Attached files
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EX-31.1 - HealthWarehouse.com, Inc. | v185266_ex31-1.htm |
EX-31.2 - HealthWarehouse.com, Inc. | v185266_ex31-2.htm |
EX-32.2 - HealthWarehouse.com, Inc. | v185266_ex32-2.htm |
EX-32.1 - HealthWarehouse.com, Inc. | v185266_ex32-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended March 31, 2010
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
File Number 0-13117
HealthWarehouse.com,
Inc.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
22-2413505
|
|
(State
or Other Jurisdiction
|
(I.R.S.
Employer
|
|
of
Incorporation or Organization)
|
Identification
No.)
|
100 Commerce Boulevard, Cincinnati,
Ohio
|
45140
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(513)
618-0911
(Registrant’s
Telephone Number, Including Area Code)
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by
check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for
such shorter period that the registrant was
required to file such reports), and (2) has been subject
to such filing requirements for the past 90
days. Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨
No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
Non-accelerated
Filer ¨
|
Smaller
Reporting Company x
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No
x
HEALTHWAREHOUSE.COM,
INC.
QUARTERLY
REPORT ON FORM 10-Q
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2010
TABLE OF
CONTENTS
Page
|
||||
PART
I. FINANCIAL INFORMATION
|
||||
ITEM
1. Financial Statements
|
1
|
|||
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
11
|
|||
ITEM
3. Quantitative and Qualitative Disclosures About Market
Risk
|
14
|
|||
ITEM
4T. Controls and Procedures
|
14
|
|||
PART
II. OTHER INFORMATION
|
||||
ITEM
1. Legal Proceedings
|
16
|
|||
ITEM
1A. Risk Factors
|
16
|
|||
ITEM
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
16
|
|||
ITEM
3. Defaults upon Senior Securities
|
16
|
|||
ITEM
4. Removed and Reserved
|
16
|
|||
ITEM
5. Other Information
|
16
|
|||
ITEM
6. Exhibits
|
16
|
|||
SIGNATURES
|
17
|
ITEM
1. FINANCIAL STATEMENTS
The
condensed consolidated financial statements included herein have been prepared
by us without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. It is suggested
that these financial statements be read in conjunction with the audited
financial statements and the notes thereto included in our report on Form 10-K
for the year ended December 31, 2009 as filed with the Securities and Exchange
Commission.
1
HEALTHWAREHOUSE.COM,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
March 31, 2010
(unaudited)
|
December 31,
2009
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
|
$
|
-
|
$
|
191,181
|
||||
Accounts
receivable
|
518,981
|
277,716
|
||||||
Inventories
|
603,417
|
388,748
|
||||||
Prepaid
expenses and other current assets
|
128,941
|
190,999
|
||||||
Total
current assets
|
$
|
1,251,339
|
$
|
1,048,644
|
||||
Property
and equipment, net
|
312,645
|
318,793
|
||||||
Website
development costs, net of accumulated amortization of $64,325
and $39,275
|
136,071
|
161,121
|
||||||
Total assets
|
$
|
1,700,055
|
$
|
1,528,558
|
||||
Liabilities
and Stockholders’ Deficiency
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable – related parties
|
$
|
288,764
|
$
|
73,254
|
||||
Accounts
payable – trade
|
853,745
|
802,607
|
||||||
Accrued
expenses
|
98,611
|
72,766
|
||||||
Note
payable, net of deferred debt discount of $116,570 and $
157,713 at March 31, 2010 and December 31, 2009,
respectively
|
398,430
|
357,287
|
||||||
Note
payable, related party
|
54,000
|
-
|
||||||
Total
current liabilities
|
$
|
1,693,550
|
$
|
1,305,914
|
||||
Convertible
notes, net of deferred debt discount of $ 25,057 and $30,737 at
March 31, 2010 and December 31, 2009, respectively
|
574,943
|
594,263
|
||||||
Total
liabilities
|
$
|
2,268,493
|
$
|
1,900,177
|
||||
Commitments
and contingencies
|
||||||||
Stockholders’
deficiency
|
||||||||
Preferred
stock – par value $.001 per share; authorized 1,000,000
shares;
200,000
shares designated Series A; 107,501 shares issued and
outstanding
(aggregate liquidation preference $172,016)
|
108
|
108
|
||||||
Common
stock – par value $.001 per share; authorized 750,000,000
shares;
197,965,731
and197,635,349 shares issued and outstanding
|
197,965
|
197,635
|
||||||
Additional
paid-in capital
|
2,669,855
|
2,548,098
|
||||||
Accumulated
deficit
|
(3,436,366
|
)
|
(3,117,460
|
)
|
||||
Total
stockholders’ deficiency
|
(568,438
|
)
|
(371,619)
|
|||||
Total
liabilities and stockholders’ deficiency
|
$
|
1,700,055
|
$
|
1,528,558
|
2
HEALTHWAREHOUSE.COM,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Quarter
Ended
March 31, 2010
|
For the Quarter
Ended
March 31, 2009
|
|||||||
Net
sales
|
$
|
1,235,514
|
$
|
756,171
|
||||
Cost
of sales
|
607,415
|
573,689
|
||||||
Gross
profit
|
628,099
|
182,482
|
||||||
Operating
expenses:
|
||||||||
Selling,
general and administrative expenses
|
880,783
|
624,899
|
||||||
Loss
from operations
|
(252,684
|
)
|
(442,417
|
)
|
||||
Interest
income/(expense)
|
(66,222
|
)
|
-
|
|||||
Other
income (expense)
|
-
|
375
|
||||||
Net
loss
|
$
|
(318,906
|
)
|
$
|
(442,042
|
)
|
||
Per
share data:
|
||||||||
Net
loss per common share
|
||||||||
Basic
and diluted
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
||
Weighted
