Q3 2024 PetMed Express Inc Earnings Call

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Shamali: Good afternoon, everyone, and thank you for joining the Petmed Express Third Quarter Preliminary Financial Results. My name is Shamali, the operator for today. I would now like to pass the conference over to our Brian Preveno and Vasilis.

Good afternoon, everyone and thank you for joining at Med Express third quarter preliminary financial results Conference call. My name is tamales be operator for today's call.

I would now like to pass the conflict open to our host Mr. Brian Prep investigation.

Brian Preveno: Thank you, operator. And I'd like to welcome everybody here today to the Petmed Express Fiscal Third Quarter Preliminary Financial Results Conference Call. Certain information that will be included during this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934, as amended, that may involve a number of risks and uncertainties. These statements are based on our beliefs as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. The actual results could differ materially from those projected.

Brian: Thank you operator, and I'd like to welcome everybody here today to the Pet Med Express fiscal third quarter preliminary financial results conference call certain information that will be included during this call may include forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.

The Securities Exchange Act of 1934 as amended it may involve a number of risks and uncertainties.

Brian: These statements are based on our beliefs as well as assumptions we have used based upon information currently available to us because these statements reflect our current views concerning future events. These statements involve risks uncertainties and assumptions.

Brian: Actual results could differ materially from those projected there can be no assurance that any forward looking results will occur or be realized nothing contained in this presentation is where should be relied upon as a representation or warranty as to any future matter, including any matter in respect of the operations or business, where if I may.

Vasilis: There can be no assurance that any forward-looking results will occur or be realized, and nothing contained in this presentation is or should be relied upon as a representation or warranty as to any future matter, including any matter in respect of the operations or business or financial condition of Petmed. Petmeds undertakes no obligation to update publicly these forward-looking statements based on subsequent events, except as may be required by applicable law, regulation, or other competent legal authority. We have identified various risk factors associated with our operations in our most recent annual report and other filings with the Securities Exchange Commission. Now, let me introduce our CEO and President, Matt Hulett. Matt.

Brian: Condition of pet meds.

Brian: That message undertakes no obligation to update publicly these forward looking statements based on subsequent events, except as may be required by applicable law regulation or other competent legal authority.

Brian: Testified various risk factors associated with our operations in our most recent annual report and other filings with the Securities Exchange Commission.

Speaker Change: Now, let me introduce our CEO and president match that.

Matthew N. Hulett: Thank you, Brian. Thank you to everyone for taking the time today to participate in today's conference call. Today's call will follow a slightly different format than recent calls. As many of today's listeners likely saw, this afternoon we filed an 8K and issued a press release announcing a planned restatement of certain previously issued financial statements due to errors in accounting for certain tax-related matters. Please refer to those documents for additional information regarding those factors that may affect the restatement of our financial statements. Additionally, due to the administrative burden and the process required for a multi-year restatement, our 10-Q for fiscal year 2024's third quarter ended December 31st, 2023, will be delayed.

Speaker Change: Thank you Brian thank.

Speaker Change: Thank you to everyone for making the time today to participate in today's conference call.

Speaker Change: Today's call will follow a slightly different format in recent calls.

Speaker Change: As many of todays listeners likely saw this afternoon, we filed an 8-K and issued a press release announcing a planned restatement of certain previously issued financial statement due to errors in accounting for certain tax related matters.

Speaker Change: Please reference to those documents for additional information regarding those factors that may affect the restatement of our financial statements. Additionally, due to the administrative burden and the process required for a multi year restatement, our 10-Q for fiscal year 'twenty 'twenty. Four is third quarter ended December 31 2023.

Speaker Change: It will be delayed.

Matthew N. Hulett: The restatement and the delay in this quarter's 10-Q filing are due to errors in the accounting treatment related to certain previously reported tax-related items. As you recall, our Chief Financial Officer, Christine Chambers, first discussed the identification of the need for a sales tax accrual in the second fiscal quarter of last year and provided an update on the fiscal fourth quarter call. The restatement pertains in part to the recording of this sales tax accrual. I want to stress a few things.

Speaker Change: The restatement and the delay in this quarters 10-Q filing are due to errors in the accounting treatment related to certain previously reported tax related items.

Speaker Change: As you recall, our chief financial Officer of Christine Chambers first discuss the identification of a need for a sales tax accrual in the second fiscal quarter of last year and provided an update on the fiscal fourth quarter call.

Speaker Change: The restatement pertains in part to the recording of this sales tax are cool.

Speaker Change: I want to stress a few things.

