Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of
Report (Date of earliest event reported): May 14, 2009
CLACENDIX,
INC.
(Exact
Name of Registrant as Specified in Charter)
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Delaware
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0-13117
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22-2413505
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(State
or other jurisdiction
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(Commission
File Number)
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(IRS
Employer
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of
incorporation)
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Identification
No.)
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100
Commerce Boulevard
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Cincinnati, Ohio
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45140
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (513) 618-0911
2001
Route 46
Parsippany, New Jersey
07054
(Former
name or former address, if changed since last report)
With a
copy to:
Greenberg
Traurig, LLP
MetLife
Building
200 Park
Avenue, 15th
Floor
New York,
New York 10166
Phone:
(212) 801-9200
Fax:
(212) 801-6400
Attn:
Constantine S. Potamianos, Esq.
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
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¨
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 DFR
240.14a-12)
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¨
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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¨
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Pre-commencement
communications pursuant to Rule 13e-4 (c) under the Exchange Act (17 CFR
240.13e-4(c))
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CURRENT
REPORT ON FORM 8-K
CLACENDIX,
INC.
(Operating
as HealthWarehouse.com, Inc.)
May
14, 2009
TABLE
OF CONTENTS
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Page
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Items
1.01 & 2.01.
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Entry
into a Material Definitive Agreement; Completion of Acquisition or
Disposition of Assets
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1
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Item
3.02.
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Unregistered
Sales of Equity Securities
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45
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Item
5.01.
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Changes
in Control of Registrant
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45
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Item
5.02.
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Departure
of Directors or Certain Officers; Election of Directors; Appointment of
Certain Officers; Compensatory Arrangements of Certain
Officers
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45
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Item
5.06.
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Change
in Shell Company Status
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45
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Item
9.01.
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Financial
Statements and Exhibits
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45
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Items
1.01 and 2.01. Entry into a Material
Definitive Agreement; Completion of Acquisition or Disposition of
Assets.
On May
14, 2009, we completed a share exchange transaction pursuant to the terms of a
Securities Exchange Agreement, dated as of May 14, 2009. Under the
Securities Exchange Agreement, we acquired all the outstanding capital stock of
HealthWarehouse.com, Inc., a Delaware corporation (HW). HW is a U.S. licensed
pharmacy and healthcare e-commerce company that sells discounted generic
prescription drugs and over-the-counter medical products. As a result
of the share exchange transaction, HW became our subsidiary, with HW’s former
stockholders acquiring a majority of the outstanding shares of our common
stock. A copy of the Securities Exchange Agreement is included as an
exhibit to this current report.
We intend
to change our corporate name to HealthWarehouse.com, Inc., upon stockholder
approval in accordance with applicable federal securities and state corporate
law. In connection with the name change, we will also seek to obtain
a new ticker symbol for quotation on the OTC Bulletin Board. Simultaneously with
our name change, we intend to change the corporate name of our HW subsidiary to
Hwareh.com, Inc.
The
Share Exchange Transaction
Pursuant
to the Securities Exchange Agreement, we issued 155,194,563 shares of our common
stock, par value $.001 per share, in exchange for all the outstanding capital
stock of HW. At closing, stockholders of HW received approximately
141.008 shares of our common stock for each share of class A common stock and
class B common stock of HW in the share exchange transaction. As a
result, at closing we issued 155,194,563 shares of our common stock to the
former stockholders of HW, representing 82.44% of our outstanding common stock
following the share exchange transaction, in exchange for the outstanding shares
of class A and class B common stock of HW. Additionally, as a result
of the share exchange transaction we assumed HW’s rights and obligations under
certain agreements pursuant to which we are obligated to issue up to 10,569,396
additional shares of our common stock through December 31, 2009 if we receive
additional investments totaling $800,000 from the parties to the
agreements. We also assumed HW’s rights and obligations under certain
HW warrants to purchase common stock, exercisable for up to 8,068,197 shares of
our common stock, and certain HW convertible promissory notes with a principal
value of $1,200,000, convertible for up to 15,855,227 shares of our common
stock. The consideration issued in the share exchange transaction was determined
as a result of arm’s-length negotiations between the parties.
The
shares of our common stock issued to the former holders of HW capital stock as
part of the share exchange transaction were not registered under the Securities
Act of 1933, as amended. These shares may not be sold or offered for
sale in the absence of an effective registration statement for the shares under
the Securities Act of 1933, as amended, or an applicable exemption from the
registration requirements. Certificates evidencing these shares of
common stock contain a legend stating the same.
Changes
Resulting from the Share Exchange Transaction
We intend
to carry on HW’s business as our sole line of business. HW, based in
Cincinnati, Ohio, is a U.S. licensed pharmacy and is engaged in the business of
selling discounted generic prescription drugs and over-the-counter medical
products via the Internet. We have relocated our executive offices to
those of HW at 100 Commerce Boulevard, Cincinnati, Ohio 45140. Our
telephone number is (513) 618-0911, and our website is located at
http://www.healthwarehouse.com. The contents of HW’s website are not
part of this current report and should not be relied upon with respect
thereto.
Prior to
the share exchange transaction, there were no material relationships between us
and HW or any of our respective affiliates, directors or officers, or any
associates of the respective officers or directors.
Under
Delaware law, we did not need the vote of our stockholders to complete the share
exchange transaction. The share exchange transaction was
contractually agreed to by all of the holders of HW capital stock.
Change
of Board Composition and Executive Officers
Prior to
the closing of the exchange transaction, our board of directors was composed of
Stephen M. Deixler, Norman E. Corn and Frank M. Russo. Effective May 14, 2009,
immediately following the share exchange transaction, Mr. Russo resigned as our
director. In accordance with our by-laws for filling newly-created board
vacancies, remaining board members Messrs. Corn and Deixler appointed Lalit
Dhadphale and Wayne Corona, previous directors of HW, to serve as directors of
our company effective at the closing of the share exchange
transaction. Mr. Deixler resigned as our director effective upon
compliance by us with the provisions of Section 14(f) of the Securities Exchange
Act and Rule 14f-1 under that act. All directors hold office until the next
annual meeting of stockholders and the election and qualification of their
successors.
Prior to
the closing of the exchange transaction, Stephen M. Deixler was our Chairman of
the Board, Norman E. Corn was our Chief Executive Officer and Patrick E. Delaney
was our Chief Financial Officer. Mr. Deixler resigned from his position as
Chairman of the Board and Mr. Corn resigned from his position as Chief Executive
Officer effective on May 14, 2009.
On May
14, 2009, our board of directors named the following persons as our new
executive officers: Lalit Dhadphale - President and Chief Executive Officer,
Patrick E. Delaney - Chief Financial Officer and Treasurer, and Wayne Corona -
Secretary. Officers are elected annually by our board of directors
and serve at the discretion of our board.
Accounting
Treatment; Change of Control
The share
exchange transaction is being accounted for as a “reverse acquisition,” since
the former shareholders of HW own a majority of the outstanding shares of our
common stock immediately following the transaction. The share
exchange transaction is considered to be a capital transaction in substance,
rather than a business combination and is equivalent to the issuance of stock by
a private company for the net monetary assets of a shell corporation,
accompanied by a recapitalization. As such, HW is deemed to be the acquirer in
the reverse acquisition and, consequently, the assets and liabilities and the
historical operations that will be reflected in our financial statements will be
those of HW and will be recorded at the historical cost basis of
HW. The consolidated financial statements after completion of the
share exchange transaction will include the assets and liabilities of HW and us,
historical operations of HW and the operations of our company from the closing
date of the transaction. The computation of loss per share in the pro
forma financial statements included as an exhibit to this report has been
retroactively restated to reflect our capital structure.
Except as
described in the previous paragraphs, no arrangements or understandings exist
among present or former controlling stockholders with respect to the election of
members of our board of directors and, to our knowledge, no other arrangements
exist that might result in a change of control of our
company. Further, as a result of the issuance of 155,194,563 shares
of our common stock, a change in control of our company occurred on the closing
date of the share exchange transaction. We will continue to be a
“smaller reporting company,” as defined under the Securities Exchange Act of
1934, following the share exchange transaction.
Description
of Our Company and Predecessor
We were
formed as a New Jersey corporation in 1982 as MicroFrame, Inc. for the purpose
of designing, developing and marketing a broad range of remote network
management and remote maintenance and security products for mission critical
voice and data communications networks. In March 1999, we purchased all of the
outstanding share capital of SolCom Systems Limited, a company incorporated
under the Companies Act 1985 of the United Kingdom. SolCom was a developer of
remote monitoring technology. Simultaneously with the consummation of the SolCom
acquisition, we reincorporated in the State of Delaware and in the process
changed our name to ION Networks, Inc. As ION Networks, we developed and
manufactured software and hardware solutions for monitoring and managing
mission-critical voice, data, video and environmental applications and
networking systems. In December 2007, we sold substantially all of our operating
assets to Cryptek, Inc., a Delaware corporation. Pursuant to the Cryptek sale,
we changed our name to Clacendix, Inc. Following the date of the Cryptek sale
and until the closing of the share exchange transaction with HW, we existed as a
shell company with no operations that was seeking a target company with which to
merge or to complete a business combination.
Following
the closing of the share exchange transaction with HW, we succeeded to the
business of HW as our sole line of business. Accordingly, the past
trading history of our common stock is not relevant due to the change in our
business.
Description
of Business
Unless
the context otherwise requires, “we,” “our,” “us” and similar expressions refer
to HealthWarehouse.com, Inc. separately prior to the closing of the share
exchange transaction on May 14, 2009, and Clacendix, Inc., as successor to the
business of HW, following the closing of the share exchange
transaction.
Overview
We are a
U.S. licensed pharmacy and healthcare e-commerce company that sells brand name
and generic prescription drugs as well as over-the-counter (OTC) medical
products. Our web store is located at http://www.healthwarehouse.com. At
present, we sell:
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a
range of prescription drugs (we are licensed as a mail-order pharmacy for
sales to 36 states and the District of
Columbia);
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diabetic
supplies including glucometers, lancets, syringes and test
strips;
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OTC
medications covering a range of conditions from allergy and sinus to pain
and fever to smoking cessation
aids;
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home
medical supplies including incontinence supplies, first aid kits and
mobility aids; and
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diet
and nutritional products including supplements, weight loss aids, and
vitamins and minerals.
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Our
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. Our website facilitates convenience and future shopping by
allowing for on-the-fly product comparisons. We offer what we believe is an
industry-leading 90-day return policy with no restocking fees, 100% free
standard shipping, and we only sell products which are U.S. Food and Drug
Administration (FDA) approved and legal in the United States. We consistently
achieve high scores in customer satisfaction and believe we offer competitive
prices on the Internet for the products we sell. We intend to continue to expand
our product line as our business grows.
In March
2007, HealthWarehouse.com, Inc. was incorporated to carry on the business of
selling OTC products manufactured in FDA-approved facilities in India. In
November 2007, we opened a technology center in Bandung, Indonesia to develop
the proprietary software necessary for our business, and in February 2008,
version 1 of the http://www.healthwarehouse.com website was successfully
launched running on our own proprietary software.
In March
2008, as part of our expansion into prescription drugs, we completed
construction of a full service pharmacy within our warehouse in Cincinnati,
Ohio. The pharmacy includes a machine which counts and packages prescriptions.
This machine can fill up to 1,200 prescriptions per day. Our pharmacy passed
inspection by the Ohio State Pharmacy Board in April 2008. We are presently
licensed as a mail-order pharmacy for sales to 36 states and the District of
Columbia, and we intend to apply for and obtain licenses to sell prescriptions
in all 50 states by the end of 2009. We also intend to begin accepting health
insurance as part of our prescription program, initially contracting with the
largest insurance providers and later with additional providers based on
customer demand.
Our
growth strategy includes:
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aggressively
marketing our website to customers both online and
offline,
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expanding
and hiring key personnel, and
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continuing
to develop our proprietary software and
technology.
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Our
Business Model
We break
down our business model into three components: commerce, content and community.
We seek to build traffic and sales by focusing on these components. We expect
that the combination of these three components of our business model will result
in proprietary data that can be stripped of personal information for privacy
concerns, and then used to help marketers target advertisers.
The
commerce aspect of our business model involves sourcing products at the lowest
possible prices, or manufacturing the products ourselves in FDA-approved
facilities in India or other offshore locations, and selling them direct to the
consumer. Our aim is to collapse the current healthcare channel, which typically
involves three layers of intermediate costs before reaching the consumer, to one
which goes straight from the manufacturer to the consumer.
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Current Healthcare
Distribution
Model
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Our Distribution
Model
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Manufacturer
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Manufacturer
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Wholesaler
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Distributor
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HealthWarehouse.com
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Pharmacy
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Consumer
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Consumer
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We have
found that consumers will volunteer information where drug prices are the
cheapest. Accordingly, we market our prescription and OTC drugs at what we
believe are some of the lowest prices available through the Internet in order to
gain customers. This is possible because typically we source them at the
wholesale level from the manufacturer, eliminating layers of cost in the
healthcare channel.
The
content aspect of our business model is a means by which we plan to generate
traffic and interest in our website. We intend to purchase side effect and drug
interaction data for over 115,000 drugs from a content provider to build out our
content library. We believe that consumers’ search for relevant information will
generate significant traffic and search engine optimization opportunities for
us.
In
addition to purchasing content, we intend to augment this information base by
building applications to enhance the purchased content
value to consumers. We envision that consumers will be able to write
their own content on drugs (personal experiences, etc.) and we will consider
creating an application programming interface (API) that will allow that data to
be shared with other websites and developers. As consumers recognize the value
of these applications, it is our belief they will have a beneficial impact on
driving significant traffic to our product sales site and will increase
sales.
The
community aspect of our business model is our plan to implement tools and
features for consumers that will allow them to share information easily and
foster rich user interaction. We are evaluating Google’s OpenSocial standard,
which will enable us to use content from other sites to add value for our
customers. OpenSocial defines a common API for social applications across
multiple websites. Google has aggregated some of the top web properties to build
on OpenSocial including, according to Google: MySpace, LinkedIn, Bebo, hi5,
Ning, Salesforce.com, Orkut, Flixster, iLike and Virtual Tourist. It can allow
us to make our content accessible to other websites and, additionally, we will
be able to add content to our website that others have built on OpenSocial
standards. By implementing OpenSocial standards, our content should be
accessible to users of the sites listed above, potentially generating
significant exposure for our product offerings.
Our
Online Pharmacy
We
operate a full-service mail-order pharmacy within our warehouse in Cincinnati,
Ohio. The pharmacy includes a machine which counts and packages prescriptions
that can fill up to 1,200 prescriptions per day. Our pharmacy passed inspection
by the Ohio State Pharmacy Board and we are presently licensed as a mail-order
pharmacy for sales to 36 states and the District of Columbia, and we intend to
apply for and obtain licenses to sell prescriptions in all 50 states by the end
of 2009. We also intend to begin accepting health insurance as part of our
prescription program, initially contracting with the largest insurance providers
and later with additional providers based on customer demand.
Our
online pharmacy offers the following advantages:
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Legitimacy. We have
obtained certifications to separate ourselves from the many “rogue”
pharmacies which exist. Our Pharmacy Checker ID certification allows us to
advertise prescription drugs on Google, Microsoft and Yahoo. In addition,
we have applied for Verified Internet Pharmacy Practice Sites (VIPPS)
accreditation from the National Association of Boards of
Pharmacy.
