For the Quarterly Period Ended March 31, 2016

 

Commission File Number 0-13117

 

 

Large Accelerated Filer  ☐                                                                       Accelerated Filer                     ☐

 

 

 

 

 

HEALTHWAREHOUSE.COM, INC.

 

 

 

PART I – FINANCIAL INFORMATION

 

HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
		March 31,				December 31,
		2016				2015
		(unaudited)
Assets
Current assets:
Cash		$	24,866			$	11,217
Restricted cash			115,088				145,088
Accounts receivable, net of allowance of $47,143 as of March 31, 2016 and
December 31, 2015			64,521				51,627
Inventories - finished goods, net			241,642				182,647
Prepaid expenses and other current assets			85,423				81,718
Total current assets			531,540				472,297
Property and equipment, net of accumulated depreciation of $827,528 and $801,270 as of
March 31, 2016 and December 31, 2015			382,990				409,248
Web development costs, net of accumulated amortization of  $165,699 and $146,448 as of
March 31, 2016 and December 31, 2015			65,311				84,562
Total assets		$	979,841			$	966,107
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable – trade		$	2,310,300			$	2,189,649
Accounts payable – related parties			260				862
Accrued expenses and other current liabilities			347,844				597,665
Current portion of equipment lease payable			29,349				46,143
Notes payable and other advances, net of debt discount of $12,056 and $0 as of March 31, 2016			1,087,944				991,089
and December 31, 2015, respectively
Note payable and other advances – related parties			16,058				23,889
Redeemable preferred stock - Series C; par value $0.001 per share;
10,000 designated Series C: 10,000 issued and outstanding as of
March 31, 2016 and December 31, 2015 (aggregate liquidation preference of $1,000,000)			1,000,000				1,000,000
Total current liabilities			4,791,755				4,849,297
Total liabilities			4,791,755				4,849,297
Commitments and contingencies
Stockholders' deficiency:
Preferred stock – par value $0.001 per share; authorized 1,000,000 shares; issued and outstanding
as of March 31, 2016 and December 31, 2015 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; 517,359 and 483,512
shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively (aggregate
liquidation preference of $4,974,601 and $4,889,043 as of March 31, 2016 and			517				484
December 31, 2015, respectively)
Common stock – par value $0.001 per share; authorized 100,000,000 shares; 38,844,374 shares
issued and 37,665,162 shares outstanding as of March 31, 2016 and December 31, 2015			38,844				38,844
Additional paid-in capital			31,067,056				30,656,598
Treasury stock, at cost, 1,179,212 shares as of  March 31, 2016 and December 31, 2015			(3,419,715	)			(3,419,715	)
Accumulated deficit			(31,498,616	)			(31,159,401	)
Total stockholders' deficiency			(3,811,914	)			(3,883,190	)
Total liabilities and stockholders' deficiency		$	979,841			$	966,107
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
		March 31,
		2016				2015
Net sales		$	2,347,798			$	1,612,677
Cost of sales			891,820				631,163
Gross profit			1,455,978				981,514
Operating expenses:
Selling, general and administrative expenses			1,683,716				1,107,550
Net loss from operations			(227,738	)			(126,036	)
Other expense:
Interest expense			(25,919	)			(74,752	)
Total other expense			(25,919	)			(74,752	)
Net loss			(253,657	)			(200,788	)
Preferred stock:
Series B convertible contractual dividends			(85,558	)			(79,961	)
Net loss attributable to common stockholders		$	(339,215	)		$	(280,749	)
Per share data:
Net loss – basic and diluted		$	(0.01	)		$	(0.01	)
Series B convertible contractual dividends			(0.00	)			(0.00	)
Net loss attributable to common stockholders - basic and diluted		$	(0.01	)		$	(0.01	)
Weighted average number of common shares outstanding - basic and diluted			37,665,162				37,570,383
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 Three Months Ended
		March 31,
		2016				2015
Cash flows from operating activities
Net loss		$	(253,657	)		$	(200,788	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts			-				90
Provision for employee advance reserve			-				2,143
Depreciation and amortization			45,509				45,661
Stock-based compensation			75,138				79,005
Gain on settlement of accounts payable			-				(66,179	)
Amortization of debt discount			3,444				54,517
Changes in operating assets and liabilities:
Accounts receivable			(12,894	)			(11,558	)
Inventories - finished goods			(58,995	)			(1,034	)
Prepaid expenses and other current assets			(3,705	)			12,857
Accounts payable – trade			120,651				(65,472	)
Accounts payable – related parties			(602	)			(382	)
Accrued expenses and other current liabilities			(15,526	)			(57,168	)
Net cash used in operating activities			(100,637	)			(208,308	)
Cash flows from investing activities
Change in restricted cash			30,000				-
Capital expenditures			-				(5,539	)
Website development costs			-				(10,942	)
Net cash provided by (used in) investing activities			30,000				(16,481	)
Cash flows from financing activities
Principal payments on equipment leases payable			(16,794	)			(15,382	)
Proceeds from issuance of notes payable			108,911				-
Repayment of notes payable			(7,831	)			-
Net cash provided by (used in) financing activities			84,286				(15,382	)
Net increase (decrease) in cash			13,649				(240,171	)
Cash - beginning of period			11,217				506,019
Cash - end of period		$	24,866			$	265,848
Cash paid for:
Interest		$	22,474			$	19,544
Non-cash investing and financing activities:
Issuance of Series B preferred stock for settlement of accrued dividends		$	319,853			$	298,918
Warrants issued as debt discount in connection with notes payable		$	15,500			$	41,300
Accrual of contractual dividends on Series B convertible preferred stock		$	85,558			$	79,961
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

