PETMED EXPRESS INCPETS

PETMED EXPRESS INC Income Taxes Disclosure

10-KFiled Oct 14, 20256 min read
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows (in thousands):
March 31,
20252024
Deferred tax assets:
Accrued sales tax liability
$5,101 $5,126 
Other accrued expenses
200 225 
Deferred stock compensation425 680 
Deferred revenue— 31 
Bad debt and inventory reserves227 440 
Capitalized research and development costs
3,201 317 
Lease liabilities
250 375 
    Net operating loss carryforward3,431 3,001 
Total deferred tax assets12,835 10,195 
Deferred tax liabilities:
Tax accounting method change
(349)(541)
Intangible assets
(1,921)(2,627)
Property and equipment
(3,181)(1,041)
Right of use assets
(242)(376)
Total deferred tax liabilities
(5,693)(4,585)
Valuation allowance(7,405)(624)
Total net deferred tax (liability) asset $(263)$4,986 
As of March 31, 2025, the Company had $13.6 million of federal net operating loss carryforwards which begin to expire in fiscal 2026. The Company also had $11.1 million in state net operating loss carryforwards which begin to expire in fiscal 2026. In fiscal 2024 the Company acquired PetCareRx, a loss corporation. The tax attributes acquired are subject to Internal Revenue Code Section 382 which limits the utilization annually. Outlined below are the tax attributes acquired and the balances remaining as of March 31, 2025 and March 31, 2024 (in thousands).
PetCareRx Tax Attributes AcquiredTotalSec. 382 limited utilizationAttributes for which a deferred tax asset is recordedExpiration
Federal net operating losses - limited carryover$85,454 $83,300 $2,154  Beginning in FY 2024
Federal net operating losses - unlimited carryover$10,501 $— $10,501  None
Disallowed business interest expense carryover$1,855 $— $1,855  None
State net operating losses$11,040 $2,066 $8,974  Beginning in FY 2026
Tax Attributes as of March 31, 2024TotalSec. 382 limited utilizationAttributes for which a deferred tax asset is recordedExpiration
Federal net operating losses - limited carryover$84,114 $83,300 $814  Beginning in FY 2025
Federal net operating losses - unlimited carryover$10,501 $— $10,501  None
Disallowed business interest expense carryover$— $— $—  None
State net operating losses$11,040 $2,066 $8,974  Beginning in FY 2026
Tax Attributes as of March 31, 2025TotalSec. 382 limited utilizationAttributes for which a deferred tax asset is recordedExpiration
Federal net operating losses - limited carryover$77,052 $76,238 $814 Beginning in FY 2026
Federal net operating losses - unlimited carryover$12,739 $— $12,739 None
Disallowed business interest expense carryover$— $— $— None
State net operating losses$11,884 $832 $11,052 Beginning in FY 2026

The Company has evaluated the positive and negative evidence bearing upon the realizability of its net deferred tax assets, which are composed primarily of net operating losses and capitalized research and development costs. Management has considered the Company’s cumulative net losses in recent years and limited evidence of sustainable taxable income in future periods, and concluded that it is more likely than not that the Company will not recognize the benefits of deferred tax assets. As a result, a full valuation allowance has been established against the Company’s net deferred tax assets as of March 31, 2025. As of March 31, 2025, the Company recorded a deferred tax liability of $263 thousand, primarily attributable to acquired indefinite-lived intangibles with no corresponding tax basis. For accounting purposes, the intangible assets will not be amortized and subject to impairment review and testing. A portion of these deferred tax liabilities are not available as a source of income to support the realization of deferred tax assets because they are not expected to reverse in the same period as deferred tax assets. As a result, the Company has recorded a deferred tax liability for the portion of the liability that cannot be offset with indefinite lived deferred tax assets. Management reevaluates the positive and negative evidence at each reporting period. The valuation allowance increased by $6.8 million and $0.6
million during the fiscal years ended March 31, 2025 and 2024, respectively. Changes in the valuation allowance were as follows:

Year Ended March 31,
202520242023
Valuation allowance at beginning of year(624)——
Increases recorded (6,781)(624)—
Valuation allowance at end of year$(7,405)$(624)—

The components of the income tax provision consist of the following (in thousands):
Year Ended March 31,
202520242023
Current taxes
Federal$343 $490 $2,622 
State93 408 1,312 
Total current income tax provision
436 898 3,934 
Deferred income tax provision (benefit)
Federal4,448 412 (453)
State800 (119)(1,176)
Total deferred taxes5,248 293 (1,629)
Total income tax provision
$5,684 $1,191 $2,305 
The reconciliation of income tax provision computed at the U.S. federal statutory tax rates to income tax expense is as follows (in thousands):
Year Ended March 31,
202520242023
Income taxes at federal statutory rates
$(123)$(1,317)$1,563 
State income taxes, net of federal tax benefit(264)304 107 
Non-deductible executive compensation
(1,771)1,771 — 
Other permanent differences
(56)105 340 
Restricted stock shortfall adjustment
373 281 171 
Deferred tax adjustments
369 47 — 
Taxes payable adjustments363 — — 
Valuation allowance6,781 — — 
Other
12 — 124 
Total income tax provision
$5,684 $1,191 $2,305 

In fiscal 2025 the Company recorded income tax expense of $5.7 million which was primarily related to the increase in the Company's 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. In fiscal 2024, the Company recognized non-deductible executive stock compensation of approximately $1.8 million. This included adjusting the deferred tax assets by a cumulative $1.0 million to account for future limitations under Sec. 162(m). This limits deductions for compensation of covered executives to $1.0 million per individual. In fiscal 2023, the Company recognized a
stock compensation shortfall charge of approximately $171 thousand, and recognized a one-time charge of approximately $124 thousand, related to a return to provision true up from the fiscal 2022 income tax provision.

The differences between the effective income tax rate and the statutory U.S. federal income tax rate are as follows:
Year Ended March 31,
202520242023
Federal rate on income before taxes21.0 %21.0 %21.0 %
State income taxes, net of federal tax benefit45.0 %(4.9)%1.4 %
Non-deductible executive compensation301.7 %(28.2)%— %
Other permanent differences9.5 %(1.7)%4.6 %
Restricted stock shortfall adjustment(63.5)%(4.4)%2.3 %
Deferred tax adjustments(62.9)%(0.8)%— %
Taxes payable adjustments(61.9)%— %— %
Valuation allowance(1155.2)%— %— %
Other(2.0)%— %1.7 %
Total effective tax rate(968.3)%(19.0)%31.0 %

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.
The pre-tax loss in fiscal 2024 caused unfavorable items to decrease the rate instead of increasing it. The primary driver is related to the non-deductible executive compensation. The primary drivers for the increase in effective tax rate for the fiscal 2023 is due to the recognition of permanent differences related to one-time acquisition costs and a non-deductible portion of restricted stock compensation.
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Historical Timeline

Fiscal YearFiled
2025Oct 14, 2025Showing above
2024Jun 14, 2024

About Income Taxes Disclosures

The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.

Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.

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