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UNITED STATES
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 June 30, 2013
 
¨
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.)
 
7107 Industrial Road, Florence, Kentucky
41042
(Address of Principal Executive Offices)
(Zip Code)

(800) 748-7001
(Registrant’s Telephone Number, Including Area Code)

Indicate  by check mark whether the registrant (1) has filed all reports required to be  filed by Section 13 or 15(d) of the Exchange Act of 1934 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  o    No  x

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  x     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.
 
Large Accelerated Filer  o                                                                       Accelerated Filer                     o
 
Non-accelerated Filer     o                                                                       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

There were 26,529,091 shares of Common Stock outstanding as of October 18, 2013.
 
 
 


HEALTHWAREHOUSE.COM, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

 
Page
   
PART I – FINANCIAL INFORMATION
 
   
Item 1.      Financial Statements.
3
   
20
   
25
   
Item 4.      Controls and Procedures.
25
   
PART II – OTHER INFORMATION
 
   
Item 1.      Legal Proceedings.
26
   
Item 1A.   Risk Factors.
28
   
28
   
29
   
Item 4.      Mine Safety Disclosures.
29
   
Item 5.      Other Information.
29
   
Item 6.      Exhibits.
29
   
30
 
 
 
 

 

 
 
PART I – FINANCIAL INFORMATION
 
 
 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
             
   
June 30,
   
December 31,
 
   
2013
   
2012
 
   
(unaudited)
       
Assets
           
             
Current assets:
           
Cash
  $ 808     $ -  
Restricted cash
    -       850,002  
Accounts receivable, net
    288,901       214,973  
Inventories - finished goods, net
    357,597       395,584  
Prepaid expenses and other current assets
    53,107       52,292  
Total current assets
    700,413       1,512,851  
Property and equipment, net
    748,124       768,021  
Total assets
  $ 1,448,537     $ 2,280,872  
                 
Liabilities and Stockholders’ Deficiency
               
                 
Current liabilities:
               
Accounts payable – trade
  $ 2,768,410     $ 2,973,774  
Accounts payable – related parties
    184,983       147,933  
Accrued expenses and other current liabilities
    625,188       1,942,769  
Deferred revenue
    18,605       73,787  
Current portion of equipment lease payable
    52,565       49,122  
Convertible notes
    -       1,000,000  
Notes payable and other advances, net of debt discount of $0 and $44,363 as of June 30, 2013
               
and December 31, 2012, respectively
    40,000       1,955,637  
Note payable and other advances – related parties
    -       765,000  
Redeemable preferred stock - Series C; par value $0.001 per share;
               
10,000 designated Series C: 10,000 issued and outstanding as of
               
June 30, 2013 and December 31, 2012 (aggregate liquidation preference of $1,000,000)
    1,000,000       1,000,000  
Total current liabilities
    4,689,751       9,908,022  
                 
Long term liabilities:
               
Long term portion of equipment lease payable
    139,005       166,286  
Note payable, net of debt discount of $247,900 as of June 30, 2013
    225,100       -  
Total long term liabilities
    364,105       166,286  
Total liabilities
    5,053,856       10,074,308  
                 
Commitments and contingencies
               
                 
Stockholders’ deficiency:
               
Preferred stock – par value $0.001 per share; authorized 1,000,000 shares; issued and outstanding
               
as of  June 30, 2013 and December 31, 2012 as follows:
               
Convertible preferred stock - Series A – 200,000 shares designated Series A; 44,443 shares available
               
to be issued; no shares issued and outstanding
    -       -  
Convertible preferred stock - Series B – 625,000 shares designated Series B; 422,315 and 394,685
               
shares issued and outstanding as of June 30, 2013 and December 31, 2012 , respectively (aggregate
               
liquidation preference of $4,130,557 and $3,990,877 as of June 30, 2013
    422       395  
and December 31, 2012, respectively)
               
Common stock – par value $0.001 per share; authorized 50,000,000 shares; 27,100,119 and 13,030,397
               
shares issued and 25,920,907 and 11,851,185 shares outstanding as of June 30, 2013
               
and December 31, 2012, respectively
    27,100       13,031  
Additional paid-in capital
    26,698,877       16,460,385  
Employee advances
    (63,574 )     (18,858 )
Treasury stock, at cost, 1,179,212 shares as of June 30, 2013 and December 31, 2012
    (3,419,715 )     (3,419,715 )
Accumulated deficit
    (26,848,429 )     (20,828,674 )
Total stockholders’ deficiency
    (3,605,319 )     (7,793,436 )
Total liabilities and stockholders’ deficiency
  $ 1,448,537     $ 2,280,872  
                 
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
 


 
 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                         
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Net sales
  $ 2,674,761     $ 2,997,326     $ 5,084,677     $ 6,150,933  
                                 
Cost of sales
    1,339,120       1,515,608       2,574,276       3,220,255  
                                 
Gross profit
    1,335,641       1,481,718       2,510,401       2,930,678  
                                 
Operating expenses:
                               
                                 
Selling, general and administrative expenses
    1,546,446       2,824,358       3,935,549       5,508,836  
                                 
Loss from operations
    (210,805 )     (1,342,640 )     (1,425,148 )     (2,578,158 )
                                 
Other income (expense):
                               
Loss on extinguishment of debt
    -       -       (2,792,900 )     -  
Other income
    -       1,210       -       3,758  
Interest expense
    (58,182 )     (261,240 )     (129,305 )     (578,582 )
Total other expense
    (58,182 )     (260,030 )     (2,922,205 )     (574,824 )
                                 
Net loss
    (268,987 )     (1,602,670 )     (4,347,353 )     (3,152,982 )
                                 
Preferred stock:
                               
Series B convertible contractual dividends
    (69,840 )     (65,271 )     (139,680 )     (130,542 )
Series B convertible deemed dividends
    -       -       (1,532,722 )     -  
Series C redeemable deemed dividends
    -       (92,916 )     -       (185,832 )
                                 
Loss attributable to common stockholders
  $ (338,827 )   $ (1,760,857 )   $ (6,019,755 )   $ (3,469,356 )
                                 
Per share data:
                               
Net loss – basic and diluted
  $ (0.01 )   $ (0.15 )   $ (0.21 )   $ (0.31 )
Series B convertible contractual dividends
    -       (0.01 )     (0.01 )     (0.01 )
Series B convertible deemed dividends
    -       -       (0.07 )     -  
Series C redeemable deemed dividends
    -       (0.01 )     -       (0.02 )
                                 
Net loss attributable to common stockholders - basic and diluted
  $ (0.01 )   $ (0.17 )   $ (0.29 )   $ (0.34 )
                                 
Weighted average number of common shares outstanding - basic and diluted
    25,216,138       10,378,713       20,439,551       10,229,003  
                                 
                                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 

 
 
 
 
 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
 
FOR THE SIX MONTHS ENDED JUNE 30, 2013
 
(Unaudited)
 
                                                             
   
Convertible
                                                 
   
Series B
                                             
Total
 
   
Preferred Stock
   
Common Stock
   
Additional
   
Employee
   
Treasury Stock
   
Accumulated
   
Stockholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Paid-In Capital
   
Advances
   
Shares
   
Amount
   
Deficit
   
Deficiency
 
                                                             
Balances, December 31, 2012
    394,685     $ 395       13,030,397     $ 13,031     $ 16,460,385     $ (18,858 )     1,179,212     $ (3,419,715 )   $ (20,828,674 )   $ (7,793,436 )
                                                                                 
