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 June 30, 2012 compared to the three months ended June 30,
2011
                                      The three                            The three
                                    months ended          % of           months ended          % of
                                    June 30, 2012        Revenue         June 30, 2011        Revenue

Revenue                            $     2,997,326           100.0 %    $     2,519,721           100.0 %
Cost of sales                            1,515,608            50.6 %          1,404,192            55.7 %
Gross profit                             1,481,718            49.4 %          1,115,529            44.3 %
Selling, general &
administrative expenses                  2,824,358            94.2 %          2,116,736            84.0 %
Loss from operations                    (1,342,640 )         (44.8 )%        (1,001,207 )         (39.7 )%
Other income                                   157             0.0 %                  -               - %
Interest income                              1,053             0.0 %              1,635             0.1 %
Interest expense                          (261,240 )          (8.7 )%          (100,522 )          (4.0 )%
Net loss                           $    (1,602,670 )         (53.5 )%   $    (1,100,094 )         (43.7 )%



Revenue

                                       The three                       The three
                                     months ended         %          months ended
                                     June 30, 2012      Change       June 30, 2011
Total revenue                       $     2,997,326       19.0%     $     2,519,721
Total average net sales per order   $         53.98       0.5%      $         53.69

Revenues for the three months ended June 30, 2012 grew to $2,997,326 from $2,519,721 for the three months ended June 30, 2011. Revenues increased for the three months ended June 30, 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, offsetting a decline in over the counter products and freight revenue. During the three months ended June 30, 2012, prescription and OTC revenue totaled $1,710,607 and $1,200,183, respectively, compared to $1,165,174 and $1,270,189, respectively for the three months ended June 30, 2011. During the three months ended June 30, 2012, revenues from the Hocks acquisition totaled $447,448 compared to the three months ended June 30, 2011 of $730,999.

During the three months ended June 30, 2012, our websites attracted over 856,274 visits with over 3,001,860 pageviews compared to 876,384 visits and 3,252,290 pageviews during the three months ended June 30, 2011. The decrease in activity is due to lower advertising expenses.

Cost of Sales and Gross Margin

                                   The three                       The three
                                 months ended          %         months ended
                                 June 30, 2012      Change       June 30, 2011
Total cost of sales             $     1,515,608       7.9%      $     1,404,192
Total gross profit dollars      $     1,481,718       32.8%     $     1,115,529
Total gross margin percentage             49.4%       5.1%                44.3%

Total cost of sales increased to $1,515,608 for the three months ended June 30, 2012 as compared to $1,404,192 for the three months ended June 30, 2011 as a result of growth in order volume and revenue. Gross margin percentage increased year-over-year from 44.3% for the three months ended June 30, 2011 to 49.4% for the three months ended June 30, 2012. The increase in gross profit margins was due primarily to greater increase in prescription drugs sales, which have higher margins, compared to over the counter products, as well as increases in freight revenue.

Selling, General and Administrative Expenses

                                                  The three                          The three
                                                months ended           %            months ended
                                                June 30, 2012        Change        June 30, 2011
Selling, general and administrative expenses   $     2,824,358        33.4%       $    2,116,736
Percentage of revenue                                    94.2%        10.2%                84.0%

Selling, general and administrative expenses increased by $707,622 in the three months ended June 30, 2012 compared to the same period in 2011, an increase of 33.4%. During the three months ended June 30, 2012, expense increases were due primarily to increased legal expenses of $268,978, shipping expenses of $94,075, accounting expenses of $90,762, salary-related expenses of $67,639, and health insurance expenses of $63,995 compared to the three months ended June 30, 2011. In addition, the recognition of the following expenses for the three months ended June 30, 2012 compared to the three months ended June 30, 2011: (a) $290,221 for non-cash stock based compensation expense compared to $213,479, (b) and depreciation and amortization expenses of $67,795 compared to $55,120. We expect that our selling, general and administrative expenses will decrease in future periods as we anticipate our legal and professional fees will go down.

Other income (expense)

                      The three                         The three
                    months ended           %           months ended
                    June 30, 2012       Change        June 30, 2011
Other income        $        1,210       (26.0)%      $       1,635
Interest expense    $    (261,240)        159.9%      $   (100,522)

Interest expense increased from $100,522 in the three months ended June 30, 2011 to $261,240 in the three months ended June 30, 2012, primarily due to the recognition of the non-cash accretion of debt discount for the three months ended June 30, 2012 of $215,711 compared to $82,616 for the same period in 2011. Contractual loan interest expense increased to $45,529 for the three months ended June 30, 2012 compared to $17,906 in the three months ended June 30, 2011, mainly due to increases in the average outstanding balances of our convertible notes payable and notes payable.

The six months ended June 30, 2012 compared to the six months ended June 30,

2011

                                       The six                               The six
                                    months ended          % of            months ended          % of
                                    June 30, 2012        Revenue          June 30, 2011        Revenue

Revenue                            $     6,150,933           100.0 %     $     4,804,273           100.0 %
Cost of sales                            3,220,255            52.4 %           2,702,335            56.2 %
Gross profit                             2,930,678            47.6 %           2,101,938            43.8 %
Selling, general &
administrative expenses                  5,508,836            89.6 %           4,070,434            84.7 %
Loss from operations                    (2,578,158 )         (41.9 ) %        (1,968,496 )         (41.0 )%
Other income                                   157             0.0 %                   -               - %
Interest income                              3,601             0.1 %               2,797             0.1 %
Interest expense                          (578,582 )          (9.4 ) %          (205,674 )          (4.3 )%
Net loss                           $    (3,152,982 )         (51.3 ) %   $    (2,171,373 )         (45.2 )%