average number of common shares outstanding
|
||||||||
Basic
and diluted
|
197,815,224
|
154,876,449
|
3
HEALTHWAREHOUSE.COM,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three
Months
Ended March 31,
2010
|
For the Three
Months Ended
March 31, 2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$
|
(318,906
|
)
|
$
|
(442,042
|
)
|
||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
22,122
|
10,612
|
||||||
Amortization
of web development costs
|
25,050
|
-
|
||||||
Non-cash
stock-based compensation
|
97,089
|
-
|
||||||
Amortization
of deferred debt discount
|
46,823
|
-
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(241,265
|
)
|
(14,779
|
)
|
||||
Inventories
|
(214,669
|
)
|
(27,507
|
)
|
||||
Prepaid
expenses and other current assets
|
62,057
|
-
|
||||||
Accounts
payable – trade
|
51,138
|
169,641
|
||||||
Accounts
payable – related parties
|
215,510
|
365,288
|
||||||
Accrued
expenses
|
25,844
|
-
|
||||||
Net
cash (used in) provided by operating activities
|
(229,207
|
)
|
61,213
|
|||||
Cash
flow from investing activities
|
||||||||
Acquisition
of property and equipment
|
(15,974
|
)
|
(45,570
|
)
|
||||
Net
cash (used in) investing activities
|
(15,974)
|
(45,570)
|
||||||
Cash
flows from financing activities
|
||||||||
Proceeds
from sale of common stock
|
-
|
50,196
|
||||||
Advances
from former director
|
54,000
|
-
|
||||||
Net
cash provided by financing activities
|
54,000
|
50,196
|
||||||
Net
(decrease) increase in cash
|
(191,181
|
)
|
65,839
|
|||||
Cash
– beginning of period
|
191,181
|
357,938
|
||||||
Cash
– end of period
|
$
|
-
|
$
|
423,777
|
||||
Non-cash
investing and financing activities:
|
||||||||
Conversion
of debt to common stock
|
$
|
25,000
|
$
|
-
|
4
Notes
to Condensed Consolidated Financial Statements
(unaudited)
1.
Organization, Basis of Presentation and Reverse
Recapitalization
On May
14, 2009, Hwareh.com, Inc. completed a share exchange transaction with
Clacendix, Inc. (“Clacendix”), pursuant to the terms of a Securities
Exchange Agreement, dated as of May 14, 2009. Under the Securities
Exchange Agreement, Clacendix acquired all the outstanding capital stock of
Hwareh.com, Inc. As a result of the exchange, the former stockholders of
Hwareh.com, Inc. owned 155,194,563 shares or approximately 82.4% of the
outstanding shares of common stock of Clacendix. Each share of Hwareh.com which
was previously outstanding was exchanged for 141.008 shares of Clacendix. This
transaction was accounted for as a reverse recapitalization, whereby Hwareh.com,
Inc. is deemed to be the accounting acquirer for accounting purposes. The
net assets received in the share exchange transaction were recorded at
historical costs. Following the closing of the share exchange transaction with
Hwareh.com, Clacendix succeeded to the business of Hwareh.com as its sole line
of business. Effective August 5, 2009, Clacendix changed its corporate
name to HealthWarehouse.com, Inc. The financial statements set forth in this
report for all periods prior to the reverse re-capitalization are the historical
financial statements of Healthwarehouse.com Inc. and subsidiaries (“The
Company”), and have been retroactively restated to give effect to the share
exchange transaction. The operations of Clacendix from the date of the
share exchange transaction through December 31, 2009 have been included in
operations.
The
Company is a U.S. licensed virtual retail pharmacy (“VRP”) and healthcare
e-commerce company that sells brand name and generic prescription drugs as well
as over-the-counter (“OTC”) medical products. The Company’s objective is to be
viewed by individual healthcare product consumers as a low-cost, reliable and
hassle-free provider of prescription drugs and OTC medical
products.
The
Company is presently licensed as a mail-order pharmacy for sales to 45 states
and the District of Columbia, and intends to apply for and obtain licenses to
sell prescriptions in all 50 states by the end of June 2010. The Company has
begun accepting health insurance as part of its prescription program,
contracting with insurance providers based on customer demand and business
opportunity.
The
condensed consolidated financial statements have been prepared in accordance
with U.S. GAAP for certain financial information and the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, the condensed consolidated
balance sheet as of March 31, 2010 and the condensed consolidated statements of
operations and cash flows for the three months ended March 31, 2010 and 2009,
have been prepared by the Company without audit. In the opinion of management,
all adjustments (which include normal recurring adjustments) necessary to make
the Company’s financial position, results of operations and cash flows at March
31, 2010 and for the three months ended March 31, 2010 and 2009 not misleading
have been made. The results of operations for the three months ended March
31, 2010 and 2009 are not necessarily indicative of results that would be
expected for the full year or any other interim period.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. It is suggested that
these financial statements be read in conjunction with the financial statements
and notes thereto included in the current report on Form 10-K filed with the
Securities and Exchange Commission on April 15, 2010.
