For the Quarterly Period Ended June 30, 2016

 

 

HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
		June 30,				December 31,
		2016				2015
		(unaudited)
Assets
Current assets:
Cash		$	2,199			$	11,217
Restricted cash			144,929				145,088
Accounts receivable, net of allowance of $47,143 as of June 30, 2016 and
December 31, 2015			47,473				51,627
Inventories - finished goods, net			250,081				182,647
Prepaid expenses and other current assets			69,020				81,718
Total current assets			513,702				472,297
Property and equipment, net of accumulated depreciation of $853,270 and $801,270 as of
June 30, 2016 and December 31, 2015			357,248				409,248
Web development costs, net of accumulated amortization of  $182,825 and $146,448 as of
June 30, 2016 and December 31, 2015			48,185				84,562
Total assets		$	919,135			$	966,107
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable – trade		$	2,321,519			$	2,189,649
Accounts payable – related parties			-				862
Accrued expenses and other current liabilities			428,120				597,665
Equipment lease payable			11,951				46,143
Notes payable and other advances, net of debt discount of $6,889 as of June 30, 2016			1,093,111				991,089
Note payable and other advances – related parties			4,065				23,889
Redeemable preferred stock - Series C; par value $0.001 per share;
10,000 designated Series C: 10,000 issued and outstanding as of
June 30, 2016 and December 31, 2015 (aggregate liquidation preference of $1,000,000)			1,000,000				1,000,000
Total current liabilities			4,858,766				4,849,297
Total liabilities			4,858,766				4,849,297
Commitments and contingencies
Stockholders' deficiency:
Preferred stock – par value $0.001 per share; authorized 1,000,000 shares; issued and outstanding
as of June 30, 2016 and December 31, 2015 as follows:
Convertible preferred stock - Series A – 200,000 shares designated Series A; 44,443 shares available
to be issued; no shares issued and outstanding			-				-
Convertible preferred stock - Series B – 625,000 shares designated Series B; 517,359 and 483,512
shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively (aggregate
liquidation preference of $5,060,159 and $4,889,043 as of June 30, 2016 and			517				484
December 31, 2015, respectively)
Common stock – par value $0.001 per share; authorized 100,000,000 shares; 38,872,616 and 38,844,374
shares issued and 37,693,404 and 37,665,162 shares outstanding as of June 30, 2016 and
December 31, 2015, respectively			38,872				38,844
Additional paid-in capital			31,104,329				30,656,598
Treasury stock, at cost, 1,179,212 shares as of  June 30, 2016 and December 31, 2015			(3,419,715	)			(3,419,715	)
Accumulated deficit			(31,663,634	)			(31,159,401	)
Total stockholders' deficiency			(3,939,631	)			(3,883,190	)
Total liabilities and stockholders' deficiency		$	919,135			$	966,107
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

 

 

 

 

HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
		For the Three Months Ended								For the Six Months Ended
		June 30								June 30
		2016				2015				2016				2015
Net sales		$	2,403,974			$	1,870,840			$	4,751,772			$	3,483,517
Cost of sales			858,836				618,391				1,750,656				1,249,554
Gross profit			1,545,138				1,252,449				3,001,116				2,233,963
Operating expenses:
Selling, general and administrative expenses			1,599,515				1,286,925				3,283,231				2,394,475
Net loss from operations			(54,377	)			(34,476	)			(282,115	)			(160,512	)
Other expense:
Gain on settlement of accounts payable			2,445				-				2,445				-
Interest expense			(27,529	)			(45,205	)			(53,448	)			(119,957	)
Total other expense			(25,084	)			(45,205	)			(51,003	)			(119,957	)
Net loss			(79,461	)			(79,681	)			(333,118	)			(280,469	)
Preferred stock:
Series B convertible contractual dividends			(85,558	)			(79,961	)			(171,116	)			(159,922	)
Loss attributable to common stockholders		$	(165,019	)		$	(159,642	)		$	(504,234	)		$	(440,391	)
Per share data:
Net loss – basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.01	)		$	(0.01	)
Series B convertible contractual dividends			(0.00	)			(0.00	)			(0.00	)			(0.00	)
Net loss attributable to common stockholders - basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.01	)		$	(0.01	)
Weighted average number of common shares outstanding - basic and diluted			37,684,714				37,570,383				37,674,938				37,570,383

 

 

 

 

 

 

 

 

 

 

HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
		For the Six Months Ended
		June 30
		2016				2015
Cash flows from operating activities
Net loss		$	(333,118	)		$	(280,469	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for employee advance reserve			-				2,143
Depreciation and amortization			88,377				91,974
Stock-based compensation			112,439				198,568
Gain on settlement of accounts payable			(2,445	)			(87,969	)
Amortization of debt discount			8,611				79,767
Changes in operating assets and liabilities:
Accounts receivable			4,154				(9,821	)
Inventories - finished goods			(67,434	)			(32,864	)
Prepaid expenses and other current assets			12,698				13,571
Accounts payable – trade			134,315				(181,835	)
Accounts payable – related parties			(862	)			(20,000	)
Accrued expenses and other current liabilities			(20,807	)			(59,113	)
Deferred revenue			-				(1,995	)
Net cash used in operating activities			(64,072	)			(288,043	)
Cash flows from investing activities
Change in restricted cash			159				75,000
Capital expenditures			-				(5,539	)
Website development costs			-				(17,937	)
Net cash provided by investing activities			159				51,524
Cash flows from financing activities
Principal payments on equipment leases payable			(34,192	)			(31,261	)
Proceeds from issuance of notes payable			108,911				-
Repayment of notes payable			(19,824	)			(15,000	)
Net cash provided by (used in) financing activities			54,895				(46,261	)
Net decrease in cash			(9,018	)			(282,780	)
Cash - beginning of period			11,217				506,019
Cash - end of period		$	2,199			$	223,239
Cash paid for:
Interest		$	44,836			$	38,900
Non-cash investing and financing activities:
Issuance of Series B preferred stock for settlement of accrued dividends		$	319,854			$	298,918
Warrants issued as debt discount in connection with notes payable		$	15,500			$	41,300
Accrual of contractual dividends on Series B convertible preferred stock		$	171,116			$	159,922
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

 

 

 

HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

1.  Organization and Basis of Presentation

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated financial statements of the Company as of June 30, 2016 and for the six months ended June 30, 2016 and 2015. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the operating results for the full year ending December 31, 2016 or any other period. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related disclosures of the Company as of December 31, 2015 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on March 25, 2016.

 

2. Going Concern and Management's Liquidity Plans

Since inception, the Company has financed its operations primarily through debt and equity financings and advances from related parties. As of June 30, 2016, the Company had a working capital deficiency of $4,345,064 and an accumulated deficit of $31,663,634.  During the six months ended June 30, 2016 and the year ended December 31, 2015, the Company incurred net losses of $333,118 and $626,682, respectively, and used cash in operating activities of $64,072 and $548,281, respectively.   These conditions raise substantial doubt about the Company's ability to continue as a going concern.

Subsequent to June 30, 2016, the Company continues to incur net losses, use cash in operating activities and experience cash and working capital constraints.

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

The Company recognizes it will need to raise additional capital in order to fund operations, meet its payment obligations, including its obligations under a loan and security agreement (see Note 5), and execute its business plan. There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, attempt to extend note repayments, attempt to negotiate the preferred stock redemption and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.  If the Company is unable to obtain financing on a timely basis, the Company could be forced to sell its assets, discontinue its operation and /or seek reorganization under the U.S. bankruptcy code.

Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not necessarily represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

 

 

 

 

 

3. Summary of Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  The Company's significant estimates include reserves related to accounts receivable and inventory, the recoverability and useful lives of long-lived assets, the valuation allowance related to deferred tax assets, the valuation of equity instruments and debt discounts.

Reclassifications

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

Net Earnings (Loss) Per Share of Common Stock

Basic net earnings (loss) per share is computed by dividing net earnings (loss) attributable to Common Stockholders by the weighted average number of common shares outstanding during the period.  Diluted net earnings (loss) per share reflects the potential dilution that could occur if securities or other instruments to issue Common Stock were exercised or converted into Common Stock.  Potentially dilutive securities are excluded from the computation of diluted net earnings (loss) per share if their inclusion would be anti-dilutive and consist of the following:

		June 30,
		2016				2015
Options			5,109,386				5,008,830
Warrants			10,046,198				9,976,474
Series B Convertible Preferred Stock			5,892,720				5,507,202
Total potentially dilutive shares			21,048,304				20,492,506

4. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

		June 30,				December 31,
		2016				2015
Deferred Rent		$	12,926			$	25,852
Advertising			76,639				76,639
Salaries and Benefits			57,437				64,007
Dividend Payable			171,116				319,854
Accrued Interest			44,249				44,249
Accrued Rent			50,495				49,614
Other			15,258				17,450
Total		$	428,120			$	597,665

 

 

 

 

 

 

 

 

5. Notes Payable

The Company is a party to a Loan and Security Agreement (the "Loan Agreement") with a lender (the "Lender"). Under the terms of the Loan Agreement, the Company borrowed an aggregate of $1,000,000 from the Lender (the "Loan").  The Loan is evidenced by a promissory note (the "Senior Note") in the face amount of $1,000,000 (as amended).     The Senior Note bears interest on the unpaid principal balance of the Note until the full amount of principal has been paid at a floating rate equal to the Prime Rate plus 4.25% per annum (7.75% as of June 30, 2016).  Under the terms of the Loan Agreement, the Company has agreed to make monthly payments of accrued interest on the first day of every month. The principal amount and all unpaid accrued interest on the Note is payable on August 31, 2016, or earlier in the event of default or a sale or liquidation of the Company. The Loan may be prepaid in whole or in part at any time by the Company without penalty.   The Senior Note contains financial covenants which require the Company to meet certain minimum targets for earnings before interest, taxes and non-cash expenses, including depreciation, amortization and stock-based compensation ("EBITDAS").  The Company granted the Lender a first, priority security interest in all of the Company's assets, in order to secure the Company's obligation to repay the Loan, including a Deposit Account Control Agreement, which grants the Lender a security interest in certain bank accounts.  In addition, the Company is required to direct the proceeds of its credit card receipts to a cash collateral account controlled by the Lender.

