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HEALTHWAREHOUSE.COM, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

 

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements			1
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			14
ITEM 4T. Controls and Procedures			14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings			16
ITEM 1A. Risk Factors			16
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			16
ITEM 3. Defaults upon Senior Securities			16
ITEM 4. Removed and Reserved			16
ITEM 5. Other Information			16
ITEM 6. Exhibits			16
SIGNATURES			17

 

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HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31, 2010 (unaudited)				December 31, 2009
Assets
Current assets
Cash		$	-			$	191,181
Accounts receivable			518,981				277,716
Inventories			603,417				388,748
Prepaid expenses and other current assets			128,941				190,999
Total current assets		$	1,251,339			$	1,048,644
Property and equipment, net			312,645				318,793
Website development costs, net of accumulated amortization of  $64,325 and $39,275			136,071				161,121
Total  assets		$	1,700,055			$	1,528,558
Liabilities and Stockholders’ Deficiency
Current liabilities
Accounts payable – related parties		$	288,764			$	73,254
Accounts payable – trade			853,745				802,607
Accrued expenses			98,611				72,766
Note payable, net of deferred debt discount of  $116,570 and $ 157,713  at March 31, 2010 and December 31, 2009, respectively			398,430				357,287
Note payable, related party			54,000				-
Total current liabilities		$	1,693,550			$	1,305,914
Convertible notes, net of deferred debt discount of  $ 25,057 and $30,737 at March 31, 2010 and December 31, 2009, respectively			574,943				594,263
Total liabilities		$	2,268,493			$	1,900,177
Commitments and contingencies
Stockholders’ deficiency
Preferred stock – par value $.001 per share; authorized 1,000,000 shares; 200,000 shares designated Series A; 107,501 shares issued and outstanding (aggregate liquidation preference $172,016)			108				108
Common stock – par value $.001 per share; authorized 750,000,000 shares; 197,965,731 and197,635,349  shares issued and outstanding			197,965				197,635
Additional paid-in capital			2,669,855				2,548,098
Accumulated deficit			(3,436,366	)			(3,117,460	)
Total stockholders’ deficiency			(568,438	)			(371,619)
Total liabilities and stockholders’ deficiency		$	1,700,055			$	1,528,558

 

 

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HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

		For the Quarter Ended March 31, 2010				For the Quarter Ended March 31, 2009
Net sales		$	1,235,514			$	756,171
Cost of sales			607,415				573,689
Gross profit			628,099				182,482
Operating expenses:
Selling, general and administrative expenses			880,783				624,899
Loss from operations			(252,684	)			(442,417	)
Interest income/(expense)			(66,222	)			-
Other income (expense)			-				375
Net loss		$	(318,906	)		$	(442,042	)
Per share data:
Net loss per common share
Basic and diluted		$	(0.01	)		$	(0.00	)
Weighted average number of common shares outstanding
Basic and diluted			197,815,224				154,876,449

 

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HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		For the Three Months Ended March 31, 2010				For the Three Months Ended March 31, 2009
Cash flows from operating activities
Net loss		$	(318,906	)		$	(442,042	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			22,122				10,612
Amortization of web development costs			25,050				-
Non-cash stock-based compensation			97,089				-
Amortization of deferred debt discount			46,823				-
Changes in operating assets and liabilities:
Accounts receivable			(241,265	)			(14,779	)
Inventories			(214,669	)			(27,507	)
Prepaid expenses and other current assets			62,057				-
Accounts payable – trade			51,138				169,641
Accounts payable – related parties			215,510				365,288
Accrued expenses			25,844				-
Net cash (used in) provided by operating activities			(229,207	)			61,213
Cash flow from investing activities
Acquisition of property and equipment			(15,974	)			(45,570	)
Net cash (used in) investing activities			(15,974)				(45,570)
Cash flows from financing activities
Proceeds from sale of common stock			-				50,196
Advances from former director			54,000				-
Net cash provided by financing activities			54,000				50,196
Net (decrease) increase in cash			(191,181	)			65,839
Cash – beginning of period			191,181				357,938
Cash – end of period		$	-			$	423,777
Non-cash investing and financing activities:
Conversion of debt to common stock		$	25,000			$	-

 

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These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the company as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

3. Summary of Significant Accounting Policies

 

Principles of Consolidation

The condensed consolidated financial statements include the accounts of HealthWarehouse.com, Inc. Hwareh.com, Inc., ION Holding NV, and ION Belgium NV its wholly-owned inactive subsidiaries. All material inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  The Company’s significant estimates include depreciation, stock-based compensation, valuation of warrants, and deferred tax assets, which have been offset by a valuation allowance because it is more likely than not that the deferred tax assets will not be realized in future periods.