2.
Going Concern and Management’s Liquidity Plans
As of
March 31, 2010, the Company had $0 in cash and cash equivalents and a working
capital deficiency of $442,211. During the three months ended March 31,
2010, the Company generated revenue of $1,235,514 and a net loss
of $318,906. For the three months ended March 31, 2010, cash flows
included net cash used in operating activities of $229,207, net cash used
by investing activities of $15,974 and net cash provided by financing activities
of $54,000.
Since
inception, the Company has financed its operations primarily through product
sales to customers, cash received in connection with the Securities Exchange
Agreement and debt and private equity investments by existing stockholders,
officers and directors. During the three months ended March 31, 2010, the
Company’s cash and cash equivalents were reduced by $191,181.
Based
upon projected operating expenses, the Company believes that its working
capital as of March 31, 2010 may not be sufficient to fund its plan of
operations for the next twelve months. The Company anticipates that it
will need to raise additional capital in order to fund operations and execute
its business plans. Management has also indicated that the Company is
taking certain steps to improve its operations and cash flows, including the
re-launch of its corporate website, improved inventory management and an
increase in the number of suppliers. Management has indicated that
the Company is in discussions with certain parties regarding various financing
opportunities including selling additional capital stock and/or entering into
debt facilities. However, the Company does not know at this time whether
any such transactions between the Company and any third party, will be
consummated and, if consummated, when it might occur, or if the terms would be
acceptable to us. In addition, the SEC’s penny stock rules may further
impact the Company’s ability to obtain debt and or equity financing. If
the Company cannot raise sufficient funds on acceptable terms, it may have to
curtail its level of expenditures and scope of operations.
5
These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. Accordingly, the accompanying condensed consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplate continuation of the
company as a going concern and the realization of assets and the satisfaction of
liabilities in the normal course of business. The carrying amounts of assets and
liabilities presented in the financial statements do not necessarily purport to
represent realizable or settlement values. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
3.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of
HealthWarehouse.com, Inc. Hwareh.com, Inc., ION Holding NV, and ION Belgium NV
its wholly-owned inactive subsidiaries. All material inter-company balances and
transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of condensed consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
Company’s significant estimates include depreciation, stock-based compensation,
valuation of warrants, and deferred tax assets, which have been offset by a
valuation allowance because it is more likely than not that the deferred tax
assets will not be realized in future periods.
Reclassifications
Certain
accounts in the prior period financial statements have been reclassified for
comparison purposes to conform to the presentation of the current period
condensed financial statements. These reclassifications had no effect on
the previously reported loss.
6
Basic net
loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted net loss per share reflects the potential dilution
that could occur if securities or other instruments to issue common stock were
exercised or converted into common stock. Potentially dilutive securities
totalling 45,438,623 at March 31, 2010 are excluded from the computation of
diluted net loss per share as their inclusion would be antidilutive. These
potentially dilutive securities consist of stock options to purchase up to
30,186,000 shares of common stock, warrants to purchase up to 6,250,000 shares
of common stock, convertible promissory notes convertible into 7,927,613 shares
of common stock and convertible preferred stock convertible into 1,075,010
shares of common stock. The Company had no potentially dilutive securities at
March 31, 2009.
Stock-Based Compensation
The
Company accounts for stock-based compensation in accordance with the fair value
recognition provisions of Accounting Standards Codification (“ASC”) 718.
Stock-based compensation expense for all stock-based payment awards is recorded
using the estimated grant-date fair value. The Company recognizes these
compensation costs over the requisite service period of the award, which is
generally the option vesting term. Option valuation models require the
input of highly subjective assumptions including the expected life of the
option. Because the Company’s employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management’s opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The fair value
of stock-based payment awards was estimated using the Black-Scholes option
pricing model using volatility derived from an index of comparable
entities. Management will review this assumption as the Company’s trading
history becomes a better indicator of value. The Company accounts for the
expected life of options in accordance with the “simplified” method provisions
of SEC Staff Accounting Bulletin (“SAB”) No. 110, which enables the use of the
simplified method for “plain vanilla” share options as defined in SAB No.
107.
7
Stock-based
compensation was recorded in the condensed consolidated statements of operations
in selling general and administrative line item and totaled $97,089 and $0 for
the three months ended March 31, 2010 and 2009, respectively.
The fair
value of stock-based payment awards was estimated using the Black-Scholes
pricing model with the following assumptions and weighted average fair values
ranges as follows:
For the Three Months
Ended
March 31, 2010
|
||||
Risk-free
interest rate
|
2.32 | % | ||
Dividend
yield
|
N/A | |||
Expected
volatility
|
57.6 | % | ||
Expected
life in years
|
6.00 | |||
Expected
forfeiture rate (through term)
|
0 | % |
Inventories
Inventory
consists primarily of finished goods. The inventories were stated at the lower
of cost (average cost) or market. No reserves for slow moving and obsolete
inventories are provided based on historical experience and current product
demand. If the Company’s estimate of future demand is not correct or if its
customers place significant order cancellations, inventory reserves could be
required in the future.
4.