On January 11, 2016, the Company entered into an Amendment to Promissory Note in the face amount of $100,000 with a different lender, effective October 31, 2015, which extended the maturity date of the note payable from November 1, 2015 to October 31, 2016.  In consideration of the extension of the maturity date of the note payable, the Company issued to the lender a five-year warrant to purchase 75,000 shares of Common Stock at an exercise price of $0.25 per share. The warrants had a fair value of $15,500 using the Black-Scholes model (see note 6) which was established as debt discount during the six months ended June 30, 2016 and is being amortized using the effective interest method over the remaining term of the Promissory Note.   Including the value of the warrants issued in connection with the extension of the maturity date of the Promissory Note, the Promissory Note has an effective interest rate of 23% per annum during the extension period.

The Company recorded amortization of debt discount associated with notes payable of $5,167 and $8,611 for the three and six months ended June 30, 2016, respectively, and $25,250 and $79,767 for the three and six months ended June 30, 2015, respectively.

6. Stockholders' Deficiency

Preferred Stock

As of June 30, 2016 and December 31, 2015, the Company had accrued contractual dividends of $171,116 and $319,853, respectively, related to the Series B Preferred Stock.  On January 1, 2016 and 2015, the Company issued 33,847 and 31,633 shares of Series B convertible preferred stock valued at approximately $320,000 and $299,000, respectively, representing approximately $0.66 in value per share of Series B Preferred Stock outstanding on each date, to the Series B convertible preferred stock holders as payment in kind for dividends.

Stock Options

Valuation

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

		For The Three Months Ended				For The Six Months Ended
		June 30,				June 30,
		2016		2015		2016		2015
Risk free interest rate		1.25%		1.35% to 1.85%		1.25% to 2.12%		1.35% to 1.85%
Dividend yield		0.00%		0.00%		0.00%		0.00%
Expected volatility		200.0%		195.0%		199.0% to 200.0%		195.0%
Expected life in years		5.5		5.5 to 10.0		5.5 to 10.0		5.5 to 10.0

The Company estimated forfeitures at a weighted average annual rate of 3% to 4% for the three and six months ended June 30, 2016 and 2015.

 

 

 

 

 

 

 

Grants

The weighted average fair value of the stock options granted during the three and six months ended June 30, 2016 was $0.29 and $0.26 per share, respectively.  The weighted average fair value of the stock options granted during the three and six months ended June 30, 2015 was $0.09 per share.

During the six months ended June 30, 2016, the Company granted options to consultants and directors of the Company to purchase an aggregate of 267,102 shares of common stock under a previously approved plan at exercise price ranging between $0.24 and $0.29 per share for an aggregate grant date value of $68,380.  The options vested on the grant date and have a term of ten years.

Stock-based compensation expense related to stock options was recorded in the condensed consolidated statements of operations as a component of selling, general and administrative expenses and totaled $37,301 and $112,439 for the three and six months ended June 30, 2016, respectively, and $107,500 and $186,289 for the three and six months ended June 30, 2015, respectively.

As of June 30, 2016, stock-based compensation expense related to stock options of $969,620 remains unamortized, including $77,751 which is being amortized over the weighted average remaining period of 1.9 years.  The remaining $891,569 is related to a performance based option where vesting is currently deemed to be improbable and no amount is being amortized.

Summary

A summary of the stock option activity during the six months ended June 30, 2016 is presented below:

 

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Life				Intrinsic
		Options				Price				In Years				Value
Outstanding, January 1, 2016			5,341,284			$	0.70
Granted			267,102				0.26
Exercised			-				-
Forfeited			(499,000	)			1.62
Outstanding, June 30, 2016			5,109,386			$	0.58				7.5			$	699,666
Exercisable, June 30, 2016			3,931,053			$	0.49				7.6			$	516,200

 

The following table presents information related to stock options at June 30, 2016:

				Options Outstanding								Options Exercisable
				Weighted								Weighted				Weighted
Range of				Average				Outstanding				Average				Average				Exercisable
Exercise				Exercise				Number of				Exercise				Remaining Life				Number of
Price				Price				Options				Price				In Years				Options
$	0.09 - $2.20			$	0.21				4,577,386			$	0.23				7.8				3,649,053
$	2.21 - $3.80				3.31				400,000				2.50				3.4				150,000
$	3.81 - $6.99				5.49				132,000				5.49				5.3				132,000
				$	0.58				5,109,386			$	0.49				7.6				3,931,053

 

 

 

Warrants

Valuation

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

 

		For The Three Months Ended				For The Six Months Ended
		June 30,				June 30,
		2016		2015		2016		2015
Risk free interest rate		n/a		1.26% to 1.68%		1.58%		1.26% to 1.75%
Dividend yield		n/a		0.00%		0.00%		0.00%
Expected volatility		n/a		195.0% to 197.0%		200.0%		195.0% to 197.0%
Contractual term in years		n/a		5.0 to 7.3		5.0		5.0 to 7.5

Grants

The weighted average fair value of the stock warrants granted during the six months ended June 30, 2016 was $0.24 per share.  There were no stock warrants granted during the three months ended June 30, 2016.  The weighted average fair value of the stock warrants granted during the three and six months ended June 30, 2015, was $0.09 and $0.08 per share, respectively.