1.  Organization and Basis of Presentation

HealthWarehouse.com, Inc. ("HEWA" or the "Company"), a Delaware company incorporated in 1998, is an online mail order pharmacy, licensed in 50 states and the District of Columbia to focus on the out-of-pocket prescription drug market. The Company is Verified Internet Pharmacy Practice Site ("VIPPS") accredited by the National Association of Boards of Pharmacy ("NABP").  The Company markets a complete range of generic, brand name, and pet prescription medications as well as over-the-counter ("OTC") medications and products.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. Accordingly, they do not include all of the information and disclosures required by U.S. 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 March 31, 2016 and for the three months ended March 31, 2016 and 2015. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the operating results for the full year ending December 31, 2016 or any other period. 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, 2015 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on March 25, 2016.

 

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 March 31, 2016, the Company had a working capital deficiency of $4,260,215 and an accumulated deficit of $31,498,616. During the three months ended March 31, 2016 and the year ended December 31, 2015, the Company incurred net losses of $253,657 and $626,682, respectively and used cash in operating activities of $100,637 and $548,281, respectively. These conditions raise substantial doubt about the Company's ability to continue as a going concern.

Subsequent to March 31, 2016, the Company continues to incur net losses, use cash in operating activities and experience cash and working capital constraints.

The Company is subject to a 2013 Notice of Redemption related to its Series C Redeemable Preferred Stock aggregating $1,000,000, whereby 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 U.S. 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.

 

 

 

 

 

 

 

 

3. Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of HealthWarehouse.com, Inc., Hwareh.com, Inc., Hocks.com, Inc., ION Holding NV and ION Belgium NV, 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 U.S. 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.

Net Earnings (Loss) Per Share of Common Stock

Basic net earnings (loss) per share is computed by dividing net earnings (loss) attributable to Common Stockholders by the weighted average number of common shares outstanding during the period.  Diluted net earnings (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 earnings (loss) per share if their inclusion would be anti-dilutive and consist of the following:

		March 31,
		2016				2015
Options			5,381,205				3,944,557
Warrants			10,121,198				9,839,044
Series B Convertible Preferred Stock			5,892,720				5,507,202
Total potentially dilutive shares			21,395,123				19,290,803

 

4. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

		March 31,				December 31,
		2016				2015
Deferred Rent		$	19,389			$	25,852
Advertising			76,639				76,639
Salaries and Benefits			58,937				64,007
Dividend Payable			85,558				319,854
Accrued Interest			44,249				44,249
Accrued Rent			50,078				49,614
Other			12,994				17,450
Total		$	347,844			$	597,665

 

 

 

 

 

 

 

 

 

5. Notes Payable

The Company is a party to a Loan and Security Agreement (the "Loan Agreement") with a lender (the "Lender").  Under the terms of the Loan Agreement, the Company borrowed an aggregate of $1,000,000 from the Lender (the "Loan").  The Loan is evidenced by a promissory note (the "Senior Note") in the face amount of $1,000,000 (as amended).  The Senior Note bears interest on the unpaid principal balance of the 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 (7.75% as of March 31, 2016).  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. The principal amount and all unpaid accrued interest on the Note is payable on May 31, 2016, 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.  The Senior 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").  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, including a Deposit Account Control Agreement, which grants the Lender a security interest in certain bank accounts.