Stock-based compensation
    -       -       -       -       353,407       -       -       -       -       353,407  
                                                                                 
Warrants issued to 2012 private
                                                                               
placement investors
    -       -       -       -       487,200       -       -       -       -       487,200  
                                                                                 
Issuance of Series B preferred stock as
                                                                               
payment-in-kind for dividend
    27,630       27       -       -       261,057       -       -       -       -       261,084  
                                                                                 
Cashless exercise of warrants into
                                                                               
common stock
    -       -       9,734,747       9,734       (9,734 )     -       -       -       -       -  
                                                                                 
Contractual dividends on Series B convertible
                                                                               
preferred stock
    -       -       -       -       -       -       -       -       (139,680 )     (139,680 )
                                                                                 
Beneficial conversion feature and deemed
                                                                               
dividend on Series B convertible preferred
                                                                               
stock
    -       -       -       -       1,532,722       -       -       -       (1,532,722 )     -  
                                                                                 
Warrants issued as debt discount in
                                                                               
connection with notes payable
    -       -       -       -       315,300       -       -       -       -       315,300  
                                                                                 
Conversion of notes and accounts payable
                                                                               
into common stock and warrants
    -       -       833,000       833       3,625,067       -       -       -       -       3,625,900  
                                                                                 
Issuance of common stock and warrants
                                                                               
for cash
    -       -       3,501,975       3,502       3,498,473       -       -       -       -       3,501,975  
                                                                                 
Imputed value of services contributed
    -       -       -       -       175,000       -       -       -       -       175,000  
                                                                                 
Reduction in value of employee
                                                                               
advance reserve
    -       -       -       -       -       (44,716 )     -       -       -       (44,716 )
                                                                                 
Net loss
    -       -       -       -       -       -       -       -       (4,347,353 )     (4,347,353 )
                                                                                 
Balances, June 30, 2013
    422,315     $ 422       27,100,119     $ 27,100     $ 26,698,877     $ (63,574 )     1,179,212     $ (3,419,715 )   $ (26,848,429 )   $ (3,605,319 )
                                                                                 
                                                                                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
             
   
For the Six Months Ended
 
   
June 30,
 
   
2013
   
2012
 
Cash flows from operating activities
           
Net loss
  $ (4,347,353 )   $ (3,152,982 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Provision for doubtful accounts
    (44,716 )     10,521  
Depreciation and amortization
    71,693       179,647  
Stock-based compensation
    353,407       549,630  
Warrants issued to 2012 private placement investors
    487,200       -  
Loss on extinguishment of notes and accounts payable
    2,792,900       -  
Imputed value of services contributed
    175,000       -  
Amortization of debt discount
    84,763       431,422  
Changes in operating assets and liabilities:
               
Accounts receivable
    (73,928 )     34,386  
Inventories - finished goods
    37,987       26,878  
Prepaid expenses and other current assets
    (815 )     10,542  
Accounts payable – trade
    (205,364 )     1,120,686  
Accounts payable – related parties
    159,050       (4,116 )
Accrued expenses and other current liabilities
    (360,175 )     211,438  
Deferred revenue
    (55,182 )     -  
Net cash used in operating activities
    (925,533 )     (581,948 )
                 
Cash flows from investing activities
               
Change in restricted cash
    850,002       -  
Changes in employee advances
    -       138,241  
Website development costs
    (51,796 )     -  
Net cash provided by investing activities
    798,206       138,241  
                 
Cash flows from financing activities
               
Principal payments on equipment leases payable
    (23,838 )     (32,691 )
Proceeds from  exercise of common stock options
    -       26,662  
Proceeds from issuance of notes payable
    500,000       -  
Repayment of notes payable
    (2,000,000 )     -  
Repayment of convertible notes payable
    (1,000,000 )     -  
Proceeds from the sale of common stock [1]
    2,651,973       175,000  
Cash overdraft
    -       (46,313 )
Proceeds from notes payable and other advances – related parties
    -       605,000  
Repayment of notes payable and other advances – related parties
    -       (283,812 )
Net cash provided by financing activities
    128,135       443,846  
                 
Net increase in cash
    808       139  
                 
Cash - beginning of period
    -       40  
                 
Cash - end of period
  $ 808     $ 179  
                 
[1] - Excludes $850,002 of cash received during 2012 but closed on during the six months ended June 30, 2013
               
                 
Cash paid for:
               
    Interest
  $ 399,374     $ 21,491  
    Taxes
  $ 899     $ -  
                 
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited - Continued)
 
             
   
For the Six Months Ended
 
   
June 30,
 
   
2013
   
2012
 
Non-cash investing and financing activities:
           
Issuance of Series B preferred stock for settlement of accrued dividends
  $ 261,084     $ 244,001  
Cashless exercise of warrants into common stock
  $ 9,734     $ 1,465  
Cashless exercise of options into common stock
  $ -     $ 93  
Warrants issued as debt discount in connection with notes payable
  $ 315,300     $ -  
Accrual of contractual dividends on Series B convertible preferred stock
  $ 139,680     $ 130,542  
Deemed dividends on Series B convertible preferred stock
  $ 1,532,722     $ -  
Reclassification of accounts payable - trade to equipment lease payable
  $ -     $ 257,583  
Deemed dividend – redeemable Series C preferred stock
  $ -     $ 185,832  
Common stock and warrants issued in exchange of notes and accounts payable
  $ 3,625,900     $ -  
                 
                 
                 
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.  Organization and Basis of Presentation

HealthWarehouse.com, Inc., a Delaware company incorporated in 1998, (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 50 states and the District of Columbia.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and disclosures required by GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated financial statements of the Company as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the operating results for the full year ending December 31, 2013. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related disclosures of the Company as of December 31, 2012 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on July 23, 2013.

2. Going Concern and Management’s Liquidity Plans

Since inception, the Company has financed its operations primarily through debt and equity financings and advances from related parties. As of June 30, 2013, the Company had a working capital deficiency of $3,989,338 and an accumulated deficit of $26,848,429. During the six months ended June 30, 2013 and year ended December 31, 2012, the Company incurred net losses of $4,347,353 and $5,574,775 and used cash in operating activities of $925,533 and $947,911, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

Subsequent to June 30, 2013, the Company (a) raised an aggregate of $149,000 in debt financings; and (b) continues to incur net losses, use cash in operating activities and experience cash and working capital constraints. See Note 11.

On February 13, 2013, the Company received a Notice of Redemption related to its Series C Redeemable Preferred Stock aggregating $1,000,000 (see Note 7). As a result of receiving the Notice of Redemption, the Company must now apply all of its assets to redemption of the Series C Preferred Stock and to no other corporate purpose, except to the extent prohibited by Delaware law governing distributions to stockholders (the Company is not permitted to utilize toward the redemption those assets required to pay its debts as they come due and those assets required to continue as a going concern).

The Company recognizes it will need to raise additional capital in order to fund operations, meet its payment obligations and execute its business plan. There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, attempt to extend note repayments, attempt to negotiate the preferred stock redemption and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.  If the Company is unable to obtain financing on a timely basis, the Company could be forced to sell its assets, discontinue its operation and /or seek reorganization under the U.S. bankruptcy code.

Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplates 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 condensed consolidated financial statements do not necessarily represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 

 


 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

3. Summary of Significant Accounting Policies

Principles of Consolidation

On June 4, 2013, the Company formed a wholly-owned subsidiary called Pagosa Health LLC (“Pagosa”). The condensed consolidated financial statements include the accounts of HealthWarehouse.com, Inc., Hwareh.com, Inc., Hocks.com, Inc., ION Holding NV, ION Belgium NV and Pagosa, its wholly-owned subsidiaries. ION Holding NV and ION Belgium NV are 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 GAAP 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 condensed consolidated 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 reserves related to accounts receivable and inventory, the recoverability and useful lives of long-lived assets, the valuation allowance related to deferred tax assets, the valuation of equity instruments and debt discounts.

Reclassifications

Certain accounts in the prior period condensed consolidated financial statements have been reclassified for comparison purposes to conform to the presentation of the current period condensed consolidated financial statements.  These reclassifications had no effect on the previously reported net loss.

Revenue Recognition

Revenues for the sales of products are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collectability is reasonably assured. The Company defers revenue when cash has been received from the customer but delivery has not yet occurred.  Such amounts are reflected as deferred revenues in the accompanying condensed consolidated financial statements.

Net Loss Per Share of Common Stock

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 are excluded from the computation of diluted net loss per share if their inclusion would be anti-dilutive and consist of the following:

   
June 30,
 
   
2013
   
2012
 
             
Options
    2,235,650       2,025,475  
Warrants
    2,798,771       562,846  
Series B Convertible Preferred Stock
    3,438,275       1,973,427  
Convertible Promissory Notes
    -       529,100  
Total potentially dilutive shares
    8,472,696       5,090,848  

Stock-Based Compensation

Stock-based compensation expense for all stock-based payment awards is based on the estimated fair value of the award. For employees and directors, the award is measured on the grant date.  For non-employees, the award is measured on the grant date and is then remeasured at each vesting date and financial reporting date.  The Company recognizes the estimated fair value of the award as compensation cost over the requisite service period of the award, which is generally the option vesting term.  The Company generally issues new shares of common stock to satisfy option and warrant exercises.

 
 

 

 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


3. Summary of Significant Accounting Policies – Continued

Recently Issued Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This ASU addresses the requirements regarding the financial statement presentation of an unrecognized tax benefit within Accounting Standards Codification ("ASC") Topic 740 for the purpose of providing consistency between the financial reporting of U.S. GAAP entities. Generally, this ASU provides guidance for the preparation of financial statements and disclosures when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  This ASU is effective for periods beginning after December 15, 2013 and is not expected to have any impact on the Company’s condensed consolidated financial statements or disclosures.

4. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

   
June 30,
   
December 31,
 
   
2013
   
2012
 
             
Deferred rent
  $ 42,677     $ 39,100  
Advertising
    75,000       75,000  
Salaries and benefits
    153,899       166,118  
Professional fees
    110,000       81,872  
Dividends payable
    139,681       261,084  
Accrued interest
    44,250       410,101  
Due to investors (1)
    -       850,002  
Customer payables
    32,406       51,333  
Other
    27,275       8,159  
Total
  $ 625,188     $ 1,942,769  

(1) - Proceeds received from investors in advance of equity offering closing.

5. Convertible Notes Payable

On February 1, 2013, the Company repaid convertible notes with an outstanding principal balance of $1,000,000 plus outstanding accrued interest of $163,861. The convertible notes bore interest at a rate of 7% per annum compounded annually and were due on December 31, 2012. The Company recorded amortization of debt discount associated with convertible notes payable of $82,617 and $165,233 for the three and six months ended June 30, 2012, respectively, using the effective interest method. As of December 31, 2012, the debt discount had been fully amortized.

6. Notes Payable

On February 1, 2013, the Company repaid notes with an outstanding principal balance of $2,000,000 plus outstanding accrued interest of $199,260. The notes bore interest at a rate of 7% per annum and were due on January 15, 2013.
 
On March 28, 2013, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with a lender (the "Lender"). Under the terms of the Loan Agreement, the Company borrowed $500,000 from the Lender (the “Loan”). The Loan is evidenced by a promissory note (the “March Note”) and bears interest on the unpaid principal balance of the March Note until the full amount of principal has been paid at a floating rate equal to the Prime Rate plus four and one-quarter percent (4.25%) per annum (as of June 30, 2013, the Prime Rate was 3.25% per annum). Under the terms of the Loan Agreement, the Company has agreed to make monthly payments of accrued interest on the first day of every month, beginning on May 1, 2013. The principal amount and all unpaid accrued interest on the March Note is payable on March 1, 2015, or earlier in the event of default or a sale or liquidation of the Company. The Loan may be prepaid in whole or in part at any time by the Company without penalty.
 
 

 
 
- 10 -


 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


6. Notes Payable – Continued

The Company granted the Lender a first, priority security interest in all of the Company’s assets, in order to secure the Company’s obligation to repay the Loan. The Loan Agreement contains customary negative covenants restricting the Company’s ability to take certain actions without the Lender’s consent, including incurring additional indebtedness, transferring or encumbering assets, paying dividends or making certain other payments, and acquiring other businesses. Upon the occurrence of an event of default, the Lender has the right to impose interest at a rate equal to five percent (5.0%) per annum above the otherwise applicable interest rate (the “Default Rate”). The repayment of the Loan may be accelerated prior to the maturity date upon certain specified events of default, including failure to pay, bankruptcy, breach of covenant, and breach of representations and warranties.

In consideration of the Loan, the Company granted the Lender a five-year warrant to purchase 750,000 shares of common stock at an exercise price of $0.35 per share. The warrants contain customary anti-dilution provisions. The warrant had a relative fair value of $315,300 which was setup as debt discount and is being amortized using the effective interest method over the term of the Loan.  Including the value of the warrant, the March Note had an effective interest rate of 40% per annum.

The Company recorded amortization of debt discount associated with notes payable of $40,400 and $84,763 for the three and six months ended June 30, 2013, respectively, and $133,094 and $266,189 for the three and six months ended June 30, 2012, respectively, using the effective interest method.

See Note 7 – Stockholders’ Deficiency – Common Stock for details regarding the conversion of outstanding notes payable – related parties into common stock and warrants.

See Note 11 – Subsequent Events for additional details.

7. Stockholders’ Deficiency

Common Stock

During the six months ended June 30, 2013, pursuant to a private placement offering of units that commenced on October 4, 2012 (the “Private Placement”), the Company received an aggregate of $3,501,975 of proceeds related to the sale of 3,501,975 units at a price of $1.00 per unit. The aggregate amount includes $500,000, which was received from an officer, and $850,002, which was received during the fourth quarter of 2012 and classified as restricted cash as of December 31, 2012. Each unit consists of (i) one share of the Company’s common stock and (ii) a five-year warrant to purchase three shares of the Company’s common stock at an exercise price of $0.25 per share, such that warrants to purchase an aggregate of 10,505,925 shares of common stock were issued. Substantially all of the proceeds from the sale of the units were used by the Company to satisfy all of its obligations under the convertible notes and notes (see Notes 5 and 6). In connection with the Private Placement, an officer has entered into repurchase agreements with certain purchasers of units, pursuant to which he has agreed to repurchase, subject to certain conditions, one-half of these holder’s units at a purchase price of $1.00 per unit if the closing price of the Common Stock is less than $0.25 on five consecutive trading days at any time within one year of February 1, 2013. Cape Bear, which holds a substantial equity position in the Company, also entered into repurchase agreements with certain purchasers, other than the officer, that are substantially similar to the officer’s agreements, except that Cape Bear’s obligations are secured by a lien over certain real estate.