Exercise

During the three and six months ended June 30, 2016, the Company issued an aggregate of 28,242 shares of Common Stock to a holder of warrants who elected to exercise warrants to purchase 75,000 shares of Common Stock on a "cashless" basis under the terms of the warrants.  The warrants had an exercise price of $0.25 per share.

The aggregate intrinsic value of the warrants exercised was $11,325 for the three and six months ended June 30, 2016.

There was no stock-based compensation expense related to warrants recorded in the three and six months ended June 30, 2016.  Stock-based compensation expense related to warrants for the three and six months ended June 30, 2015 was recorded in the condensed consolidated statements of operations as a component of selling, general and administrative expenses totaled $12,063 and $12,279, respectively.  As of June 30, 2016, stock-based compensation expense related to warrants of $576,840 remains unamortized.  The remaining $576,840 is related to a performance based warrant where vesting is currently deemed to be improbable and no amount is being amortized.

A summary of the stock warrant activity during the six months ended June 30, 2016 is presented below:

 

						Weighted				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Life				Intrinsic
		Warrants				Price				In Years				Value
Outstanding, January 1, 2016			10,046,198			$	0.41
Granted			75,000				0.25
Exercised			(75,000	)			0.25
Forfeited			-				-
Outstanding, June 30, 2016			10,046,198			$	0.40				2.9			$	512,142
Exercisable, June 30, 2016			9,796,198			$	0.34				2.9			$	512,142

 

 

 

 

 

 

 

 

The following table presents information related to stock warrants at June 30, 2016:

				Warrants Outstanding								Warrants Exercisable
				Weighted								Weighted				Weighted
Range of				Average				Outstanding				Average				Average				Exercisable
Exercise				Exercise				Number of				Exercise				Remaining Life				Number of
Price				Price				Warrants				Price				In Years				Warrants
$	0.10 - $0.35			$	0.25				9,496,198			$	0.25				3.0				9,496,198
$	0.36 - $3.00				2.90				520,000				2.90				0.3				270,000
$	3.01 - $4.95				4.95				30,000				4.95				1.3				30,000
$	0.10 - $4.95			$	0.40				10,046,198			$	0.34				2.9				9,796,198

 

7. Commitments and Contingent Liabilities

Operating Leases

The Company is a party to a lease agreement for approximately 28,500 square feet of office and storage space with an entity.  On March 15, 2016, the Company entered into an amendment of the lease agreement which extended the lease for an additional three years.  The amended monthly lease rate will be $5,462 in 2016, $6,649 in 2017, $6,886 in 2018 and $7,124 in 2019.  The lease expires on December 31, 2019.  The Company accounts for rent expense using the straight line method of accounting, deferring the difference between actual rent due and the straight line amount.  Deferred rent payable of $12,926 and $25,852 as of June 30, 2016 and December 31, 2015, respectively, has been included in accrued expenses and other current liabilities on the condensed consolidated balance sheets.

On June 7, 2013, Pagosa signed a three year lease for $1,000 per month to house an office, pharmacy as well as inventory and is located in Lawrenceburg, IN.  On July 8, 2013, the parties agreed to extend the lease for two additional years, such that the new termination date is now June 7, 2018.  On January 14, 2014, the Company closed Pagosa Health and vacated the Lawrenceburg facility. The Company is currently in discussions with the Landlord regarding termination of the lease related to the building.   The present value of the remaining lease payments of $50,495 is reflected as a component of accrued expenses and other liabilities on the condensed consolidated financial statements as of June 30, 2016.

Future minimum payments, by year and in the aggregate, under operating leases as of June 30, 2016 are as follows:

 

For years ending December 31,		Amount
2016		$	38,768
2017			91,783
2018			87,633
2019			85,482
Total future minimum lease payments		$	303,666

 

During the three and six months ended June 30, 2016, the Company recorded aggregate rent expense of $18,564 and $38,838, respectively, and $43,273 and $61,615 (net of sub-lease) during the three and six months ended June 30, 2015, respectively.

Employment Agreement

On May 9, 2016, the Company entered into an employment agreement (the "Employment Agreement") with Mr. Lalit Dhadphale.  The terms of the Employment Agreement include a term of two years beginning on January 1, 2016 with an extension provision, the titles and positions of Chief Executive Officer and President, an initial base salary of $175,000 per year, subject to certain bonus and severance provisions.  Mr. Dhadphale's agreement is bound by restrictive covenants regarding disclosure of confidential information, non-solicitation and employee non-competition.

