Welcome to the PetMeds Conference Call to Review the Financial Results for the Third Fiscal Quarter ended on December 31, 2021. At the request of the company, this conference call is being recorded. Founded in 1996, PetMeds is America’s most trusted pet pharmacy, delivering prescription and non-prescription pet medications and other health products for dogs, cats and horses, direct to the customer. PetMeds markets its products through national advertising campaigns, which direct customers to order online or by phone and which are intended to increase the recognition of the PetMeds brand names. PetMeds provides an attractive alternative for obtaining pet medications in terms of convenience, price, ease of ordering and rapid home delivery. At this time, I would like to turn the call over to the Company’s Chief Financial Officer, Mr. Bruce Rosenbloom.

Thank you. And I’d like to welcome everybody here today. I would also like to remind everyone that the first portion of this conference call will be listen-only until the question-and-answer session which will be later in the call. Also, certain information that will be included in this press conference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 or the Securities and Exchange Commission 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 the information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties and assumptions. Actual future results may vary significantly based on a number of factors that may cause the actual results or events to be materially different from future results, performance or achievements expressed or implied by these statements. We have identified various risk factors associated with our operations in our most recent Annual Report and other filings with the Securities and Exchange Commission. Now let me now introduce our CEO and President, Matt Hulett. Matt?

Thanks Bruce. Good afternoon and thank you for joining us. My first several months as the CEO and President of PetMeds has been incredibly busy and exciting. I continue to believe that PetMeds is a terrific company with a talented and dedicated workforce serving a loyal customer base. By the way, we like to feature pictures of our customers and employees pets in our slide decks. You will see many original pictures throughout this presentation. In fact, this slide features my dog Harry. As CEO, my continued commitment is to be open and transparent with all of our stakeholders as to how we are engineering the transformation of this iconic company. So today, I will spend some time on our current status and share with you how we are thinking about our transition into a growth company, because we believe that this will provide some helpful insight into the business, our most recent results and our future plans. We will kick off that discussion today by describing the overall market and the opportunity, as well as our financial progress to the December quarter. In addition, I will be providing a more detailed perspective on the actions and initiatives that we have begun since I joined in September. As we've covered in our previous earnings call, PetMeds operates in a very large and growing addressable market. The U.S. pet market is over $100 billion in annual sales and it is expected to reach $120 billion by 2024. The addressable pet medication market where we participate today is approximately 10 billion and growing rapidly. We are one of the leading pet pharmacies today. I hinted at a broader vision in our last earnings call and we've been actively testing and investigating opportunities against this broader vision throughout the last quarter. Based on…

Thanks, Matt. Now we will review the financial results. We will compare our third fiscal quarter ended December 31, 2021 to last year's quarter ended on December 31, 2020. And in some cases, we will refer back to December 31, 2019. I would also like to highlight that we are introducing new, non-GAAP financial metrics, adjusted EBITDA and adjusted EBITDA per share. We decided to include these new metrics, because they are key metrics used by management and our board to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. Adjusted EBITDA and adjusted EBITDA per share are a more accurate picture of our underlying profitability, and it also highlights the increase in non-cash stock based compensation, which increased significantly in the current year. Similar to our prior quarters, we faced the unique situation comparing two totally different environments, between 2020 pandemic and 2021, mostly post pandemic. In fact, we saw a stronger month of December in 2020 than our historical averages, which was primarily driven by increased e-commerce demand as a result of the second wave of the pandemic in December 2020, which caused many retail stores to close and many veterinarians to be unavailable. During the quarter ended December 2021, we also executed on a number of new changes to our marketing partnerships, agencies, and processes that were more important investments to help transform the company into a growth business. During this transition phase, or as Matt likes to call it, our test and learn phase, we were less efficient in the deployment of our variable marketing investment. During the quarter, we ended up spending approximately 34% more on advertising year-over-year, where we spent $4.3 million in the quarter ended December 31 2021 compared to $3.2 million for the same…

Thanks, Bruce. My commitment is to be clear and transparent with all of our stakeholders as we start to unpack the plan for growth and our strategic plan. So let me jump in. It has been almost four months since they started the company and rapidly dived into looking at the key elements of the business that includes people, process and strategy. During major transformation periods in a business, it is common and even expected to have some uneven execution. And we have been no exception. But equally, we've made some huge inroads into our strategic journey. Here's the status of our 90-day transformation blitz. Let us start with our people. PetMeds has historically had a thinly staffed executive management team. I have recently brought in three new executive team members that I believe are perfectly suited to help execute our business transformation. You may have seen that we have announced these three new executive team members earlier this month. In case you missed it. I'm pleased to tell you about the following additions to our team, who I'm confident will be game changers as part of this new chapter at PetMeds. Our new Chief Information and Technology Officer is Mark Moseley. He joins us from Rosetta Stone where he spent 17 years driving every aspect of their technology and operations. His unique experience includes IT, Scaled Product Development, Infrastructure and Operations. Our new Chief Marketing Officer is Dan Pingree. He joins us with a diverse set of digital retailing experiences including seven years as the Chief Marketing Officer at Moosejaw Mountaineering, and this experience includes being part of the team that successfully sold the business to Walmart. In addition, he has public company direct-to-consumer pharmaceutical experience as an executive@drugstore.com. Our new Vice President of People is Jacqueline Smith. She…