On March 13, 2013, the Company exchanged $761,000 of notes payable and other advances – related parties and $72,000 of accounts payable to a related party into an aggregate of 833,000 units at a price of $1.00 per unit. Each unit consists of (i) one share of the Company’s common stock, and (ii) a five-year warrant to purchase two and three-quarters shares of the Company’s common stock at an exercise price of $0.25 per share (such that warrants to purchase an aggregate of 2,290,750 shares of common stock were issued). The $3,625,900 aggregate fair value of the securities issued ($2,639,700 related to the warrants and $986,200 related to the common stock) was credited to equity at conversion. The Company recorded a $2,792,900 extinguishment loss which represents the incremental fair value of the securities issued as compared to the carrying value of the liabilities.

 

 
 
- 11 -


 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


7. Stockholders’ Deficiency – Continued

Series B Preferred Stock

On January 1, 2013, the Company issued 27,630 shares of Series B Convertible Preferred Stock valued at $261,084, representing approximately $0.66 in value per share of Series B Preferred Stock outstanding to the Series B Convertible Preferred Stockholders as payment in kind for dividends (the “2013 Series B Dividend”). In connection with the 2013 Series B Dividend, the Company recognized a beneficial conversion feature of $202,305 during the six months ended June 30, 2013, which represents the difference between the commitment date value of the shares and the effective conversion price. In connection with the outstanding preferred stock, during the three and six months ended June 30, 2013, the Company recorded $69,840 and $139,689 as contractual dividends, respectively, and recorded $65,271 and $130,542 during the three and six months ended June 30, 2012, respectively. As of December 31, 2012, February 1, 2013, March 13, 2013 and April 11, 2013, Series B holders were entitled to convert into 5.00, 7.61, 8.07 and 8.14 shares, respectively, of the Company’s common stock for each share of Series B Preferred Stock due to the anti-dilution provision. The anti-dilution provision represents a contingent beneficial conversion feature.  As of June 30, 2013, an incremental 1,326,700 shares of common stock are issuable at conversion of the Series B Convertible Preferred Stock as compared to the original terms.   Using the commitment date common stock price in effect, the commitment date value of the incremental shares is $3,348,975. However, recognition of beneficial conversion features is limited to the aggregate gross proceeds allocated to the preferred stock of $3,199,689 (422,315 shares of Series B Convertible Preferred Stock times $9.45 per share less the proceeds allocated to the warrants of $791,188) less the $1,666,967 beneficial conversion feature already recognized on the original 365,265 shares of Series B Preferred Stock (prior to the issuance of additional shares as payment-in-kind in lieu of cash dividends) and the $202,305 recognized related to the 2013 Series B Dividend. Due to these limitations, a beneficial conversion feature of $0 and $1,330,417 related to the incremental shares was recognized during the three and six months ended June 30, 2013, respectively.

Series C Preferred Stock

On February 13, 2013, the Company received a Notice of Redemption of Series C Preferred Stock. As a result of the Convertible Notes coming due and not being paid on December 31, 2012, the Company accelerated the accretion rate of the deemed dividend on the Redeemable Preferred Stock – Series C and reclassified the Redeemable Preferred Stock – Series C from temporary equity to current liabilities. The Company recorded Series C deemed dividends of $92,916 and $185,832 during the three and six months ended June 30, 2012, respectively. As of December 31, 2012, the discount associated with the Series C Preferred Stock was fully amortized.

Stock Options

In applying the Black-Scholes option pricing model to stock options granted, the Company used the following weighted average assumptions:

   
For The Three Months Ended
 
For The Six Months Ended
   
June 30,
 
June 30,
   
2013
 
2012
 
2013
 
2012
                 
Risk free interest rate
 
1.50%
 
n/a
 
1.13% to 1.50%
 
1.04%
Dividend yield
 
0.00%
 
n/a
 
0.00%
 
0.00%
Expected volatility
 
175.0%
 
n/a
 
166.0% to 175.0%
 
172.2%
Expectd life in years
 
6.00
 
n/a
 
6.00
 
6.00

The weighted average fair value of the stock options granted during the three and six months ended June 30, 2013 was $1.45 and $1.57 per share, respectively. The weighted average fair value of the stock options granted during the six months ended June 30, 2012 was $6.99 per share.  There were no stock options granted during the three months ended June 30, 2012.

On February 15, 2013, the Company granted options to employees to purchase an aggregate of 330,500 shares of common stock under the 2009 Plan at an exercise price of $1.60 per share for an aggregate grant date value of $395,041. The options vest over a three year period and have a term of ten years.

On June 19, 2013, the Company granted an option to a director to purchase 100,000 shares of common stock under the 2009 Plan at an exercise price of $1.45 per share for a grant date value of $109,600.  The option vests over a three year period and has a term of ten years.
 
 

 
 
- 12 -


 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


7. Stockholders’ Deficiency – Continued

Stock Options – Continued

Stock-based compensation expense related to stock options was recorded in the condensed consolidated statements of operations as a component of selling, general and administrative expenses and totaled $13,799 and $326,243 for the three and six months ended June 30, 2013, respectively, and $290,221 and $549,630 for the three and six months ended June 30, 2012, respectively.  As of June 30, 2013, stock-based compensation expense related to stock options of $1,987,548 remains unamortized, including $1,095,979 which is being amortized over the weighted average remaining period of 2.1 years.  The remaining $891,569 is related to a performance based option where vesting is currently deemed to be improbable and no amount is being amortized.

A summary of the stock option activity during the six months ended June 30, 2013 is presented below:

               
Weighted
       
         
Weighted
   
Average
       
         
Average
   
Remaining
       
   
Number of
   
Exercise
   
Life
   
Intrinsic
 
   
Options
   
Price
   
In Years
   
Value
 
                         
Outstanding, January 1, 2013
    2,183,899     $ 3.42              
Granted
    430,500       1.57              
Exercised
    -       -              
Forfeited
    (378,749 )     4.40              
Outstanding, June 30, 2013
    2,235,650     $ 2.89       5.7     $ 143,937  
                                 
Exercisable, June 30, 2013
    1,183,483     $ 2.67       4.5     $ 141,733  

The following table presents information related to stock options at June 30, 2013:

   
Options Outstanding
 
Options Exercisable
   
Weighted
     
Weighted
 
Weighted
   
Range of
 
Average
 
Outstanding
 
Average
 
Average
 
Exercisable
Exercise
 
Exercise
 
Number of
 
Exercise
 
Remaining Life
 
Number of
Price
 
Price
 
Options
 
Price
 
In Years
 
Options
                     
 $0.80 - $2.20
 
 $         1.57
 
          906,400
 
 $         1.58
 
                         2.2
 
          485,900
 $2.21 - $3.80
 
            3.21
 
          868,250
 
            2.96
 
                         5.3
 
          500,917
 $3.81 - $6.99
 
            4.88
 
          461,000
 
            4.65
 
                         7.9
 
          196,666
   
 $         2.89
 
       2,235,650
 
 $         2.67
 
                         4.5
 
       1,183,483

Warrants

In applying the Black-Scholes option pricing model to stock warrants granted, the Company used the following weighted average assumptions:

   
For The Three Months Ended
 
For The Six Months Ended
   
June 30,
 
June 30,
   
2013
 
2012
 
2013
 
2012
                 
Risk free interest rate
 
0.74%
 
n/a
 
0.87%
 
n/a
Dividend yield
 
0.00%
 
n/a
 
0.00%
 
n/a
Expected volatility
 
166.0%
 
n/a
 
164.3%
 
n/a
Expectd life in years
 
5.00
 
n/a
 
5.00
 
n/a

The weighted average fair value of the stock warrants granted during the three and six months ended June 30, 2013 was $0.71 and $1.36 per share, respectively.  There were no warrants granted during the three and six months ended June 30, 2012.
 