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Convenience. Our online
store is available to consumers 24 hours a day, seven days a week through
the Internet. All of our products are also available for purchase by
phone. We offer additional convenience to our customers through an
easy-to-use website, robust search technology, and a variety of features
such as multiple checkout options including Google
Checkout.
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Selection. Due to our
online structure, we are able to offer a significantly broader assortment
of products, with greater depth in each product category, because we do
not have the shelf display space limitations of brick-and-mortar
drugstores.
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Information. We provide
a broad array of interactive tools and information on our website to help
consumers make informed purchasing decisions. Our information services
include detailed product information pages, product user manuals and
brochures, links to manufacturer websites, detailed product descriptions
which contain the manufacturer phone number, and customer reviews. Our
customer care representatives are available by phone or e-mail to provide
personal guidance and answer customers’
questions.
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Privacy. When shopping
at a brick-and-mortar drugstore, many consumers may feel embarrassed or
uncomfortable about buying items or asking questions that may reveal
personally sensitive aspects of their health or lifestyle to pharmacists,
store personnel, or other shoppers. Our customers avoid these problems by
shopping from the privacy of their home or
office.
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Value. Our goal is to
offer shoppers a broad assortment of generic drugs and health products
with competitive pricing. We strive to improve our operating efficiencies
and to leverage our fixed costs so that we can pass along the savings to
our customers in the form of lower prices and exclusive deals. Since we
have drugs manufactured specifically for us or source them direct from the
manufacturer at the wholesale level, we believe that we are able to
provide consumers with the best value possible. We also strive to inform
customers of additional cost-saving opportunities when they become
available. For example, we show the generic equivalents of all brand name
products.
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Customer Service. Our
focus has been on customer service and we endeavor to lead the industry in
our policies and procedures. We currently offer a satisfaction guarantee
with what we believe is an industry-leading 90-day return policy with no
restocking fees, and 100% free shipping on all orders. As of March 31,
2009, our positive customer satisfaction lifetime rating on Amazon.com was
99%.
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Our
customer support representatives operate from our call center in Cincinnati,
Ohio. Our customer support specialists are available 9 a.m. to 5 p.m. Eastern
Standard Time, Monday through Friday, via e-mail, fax or telephone to handle
customer inquiries and assist customers in finding desired products. Our online
Help Center outlines store policies and provides answers to customers’
frequently asked questions.
We ship
our products to all 50 states, the U.S. Territories, and APO/FPO military and
embassy addresses. We process all orders from our primary distribution center in
Cincinnati, Ohio. We based our logistics operation there to maintain proximity
to UPS, located 90 miles away in Louisville, Kentucky, and FedEx, located in
Memphis, Tennessee. Processing from this
location allows us to reach 80% of the U.S. population by standard ground
shipping in two days. In order to maintain high customer satisfaction ratings
and quality control over the process, we do not drop ship orders. Due to the
relatively short lead time required to fill orders for our products, usually 24
to 48 hours, order backlog has not proven material to our business.
Marketing
and Sales
Our
marketing strategy aims to build brand recognition, increase customer traffic to
our online store, add new customers, build strong customer loyalty, maximize
repeat purchases and develop incremental revenue opportunities. It is centered
on Internet-based advertising.
Our
online advertising campaigns focus on the following areas:
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Search Engines: Google,
MSN and Yahoo;
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Price Comparison
Engines: Become, Google Product Search, NexTag, PriceGrabber.com,
Pronto, Shopping.com, Shopzilla, Smarter and Yahoo Shopping;
and
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Social Networking:
Facebook, MySpace and Twitter.
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To date,
our online advertising has proven to be an effective sales strategy for our
business. Apart from any personnel involved with our online advertising
campaigns, we do not have a dedicated sales force.
Intellectual
Property and Technology
We
applied for a trademark on the name “HealthWarehouse.com” that was approved by
the U.S. Patent and Trade Office effective April 4, 2009. We also rely on trade
secret law and contractual restrictions to protect our intellectual property,
and we do not intend to seek patent or copyright protection for our intellectual
property at this time.
We have
implemented a broad array of services and systems for website management,
product searching, customer interaction, transaction processing, and order
fulfillment functions. These services and systems use a combination of our own
proprietary technologies, open-source technologies and commercially-available,
licensed technologies.
We focus
our internal development efforts on creating and enhancing the specialized,
proprietary software that is unique to our business. For example, our core
merchandise catalog, as well as our customer interaction, order collection,
fulfillment, and back-end systems are proprietary to us. Our systems are
designed to provide real-time connectivity to our distribution center systems
for both pharmacy and OTC products. They include an inventory tracking system, a
real-time order tracking system, an executive information system and an
inventory replenishment system.
Our
website at http://www.healthwarehouse.com is hosted on the Amazon EC2 platform
due to the platform’s perceived cost effectiveness and scalability. EC2 allows
us to pay only for bandwidth used. In addition, due to Amazon’s lengthy
experience at running servers capable of serving the largest commerce site on
the web, our site remains scalable on days where our traffic
spikes.
Our
website was developed using 100% open source code. We use a 100% open source
platform which runs on Linux, Apache, MySQL and PHP (LAMP).
In
addition, we have utilized open source software from other vendors to speed up
our development time. For management of our content and commerce catalog we
utilize Magento, an open source e-commerce platform. For our reporting and
tools, we utilize Google Analytics. Our checkout process has two options
including Google Checkout for OTC orders and our own proprietary checkout for
OTC and prescription orders which uses Authorize.net.
Suppliers
There are
a number of suppliers available for the pharmaceutical and non-pharmaceutical
products that we sell. Our principal suppliers are Masters Pharmaceutical, Inc.,
from which we source the majority of our supplies, and Allison Medical, Inc.,
The Harvard Drug Group, LLC, Masters Healthcare, LLC and Prescription Supply,
Inc. While we source our supplies from a limited number of suppliers, we do not
believe that our business is dependant on any one supplier since the products
that we sell are readily available from a number of alternative suppliers. If a
supplier, even if a significant supplier such as Masters Pharmaceutical, were to
no longer be available to us, we believe that we could source replacement
product through one or more alternative suppliers.
Competition
The
market for prescription and OTC health products is intensely competitive and
highly fragmented. Our competitors in the segment include chain drugstores, mail
order pharmacies, mass market retailers, warehouse clubs and supermarkets. Many
of these potential competitors in the market are also established organizations
with greater access to resources and capital than we have. In addition, we face
competition from foreign online pharmacies that can often sell drugs to U.S.
residents at a lower price because they do not comply with U.S. pharmacy
regulations, are not subject to U.S. regulatory oversight, or both. We also
compete with Internet portals and online service providers that feature shopping
services and with other online or mail-order retailers that offer products
within one or more of our business segments.
We
believe that the principal competitive factors in our market segments include
brand awareness and preference, company credibility, product selection and
availability, convenience, price, actual or perceived value, website features,
functionality and performance, ease of purchasing, customer service, privacy,
quality and quantity of information supporting purchase decisions (such as
product information and reviews), and reliability and speed of order
shipment.
Government
Regulation
Federal
and state laws and regulations govern many aspects of our business and are
specific to pharmacies and the sale of OTC drugs. Our pharmacy passed inspection
by the Ohio State Pharmacy Board and we are presently licensed as a mail-order
pharmacy for sales to 36 states and the District of Columbia, and we intend to
apply for and obtain licenses to sell prescriptions in all 50 states by the end
of 2009. We ship our non-prescription products to all 50 states, the U.S.
Territories, and APO/FPO military and embassy addresses.
We
believe we are in substantial compliance with all existing legal and regulatory
requirements material to the operation of our business. We have standard
operating procedures and controls designed to assist in ensuring compliance with
existing contractual requirements and state and federal law. We diligently
monitor and audit our adherence to these procedures and controls, and we take
prompt corrective and disciplinary action when appropriate. However, we cannot
predict how courts or regulatory agencies may interpret existing laws or
regulations or what additional federal or state legislation or regulatory
initiatives may be enacted in the future regarding healthcare or the pharmacy
industry and the application of complex standards to the operation of our
business creates areas of uncertainty.
In
addition, our operations may in the future participate in federal and state
programs such as Medicare and Medicaid. If we do, we would be subject to
extensive government regulation including numerous state and federal laws and
corresponding regulations directed at preventing fraud and abuse and regulating
reimbursement.
Among the
federal and state laws and regulations that currently affect or may reasonably
affect in the future aspects of our business are the following:
Regulation of Our Pharmacy
Operations. The practice of pharmacy is generally regulated at the state
level by state boards of pharmacy. Our pharmacy must be licensed in the state in
which it is located. In some states, regulations require compliance with
standards promulgated by the United States Pharmacopeia (USP). The USP creates
standards in the packaging, storage and shipping of pharmaceuticals. Also, many
of the states where we deliver pharmaceuticals, including controlled substances,
have laws and regulations that require out-of-state mail-order pharmacies to
register with that state’s board of pharmacy or similar regulatory body. In
addition, some states have proposed laws to regulate online pharmacies, and we
may be subject to this legislation if it is passed. Furthermore, if our pharmacy
dispenses durable medical equipment items, such as infusion pumps, that bear a
federal legend requiring dispensing pursuant to a prescription, we would also be
regulated by applicable state and federal durable medical equipment
laws.
Federal
agencies further regulate our pharmacy operations. Pharmacies must register with
the Drug Enforcement Administration (DEA) and individual state controlled
substance authorities in order to dispense controlled substances. Currently, we
do not sell any controlled substances and therefore do not require a DEA
license. In addition, the FDA inspects facilities in connection with
procedures to effect recalls of prescription drugs. The Federal Trade Commission
(FTC) also has requirements for mail-order sellers of goods. The U.S. Postal
Service (USPS) has statutory authority to restrict the transmission of drugs and
medicines through the mail to a degree that could have an adverse effect on our
mail-order operations. The USPS historically has exercised this statutory
authority only with respect to controlled substances. If the USPS restricts our
ability to deliver drugs through the mail, alternative means of delivery are
available to us. However, alternative means of delivery could be significantly
more expensive. The Department of Transportation has regulatory authority to
impose restrictions on drugs inserted in the stream of commerce. These
regulations generally do not apply to the USPS and its operations.
Additionally,
under the Omnibus Budget Reconciliation Act of 1990 and related state and local
regulations, our pharmacists are required to offer counseling to our customers
about medication, dosage, delivery systems, common side effects, adverse effects
or interactions and therapeutic contraindications, proper storage, prescription
refill, and other information deemed significant by the pharmacists. We are also
subject to requirements under the Controlled Substances Act and federal DEA
regulations, as well as related state and local laws and regulations, relating
to our pharmacy operations, including registration, security, recordkeeping, and
reporting requirements related to the purchase, storage and dispensing of
controlled substances, prescription drugs, and some OTC drugs.
“Compendial
standards,” which can also be called “official compendium,” means the standards
for drugs related to strength, purity, weight, quality, labeling and packing
contained in the official Pharmacopeia of the United States, official National
Formulary, or any supplement to any of them. Under the Food, Drug and Cosmetic
Act of 1938, a drug recognized by the Homeopathic Pharmacopeia of the United
States must meet all compendial standards and labeling requirements contained
therein, or it will be considered adulterated (for example, lacking appropriate
strength, quality, or purity; or containing poisonous or unsanitary ingredients)
or misbranded (for example, having a false or misleading label; or a label
containing an inaccurate description of contents). If we add homeopathic
remedies to our product offerings, we will be required to comply with the Food,
Drug and Cosmetic Act. The distribution of adulterated or misbranded homeopathic
remedies or other drugs is prohibited under the Food, Drug and Cosmetic Act, and
violations could result in substantial fines and other monetary penalties,
seizure of the misbranded or adulterated items, and/or criminal
sanctions.
We also
are required to comply with the Dietary Supplement Health and Education Act when
selling dietary supplements and vitamins.
We
believe that our operations have the appropriate licenses required under the
laws of the states in which they are located and that we conduct our pharmacy
operations in accordance with the laws and regulations of these
states.
Drug Importation. In the face
of escalating costs for plan sponsors providing a prescription drug benefit for
their employees, and uninsured individuals seeking to lower their drug costs,
the issue of importing drugs from Canada or other foreign countries has received
significant attention. Drug importation, sometimes called drug re-importation,
occurs when prescription medicines from other countries are imported for
personal use or commercial distribution. Individual importation activities are
generally prohibited under U.S. law, and the FDA has issued warnings and safety
alerts to a number of entities seeking to promote or facilitate systematic
importation activities. However, there has been considerable legislative and
political activity seeking to change the FDA requirements to enable drug
importation, and we are evaluating appropriate actions if such legislation were
to be enacted.
Health Management Services
Regulation. All states regulate the practice of medicine and require
licensing under applicable state law. It is not our intent to
practice medicine and we have tried to structure our website and our business to
avoid violation of state licensing requirements. However, the
application of this area of the law to Internet services such as ours is not
well established and, accordingly, a state regulatory authority could at some
time allege that some portion of our business violates these
statutes. Any such allegation could harm our
business. Further, any liability based on a determination that we
engaged in the unlawful practice of medicine may be excluded from coverage under
the terms of our general liability insurance policy.
Consumer Protection Laws. Most
states have consumer protection laws designed to ensure that information
provided to consumers is adequate, fair and not misleading. We believe that our
practices conform to the requirements of state consumer protection laws.
However, we may be subject to further scrutiny under these laws as they are
often interpreted broadly.
Regulation Relating to Data
Transmission and Confidentiality of Patient Identifiable Information.
Dispensing of prescriptions and management of prescription drug benefits
require the ability to utilize patient-specific information. Government
regulation of the use of patient identifiable information has grown
substantially over the past several years. At the federal level, Congress
enacted the Health Insurance Portability and Accountability Act of 1996 (HIPAA),
which extensively regulates the transmission, use and disclosure of health
information by all participants in healthcare delivery, including physicians,
hospitals, insurers and other payors. Our pharmacy operations are covered
entities, which are directly subject to these requirements. Additionally,
regulation of the use of patient-identifiable information is likely to increase.
Congress is currently reviewing proposals that would alter HIPAA, which would
create additional administrative burdens. Many states have passed or are
considering laws addressing the use and disclosure of health information. These
proposals vary widely, some relating to only certain types of information,
others to only certain uses, and yet others to only certain types of entities.
These laws and regulations have a significant impact on our operations, products
and services, and compliance with them is a major operational requirement.
Regulations and legislation that severely restrict or prohibit our use of
patient identifiable information could materially adversely affect our
business.
Sanctions
for failing to comply with HIPAA standards include criminal and civil penalties.
If we are found to have violated any state or federal statute or regulation with
regard to the confidentiality, dissemination or use of patient medical
information, we could be liable for significant damages, fines or
penalties.
Fraudulent Billing, Anti-Kickback,
Stark, Civil Monetary Penalties and False Claims Laws and Regulations.