[Operator Instructions]. Our first question is from Erin Wright with Morgan Stanley. Please proceed with your question.

Great, thanks. Thanks for taking my questions here. Can you elaborate on the some of the changes you've made in the marketing strategy and the partnerships there? And can you give us an update on the traction on that fund? You said that some of this didn't really pick up or wasn't initiated until later in the quarter? But how should we be thinking about the advertising spend then in the coming quarter? And then over the course of fiscal 2023, is this the sort of level we should anticipate kind of going forward?

Erin thanks for the questions. Great to hear from you. Several things. And then Bruce, why don't you jump in at the end. One is what I mentioned on the call today is that we really changed out a legacy set of partnerships and went into several others for a couple of reasons. One is, really the way we've been targeting customers has been pretty much the same way we've been targeting customers for the last 10 years. We've identified some new customer segments to go after because we've really been going after a small cohort of customers for a long time. And so as part of that unraveling, or I called the unbundling of these relationships, which was kind of in the middle to late of the quarter, we are testing a lot of new channels as well as some new spend levels. And I think, as you heard from the call today, you can expect rollout as which as a metric will be emphasized. But LTV to CAC should be at much healthier levels. And the variable marketing spend to revenue could go up, but we associate that with more efficiency going forward. The reason why we hit the gas so hard to be blunt is flea and tick season starts in March. I want to make sure that we are ready to go with rock solid go-to-market plans before March. And so I'm really confident that we've got the right people and processes around spend and then Bruce, is there anything you want to add to that?

And as far as the increase in marketing we talked in the call earlier, 50% of this due to rate increases across our marketing channels. And the remaining portion was due to increase in the number of advertising impressions. So we definitely made an effort to grow new customers. But obviously we're a bit more inefficient than we would have expected today. But I think we definitely had some better insights from the quarter. And I think that's going to help us in the current quarter in the March quarter as we move forward.

Okay, great. Thanks. And then you mentioned AutoShip penetration. I believe that 25% where can that go over time realistically, just given the mix of the products that you have, what percentage of revenue would be tied to more chronic treatments as opposed to acute and how far can that ultimately go? Thanks.

Yes, no, we haven't really guided to kind of a Pareto percentage that would be ideal for the business. But I can tell you what our supplier partners tell us is that over 50% would be on benchmark or above. And that's because the good news is not only chronic, but also even non chronic medications in this marketplace are highly consumable. So that's not our official number. But that's what we're hearing from our supply partners 50% or above, and I'd love to see the Auto Ship numbers grow more aggressively, which we're working on this quarter.

Okay, great. Thank you so much.

You're welcome.

Our next question is from Anthony Lebiedzinski from Sidoti & Company. Please proceed with your question.

Yes, good afternoon. And thank you for taking the question. So I guess the first question on the AOV increase? What are the main reasons for that? And how do you see that trending as we know, in the future quarters.

Hey Anthony. You want to take that?

Yes. How you doing? AOV I mean, I think it's a function of we talked about previously, where we're seeing a movement more so to RX, we're doing -- we're during the pandemic, we actually saw a large uptake in OTC, which was a little bit unusual with our trends that we were seeing previously, or should I say pre-pandemic. So we're going back to a more normalized distribution between RX and OTC. So that obviously helps. As you know, we do buy direct from the major manufacturers as well. And we do have map pricing that we need to adhere to, when there are when there are the annual increases that our manufacturers have on the price of products, the map pricing will also increase. So it gives us an opportunity to pass on those additional increases to the customers.

Got you. Okay. And then, in terms of the G&A expenses, those were higher than we anticipated. Can you just quickly go over like what drove that increase from last year? And then as far as the expected quarterly G&A run rate, what should we anticipate going forward?

Right, I would say that from a G&A perspective, the majority of that is stock compensation. And that's one reason why we introduced the new metric, adjusted EBITDA to account for that stock compensation increased significantly during the quarter, and we expect that number to increase year-over-year moving forward. So that's one of the reasons behind it. As far as the other items, I know, there's really nothing else that was really specific driver the increase in G&A, other than stock compensation. Obviously, Matt mentioned, we did increase our headcount in our executive management team. So both stock compensation with G&A.