Convertible Debt
During
the year ended December 31, 2009, the Company received the proceeds of
$1,200,000 relating to certain convertible promissory notes (“Convertible
Debentures”). During the three months ended March 31, 2010 and the three
months ended March 31, 2009, the Company recognized $5,680 and $0,
respectively, of amortization of the deferred debt discount. During
the three months ended March 31, 2010, Convertible Debentures in the amount of
$25,000 were converted to 330,382 shares of common stock.
5.
Short Term Debt
On
December 15, 2009, we entered into a Loan and Security Agreement (the “Loan
Agreement”) with HWH Lending LLC, a Delaware limited liability company (the
“Lender”). Under the terms of the Loan Agreement, we borrowed $515,000
from the Lender on December 15, 2009 (the “First Loan”). On May 3, 2010,
the Company exercised its right to borrow an additional $500,000 (the “Second
Loan”) from the Lender upon the Company’s request, after achieving positive cash
flow for the month of March. The proceeds of the Loans will be used for
working capital purposes. Each Loan is evidenced by a promissory note (the
“Notes”), and will bear interest at the rate of 12% per annum, payable at
maturity. The Loans are collateralized by substantially all of the
Company’s assets. The maturity date of each Loan is one year from the date
of the Loan. The Loans may be prepaid in whole or in part at any time by
us without penalty, upon 15 days notice.
In
consideration of the each Loan, the Company granted the Lender a warrant to
purchase 6,250,000 shares, for a total of 12,500,000 outstanding as of May 13,
2010, of our common stock at a purchase price of $0.08 per share. Each
warrant may be exercised in whole or in part and from time to time for a term of
five years from its grant date. The Lender has customary “piggy-back”
registration rights with respect to the common stock issued or issuable upon the
exercise of the warrants (the “Warrant Shares”). In addition, the Lender
has demand registration rights with respect to the Warrant Shares, so that upon
written request of the Lender, we will be obligated to prepare and file with the
U.S. Securities and Exchange Commission a registration statement sufficient to
permit the resale of the Warrant Shares. The Lenders’ registration rights
terminate on the date on which all of the Warrant Shares may be sold under Rule
144 of the Securities Act of 1933 without any limitations. The warrants
contain customary anti-dilution and purchase price adjustment provisions. The
warrants are transferable in whole or in part, so long as the transfers comply
with applicable securities laws. The fair value of the warrants was estimated
using the Black Scholes method. During the three months ended March 31,
2010 and the three months ended March 31, 2009, the Company recognized $41,142
and $0, respectively, of amortization of the deferred debt
discount.
8
6.
Stockholders’ Deficiency
Stock
Option Plans
On
February 10, 2010, the Company granted to consultants options to purchase an
aggregate of 1,650,000 shares of common stock with an exercise price of $0.14
per share for a total fair value of approximately $130,000 under a previously
approved option plan.
Details
of the options outstanding under all plans are as follows:
Shares
|
Weighted
Average
Exercise Price
($)
|
Weighted-
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Options
outstanding at January 1, 2010
|
30,286,000 | $ | 0.09 | |||||||||||||
Granted
|
1,650,000 | 0.14 | - | |||||||||||||
Expired
|
- | - | - | |||||||||||||
Canceled
|
(1,750,000 | ) | 0.10 | - | ||||||||||||
Exercised
|
- | $ | - | - | ||||||||||||
Options
outstanding at March 31, 2010
|
30,186,000 | $ | 0.09 | 7.26 | $ | 1,069,740 | ||||||||||
Options
exercisable at March 31, 2010
|
4,718,000 | $ | 0.05 | 4.02 | $ | 168,720 |
Range of
Exercise
|
Number
Outstanding
|
Weighted Average
Remaining Years of
Contractual Life
|
Weighted Average
Exercise Price
|
Number Exercisable
|
Weighted Average
Exercise Price
|
|||||||||||||||
$0.00 – 0.10
|
8,436,000
|
6.62
|
$
|
0.04
|
4,218,000
|
$
|
0.04
|
|||||||||||||
$0.10 – 0.25
|
21,750,000
|
7.51
|
$
|
0.11
|
500,000
|
$
|
0.11
|
|||||||||||||
$0.00 – $0.25
|
30,186,000
|
7.48
|
$
|
0.09
|
4,718,000
|
$
|
0.05
|
6.
Commitments
Operating
Leases
The
Company occupies approximately 16,000 square feet of office and storage space
under a Commercial Sublease Agreement with 100 Commerce Boulevard LLC, a related
party (see Note 8). The sublease has a current monthly rental rate of
$9,417(as amended) through March 31, 2011, the expiration date. During the three
months ended March 31, 2010 and 2009, the Company recorded rent expense of
$28,251 and $16,700, respectively.
7.
Contingent Liabilities
On or
about January 15, 2010, the Company's former outside counsel, Duval &
Stachenfeld LLP (“Duval”), commenced litigation against the Company in federal
court in New York, New York asserting that the Company owes Duval $213,887 in
unpaid legal fees. Duval is also seeking to recover interest and its fees
in connection with the litigation. The Company has denied that it owes
Duval the amount sought and has filed an answer to the complaint and asserted
counterclaims against Duval for malpractice, breach of contract, and breach
of the covenant of good faith and fair dealing. The litigation is in its
early stages, and the Company is vigorously asserting its claims and
defenses. The Company has accounted for this action in accordance with ASC
450. Legal fees relating to this action are being expensed as
incurred.
