Overview

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:

· a range of prescription drugs;

· diabetic supplies including glucometers, lancets, syringes and test strips;

· OTC medications covering a range of conditions from allergy and sinus to pain and fever to smoking cessation aids;

· home medical supplies including incontinence supplies, first aid kits and mobility aids; and

· diet and nutritional products including supplements, weight loss aids, and vitamins and minerals.

Our objective is to 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 all 50 states and the District of Columbia.

Results of Operations

The three months ended March 31, 2012 compared to the three months ended March
31, 2011

                                    The three months                        The three months
                                         ended               % of                ended               % of
                                     March 31, 2012         Revenue          March 31, 2011         Revenue

Revenue                            $        3,153,607           100.0 %    $        2,284,552           100.0 %
Cost of sales                               1,704,647            54.1 %             1,298,143            56.8 %
Gross profit                                1,448,960            45.9 %               986,409            43.2 %
Selling, general &
administrative expenses                     2,684,478            85.1 %             1,953,698            85.5 %
Loss from operations                       (1,235,518 )         (39.2 )%             (967,289 )         (42.3 )%
Interest income                                 2,548             0.1 %                 1,162             0.1 %
Interest expense                             (317,342 )         (10.1 )%             (105,152 )          (4.6 )%
Net loss                           $       (1,550,312           (49.2 )%   $       (1,071,279 )         (46.9 )%



Revenue

                                                The three                        The three
                                                  months                           months
                                                  ended                            ended
                                                March 31,                        March 31,
                                                   2012          % Change           2011
Total revenue                                  $  3,153,607         38.0%       $  2,284,552
Total average net sales per order              $      52.47         (5.6)%      $      55.58

Revenues for the three months ended March 31, 2012 grew to $3,153,607 from $2,284,552 for the three months ended March 31, 2011. Revenues increased for the three months ended March 31, 2012 compared to the prior year as a result of an increase in order volume. This increase is due primarily to a sharp increase in prescription products and an increase in both over the counter products and freight revenue. During the three months ended March 31, 2012, revenues from the Hocks acquisition totaled $597,279 compared to the three months ended March 31, 2011 of $636,204. The $869,055 increase in revenues for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was due primarily to increased advertising.

Another indicator of increased business activity was that our website attracted over 1,087,853 visits with over 3,541,872 pageviews during the three months ended March 31, 2012 compared to 837,020 visits and 2,901,173 pageviews during the three months ended March 31, 2011.

Cost of Sales and Gross Margin

                                 The three months                   The three months
                                      ended               %              ended
                                  March 31, 2012       Change        March 31, 2011
Total cost of sales             $        1,704,647       31.3%     $        1,298,143
Total gross profit dollars      $        1,448,960       46.9%     $          986,409
Total gross margin percentage                 45.9 %     2.7%                    43.2  %

Total cost of sales increased to $1,704,647 for the three months ended March 31, 2012 as compared to $1,298,143 for the three months ended March 31, 2011 as a result of growth in order volume and revenue. Gross margin percentage increased year-over-year from 43.2% for the year ended March 31, 2011 to 45.9% for the three months ended March 31, 2012. The increase in gross profit margins was due primarily to the product mix shifting to primarily prescription drugs sales compared to over the counter products.

Selling, General and Administrative Expenses

                                                The three
                                                  months
                                                  ended                         The three months
                                                March 31,           %                 ended
                                                   2012           Change         March 31, 2011
Selling, general and administrative expenses   $  2,684,478        37.4%       $       1,953,698
Percentage of revenue                                 85.1%        (0.4)%                  85.5%

Selling, general and administrative expenses increased by $730,780 in the three months ended March 31, 2012 compared to the same period in 2011, an increase of 37.4%. During the three months ended March 31, 2012, expense increases were due primarily to increased headcount and salary related expenses of $94,562 and increases of approximately $490,642 for advertising, credit card fees, finance charge, promotional, shipping and fulfillment and professional expenses compared to the three months ended March 31, 2011. In addition, the following expenses increased for the three months ended March 31, 2012 compared to the three months ended March 31, 2011: (a) $259,409 for non-cash stock based compensation expense compared to $211,713, (b) and depreciation and amortization expenses of $111,851 compared to $71,008.

Other income (expense)

                   The three months                  The three months
                         ended              %              ended
                    March 31, 2012       Change       March 31, 2011
Interest income                2,548       119.2 %               1,162
Interest expense             317,342       201.8 %             105,152

Interest expense increased from $105,152 in the three months ended March 31, 2011 to $317,342 in the three months ended March 31, 2012, primarily due to the recognition of the non-cash accretion of debt discount for the three months ended March 31, 2012 of $215,711 compared to $86,775 for the same period in 2011. Contractual loan interest expense increased from $101,631 for the three months ended March 31, 2012 compared to $18,377 in the three months ended March 31, 2011.

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 three months ended March 31, 2012 and 2011. We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.

As of March 31, 2012, the Company had negligible cash and a working capital deficit of $4,479,571. During the three months ended March 31, 2012, the Company generated revenue of $3,153,607 and a net loss of $1,550,312. For the three months ended March 31, 2012, cash flows included net cash used in operating activities of $177,395, net cash used in investing activities of $81,043 and net cash provided by investing activities of $258,401.

Since inception, the Company has financed its operations primarily through product sales to customers, and debt and private equity investments by existing stockholders, officers and directors. Our sources and uses of funds during this period were as follows:

For the three months ended March 31, 2012, cash flows included net cash used in operating activities of $177,395. The primary reason for the use of cash was due to the increase in net loss for the period for the expansion of the Company's operating expenses to support increased revenues offset in part by accounts payable-trade of $550,400, stock-based compensation of $259,409, amortization of deferred debt discount of $215,711, and accrued expenses and other current liabilities of $84,793. Management believes that during the current year with the organic growth that the losses will decline, although there can be no such assurance.

For the three months ended March 31, 2012, net cash used in investing activities was $81,043. For the three months ended March 31, 2011, net cash used in investing activities was $221,407.

For the three months ended March 31, 2012, net cash provided by financing activities was $258,401, due primarily to advances from certain stockholders of $375,000, of which $63,812 has been repaid to certain stockholders and proceeds from shares issued of $125,000 offset in part by capital lease payments of $22,131 and a cash overdraft of $155,656. For the three months ended March 31, 2011, no cash was provided by financing activities.

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 in February 2011 should continue to improve the operating productivity and efficiency of the Company's expenditures for selling, general and administrative activities during 2012. Management believes that this plan will be successful, but there are no such assurances.

Subsequent to March 31, 2012, the Company received advances from certain stockholders aggregating $220,000 which 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 $300,004 and from the exercise of stock options in the amount of $26,662. 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 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 condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to exercise its judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosures of commitments and contingencies at the date of the financial statements. Our 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.

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.

We account for stock-based compensation in accordance with the fair value recognition provisions of Accounting Standards Codification ("ASC") 718, for all stock-based payment awards is based on the estimated grant-date fair value. We recognize 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 period ended June 30, 2011 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. Beginning July 2011, we 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. We account for the expected life of options in accordance with the "simplified" method provisions of SEC Staff Accounting Bulletin ("SAB") No. 110, which enables the use of the simplified method for "plain vanilla" share options as defined in SAB No. 107.