 

6. Stockholders' Deficiency

Preferred Stock

As of March 31, 2016 and December 31, 2015, the Company had accrued contractual dividends of $85,558 and $319,853, respectively, related to the Series B Preferred Stock. On January 1, 2016 and 2015, the Company issued 33,847 and 31,633 shares of Series B convertible preferred stock valued at approximately $320,000 and $299,000, respectively, representing approximately $0.66 in value per share of Series B Preferred Stock outstanding on each date, to the Series B convertible preferred stock holders as payment in kind for dividends.

Stock Options

Valuation

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

 

		For The Three Months Ended
		March 31,
		2016		2015
Risk free interest rate		1.63% to 2.12%		n/a
Dividend yield		0.00%		n/a
Expected volatility		199% to 200.0%		n/a
Expected life in years		5.5 to 10.0		n/a

 

Grants

The weighted average fair value of the stock options granted during the three months ended March 31, 2016 was $0.24 per share.  There were no stock options granted during the three months ended March 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

During the three months ended March 31, 2016, the Company granted options to consultants and directors of the Company to purchase an aggregate of 172,254 shares of common stock under a previously approved plan at exercise prices ranging between $0.24 and $0.25 per share for an aggregate grant date value of $41,379.  The options vested on the grant date and have a term of ten years.

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 $75,138 and $78,789 for the three months ended March 31, 2016 and 2015, respectively.

As of March 31, 2016, stock-based compensation expense related to stock options of $996,064 remains unamortized, including $104,495 which is being amortized over the weighted average remaining period of 2.0 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.

Summary

A summary of the stock option activity during the three months ended March 31, 2016 is presented below:

						Weighted				Average
						Average				Remaining			Aggregate
		Number of				Exercise				Life			Intrinsic
		Options				Price				In Years			Value
Outstanding, January 1, 2016			5,341,284			$	0.70
Granted			172,254				0.24
Exercised			-				-
Forfeited			(132,333	)			0.49
Outstanding, March 31, 2016			5,381,205			$	0.69			7.6			$	332,554
Exercisable, March 31, 2016			4,169,539			$	0.62			7.6			$	240,254

 

The following table presents information related to stock options at March 31, 2016:

				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
$	0.09 - $2.20			$	0.23			4,701,705			$	0.25			8.0			3,740,039
$	2.21 - $3.80				3.35			492,500				2.88			3.8			242,500
$	3.81 - $6.99				5.17			187,000				5.17			5.4			187,000
				$	0.69			5,381,205			$	0.62			7.6			4,169,539

 

 

 

 

 

 

 

Warrants

Valuation

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

 

Grants

The weighted average fair value of the stock warrants granted during the three months ended March 31, 2016 and 2015, was $0.24 and $0.08 per share, respectively.

Stock-based compensation expense related to warrants for the three months ended March 31, 2016 and 2015 was recorded in the condensed consolidated statements of operations as a component of selling, general and administrative expenses and totaled $0 and $216, respectively.  As of March 31, 2016, stock-based compensation expense related to warrants of $576,840 remains unamortized.  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 March 31, 2016 is presented below:

						Weighted				Average
						Average				Remaining			Aggregate
		Number of				Exercise				Life			Intrinsic
		Warrants				Price				In Years			Value
Outstanding, January 1, 2016			10,046,198			$	0.41
Granted			75,000				0.25
Exercised			-				-
Forfeited			-				-
Outstanding, March 31, 2016			10,121,198			$	0.40			3.1			$	150,922
Exercisable, March 31, 2016			9,871,198			$	0.34			3.1			$	150,922

 

The following table presents information related to stock warrants at March 31, 2016:

 

				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
$	0.10 - $0.35			$	0.25			9,571,198			$	0.25			3.2			9,571,198
$	0.36 - $3.00				2.90			520,000				2.90			0.5			270,000
$	3.01 - $4.95				4.95			30,000				4.95			1.5			30,000
$	0.10 - $4.95			$	0.40			10,121,198			$	0.33			3.1			9,871,198

 

 

 

 

 

 

 

 

 

 

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, IN.  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.  On January 14, 2014, the Company closed Pagosa Health and vacated the Lawrenceburg facility.  The Company is currently in discussions with the Landlord regarding termination of the lease related to the building.   The present value of the remaining lease payments of $50,078 is reflected as a component of accrued expenses and other liabilities on the condensed consolidated financial statements as of March 31, 2016.