9
In the
normal course of business the Company may be involved in legal proceedings,
claims and assessments arising in the ordinary course of business. Such matters
are subject to many uncertainties, and outcomes are not predictable with
assurance. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company’s business
financial position or results of operations.
8.
Related Party Transactions
The
Company occupies approximately 16,000 square feet of office and storage space
under a Commercial Sublease Agreement with 100 Commerce Boulevard LLC, an entity
controlled by Jason Smith. Mr. Smith is also the Manager of Rock Castle
Holdings, LLC, a 10% or greater stockholder in the Company. Mr. Smith is the son
of the controlling stockholder of Masters Pharmaceutical, Inc., one of the
Company’s principal suppliers from whom the Company purchased $219,716 and
$485,997 of supplies during the three months ended March 31, 2010 and 2009,
respectively, representing approximately 33.7% and 80.7% of total
purchases. For the three months ended Marcher 31, 2010 and
2009, The Company had sales to Masters Pharmaceuticals of $49,284 and
$0, respectively. As of March 31, 2010, the Company had amounts due to
Masters
Pharmaceuticals in the amount of $288,764.
Ron
Ferguson, a former Hwareh.com director, has guaranteed the Company’s obligation
to supplier Prescription Supply Inc. Mr. Ferguson is the
spouse of Diane Ferguson, a stockholder of the Company. The guarantee, and Mr.
Ferguson’s maximum exposure under the guarantee, does not
have a fixed dollar limit. As of March 31, 2010, there was $1,957 due to
Prescription Supply Inc.
During
the three months ended March 31, 2010, a former director advanced $54,000 in
short term financing to the Company. The amount was outstanding at March
31,2010.
9. New Accounting
Pronouncements
In
June 2009, the FASB issued ASC810 (prior authoritative literature, SFAS 167
“Amendments to FASB Interpretation No. 46(R)”) ASC810 eliminates
Interpretation 46(R)’s exceptions to consolidating qualifying special-purpose
entities, contains new criteria for determining the primary beneficiary, and
increases the frequency of required reassessments to determine whether a company
is the primary beneficiary of a variable interest entity. ASC810 also contains a
new requirement that any term, transaction, or arrangement that does not have a
substantive effect on an entity’s status as a variable interest entity, a
company’s power over a variable interest entity, or a company’s obligation to
absorb losses or its right to receive benefits of an entity must be disregarded
in applying Interpretation 46(R)’s provisions. The elimination of the qualifying
special-purpose entity concept and its consolidation exceptions means more
entities will be subject to consolidation assessments and reassessments. ASC810
is effective January 1, 2010. The adoption of this pronouncement did
not have an impact on the Company’s condensed consolidated financial position
and results of operations.
10. Subsequent
Events
The
Company evaluates events that have occurred after the balance sheet date through
the date the financial statements are issued. Based upon the
evaluation, the Company did not identify any non-recognized subsequent events
that would require adjustment or disclosure in the condensed consolidated
financial statements.
On April
6, 2010, the Company granted to a consultant for services, options to purchase
an aggregate of 300,000 shares of common stock with an exercise price of $0.125
per share for a total fair value of approximately $ 18,602 under a previously
approved option plan.
On April
22, 2010, the Company granted to a consultant for services, options to purchase
250,000 shares of common stock with an exercise price of $0.12 per share for a
total fair value of approximately $14,882 under a previously approved option
plan.
On May 3,
2010, the Company granted to employees and consultants options to purchase an
aggregate of 1,600,000 shares of common stock with an exercise price of $0.18
per share for a total fair value of approximately $143,000 under a previously
approved option plan.
Subsequent
to March 31, 2010, convertible debentures in the amount of $50,000 have been
converted into 660,764 shares of common stock.
Subsequent
to March 31, 2010, the Company sold convertible debentures with a term of two
years bearing a 10% per annum interest rate payable annually in the
amount of $25,000. The debentures are convertible into 250,000 shares
of the Company’s common
stock.
On May 3,
2010, as disclosed in Note 5, the Company borrowed an additional $500,000 under
the Loan Agreement and in consideration of this loan, the Company granted the
Lender an additional warrant to purchase 6,250,000 shares of the Company’s
common stock at a purchase price of $0.08 per share. The warrant may be
exercised in whole or in part from time to time for a term of five years from
its grant date.
10
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Overview
On May
14, 2009, we completed a share exchange transaction with Hwareh.com, Inc.
pursuant to the terms of a Securities Exchange Agreement, dated as of May 14,
2009. Under the Securities Exchange Agreement, we acquired all the outstanding
capital stock of Hwareh.com, Inc. (formerly named HealthWarehouse.com, Inc.). As
a result of the exchange, the former stockholders of Hwareh.com, Inc. owned
approximately 82.4% of the outstanding shares of our common stock. This
transaction was accounted for as a reverse recapitalization, whereby Hwareh.com,
Inc. is deemed to be the accounting acquirer for accounting purposes. Following
the closing of the share exchange transaction with Hwareh.com, we succeeded to
the business of Hwareh.com as our sole line of business. Effective August
5, 2009, we changed our corporate name to HealthWarehouse.com, Inc.