Reclassifications

 

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

 

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Stock-based compensation was recorded in the condensed consolidated statements of operations in selling general and administrative line item and totaled $97,089 and $0 for the three months ended March 31, 2010 and 2009, respectively.

The fair value of stock-based payment awards was estimated using the Black-Scholes pricing model with the following assumptions and weighted average fair values ranges as follows:

 

		For the Three Months Ended March 31, 2010
Risk-free interest rate			2.32	%
Dividend yield			N/A
Expected volatility			57.6	%
Expected life in years			6.00
Expected forfeiture rate (through term)			0	%

  

Inventories

 

Inventory consists primarily of finished goods. The inventories were stated at the lower of cost (average cost) or market. No reserves for slow moving and obsolete inventories are provided based on historical experience and current product demand. If the Company’s estimate of future demand is not correct or if its customers place significant order cancellations, inventory reserves could be required in the future.

 

4. Convertible Debt

 

During the year ended December 31, 2009, the Company received the proceeds of $1,200,000 relating to certain convertible promissory notes (“Convertible Debentures”).  During the three months ended March 31, 2010 and the three months ended March 31, 2009, the Company recognized $5,680 and $0, respectively, of amortization of the deferred debt discount.  During the three months ended March 31, 2010, Convertible Debentures in the amount of $25,000 were converted to 330,382 shares of common stock.

5. Short Term Debt

On December 15, 2009, we entered into a Loan and Security Agreement (the “Loan Agreement”) with HWH Lending LLC, a Delaware limited liability company (the “Lender”).  Under the terms of the Loan Agreement, we borrowed $515,000 from the Lender on December 15, 2009 (the “First Loan”).  On May 3, 2010, the Company exercised its right to borrow an additional $500,000 (the “Second Loan”) from the Lender upon the Company’s request, after achieving positive cash flow for the month of March.  The proceeds of the Loans will be used for working capital purposes.  Each Loan is evidenced by a promissory note (the “Notes”), and will bear interest at the rate of 12% per annum, payable at maturity.  The Loans are collateralized by substantially all of the Company’s assets.  The maturity date of each Loan is one year from the date of the Loan.  The Loans may be prepaid in whole or in part at any time by us without penalty, upon 15 days notice.

 

In consideration of the each Loan, the Company granted the Lender a warrant to purchase 6,250,000 shares, for a total of 12,500,000 outstanding as of May 13, 2010, of our common stock at a purchase price of $0.08 per share.  Each warrant may be exercised in whole or in part and from time to time for a term of five years from its grant date.  The Lender has customary “piggy-back” registration rights with respect to the common stock issued or issuable upon the exercise of the warrants (the “Warrant Shares”).  In addition, the Lender has demand registration rights with respect to the Warrant Shares, so that upon written request of the Lender, we will be obligated to prepare and file with the U.S. Securities and Exchange Commission a registration statement sufficient to permit the resale of the Warrant Shares.  The Lenders’ registration rights terminate on the date on which all of the Warrant Shares may be sold under Rule 144 of the Securities Act of 1933 without any limitations.  The warrants contain customary anti-dilution and purchase price adjustment provisions. The warrants are transferable in whole or in part, so long as the transfers comply with applicable securities laws. The fair value of the warrants was estimated using the Black Scholes method.  During the three months ended March 31, 2010 and the three months ended March 31, 2009, the Company recognized $41,142 and $0, respectively, of amortization of the deferred debt discount.

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6. Stockholders’ Deficiency

Stock Option Plans

 

On February 10, 2010, the Company granted to consultants options to purchase an aggregate of 1,650,000 shares of common stock with an exercise price of $0.14 per share for a total fair value of approximately $130,000 under a previously approved option plan.

 

Details of the options outstanding under all plans are as follows:

 

8. Related Party Transactions

The Company occupies approximately 16,000 square feet of office and storage space under a Commercial Sublease Agreement with 100 Commerce Boulevard LLC, an entity controlled by Jason Smith.  Mr. Smith is also the Manager of Rock Castle Holdings, LLC, a 10% or greater stockholder in the Company. Mr. Smith is the son of the controlling stockholder of Masters Pharmaceutical, Inc., one of the Company’s principal suppliers from whom the Company purchased $219,716 and $485,997 of supplies during the three months ended March 31, 2010 and 2009, respectively, representing approximately 33.7% and 80.7% of total purchases.  For the three months ended Marcher 31, 2010 and 2009,  The Company had sales to Masters Pharmaceuticals of $49,284 and $0, respectively.  As of March 31, 2010, the Company had amounts due to Masters Pharmaceuticals in the amount of $288,764.