Litigation

In the ordinary course of business, we may become subject to lawsuits and other claims and proceedings that might arise from litigation matters or regulatory audits. Such matters are subject to uncertainty and outcomes are often not predictable with assurance. Our management does not presently expect that any such matters will have a material adverse effect on the Company's condensed consolidated financial condition or condensed consolidated results of operations.

 

 

 

 

 

On June 7, 2016, Shipping & Transit LLC filed suit against the Company for infringing on certain claims of patents held by Shipping & Transit.  On July 20, 2016, the Company entered into a Settlement, Release and License Agreement whereby the Company paid $11,000 for any past violations and future licensing of the patents.

On May 13, 2016, Taft Stettinius & Hollister, LLP (the "Plaintiff") filed a complaint in the Court of Common Pleas for Hamilton County, Ohio against Healthwarehouse.com, Inc. (the "Company").  The complaint alleges that the Plaintiff provided legal services to the Company beginning in April 2011 until January 2015 and billed the Company in the amount of $936,777, and for which the Company has not made payment. The complaint seeks damages against the Company in the amount of $936,777 plus interest.  The Company is in the process of investigating such claims and intends to defend the action vigorously.  The Company has accounted for this matter in accordance with ASC 450 ("Contingencies").

 

8. Concentrations

During the three months ended June 30, 2016, three vendors represented 45%, 19% and 18% of total inventory purchases and 47%, 17% and 16% of total inventory purchases for the six months ended June 30, 2016.  During the three months ended June 30, 2015, two vendors represented 69% and 11% of total inventory purchases and of total inventory purchases for the six months ended June 30, 2015.

Two vendors represented 41% and 31% of the accounts payable balance as of June 30, 2016.  Two vendors represented 43% and 13% of the accounts payable balance as of December 31, 2015.

9. Subsequent Events

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

Stock Option Grants

On July 6, 2016, the Company granted options to non-employee directors of the Company to purchase an aggregate of 161,804 shares of common stock under the Company's stock equity plan at an exercise price of $0.35 per share for an aggregate grant date value of $55,550.  The options vested on the grant date and have a term of ten years.  The options were granted as part of director compensation approved by the Compensation Committee.

Stock Options Exercised

On July 27, 2016, the Company issued an aggregate of 1,492,078 shares of Common Stock to an officer and the directors of the Company who elected to exercise options to purchase 3,091,475 shares of Common Stock on a cashless basis under the terms of the options.  The options had exercise prices ranging from $0.09 to $0.30 per share.

Stock Warrants Exercised

On July 27, 2016, the Company issued an aggregate of 721,776 shares of Common Stock to an officer of the Company who elected to exercise warrants to purchase 1,125,000 shares of Common Stock on a cashless basis under the terms of the warrants.  The warrants had exercise prices ranging from $0.10 to $0.12 per share.

Common Stock Issuance

On July 28, 2016, the Company entered an Exchange Agreement with Dellave Holdings LLC ("Dellave") whereby the Company issued an aggregate of 2,253,528 shares of Common Stock in exchange for the extinguishment of accounts payable balances totaling $698,594 held by Dellave.  The exchange was based on the prior day's closing price of $0.31.   Mr. Timothy Reilly is the managing member of Dellave.  Mr. Reilly is also the managing member of Melrose Capital Advisors, LLC, the Company's senior lender.

 

 

 

 

The following discussion and analysis of the results of operations and financial condition of HealthWarehouse.com, Inc. (and including its subsidiaries,  the "Company") as of June 30, 2016 and for the six months ended June 30, 2016 and 2015 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. References in this Management's Discussion and Analysis of Financial Condition and Results of Operations to "us," "we," "our," and similar terms refer to the Company. This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words "may," "will," "expect," "believe," "anticipate," "project," "plan," "intend," "estimate," and "continue," and their opposites and similar expressions, are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Factors that may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 7 ("Management's Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Results and Financial Condition") of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission (the "SEC") on March 25, 2016.

 

Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

 

Overview

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

●      with no insurance coverage;
●      with high insurance deductibles or copays;
●      with Medicare Part D plans with high deductibles;with Health Savings Accounts (HSA) or Flexible Savings Accounts (FSA);
●      with insurance through the Affordable Care Act (ACA) with high deductibles;

●      with drug exclusions and quantity restrictions placed by insurance companies.

 

Our objectives are to utilize our proprietary technology to make the pharmaceutical supply chain more efficient and to pass the savings on to the consumer.  We are becoming known by consumers as a convenient, reliable, discount provider of over-the-counter products and prescription medications. We intend to continue to expand our product line as our business grows.