We are a
licensed U.S. pharmacy and healthcare e-commerce company that sells discounted
brand name and generic prescription drugs and over-the-counter (OTC) medical
products. Our web address is http://www.healthwarehouse.com. At present, we
sell:
·
|
a range of prescription
drugs;
|
·
|
diabetic supplies including
glucometers, lancets, syringes and test
strips;
|
·
|
OTC medications covering a range
of conditions from allergy and sinus to pain and fever to smoking
cessation aids;
|
·
|
home medical supplies including
incontinence supplies, first aid kits and mobility aids;
and
|
·
|
diet and nutritional products
including supplements, weight loss aids, and vitamins and
minerals.
|
Our
objective is to make the pharmaceutical supply chain more efficient by
eliminating costs and passing on the savings to the consumer. We are
becoming known by consumers as a convenient, reliable, discount provider of over
the counter and prescription medications and products. We intend to continue to
expand our product line as our business grows. We are presently licensed as a
mail-order pharmacy for sales to 45 states and the District of Columbia, and we
intend to apply for and obtain licenses to sell prescriptions in all 50 states
by June of 2010.
We have
begun accepting health insurance as part of our prescription program, initially
contracting with a limited number of insurance providers based on customer
demand and business opportunity. Our customers tend to be under or uninsured
consumers who rely on our service for their daily medications. In
addition, due to the savings we pass on to the consumer, our prices are often
below insurance co-pay amounts making insurance unnecessary when purchasing from
us. We intend to continue expanding the number of health insurance providers
that we accept as customer demand warrants.
To date,
we have incurred operational losses for all historic periods. We have
financed our activities to date through revenues from our online sales, the
proceeds from sales of our equity securities in private placement financings and
the proceeds from the issuance of our promissory notes in private
financings.
The
three months ended March 31, 2010 compared to the three months ended March 31,
2009.
The three
months ended
March 31,
2010
|
% of
Revenue
|
The three
months ended
March 31,
2009
|
% of
Revenue
|
|||||||||||||
Revenue
|
$
|
1,235,514
|
100.0
|
%
|
$
|
756,171
|
100.0
|
%
|
||||||||
Cost
of sales
|
607,415
|
49.2
|
%
|
573,689
|
75.9
|
%
|
||||||||||
Gross
profit
|
628,099
|
50.8
|
%
|
182,482
|
24.1
|
%
|
||||||||||
Selling,
general & administrative expenses
|
880,783
|
71.2
|
%
|
624,899
|
82.6
|
%
|
||||||||||
Loss
from operations
|
(252,684
|
)
|
(20.4
|
)%
|
(442,417
|
)
|
(58.5
|
)% | ||||||||
Interest
income(expense)
|
(66,222
|
) |
(5.4
|
)% |
-
|
|||||||||||
Other
income (expense)
|
-
|
-
|
375
|
.1
|
%
|
|||||||||||
Net
loss before taxes
|
(318,906
|
)
|
(25.8
|
)%
|
(442,042
|
)
|
(58.4
|
)%
|
||||||||
Income
tax expense
|
-
|
-
|
%
|
-
|
-
|
%
|
||||||||||
Net
loss
|
$
|
(318,906
|
)
|
(25.8
|
)%
|
$
|
(442,042
|
)
|
(58.4
|
)%
|
11
Revenue
The three
months
ended
March 31,
2010
|
% Change
|
The three
months
ended
March 31,
2009
|
||||||||||
Total
revenue
|
$ | 1,235,514 | 63.4 | % | $ | 756,171 | ||||||
Total
average net sales per order
|
$ | 81.83 | (59.7 | )% | $ | 51.23 |
Revenues
for the three months ended March 31, 2010 grew to $1,235,514 from $756,171 for
the three months ended March 31, 2009. Revenues increased for the three months
ended March 31, 2010 compared to the same quarter in the prior year as a result
of an increase in order volume and a significant increase in the average net
sales per order. This increase is due primarily to an increase in
prescription products and the revenue generated from the sale of certain
prescription products to manufacturers. The Company expanded into more and
larger markets and increased its business to business during the three months
ended March 31, 2010 compared to the same period last year.
Costs
and Expenses
Cost
of Sales and Gross Margin
The three
months
ended
March 31,
2010
|
%
Change
|
The three
months ended
March 31,
2009
|
||||||||||
Total
cost of sales
|
$ | 607,415 | 5.9 | % | $ | 573,689 | ||||||
Total
gross profit dollars
|
$ | 628,099 | 244.2 | % | $ | 182,482 | ||||||
Total
gross margin percentage
|
50.8 | % | 26.7 | % | 24.1 | % |
Total cost of sales increased to $607,415 for the three months
ended March 31, 2010 as compared to$573,689 for the three months ended March 31,
2009 as a result of growth in order volume and revenue. Gross margin percentage
increased year-over-year from 24.1% for the three months ended March 31, 2009 to
50.8% for the three months ended March 31, 2010. The improvement in gross
profit margins was due primarily to the product mixing from primarily OTC
products sales in the three months ended March 31, 2010 to an increase in the
revenues for prescription drugs and the revenue generated from the sale of
certain prescription products to manufacturers.