 

 
 
- 13 -


 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


7. Stockholders’ Deficiency – Continued

Warrants – Continued

On February 15, 2013, the Company granted vested five-year warrants to purchase an aggregate of 408,345 shares of common stock at an exercise price of $1.00 per share to investors who purchased shares in private placements at $4.50 per share during 2012. The warrants had an issuance date fair value of $487,200 which was expensed immediately.

See Note 7 – Stockholders’ Deficiency – Common Stock for details regarding warrants granted in connection with the Private Placement and the conversion of related party notes payable, other advances and accounts payable into equity.

During the six months ended June 30, 2013, the Company issued an aggregate of 9,734,747 shares of common stock to several holders of warrants who elected to exercise warrants to purchase 11,749,098 shares of common stock on a "cashless" basis under the terms of the warrants. The warrants had an exercise prices of $0.25 per share (10,590,750 gross shares), $0.35 per share (750,000 gross shares), and $1.00 per share (408,348 gross shares). The aggregate intrinsic value of the warrants exercised was $16,171,952 for the six months ended June 30, 2013.

Stock-based compensation expense related to warrants for the three and six months ended June 30, 2013 was recorded in the condensed consolidated statements of operations as a component of selling, general and administrative expenses and totaled $9,587 and $514,364, respectively. There was no stock-based compensation expense related to warrants during the three and six months ended June 30, 2012. As of June 30, 2013, stock-based compensation expense related to warrants of $664,724 remains unamortized, including $87,884 which is being amortized over the weighted average remaining period of 2.3 years.  The remaining $576,840 is related to a performance based warrant where vesting is currently deemed to be improbable and no amount is being amortized.

A summary of the stock warrant activity during the three months ended June 30, 2013 is presented below:

               
Weighted
       
         
Weighted
   
Average
       
         
Average
   
Remaining
       
   
Number of
   
Exercise
   
Life
   
Intrinsic
 
   
Warrants
   
Price
   
In Years
   
Value
 
                         
Outstanding, January 1, 2013
    592,846     $ 3.01              
Granted
    13,955,023       0.28              
Exercised
    (11,749,098 )     0.28              
Forfeited
    -       -              
Outstanding, June 30, 2013
    2,798,771     $ 0.83       4.3     $ 2,695,729  
                                 
Exercisable, June 30, 2013
    2,518,771     $ 0.58       4.4     $ 2,695,729  

The following table presents information related to stock warrants at June 30, 2013:

     
Warrants Outstanding
   
Warrants Exercisable
 
     
Weighted
         
Weighted
   
Weighted
       
Range of
   
Average
   
Outstanding
   
Average
   
Average
   
Exercisable
 
Exercise
   
Exercise
   
Number of
   
Exercise
   
Remaining Life
   
Number of
 
Price
   
Price
   
Warrants
   
Price
   
In Years
   
Warrants
 
                                 
$ 0.25 - $0.35     $ 0.25       2,205,925     $ 0.25       4.6       2,205,925  
$ 0.36 - $3.00       2.91       562,846       2.91       3.2       312,846  
$ 3.01 - $4.95       4.95       30,000       -       -       -  
        $ 0.83       2,798,771     $ 0.58       4.4       2,518,771  

 
 

 
 
- 14 -


 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


7. Stockholders’ Deficiency – Continued

Services Contributed

Effective January 1, 2013, an executive officer of the Company waived payment for services contributed during 2013. As a result, the Company imputed the value of the services contributed and recorded salary expense of $87,500 and $175,000 for the three and six months ended June 30, 2013, respectively, with a corresponding credit to stockholders’ deficiency.

8. Commitments and Contingent Liabilities

Operating Leases

On March 13, 2013, the Company gave notice of early termination for a lease agreement for a corporate apartment dated May 31, 2011. Accordingly, the lease expired on March 31, 2013. The Company did not incur any penalties related to the early termination of the lease agreement.

On June 7, 2013, Pagosa signed a three year lease for $1,000 per month to house an office, pharmacy as well as inventory and is located in Lawrenceburg, Indiana. A redundant facility is required by Verified Internet Pharmacy Practice Sites (“VIPPS”) and a newly acquired contract.  Pagosa will serve as a backup facility and will function as a closed door pharmacy. On July 8, 2013, the parties agreed to extend the lease for two additional years, such that the new termination date is now June 7, 2018.

During the three and six months ended June 30, 2013, the Company recorded aggregate rent expense of $47,617 and $93,336, respectively, and $46,307 and $98,764 during the three and six months ended June 30, 2012, respectively.

Litigation

On February 9, 2012, two of our former stockholders, Rock Castle and Jason Smith (“Plaintiffs”), filed suit against the Company in the Hamilton County, Ohio Court of Common Pleas, alleging that the Company had breached the terms of certain stock options the Company granted to the Plaintiffs in connection with the Company’s now-terminated oral consulting arrangements with the Plaintiffs, by among other things, refusing Plaintiffs’ purported exercise of options to purchase 233,332 shares of the Company’s common stock at an exercise price of $2.00 per share in December 2011.  Plaintiffs have requested that, among other things, the court require the Company to permit the exercise of the 233,332 options.  Plaintiffs have also provided an expert report indicating damages of $2.086 million. Also named as defendants were two individuals, Michael Peppel and Gary Singer, whom Plaintiffs claim acted as agents for the Company in connection with its purchase of shares of its common stock from Plaintiffs in September 2011. On April 26, 2013, Plaintiffs dismissed Mr. Singer from the lawsuit.  Trial of the case is currently scheduled for April of 2014.  The Company denies all of the Plaintiffs’ claims and intends to contest this matter vigorously.

On October 9, 2012, American Express Travel Related Services Company, Inc. brought legal action against the Company in the Boone County, Kentucky Circuit Court. The action seeks to recover the unpaid balance on a credit card account in the amount of $87,029, plus interest and costs. The Company filed an answer in November 2012.  This litigation was resolved on July 10, 2013 by a negotiated settlement. Such amount has been accrued in the accompanying consolidated balance sheet as of June 30, 2013.

On November 5, 2012, HD Smith, Inc., one of the Company’s vendors, (“Plaintiff”) filed a complaint against the Company alleging that it breached its vendor credit agreement. The Plaintiff is seeking damages of $170,316 plus pre-judgment interest and attorneys’ fees. This litigation was resolved on January 25, 2013, as amended on June 20, 2013, by a negotiated settlement. Such amount has been accrued in the accompanying consolidated balance sheet as of June 30, 2013.
 
On March 13, 2013, a former vendor filed suit against the Company in the Hamilton County, Ohio Court of Common Pleas, alleging that the Company had breached its contract. The plaintiff is seeking damages of $17,800 plus pre-judgment interest and other costs and expenses. The Company answered the complaint and trial was set for June 2014. This matter was resolved by a negotiated settlement. Such amount has been accrued in the accompanying consolidated balance sheet as of June 30, 2013.
 