Ron Ferguson, a former Hwareh.com director, has guaranteed the Company’s obligation to supplier Prescription Supply Inc. Mr. Ferguson is the spouse of Diane Ferguson, a stockholder of the Company. The guarantee, and Mr. Ferguson’s maximum exposure under the guarantee, does not have a fixed dollar limit. As of March 31, 2010, there was $1,957 due to Prescription Supply Inc.

During the three months ended March 31, 2010, a former director advanced $54,000 in short term financing to the Company.  The amount was outstanding at March 31,2010.

 9.  New Accounting Pronouncements

In June 2009, the FASB issued ASC810 (prior authoritative literature, SFAS 167 “Amendments to FASB Interpretation No. 46(R)”) ASC810 eliminates Interpretation 46(R)’s exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. ASC810 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying Interpretation 46(R)’s provisions. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. ASC810 is effective January 1, 2010.   The adoption of this pronouncement did not have an impact on the Company’s condensed consolidated financial position and results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

 

On May 14, 2009, we completed a share exchange transaction with Hwareh.com, Inc. pursuant to the terms of a Securities Exchange Agreement, dated as of May 14, 2009. Under the Securities Exchange Agreement, we acquired all the outstanding capital stock of Hwareh.com, Inc. (formerly named HealthWarehouse.com, Inc.). As a result of the exchange, the former stockholders of Hwareh.com, Inc. owned approximately 82.4% of the outstanding shares of our common stock. This transaction was accounted for as a reverse recapitalization, whereby Hwareh.com, Inc. is deemed to be the accounting acquirer for accounting purposes. Following the closing of the share exchange transaction with Hwareh.com, we succeeded to the business of Hwareh.com as our sole line of business.  Effective August 5, 2009, we changed our corporate name to HealthWarehouse.com, Inc.

 

We are a licensed U.S. pharmacy and healthcare e-commerce company that sells discounted brand name and generic prescription drugs and over-the-counter (OTC) medical products. Our web address is http://www.healthwarehouse.com. At present, we sell:

 

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a range of prescription drugs;

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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.

 

Our objective is to make the pharmaceutical supply chain more efficient by eliminating costs and passing on the savings to the consumer.  We are becoming known by consumers as a convenient, reliable, discount provider of over the counter and prescription medications and products. We intend to continue to expand our product line as our business grows. We are presently licensed as a mail-order pharmacy for sales to 45 states and the District of Columbia, and we intend to apply for and obtain licenses to sell prescriptions in all 50 states by June of 2010.

 

We have begun accepting health insurance as part of our prescription program, initially contracting with a limited number of insurance providers based on customer demand and business opportunity. Our customers tend to be under or uninsured consumers who rely on our service for their daily medications.  In addition, due to the savings we pass on to the consumer, our prices are often below insurance co-pay amounts making insurance unnecessary when purchasing from us. We intend to continue expanding the number of health insurance providers that we accept as customer demand warrants.

 

To date, we have incurred operational losses for all historic periods.  We have financed our activities to date through revenues from our online sales, the proceeds from sales of our equity securities in private placement financings and the proceeds from the issuance of our promissory notes in private financings.

 

Selling, General and Administrative Expenses

 

		The three months ended March 31, 2010				% Change				The three months ended December 31, 2009
Selling, general and administrative expenses		$	880,783				40.8	%		$	624,899
Percentage of revenue			71.2	%			(11.4	)%			82.6	%

Selling, general and administrative expenses increased by $255,485 in the three months ended March 31, 2010 compared to the same period in 2009, an increase of 40.8%.  Expense increases were due primarily to an increase of revenue of $503,925, including increased expenses for payroll, advertising, legal, shipping and fulfillment expenses. In addition the Company recognized $97,089 for non-cash based stock compensation expense for the three months ended March 31, 2010 compared to zero in the three months ended March 31, 2009. The recognition of non-cash stock compensation expense accounted for 15.4% of the total increase of 40.8% increase in selling, general and administrative expenses.

 

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Off-Balance Sheet Arrangements

 

We have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations.

Impact of Inflation

 

We believe that inflation has not had a material impact on our results of operations for the quarters ended March 31, 2010 and 2009. We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.

 

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PART II. OTHER INFORMATION

 

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 SIGNATURES

 

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

 

Dated:  May 17, 2010

 

	HEALTHWAREHOUSE.COM, INC.
	By:	/s/ Lalit Dhadphale
		Lalit Dhadphale
		President and Chief Executive Officer
		(principal executive officer)
	By:	/s/ Patrick E. Delaney
		Patrick E. Delaney
		Chief Financial Officer and Treasurer
		(principal financial and accounting officer)

 

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