Selling,
General and Administrative Expenses
The three
months
ended
March 31,
2010
|
%
Change
|
The three
months
ended
December
31, 2009
|
||||||||||
Selling,
general and administrative expenses
|
$ | 880,783 | 40.8 | % | $ | 624,899 | ||||||
Percentage
of revenue
|
71.2 | % | (11.4 | )% | 82.6 | % |
Selling,
general and administrative expenses increased by $255,485 in the three months
ended March 31, 2010 compared to the same period in 2009, an increase of
40.8%. Expense increases were due primarily to an increase of revenue of
$503,925, including increased expenses for payroll, advertising, legal, shipping
and fulfillment expenses. In addition the Company recognized $97,089 for
non-cash based stock compensation expense for the three months ended March 31,
2010 compared to zero in the three months ended March 31, 2009. The recognition
of non-cash stock compensation expense accounted for 15.4% of the total increase
of 40.8% increase in selling, general and administrative
expenses.
12
Off-Balance
Sheet Arrangements
We have
not entered into any transactions with unconsolidated entities in which we have
financial guarantees, subordinated retained interests, derivative instruments or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities or any other obligations.
Impact
of Inflation
We
believe that inflation has not had a material impact on our results of
operations for the quarters ended March 31, 2010 and 2009. We cannot assure you
that future inflation will not have an adverse impact on our operating results
and financial condition.
As of
March 31, 2010, the Company had zero in cash and cash equivalents and a working
capital deficit of $442,211. During the three months ended March 31, 2010,
the Company generated revenue of $1,235,514 and a net loss of approximately
$318,906. For the three months ended March 31, 2010, cash flows included
net cash used in operating activities of $229,207 net cash used in investing
activities of $15,974 and net cash provided by financing activities of
$54,000.
Since
inception, the Company has financed its operations primarily through product
sales to customers, and debt and private equity investments by existing
stockholders, officers and directors. During the three months ended March
31, 2010, the Company’s cash and cash equivalents were reduced by approximately
$191,181. Our sources and uses of funds during the periods were as
follows:
For the
three months ended March 31, 2010, net cash used in investing activities was
$15,974. For the three months ended March 31, 2009, net cash used by investing
activities was $45,570.
For the
three ended March 31, 2010, net cash provided by financing activities was
$54,000 from an advance from a former director. For the three months ended March
31, 2009, net cash provided by financing activities was $50,196, consisting of a
sale of common stock.
Going Concern
Based
upon projected operating expenses, the Company believes that its working
capital as of March 31, 2010 may not be sufficient to fund its plan of
operations for the next twelve months. The Company anticipates that it
will need to raise additional capital in order to meet operations and execute
its business plans. Management has indicated that the Company is in
discussions with certain parties regarding various financing opportunities
including selling additional capital stock and/or entering into debt
facilities. However, the Company does not know at this time whether any
such transactions between the Company and any third party, will be consummated
and, if consummated, when it might occur, or if the terms would be acceptable to
us. In addition, the SEC’s penny-stock rules may further impact the
Company’s ability to obtain debt and/or equity financing. If the Company
cannot raise sufficient funds on acceptable terms, it may have to curtail its
level of expenditures and scope of operations.
These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. Accordingly, the accompanying condensed consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplate continuation of the
Company as a going concern and the realization of assets and the satisfaction of
liabilities in the normal course of business. The carrying amounts of assets and
liabilities presented in the financial statements do not necessarily purport to
represent realizable or settlement values. The accompanying financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Management
is taking certain steps to improve operations and cash flows, including the
re-launch of the corporate website, improved inventory management and an
increase in the number of suppliers. The enhanced website’s functionality
is providing a greatly improved total customer experience, our conversion rate
has improved, which we believe will translate into significant growth of both
our OTC product and prescription sales. In addition, the launching of our first
direct partnership with a health care provider in January of 2010 has begun to
provide increasing revenues.
13
In
addition, our cash needs to fund the anticipated growth should be mitigated
somewhat since we are often able to source items in 24 hours, thereby reducing
the amount of required inventory on-hand. Furthermore, our customers
usually purchase their products with an upfront credit card payment, and we
typically have terms of up to 30 days with our suppliers. With our
anticipated growth in revenues, we expect that our cash flow from operating
activities will be a growing source of funds for us. We have increased our
number of suppliers increasing competition lowering our product acquisition
costs this with along with an increase in our prescription business is having a
positive impact on gross margin due to increased competition.
The
preparation of our condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires our management to exercise judgment. We exercise considerable judgment
with respect to establishing sound accounting policies and in making estimates
and assumptions that affect the reported amounts of our assets and liabilities,
our recognition of revenues and expenses, and disclosures of commitments and
contingencies at the date of the financial statements.
On an
ongoing basis, we evaluate our estimates and judgments. We base our estimates
and judgments on a variety of factors including our historical experience,
knowledge of our business and industry, current and expected economic
conditions, the composition of our products/services and the regulatory
environment. We periodically re-evaluate our estimates and assumptions
with respect to these judgments and modify our approach when circumstances
indicate that modifications are necessary.
While we
believe that the factors we evaluate provide us with a meaningful basis for
establishing and applying sound accounting policies, we cannot guarantee that
the results will always be accurate. Since the determination of
these estimates requires the exercise of judgment, actual results could differ
from such estimates.