Future minimum payments, by year and in the aggregate, under operating leases as of March 31, 2016 are as follows:

 

For years ending December 31,		Amount
2016		$	58,152
2017			91,783
2018			87,633
2019			85,482
Total future minimum lease payments		$	323,050

 

During the three months ended March 31, 2016 and 2015, the Company recorded aggregate rent expense of $20,274 and $18,342 (net of sub-lease), respectively.

Litigation

In the ordinary course of business, we may become subject to lawsuits and other claims and proceedings that might arise from litigation matters or regulatory audits. 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 condensed consolidated financial condition or condensed consolidated results of operations. We are not currently involved in any pending or threatened material litigation or other material legal proceedings nor have we been made aware of any penalties from regulatory audits.

8. Concentrations

During the three months ended March 31, 2016, three vendors represented 49%, 16% and 15% of total inventory purchases. During the three months ended March 31, 2015, two vendors represented 74% and 10% of total inventory purchases, respectively.

Two vendors represented 40% and 12% of the accounts payable balance as of March 31, 2016.  Two vendors represented 43% and 13% of the accounts payable balance as of December 31, 2015.

9. 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.

Stock Option Grants

On April 8, 2016, the Company granted options to directors of the Company to purchase an aggregate of 94,848 shares of common stock under a previously approved plan at an exercise price of $0.29 per share for an aggregate grant date value of $27,000.  The options vested on the grant date and have a term of ten years.  The options were granted as part of director compensation approved by the Compensation Committee.

 

Common Stock Issued

On May 3, 2016, the Company issued 28,242 shares of common stock to an investor as a result of a cashless exercise of warrants.

 

 

 

 

 

 

 

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 March 31, 2016 and for the three months ended March 31, 2016 and 2015 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, 2015 filed with the Securities and Exchange Commission (the "SEC") on March 25, 2016.

 

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

HealthWarehouse.com, Inc. ("HEWA" or the "Company") is America's Trusted Online Pharmacy, licensed in 50 states to focus on the out-of-pocket prescription drug market, a market which is expected to grow to $80 billion in 2016. HealthWarehouse.com is currently 1 of 45 Verified Internet Pharmacy Practice Websites ("VIPPS") accredited by the National Association of Boards of Pharmacy ("NABP") and is the only VIPPS accredited pharmacy licensed in all 50 states and the District of Columbia that processes out-of-pocket prescriptions online.  The Company won the 2015 BizRate Circle of Excellence Award for outstanding customer service and satisfaction along with 186 other major online retailers, the fourth time since its inception and was prominently featured in two nationally recognized consumer magazines during the fourth quarter of 2015 as having the lowest price among top US pharmacies for five commonly prescribed medications.  The Company markets a complete range of generic, brand name, and pet prescription medications as well as over-the-counter ("OTC") medications and products.

 

Consumers who pay out of pocket for their prescriptions include those:

 

Our objectives are to utilize our proprietary technology 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 products and prescription medications. We intend to continue to expand our product line as our business grows.

 

 

 

 

 

 

 

 

Results of Operations

 

For The Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

 

		For three months ended				% of			For three months ended				% of
		Ended March 31, 2016				Revenue			Ended March 31, 2015				Revenue
Net sales		$	2,347,798			100.0	%		$	1,612,677			100.0	%
Cost of sales			891,820			38.0	%			631,163			39.1	%
Gross profit			1,455,978			62.0	%			981,514			60.9	%
Selling, general & administrative expenses			1,683,716			71.7	%			1,107,550			68.7	%
Loss from operations			(227,738	)		(9.7	%)			(126,036	)		(7.8	%)
Interest expense			(25,919	)		(1.1	%)			(74,752	)		(4.6	%)
Net loss		$	(253,657	)		(10.8	%)		$	(200,788	)		(12.4	%)