 

 

 

 

 

 

 

Results of Operations

For The Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

		For three months ended				% of				For three months ended				% of
		June 30, 2016				Revenue				June 30, 2015				Revenue
Net sales		$	2,403,974				100.0	%		$	1,870,840				100.0	%
Cost of sales			858,836				35.7	%			618,391				33.1	%
Gross profit			1,545,138				64.3	%			1,252,449				66.9	%
Selling, general & administrative expenses			1,599,515				66.5	%			1,286,925				68.8	%
Loss from operations			(54,377	)			(2.2	%)			(34,476	)			(1.9	%)
Gain on settement of accounts payable			2,445				0.1	%			-				0.0	%
Interest expense			(27,529	)			(1.1	%)			(45,205	)			(2.4	%)
Net loss		$	(79,461	)			(3.3	%)		$	(79,681	)			(4.3	%)

Net Sales

For three months ended June 30, 2016				% Change				$ Change				For three months ended June 30, 2015
$	2,403,974				28.5	%		$	533,134			$	1,870,840

The Company continues to benefit from being prominently featured in two nationally recognized consumer magazines during the fourth quarter of 2015 as having the lowest price among top US Pharmacies for five commonly prescribed medications. In 2016, those articles and subsequent articles continue to be featured and rebroadcasted by the national media outlets as the cost of prescription drugs has developed into a national issue.  The favorable articles had an immediate impact on new customer acquisition and order volume beginning in December 2015 with combined consumer prescription and over-the-counter orders from new customers in June 2016 increasing by 85% in comparison to order levels in October 2015, prior to the release of the articles.  This trend in new customer acquisition growth has positively impacted repeat customer orders which increased during the first and second quarters of 2016 and we believe will continue through the remainder of 2016 as the Company will continue to focus on customer acquisition, conversion and retention.

Cost of Sales and Gross Margin

		For three months ended				%				$				For three months ended
		June 30, 2016				Change				Change				June 30, 2015
Cost of sales		$	858,836				38.9	%		$	240,445			$	618,391
Gross margin $		$	1,545,138				23.4	%		$	292,689			$	1,252,449
Gross margin %			64.3	%			-3.9	%			-2.6	%			66.9	%

 

 

 

 

 

Cost of sales were $858,836 for the three months ended June 30, 2016 as compared to $618,391 for the three months ended June 30, 2015, an increase of $240,445, or 38.9%, primarily as a result of an increase in consumer prescription and over-the-counter order volume offset by a reduction in business-to-business orders. Gross margin percentage decreased from 66.9% for the three months ended June 30, 2015 to 64.3% for the three months ended June 30, 2016, primarily due to one-time higher margin business-to-business opportunities in 2015.  There was minimal change in the gross margins on the core consumer prescription and over-the-counter business during the quarter.  Management will continue to focus its advertising and operational efforts on promoting and offering its higher margin product lines to consumers and strategic purchasing efforts to further improve costs.

Selling, General and Administrative Expenses

			For three months ended				%				$				For three months ended
			June 30, 2016				Change				Change				June 30, 2015
S,G&A			$	1,599,515				24.3	%		$	312,590			$	1,286,925
% of sales				66.5	%											68.8	%

Selling, general and administrative expenses totaled $1,599,515 for the three months ended June 30, 2016 compared to $1,286,925 for the three months ended June 30, 2015, an increase of $312,590, or 24.3%.  The three months ended June 30, 2016 expense increases included (a) an increase in salary expense of $150,969 (primarily due to an increase  in headcount to process higher levels of call and order volumes, reduced efficiency of pharmacy staff due to higher level of new customer orders and the addition of the Chief Financial Officer);  (b) an increase in freight expense of $125,905 (due to higher volume and higher expedited shipping cost);  (c) an increase in legal expense of $62,216 (primarily related to proxy materials for the 2016 annual meeting, litigation and shareholder services);  (d) an increase in investor and public relations expenses of $31,745 (primarily due to an increase in promotion campaigns and investor conference participation); and (e) an increase in credit card processing expense of $31,022 (primarily due to the increase in order volume).  These expense increases were partially offset by an $82,262 reduction in stock based compensation.  We will continue to focus on controlling costs and improving efficiencies of our personnel to limit the future growth in expenses.

Interest Expense

Interest expense decreased from $45,205 in the three months ended June 30, 2015 to $27,529 in the three months ended June 30, 2016, a decrease of $17,676, or 39.1%, primarily due to a decrease in amortization of debt discounts, partially offset by higher notes payable balances and interest rates.

 

For The Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

 

		For six months ended				% of				For six months ended				% of
		June 30, 2016				Revenue				June 30, 2015				Revenue
Net sales		$	4,751,772				100.0	%		$	3,483,517				100.0	%
Cost of sales			1,750,656				36.8	%			1,249,554				35.9	%
Gross profit			3,001,116				63.2	%			2,233,963				64.1	%
Selling, general & administrative expenses			3,283,231				69.1	%			2,394,475				68.7	%
Loss from operations			(282,115	)			(5.9	%)			(160,512	)			(4.6	%)
Gain on settement of accounts payable			2,445				0.1	%			-				0.0	%
Interest expense			(53,448	)			(1.1	%)			(119,957	)			(3.4	%)
Net loss		$	(333,118	)			(7.0	%)		$	(280,469	)			(8.1	%)

 

\

 

 