Our operations may in the future participate in federal and state
programs such as Medicare and Medicaid. If we do, we would be subject to
extensive government regulation including numerous state and federal laws and
corresponding regulations directed at preventing fraud and abuse and regulating
reimbursement. The government’s Medicare and Medicaid regulations are complex
and sometimes subjective and therefore may require our management’s
interpretation. If we were to participate in federal and state programs such as
Medicare and Medicaid, our compliance with Medicare and Medicaid regulations may
be reviewed by federal or state agencies, including the Department of Health and
Human Services’ (HHS) Office of the Inspector General (OIG), the Centers for
Medicare and Medicaid Services (CMS), the Department of Justice (DOJ), and the
FDA. To ensure compliance with Medicare, Medicaid and other regulations,
government agencies conduct periodic audits to ensure compliance with various
supplier standards and billing requirements. Similarly, regional health
insurance carriers routinely conduct audits and request patient records and
other documents to support claims submitted for payment.
Federal
law prohibits the payment, offer, receipt or solicitation of any remuneration
that is knowingly and willfully intended to induce the referral of Medicare,
Medicaid or other federal healthcare program beneficiaries for the purchase,
lease, ordering or recommendation of the purchase, lease or ordering of items or
services reimbursable under federal healthcare programs. These laws are commonly
referred to as anti-remuneration or anti-kickback laws. Several states also have
similar laws, known as “all payor” statutes, which impose anti-kickback
prohibitions on services not covered by federal healthcare programs.
Anti-kickback laws vary between states, and courts have rarely interpreted
them.
Courts,
the OIG, and some administrative tribunals have broadly interpreted the federal
anti-kickback statute and regulations. Courts have ruled that a violation of the
statute may occur even if only one of the purposes of a payment arrangement is
to induce patient referrals or purchases. Should we enter the government payor
sector, it is possible that our current practices in the commercial sector may
not be appropriate in the government payor sector.
The
Ethics in Patient Referrals Law (Stark Law) prohibits physicians from making a
referral for certain health items or services if they, or their family members,
have a financial relationship with the entity receiving the referral. No bill
may be submitted in connection with a prohibited referral. Violations are
punishable by civil monetary penalties upon both the person making the referral
and the provider rendering the service. Such persons or entities are also
subject to exclusion from Medicare and Medicaid. Many states have adopted laws
similar to the Stark Law, which restrict the ability of physicians to refer
patients to entities with which they have a financial relationship.
The
Federal False Claims Act prohibits the submission of a false claim or the making
of a false record or statement in order to secure a reimbursement from a
government-sponsored program. In recent years, the federal government has
launched several initiatives aimed at uncovering practices that violate false
claims or fraudulent billing laws. Civil monetary penalties may be assessed for
many types of conduct, including conduct that is outlined in the statutes above
and other federal statutes in this section. Under the Deficit Reduction Act of
2005 (DRA), states are encouraged to pass State False Claims Act laws similar to
the Federal statute.
Sanctions
for fraudulent billing, kickback violations, Stark’s law violations or
violations of the False Claims Act include criminal or civil penalties. If we do
participate in federal payor programs and are found to have violated any state
or federal kickback, Stark Law or False Claims Act law, we could be liable for
significant damages, fines or penalties and potentially be ineligible to
participate in federal payor programs.
Legislation and Regulation Affecting
Drug Prices and Potentially Affecting the Market for Prescription Benefit Plans
and Reimbursement for Durable Medical Equipment. Recently, the federal
government has increased its focus on methods drug manufacturers employ to
develop pricing information, which in turn is used in setting payments under the
Medicare and Medicaid programs. One element common to many payment formulas, the
use of “average wholesale price” (AWP) as a standard pricing unit throughout the
industry, has been criticized as not accurately reflecting prices actually
charged and paid at the wholesale or retail level. The DOJ is currently
conducting, and the House Commerce Committee has conducted, an investigation
into the use of AWP for federal program reimbursement, and whether the use of
AWP has inflated drug expenditures by the Medicare and Medicaid programs.
Federal and state proposals have sought to change the basis for calculating
reimbursement of certain drugs by the Medicare and Medicaid
programs.
The
DRA revised the formula used by the federal government to set the Federal Upper
Limit (FUL) for multiple source drugs by adopting 250 percent of the average
manufacturer’s price (AMP) without regard to customary prompt pay discounts to
wholesalers for the least costly therapeutic equivalent. On July 17, 2006, HHS
published a Final Rule for the Medicaid Prescription Drug Program implementing
the DRA in which AMP was defined to exclude discounts and rebates to pharmacy
benefit managers and include sales to mail-order and specialty pharmacies in the
AMP calculation by manufacturers.
These
proposals and other legislative or regulatory adjustments that may be made to
the program for reimbursement of drugs by Medicare and Medicaid, if implemented,
could affect our ability to negotiate discounts with pharmaceutical
manufacturers. They could also impact the reimbursement we may receive from
government payors in the future. In addition, they may affect our relationships
with health plans. In some circumstances, they might also impact the
reimbursement that we would receive from managed care organizations that
contract with government health programs to provide prescription drug benefits
or otherwise elect to rely on the revised pricing information. Furthermore,
private payors may choose to follow the government’s example and adopt different
drug pricing bases. This could affect our ability to negotiate with plans,
manufacturers and pharmacies regarding discounts and rebates.
Relative
to our durable medical equipment operations, The Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (DIMA), established a program for the
competitive acquisition of certain covered items of durable medical equipment,
prosthetics, orthotics and supplies (DMEPOS). Diabetes testing supplies,
including test strips and lancets, which are commonly supplied via mail-order
delivery, will be subject to the competitive acquisition program. Only qualified
suppliers that meet defined participation standards specified in the final rule
will be permitted to engage in the competitive acquisition program. In 2010,
mail-order diabetes testing supplies may be subject to a national or regional
program, which would require mail-order suppliers to bid on supplying certain
DMEPOS items.
Medicare Part D and Part B; State
Prescription Drug Assistance Programs. The DIMA also offers far-reaching
changes to the Medicare program. The DIMA established a new Medicare Part D
outpatient prescription drug benefit for over 40 million Americans who are
eligible for Medicare. Qualified beneficiaries, including senior citizens and
disabled individuals, have had the opportunity to enroll in Medicare Part D
since January 1, 2006.
In
addition, many states have expanded state prescription drug assistance programs
to increase access to drugs by those currently without coverage and/or
supplement the Medicare Part D benefit of those with coverage to offer options
for a seamless benefit. In accordance with applicable CMS requirements, to
participate we may have to enter into agreements with a number of state
prescription drug assistance programs and collaborate to coordinate benefits
with Medicare Part D plans.
Industry Standards for Pharmacy
Operations. The National Committee on Quality Assurance, the American
Accreditation Health Care Commission, known as URAC, the Joint Commission on
Accreditation of Healthcare Organizations and other quasi-regulatory and
accrediting bodies have developed standards relating to services performed by
pharmacies, including mail order, formulary, drug utilization management and
specialty pharmacy. While the actions of these bodies do not have the force of
law, pharmacy benefit managers and many clients for pharmacy benefit manager
services seek certification from them, as do other third parties. These bodies
may influence the federal government or states to adopt requirements or model
acts that they promulgate. The federal government and some states incorporate
accreditation standards of these bodies, as well as the standards of the
National Association of Insurance Commissioners and the National Association of
Boards of Pharmacy, a coalition of state pharmacy boards, into their drug
utilization review regulation. Future initiatives of these bodies are uncertain,
and resulting standards or legislation could impose restrictions on us in a
manner that could significantly impact our business.
The
National Association of Boards of Pharmacy has also developed a program, the
Verified Internet Pharmacy Practice Sites, as a model for self-regulation for
online pharmacies. We intend to comply with its criteria for
certification.
Facilities
Our
corporate headquarters, which also house our pharmacy and customer service
operations as well as our inventory, are located at 100 Commerce Boulevard,
Cincinnati, Ohio 45140. We occupy 16,000 square feet of warehouse space under a
lease with a monthly rental rate of $5,567 that expires in March
2011.
Employees
As of May
14, 2009, we employed 15 full-time employees and no part-time
employees. None of our employees is subject to a collective
bargaining agreement and we believe that relations with our employees are
good.
Legal
Proceedings
We are
not involved in any pending or threatened material litigation or other material
legal proceedings.
Risk
Factors
Our
business involves significant risks and uncertainties, many of which are beyond
our control, and any investment in our common stock involves a high degree of
risk. Discussed below are many of the material risk factors faced by
us that may have an impact on our future results.
Risks
Relating to Our Business and Industry
HW
has a limited operating history, a history of generating significant losses, and
may not be able to sustain profitability.
HW, which
now constitutes our principal business, was formed in March 2007 and has a
limited operating history upon which you can evaluate our business and
prospects. To date, we have not been profitable, and we may never achieve
profitability on a full-year or consistent basis. We incurred net losses of
$667,301 for the year ended December 31, 2008 and $677,958 from inception
through December 31, 2008. We expect to continue to incur net losses in 2009,
and possibly longer. As a result, investors may lose all or a part of their
investment.
We
may experience significant fluctuations in our operating results and rate of
growth.
Our
evolving business model and the unpredictability of our industry make it
difficult for us to forecast accurately the level or source of our revenues and
our rate of growth. Our financial projections are based on assumptions and
estimates that inherently are subject to significant business, economic,
competitive, regulatory and operational uncertainties, contingencies and risks,
many of which are beyond our control. Our projections assume the success of our
business strategy. The success of this strategy is subject to uncertainties and
contingencies beyond our control, and we cannot assure you that the strategy
will be successful or that the anticipated benefits from the strategy will be
realized in the manner or during the periods reflected in our projections or at
all. These uncertainties may result in material changes in our financial
condition and results of operations, which may differ materially from our
projections.
Our
revenues and operating results may vary significantly from quarter to
quarter.
Our
revenues and operating results may vary significantly from quarter to quarter
due to a number of factors, including:
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our
ability to retain and increase sales to existing customers, attract new
customers, and satisfy our customers’
demands;
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the
frequency and size of customer orders and the quantity and mix of OTC and
prescription products our customers
purchase;
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changes
in demand with respect to existing and new OTC and prescription
products;
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changes
in consumer acceptance and usage of the Internet, online services, and
e-commerce;
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the
price we charge for our OTC and prescription products and for shipping
those products, or changes in our pricing policies or the pricing policies
of our competitors;
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the
extent to which we offer free shipping or other promotional discounts to
our customers;
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our
ability to acquire merchandise, manage inventory, and fulfill
orders;
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technical
difficulties, system downtime, or
interruptions;
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timing
and costs of upgrades and developments in our systems and
infrastructure;
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timing
and costs of marketing and other
investments;
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disruptions
in service by shipping carriers;
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the
introduction by our competitors of new websites, products, or
services;
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the
extent of reimbursements available from third-party payors;
and
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changes
in government regulation.
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addition, our operating expenses are largely based on anticipated revenue trends
and a high percentage of our expenses are fixed in the short term. As a result,
a delay in generating or recognizing revenue for any reason could result in
substantial additional operating losses.
We
face significant competition from both traditional and online domestic
pharmaceutical and medical product retailers.
The
market segments in which we compete are rapidly evolving and intensely
competitive, and we have many competitors in different industries, including
both the retail and e-commerce services industries. These competitors include
chain drugstores, mass market retailers, warehouse clubs, supermarkets,
specialty retailers, major department stores, insurers and health care
providers, mail-order pharmacies, Internet portals and online service providers
that feature shopping services, and various online stores that offer products
within one or more of our product categories. Many of our current and potential
competitors have longer operating histories, larger customer bases, greater
brand recognition, and significantly greater financial, marketing, and other
resources than we have. They may be able to secure merchandise from vendors on
more favorable terms, operate with a lower cost structure, adopt more aggressive
pricing policies, or devote more resources to technology development and
marketing than we do. In addition, other companies in the retail and e-commerce
service industries may enter into business combinations or alliances that would
strengthen their competitive positions and prevent them, their affiliated
companies, or their strategic partners from entering into relationships with us.
For example, our inability to enter into or maintain relationships with major
insurance companies or managed care organizations could be a major competitive
disadvantage to us.
We
face competition from online pharmacies outside the United States.
Although
it is currently illegal to re-import prescription drugs into the United States
from any foreign country, we nonetheless face competition from online pharmacies
outside the United States. A growing number of U.S. consumers seek to fill their
prescriptions through Canadian and other foreign online pharmacies, and a number
of state and local governments have set up websites directing their constituents
to Canadian pharmacies. The FDA has taken only limited action to date, and may
not take aggressive action in the future, against those who illegally re-import
prescription drugs or support or facilitate illegal re-importation. In the U.S.
Congress, legislation allowing for re-importation of prescription drugs by
individuals for personal use has repeatedly been introduced. If such legislation
were to be enacted, or if consumers increasingly use foreign-based online
prescription drug websites instead of U.S.-based online pharmacies, such as
ours, to fill their prescription needs, our business and operating results could
be harmed.
We
may be unable to increase the migration of consumers of health and pharmacy
products from brick-and-mortar stores to our online solution, which would harm
our revenues and prevent us from becoming profitable.
If we do
not attract and retain higher volumes of customers to our Internet store at a
reasonable cost, we will not be able to increase our revenues or achieve
consistent profitability. Our success depends on our ability to continue to
convert a large number of customers from traditional shopping methods to online
shopping for health and pharmacy products. Specific factors that could prevent
widespread customer acceptance of our online solution include:
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shipping
charges, which do not apply to purchases made at a brick-and-mortar
store;
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delivery
time associated with Internet orders, as compared to the immediate receipt
of products at a brick-and-mortar
store;
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lack
of consumer awareness of our
website;
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additional
steps and delays in verifying prescriptions and ensuring insurance
coverage for prescription products;
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non-participation
in the networks of some insurance
carriers;
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regulatory
restrictions or reform at the state and federal levels that could affect
our ability to serve our customers;
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the
general acceptance or legalization of prescription drug
re-importation;
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customer
concerns about the security of online transactions, identity theft, or the
privacy of their personal
information;
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product
damage from shipping or shipments of wrong or expired products from us or
other vendors, resulting in a failure to establish, or loss of, customers’
trust in buying drugstore items
online;
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inability
to serve the acute care needs of customers, including emergency
prescription drugs and other urgently needed
products;
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delays
in responses to customer inquiries;
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difficulties
or delays in returning or exchanging orders;
and
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activity
that diminishes a user’s online experience or subjects online shoppers to
security risks, such as viruses, spam, spyware, phishing (spoofing e-mails
directed at Internet users), “denial of service” attacks directed at
Internet service providers and online businesses, and breaches of data
security.
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If
our marketing efforts are not effective at attracting and retaining customers at
an acceptable cost, we will be unable to achieve profitability.
If we do
not maintain our brand and continue to increase awareness of our Internet
shopping presence, we may not build a critical mass of customers. Promoting and
positioning our brand depends largely on the success of our marketing efforts
and our ability to provide consistent, high quality customer experiences. We
believe that, because we are a small company with low public brand awareness,
achieving significant market awareness will require significant marketing
expense. To promote our brand and our products and services, we have incurred
and expect to continue to incur substantial expense in our marketing efforts
both to attract and to retain customers. Our promotional activities may not be
effective at building our brand awareness and customer base to the extent
necessary to generate sufficient revenue to become consistently profitable.
Search engine and other online marketing initiatives comprise a substantial part
of our marketing efforts, and our success depends in part on our ability to
manage costs associated with these initiatives, or to find other channels to
acquire and retain customers cost-effectively. The demand for and cost of online
advertising has been increasing and may continue to increase. An inability to
acquire and retain customers at a reasonable cost would increase our operating
costs and prevent us from maintaining profitability.