Matthew N. Hulett: Number one, we are working together with all of our relevant partners and consultants to finalize the accounting treatment and complete the restatement as quickly as possible. Number two, the restatement has no impact on our day-to-day business operations or on our strategy. And number three, the restatement is a matter of accounting for tax-related items, and there is no impact on our current cash balance. Christine will be discussing this accounting issue in more detail during her portion of the call. We'd like to spend the remainder of the time on today's call discussing progress made in the business and sharing some high-level specifics from the fiscal third quarter. For the quarter ending December 31st, 2023, PetMeds delivered sales of $65.3 million compared to sales of $58.9 million in the prior year, an increase of 11% year over year, including from our recent acquisition of PetCorrect. We reported a gross margin of 27.4%, which was in line with our expectations.

Speaker Change: For one we are working together with all of our relevant partners and consultants to finalize the accounting treatment incomplete that restatement as quickly as possible number two the restatement has no impact on our day to day business operations or on our strategy and number three the restatement as a matter of accounting for tax related items.

Speaker Change: And there is no impact on our current cash balance.

Speaker Change: Christine we will be discussing this accounting issue in more detail during her portion of the call.

Christine Chambers: We'd like to spend the remainder of the time on today's call discussing progress made in the business and sharing some high level specifics from the fiscal third quarter.

Christine Chambers: For the quarter ending December 31st 2023, 10 minutes delivered sales of $65 3 million compared to sales of $58 9 million in the prior year, an increase of 11% year over year, including from our recent acquisition of pet care acts.

Christine Chambers: We reported a gross margin of 27, 4%, which was in line with our expectations. This reflects a balance between promotional activities intended to introduce food to our customers and a regimented focus on maintaining our historical gross margin as an overall business.

Matthew N. Hulett: This reflects a balance between promotional activities intended to introduce food to our customers and a regimented focus on maintaining our historical gross margin as an overall business. Returning customers accounted for sales of $57.7 million during the quarter, reflecting a growth of 8% year-over-year related to the addition of the PetCareRx business. In terms of our initiatives to offer more products and provide more value to our existing pet parent customers, we've focused intensely on raising awareness about our food catalog at both the category and brand levels. Additionally, we are enhancing our cross-sell initiatives through our email CRM, call center, and website. Along those lines, we are excited to announce the addition of another major food brand of pet meds in the coming months. We have entered into a partnership with Hill's Pet Nutrition and are launching Hill's Science Diet this quarter, a premium category known for its tailor-made nutrition that promotes healthy skin, coat, and immune system in pets. The Hill Science Diet will start to roll out as early as next month.

Christine Chambers: Returning customers accounted for sales of $57 7 million during the quarter, reflecting a growth of 8% year over year related to the addition of the pet care Rx business.

Christine Chambers: In terms of our initiatives to offer more products and provide more value to our existing pet parent customers, we focused intensely on raising awareness about our food catalog at both the category and brand levels.

Christine Chambers: Additionally, we are enhancing our cross sell initiatives through our email CRM call Center and website.

Christine Chambers: Along those lines. We are excited to announce the addition of another major food brand a pet meds in the coming months.

Christine Chambers: We have entered into a partnership with Hill's pet nutrition and are launching hills science diet. This quarter, a premium category known for its tailor made nutrition that promotes healthy skin coat and immune system and pets.

Christine Chambers: Hill's science diet will start to roll out as early as next month.

Matthew N. Hulett: Premium food brands are important relationships for Petmed, and this expansion was accelerated in part due to our acquisition of Petcare Rx. Prescription and premium food are important categories for pet meds, as our pet parents are very health and wellness focused. Simply put, our customers want premium food and prescription food options, and we'll be leaning heavily on this brand, as well as new ones, as we continue to go to market in the pet food category. We believe these additional food options provide us with the ability to interact with our customers more often, increase the average order size, and enhance the lifetime value of each customer. Let's turn to our operational advancements and initiatives. We have talked about our key performance indicators for the transformation of the business, successfully providing more product offerings to our current customers, increasing our recurring customer base, and driving recurring revenue.

Christine Chambers: <unk> food brands are important relationships their pet meds and this expansion was accelerated in part due to our acquisition of pet care Rx.

Christine Chambers: Prescription in premium food are important categories for patent that as our pet parents are very health and wellness focused simply put our customers want premium food infrastructure and food options and we'll be leaning in heavily on this brand as well as new ones as we continue to go to market and the pet food category.

Christine Chambers: We believe these additional food options provide us the ability to interact with our customers in more often increase the average order size and enhance the lifetime value of each customer.