Net Sales

For six months ended				%				$				For six months ended
June 30, 2016				Change				Change				June 30, 2015
$	4,751,772				36.4	%		$	1,268,255			$	3,483,517

 

Net sales for the six months ended June 30, 2016 increased to $4,751,772 from $3,483,517 for the six months ended June 30, 2015, an increase of $1,268,255, or 36.4% due to an increase in core consumer prescription and over-the-counter sales offset by a reduction in business-to-business sales of $463,855.  The core prescription sales grew by $1,289,931 or 56.0% as new customer orders grew by 144.1% and repeat customer orders grew 68.0%, in comparison to the first six months of the prior year.  Core over-the-counter sales grew by $368,302 or 63.2% as new customer order volume grew by 106.1% and repeat customer orders grew by 67.3% due to continued advertising efforts and improved order fulfillment rates and customer satisfaction.  The combined core consumer prescription and over-the-counter sales increased 57.4% and order volume for the first six months of 2016 increased 82.2% when compared to order levels of the same period of the prior year due to new customer acquisition through advertising and customer retention.

The Company continues to benefit from being prominently featured in two nationally recognized consumer magazines during the fourth quarter of 2015 as having the lowest price among top US Pharmacies for five commonly prescribed medications. In 2016, those articles and subsequent articles continue to be featured and rebroadcasted by the national media outlets as the cost of prescription drugs has developed into a national issue.  The favorable articles had an immediate impact on new customer acquisition and order volume beginning in December 2015 with combined consumer prescription and over-the-counter orders from new customers in June 2016 increasing by 85% in comparison to order levels in October 2015, prior to the release of the articles.  This trend in new customer acquisition growth has positively impacted repeat customer orders which increased during the first and second quarters of 2016 and we believe will continue through the remainder of 2016 as the Company will continue to focus on customer acquisition, conversion and retention.

Cost of Sales and Gross Margin

		For six months ended				%				$				For six months ended
		June 30, 2016				Change				Change				June 30, 2015
Cost of sales		$	1,750,656				40.1	%		$	501,102			$	1,249,554
Gross margin $		$	3,001,116				34.3	%		$	767,153			$	2,233,963
Gross margin %			63.2	%			-1.4	%			-0.9	%			64.1	%

Cost of sales were $1,750,656 for the six months ended June 30, 2016 as compared to $1,249,554 for the six months ended June 30, 2015, an increase of $501,102, or 40.1%, primarily as a result of increased order volume partially offset by improved costs realized through strategic purchasing efforts.  Gross margin percentage decreased slightly from 64.1% for the six months ended June 30, 2015 to 63.2% for the six months ended June 30, 2016, primarily due to one-time higher margin business-to-business opportunities in 2015 and a slight reduction in margins for the core consumer prescription and over-the-counter business.  Management will continue to focus its advertising and operational efforts on promoting and offering its higher margin product lines to consumers and strategic purchasing efforts to further improve costs.

Selling, General and Administrative Expenses

		For six months ended				%				$				For six months ended
		June 30, 2016				Change				Change				June 30, 2015
S,G&A		$	3,283,231				37.1	%		$	888,756			$	2,394,475
% of sales			69.1	%											68.7	%

 

 

 

 

 

Selling, general and administrative expenses totaled $3,283,231 for the six months ended June 30, 2016 compared to $2,394,475 for the six months ended June 30, 2015, an increase of $888,756, or 37.1%.  The six months ended June 30, 2016 expense increases included (a) an increase in salary  expense of $335,650 (primarily due to an increase in headcount to process higher levels of call and order volumes, reduced efficiency of pharmacy staff due to higher level of new customer orders and the addition of the Chief Financial Officer);  (b) an increase in freight expense of $259,946 (due to higher volume and higher expedited shipping cost);  (c) an increase in advertising, marketing and public relations expenses of $110,820 (primarily due to an increase in the advertising and promotion campaigns);  (d) an increase in legal expense of $81,994 (primarily related to proxy expenses for the 2016 annual meeting and efforts to release the garnishment of funds in our bank account);  and (e) an increase in credit card processing expense of $65,694 (primarily due to the increase in order volume).  We will continue to focus on controlling costs and improving efficiencies of our personnel to limit the future growth in expenses.

Interest Expense

Interest expense decreased from $119,957 in the six months ended June 30, 2015 to $53,448 in the six months ended June 30, 2016, a decrease of $66,509 or 55.4%, primarily due to a decrease in amortization of debt discounts partially offset by higher notes payable balances and higher interest rates.

 Adjusted EBITDAS

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

 

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

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

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

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
		(unaudited)								(unaudited)
Net loss		$	(79,461	)		$	(79,681	)		$	(333,118	)		$	(280,469	)
Non-GAAP adjustments:
Interest expense			27,529				45,205				53,448				119,957
Depreciation and amortization			42,868				46,313				88,377				91,974
Gain on settlement of accounts payable			(2,445	)			(21,790	)			(2,445	)			(87,969	)
Stock-based compensation			37,301				119,563				112,439				198,568
Change in fair value of collateral securing
employee advances			-				-				-				2,143
Adjusted EBITDAS		$	25,792			$	109,610			$	(81,299	)		$	44,204

 

 

 

 

 

 

 

 

 

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 six months ended June 30, 2016 and 2015. We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.