Since
our business is Internet-based, we are vulnerable to system interruption and
damage, which would harm our operations and reputation.
Our
ability to receive and fulfill orders promptly and accurately is critical to our
success and largely depends on the efficient and uninterrupted operation of our
computer and communications hardware and software systems. We experience
periodic system interruptions that impair the performance of our transaction
systems or make our website inaccessible to our customers. These systems
interruptions delay us from efficiently accepting and fulfilling orders, sending
out promotional e-mails and other customer communications in a timely manner,
introducing new products and features on our website, promptly responding to
customers, or providing services to third parties. Frequent or persistent
interruptions in our services could cause current or potential customers to
believe that our systems are unreliable, which could cause them to avoid our
website, drive them to our competitors, and harm our reputation. To minimize
future system interruptions, we need to continue to add software and hardware
and to improve our systems and network infrastructure to accommodate increases
in website traffic and sales volume, to replace aging hardware and software, and
to make up for two years of underinvestment in technology. We may be unable to
promptly and effectively upgrade and expand our systems and integrate additional
functionality into our existing systems. Any unscheduled interruption in our
services could result in fewer orders, additional operating expenses, or reduced
customer satisfaction, any of which would harm our revenues and operating
results and could delay or prevent our becoming consistently profitable. In
addition, the timing and cost of upgrades to our systems and infrastructure may
substantially affect our ability to maintain profitability.
All
of our fulfillment operations and inventory are located in our distribution
facility, and any significant disruption of this center’s operations would hurt
our ability to make timely delivery of our products.
We
conduct all of our fulfillment operations from our distribution facility in
Cincinnati, Ohio, which houses our entire product inventory. A natural disaster
or other catastrophic event, such as an earthquake, fire, flood, severe storm,
break-in, server or systems failure, terrorist attack, or other comparable event
at this facility, would cause interruptions or delays in our business and loss
of inventory and could render us unable to process or fulfill customer orders in
a timely manner, or at all. Further, we have no formal disaster recovery plan,
and our business interruption insurance may not adequately compensate us for
losses that may occur. In the event that a significant part of this facility was
destroyed or our operations were interrupted for any extended period of time,
our business, financial condition, and operating results would be
harmed.
Our
operating results will be harmed if we are unable to manage and sustain our
growth.
Our
business is unproven on a large scale and actual operating margins may be less
than expected. If we are unable to scale capacity efficiently, we may
fail to achieve expected operating margins, which would have an adverse effect
on our operating results.
If
we are unable to obtain shipments of products from our vendors, our business and
results of operations would be harmed.
We have
significant vendors that are important to our sourcing of pharmaceutical and
non-pharmaceutical products. We do not have long-term arrangements with most of
our vendors to guarantee availability of merchandise, particular payment terms,
or extension of credit limits. If our current vendors were to stop selling
merchandise to us on acceptable terms, we may not be able to acquire merchandise
from other vendors in a timely and efficient manner and on acceptable terms, or
at all.
We
have significant inventory risk.
We must
maintain sufficient inventory levels to operate our business successfully and to
meet our customers’ expectations that we will have the products they order in
stock. However, we must also guard against the risk of accumulating excess
inventory. We are exposed to significant inventory risk as a result of rapid
changes in product cycles, changes in consumer tastes, uncertainty of success of
product launches, seasonality, manufacturer backorders, and other vendor-related
problems. In order to be successful, we must accurately predict these trends and
events, which we may be unable to do, and avoid over- or under-stocking
products. In addition, demand for products can change significantly between the
time product inventory is ordered and the time it is available for sale. When we
begin selling a new product, it is particularly difficult to forecast product
demand accurately. A failure to optimize inventory would increase our expenses
if we have too much inventory, and would harm our margins by requiring us to
make split shipments for backordered items or pay for expedited delivery from
the manufacturer if we had insufficient inventory. In addition, we may be unable
to obtain certain products for sale on our website as a result of general
shortages (for example, in the case of some prescription drugs), manufacturer
policies (for example, in the case of some contact lenses and prestige beauty
items), manufacturer or distributor problems, or popular demand. Failure to have
inventory in stock when a customer orders it could cause us to lose that order
or that customer. The acquisition of some types of inventory, or inventory from
some of our sources, may require significant lead time or prepayment, and this
inventory may not be returnable. We carry a broad selection of products and
significant inventory levels of a substantial number of products, and we may be
unable to sell this inventory in sufficient quantities or during the relevant
selling seasons. The occurrence of one or more of these inventory risks may
adversely affect our business and operating results.
If
we make an error in filling or packaging the prescription drugs that we sell, we
would be subject to liability and negative publicity.
Errors
relating to prescriptions, dosage, and other aspects of the prescription
medication could result in liability for us that our insurance may not cover.
Because we distribute pharmaceutical products directly to the consumer, we are
one of the most visible participants in the distribution chain and therefore
have increased exposure to liability claims. Our pharmacists are required by law
to offer counseling, without additional charge, to our customers about
medication, dosage, delivery systems, common side effects, and other information
deemed significant by the pharmacists. Our pharmacists may have a duty to warn
customers regarding any potential adverse effects of a prescription drug if the
warning could reduce or negate those effects. This counseling is in part
accomplished through e-mails to our customers and inserts included with the
prescription, which may increase the risk of miscommunication because the
customer is not personally present to receive the counseling or advice or may
not have provided us with all relevant information. Although we also post
product information on our website, customers may not read this information.
Providing information on pharmaceutical and other products creates the potential
for claims to be made against us for negligence, personal injury, wrongful
death, product liability, malpractice, invasion of privacy, or other legal
theories based on our product or service offerings. Our general liability and
business owners liability insurance may not cover potential claims of this type
or may not be adequate to protect us from all liabilities that may be imposed if
any such claims were to be successful. In addition, errors by either us or our
competitors may also produce significant adverse publicity either for us or for
the online pharmacy industry in general, which could result in an immediate
reduction in the amount of orders we receive and would harm our ability to
conduct and sustain our business.
Security
breaches would damage our reputation, expose us to liability and otherwise harm
our business.
Our
security measures may not prevent security breaches that could harm our
business. To succeed, we must provide a secure transmission of confidential
information over the Internet and protect the confidential customer and patient
information we retain, such as credit card numbers and prescription records. A
third party who compromises or breaches the physical and electronic security
measures we use to protect transaction data and customer records could
misappropriate proprietary information, cause interruptions in our operations,
damage our computers or those of our customers, or otherwise harm our business.
Any of these would harm our reputation and expose us to a risk of loss or
litigation and possible liability. We may need to expend significant resources
to protect against security breaches or to address problems caused by
breaches.
We
may be unable to obtain the additional financing we need in the future to
support our growth.
We have
sufficient financing or financing commitments to fund our anticipated operations
for at least the next 12 months. However, this financing, along with revenues
from operations, may not be sufficient to meet all of our long-term business
development requirements, and we may seek to raise additional funds through bank
debt or public or private debt or equity financings. Any additional financing
that we may need may not be available on terms favorable to us, or at all. If
adequate funds are not available or are not available on acceptable terms, our
strategic flexibility or ability to develop and grow our business would be
significantly limited.
Expanding
the breadth and depth of our product offerings is expensive and difficult, and
we may receive no benefit from our expansion.
We intend
to continue to expand the breadth and depth of our prescription and OTC product
offerings by promoting new or complementary products or sales formats. Expansion
of our offerings in this manner could require significant additional
expenditures and could strain our management, financial, and operational
resources. For example, we may need to incur significant marketing expenses,
develop relationships with new fulfillment partners or manufacturers, or comply
with new regulations. We may be unable to expand our product offerings or sales
formats in a cost-effective or timely manner, and any new offerings or formats
may not generate satisfactory revenues to offset the costs involved.
Furthermore, any new product offering or sales format that is not favorably
received by consumers could damage the reputation of our brand. A lack of market
acceptance of our efforts or our inability to generate sufficient revenues to
offset the cost of expanded offerings would harm our business.
We
face uncertainty related to pharmaceutical costs and pricing, which could affect
our revenues and profitability.
Sales of
our pharmacy products depend in part on the availability of reimbursement from
third-party payors such as government health administration authorities, private
health insurers, managed care organizations, pharmacy benefit managers and other
organizations. These organizations are increasingly challenging the price and
cost-effectiveness of medical products and services. The efforts of third-party
payers to contain costs often place downward pressures on profitability from
sales of prescription drugs. In addition, our products or services may not be
considered cost-effective, and adequate third-party reimbursement may not be
available to enable us to maintain price levels sufficient to realize a profit.
Our revenues from prescription drug sales may also be affected by health care
reform initiatives of federal and state governments, including proposals
designed to address other government programs, prescription drug discount card
programs, changes in programs providing for reimbursement for the cost of
prescription drugs by third-party payers, and regulatory changes related to the
approval process for prescription drugs. These initiatives could lead to the
enactment of additional federal and state regulations that may adversely affect
our prescription drug pricing, sales and profitability.
The
implementation of the Medicare Part D prescription drug benefit has and will
likely continue to adversely affect drug pricing, which decreases our
profitability.
In 2006,
the Medicare Part D prescription drug benefit under the DIMA became effective.
The Medicare Part D prescription drug benefit has negatively affected, and is
likely to continue to have a negative impact on, our business. Medicare Part D
prescription drug coverage will likely increase the number of senior citizens
with prescription drug coverage and reduce the number of customers who pay for
their prescription drugs themselves. Customers who choose to obtain coverage
under a Medicare Part D plan will likely purchase fewer drugs, or no longer
purchase drugs, from us. Because we are not currently processing claims for
Medicare Part D, we will be able to serve Medicare D customers only when those
customers elect to purchase outside of their Medicare Part D plan and purchase
their prescriptions out-of-pocket, such as when the particular medication is not
covered by the customer’s Medicare plans or when the customer’s purchase is not
covered because of a deductible, co-payment, or other exclusion. Moreover, the
DIMA calls for significant changes to the formulas the Medicare program uses to
calculate its payments for prescription drugs, as well as introduction of
managed care elements and changes to the administration of the drug benefit
program. When fully implemented, these changes could exert downward pressure on
prescription drug prices and payments by the government, even as the number of
people who use the Medicare benefits to pay for prescription drugs increases.
All of these factors could adversely affect our drug prices and dispensing fees,
and ultimately could reduce our profit margins.
If
we are unable to obtain insurance reimbursement coverage for our customers, our
ability to sell pharmacy products online could decrease, which would harm our
revenues.
To obtain
reimbursement on behalf of our customers for the prescription products that they
purchase on our website, we must maintain relationships with insurance
companies, managed health organizations, and pharmacy benefit managers. Many of
our planned direct agreements with insurance companies, pharmacy benefit
managers and third-party benefits companies are short-term, may be terminated
with less than 30 days’ prior notice, and are subject to unilateral amendment by
the other party. If we are unable to establish, maintain, and leverage our
direct relationships with insurers, pharmacy benefit managers and third-party
benefit companies, and if these relationships do not extend to cover the
prescriptions we process, our ability to obtain reimbursement coverage for our
customers would be reduced. This would reduce the number of customers that fill
prescriptions through our website, which would harm our business, financial
condition, and results of operations.
Government
regulation of our business is extensive, and our failure to comply fully with
regulations could result in civil and criminal penalties for us.
Our
business is subject to extensive federal, state and local regulations. For
example:
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·
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entities
engaging in the practice of pharmacy are subject to numerous federal and
state regulatory requirements, including those relating to pharmacy
licensing and registration, the dispensing of prescription drugs, pharmacy
record keeping and reporting, and the confidentiality, security, storage,
and release of patient records; and
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·
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the
sale, advertisement, and promotion of, among other things, prescription,
OTC and homeopathic medications, dietary supplements, medical devices,
cosmetics, foods, and other consumer products that we sell are subject to
regulation by the FDA, the FTC, the Consumer Product Safety Commission,
and state regulatory authorities, as the case may
be.
|
As we
expand our product offerings and more non-pharmaceutical products become subject
to FDA, FTC and other regulation, more of our products will likely be subject to
regulation. In addition, regulatory requirements to which our business is
subject may expand over time, and some of these requirements may have a
disproportionately negative effect on Internet pharmacies. For example, the
federal government and a majority of states now regulate the retail sale of OTC
products containing pseudoephedrine that might be used as precursors in the
manufacture of illegal drugs. As a result, we are currently unable to sell these
products to customers residing in states that require retailers to obtain a
physical form of identification or maintain a signature log. Some members of
Congress have proposed additional regulation of Internet pharmacies in an effort
to combat the illegal sale of prescription drugs over the Internet, and state
legislatures could add or amend legislation related to the regulation of
nonresident pharmacies. In addition to regulating the claims made for specific
types of products, the FDA and the FTC may attempt to regulate the format and
content of websites that offer products to consumers. The laws and regulations
applicable to our business often require subjective interpretation, and we
cannot be certain that our efforts to comply with these regulations will be
deemed sufficient by the appropriate regulatory agencies. Violations of any
regulations could result in various civil and criminal penalties, including
suspension or revocation of our licenses or registrations, seizure of our
inventory, or monetary fines, any of which could harm our business, financial
condition, or operating results. Compliance with new laws or regulations could
increase our expenses or lead to delays as we adjust our website and
operations.
Increasing
concern about privacy, spam, and the use and security of customer information
could restrict our marketing efforts and harm our business.
Internet
retailers are also subject to increasing regulation and scrutiny relating to
privacy, spam, and the use and security of personal user information. These
regulations, along with increased governmental or private enforcement (for
example, by Internet service providers), may increase the cost of growing our
business. Current and proposed regulations and enforcement efforts may restrict
our ability to collect and use demographic and personal information from users
and send promotional e-mails, which could be costly or harm our marketing
efforts. For example, if one or more Internet service providers were to block
our promotional e-mails to customers, our ability to generate orders and revenue
could be harmed. Further, any violation of privacy, anti-spam, or data
protection laws or regulations may subject us to fines, penalties, and damages
and may otherwise have a material adverse effect on our business, results of
operations, and financial condition.
If
people or property are harmed by the products we sell, product liability claims
could damage our business and reputation.
Some of
the products we sell may expose us to product liability claims relating to
personal injury, death, or property damage caused by these products and may
require us to take actions such as product recalls. Any such product liability
claim or product recall may result in adverse publicity regarding us and the
products we sell, which may harm our reputation. If we are found liable under
product liability claims, we could be required to pay substantial monetary
damages. Further, even if we successfully defend ourselves against this type of
claim, we could be forced to spend a substantial amount of money in litigation
expenses, our management could be required to spend valuable time in the defense
against these claims, and our reputation could suffer, any of which could harm
our business. Our current vendors do not, and future vendors may not, indemnify
us against product liability. Further, our liability insurance may not be
adequate to protect us from all liability that may be imposed as a result of
these claims, and we cannot be certain that insurance will continue to be
available to us on economically reasonable terms, or at all. Any imposition of
product liability that is not covered by vendor indemnification or our insurance
could harm our business, financial condition, and operating results. We do not
have vendor indemnification clauses with our current vendors.
If
we are required to collect sales and use taxes on the products we sell in
additional jurisdictions, we may be subject to liability for past sales and our
future sales may decrease.