 

Net Sales

For three months ended				%				$				For three months ended
March 31, 2016				Change				Change				March 31, 2015
$	2,347,798				45.6	%		$	735,121			$	1,612,677

 

 

Net sales for the three months ended March 31, 2016 increased to $2,347,798 from $1,612,677, an increase of $735,121, or 45.6% due to an increase in core consumer prescription and over-the-counter sales offset by a reduction in business-to-business sales.  The core prescription sales grew by $691,929 or 63.3% as new customers grew 198.5% and repeat customers grew 38.9%, in comparison to the same quarter of the prior year, continuing the upward trend experienced during 2015.  Core over-the-counter sales grew by $187,029 or 68.8% and order volume more than doubled due to continued advertising efforts and improved order fulfillment rates and customer satisfaction.  The combined first quarter core consumer prescription and over-the-counter order volume increased 89.4% when compared to order levels of the same quarter of the prior year due to new customer acquisition through advertising and customer retention.

Cost of Sales and Gross Margin

 

		For three months ended				%				$				For three months ended
		March 31, 2016				Change				Change				March 31, 2015
Cost of sales		$	891,820				41.3	%			260,657			$	631,163
Gross margin $		$	1,455,978				48.3	%			474,464			$	981,514
Gross margin %			62.0	%			1.8	%			1.1	%			60.9	%

 

Cost of sales were $891,820 for the three months ended March 31, 2016 as compared to $631,163 for the three months ended March 31, 2015, an increase of $260,657, or 41.3%, primarily as a result of an increase in consumer prescription and over-the-counter order volume offset by a reduction in business-to-business orders. Gross margin percentage increased from 60.9% for the three months ended March 31, 2015 to 62.0% for the three months ended March 31, 2016, primarily due to a reduction in the lower margin business-to-business sales.  Management will continue to focus its advertising and operational efforts on promoting and offering its higher margin product lines to consumers and strategic purchasing efforts to further improve costs.

 

 

 

 

 

 

 

 

 

Selling, General and Administrative Expenses

 

For three months ended				%				$				For three months ended
March 31, 2016				Change				Change				March 31, 2015
$	1,683,716				52.0	%		$	576,166			$	1,107,550
	71.7	%											68.7	%

 

Selling, general and administrative expenses totaled $1,683,716 for the three months ended March 31, 2016 compared to $1,107,550 for the three months ended March 31, 2015,  an increase of $576,166, or 52.0%.  The three months ended March 31, 2016 expense increases included (a) an increase in salary expense of $184,681 (primarily due to an increase  in headcount to process higher levels of call and order volumes, reduced efficiency of pharmacy staff due to higher level of new customer orders and the addition of the Chief Financial Officer); (b) an increase in freight expense of $134,042 (due to higher volume and higher expedited shipping cost);  (c) an increase in advertising and public relations expenses of  $101,811 (primarily due to an increase in the advertising and promotion campaigns); (d) an increase in credit card processing expense of $34,672 (primarily due to the increase in order volume);  (e) an increase in legal expense of $19,778 (primarily related to efforts to release the garnishment of funds in our bank account); and (f) an increase in the board of directors fees of $18,000.  We will continue to focus on controlling costs and improving efficiencies of our personnel to limit the future growth in expenses.

 

Interest Expense

 

Interest expense decreased from $74,752 in the three months ended March 31, 2015 to $25,919 in the three months ended March 31, 2016,  a decrease of $48,833, or 65.3% primarily due to a reduction  in amortization of debt discounts.

 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.

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:

		March 31,
		2016				2015
		(unaudited)
Net loss		$	(253,657	)		$	(200,788	)
Non-GAAP adjustments:
Gain on settlement of accounts payable			-				(66,179	)
Interest expense			25,919				74,752
Depreciation and amortization			45,509				45,661
Stock-based compensation			75,138				79,005
Change in fair value of collateral securing
employee advances			-				2,143
Adjusted EBITDAS		$	(107,091	)		$	(65,406	)

 

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 under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.

 

Impact of Inflation

 

We believe that inflation has not had a material impact on our results of operations for the three months ended March 31, 2016 and 2015. We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.

