of non-recurring matters, and reductions in capital expenditures. Management determined that these plans are probable of being effectively implemented and are probable of mitigating the conditions that raised substantial doubt and has concluded that substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following issuance of these consolidated financial statements has been alleviated.\n\nAt March 31, 2026, we had $21.4 million in cash and cash equivalents and no debt obligations. Our working capital at March 31, 2026 and 2025 was approximately $(8.4) million and approximately $16.1 million, respectively. The $24.5 million decrease in working capital was attributable to $35.3 million decrease in current assets, out of which $2.6 million from inventory and $10.8 million decrease in current liabilities, out of which $7.0 million from accounts payable and accrued expenses.\n\nCash flow used by operating activities was $28.4 million for the fiscal year ended March 31, 2026 compared to cash flow provided of $4.7 million in the prior year period. The $33.1 million decrease in cash used to fund operating activities is due to the $51.0 million increase in net loss reduced by $30.0 million of non-cash operating adjustments and partially offset by the $12.1 million decrease in current liabilities net of current assets excluding cash.\n\nNet cash used in investing activities was $4.6 million and $5.1 million for the fiscal years ended March 31, 2026 and 2025, respectively.\n\nNet cash used in financing activities was $0.3 million and $0.2 million for the fiscal years ended March 31, 2026 and 2025, respectively.\n\nWe paid cash dividends quarterly from August 2009 to August 2023. On February 1, 2024, our Board of Directors elected to suspend the quarterly dividend indefinitely. This move is intended to focus use of the Company’s cash flow on growth initiatives and other higher return initiatives. The Board of Directors reviews and discusses the capital allocation needs of the Company, at a minimum, on a quarterly basis. The declaration and payment of future dividends is discretionary and will be subject to a determination by the Board of Directors. When considering whether to declare a dividend, our Board of Directors will take into account:\n\n37\n\n• General economic and business conditions;\n\n• Our financial condition and operating results;\n\n• Our available cash and current and anticipated cash needs;\n\n• Our capital requirements;\n\n• Strategic uses of cash for growth initiatives;\n\n• Contractual, legal, tax and regulatory restrictions on the payment of dividends by us; and\n\n• Such other factors as our Board of Directors may deem relevant.\n\nAt March 31, 2026 we had no material outstanding purchase or lease commitments. Other than the lease commitments assumed as part of the PetCareRx acquisition for the leases on two buildings, we are not currently bound by any long- or short-term agreements for the purchase or lease of property and equipment. Any material amounts expended for property and equipment 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. Our primary source of working capital is cash from operations. We presently have no need for alternative sources of working capital and have no commitments.\n\nRecent Accounting Pronouncements\n\nOther than disclosures included in Note 1 of the Consolidated Financial Statements, which are incorporated by reference as if fully set forth herein, we do not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on our consolidated financial position, results of operations, or cash flows."}