In
accordance with current industry practice and our interpretation of applicable
law, historically, we have not collected sales and use taxes or other taxes with
respect to shipments of goods into states other than Ohio and Nevada. The
operation of our distribution center, the operations of any future distribution
centers and other aspects of our evolving business, however, may result in
additional sales and use tax collection obligations. In addition, one or more
other states may successfully assert that we should collect sales and use or
other taxes on the sale of our products in that state. One or more states or the
federal government may seek, either through unilateral action or through federal
legislation, to impose sales or other tax collection obligations on
out-of-jurisdiction companies that engage in electronic commerce as we do.
Moreover, one or more states could begin to impose sales taxes on sales of
prescription products, which are not generally taxed at this time, or impose
sales taxes on sales of certain prescription products. The imposition of
additional tax obligations on our business by state and local governments could
create significant administrative burdens for us, decrease our future sales, and
harm our cash flow and operating results.
We
are dependent on key personnel and their loss would adversely affect our ability
to conduct our business.
In order
to execute our business plan, we must be able to keep our existing management
and professionals and, when necessary, hire additional personnel who have the
expertise we need. We cannot assure you that we will be able to this, and our
failure to do so could have a material adverse effect on our business, results
of operations and financial condition. We are particularly dependent on the
services of Lalit Dhadphale, our Chief Executive Officer and President. We do
not carry key-man life insurance for our benefit on Mr. Dhadphale or on any
other employee of our company.
Our
post-share exchange company may not be able to realize the tax savings benefits
for the entire amount of Clacendix’s Deferred Tax Assets.
As of
December 31, 2008, we had a deferred tax asset of $16,400,000, primarily
relating to federal net operating loss carry forwards of approximately
$44,730,000 available to offset future taxable income through 2028. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. We consider projected future taxable income and tax planning
strategies in making this assessment. At present, we do not have a sufficient
history of income to conclude that it is more likely than not that we will be
able to realize all of its tax benefits in the near future and therefore a
valuation allowance was established in the full value of the deferred tax
asset.
A
valuation allowance will be maintained until sufficient positive evidence exists
to support the reversal of any portion or all of the valuation allowance net of
appropriate reserves. Should we be profitable in future periods with supportable
trends, the valuation allowance will be reversed accordingly.
Furthermore,
our ability to utilize net operating losses, which we refer to as NOLs, to
offset our future taxable income would be limited as the share exchange
transaction would constitute an “ownership change” within the meaning of Section
382 of the Internal Revenue Code. In general, an “ownership change” occurs
whenever the percentage of the stock of a corporation owned by “5-percent
shareholders” (within the meaning of Section 382 of the Internal Revenue Code)
increases by more than 50 percentage points over the lowest percentage of the
stock of such corporation owned by such “5-percent shareholders” at any time
over a three-year testing period. When a corporation undergoes an ownership
change within the meaning of Section 382 of the Internal Revenue Code, its
ability to utilize NOLs and other tax benefits is subject to an annual
limitation.
As
a result of our operating as a public company, our management will be required
to devote substantial time to new compliance initiatives, which may divert our
management’s attention from the growth and operation of our
business.
The
Sarbanes-Oxley Act of 2002 and the rules subsequently implemented by the U.S.
Securities and Exchange Commission, or SEC, impose a number of requirements on
public companies, including provisions regarding corporate governance practices.
Our management and other personnel will need to devote a substantial amount of
time to these compliance initiatives. Moreover, these rules and regulations will
make some activities more time-consuming and costly. These rules and regulations
could also make it more difficult for us to attract and retain qualified persons
to serve on our board of directors, our board committees or as executive
officers.
In
addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
effective internal control over financial reporting and disclosure controls and
procedures. In particular, we will need to perform system and process evaluation
and testing of our internal control over financial reporting to allow management
and our independent registered public accounting firm to report on the
effectiveness of our internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by
our independent registered public accounting firm, may reveal deficiencies in
our internal control over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 will require that we expend
management time on compliance-related issues. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identify deficiencies in our
internal control over financial reporting that are deemed to be material
weaknesses, the market price of our common stock could decline and we could be
subject to sanctions or investigations by the SEC or other regulatory
authorities, which would require additional financial and management
resources.
We
cannot be certain that our internal control over financial reporting will be
effective or sufficient in the future.
Our
ability to manage our operations and growth requires us to maintain effective
operations and compliance and management controls, as well as our internal
control over financial reporting. We may not be able to implement necessary
improvements to our internal control over financial reporting in an efficient
and timely manner and may discover deficiencies and weaknesses in existing
systems and controls, especially when such systems and controls are tested by
our anticipated increased rate of growth or the impact of acquisitions. In
addition, upgrades or enhancements to our computer systems could cause internal
control weaknesses.
We have
in the past implemented an effective system of internal control; however, if we
fail to maintain an effective system of internal control or if our management or
our independent registered public accounting firm were to discover material
weaknesses in our internal control systems, we may be unable to produce reliable
financial reports or prevent fraud. If we are unable to assert that our internal
control over financial reporting is effective at any time in the future, or if
our independent registered public accounting firm is unable to attest to the
effectiveness of our internal controls, is unable to deliver a report at all or
can deliver only a qualified report, we could be subject to regulatory
enforcement and may lose investor confidence in our ability to operate in
compliance with existing internal control rules and regulations, either of which
could result in a decline in our stock price.
Risks
Related to Our Common Stock
Because we became public through a
share exchange transaction (or reverse acquisition), we may not be able to
attract the attention of major brokerage firms.
Additional
risks are associated with HW becoming public through a share exchange
transaction (or reverse acquisition). For example, security analysts
of major brokerage firms may not provide coverage of us since there is no
incentive to brokerage firms to recommend the purchase of our common
stock. We cannot assure you that brokerage firms will want to conduct
any public offerings on our behalf in the future.
Our
common stock may be considered a “penny stock” and may be difficult to
sell.
The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market or exercise price of less than $5.00 per share,
subject to specific exemptions. The market price of our common stock
may be below $5.00 per share and therefore may be designated as a “penny stock”
according to SEC rules. This designation requires any broker or
dealer selling these securities to disclose certain information concerning the
transaction, obtain a written agreement from the purchaser and determine that
the purchaser is reasonably suitable to purchase the
securities. These rules may restrict the ability of brokers or
dealers to sell our common stock and may affect the ability of our stockholders
to sell their shares. In addition, since our common stock is quoted
on the OTC Bulletin Board, our stockholders may find it difficult to obtain
accurate quotations of our common stock and may find few buyers to purchase the
stock or a lack of market makers to support the stock price.
A
significant number of the shares of our common stock are eligible for sale, and
their sale could depress the market price of our common stock.
Sales of
a significant number of shares of common stock in the public market could harm
the market price of our common stock. We issued 155,194,563 shares of
common stock in our share exchange transaction. The shares issued in
the share exchange are restricted under federal securities
laws. These shares will generally be salable under Rule 144 of the
Securities Act of 1933, as amended, commencing one year after the filing of this
current report on Form 8-K. Sales of common stock either pursuant to
a registration statement or Rule 144 are likely to have a depressive effect on
the market of our common stock.
Our
officers, directors and 5% or greater stockholders have significant voting power
and may take actions that may not be in the best interests of other
stockholders.
Our
executive officers, present and proposed directors, and our 5% or greater
stockholders beneficially own approximately 70.88% of our outstanding voting
securities. If these stockholders act together, they will be able to
exert significant control over our management and affairs requiring stockholder
approval, including approval of significant corporate
transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control and might adversely affect the market
price of our common stock. This concentration of ownership may not be
in the best interests of all of our stockholders.
We
may engage in additional financing that could lead to dilution of existing
stockholders.
HW has
relied on equity and debt financing to carry on its business to
date. Any future financings by us may result in substantial dilution
of the holdings of existing stockholders and could have a negative impact on the
market price of our common stock. Furthermore, we cannot assure you
that such future financings will be possible.
We
do not anticipate paying dividends in the foreseeable future; you should not buy
our stock if you expect dividends.
We
currently intend to retain our future earnings to support operations and to
finance expansion and, therefore, we do not anticipate paying any cash dividends
on our common stock in the foreseeable future.
Cautionary
Language Regarding Forward-Looking Statements and Industry Data
This
report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties,
many of which are beyond our control. Our actual results could differ
materially and adversely from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth in this
report. Important factors that may cause actual results to differ
from projections include, but are not limited to, for example:
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adverse
economic conditions,
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inability
to raise sufficient additional capital to operate our
business,
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unexpected
costs, lower than expected sales and revenues, and operating
defects,
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●
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adverse
results of any legal proceedings,
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the
volatility of our operating results and financial
condition,
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●
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inability
to attract or retain qualified senior management personnel,
and
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●
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other
specific risks that may be referred to in this
report.
|
All
statements, other than statements of historical facts, included in this current
report regarding our strategy, future operations, financial position, estimated
revenue or losses, projected costs, prospects and plans and objectives of
management are forward-looking statements. When used in this report,
the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,”
“expect,” “project,” “plan” and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
such identifying words. All forward-looking statements speak only as
of the date of this report. We undertake no obligation to update any
forward-looking statements or other information contained
herein. Stockholders and potential investors should not place undue
reliance on these forward-looking statements. Although we believe
that our plans, intentions and expectations reflected in or suggested by the
forward-looking statements in this report are reasonable, we cannot assure
stockholders and potential investors that these plans, intentions or
expectations will be achieved. We disclose important factors that
could cause our actual results to differ materially from its expectations under
“Risk Factors” and elsewhere in this report. These cautionary
statements qualify all forward-looking statements attributable to us or persons
acting on our behalf.
Information
regarding market and industry statistics contained in this current report is
included based on information available to us that we believe is
accurate. It is generally based on academic and other publications
that are not produced for purposes of securities offerings or economic
analysis. Forecasts and other forward-looking information obtained
from these sources are subject to the same qualifications and the additional
uncertainties accompanying any estimates of future market size, revenue and
market acceptance of products and services. We have no obligation to
update forward-looking information to reflect actual results or changes in
assumptions or other factors that could affect those statements. See
“Risk Factors” for a more detailed discussion of risks and uncertainties that
may have an impact on our future results.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion of our financial condition and results of operations has
been prepared using, and should be read in conjunction with, our financial
statements and related notes included under Item 9.01(a) of this current
report.
As
described above, on May 14, 2009, we completed a share exchange transaction with
HW, pursuant to the terms of the Securities Exchange
Agreement. In connection with the share exchange transaction, HW
became our wholly-owned subsidiary, with the former stockholders of HW
collectively owning shares of our common stock representing approximately 82.44%
of our outstanding common stock. The share exchange transaction is being
accounted for as a “reverse acquisition,” since the former shareholders of HW
own a majority of the outstanding shares of our common stock immediately
following the transaction. HW is deemed to be the acquirer in the
reverse acquisition and, consequently, the assets and liabilities and the
historical operations that will be reflected in our financial statements will be
those of HW and will be recorded at the historical cost basis of
HW. Accordingly, the historical financial results prior to the share
exchange transaction are those of HW and replace our historical financial
results as we existed prior to the share exchange transaction.
Overview
We are a
U.S.-licensed pharmacy and healthcare e-commerce company that sells discounted
brand name and generic prescription drugs and OTC medical products. Our web
store is located at http://www.healthwarehouse.com. At present, we
sell:
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|
a
range of prescription drugs (we are licensed as a mail-order pharmacy for
sales to 36 states and the District of
Columbia);
|
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|
·
|
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
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|
·
|
diet
and nutritional products including supplements, weight loss aids, and
vitamins and minerals.
|
Our
objective is to be viewed by individual healthcare product consumers as a
low-cost, reliable and hassle-free provider of prescription drugs as well as OTC
medical products. We intend to continue to expand our product line as our
business grows.
In March
2007, HealthWarehouse.com, Inc. was incorporated to sell OTC products direct
from manufacturer to consumer. In November 2007, we opened a technology center
in Bandung, Indonesia to develop the proprietary software necessary for our
business, and in February 2008, version 1 of the http://www.healthwarehouse.com/
website was successfully launched running on our own proprietary software. In
March 2008, as part of our expansion into prescription drugs, we completed
construction of a full service pharmacy within our warehouse in Cincinnati,
Ohio. Our pharmacy passed inspection by the Ohio State Pharmacy Board in April
2008. We are presently licensed as a mail-order pharmacy for sales to 36 states
and the District of Columbia, and we intend to apply for and obtain licenses to
sell prescriptions in all 50 states by the end of 2009.
We also
intend to begin accepting health insurance as part of our prescription program,
initially contracting with the largest insurance providers and later with
additional providers based on customer demand. Our mission is to become a major
repository of patient health records and a leading healthcare portal by building
the first online pharmacy to vertically integrate and control the supply
chain.
To date,
we have incurred operational losses for all historic periods. We have
financed our activities to date through revenues from our online sales, the
proceeds from sales of our equity securities in private placement financings and
the proceeds from the issuance of our promissory notes in private
financings.
Results
of Operations
Year
ended December 31, 2008 Compared to Year ended December 31, 2007
|
|
|
Year
ended December
31,
2008
|
|
|
%
of Revenue
|
|
|
Year
ended December
31,
2007
|
|
|
%
of Revenue
|
|
|
Revenue
|
|
$ |
1,270,527 |
|
|
|
100.00 |
% |
|
$ |
59,562 |
|
|
|
100.0 |
% |
|
Cost
of sales
|
|
|
970,627 |
|
|
|
76.40 |
% |
|
|
32,433 |
|
|
|
55.5 |
% |
|
Gross
profit
|
|
|
299,900 |
|
|
|
23.60 |
% |
|
|
27,129 |
|
|
|
45.5 |
% |
|
Selling,
general and administrative expenses
|
|
|
969,837 |
|
|
|
76.30 |
% |
|
|
37,786 |
|
|
|
63.4 |
% |
|
Income
from operations
|
|
|
(669,937 |
) |
|
|
-52.70 |
% |
|
|
(10,657 |
) |
|
|
(17.9 |
)% |
|
Other
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,636 |
|
|
|
0.20 |
% |
|
|
- |
|
|
|
- |
|
|
Net
loss
|
|
$ |
(667,301 |
) |
|
|
-52.50 |
% |
|
$ |
(10,657 |
) |
|
|
(17.9 |
)% |
Revenue
|
|
|
Year ended
December 31,
2008
|
|
|
% Change
|
|
|
Year ended
December 31,
2007
|
|
|
Total
revenue
|
|
$ |
1,270,527 |
|
|
|
2,133.1 |
% |
|
$ |
59,562 |
|
|
Total
customer orders shipped
|
|
|
22,950 |
|
|
|
2,004.4 |
% |
|
|
1,145 |
|
|
Total
average net sales per order
|
|
$ |
55.36 |
|
|
|
6.4 |
% |
|
$ |
52.02 |
|
Revenues
include gross revenues from sales of product, shipping fees and service fees,
net of discounts and provision for sales returns, and other
allowances. We bill orders to the customer’s credit card or, in the
case of prescriptions covered by insurance, we bill the co-payment to the
customer’s credit card and the remainder of the prescription price to insurance.
We record sales of pharmaceutical products covered by insurance as the sum of
the amounts received from the customer and the third party insurer.
Revenues
increased for the year ended December 31, 2008 compared to the prior year as a
result of an increase in order volume and average net sales per
order. This increase is due primarily to the maturing of business
activities from a startup company in 2007 with limited operating activities and
the initial rollout of the business model during 2008.