Revenue
                                        The six                           The six
                                     months ended          %           months ended
                                     June 30, 2012       Change        June 30, 2011
Total revenue                       $     6,150,933        28.0%      $     4,804,273
Total average net sales per order   $         53.19       (13.5)%     $         61.50

Revenues for the six months ended June 30, 2012 grew to $6,150,933 from $4,804,273 for the six months ended June 30, 2011. Revenues increased for the six months ended June 30, 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 supported by continued recurring prescription sales. During the six months ended June 30, 2012, prescription and OTC revenue totaled $3,395,943 and $2,527,476, respectively, compared to $2,195,371 and $2,475,951, respectively for the six months ended June 30, 2011.During the six months ended June 30, 2012, revenues from the Hocks acquisition totaled $1,044,727 compared to the six months ended June 30, 2011 of $1,367,202.

During the six months ended June 30, 2012, our website attracted over 2,139,185 visits with over 7,088,673 pageviews compared to 1,993,092 visits and 7,004,273 pageviews during the six months ended June 30, 2011. The decrease in activity is due to lower advertising expenses.

Cost of Sales and Gross Margin

                                    The six                         The six
                                 months ended          %          months ended
                                 June 30, 2012      Change       June 30, 2011
Total cost of sales             $     3,220,255       19.2%     $     2,702,335
Total gross profit dollars      $     2,930,678       39.4%     $     2,101,938
Total gross margin percentage             47.6%       3.8%                43.8%

Total cost of sales increased to $3,220,255 for the six months ended June 30, 2012 as compared to $2,702,335 for the six months ended June 30, 2011 as a result of growth in order volume and revenue. Gross margin percentage increased year-over-year from 43.8% for the six months ended June 30, 2011 to 47.6% for the six months ended June 30, 2012. The increase in gross profit margins was due primarily to a greater increase in prescription drug sales, which have higher margins, compared to over the counter products as well as increases in freight revenue.

Selling, General and Administrative Expenses

                                                   The six                            The six
                                                months ended           %            months ended
                                                June 30, 2012        Change        June 30, 2011
Selling, general and administrative expenses   $     5,508,836        35.3%       $    4,070,434
Percentage of revenue                                    89.6%         4.9%                84.7%

Selling, general and administrative expenses increased by $1,438,402 in the six months ended June 30, 2012 compared to the same period in 2011, an increase of 35.3%. During the six months ended June 30, 2012, expense increases were due primarily to increases in shipping expenses of $308,877, legal expenses of $267,301, health insurance expenses of $148,823, advertising expenses of $118,724, and accounting expenses of $103,462 compared to the six months ended June 30, 2011. In addition, the recognition of the following expenses for the six months ended June 30, 2012 compared to the six months ended June 30, 2011:
(a) $549,630 for non-cash stock based compensation expense compared to $425,192,
(b) and depreciation and amortization expenses of $179,646 compared to $126,128. We expect that our selling, general and administrative expenses will decrease in future periods as we anticipate our legal and professional fees will go down.

Other income (expense)

                       The six                          The six
                    months ended          %           months ended
                    June 30, 2012       Change       June 30, 2011
Other income        $        3,758        34.7%      $       2,797
Interest expense    $    (578,582)       181.3%      $   (205,674)

Interest expense increased from $205,674 in the six months ended June 30, 2011 to $578,582 in the six months ended June 30, 2012, primarily due to the recognition of the non-cash accretion of debt discount for the six months ended June 30, 2012 of $431,422 compared to $169,391 for the same period in 2011. Contractual loan interest expense increased to $147,160 for the six months ended June 30, 2012 compared to $36,283 in the six months ended June 30, 2011, mainly due to increases in the average outstanding balances of our convertible notes payable and notes payable.

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, 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 June 30, 2012, the Company had negligible cash and a working capital deficit of $5,724,914. During the six months ended June 30, 2012, the Company generated revenue of $6,150,933 and a net loss of $3,152,982. For the six months ended June 30, 2012, cash flows included net cash used in operating activities of $581,948, net cash provided by investing activities of $138,241 and net cash provided by investing activities of $443,846. These conditions raise substantial doubt about the entity's ability to continue as a going concern.

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.

Subsequent to June 30, 2012, the Company received proceeds from the sale of common stock in the amount of $350,004 and advances from members of management in the amount of approximately $168,000. 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.

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.

For the six months ended June 30, 2012, cash flows included net cash used in operating activities of $581,948. 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 $1,120,686, stock-based compensation of $549,630, amortization of deferred debt discount of $431,422, and accrued expenses and other current liabilities of $211,438. The increases in Accounts Payable - Trade and accrued expenses and other current liabilities were a result of the Company extending payables in order to preserve cash balances. For the six months ended June 30, 2011, cash flows included net cash used in operating activities of $1,006,680. 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 headcount and operating expenses to support increased revenues which was offset by non-cash items of $750,711 and larger increases in accounts payable compared to increases in current assets.

For the six months ended June 30, 2012, net cash provided by investing activities was $167,267 related to net employee advances of $138,241. For the six months ended June 30, 2011, net cash used in investing activities was $279,016.

For the six months ended June 30, 2012, net cash provided by financing activities was $443,846, due primarily to advances from certain stockholders of $605,000, of which $283,812 has been repaid to certain stockholders and proceeds from common shares issued of $201,662 offset in part by capital lease payments of $32,691 and a cash overdraft of $46,313. For the six months ended June 30, 2011, no cash was provided by or used in financing activities.

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, whereby all stock-based payment awards are 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.