Christine Chambers: Let's turn to our operational advancements and initiatives, we have talked about our key performance indicators for the transformation of the business successfully providing more product offerings darker and customers, increasing our recurring customer base and driving recurring rabbits.

Matthew N. Hulett: A key business model driver for the Petmeds business is to expand the number and types of products our core prescription customer base buys from us or will buy from us on a recurring basis. We believe that our new auto-ship platform, which was recently launched, will help facilitate the long-term compounded benefit and expanded customer loyalty by delivering exceptional value. This new auto-ship and save capability enhances our current capabilities to include more pet parent control over their ordering experience, including activities like controlling the subscription duration, pausing or accelerating a subscription, and adding additional products. We have also integrated our VetLive functionality, which connects pet parents to licensed veterinarians over a digital connection 24-7, which is now available for all of our AutoShip and SAVE customers on a complimentary basis.

Christine Chambers: A key business model driver for the pet Meds business is to expand the number and types of products are core prescription customer base buys from us or will buy from us on a recurring basis, we believe that our new auto ship platform, which was recently launched will help facilitate the long term compounded benefit and.

Christine Chambers: Handed customer loyalty by delivering exceptional value this new auto ship and save capability enhances our current capabilities to include more pet parent control over their ordering experience, including activities like controlling the subscription duration.

Christine Chambers: Pausing or accelerating as subscription and adding additional products.

Christine Chambers: We've also integrated our vet life functionality, which connects pet parents to licensed spectrum areas over a digital connection 24, seven which is now available for all of our auto ship and save customers on a complementary basis.

Christine Chambers: We believe the more products a pet parent uses in our Autoship program, the more loyal they become. Our Autoship and Save and Pet Plus programs grew to 52% of our revenue during this last fiscal quarter, a substantial increase from 42% of revenue for the same time last year. I will now turn the call over to our CFO, Christine Chambers, to provide an overview of the quarter's financials. Thanks, Matt.

Christine Chambers: We believe the more products that pet parent uses on our auto ship program the more loyal they become.

Christine Chambers: Our auto ship and saved and pet plus programs grew to 52% of our revenue. During this last fiscal quarter, a substantial increase from 42% of revenue for the same time last year.

Christine Chambers: I'll now turn the call over to our CFO Christine Chambers to provide an overview of the quarter's financials.

Christine Chambers: Thanks, Matt.

Christine Chambers: I want to first address the restatement announced in the 8K earlier this afternoon, and then I will address selected preliminary third quarter results for fiscal year 2024, in our previously issued annual financial statement for fiscal year 2023. We determined that an accrual for sales tax was required, and we recorded a sales tax accrual during the period based on a determination that the sales tax liability was probable and estimable, and that it was in accordance with what we believe to be the appropriate guidance from GAAP. In the third quarter of fiscal year 2024, the company reviewed, in conjunction with our auditors, RSM, the accounting treatment related to the previously reported sales tax accruals, as well as the accounting treatment related to the deferred tax asset associated with the company's acquisition of PetCare Rx in April 2023. As a result of the review, the Audit Committee of our Board has concluded, based on management's determination, that the company misapplied GAAP as it relates to the sales tax liability for prior periods, included in the second quarter and fourth quarter of fiscal year 2023. The deferred tax inset was reported in the first and second quarter of fiscal year 2024.

Christine Chambers: I Wonder if there is to address the restatements announced in the 8-K earlier this afternoon.

Christine Chambers: And then I will address selected preliminary third quarter results for fiscal year 'twenty 'twenty four.

Christine Chambers: In our previously issued annual financial statements for fiscal year 2023.

Christine Chambers: We determined that an accrual for sales taxes, which were quiet and we recorded a sales tax accrual in the period based on a determination.

Christine Chambers: The sales tax liability was probable and estimable.

Christine Chambers: And then it was in accordance with what we believe to be the appropriate guidance from GAAP.

Christine Chambers: In the third quarter of fiscal year 2020 for the company reviewed in conjunction with our auditors our S. M D.

Christine Chambers: The accounting treatment related to the previously reported sales tax accruals.

Christine Chambers: As well as the accounting treatment related to the deferred tax benefit associated with the company's acquisition of pet care of racks in April 2023.

Christine Chambers: So as a result of the review.

Christine Chambers: The committee of our board has concluded.

Christine Chambers: Just on management's determination.

Christine Chambers: Did the company misapplied gap as it relates to the sales tax liabilities the prior period.

Christine Chambers: <unk> in the second quarter and fourth quarter of fiscal year 2023.

Christine Chambers: You said before changes in the first and second quarters of fiscal year 'twenty 'twenty four.