Liquidity and Capital Resources

Since inception, we have financed operations primarily through debt and equity financings and advances from stockholders.  As of June 30, 2016 we had a working capital deficiency of $4,345,064 and an accumulated deficit of $31,663,634.  During the six months ended June 30, 2016 and the year ended December 31, 2015, we incurred net losses of $333,118 and $626,682 and used cash in operating activities of $64,072 and $548,281, respectively. These conditions raise substantial doubt about our ability to continue as a going concern.

Subsequent to June 30, 2016, we continue to incur net losses, use cash in operating activities and experience cash and working capital constraints.

The Company is subject to a Notice of Redemption related to our Series C Redeemable Preferred Stock aggregating $1,000,000 and must apply all of our assets to redemption of the Series C Preferred Stock and to no other corporate purpose, except to the extent prohibited by Delaware law governing distributions to stockholders (we are not permitted to utilize toward the redemption those assets required to pay our debts as they come due and those assets required to continue as a going concern).

We recognize that we will need to raise additional capital in order to fund operations, meet our payment obligations, including its obligations under a loan and security agreement (see Note 5 to our condensed consolidated financial statements) and the redemption of the Series C Redeemable Preferred Stock, and execute our business plan. There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to us and whether we will become profitable and generate positive operating cash flow. If we are unable to raise sufficient additional funds, we will have to develop and implement a plan to further extend payables, extend note repayments, extend the preferred stock redemption and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.  If we are unable to obtain financing on a timely basis, we could be forced to sell our assets, discontinue our operations and/or seek reorganization under the U.S. bankruptcy code.

Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate our continuation as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not necessarily represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As of June 30, 2016 and December 31, 2015, the Company had cash on hand, net of restricted cash, of $2,199 and $11,217, respectively.  Our cash flow from operating, investing and financing activities during these periods were as follows:

 

 

 

 

 

 

 

For the six months ended June 30, 2016, net cash provided by investing activities was $159 related to a decrease in restricted cash.   For the six months ended June 30, 2015, net cash provided by investing activities was $51,524 related to a reduction in restricted cash offset by the capitalization of website development costs and the purchase of computer equipment.

For the six months ended June 30, 2016, net cash provided by financing activities was $54,895 related to proceeds received from the issuance of notes payable offset by principal payments on equipment leases and repayment of notes payable.  For the six months ended June 30, 2015, net cash used by financing activities was $46,261 related to the principal payment on equipment leases and notes payable.

 

Critical Accounting Policies and Estimates

 

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

Not applicable.

Evaluation of Disclosure Controls and Procedures

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

In connection with the preparation of this Form 10–Q, our management, (Chief Executive and Principal Financial Officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2016. Management had previously identified material weaknesses in our internal control over financial reporting as of December 31, 2015 (see Form 10-K filed with the SEC on March 25, 2016), which is an integral component of our disclosure controls and procedures.  During the year ended December 31, 2015, management implemented policies, procedures and controls to address the weaknesses in various areas including operational and financial systems integration, separation of duties in review and approval of disbursement, cash handling, purchasing, receiving, shipping and invoicing functions, daily transaction processing and monthly financial closing procedures and timelines and board approval of related party and other significant transactions.  Management believes that the controls implemented in these specific areas are sufficient to address the above weaknesses, however, they have concluded that such controls have not been in place for a sufficient period of time in order to conclude that the identified material weaknesses described above have been fully remediated.  Therefore, management has concluded that as of June 30, 2016, our disclosure controls were not effective.

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

 

 

 

 

 

 

 

 

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting or in other factors during the six months ended June 30, 2016, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting, except as discussed above.

Limitations of the Effectiveness of Control

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

PART II. OTHER INFORMATION

On May 13, 2016, Taft Stettinius & Hollister, LLP (the "Plaintiff") filed a complaint in the Court of Common Pleas for Hamilton County, Ohio against Healthwarehouse.com, Inc. (the "Company").  The complaint alleges that the Plaintiff provided legal services to the Company beginning in April 2011 until January 2015 and billed the Company in the amount of $936,777, and for which the Company has not made payment. The complaint seeks damages against the Company in the amount of $936,777 plus interest.  The Company is in the process of investigating such claims and intends to defend the action vigorously.

Not applicable.

Recent Repurchases of Common Stock

 

There were no repurchases of our Common Stock during the three months ended June 30, 2016. The Company does not currently have an announced repurchase program.

Item 3.   Defaults upon Senior Securities.

Not applicable.

None.

 

Item 6.   Exhibits.

 

 

 

 

 

 

 

 

 

Dated: August 8, 2016

HEALTHWAREHOUSE.COM, INC.       By: /s/  Lalit Dhadphale                                                                    Lalit Dhadphale              President and Chief Executive Officer