Overview

We are a VIPPS accredited retail mail-order pharmacy and healthcare e-commerce company that sells discounted generic and brand name prescription drugs, as well as, over-the-counter (OTC) medical products. Our web address is http://www.healthwarehouse.com and http://www.hocks.com. At present, we sell:

· a range of prescription drugs (we are licensed as a mail-order pharmacy for sales to 50 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 objectives are 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 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 50 states and the District of Columbia. For additional information see Part I Item 1 page 4.

Results of Operations

The year ended December 31, 2011 compared to the year ended December 31, 2010.

                                     The year                           The year
                                       ended                              ended
                                   December 31,         % of          December 31,         % of
                                       2011            Revenue            2010            Revenue

Revenue                            $  10,363,293           100.0 %    $   5,691,765           100.0 %
Cost of sales                          5,845,525            56.4 %        3,450,021            60.6 %
Gross profit                           4,517,768            43.6 %        2,241,744            39.4 %
Selling, general &
administrative expenses                9,246,431            89.2 %        5,303,617            93.2 %
Loss from operations                  (4,728,663 )         (45.6 )%      (3,061,873 )         (53.8 )%
Gain on accounts payable
settlement                                32,210             0.3 %                -               - %
Interest income                            4,166               - %              642               - %
Interest expense                      (1,021,112 )           9.9 %         (679,330 )         (11.9 )%
Gain on litigation settlement                  -               - %           48,887             0.9 %
Other income                               1,200               - %                -               - %
Net loss                           $  (5,712,199 )         (55.1 )%   $  (3,691,674 )         (64.9 )%



Revenue

                  The year ended                         The year ended
                 December 31, 2011       % Change       December 31, 2010

Total revenue   $        10,363,293           82.1 %   $         5,691,765

Net sales for the year ended December 31, 2011 grew to $10,363,293 from $5,691,765 for the year ended December 31, 2010. Revenues increased for the year ended December 31, 2011 compared to the prior year as a result of an increase in order volume in the prescription products sales of $2,889,622, revenues related to the acquisition of Hocks.com in the amount of $2,674,031 and an increase in reimbursed freight revenue of $235,748. This increase was offset by a decline in the Company's non Hocks.com over the counter product sales of $607,478 and the decision to leave the business of selling certain prescription products to a manufacturer. The Company expanded into additional and larger markets and increased its focus on business to business activities compared to the prior year. The Company intends to continue this trend towards increasing business to consumer revenues as well as expanding its business to business activities in 2012.

Another indicator of increased business activity was that visits to our website increased from 1.5 million in 2010 to over 3.8 million in 2011 an increase of 2.3 million or 153%. Pageviews of our website also increased from 5.2 million in 2010 to over 13.1 million in 2011, an increase of 7.9 million or 152%.

Costs and Expenses

Cost of Sales and Gross Margin

                                  The year ended           %          The year ended
                                 December 31, 2011      Change       December 31, 2010
Total cost of sales             $         5,845,525        69.4 %   $         3,450,021
Total gross profit dollars      $         4,517,768       101.5 %   $         2,241,744
Total gross margin percentage                  43.6 %       4.2 %                  39.4 %

Total cost of sales increased to $5,845,525 for the year ended December 31, 2011 as compared to $3,450,021 for the year ended December 31, 2010 as a result of growth in order volume and revenue. Gross margin percentage increased year-over-year from 39.4% for the year ended December 31, 2010 to 43.6% for the year ended December 31, 2011. The improvement in gross profit margins was due primarily to the shift in product mix to higher margin prescription drugs from approximately 36.1% during the year ended December 31, 2010 to over 47.8% in the year ended December 31, 2011, In addition the Company increased gross margin during 2011 by increasing pricing of over the counter products. These increases in gross margin were offset in part by the Company's decision to cease selling certain prescription products to manufacturers which had a higher profit margin but limited market growth opportunity. The Company believes that the increase prices for over the counter products as well as the change in product mix with prescription drugs increasing will continue to improve margins during 2012.