Got okay. And then, longer term questions. So as you work to transition the business to be more of a subscription based business, and you look to add more pet health, telehealth, how should we think about long term operating margin profile of the company?

Yes, that's a good question. I have kind of a flank, answer to that Anthony. And then I like, Bruce, that answered as well is the reason why the shift from LTV to CAC, and versus -- as, and it's a little bit nuanced for some folks who are not used to that metric is the fact that the company used to think about returning capital in terms of variable marketing within the quarter. And that's somewhat not realistic with kind of modern day marketing practices. So there's some things that you'd be doing like connected TV or linear TV that may not pay-off in three months, but may pay-off over time. And so it's important to make sure that you're not doing bottom of the funnel marketing only, because that's not really going to expand into customers. And that's some of the margin profile shifts in terms of the variable marketing between LTV and CAC. And that's why we've reinforced that from an LTV basis. Bruce, I think we could say that we expect LTV as we introduce that metric to go up over time, because we haven't done a great job as a business attaching net new products and certainly at 25% AutoShip, I would anticipate LTV to go up over time, because we have recurring on file customers, Bruce is there anything you'd like to add?

No, I would agree with that 100% And there's definitely an opportunity there. One item is more related to gross margins but with our vendors recently shifting this year to co-op marketing, it negatively impacted margins, but we're going to go on year-over-year anniversary in those changes. So hopefully over time to maybe an opportunity for gross margin expansion moving forward. But that also is dependent on how much additional discounting we may need to attract new customers.

Got you. Okay. And then lastly, what's your strong cash position, what are your thoughts about buying back your shares?

As far as buy back – let me, you do have about $20 million currently authorized. And I don't think we've been active in the share buybacks since 2019. And that's something that we discuss with the board periodically. And as of today, they have been more keenly or have been concentrating more so on the dividends of return equity back to shareholders, more so than the share buyback, but we have been active in the past and there may be opportunities going forward. And we'll see how that shapes out.

Okay. All right. Thank you very much, best of luck.

Thanks Anthony.

Our next question is from Corey Grady with Jefferies. Please proceed with your question.

Hi, thanks for taking my question. Wanted to ask about reorder sales? How did results for the quarter compare to your expectations coming in? And then can you expand on what you're seeing in terms of this trends and overall performance from the vet channel?

Matt, you want me to wrap that?

Yes, go ahead, sure.

So I think the first part, as far as you know, reorder sales, for the quarter down about 7% for the nine months down about 9%. So obviously, off, we're off from year-over-year or year-over-year perspective. But if you look at reorder sales from pre-pandemic levels, so say December 31 2019, we're actually up 5%. So I think we're moving in the right direction as far as reorder sales. The early success that we've seen in our AutoShip & Save subscription program is it's going to be a huge determining factor moving forward with reorder sales. And as we grow that percentage that will also shouldn't be reorder numbers. So that's one part. Matt, do you want to touch base on the second part of that question?

Yes, I just wanted to add one thing that Bruce, you mentioned in the prepared remarks is December was an odd month, where typically you never have a strong December in the business. And we had one. And so there's these weird base effects and still pop up when there's a COVID restrictions. And that was just a weird year-over-year comparison for us. We were feeling pretty good. Like in November, for instance, year-over-year in December was a little bit of a anomaly Bruce, don't you think that's accurate?

No, that is very true.

Yes, so we're feeling pretty good overall, on just the reorder base, it's been a really, it's a better than a bedrock to the business has been extremely loyal base, we provide exceptional service. I'm not as -- that's one area that we're not as worried about, and we're clearly focused on it. And then we're going to enhance the benefits to the AutoShip subscribers, as well. So I think that's just going to get stronger what Bruce mentioned. It's the new customer space that obviously we're like a laser being very focused on. Did that answer your question though?

Yes, it did. Thank you. Okay. Then, my other question I wanted to ask about performance within OTC and RX Meds. I mean, maybe within OTC you can talk about what subcategories are outperforming and which are underperforming and then maybe the same on the RX side?

Matt, you want to take that.

Sure, yes. Just maybe general, I think. I think we will be coy about it. Bruce, real quick is I think the, the one thing about our business that's surprising. Diving into it is that we don't attach a lot of additional products. And that's one area that obviously we have a high concentration in RX. And it won't surprise you because you can go to our site and see exactly what are the top sellers. I think that's a big area of opportunity to have a bigger basket over time. And Bruce, what are you going to say? Sorry.