 

 

 
- 15 -


 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


8. Commitments and Contingent Liabilities – Continued

Litigation – Continued

On March 20, 2013, a complaint was filed in the Delaware Court of Chancery by two shareholders of the Company, HWH Lending, LLC and Milfam I L.P., seeking to compel the holding of an annual meeting of stockholders for the election of directors under Delaware law.  The Company filed an answer to the complaint on April 12, 2013.  On May 13, 2013, the Company publicly announced that the Board of Directors had set the date for the Company’s next annual meeting of stockholders as August 15, 2013 at 11:00 a.m. Eastern time.  In lieu of further litigation, on July 18, 2013, the parties submitted to the court a proposed order confirming August 15, 2013 as the annual meeting date and establishing certain procedures related to the annual meeting.  On July 18, 2013, the court entered the proposed order providing that (i) the Company shall notice and hold its annual meeting on August 15, 2013 for the election of directors and for the transaction of any other business properly brought before the meeting, and the date of the  meeting shall not be adjourned, continued or postponed prior to the election of directors absent an order of the court; (ii) the shares of the Company’s stock represented at the annual meeting, either in person or by proxy, and entitled to vote thereat shall constitute a quorum for purposes of the meeting, notwithstanding any contrary provision in the Company’s certificate of incorporation or bylaws, and (iii) the record date for the determination of stockholders entitled to notice of and to vote at the annual meeting is July 1, 2013, and if the annual meeting noticed for August 15, 2013 is adjourned, continued or postponed prior to the election of directors pursuant to an order of the court, the Company may set a new record date in accordance with the Company’s bylaws. In accordance with the Court order, the Company’s annual meeting of stockholders was held on August 15, 2013 at which time Lalit Dhadphale, Youssef Bennani, Joseph Savarino, and Ambassador Ned Siegel each received a plurality of the total votes cast at the annual meeting and each was elected as a director by the stockholders of the Company. On September 24, 2013, this action was dismissed without prejudice by a joint stipulation of dismissal.

 On April 23, 2013, the Company’s Board of Directors formed a Special Committee, chaired by Youssef Bennani, a director and Chairman of the Company’s Audit Committee, to investigate certain stockholder demands.  Since March 1, 2013, the Company has received three letters from stockholders alleging certain breaches of fiduciary duties by directors of the Company and demanding that the Company commence investigations of the alleged conduct.  On March 1, 2013, the Company received a letter on behalf of the holders of the Company’s Series B Preferred Stock (“Preferred Holders”) alleging that a convicted felon appears to be a consultant to the Company, owes the Company money, and exercises control over the Company.  On March 8, 2013, the Company received a letter on behalf of stockholder Wayne Corona alleging that two directors, Matthew Stecker and John Backus, breached their fiduciary duties and demanding that the Company investigate legal claims against those directors.  The letter alleges that the director designee of the holders of the Company’s Series B Preferred Stock and the director designee of New Atlantic Ventures Fund III, L.P. (“NAV”) acted in concert to attempt to scuttle the Company’s recent financing plan.  The letter also alleged that the director designee of the Preferred Holders and the director designee of NAV sought to prevent the Company from paying back its lenders in 2010 and 2011.  On March 18, 2013, the Company received a letter on behalf of the two directors denying the allegations and stating there was no proper basis for launching an investigation.  On March 27, 2013, a letter on behalf of Messrs. Backus and Stecker, in their capacities as directors and stockholders, demanded that the Company (i) investigate alleged breaches of confidentiality and fiduciary duties by the Company’s President and CEO and two other directors in connection with the purported stockholder demand letter of Mr. Corona dated March 8, 2013, and (ii) assert related claims against those individuals.  The letter also asserted that the director constituting the special committee, Youssef Bennani, is subject to alleged conflicts of interest that disqualify him from serving on any proposed special committee to evaluate the pending stockholder demands.  The Special Committee has retained an independent law firm to conduct the investigation and advise the Special Committee.

On April 30, 2013, a purported class-action complaint was filed against the Company in the United States District Court for the Northern District of Illinois.  The complaint alleges that the Company sent an unsolicited advertising fax to Glen Ellyn Pharmacy, the named plaintiff, and other recipients.  The complaint alleges that such a fax violates the federal Telephone Consumer Protection Act (the “TCPA”), the Illinois Consumer Fraud Act and Illinois common law.  Under the TCPA, recipients of unsolicited fax advertisements are entitled to damages of up to $500 per fax for inadvertent violations and up to $1,500 for knowing or willful violations.  At the time of filing the complaint, the plaintiff also filed a motion asking the Court to certify a class of persons and entities who were sent advertising faxes by the Company which did not contain an opt out notice.  On June 19, 2013, the plaintiff filed an amended class-action complaint which withdrew the two counts for alleged violations of the Illinois Consumer Fraud Act and the common law tort of conversion.  The amended complaint eliminates claims for damages under Illinois law and leaves only a single count for an alleged violation of the TCPA.  The Company filed an answer to the amended complaint on July 8, 2013 contesting class certification and liability. The District Court has not established or recognized any class.  This litigation was resolved on September 24, 2013. The settlement amount is deemed to be de minimis.
 
 


 
- 16 -

 

 
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


8. Commitments and Contingent Liabilities – Continued

Litigation – Continued

On May 7, 2013, a putative stockholder derivative action was filed in the Court of Chancery of the State of Delaware against certain directors and the chief executive officer of the Company and against the Company, as a nominal defendant.  The complaint alleges claims for breach of fiduciary duty, entrenchment and corporate waste arising out of the alleged failure to conduct annual meetings, SEC filing obligations, advances to a former employee and a $500,000 secured loan to the Company which the entire board of directors approved.  The derivative complaint seeks unspecified compensatory damages and other relief.  The Company and the individual defendants believe that the allegations stated in the complaint are without merit and they intend to defend themselves vigorously against the allegations. The individual director defendants filed a motion to dismiss the complaint on July 22, 2013 and filed an opening brief in support of the motion to dismiss on August 2, 2013.  The Company joined in the motion to dismiss.  Plaintiff’s brief in opposition to the motion to dismiss was due on September 16, 2013.  Instead of filing a brief in opposition to the motion to dismiss, on September 16, 2013, plaintiff filed an amended complaint against the same defendants alleging two claims for breach of fiduciary duty and corporate waste and deleting the claim for entrenchment.  The claims in the amended complaint arise out of allegations regarding a failure to conduct stockholder annual meetings, a failure to comply with SEC filing obligations, a lack of internal controls and unauthorized advances to a former employee and a $500,000 secured loan approved by the Company’s entire board.  The Company and the individual defendants continue to believe the allegations are without merit and intend to vigorously defend themselves against the allegations. On October 3, 2013, the individual director defendants moved to dismiss the amended complaint, and the Company joined in the motion to dismiss.  Under a briefing schedule approved by the court, defendants’ brief on the motion to dismiss is due by November 4, 2013, plaintiff’s answering brief is due by December 13, 2013, and defendants’ reply brief is due by January 10, 2014.

On May 15, 2013, a former consultant filed suit in Boone County, Kentucky Circuit Court alleging breach of contract and unjust enrichment for unpaid consulting fees and expenses of approximately $27,000.  The Company filed an answer to the complaint on July 22, 2013 and intends to vigorously defend itself against the allegations.