 

Liquidity and Capital Resources

 

Since inception, we have financed operations primarily through debt and equity financings and advances from stockholders.  As of March 31, 2016, we had a working capital deficiency of $4,260,215 and an accumulated deficit of $31,498,616.  During the three months ended March 31, 2016 and the year ended December 31, 2015, we incurred net losses of 253,657 and $626,682 and used cash in operating activities of $100,637 and $548,281, respectively.  These conditions raise substantial doubt about our ability to continue as a going concern.

Subsequent to March 31, 2016, we continue to incur net losses, use cash in operating activities and experience cash and working capital constraints.

The Company is subject to a Notice of Redemption related to our Series C Redeemable Preferred Stock aggregating $1,000,000 and must apply all of our 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 (we are not permitted to utilize toward the redemption those assets required to pay our debts as they come due and those assets required to continue as a going concern).

We recognize that we will need to raise additional capital in order to fund operations, meet our payment obligations, including the redemption of the Series C Redeemable Preferred Stock, and execute our 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 us and whether we will become profitable and generate positive operating cash flow. If we are unable to raise sufficient additional funds, we will have to develop and implement a plan to further extend payables, extend note repayments, extend 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 we are unable to obtain financing on a timely basis, we could be forced to sell our assets, discontinue our operations and/or seek reorganization under the U.S. bankruptcy code.

Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate our continuation 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.

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2016, net cash provided by investing activities was $30,000 related to a decrease in restricted cash.   For the three months ended March 31, 2015, net cash utilized by investing activities was $16,481 related to capitalized website development costs and the purchase of computer equipment.

For the three months ended March 31, 2016, net cash provided by financing activities was $84,286 related to proceeds received from the issuance of notes payable offset by principal payments on equipment leases and repayment of notes payable.  For the three months ended March 31, 2015, net cash used by financing activities was $15,382 related to the principal payment on equipment leases.

Critical Accounting Policies and Estimates

 

There are no material changes from the critical accounting policies set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K filed on March 25, 2016. Please refer to that document for disclosures regarding the critical accounting policies related to our business.

Not applicable.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d–15(e) under the Exchange Act) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the forms and rules of the SEC and that such information is accumulated and communicated to management, including the Chief Executive Officer, in a manner to allow timely decisions regarding required disclosures.

In connection with the preparation of this Form 10–Q, our management, (Chief Executive and Principal Financial Officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2016. Management had previously identified material weaknesses in our internal control over financial reporting as of December 31, 2015 (see Form 10-K filed with the SEC on March 25, 2016), which is an integral component of our disclosure controls and procedures.  During the year ended December 31, 2015, management implemented policies, procedures and controls to address the weaknesses in various areas including operational and financial systems integration, separation of duties in review and approval of disbursement, cash handling, purchasing, receiving, shipping and invoicing functions, daily transaction processing and monthly financial closing procedures and timelines and board approval of related party and other significant transactions.  Management believes that the controls implemented in these specific areas are sufficient to address the above weaknesses, however, they have concluded that such controls have not been in place for a sufficient period of time in order to conclude that the identified material weaknesses described above have been fully remediated.  Therefore, management has concluded that as of March 31, 2016, our disclosure controls were not effective.

Effective January 1, 2016, the Company hired a Chief Financial Officer with sufficient experience with United States generally accepted accounting principles to address the accounting for complex transactions.  The Chief Financial Officer is developing a plan to continue to evaluate the controls and procedures implemented in the prior year.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting or in other factors during the three months ended March 31, 2016, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting, except as discussed above.

Limitations of the Effectiveness of Control

 

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. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

 

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

In the ordinary course of business, we may become subject to lawsuits and other claims and proceedings that might arise from litigation matters or regulatory audits. 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 consolidated financial condition or consolidated results of operations. We are not currently involved in any pending or threatened material litigation or other material legal proceedings nor have we been made aware of any penalties from regulatory audits, except as described below.

Not applicable.

Recent Repurchases of Common Stock

 

There were no repurchases of our Common Stock during the three months ended March 31, 2016.  The Company does not currently have an announced repurchase program.

Item 3. Defaults upon Senior Securities.

Not applicable.

Not applicable.
 

 

 

 

 

 

 

 

 

 

 

 

Item 6.     Exhibits.

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.