Christine Chambers: The company expects the impact of the restatement to affect multiple periods. The most significant impact on the income statement is expected to be a decrease in general and administrative expense for fiscal year 2023 in the range of $6 to $8 million and a corresponding increase in net income for the same period. This amount was originally recorded as a sales tax liability based on a probable and estimable approach in fiscal year 2023, rather than the correct legal liability approach under which the maximum potential sales liability would have been recorded beginning in fiscal year 2020. The restatement is expected to require the company to revise and record a sales tax liability of approximately $14 to $20 million as of March 31, 2020 because this liability gets adjusted in subsequent periods. As of March 31st, 2023, we expect to record a maximum potential sales tax liability of approximately $16 to $23 million.

Christine Chambers: The company expects the impact of the restatement to affect multiple periods.

Christine Chambers: The most significant impact to the income statement is expected to be a decrease in general and administrative expense for fiscal year 2023 in the range of six to 8 million.

Christine Chambers: And the corresponding increase in net income for the same period.

Christine Chambers: This amount was originally recorded as a sales tax liability based on a probable and estimable approach in fiscal year 2023.

Christine Chambers: Rather than the correct legal liability approach under which the maximum potential sales liability would have been recorded beginning in fiscal year 'twenty 'twenty.

Christine Chambers: The restatement is expected to require the company to revise and record a sales tax liability of approximately $14 million to $20 million as of March 31st 2020.

Christine Chambers: Because this liability get suggested in subsequent periods.

Christine Chambers: As of March 30 says 2023.

Christine Chambers: We expect to record a maximum potential sales tax liability of approximately $16 million to $23 million.

Christine Chambers: In addition, the accounting related to the valuation of the carried forward net operating loss, resulting in an overstated deferred tax asset reported at June 30th and September 30th, 2023, related to the Petcarex acquisition will also be revised. This will increase goodwill and decrease the deferred tax assets on the balance sheet. This revision is the result of a technical tax matter surrounding a limitation adjustment to the net operating losses acquired. The company believes that this fairly represents the expected impact of the restatement on the company's prior financial statements. However, further adjustments may arise.

Christine Chambers: In addition, the accounting related to the valuation.

Christine Chambers: They carried forward net operating loss.

Christine Chambers: Resulting in an overstated deferred tax asset recorded at G.

Christine Chambers: June 30th in September since he is 2023 related to the pet care Rx acquisition will also be revised.

Christine Chambers: This will increase goodwill and decrease the deferred tax asset on the balance sheet.

Christine Chambers: This revision is the result of a technical tax matter surrounding a limitation adjustment to the net operating losses are quiet.

Christine Chambers: The company believes that this fairly represents the expected impact of the restatement on the company's prior financial statements will have a further adjustments may arise.

Christine Chambers: It is important to note that while unfortunate, the restatement is not expected to have an impact on the company's fiscal year 2024 revenue or cost of sales sold, nor is it expected to impact our current cash balance. Additionally, the restatement is not expected to impact our day-to-day business operations or strategic priorities as a result of the level of administrative effort and time associated with completing the restatement. The company will experience a delay in the filing of its quarterly report on Form 10-Q for the quarter ended December 31st, 2023 and expects to file a notification of late filing with the SEC.

Christine Chambers: It is important to note the violent fortunate the restatement is not expected to have an impact on the company's fiscal year 'twenty 'twenty four revenue or cost of sales sold.

Christine Chambers: It does not impact our current cash balance.

Christine Chambers: Did we statement is not expected to impact our day to day business operations or strategic priorities.

Christine Chambers: As a result of the level of administrative effort and time associated with completing the restatement.

Company will experience a delay in the filing of its quarterly reports on Form 10-Q for the quarter ended December 31st 2023, and expects to file notification of late filing with the SEC.

Christine Chambers: To reiterate, this quarter, due to the restatement process, we cannot comment on numbers below the gross profit line, as a restatement could potentially impact G&A. Today, I will report our selected preliminary third quarter fiscal 2024 results for the quarter ended December 31st, 2023. As a reminder, this will be the third quarter of combined results, including the acquisition of Petcare Rx, compared to results for Petmeds only for fiscal year 2023. Third quarter sales were $65.3 million, compared to sales of 58.9 million in the same period last year, representing growth of 11 percent year over year. The growth was due to incremental sales from the acquisition of Petcare Rx, partially offset by declines in Petmed's legacy new order and reorder sales. Additionally, we continue to experience a single-digit decline in Petmed's legacy real estate sales.

Christine Chambers: Reiterate this quarter due to the restatement process, we cannot comment on numbers below the gross profit line and the restatement could potentially impact G&A.