We
account for stock-based compensation in accordance with the fair value
recognition provisions of Accounting Standards Codification (“ASC”) 718 (prior
authoritative literature: SFAS No. 123R, “Share-Based Payment”), for all
stock-based payment awards is based on the estimated grant-date fair value. We
recognize these compensation costs over the requisite service period of the
award, which is generally the option vesting term. Option valuation models
require the input of highly subjective assumptions including the expected life
of the option. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
our management’s opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of our employee stock options. The
fair value of stock-based payment awards was estimated using the Black-Scholes
option pricing model using volatility derived from an index of comparable
entities. Our management will review this assumption as our trading
history becomes a better indicator of value. We account for the expected life of
options in accordance with the “simplified” method provisions of SEC Staff
Accounting Bulletin (“SAB”) No. 110, which enables the use of the simplified
method for “plain vanilla” share options as defined in SAB No.
107.
The
information contained in Footnote 9 to the Company’s condensed consolidated
financial statements included in Item 1 to this report is incorporated herewith
by reference.
Not
required.
ITEM
4T. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by our Company is recorded,
processed, summarized and reported, within the time periods specified in the
rules and forms of the SEC. Our Chief Executive Officer and Chief Financial
Officer are responsible for establishing and maintaining disclosure controls and
procedures for our Company.
14
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of our
“disclosure controls and procedures” (as defined in the Securities Exchange Act
of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this quarterly report on Form 10-Q (the “Evaluation Date”).
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures are not effective to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act (i) is
recorded, processed, summarized and reported, within the time periods specified
in the SEC rules and forms and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
Specifically, management’s evaluation was
based on the following material weaknesses, which existed as of March 31,
2010:
·
|
Financial
Reporting Systems
: We did not maintain a fully integrated financial
consolidation and reporting system throughout the year and as a result,
extensive manual analysis, reconciliation and adjustments were required in
order to produce financial statements for external reporting
purposes.
|
·
|
Accounting
for Complex Transactions: We lack adequately
trained accounting personnel with appropriate United States generally
accepted accounting principles (US GAAP) expertise for complex
transactions.
|
·
|
Segregation
of Duties
: We do not currently have a sufficient complement of technical
accounting and external reporting personnel commensurate to support
standalone external financial reporting under public company or SEC
requirements. Specifically, the Company did not effectively
segregate certain accounting duties due to the small size of its
accounting staff, and maintain a sufficient number of adequately trained
personnel necessary to anticipate and identify risks critical to financial
reporting and the closing process. In addition, there were
inadequate reviews and approvals by the Company's personnel of certain
reconciliations and other processes in day-to-day operations due to the
lack of a full complement of accounting
staff.
|
·
|
Policies
and Procedures
: We have not commenced design, implementation and
documentation of the policies and procedures used for external financial
reporting, accounting and income tax
purposes.
|
·
|
Assessment
of Internal Control
: We did not perform a complete assessment of internal control
over financial reporting as outlined Section 13(a) or 15(d) of the
Act.
|
Changes in Internal Control Over
Financial Reporting
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected.
During the three months ended March 31, 2010, there was no change in
our internal control over financial reporting or in other factors that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
15
PART
II. OTHER INFORMATION
ITEM
1. Legal Proceedings
In the
ordinary course of business, we may become subject to lawsuits and other claims
and proceedings. Such matters are subject to uncertainty and outcomes are often
not predictable with assurance. Our management does not presently expect that
any such matters will have a material adverse effect on the Company’s financial
condition or results of operations. We are not currently involved any pending or
threatened material litigation or other material legal proceedings, except the
following.
On or
about January 15, 2010, the Company's former outside counsel, Duval &
Stachenfeld LLP (“Duval”), commenced litigation against the Company in federal
court in New York, New York asserting that the Company owes Duval $213,887 in
unpaid legal fees. Duval is also seeking to recover interest and its fees
in connection with the litigation. The Company has denied that it owes
Duval the amount sought and has filed an answer to the complaint and asserted
counterclaims against Duval & Stachenfeld LLP for malpractice, breach
of contract, and breach of the covenant of good faith and fair dealing.
The litigation is in its early stages, and the Company is vigorously asserting
its claims and defenses
ITEM 1A.
Risk Factors
Not
required.
ITEM
2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered
Sales of Equity Securities during the Three Months ended March 31,
2010
On February 10, 2010, the holder of a
convertible promissory note in the principal amount of $25,000 converted the
note, at a conversion price of $0.0757 per share, and received 330,382 shares of
the Company’s common stock. The issuance of the common stock upon conversion of
the note was made without registration in reliance on the exemptions from
registration afforded by Section 4(2) and Rule 506 under the Securities Act of
1933 and corresponding provisions of state securities laws, which exempt
transactions by an issuer not involving any public offering.
ITEM
3. Defaults upon Senior Securities
None.
ITEM
4. Removed and Reserved
ITEM
5. Other Information
None.
ITEM
6. Exhibits
The
following exhibits are filed as part of this quarterly
report:
Exhibit Number and
Description
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act.
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act.
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act.
|
16
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated:
May 17, 2010
HEALTHWAREHOUSE.COM,
INC.
|
||
By:
|
/s/ Lalit Dhadphale
|
|
Lalit
Dhadphale
|
||
President
and Chief Executive Officer
|
||
(principal
executive officer)
|
||
By:
|
/s/ Patrick E. Delaney
|
|
Patrick
E. Delaney
|
||
Chief
Financial Officer and Treasurer
|
||
(principal
financial and accounting officer)
|
17