We
believe that our trend towards increasing revenues is continuing,
with preliminary estimated revenues for the quarter ended March 31,
2009 growing to $763,456 from $126,038 for the first quarter of 2008 (the 2009
first quarter revenues estimate has not yet been reviewed by our
auditors). Another indicator of increased business activity was that
our website attracted over 225,000 visits during the first three months of 2009
compared to fewer than 50,000 visits during the first three months of
2008.
Costs
and Expenses
Cost
of Sales and Gross Margin
|
|
|
Year ended
December 31,
2008
|
|
|
% Change
|
|
|
Year ended
December
31, 2007
|
|
|
Total
cost of sales
|
|
$ |
970,627 |
|
|
|
2992.7 |
% |
|
$ |
32,433 |
|
|
Total
gross profit dollars
|
|
$ |
299,900 |
|
|
|
1105.5 |
% |
|
$ |
27,129 |
|
|
Total
gross margin percentage
|
|
|
23.6 |
% |
|
|
|
|
|
|
45.5 |
% |
Cost of
sales consists primarily of the cost of products sold to our customers,
including allowances for shrinkage, damaged, slow-moving and expired inventory,
and expenses related to promotional inventory included in shipments to
customers. Payments that we receive from vendors in connection with volume
purchases or rebate allowances and payment discount terms are netted against
cost of sales.
Total
cost of sales increased year-over-year in absolute dollars for the year ended
December 31, 2008 as compared to the year ended December 31, 2007 as
a result of growth in order volume and net sales. This increase is due primarily
from the maturing of business activities from a startup company in 2007 with
limited operating activities and the initial rollout of the business model
during 2008. Gross margin percentage decreased year-over-year from 45.5% for the
year ended December 31, 2007 to 30.9% for the year ended December 31, 2008, due
to a more representative relationship between revenues and cost of sales per our
business model in 2008 compared to 2007.
Selling,
General and Administrative Expenses
|
|
|
Year ended
December 31,
2008
|
|
|
% Change
|
|
|
Year ended
December 31,
2007
|
|
|
Selling,
general and administrative expenses
|
|
$ |
969,837 |
|
|
|
2566.7 |
% |
|
$ |
37,786 |
|
|
Percentage
of revenue
|
|
|
76.3 |
% |
|
|
|
|
|
|
63.4 |
% |
Selling,
general and administrative expenses consists of all
operating expenses for our company including payroll and related
expenses for all personnel, advertising, freight, bad debt expense, corporate
facility expenses, professional service expenses and other general corporate
expenses.
Selling,
general and administrative expenses increased in both dollars and as a
percentage of revenue for the year ended December 31, 2008 compared to the prior
year. The expense increases are due primarily from the maturing of business
activities from a startup company in 2007 with limited operating activities and
the initial rollout of the business model during 2008. The year-over-year
expenses increase of $932,051 from $37,786 for the year ended December 31, 2007
to $969,837 for the year ended December 31, 2008 were due primarily to increases
in advertising expense of $309,595, freight and shipping expenses of $133,203,
payroll and related expenses of $100,834, travel and entertainment expenses of
$77,835, increase in professional fees of $66,061, Internet and related
transaction fees of $60,528, and increases in bad debt expense of
$54,753.
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 years ended December 31, 2008 and 2007. We cannot assure you
that future inflation will not have an adverse impact on our operating results
and financial condition.
Seasonality
Historically,
the largest amount of our net sales occur during our fourth quarter. As a
result, we sometimes experience an increase in our shipping cost due to
complimentary upgrades, split-shipments, and additional long-zone shipments
necessary to ensure timely delivery during this time of year.
Liquidity
and Capital Resources
Since
HW’s inception, it has financed operations through product sales to customers,
and debt and private equity investment by existing stockholders, officers and
directors.
As of May
14, 2009, we had approximately $2.4 million in cash and cash
equivalents. We estimate that our existing cash, combined with our
revenues, will be sufficient to fund current operations for at least the next 12
months. In addition, one of the recent HW investors has entered
into an agreement to purchase an additional $800,000 of our common stock
through December 31, 2009 and another recent HW investor holds two warrants
exercisable for our common stock (with an up to $400,000 exercise price in the
aggregate) which expire on June 30, 2009 and December 31, 2009,
respectively.
If our
plans or assumptions change or prove to be inaccurate, we may be required to
seek additional capital through one or more financings. If we need to
raise additional funds, we may not be able to do so on terms favorable to us, or
at all. If we cannot raise sufficient funds on acceptable terms, we
may have to curtail our level of expenditures and our rate of
expansion.
With our
revenues expected to grow, we anticipate that our cash flow from operating
activities will be a growing source of funds for us. Assuming we achieve cash
flow breakeven, we intend to seek to secure a standby secured asset line to fund
asset acquisitions particularly for inventory growth. Our operating
model calls for payment by the customer via credit card sometimes prior to when
the products are due to be paid to our vendors. Accordingly,
controlling inventory exposure will be an important operating objective for
us.
Critical
Accounting Policies and Estimates
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires our management to exercise its judgment. We exercise considerable
judgment with respect to establishing sound accounting polices and in making
estimates and assumptions that affect the reported amounts of our assets and
liabilities, our recognition of revenues and expenses, and disclosures of
commitments and contingencies at the date of the financial
statements.
On an
ongoing basis, we evaluate our estimates and judgments. We base our estimates
and judgments on a variety of factors including our historical experience,
knowledge of our business and industry, current and expected economic
conditions, the composition of our products/services and the regulatory
environment. We periodically re-evaluate our estimates and
assumptions with respect to these judgments and modify our approach when
circumstances indicate that modifications are necessary.
While we
believe that the factors we evaluate provide us with a meaningful basis for
establishing and applying sound accounting policies, we cannot guarantee that
the results will always be accurate. Since the determination of
these estimates requires the exercise of judgment, actual results could differ
from such estimates. A description of significant accounting polices
that require us to make estimates and assumptions in the preparation of our
consolidated financial statements is as follows:
Accounts
Receivable
Trade
accounts receivable are stated at the amount our management expects to collect
from outstanding balances. Our management provides for probable uncollectible
amounts through a charge to earnings and a credit to a valuation allowance based
on its assessment of the current status of individual accounts. Balances that
are still outstanding after our management has used reasonable collection
efforts are written off through a charge to the valuation allowance and a credit
to trade accounts receivable. As of December 31, 2008 and 2007, our
management considers all receivables to be fully collectible.
Inventories
Inventories
are valued at lower of average cost or market, using first-in, first out (FIFO)
method and consist substantially of finished goods available for
sale.
Property
and Depreciation
Property
and equipment is recorded at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the respective
assets.
Revenue
Recognition
Revenue
is recognized when products are shipped to customers. Provisions for
chargebacks are provided for in the same period the related revenue is
recorded.
Income
taxes
Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws. Income tax expense
is comprised of tax currently payable for the period and the change during the
period in deferred tax assets and liabilities.
The
Financial Accounting Standards Board (“FASB”) has issued Interpretation No. 48
(“FIN 48”), which clarifies generally acceptable accounting principles for
recognition, measurement, presentation and disclosure relating to uncertain tax
positions. As permitted by FIN 48 (as amended), prior to the share
exchange, we elected to defer the application of FIN 48 until issuance of our
December 31, 2009 financial statements.
FIN 48
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits to be recognized, a tax position must
be more likely than not to be sustained upon examination by taxing authorities.
Differences between tax positions taken or expected to be taken in a tax return
and the benefit recognized and measured pursuant to the interpretation are
referred to as “unrecognized benefits”. A liability is recognized (or amount of
net operating loss carry forward or amount of tax refundable is reduced) for an
unrecognized tax benefit because it represents an enterprise’s potential future
obligation to the taxing authority for a tax position that was not recognized as
a result of applying the provisions of FIN 48.
In
accordance with FIN 48, interest costs related to unrecognized tax benefits are
required to be calculated (if applicable) and would be classified as “Interest
expense” in the consolidated statements of operations. Penalties would be
recognized as a component of “Selling, general and administrative
expenses.”
We are
currently in the process of evaluating the impact of the adoption of the
provisions of FIN 48 on our consolidated financial position and results of
operations.
Recently-issued
Accounting Pronouncements
On
October 10, 2008, the FASB issued Staff Position (“FSP”) FAS 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active.” FSP FAS 157-3 clarifies the application of FASB Statement No. 157 in a
market that is not active. The guidance is primarily focused on addressing how
the reporting entity’s own assumptions should be considered when measuring fair
value when relevant observable inputs does not exist; how available observable
inputs in a market that is not active should be considered when measuring fair
value; and how the use of market quotes should be considered when assessing the
relevance of observable and unobservable inputs available to measure fair value.
The adoption of FSP FAS 157-3 did not have a material impact on our financial
statements.
In June
2008, the Emerging Issues Task Force (“EITF”) reached a consensus in Issue No.
07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 addresses the determination of
whether an instrument (or an embedded feature) is indexed to an entity’s own
stock, which is the first part of the scope exception in paragraph 11(a) of FASB
Statement No. 133. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. We are currently in the process of evaluating the
impact of the adoption of EITF 07-5 on our results of operations and financial
condition.
In May
2008, the FASB issued Statement No. 162 “The Hierarchy of Generally Accepted
Accounting Principles.” The current hierarchy of generally accepted accounting
principles is set forth in the American Institute of Certified Accountants
(AICPA) Statement of Auditing Standards (SAS) No. 69, “The meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles. FASB
Statement No. 162 is intended to improve financial reporting by identifying a
consistent framework or hierarchy for selecting accounting principles to be used
in preparing financial statements that are presented in conformity with U.S.
generally accepted accounting principles for nongovernmental entities. FASB
Statement No. 162 is effective 60 days following the SEC’s approval of the
Public Company Oversight Board Auditing amendments to SAS 69. We do not
anticipate that FASB Statement No. 162 will have a material effect on our
results of operations or financial position.
In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133,” to
require enhanced disclosures about an entity’s derivative and hedging activities
and thereby improves the transparency of financial reporting. FASB Statement No.
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early adoption encouraged. We
are currently evaluating the effect that the adoption of FASB Statement No. 161
will have on our consolidated results of operations and financial condition, but
do not expect it to have a material impact.
In
December 2007, the FASB issued Statement No. 141R, “Business Combinations”
(“SFAS 141R”), which replaces Statement No. 141, “Business Combinations.” FASB
Statement No. 141R establishes principles and requirements for determining how
an enterprise recognizes and measures the fair value of certain assets and
liabilities acquired in a business combination, including noncontrolling
interests, contingent consideration, and certain acquired contingencies. FASB
Statement No. 141R also requires acquisition-related transaction expenses and
restructuring costs be expensed as incurred rather than capitalized as a
component of the business combination. FASB Statement No. 141R will be
applicable prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. FASB Statement No. 141R would have an impact on
accounting for any businesses acquired after the effective date of this
pronouncement.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of FASB
Statement No. 115.” FASB Statement No. 159 permits companies to
choose to measure certain financial instruments and certain other items at fair
value. The standard requires that unrealized gains and losses on
items for which the fair value option has been elected be reported in
earnings. We adopted FASB issued Statement No. 159 beginning in the
first quarter of 2008, without material effect on our consolidated financial
position or results of operations.
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.”
FASB Statement No. 157 establishes a single definition of fair value and a
framework for measuring fair value, sets out a fair value hierarchy to be used
to classify the source of information used in fair value measurements, and
requires new disclosures of assets and liabilities measured at fair value based
on their level in the hierarchy. This statement applies under other accounting
pronouncements that require or permit fair value measurements. In February 2008,
the FASB issued FSPs No. 157-1 and No. 157-2, which, respectively, remove
leasing transactions from the scope of FASB Statement No. 157 and defer its
effective date for one year relative to certain nonfinancial assets and
liabilities. As a result, the application of the definition of fair value and
related disclosures of FASB Statement No. 157 (as impacted by these two FSPs)
was effective for us beginning January 1, 2008 on a prospective basis with
respect to fair value measurements of (a) nonfinancial assets and liabilities
that are recognized or disclosed at fair value in our financial statements on a
recurring basis (at least annually) and (b) all financial assets and
liabilities. This adoption did not have a material impact on our consolidated
results of operations or financial condition. The remaining aspects of FASB
Statement No. 157 for which the effective date was deferred under FSP No. 157-2.
Areas impacted by the deferral relate to nonfinancial assets and liabilities
that are measured at fair value, but are recognized or disclosed at fair value
on a nonrecurring basis. This deferral applies to such items as nonfinancial
assets and liabilities initially measured at fair value in a business
combination (but not measured at fair value in subsequent periods) or
nonfinancial long-lived asset groups measured at fair value for an impairment
assessment. The effects of these remaining aspects of FASB Statement No. 157 are
to be applied to fair value measurements prospectively beginning January 1,
2009. We do not expect them to have a material impact on our consolidated
results of operations or financial condition.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information regarding the beneficial ownership of our
common stock as of May 14, 2009, by (a) each person who is known by us to
beneficially own 5% or more of our common stock, (b) each of our directors and
executive officers, and (c) all of our directors and executive officers as a
group.
|
Name(1)
|
|
Number
of
Shares
Beneficially
Owned(2)
|
|
|
Percentage
of
Shares
Beneficially
Owned(3)
|
|
|
|
|
|
|
|
|
|
|
5%
or Greater Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cape
Bear Partners, LLC (4)
|
|
|
34,606,466 |
|
|
|
18.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
Rock
Castle Holdings, LLC (5)
|
|
|
45,053,326 |
|
|
|
23.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
Austin
W. Marxe and David M. Greenhouse (6)
|
|
|
11,258,068 |
|
|
|
5.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
Executive
Officers and Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lalit
Dhadphale
|
|
|
38,814,992 |
|
|
|
20.62 |
% |
|
|
|
|
|
|
|
|
|
|
|
Patrick
E. Delaney (7)
|
|
|
479,376 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
Wayne
A. Corona (8)
|
|
|
6,631,325 |
|
|
|
3.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
Stephen
M. Deixler (9)
|
|
|
2,741,016 |
|
|
|
1.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
Norman
E. Corn (7)
|
|
|
490,972 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
All
executive officers, present directors and proposed directors as a group (5
persons)
|
|
|
49,157,781 |
|
|
|
25.83 |
% |
|
(1)
|
The
address of each person except Austin W. Marxe and David M. Greenhouse is
c/o Clacendix, Inc., 100 Commerce Boulevard, Cincinnati, Ohio 45140. The
address of Austin W. Marxe and David M. Greenhouse is 527 Madison Avenue,
Suite 2600, New York, New York
10022.
|
|
(2)
|
Unless
otherwise indicated, includes shares owned by a spouse, minor children and
relatives sharing the same home, as well as the entities owned or
controlled by the named person. Also includes shares if the
named person has the right to acquire those shares within 60 days after
May 14, 2009, by the exercise of any warrant, stock option or other
right. Unless otherwise noted, shares are owned of record and
beneficially by the named person.
|
|
(3)
|
The
calculation in this column is based upon 188,250,724 shares of common
stock outstanding on May 14, 2009. Does not include 155,570
shares of series A preferred stock outstanding on May 14, 2009, which
shares are convertible into 1,555,570 shares of common stock. The shares
of common stock and shares underlying convertible preferred stock and
stock options are deemed outstanding for purposes of computing the
percentage of the person holding such convertible preferred stock and/or
stock options but are not deemed outstanding for the purpose of computing
the percentage of any other person.