On August 9, 2013, two shareholders of the Company, HWH Lending, LLC and Milfam I L.P., filed in the Delaware Court of Chancery a verified complaint for injunctive and declaratory relief, seeking to prevent the Company from including a 10.5% block of shares held by a stockholder in the vote count at the Company’s upcoming annual meeting of stockholders scheduled for August 15, 2013.  The complaint alleged that the Company and its Chief Executive Officer did not follow proper procedures in issuing the shares to the stockholder and caused those shares to be issued in violation of Delaware law.  Following an expedited briefing schedule, the court held a hearing on August 14, 2013 and denied plaintiffs’ request for a temporary restraining order.  On August 21, 2013, the plaintiffs filed a notice of voluntary dismissal, dismissing the action without prejudice.

On October 11, 2013, two former directors of the Company sent a letter demanding payment of $80,766 in legal fees and expenses pursuant to certain Company indemnification and advancement provisions.  The Company is evaluating the demand and has requested additional information.

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. Legal fees for such matters are expensed as incurred and we accrue for adverse outcomes as they become probable and estimable. Currently, other than discussed above, the Company is not involved in any such material matters.

Settlement Agreement

On February 22, 2013, the Company entered into a settlement agreement with a counterparty for amounts owed related to the return of expired goods and inventory and the Company wrote down the accounts receivable to the settlement amount as of December 31, 2012. On February 28, 2013, the Company received $50,000 in connection with the agreement in complete satisfaction of all outstanding and past due accounts receivable from the counterparty, such that there was no balance due to the Company as of June 30, 2013.
 
 

 

 
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HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 
9. Concentrations

The Company maintains deposits in financial institutions which are insured by the Federal Deposit Insurance Corporation (“FDIC”). At various times, the Company has deposits in these financial institutions in excess of the amount insured by the FDIC.

As of June 30, 2013, three companies represented approximately 17%, 13% and 10% of accounts receivable.  As of December 31, 2012, two companies represented approximately 18% and 14% of accounts receivable.

During the three months ended June 30, 2013, two vendors represented 35% and 12% of total inventory purchases. During the six months ended June 30, 2013, two vendors represented 33% and 11% of total inventory purchases. During the three months ended June 30, 2012, two vendors represented 26% and 21% of total inventory purchases. During the six months ended June 30, 2012, two vendors represented 33% and 14% of total inventory purchases.

10. Related Party Transactions

During the three and six months ended June 30, 2013, a director was paid $0 for general financial and business consulting. During the three and six months ended June 30, 2012, the director was paid $30,000 and $43,800, respectively, for general financial and business consulting. Beginning July 1, 2013, the director is to be paid $3,000 per month and is entitled to expense reimbursements as compensation for serving on the Company’s Board committees.

From March 2011 to April 2013, a wife of a director served as the agent for the Company's D&O insurance. During the three and six months ended June 30, 2013, the Company recorded insurance premium expense of $14,100 and $28,200, respectively. During the three and six months ended June 30, 2012, the Company recorded insurance premium expense of $11,750 and $23,500, respectively.

See Note 7 – Stockholders’ Deficiency – Common Stock for details regarding the exchange of common stock and warrants in satisfaction of related party notes payable, advances and accounts payable.

11. Subsequent Events

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements, except as disclosed below.

Warrant Exercises

Subsequent to June 30, 2013, the Company issued an aggregate of 608,184 shares of common stock to holders of warrants who elected to exercise warrants to purchase an aggregate of 756,000 shares of common stock on a "cashless" basis under the terms of the warrants. The warrants had exercise prices of $0.25 per share.

Related Party Advances

Subsequent to June 30, 2013, an officer advanced approximately $2,000 to the Company and he was repaid approximately $46,000. As of June 30, 2013, the outstanding payable to the officer was approximately $112,000.

Notes Payable

On August 15, 2013, the Company issued a note payable to a related party with a principal balance of $49,000, bearing interest at a rate of 10% per annum.  The note has a maturity date of November 7, 2013 and will be repaid in weekly payments of principal and interest beginning in September 2013.
 
 

 

 
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HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 
11. Subsequent Events – Continued

Notes Payable – Continued

Effective September 30, 2013, the Company entered into an Amended and Restated Promissory Note (the “September Note”) which supersedes the March Note (see Note 6 – Notes Payable) with the same Lender.  The Company borrowed an additional $100,000 from the Lender, which brought the face value of the September Note to $600,000.  The September Note contains financial covenants which require the Company to meet certain minimum targets for earnings before interest, taxes and non-cash expenses, including depreciation, amortization and stock-based compensation (“EBITDAS”) for the calendar quarters and years ended between December 31, 2013 and 2014, inclusive. In addition, the September Note extended the deadline for providing the March 31, 2013 and June 30, 2013 quarterly financial statements and financial covenant certifications from 45 days after quarter end to October 31, 2013. The remainder of the material September Note terms are unchanged from the March Note.  In consideration of the Lender providing additional funds and entering into the September Note, the Company granted the Lender a five-year warrant to purchase 150,000 shares of common stock at an exercise price of $0.35 per share. The warrant contains customary anti-dilution provisions. The warrant had a relative fair value of $51,200 which was set up as debt discount and will be amortized using the effective interest method over the term of the September Note.  Including the value of warrants issued in connection with the March Note and September Note, the September Note had an effective interest rate of 41% per annum.

Sublease Agreement

On October 10, 2013, the Company entered into a sublease agreement for 15,000 square feet of warehouse space at the Company’s corporate headquarters in Florence, Kentucky. The initial term of the sublease expires on January 31, 2014 with rent of $4,688 per month. After the expiration of the initial term, the tenant may extend the term of the sublease agreement on a month to month basis.
 
 
 

 

 
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The following discussion and analysis of the results of operations and financial condition of HealthWarehouse.com, Inc. (and including its subsidiaries,  the “Company”) as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us,” “we,” “our,” and similar terms refer to the Company. This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Factors that may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Results and Financial Condition”) of our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission (the “SEC”) on July 23, 2013.
 
Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
 
Overview

We are a Verified Internet Pharmacy Practice Sites (“VIPPS”) accredited retail mail-order pharmacy and healthcare e-commerce company that sells discounted generic and brand name prescription drugs, as well as, over-the-counter (OTC) medical products and surgical supplies. Our web addresses are http://www.healthwarehouse.com  and http://www.hocks.com. At present, we sell:
 
●  
a range of prescription drugs (we are licensed as a mail-order pharmacy for sales to 50 states and the District of Columbia);
 
●  
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 objectives are to make the pharmaceutical supply chain more efficient and to pass the savings on 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.
 
Results of Operations
 
Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012
 
   
For the
Three Months
         
For the
Three Months
       
   
Ended
June 30, 2013
   
% of
Revenue
   
Ended
June 30, 2012
   
% of
Revenue
 
    (unaudited)           (unaudited)        
                         
Net sales
  $ 2,674,761       100.0 %   $ 2,997,326       100.0 %
Cost of sales
    1,339,120       50.1 %     1,515,608       50.6 %
Gross profit
    1,335,641       49.9 %     1,481,718       49.4 %
Selling, general & administrative
    1,546,446       57.8 %     2,824,358       94.2 %
Loss from operations
    (210,805 )     (7.9 %)     (1,342,640 )     (44.8 %)
Other income
    -       0.0 %     1,210       0.0 %
Interest expense
    (58,182 )     (2.2 %)     (261,240 )     (8.7 %)
Net loss
  $ (268,987 )     (10.1 %)   $ (1,602,670 )     (53.5 %)
 
 
 
 
 
 
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Net Sales
 
Net sales for the three months ended June 30, 2013 fell to $2,674,761 from $2,997,326 for the three months ended June 30, 2012, a decrease of $322,565 or 10.8%, primarily as a result of a reduction in advertising due to cash constraints as well as a shift from over-the-counter inventory toward the higher margin prescription drug inventory which has more loyal customers. As a result, OTC and prescription sales decreased approximately $215,000 and $106,000, respectively.