Selling, General and Administrative Expenses

                                                   The                             The year
                                                year ended                          ended
                                               December 31,          %           December 31,
                                                   2011           Change             2010
Selling, general and administrative expenses   $  9,246,431            74.3 %    $  5,303,617
Percentage of revenue                                  89.2 %          (3.1 )%           93.2 %

Selling, general and administrative expenses increased by $3,942,814 in the year ended December 31, 2011 compared to the same period in 2010, an increase of 74.3%. The year ended December 31, 2011, expense increases were due primarily to expenses related to the growth in the business, including increased headcount and increases in salary and salary related expenses of $1,478,195, shipping and fulfillment of $1,044,704, advertising expenses of $415,259, merchant credit card fees of $180,626, professional fees of $164,507 and travel related expenses of $131,819. Increases in the following items, not directly related to growth were non-cash stock based compensation expense of $458,158, bad debt of $348,235 and software and engineering of $133,359. The increases were partially offset by reductions to miscellaneous expenses of $188,541 and contract labor of $103,359.

The increase in payroll related expenses was due to primarily two factors: head count increase from 29 in 2010 to 50 in 2011 and the hiring of certain more highly compensated employees in 2011 compared to 2010. The Company reserved $444,084 in 2011 primarily related to receivables from sales of certain prescription products to manufacturers. The increase in expenses for software engineering compared to 2010 was due primarily to the recognition of non-capitalizable improvements to the web site as reflected in software engineering expenses in 2011. Selling, general and administrative expenses as a percentage of total revenue declined from 93.2% in 2010 to 89.2% in 2011, the Company expects that this percentage decline will accelerate during 2012, due to increased operating efficiencies for head count, rent, and professional fees along with a sharp decline in bad debt expense.

Other income (expense)

                                                 The year                         The year
                                                   ended                            ended
                                               December 31,          %            December
                                                   2011            Change         31, 2010
Gain on accounts payable settlement            $      32,210              0 %    $         -
Interest income                                        4,166          548.9 %            642
Interest expense                                  (1,021,112 )         50.3 %       (679,330 )
Gain on litigation settlement                              -             (0 )%        48,887
Other income (expense)                                 1,200              0 %              -
Total other expense                                  983,536           56.2 %        629,801

Interest expense increased from $679,330 in the year ended December 31, 2010 to $1,021,112 in the year ended December 31, 2011, or an increase of $341,782 or 50.3%. Loan interest expense decreased from $135,279 in December 31, 2010 to $122,927 for the year ended December 31, 2011, or a decrease of $12,352. The non-cash accretion of the debt discount related to our notes and convertible notes payable increased from $543,407 for the year ended December 31, 2010 to $889,185 for the year ended December 31, 2011 or an increase of $345,779. The increase was due primarily to the impact of the Company's debt financing transactions in September and October 2011.

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, 2011 and 2010. We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.

Liquidity and Capital Resources

As of December 31, 2011, the Company had negligible cash and a working capital deficiency of $2,404,464. During the year ended December 31, 2011, the Company generated revenue of $10,363,293 and incurred a net loss of $5,712,199.

Since inception, the Company has financed its operations primarily through product sales to customers, debt and equity financing agreements. During the year ended December 31, 2011, the Company's cash decreased by $1,397,543. Our sources and uses of funds during this period were as follows:

For the year ended December 31, 2011, cash flows included net cash used in operating activities of $2,799,580. This amount included a decrease in operating cash related to a net loss of $5,712,199 and an increase in accounts receivable $(60,186) due primarily to the sale of prescription products to our business to business customers and a reduction in accounts payable-related parties of $(218,649) offset by additions for the following items; (i) stock-based compensation expense $948,923 for options issued during 2010 and additional options issued during 2011 (ii) amortization of debt discount $889,186 due primarily to the debt discount impact of the Company's debt financing transactions in September and October 2011 (iii) Accounts payable - trade $508,107 (iv) Provision for doubtful accounts for $444,084(v) depreciation and amortization, $248,398 (vi) accrued expenses, $98,904. For the year ended December 31, 2010, cash flows included net cash used in operating activities of $2,483,166. This amount included a decrease in operating cash related to a net loss of $3,691,674 and an increase in accounts receivable $(507,707) due primarily to the sale of prescription products to manufacturers offset by additions for the following items; (i) amortization of debt discount, $543,407 due primarily to the debt discount related to warrants issued for two short term notes (ii) stock-based compensation expense, $490,765 for options issued during 2009, 2010 and additional options issued during 2011 (iii) depreciation and amortization, $198,836 (iv) accounts payable-related parties, $159,604 the increase was related to improved payment terms (iv) accrued expenses, $98,098 the majority of which was related to the November 8, 2010 financing.