|
|
(4)
|
Lynn
Peppel is the Managing Member of Cape Bear Partners LLC and has sole
voting and investment power over the shares owned by Cape Bear Partners
LLC.
|
|
(5)
|
Includes
3,963,594 shares of common stock issuable upon conversion of HW
convertible promissory notes. Jason Smith is the Managing Member of Rock
Castle Holdings, LLC and has sole voting and investment power over the
shares owned by Rock Castle Holdings,
LLC.
|
|
(6)
|
Based
on a Schedule 13D/A filed on March 9, 2007 by Austin W. Marxe (“Marxe”)
and David M. Greenhouse (“Greenhouse”). Marxe and Greenhouse
share sole voting and investment power over 1,929,971 shares of Common
Stock owned by Special Situations Cayman Fund, L.P., 1,213,957 shares of
Common Stock owned by Special Situations Fund III, L.P., 5,052,040 shares
of Common Stock owned by Special Situations Fund III QP,
L.P., 2,084,729 shares of Common Stock owned by Special
Situations Private Equity Fund, L.P., 153,901 shares of Common Stock owned
by Special Situations Technology Fund, L.P. and 823,470 shares of common
stock owned by Special Situations Technology Fund II,
L.P.
|
|
(7)
|
Includes
stock options to purchase 229,376 shares of common
stock.
|
|
(8)
|
Includes
991,005 shares of common stock issuable upon conversion of HW convertible
promissory notes.
|
|
(9)
|
Does
not include 967,477 shares of common stock owned by Mr. Deixler’s mother,
children and grandchildren, as to which shares Mr. Deixler disclaims
beneficial ownership. Includes 480,560 shares of common stock issuable
upon conversion of 48,056 shares of series A preferred stock, stock
options to purchase 130,500 shares of common stock and 2,200 shares of
common stock owned by Mr. Deixler’s
spouse.
|
Executive
Officers and Directors
The
names, ages and positions of our executive officers and directors as of May 14,
2009, are as follows:
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
Lalit
Dhadphale
|
|
37
|
|
President,
Chief Executive Officer and Director
|
|
|
|
|
|
|
|
Patrick
E. Delaney
|
|
56
|
|
Chief
Financial Officer and Treasurer
|
|
|
|
|
|
|
|
Wayne
A. Corona
|
|
57
|
|
Secretary
and Director
|
|
|
|
|
|
|
|
Stephen
M. Deixler
|
|
73
|
|
Director
|
|
|
|
|
|
|
|
Norman
E. Corn
|
|
62
|
|
Director
|
The
principal occupations for the past five years (and, in some instances, for prior
years) of each of our executive officers and directors are as
follows:
Lalit Dhadphale became our
President and Chief Executive Officer and a member of our board of
directors on May 14, 2009, and has served as the President and Chief Executive
Officer and a
member of the board of directors of HW since its inception in March 2007. Prior
to that, from 2003 until February 2007, he founded and managed Placa De Rei
Partners, LLC, a company specializing in residential real estate development in
the United States and Asia. Before that, Mr. Dhadphale accumulated
more than 15 years of experience developing internet websites and applications.
He served as Vice President of Product Development, Chief International Officer
and later as Chief Operating Officer of Zengine, Inc. from founding in 1999
through its sale in 2002. Under his day-to-day leadership, Zengine grew from
start-up to $30+ million in annualized sales, achieving profitability in its
second quarter as a public company in the first quarter of 2001. Prior to
co-founding Zengine, Mr. Dhadphale was a co-founder of Excite Japan, where he
was involved with product development, internationalization and localization of
web sites and Internet products. He produced the launch of both Excite Japan and
Netscape Netcenter Japan. Prior thereto, Mr. Dhadphale was International
Business Development Manager for CNET, securing relationships throughout Asia
and the Pacific Rim. His prior experience includes international trade,
entertainment and real estate development for P.O.V. Associates (Nissho Iwai
Group). Mr. Dhadphale received his BA degree from the University of Michigan,
Ann Arbor in Japanese Language & Literature and Asian Studies.
Patrick E. Delaney has served
as our Chief Financial Officer since September 2003 and as our Treasurer since
May 14, 2009. Prior to joining our company, from 2000 until 2003, Mr. Delaney
was the President of Taracon, Inc. a privately owned independent consulting firm
that provides management consulting for early and mid-stage technology and
financial services companies. Mr. Delaney also served as Chief Financial Officer
for two publicly traded telecommunications providers, Pointe Communications
Corporation from 1993 to 2000 and Advanced Telecommunications Corporation from
1986 to 1993. Mr. Delaney has served other companies in executive capacities
including RealCom Communications, Argo Communications and ACF
Industries.
Wayne A. Corona became our
Secretary and a member of our board of directors on May 14, 2009, and has served
as the Secretary and a member of the board of directors of HW since its
inception in March 2007. Mr. Corona has accumulated 30 years of experience in
brand and generic pharmaceutical sales, marketing and distribution. Since 2002,
he has served as Vice President of Business Development of Masters
Pharmaceutical, Inc. Prior to that, Mr. Corona served as a consultant to
RxBazaar, an online pharmaceutical trader, from 1998 to 2002. From 1997 to 1998,
he served as a purchasing and regulations consultant to Purity Wholesale grocers
Inc. Earlier in his career, from 1992 to 1996, he served as President of P.D.I.
Enterprises, during which the company completed major acquisitions and sales
increased from $100 million to over $500 million. Mr. Corona was the recipient
of Merrill Lynch and Inc. Magazine’s Ernst & Young “Entrepreneur of The
Year” Award in 1995. Prior to his tenure with P.D.I., Mr. Corona was Senior Vice
President of Moore Medical Corporation from 1985 to 1992 and Assistant Vice
President of Pharmaceutical Services at Genovese Drug Stores from 1974 to 1985.
Mr. Corona earned his BS degree at Columbia University College of Pharmaceutical
Sciences.
Stephen M. Deixler became a
member of our board of directors in May 1982, and served as our Chairman of the
Board from May 1982 to May 14, 2009. Mr. Deixler served as our interim Chief
Financial Officer from March 2003 to September 2003, our Chief Executive Officer
from April 1996 to May 1997, our President from May 1982 to June 1985 and
our Treasurer from our formation in 1982 until September 1993. He
also serves as Chairman of the Board of Trilogy Leasing Co., LLC and President
of Resource Planning Inc. Mr. Deixler was the Chairman of Princeton Credit
Corporation until April 1995.
Norman E. Corn became a member
of our board of directors in November 2005, and served as our Chief Executive
Officer from August 2003 to May 14, 2009. From 2000 until 2003, Mr. Corn was
Executive Vice President of Liquent, Inc., a Pennsylvania-based software company
that provides electronic publishing solutions, focused on the life sciences
industry. Mr. Corn also served from 1994 to 2000 as CEO of TCG Software, Inc.,
an offshore software services organization providing custom development to large
corporate enterprises in the United States. Over the course of his career, Mr.
Corn has led other companies, including Axiom Systems Group, The Cobre Group,
Inc., The Office Works, Inc. and Longview Results, Inc., and spent the early
part of his career in sales, marketing and executive positions at AT&T and
IBM.
All
directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors. Officers are elected
annually by the board of directors and serve at the discretion of the
board.
Board
Committees
Our board
of directors had previously established an audit committee, compensation
committee, and nominations and governance committee. In conjunction with the
share exchange transaction, we disbanded these committees. Later in 2009, our
board of directors expects to recreate such committees, in compliance with
established corporate governance requirements.
Audit Committee. We plan to
reestablish an audit committee of the board of directors. The audit committee’s
duties would be to recommend to the board of directors the engagement of
independent registered public accountants to audit our financial statements and
to review our accounting and auditing principles. The audit committee would
review the scope, timing and fees for the annual audit and the results of audit
engagements performed by the independent registered public accountants,
including their recommendations to improve the system of accounting and internal
controls. The audit committee would at all times be composed exclusively of
directors who are, in the opinion of the board of directors, free from any
relationship which would interfere with the exercise of independent judgment as
a committee member and who possess an understanding of financial statements and
generally accepted accounting principles. Due to our small size, we
do not currently have an “audit committee financial expert,” as defined under
securities laws, serving on our board of directors, but we intend to appoint one
when we reestablish our audit committee.
Compensation Committee. We
plan to reestablish a compensation committee of the board of directors. The
compensation committee would review and approve our salary and benefits
policies, including compensation of executive officers. The compensation
committee would also administer our proposed Incentive Compensation Plan, and
recommend and approve grants of stock options and restricted stock under that
plan.
Nominations and Governance
Committee. We plan to reestablish a nominations and governance committee
of the board of directors. The purpose of the nominations and governance
committee would be to select, or recommend for our entire board’s selection, the
individuals to stand for election as directors at the annual meeting of
stockholders and to oversee the selection and composition of committees of our
board. The nominations and governance committee’s duties would also include
considering the adequacy of our corporate governance and overseeing and
approving management continuity planning processes.
Director
Independence
Our board
of directors has determined that Stephen M. Deixler and Wayne A. Corona are
“independent” within the meaning of Nasdaq Rule 4200(a)(15), and that they are
also “independent” for purposes of Rule 10A-3 of the Exchange
Act. Lalit Dhadphale and Norman E. Corn are not “independent”
within the meaning of Nasdaq Rule 4200(a)(15). In addition, Philip
Levine and Frank S. Russo, who resigned from our board of directors effective
September 1, 2008 and May 14, 2009, respectively, and who were formerly members
of our audit committee, compensation committee and nominating committee, were
“independent” within the meaning of Nasdaq Rule 4200(a)(15) and for purposes of
Rule 10A-3 of the Exchange Act.
In making
each of these independence determinations, our board of directors considered and
broadly assessed, from the standpoint of materiality and independence, all of
the information provided by each director in response to detailed inquiries
concerning the director’s independence and any direct or indirect business,
family, employment, transactional or other relationship or affiliation of such
director with our company.
Director
Compensation
Directors
are expected to timely and fully participate in all regular and special board
meetings, and all meetings of committees that they may serve on. We
expect to compensate non-management directors through stock option or restricted
stock grants under our stock option plans, though we have not determined the
exact number of options or stock to be granted at this time.
Prior to
May 14, 2009, directors who were not also employees received fully-vested
options to purchase 20,000 shares of our common stock upon election
to our board and fully-vested options to purchase 10,000 shares of our common
stock upon re-election to our board. In addition, directors who were
not also employees received annually fully-vested options to purchase 1,500
shares of our common stock for each of the following committee memberships:
audit, compensation and nominating committees. These directors were also granted
fully-vested options to purchase an additional 1,500 shares of our common stock
for each board meeting they attended. Options were granted at exercise prices
per share equal to the fair market value of our common stock on the date of the
grant. In addition, we reimbursed all such directors who traveled more than
fifty miles to a meeting of the board for all reasonable travel
expenses.
Indebtedness
of Directors and Executive Officers
None of
our executive officers or directors, or their respective associates or
affiliates, is indebted to us.
Family
Relationships
There are
no family relationships among our executive officers and directors.
Legal
Proceedings
As of the
date of this current report, there are no material proceedings to which any of
our directors, executive officers, affiliates or stockholders is a party adverse
to us.
Executive
Compensation
The table
below summarizes the compensation earned for services rendered to Clacendix and
HW in all capacities, for the years indicated, by its Chief Executive Officer
and two most highly-compensated officers other than the Chief Executive
Officer.
|
Name and Principal
Position
|
|
Fiscal
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Non-Qualified
Deferred
Compensation
Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lalit
Dhadphale
|
|
2008
|
|
|
11,535 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,535 |
|
|
President
and Chief
|
|
2007
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Norman
E. Corn (1)
|
|
2008
|
|
|
167,083 |
|
|
|
- |
|
|
|
- |
|
|
|
3,585 |
|
|
|
- |
|
|
|
- |
|
|
|
6,429 |
(2) |
|
|
177,097 |
|
|
former
Chief
|
|
2007
|
|
|
235,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
369,730 |
(3) |
|
|
604,730 |
|
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick
E. Delaney
|
|
2008
|
|
|
150,000 |
|
|
|
- |
|
|
|
- |
|
|
|
3,585 |
|
|
|
- |
|
|
|
- |
|
|
|
5,700 |
(2) |
|
|
159,285 |
|
|
Chief
Financial
|
|
2007
|
|
|
200,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
305,700 |
(4) |
|
|
505,700 |
|
|
Officer
and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
information for Mr. Corn corresponds to the years ended December 31, 2008
and 2007. Mr. Corn resigned as an officer of our company on May
14, 2009.
|
|
|
(2)
|
Includes
life insurance and disability insurance premiums paid by
us.
|
|
|
(3)
|
Includes
auto allowance, life insurance and disability insurance premiums paid by
us and a severance amount of
$352,500.
|
|
|
(4)
|
Includes
auto allowance and medical benefit premiums paid by us and a severance
amount of $300,000.
|
The
aggregate amount of all other benefits in each of the years indicated did not
exceed the lesser of $50,000 or 10% of the compensation of any named
officer.
Options/SAR
Grants and Fiscal Year End Option Exercises and Values
The
following table summarizes equity awards outstanding at December 31, 2008,
for each of the executive officers named in the Summary Compensation Table
above:
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
Name
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
|
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
|
|
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
|
|
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
|
|
|
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lalit
Dhadphale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Chief
Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Norman
E. Corn
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800,000 |
|
|
|
— |
|
|
|
— |
|
|
|
0.115 |
|
|
1/28/09
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
former
Chief
|
|
|
488,404 |
|
|
|
— |
|
|
|
|
|
|
|
0.060 |
|
|
1/28/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Officer
|
|
|
229,376 |
|
|
|
20,624 |
|
|
|
|
|
|
|
0.180 |
|
|
1/23/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick
E.
Delaney
|
|
|
800,000 |
|
|
|
— |
|
|
|
— |
|
|
|
0.115 |
|
|
1/28/09
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
229,376 |
|
|
|
20,624 |
|
|
|
|
|
|
|
0.180 |
|
|
1/23/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasurer
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
information for Mr. Corn corresponds to the year ended December 31,
2008. Mr. Corn resigned as an officer of our company on May 14,
2009.
|
|
|
(2)
|
All
options vest as follows: 34% of the total number of shares subject to each
option vest and become exercisable 12 months from date of grant, and
options to purchase the remaining 66% of the number of shares subject to
each option vest and become exercisable in 8 equal installments of 8.25%
of the number of shares subject to each option, at the end of every three
month period following the 12 month anniversary of the grant date.
Outstanding un-vested options will vest upon change of control as defined
in the 2006 Stock Option Plan. All options have a 5 year
term.
|
Employment
Agreements
None of
our employees are subject to employment agreements with us at the moment. We
intend to enter into an employment agreement with Lalit Dhadphale, our President
and Chief Executive Officer, and Patrick E. Delaney, our Chief
Financial Officer and Treasurer, in the near future.