Right. I mean, as far as the categories, it's pretty much the same tried and true fleet [Indiscernible] that’s may it's really concentrated around the maintenance medications. We really don't give a breakdown as per category. But in the past, we've always mentioned flea tick and heartworm [ph], make up an overwhelming majority of our business. And then that's held true today, there's definitely more opportunity moving forward with new SKUs that are coming to market, and also the opportunity to add on with additional items. So that will continue. But I think the breakdown by channel is not something that we're willing to share with the public today.

Got it? Thank you.

Thank you.

[Operator Instructions] Our next question is from the Ben Rose with Battle Road Research. Please proceed with your question.

Yes, good afternoon, Matt, Matt and Bruce, a couple of questions. With regard to the pet telehealth service that you've been hinting at Matt, is there anything you can reveal in terms of what sort of benefits you might be taking a look at, what the timing might be for actually launching such a service. So we can sort of prepare ourselves for that kind of timeframe.

I had a feeling that was going to wet your appetite you in particular, because I know you've asked me about this before. Not yet. And the reason why I'm bringing it up is I don't want to surprise investors, and analysts like yourself. I can tell you this, that our customers absolutely love it. And there's a unique take that we'll have on this type of service that no one else has really thought through. And when we launch it, it's going to be really thoughtful. The reason why I'm not pronouncing an earnings call, but I’m talking about the pilot is, I think there are a lot of investors and stakeholders are expecting deployment of capital partnerships in M&A. And I've certainly hinted at that. And we're pretty active in thinking through all that. But the pet telehealth service in particular is pretty is pretty unique to PetMeds because we are already seen by our customers as experts. So when we deployed this and rolled it out, the feedback has been incredible. So stay tuned, I hope to have something personal [ph] to discuss by our next earnings call.

Okay, great. And, with regard to the advertising mix, Matt, I know that this is a big part of your expertise. And you've been taking a closer look at what's been going on. Can you maybe just give a little bit of perspective on whether you're seeing any of the advertising rates, for keywords and so forth on some of the major social media platforms, whether that's starting to stabilize? Or do you expect that, to continue to be competitive going forward?

Yes, no, I think the well there's, there's kind of a macro micro answer. The macro is the social media platforms, in particular, anything owned by Facebook, certainly, there's less supply, the Apple IDFA action is limited the amount of supply and just can't target as well as you used to. And so, lack of supply, same demand prices go up. And I think that's, that's the macro piece, particularly on social in terms of inter CPMs increasing. I think the micro piece would be the fact that, we've had the same playbook for many years on returning and new customer acquisition, very optimized for returning capital very quickly. And that precludes you from doing discovery of top of the funnel, and broader awareness in the category, which, like, like you heard in the prepared remarks really does add inefficiency when you start testing. But overall, I'm pretty, I'm pretty confident over time, we'll figure out that mix of top of the funnel marketing, because we're so widely known as a brand. So long winded answer is the market in general for social impressions is, is pretty high. I don't think it's going to get a lot higher. I think the other channels actually have settled down and I think for us, it's figuring out the right segments and the right message to go after within those channels. But I'm overall very confident that the hard work of unwinding everything has been done this quarter, and then we should see net improvements every time we talk.

Okay, great. And if I may, just one more question. With respect to your relationships with the veterinarian community, it sounds like that's a real strength of the company. The question I have specifically is there any thought to making more of an outreach to sell directly to the vets selling prescription and OTC medications so that they can in turn, turn around and sell that product to their customers, since so many pet owners turn to their vets for purchasing this kind of prescription medication?

Yes, great, great question. Nothing to announce here. But the reason why I keep emphasizing that status, it is a asset that we have that I think is really, really underutilized. And that would make a lot of sense. Because if you think about the $10 billion medication market, 75% of that market, is distributed through the vet, and we're fans of vets. We talked of vets all the time. We have a vet pharmacy, and we're interacting with vets every day, we're just not having business relationships with them. We're having very transactional relationships with them around authorization. So very clearly, to have 75% of a market, not being activated by a retailer is something that is interesting to us. But nothing to announce now. And I would say overall, the more you can do with vets to make your lives easier, in terms of whether it's telemedicine, whether it's appointments, everything else that they have to deal with outside of treating pets, I think would be welcome. So I do think it's an advantage. It's something we're definitely looking at as a future opportunity.

Okay, thanks very much.

Welcome.

Our question and answer portion of the call has ended. I would now like to turn the call back to Matt Hulett the company's CEO for his concluding remarks.

Thank you, operator. As you just heard, the future of PetMeds is much broader than just a prescription e-commerce company. We're building our strategy out and working hard to transform to a broader e-commerce and subscription plan that reflects and leverages our status as the trusted pet health experts. I will continue to detail our progress and look forward to providing you with updates in the not too distant future. Thank you for listening and operator, this ends the conference call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.