For the year ended December 31, 2011, net cash used in investing activities was $883,868. This was primarily due to the acquisition of equipment and leasehold improvements of $452,322 and the $200,000 cash portion of the Hocks.com acquisition. For the year ended December 31, 2010, net cash used in investing activities was $151,600 primarily due to the acquisition of equipment and leasehold improvements.

For the year ended December 31, 2011, net cash provided by financing activities was $2,285,905. Cash was provided by the sale of 597,542 shares of the Company's common stock for cash proceeds of $1,972,241, two notes payable for an aggregate amount of $3,000,000, $1,000,000 provided by the sale of 10,000 shares of the Company's redeemable preferred series C stock, and advances from a stockholder in the amount of $300,000. These amounts were offset in part by the use of $3,419,715 cash to repurchase 1,179,212 shares of the Company's common stock from Rock Castle Holdings, Inc., and repayment of $1,000,000 of notes payable. For the year ended December 31, 2010, net cash provided by financing activities was $3,841,168, consisting of a sale of preferred stock of $3,205,168 net of expenses paid in conjunction with the sale of approximately $145,012 and the sale of convertible notes of $150,000.

Management believes that the Company has taken certain steps to improve its operations and cash flows, including improved inventory management and an increase in the number of suppliers. The acquisition of Hocks.com is also expected to improve the operating productivity and efficiency of the Company's expenditures for selling, general and administrative activities. Further the Company has taken additional steps to increase the profitability derived from the acquisition of Hocks.com including significantly increasing the gross margin while decreasing the amounts spent on rent and payroll related expenses. Management believes that this plan will be successful, but there can be no such assurance.

Subsequent to December 31, 2011, the Company received advances from certain shareholders aggregating $545,000 (of which $205,000 has been repaid as of the date of this report) and the repayment of employee advances aggregating $235,000. In addition, the Company received proceeds from the sale of common stock in the amount of $175,010 and from the exercise of stock options in the amount of $26,662. Management believes the Company needs to raise additional capital in order to meet operations and execute its business plan. However, 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 be able to turn into a profitable position 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 extend payables 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.

These conditions raise substantial doubt about the Company's ability to continue as a going concern. Notwithstanding the foregoing, the accompanying 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Critical Accounting Policies and Estimates

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 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, and the valuation of assets acquired in connection with Hocks Acquisition Corporation's ("Hocks Acquisition") February 14, 2011 purchase of the business and assets of Hocks Pharmacy Inc. ("Hocks Pharmacy").

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.

Stock Compensation

Stock-based compensation expense for all stock-based payment awards is based on the estimated grant-date fair value. The Company recognizes these compensation costs over the requisite service period of the award, which is generally the option vesting term. Option valuation models require the input of highly subjective assumptions including the expected life of the option. During the year ended December 31, 2010 and prior periods, the fair value of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from an index of historical stock prices of comparable entities until sufficient data existed to estimate the volatility using the Company's own historical stock prices. During the year ended December 31, 2011, the Company began to use the historical trading prices of its own common stock as a component in the calculation of an estimated volatility figure to determine the fair value of stock-based payment awards using the Black-Scholes model. Management determined this assumption to be a better indicator of value. The Company accounts for the expected life of options in accordance with the "simplified" method which enables the use of the simplified method for "plain vanilla" share options as defined in Staff Accounting Bulletin No. 107.

Recently-issued Accounting Pronouncements

The information contained in Footnote 14 to the Company's consolidated financial statements included in Item 8 to this annual report is incorporated herewith by reference.