Christine Chambers: Today I will report our selected preliminary third quarter fiscal 'twenty 'twenty four results for.

Christine Chambers: For the quarter ended December 31st 2023.

Christine Chambers: As a reminder, this will be the third quarter of combined results, including the acquisition of Pet care Rx.

Christine Chambers: We've had two results with pet meds.

Christine Chambers: For fiscal year 2023.

Christine Chambers: Third quarter sales was $65 3 million.

Pad to sales of $58 9 million in the same period last year.

Christine Chambers: Representing growth of 11% year over year.

Christine Chambers: The growth was due to incremental sales from the acquisition of pet care Rx, partially offset by declines in pet Meds legacy New order and reorder sales.

Christine Chambers: We continue to experience a single digit decline in pet meds legacy real sales.

Christine Chambers: We welcomed approximately 67,000 new pet parents this quarter, compared to nearly 72,000 in the prior year. The decline year over year is primarily due to one-time promotions in the same period last year that we tested and intentionally did not repeat as they did not attract high order value customers. Reorder sales were $57.7 million for the quarter, an increase of 8% compared to reorder sales of $53.3 million in the same period last year. We've continued to grow our recurring revenue, including ordership and save sales and Petcarerx membership sales, as a percentage of total sales. This drives greater engagement and strengthens our recurring sales base. Recurring sales as a percentage of total sales were 52% in the quarter, up sequentially from 51% in the prior quarter and up from 42% for the same period last year. Gross profit for the quarter was a percentage of sales, with 27.4% compared to 25.9% in the same quarter last year and 28.3% in the prior quarter. The increase year over year was due to lower promotions compared to the prior year. As of December 31st, 2023, we had approximately $49.4 million of cash and equivalents on hand and no debt.

We welcomed approximately 67000, new pet parents this quarter.

Christine Chambers: Tad to nearly 72000 in the prior year.

Christine Chambers: The decline year over year is primarily due to one time promotion in the same period last year that we tested and intentionally did not repeat.

Christine Chambers: They did not attract high value customers.

Christine Chambers: Reorder sales of $57 7 million for the fortunate.

Christine Chambers: The increase of 8% compared to reorder sales of $53 3 million in the same period last year.

Christine Chambers: We've continued to grow our recurring revenue, including ownership and save sales in pet care Rx membership sales.

Christine Chambers: So your total sales.

This drives greater engagement and strengthens our recurring sales base.

Christine Chambers: Recurring sales as a percentage of total sales was 52% in the quarter up sequentially from 51%.

In the prior quarter and up from 42% for the same period last year.

Christine Chambers: Gross profit for the quarter as a percentage of sales was 27, 4% compared to 25, 9% in the same quarter last year.

Christine Chambers: 28, 3% in the private school itself.

Christine Chambers: The increase year over year was due to lower promotions compared to the prior year.

Christine Chambers: As of December 31st 2023, we had approximately $49 4 million of cash and equivalents on hand and no debt.

Matthew N. Hulett: Now I will turn the poll back to Matt for some concluding remarks. Thanks, Christine. As the CEO of this company, I've always promised to lead with full transparency. Providing financial statements that can be relied upon is fundamental and paramount to running a public company.

Christine Chambers: Now it will tend to pull back to Matt for some concluding remarks.

Matt: Thanks Christine.

Matt: As the CEO of this company I've always promise to lead with full transparency.

Matt: Providing financial statements that can be relied upon as fundamental and paramount to running a public company.

Matthew N. Hulett: In an effort to provide complete and accurate financial statements, we recorded an additional sales tax accrual during fiscal 2023 and, unfortunately, later determined the gap was misapplied in doing so. Despite having to correct this, I want to reiterate that our focus remains on operating the business and on executing our strategy. Our pet health care strategy revolves around four key pillars, medication, care, nutrition, and wellness.

Matt: In an effort to provide complete and accurate financial statements. We've recorded an additional sales tax accrual during fiscal 2023, and Unfortunately later determined the gap was misapplied in doing so.

Despite having to correct. This I want to reiterate that our focus remains on operating the business and on executing our strategy.

Matt: Our pet health care strategy revolves around four key pillars medication care nutrition and wellness.

Matthew N. Hulett: Petmed's focus on executing our initiatives to offer a broader range of products and services to our core Petmed customer base on a recurring basis. The announcement of adding a new premium food brand, along with a major upgrade to our auto ship and save infrastructure, represents significant milestones in the journey to transform Petmeds into a trusted pet health expert. This will deliver more value to new pet parents, as well as our existing 2 million customers. With these statements, we conclude our prepared remarks for today. Operator, we are now prepared to take questions. Thank you. Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone. A confirmation tone will indicate that a line is in the. You may press star 2 if you would like to remove your question.

