Introduction
On May
15, 2009, we filed a Current Report on Form 8-K describing, in Items 1.01 and
2.01 thereof, our entry into a Securities Exchange Agreement on May 14, 2009,
pursuant to which we acquired all the outstanding capital stock of
HealthWarehouse.com, Inc., a Delaware corporation (HW). This Amendment No. 1 to
the Current Report on Form 8-K is being filed to amend Items 1.01 and 2.01 to
add a discussion under Management’s Discussion and Analysis of Financial
Condition and Results of Operation of HW’s financial performance as of and for
the three months ended March 31, 2009, to make minor corrections to and update
the table and associated footnotes under Security Ownership of Certain
Beneficial Owners and Management to reflect stock option issuances since the
original filing on May 15, 2009, to describe the 2009 Incentive Compensation
Plan that was adopted since the original filing on May 15, 2009 and to update
the Description of Securities to reflect stock option issuances since the
original filing on May 15, 2009, to add a new exhibit 10.1 – Clacendix, Inc.
2009 Incentive Compensation Plan, to add a new exhibit 99.4 - HW’s unaudited
financial statements as of March 31, 2009 and for the three months ended
March 31, 2009 and 2008, and to add a new exhibit 99.5 - unaudited pro forma
combined financial statements as of and for the three months ended March 31,
2009.
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. 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:
|
|
·
|
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
|
|
|
·
|
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
March 31, 2009, the Company had a deferred tax asset primarily relating to
federal net operating loss carry forwards 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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●
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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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|
●
|
adverse
results of any legal proceedings,
|
|
|
●
|
the
volatility of our operating results and financial
condition,
|
|
|
●
|
inability
to attract or retain qualified senior management personnel,
and
|
|
|
●
|
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);
|
|
|
·
|
diabetic
supplies including glucometers, lancets, syringes and test
strips;
|
|
|
·
|
OTC
medications covering a range of conditions from allergy and sinus to pain
and fever to smoking cessation
aids;
|
|
|
·
|
home
medical supplies including incontinence supplies, first aid kits and
mobility aids; and
|
|
|
·
|
diet
and nutritional products including supplements, weight loss aids, and
vitamins and minerals.
|
Our
objective is to 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
Three
months ended March 31, 2009 compared three months ended March 31,
2008.
| |
|
Three
Months
Ended
March 31,
2009
|
|
|
%
of
Revenue
|
|
|
Three
Months
Ended
March 31,
2008
|
|
|
%
of
Revenue
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
756,171 |
|
|
|
100.00 |
% |
|
$ |
109,349 |
|
|
|
100.00 |
% |
|
Cost
of Sales
|
|
|
573,689 |
|
|
|
75.86 |
% |
|
|
77,918 |
|
|
|
71.26 |
% |
|
Gross
Profit
|
|
|
182,482 |
|
|
|
24.14 |
% |
|
|
31,431 |
|
|
|
28.74 |
% |
|
Selling,
general and administrative expenses
|
|
|
359,899 |
|
|
|
47.5 |
% |
|
|
105,942 |
|
|
|
96.88 |
% |
|
Income
from operations
|
|
|
(177,417 |
) |
|
|
(23.4 |
)% |
|
|
(74,512 |
) |
|
|
(68.14 |
)% |
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
375 |
|
|
|
0.00 |
% |
|
|
- |
|
|
|
0.00 |
% |
|
Net
Loss
|
|
$ |
(177,042 |
) |
|
|
(23.4 |
)% |
|
$ |
(74,512 |
) |
|
|
(68.14 |
)% |
Revenue
| |
|
Three
months
ended
March
31,
2009
|
|
|
%
Change
|
|
|
Three
months
ended
March
31,
2008
|
|
|
Total
revenue
|
|
$ |
756,171 |
|
|
|
691.9
|
% |
|
$ |
109,349 |
|
|
Total
customer orders shipped
|
|
|
15,723 |
|
|
|
674.8
|
% |
|
|
2,330 |
|
|
Total
average net sales per order
|
|
$ |
48.37 |
|
|
|
(9.8 |
)% |
|
$ |
53.64 |
|
Revenues
for the three months ended March 31, 2009 grew to $756,171 from $109,349 for the
three months ended March 31, 2008. Revenues increased for the three months ended
March 31, 2009 compared to corresponding period in the prior year as a result of
an increase in order volume. This increase is due primarily to the maturing of
business activities from a company with limited operating activities after the
initial rollout of the business model during 2008 the impact of increased
advertising additional licenses to sell prescription drugs increased to 36 by
the end of March 2009.
Another
indicator of increased business activity was that our website attracted over
225,000 visits with over 885,000 pageviews during the first three months of 2009
compared to fewer than 50,000 visits and more than 163,000 pageviews during the
first three months of 2008.