Costs and Expenses
 
Cost of Sales and Gross Margin
 
Cost of sales were $1,339,120 for the three months ended June 30, 2013 as compared to $1,515,608 for the three months ended June 30, 2012, a decrease of $176,488 or 11.6%, primarily as a result of a reduction in order volume. Gross margin percentage remained relatively flat year-over-year at 49.4% for the three months ended June 30, 2012 and 49.2% for the three months ended June 30, 2013. We believe that the change in product mix with prescription drugs increasing will continue to improve margins during 2013 and our marketing efforts have focused on this shift.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses totaled $1,546,446 for the three months ended June 30, 2013 compared to $2,824,358 for the three months ended June 30, 2012, a decrease of $1,277,912 or 45.2%. The three months ended June 30, 2013 expense decreases included (a) a decrease in stock-based compensation expense of $266,834 (primarily due to the forfeiture of options granted to employees that were terminated); (b)  a reduction in salary expense of $199,998 (primarily due to a reduction in headcount and salaries); (c) a reduction in legal expense of $189,580 (primarily due to one-time 2012 legal services); (d) a decrease in advertising expense of $164,147 (primarily due to the termination of an advertising campaign); (e) a reduction in accounting services expense of $55,447 (primarily due to the elimination of certain one-time 2012 accounting services); and (f) a reduction in freight expense of $114,484 (primarily due to lower sales). We expect that our selling, general and administrative expenses, specifically legal and professional fees, will decrease over time. Certain professional fees will decrease as we improve our internal controls over financial reporting. We expect our legal fees to decrease following the proxy contest that concluded at our Annual Meeting of Shareholders held on August 15, 2013 and further as we resolve our outstanding litigation.

Interest Expense
 
Interest expense decreased from $261,240 in the three months ended June 30, 2012 to $58,182 in the three months ended June 30, 2013, a decrease of $203,058 or 77.7%, primarily due to the repayment of mature notes payable and convertible notes payable during the three months ended March 31, 2013.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

   
For the
Six Months
         
For the
Six Months
       
   
Ended
June 30, 2013
   
% of
Revenue
   
Ended
June 30, 2012
   
% of
Revenue
 
    (unaudited)           (unaudited)        
                         
Net sales
  $ 5,084,677       100.0 %   $ 6,150,933       100.0 %
Cost of sales
    2,574,276       50.6 %     3,220,255       52.4 %
Gross profit
    2,510,401       49.4 %     2,930,678       47.6 %
Selling, general & administrative
    3,935,549       77.4 %     5,508,836       89.6 %
Loss from operations
    (1,425,148 )     (28.0 %)     (2,578,158 )     (41.9 %)
Loss on extinguishment
    (2,792,900 )     (54.9 %)     -       0.0 %
Interest income
    -       0.0 %     3,758       0.1 %
Interest expense
    (129,305 )     (2.5 %)     (578,582 )     (9.4 %)
Net loss
  $ (4,347,353 )     (85.5 %)   $ (3,152,982 )     (51.3 %)

Net Sales
 
Net sales for the six months ended June 30, 2013 fell to $5,084,677 from $6,150,933 for the six months ended June 30, 2012, a decrease of $1,066,256 or 17.3%, primarily as a result of a reduction in advertising due to cash constraints as well as a shift from over-the-counter inventory toward the higher margin prescription drug inventory which has more loyal customers. As a result, OTC and prescription sales decreased approximately $805,000 and $211,000, respectively.
 
 
 

 
 
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Costs and Expenses
 
Cost of Sales and Gross Margin
 
Cost of sales were $2,574,276 for the six months ended June 30, 2013 as compared to $3,220,255 for the six months ended June 30, 2012, a decrease of $645,979 or 20.1%, primarily as a result of a reduction in order volume. Gross margin percentage increased year-over-year from 47.6% for the six months ended June 30, 2012 to 49.0% for the six months ended June 30, 2013, primarily due to the shift in product mix from over-the-counter drugs to higher margin prescription drugs. We believe that the change in product mix with prescription drugs increasing will continue to improve margins during 2013 and our marketing efforts have focused on this shift.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses totaled $3,935,549 for the six months ended June 30, 2013 compared to $5,508,836 for the six months ended June 30, 2012, a decrease of $1,573,287 or 28.6%. The six months ended June 30, 2013 expense decreases included (a) a decrease in advertising expense of $518,270 (primarily due to the termination of an advertising campaign); (b) a decrease in salaries expense of $287,428 (primarily due to a reduction in headcount and salaries); (c) a decrease in freight expense of $277,134 (primarily due to reduced sales); (d) a decrease in travel expense of $112,822 (primarily due to cost reduction initiatives); (e) a decrease in legal expense of $87,535 (primarily due to one-time 2012 legal services); and (f) a decrease in amortization expense of $105,651 (primarily due to the write-off in full of our intangible assets in 2012).  The decreases were partially offset by an increase in stock-based compensation expense of $290,977 (primarily due to warrants provided to 2012 private placement investors) and an increase in contract labor expenses (primarily due to the increased use of contractors). We expect that our selling, general and administrative expenses, specifically legal and professional fees, will decrease over time. Certain professional fees will decrease as we improve our internal controls over financial reporting. We expect our legal fees to decrease following the proxy contest that concluded at our Annual Meeting of Shareholders held on August 15, 2013 and further as we resolve our outstanding litigation.

Loss on Extinguishment
 
During the six months ended June 30, 2013, we recorded a $2,792,900 extinguishment loss which represents the incremental fair value of the equity securities issued as compared to the carrying value of the liabilities that were exchanged.

Interest Expense
 
Interest expense decreased from $578,582 in the six months ended June 30, 2012 to $129,305 in the six months ended June 30, 2013, a decrease of $449,277 or 77.7%, primarily due to the repayment of mature notes payable and convertible notes payable during the three months ended March 31, 2013.

Adjusted EBITDAS

We believe Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization and Stock-Based Compensation (“Adjusted EBITDAS”), a non-GAAP financial measure, is useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary for different companies for reasons unrelated to overall operating performance. We believe that:

  
Adjusted EBITDAS provides investors and other users of our financial information consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and

  
Adjusted EBITDAS is useful because it excludes non-cash charges, such as depreciation and amortization, stock-based compensation and one-time charges, which the amount of such expense in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly between periods.

We use Adjusted EBITDAS in conjunction with traditional GAAP measures as part of our overall assessment of our performance, to evaluate the effectiveness of our business strategies and to communicate with our lenders, stockholders and board of directors concerning our financial performance.

 
 

 
 
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Adjusted EBITDAS should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do. We compensate for the inherent limitations associated with using Adjusted EBITDAS through disclosure of these limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Adjusted EBITDAS to the most directly comparable GAAP measure, specifically net loss.

The following provides a reconciliation of net loss to Adjusted EBITDAS:

   
For the Three Months Ended