Matt: Pet Meds is focus on executing our initiatives to offer a broader range of products and services to our core pet meds customer based on a recurring basis.

Matt: The announcement of adding a new premium food brand along with a major upgrade to our auto ship and save infrastructure represent significant milestones in the journey to transform pet meds into a trusted pet health expert.

Matt: This will deliver more value to new pet parents as well as our existing 2 million customers with these statements. We conclude our prepared remarks for today operator, we are now prepared to take questions. Thank you.

Speaker Change: Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Speaker Change: A confirmation tone will indicate your line is in the question queue you.

Speaker Change: You May press star two if you'd like to remove your question from the queue.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please. And our first question comes from the line of Ryan Mayers with Lake Street Capital Markets. Please proceed with your, Hey guys, thanks for taking my question. First one for me, just, you know, a couple on the actual restatement itself. Can you just discuss or explain, you know, what actually happened with the sales tax accrual and, you know, essentially how this error happened? Hi, and it's Christine, and I'm glad you asked the question.

Speaker Change: This is using speaker equipment, it may be necessary to pick up your handset before pressing the star.

Speaker Change: One moment.

Speaker Change: Yeah.

Speaker Change: Our first question will come from the line of Ryan Meyers with Lake Street Capital markets. Please proceed with your question.

Ryan Meyers: Hey, guys. Thanks for taking my question.

Ryan Meyers: First one for me just a couple on the actual restatement itself can you just discuss or explain you know what actually happened with the sales tax accrual and essentially how those are happened.

Ryan Meyers: Ryan its Christine and I'm glad you asked the question. Thank you.

Christine Chambers: Thank you. There are three really important things that need to be taken away, and the first thing I'll start with is this is the same issue that I identified and discussed last year related to our historical, these are prior period sales tax and exposure-related taxes. The difference is surrounded by the accounting tree.

Christine Chambers: There are three very important things that need to be taken away and first thing I'll start with is this is the same issue that I had identified and discussed last year related to our historical these prior period sales tax and an exposure related to that.

Christine Chambers: Is surrounded by the accounting treatment.

Christine Chambers: So, just to reiterate, this is not the result of any new facts or new analysis; it's about the accounting treatment. So, secondly, let me just talk about the accounting treatment. There are two different ways to account for prior-period sales tax liabilities. There is, you can apply ASC 450, which is based on, as I mentioned, this probable and estimable approach.

Christine Chambers: So just to reiterate this is not the result of any new facts on your analysis, it's about the accounting treatment. Secondly, let me just talk about the accounting treatment.

Christine Chambers: There's two different ways to account for prior period sales tax liabilities says you can apply a S. Faithful 50, which is based on as I mentioned this probable and estimable approach.

Christine Chambers: The other way that you can look at this is by applying ASC-405, which is based on a legal liability approach. This adopts a more strict interpretation and improves, what's important, this improves the maximum legal liability. Now, we believe that 405 is better than 450. And again, when you're looking at AFC and you're looking at accounting applications, they're often about judgment.

Christine Chambers: The other way that you can look at this is by applying a S E 405.

Christine Chambers: Which is based on the legal liability approach. This adopt a more strict interpretation any cruise what's important disappears to the maximum legal liability.

Christine Chambers: Now, we believe that four or five is better than full 50.

Christine Chambers: You know when you're looking at and E S and you're looking at accounting applications, they're often about judgment and historically that has been diversity of practice applied to this issue, but we'd just reiterate.

Christine Chambers: Historically, there has been diversity of practice applied to this issue, but we just, you know, reiterated that we believe now 405 is applicable versus 450. Thirdly, the last thing I want you to understand, yeah, just to reiterate as well, this is the third thing, you know, while having to restate, really disappointed. We are, as Matt and I have mentioned, committed to operating with the highest standards of transparency and making sure that we provide transparency and integrity. And we proactively identified the issue late in the third quarter and have begun working with our partners immediately to resolve it. So, we're working on this as quickly as possible, and we'll, you know, we'll get more out as soon as possible. Got it. That's helpful to understand.

Christine Chambers: We reiterated that we believe now four or five is applicable versus full 50.

Christine Chambers: Thirdly got it the last thing I want you to want to yeah, just just as long as the fed thing yeah.

Christine Chambers: You know, while having to restate it.

Christine Chambers: Really disappointing and we are as Matt and I have mentioned.