Costs
and Expenses
Cost
of Sales and Gross Margin
| |
|
Three
months
ended
March
31,
2009
|
|
|
%
Change
|
|
|
Three
months
ended
March 31,
2008
|
|
|
Total
cost of sales
|
|
$ |
573,689 |
|
|
|
636.3
|
% |
|
$ |
77,918 |
|
|
Total
gross profit dollars
|
|
$ |
182,482 |
|
|
|
481.8
|
% |
|
$ |
31,431 |
|
|
Total
gross margin percentage
|
|
|
24.2
|
% |
|
|
|
|
|
|
28.7
|
% |
Total
cost of sales increased for the three months ended March 31, 2009 as compared to
the three months ended March 31, 2008 as a result of growth in order volume and
revenue. Gross margin percentage decreased year-over-year from 28.7% for the
three months ended March 31, 2008 to 24.2% for the three months ended March 31,
2009, due to a more representative relationship between revenues and cost of
sales per our business model as the amount of low priced generic products became
a larger portion of our mix of revenues.
Selling,
General and Administrative Expenses
| |
|
Three
months
ended
March
31,
2009
|
|
|
%
Change
|
|
|
Three
months
ended
March
31,
2008
|
|
|
Selling,
general and administrative expenses
|
|
$ |
359,899 |
|
|
|
339.8 |
% |
|
$ |
105,942 |
|
|
Percentage
of revenue
|
|
|
47.5 |
% |
|
|
|
|
|
|
96.9 |
% |
Selling,
general and administrative expenses increased by $253,957 in the three months
ended March 31, 2009 compared to the same period during 2008; however, as a
percentage of revenue there was a decline of 49.4% during the same periods. The
expense increases are due primarily to expenses related to the maturing of
business activities including increases of approximately $255,000 for payroll,
advertising, shipping and fulfillment expenses related to revenue growth
compared to the first quarter of 2008.
Year
ended December 31, 2008 compared 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 |
|
|
|
100.00 |
% |
|
Cost
of Sales
|
|
|
970,627 |
|
|
|
76.40 |
% |
|
|
32,433 |
|
|
|
55.50 |
% |
|
Gross
Profit
|
|
|
299,900 |
|
|
|
23.60 |
% |
|
|
27,129 |
|
|
|
45.50 |
% |
|
Selling,
general and administrative expenses
|
|
|
969,837 |
|
|
|
76.30 |
% |
|
|
37,786 |
|
|
|
63.40 |
% |
|
Income
from operations
|
|
|
(669,937 |
) |
|
|
(52.70 |
)% |
|
|
(10,657 |
) |
|
|
(17.90 |
)% |
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,636 |
|
|
|
0.20 |
% |
|
|
- |
|
|
|
0.00 |
% |
|
Net
Loss
|
|
$ |
(667,301 |
) |
|
|
(52.50 |
)% |
|
$ |
(10,657 |
) |
|
|
(17.90 |
)% |
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.
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 23.6% 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 22, 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 (7)
|
|
|
38,814,992 |
|
|
|
20.62 |
% |
| |
|
|
|
|
|
|
|
|
|
Patrick
E. Delaney (8)
|
|
|
2,609,100 |
|
|
|
1.37 |
% |
| |
|
|
|
|
|
|
|
|
|
Wayne
A. Corona (9)
|
|
|
6,631,325 |
|
|
|
3.50 |
% |
| |
|
|
|
|
|
|
|
|
|
Stephen
M. Deixler (10)
|
|
|
2,741,016 |
|
|
|
1.45 |
% |
| |
|
|
|
|
|
|
|
|
|
Norman
E. Corn (8)
|
|
|
2,620,596 |
|
|
|
1.37 |
% |
| |
|
|
|
|
|
|
|
|
|
All
executive officers and directors as a group (5 persons)
|
|
|
53,417,029 |
|
|
|
27.45 |
% |
|
|
(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. Does not include stock options to purchase
5,000,000 shares of common stock that are not currently exercisable. Jason
Smith is the Manager 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)
|
Does
not include stock options to purchase 5,000,000 shares of common stock
that are not currently exercisable.
|
|
|
(8)
|
Includes
stock options to purchase 2,359,000 shares of common stock. Does not
include stock options to purchase 2,109,000 shares of common stock that
are not currently exercisable.
|
|
|
(9)
|
Includes
991,005 shares of common stock issuable upon conversion of HW convertible
promissory notes. Does not include stock options to purchase 5,000,000
shares of common stock that are not currently
exercisable.
|
|
|
(10)
|
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
|
|
|
|
|
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Stephen
M. Deixler
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73
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Director
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Norman
E. Corn
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62
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Director
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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.