We were
party to an employment agreement with Norman E. Corn ,dated August 15, 2003, as
amended effective November 10, 2004, December 19, 2007 and June 19, 2008, which
had no specific stated termination date. Pursuant to the agreement
Mr. Corn served as our Chief Executive Officer at will at an annual base salary
of $235,000. In addition, he received reimbursement for life and
disability insurance. On January 28, 2004, we awarded Mr. Corn 800,000
fully-vested incentive stock options to purchase common stock at $0.115 per
share and 750,000 fully-vested non-qualified stock options to purchase common
stock at $0.06 per share. On January 23, 2006, we awarded Mr. Corn
250,000 stock options to purchase common stock at $0.18 per share which vested
on a pro-rata basis over a three-year period from the grant date. In
connection with the consummation of the sale of substantially all the operating
assets of our company and Mr. Corn’s agreement to remain with us through June
30, 2008 in order to facilitate either a business combination with a third party
or the liquidation of our company, we agreed to pay Mr. Corn a total of
$352,500, paid 50% in January 2008 and 50% in July 2008. This amount was the
equivalent of the 18 months of salary severance amount that would be due and
payable to Mr. Corn under the employment agreement if terminated as a result of
a change of control of our company for any reason other than
cause. Effective July 1, 2008, we adjusted Mr. Corn’s
compensation to an annualized base salary of $100,000. Mr. Corn
remained eligible to receive reimbursement for life and disability insurance, as
well as reimbursement for reasonable business expenses.
We were
party to an employment agreement with Patrick E. Delaney dated September 15,
2003, as amended effective November 10, 2004, December 19, 2007 and June 19,
2008, which had no specific stated termination date. Pursuant to the
agreement, Mr. Delaney served as our Chief Financial Officer at will, at an
annual base salary of $200,000. In addition, he received
reimbursement for medical benefits and life and disability
insurance. On January 28, 2004, we awarded Mr. Delaney 800,000
fully-vested incentive stock options to purchase common stock at $0.115 per
share and 250,000 fully-vested non-qualified stock options to purchase common
stock at $0.045 per share. On January 23, 2006, we awarded Mr. Delaney 250,000
stock options to purchase common stock at $0.18 per share which vested on a
pro-rata basis over a three-year period from the grant date. In connection with
the consummation of the sale of substantially all the operating assets of our
company and Mr. Delaney’s agreement to remain with us through June 30, 2008 in
order to facilitate either a business combination with a third party or the
liquidation of our company, we agreed to pay Mr. Delaney a total of $300,000,
paid 50% in January 2008 and 50% in July 2008. This amount was the equivalent of
the 18 months of salary severance amount that would be due and payable to Mr.
Delaney under the agreement if terminated as a result of a change of control of
our company for any reason other than cause. Effective July 1,
2008, we adjusted Mr. Delaney’s compensation to an annualized base salary of
$100,000. Mr. Delaney remained eligible to receive reimbursement for
medical benefits and life and disability insurance, as well as reimbursement for
reasonable business expenses.
Stock
Option Plans
In
January 2006, we adopted our 2006 Stock Option Plan (the 2006 Plan). The
aggregate number of shares of common stock for which options may be granted
under the 2006 Plan is 4,000,000. The maximum number of options which may be
granted to an employee during any calendar year under the 2006 Plan is 300,000.
The term of these non-transferable stock options may not exceed ten years. The
exercise price of these stock options may not be less than 100% (110% if the
person granted such options owns more than ten percent of the outstanding common
stock) of the fair value of one share of common stock on the date of grant. As
of December 31, 2008, 371,500 options were outstanding under the 2006 Plan, of
which 350,876 were exercisable.
In
November 2000, we adopted our 2000 Stock Option Plan (the 2000 Plan). The
aggregate number of shares of common stock for which options may be granted
under the 2000 Plan is 3,000,000. The maximum number of options which may be
granted to an employee during any calendar year under the 2000 Plan is 400,000.
The term of these non-transferable stock options may not exceed ten years. The
exercise price of these stock options may not be less than 100% (110% if the
person granted such options owns more than ten percent of our outstanding common
stock) of the fair value of one share of common stock on the date of grant. As
of December 31, 2008, 838,000 options were outstanding under the 2000 Plan, all
of which were exercisable.
In June
1998, we adopted our 1998 Stock Option Plan (the 1998 Plan). The aggregate
number of shares of common stock for which options may be granted under the 1998
Plan is 3,000,000. The maximum number of options which may be granted to an
employee during any calendar year under the 1998 Plan is 400,000. The term of
these non-transferable stock options may not exceed ten years. The exercise
price of these stock options may not be less than 100% (110% if the person
granted such options owns more than ten percent of our outstanding common stock)
of the fair value of one share of common stock on the date of grant. As of
December 31, 2008, 1,100,000 options were outstanding under the 1998 Plan, of
which 1,079,376 were exercisable.
Certain
Relationships and Related Transactions
Lalit
Dhadphale, our President and Chief Executive Officer, and Cape Bear Partners
LLC, a 5% or greater stockholder, have guaranteed HW’s obligations under certain
HW convertible promissory notes with a principal value of $1,200,000, which
notes we assumed in connection with the share exchange transaction.
We occupy
approximately 16,000 square feet of office and storage space under a Commercial
Sublease Agreement with Masters Healthcare, LLC, one of our principal
suppliers.
Ron
Ferguson, former HW director, has personally guaranteed HW’s obligations to
supplier Prescription Supply Inc. Mr. Ferguson is the spouse of Diane Ferguson,
a stockholder of our company.
Description
of Securities
The
following is a summary description of our capital stock and certain provisions
of our Certificate of Incorporation and Amended and Restated
By-Laws. The following discussion is qualified in its entirety by
reference to the actual documents, copies of which can be obtained through our
public filings on the SEC’s website at “www.sec.gov.”
General
Our
authorized capital stock consists of 750,000,000 shares of common stock, par
value $.001 per share, and 1,000,000 shares of preferred stock, par value $.001
per share. 200,000 shares of the preferred stock have been designated as series
A preferred stock. As of May 14, 2009, we had issued and
outstanding:
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202,783,573
shares of common stock,
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155,557
shares of series A preferred stock, convertible into 1,555,570 shares of
common stock,
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stock
options to purchase 686,500 shares of common stock,
and
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warrants
to purchase 275,000 shares of common
stock.
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We have
reserved (i) 11,250,000 shares of common stock for issuance pursuant
to our stock option plans, (ii) 275,000 shares of common stock for
issuance pursuant to outstanding warrants, and (iii) 2,000,000 shares of common
stock for issuance upon conversion of our series A preferred stock.
In
connection with the share exchange transaction, we assumed HW’s rights and
obligations under certain HW warrants to purchase common stock, exercisable for
up to 8,068,197 shares of our common stock, and certain HW
convertible promissory notes with a principal value of $1,200,000, convertible
for up to 15,855,227 shares of our common stock.
Common
Stock
Holders
of common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of stockholders. Holders of common stock are
entitled to receive ratably such dividends as may be declared by our board of
directors out of funds legally available therefore. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in the assets remaining after payment of liabilities and of the
series A preferred stock liquidation preference. Holders of common stock have no
preemptive, conversion or redemption rights. All of the outstanding shares of
common stock are fully-paid and nonassessable.
Preferred
Stock
Each
share of series A preferred stock is convertible into 10 shares of common stock
at the conversion price of $0.18 per share of common stock. The series A
preferred stock is non-voting, has a standard liquidation preference equal to
its purchase price ($1.80 per share), and does not pay dividends. In addition,
the consent of holders of a majority of the outstanding shares of series A
preferred stock is required in connection with certain corporate actions,
including the issuance of any of our common stock; however, holders of a
majority of the outstanding shares of series A preferred stock have entered into
a voting agreement and irrevocable proxy, granting to us the power to approve
the authorization and issuance of any shares on behalf of such holders. Holders
of series A preferred stock have no preemptive or redemption rights. All of the
outstanding shares of series A preferred stock are fully-paid and
nonassessable.
In
addition, our board of directors may, without stockholder approval, establish
and issue shares of one or more classes or series of preferred stock having the
designations, number of shares, dividend rates, liquidation preferences,
redemption provisions, sinking fund provisions, conversion rights, voting rights
and other rights, preferences and limitations that our board may determine. The
board may authorize the issuance of preferred stock with voting, conversion and
economic rights senior to our common stock so that the issuance of preferred
stock could adversely affect the market value of the common stock. The creation
of one or more additional series of preferred stock may adversely affect the
voting power or other rights of the holders of common stock. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things and under
some circumstances, have the effect of delaying, deferring or preventing a
change in control without any action by stockholders.
Warrants
On August
14, 2007, in connection with the issuance of promissory notes related parties,
we issued to the note holders warrants to purchase an aggregate of 175,000
shares of common stock for $0.05 per share. The warrants expire on August 13,
2009.
On
September 10, 2007, in connection with the issuance of a promissory note, we
issued to the note holder warrants to purchase an aggregate of 100,000 shares of
common stock for $0.05 per share. The warrants expire on September 9,
2009.
Stock
Options
Under our
1998 Plan, 2000 Plan and 2006 Plan, we have outstanding stock options to
purchase 686,500 shares of common stock. See also “Stock Option
Plans.”
Market
Price and Dividends on Common Equity and Related Stockholder
Matters
Trading
Information
Our
common stock trades in the over-the-counter market and is quoted on the OTC
Bulletin Board under the trading symbol IONN.OB. At the time we
change our corporate name to HealthWarehouse.com, Inc., we will also obtain a
new ticker symbol for quotation on the OTC Bulletin Board.
Upon
satisfaction of all necessary initial listing requirements, we intend to apply
to list our common stock on the American Stock Exchange or the Nasdaq Capital
Market. We cannot assure you that we will satisfy the initial listing
requirements, or that our shares of common stock will ever be listed on a
national securities exchange or Nasdaq.
Transfer
Agent
The
transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company, New York, New York.
Holders
of Record
As of May
14, 2009, there were approximately 435 holders of record of our common
stock.
Dividends
We have
not paid any dividends on our common stock and we do not intend to pay any
dividends on our common stock in the foreseeable future.
Indemnification
of Directors and Officers
Our
certificate of incorporation provides that no director of our company will be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director’s duty of loyalty to us or our stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit.
We have
been advised that it is the position of the SEC that insofar as the foregoing
provisions may be invoked to disclaim liability for damages arising under the
Securities Act of 1933, as amended, that such provisions are against public
policy as expressed in the Securities Act and are therefore
unenforceable.
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Item
3.02.
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Unregistered
Sales of Equity Securities.
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On May
14, 2009, at the closing of the share exchange transaction, we issued an
aggregate of 155,194,563 shares of our common stock to the former stockholders
of HW. The shares of our common stock issued to former holders of HW capital
stock in connection with the share exchange transaction were exempt from
registration under Section 4(2) of the Securities Act of 1933 as a sale by an
issuer not involving a public offering or under Regulation D promulgated
pursuant to the Securities Act of 1933. The common stock was not
registered under the Securities Act, or the securities laws of any state, and
was offered and sold in reliance on the exemption from registration afforded by
Section 4(2) and Regulation D (Rule 506) under the Securities Act and
corresponding provisions of state securities laws, which exempts transactions by
an issuer not involving any public offering. Such securities may not
be offered or sold in the United States absent registration or an applicable
exemption from the registration requirements and certificates evidencing such
shares contain a legend stating the same.
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Item
5.01.
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Change
in Control of Registrant.
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The
information set forth above in Items 1.01 and 2.01 (Entry into a Material
Definitive Agreement; Completion of Acquisition or Disposition of Assets) of
this current report on Form 8-K is incorporated herein by reference in its
entirety.
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Item
5.02.
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Departure
of Directors or Certain Officers; Election of Directors; Appointment of
Certain Officers; Compensatory Arrangements of Certain
Officers.
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The
information set forth above in Items 1.01 and 2.01 (Entry into a Material
Definitive Agreement; Completion of Acquisition or Disposition of Assets) of
this current report on Form 8-K is incorporated herein by reference in its
entirety.
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Item
5.06.
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Change
in Shell Company Status.
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As a
result of the completion of the share exchange transaction described in Items
1.01 and 2.01 (Entry into a Material Definitive Agreement; Completion of
Acquisition or Disposition of Assets) of this current report on Form 8-K, which
is incorporated herein in its entirety, we ceased being a “shell company,” as
defined in Rule 12b-2 under the Securities Exchange Act of 1934, as
amended.
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Item
9.01.
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Financial
Statements and Exhibits.
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(a) Financial Statements of
Businesses Acquired.
The
audited financial statements of HW for the years ended December 31, 2008 and
December 31, 2007 are incorporated herein by reference to Exhibit 99.1 to this
current report.
(b) Pro Forma Financial
Information.
On May
14, 2009, we acquired HW in a share exchange transaction. The unaudited pro
forma combined financial data incorporated herein by reference to Exhibit 99.2
to this current report is derived from the historical financial statements of
HW, which are included in this report, and our historical financial
statements.
The
unaudited pro forma combined balance sheet information is presented on an as
adjusted basis as if the above business combination had occurred on January 1,
2008.
The
unaudited pro forma combined statement of operations for the year ended December
31, 2008 combines the historical audited statement of operations for HW for the
year then ended with our historical statement of operations for the year
then ended. The unaudited pro forma combined statements of operations give
effect to the merger as if the above business combination had occurred on
January 1, 2008.
The
combination of HW with us has been accounted for as a reverse acquisition and,
as explained in the notes to the unaudited proforma statements, HW is considered
the accounting acquirer.
The pro
forma adjustments are based on currently available information and upon
assumptions that our management believes are reasonable under the
circumstances.
You
should read the pro forma statements in conjunction
with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Item 2.01, and the financial statements and related
notes contained in the audited historical financial statements of
HW.
The
unaudited pro forma combined financial statements are provided for illustrative
purposes only. They do not purport to represent what the results of operations
and financial position of the combined entities would have been had the business
combination actually occurred as of the dates indicated, and they do not purport
to project or predict the future results of operations or financial position of
the combined entities.
(c) Shell Company
Transactions. See paragraphs (a) and (b) above.
(d) Exhibits.
The
exhibits listed in the following Exhibit Index are filed as part of this current
report.
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Exhibit No.
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Description
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2.1
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Share
Exchange Agreement, dated May 14, 2009, between Clacendix, Inc. and
HealthWarehouse.com, Inc.
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3.1
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Certificate
of Incorporation of the Company, as amended through December 31, 2005.
(2)
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3.2
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Certificate
of Amendment of the Certificate of Incorporation of Clacendix, Inc., filed
on July 15, 2008. (3)
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3.3
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By-Laws
of the Company. (1)
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21.1
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Subsidiaries
of the Registrant.
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23.1
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Consent
of Clark, Schaefer, Hackett & Co., independent
auditors.
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99.1
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Financial
statements of HealthWarehouse.com, Inc. for the years ended December 31,
2008 and 2007.
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99.2
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Unaudited
pro forma combined financial statements as of and for the year ended
December 31, 2008.
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99.3
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Press
release, issued May 14, 2009, announcing the share exchange
transaction.
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(1)
Incorporated by reference to the Company's Registration Statement on Form S-8
filed on April 22, 1999.
(2)
Incorporated by reference to the Company’s Annual Report on Form 10-KSB filed on
March 29, 2006.
(3)
Incorporated by reference to the Company’s Annual Report on Form 10-K/A filed on
May 14, 2009.
SIGNATURES
Pursuant
to the requirements 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.
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Date: May
14, 2009
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CLACENDIX,
INC.
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By:
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/s/ Lalit Dhadphale
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Lalit
Dhadphale
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President
and Chief Executive Officer
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