Christine Chambers: Mrs.

Christine Chambers: Operating with the highest standards of transparency and making sure that and provide transparency and integrity and we proactively identified the issue late in the third quarter and have begun working with our partners immediately each results. So we're looking at this as quickly as possible.

Christine Chambers: You know, we get more of as soon as we can.

Speaker Change: Got it that's helpful to understand and then you know you talked previously the accrual was originally estimated about six 8 million now it sounds like it's obviously going to be quite a bit more than that does that lead you guys became much more in that sales tax once those accruals go through or how should we be thinking about the taxes once youre able.

Christine Chambers: And then, you know, you talked previously about the accrual being originally estimated about $6 to $8 million. Now it sounds like it's obviously going to be quite a bit more than that. Does that mean you guys will be paying much more in sales tax once those accruals go through? Or how should we be thinking about taxes once you're able to revise this issue? Yeah, thank you. Another great question. Again, no change, Brian, to our approach or strategy in resolving sales tax issues with the states. We've demonstrated the history of most settlements with states.

Speaker Change: To revise this issue.

Speaker Change: Yeah. Thank you another great question again, no change Brian to our approach or strategy in resolving sales tag Mat sales tax issues with with the states and we've demonstrated a history unless settlements with state then.

Speaker Change: And again, our analysis of what is.

Speaker Change: Probably you know estimate has not changed so no change to our tax strategy.

Speaker Change: This resulted in decreased sales tax matters.

Speaker Change: Counting change.

Speaker Change: Okay got it and then just kind of switching gears here to the actual fundamentals of the business I'm. Just wondering if you can comment on if you've seen further stabilization of the core pet meds business.

Christine Chambers: And again, our analysis of what is probable and estimable has not changed. So, no change to our tax strategy with resolving this sales tax. It's just an accounting change. Okay.

Speaker Change: Or maybe a little bit more commentary on what you're seeing there.

Speaker Change: Yeah, I can take that Christine you Ryan. Thanks for the question Yeah, I think in the in the call. You. Obviously noted that the returning core pet meds customer base. We noted is declining relatively at the same rate.

Matthew N. Hulett: And then just kind of, you know, switching gears here to the actual fundamentals of the business. Just, you know, wondering if you can comment on whether you've seen further stabilization of the core of Petmed's business, or maybe a little bit more commentary on what you're seeing there. Yeah, I can take that, Christine.

Speaker Change: From previous quarters.

Speaker Change: And you know the really the big the Big comment there I would say is the core returning base of customers to pet meds and the answer that we've really been focused on as a company is getting more of our customers on the auto ship because our auto ship business is growing and those customers churn less and then too.

Matthew N. Hulett: Hey, Ryan, thanks for the question. Yeah, I think in the call you obviously noted that the returning core Petmeds customer base we noted is declining relatively at the same rate from previous quarters. And, you know, really the big comment there, I would say, is the core returning base of customers to Petmeds. And the answer that we've really been focused on as a company is getting more of our customers on the auto ship because our auto ship business is growing, and those customers churn less. And then two, in parallel, upgrading that platform, which I noted on the call. And I've mentioned this on several calls, but just to add a little bit more color to that, the auto ship and save infrastructure was sitting on a very legacy old platform.

Two in parallel upgrading that platform, which I noted on the call and I've mentioned this on several calls, but just to add a little bit more color to that.

Speaker Change: Auto ship and save infrastructure was sitting on a very legacy old platform.

Speaker Change: Spent about a year getting ready to do two things one to adopt that order management system that enables us to really build brains around distributing products interacting with drop shippers interacting with different warehouses and then also an order subscription platform that enables the consumer.

Speaker Change: And as well as as I said the back end to have a much more flexible system the old system.

Speaker Change: Was not really what I call industrial grade and we think that this new platform that we just released just several weeks ago is gonna be a really good answer to stabilizing the returning customer base with pet meds.

Matthew N. Hulett: We spent about a year getting ready to do two things. One, to adopt an order management system that enables us to really build brains around distributing products, interacting with drop shippers, interacting with different warehouses. And then also, an order subscription platform that enables the consumer, as well as us as the back end, to have a much more flexible system. The old system was not really what I call industrial grade.

Speaker Change: We've noted in our auto ship sales as a percent of overall sales around 50%, we'd like to be a lot higher than that our original goal was 50%. We know that other direct to consumer brands have a much higher percent than we couldnt have done that unless we made this investment about a year ago to upgrade the system. So in a long winded way.

Matthew N. Hulett: And we think that this new platform that we just released, just several weeks ago, is going to be a really good answer to stabilizing the returning customer base with Petmeds. We've noted in our auto ship sales as a percent of overall sales around 50%. We'd like to be a lot higher than that.

Hey.

Speaker Change: More customers on auto ship buying more customer more product from from pet meds, including food and this this outage and save platform. We think is gonna be a key future unlock to really stabilize that base because it is much more stable plateau, not if you're not if you're working with.

Matthew N. Hulett: Our original goal was 50%. We know that other direct-to-consumer brands have a much higher percentage, and we couldn't have done that unless we made this investment about a year ago to upgrade this system.

Speaker Change: Got it and then last question for me I'm. Just wondering if you can comment automobile food business and all of that is obviously, a newer piece of the business, but any sort of contribution you guys saw there during the quarter or how we should think about that business is trending.

Matthew N. Hulett: In a long-winded way, more customers are on AutoShip buying more products from Petmeds, including food. And this AutoShip and Save platform, we think, is going to be a key future unlock to really stabilize that base because it's a much more stable platform. Got it.

Speaker Change: Yeah, Thanks for that well the.

Speaker Change: The answer there is two parts one is getting food brands find that our customers want.

Speaker Change: And I had a little bit of color on that and then two is executing.

Speaker Change: Executing on getting more products that our customers want in the auto ship program. So on the first part we are currently expanding our relationships with many of the top prescription and premium food brands, We just announced that we'll be launching hills. This quarter Hill's science diet, and we'll be launching in announcing new deeper partnerships with these premium brands.

Matthew N. Hulett: And then last question for me, just wondering if you can comment on the food business. I know that's obviously a newer piece of the business, but any sort of contribution you guys saw there during the quarter or how we should think about that business in general. Yeah, thanks for that. Well, the answer has two parts. One is getting food brands signs that our customers want, and I had a little bit of color on that.

Speaker Change: In the future and and that's a huge deal for our customers. Our customers are very health conscious. They go to the VAT a lot they want premium food and prescription products given our prescription medication background getting those types of brands online as large because we know definitively how many of our customers use those.

Matthew N. Hulett: And then two is executing on getting more products that our customers want in the auto-ship program. So, for the first part, we are currently expanding our relationships with many of the top prescription and premium food brands. We just announced that we'll be launching Hills this quarter, Hills Science Diet, and we'll be launching and announcing new, deeper partnerships with these premium brands in the future.

Speaker Change: So that's the first unlock get the brands and get them signed the second is executing on that and we've seen a large growth in our food sales as a percentage of sales, which is very low it's our fastest growing category and so as we get better and go to market as we get better at marketing the right brands to our customers that should continue.

Matthew N. Hulett: And that's a huge deal for our customers. Our customers are very health conscious. They go to the vet a lot. They want premium food and prescription products. Given our prescription medication background, getting those types of brands online is huge because we know definitively how many of our customers use those brands. So that's the first unlock, get the brand, and get them signed.

Speaker Change: To be a really good trend for the business.

Speaker Change: Thanks for taking my questions.

Speaker Change: Great. Thank you.

Speaker Change: Thank you and we have reached the end of the question and answer session I'll now turn the call back over to Matthew <unk> for closing remarks.

Matthew N. Hulett: The second is executing on that. And we've seen a large growth in our food sales as a percentage of sales, which is very low. It's our fastest growing category, and so as we get better at going to market, as we get better at marketing the right brands to our customers, that should continue to be a really good trend for the business. Thanks for taking my questions. Great, thank you. Thank you. And we have reached the end of the question and answer session. I'll now turn the call back over to Matthew Ellich for closing remarks. Yes, thanks, everybody, for joining us today. Although it was unfortunate news today regarding the tax liability issues and the accounting change, we hope that that doesn't overshadow our excitement as a management team about the future of pet meds as we transform from a single category pet medication business to a broader pet health expert business.

Yes, thanks, everybody for joining us today, although it was unfortunate news today regarding the tax liability issues and the accounting change, we hope that that doesn't overshadow our excitement as a management team about the future of pet meds as we transform from a single category pet medication business to a broader.

Speaker Change: Our pet health expert business, we were excited about continuing to articulate our milestones along this journey and thank you very much for your time and attention today. Thank you operator, we're all done here. Thank you very much.

Speaker Change: Thank you. This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

Speaker Change: [music].

Matthew N. Hulett: We're excited about continuing to articulate our milestones along this journey and thank you very much for your time and attention today. Thank you. Operator, we're all done here. Thank you very much. Thank you. This concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.

Speaker Change: Yeah.

Speaker Change: [music].

Operator: .....