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HEWA > SEC Filings for HEWA > Form 10-Q on 22-Apr-2013All Recent SEC Filings

Show all filings for HEALTHWAREHOUSE.COM, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HEALTHWAREHOUSE.COM, INC.


22-Apr-2013

Quarterly Report


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

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 September 30, 2012 compared to the three months ended
September 30, 2011

                                         The three                        The three
                                       months ended                     months ended
                                       September 30,        % of        September 30,     % of
                                           2012           Revenue           2011        Revenue

Revenue                                $   2,634,181          100.0 %   $   2,783,240     100.0  %
Cost of sales                              1,389,328           52.7 %       1,545,970      55.5  %
Gross profit                               1,244,853           47.3 %       1,237,270      44.5  %
Selling, general &
administrative expenses                    2,563,724           97.3 %       2,401,289      86.3  %
Loss from operations                      (1,318,871 )       (50.1) %      (1,164,019 )   (41.8) %
Other income                                   1,300              - %             842         -  %
Interest expense                            (288,631 )       (11.0) %        (173,681 )   (6.2)  %
Net loss                               $  (1,606,202 )       (61.0) %   $  (1,336,858 )  (48.0)  %



Revenue
                                                 The three                         The three
                                                months ended                      months ended
                                               September 30,          %          September 30,
                                                    2012            Change            2011
Total revenue                                  $    2,634,181          (5.4) %   $    2,783,240
Total average net sales per order              $        56.81            1.5 %   $        55.96

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Total Revenue

Revenues for the three months ended September 30, 2012 declined to $2,634,181 from $2,783,240 for the three months ended September 30, 2011. The decline in revenue for the three months ended September 30, 2012 compared to the prior year was mostly the result of lower over-the-counter and freight sales at Hocks. Despite the decline in overall OTC sales, the Company witnessed higher prescription drug sales, which partially offset the decline. During the three months ended September 30, 2012, revenues from the Hocks acquisition totaled $267,208 compared to the three months ended September 30, 2011 of $677,552.

During the three months ended September 30, 2012, our websites attracted over 486,418 visits with over 2,084,160 pageviews compared to 929,056 visits and 3,284,063 pageviews during the three months ended September 30, 2011. The decrease in activity is due to lower advertising expenses.

Prescription Revenue

Prescription drug revenue increased to $1,637,630 for the three months ended September 30, 2012 from $1,326,203 for the three months ended September 30, 2011. The increase occurred mostly due to recurring purchases from current customers and new prescription purchases from both current and new customers.

OTC Revenue

Revenue related over-the-counter orders declined to $920,981 for the three
months ended September 30, 2012 from $1,366,774 three months ended September 30,
2011. The decrease in OTC revenue is mostly attributable to a decline in sales
at Hocks.

Cost of Sales and Gross Margin

                                                The three                        The three
                                               months ended                     months ended
                                                September           %          September 30,
                                                 30, 2012         Change            2011
Total cost of sales                            $  1,389,328         (10.1) %   $    1,545,970
Total gross profit dollars                     $  1,244,853            0.6 %   $    1,237,230
Total gross margin percentage                          47.3 %          2.8 %             44.5 %

Total cost of sales decreased to $1,389,328 for the three months ended September 30, 2012 as compared to $1,545,970 for the three months ended September 30, 2011. Gross margin percentage increased year-over-year from 44.5% for the three months ended September 30, 2011 to 47.3% for the three months ended September 30, 2012. The increase in gross profit margins was due primarily to an increase in prescription drugs sales, which have higher margins, along with a decline in sales of over the counter products.

Selling, General and Administrative Expenses

                                                The three                         The three
                                               months ended                      months ended
                                                September            %          September 30,
                                                 30, 2012         Change             2011
Selling, general and administrative expenses   $  2,563,724             6.8 %   $  2,401,289

Percentage of revenue 97.3 % 11.0 % 86.3 %

Selling, general and administrative expenses increased by $162,435 in the three months ended September 30, 2012 compared to the same period in 2011, an increase of 6.8%. During the three months ended September 30, 2012, expense increases were due primarily to higher legal fees of $78,481, and accounting fees of $46,790. The increases were offset by lower advertising expenses of $246,637, travel and meal expenses of $73,207, credit-card fees of $28,716, and shipping expenses of $21,027, compared to the three months ended September 30, 2011. In addition, the Company recognized the following expenses for the three months ended September 30, 2012 compared to the three months ended September 30, 2011:
(a) $268,954 for non-cash stock based compensation expense compared to $249,801,
(b) and depreciation and amortization expenses of $335,515 compared to $60,370. The significant increase in depreciation and amortization expenses from previous periods is due to the write-down of intangibles related to customer assets to $197,776. Additionally, 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.

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Other income (expense)

                        The three                             The three
                      months ended             %             months ended
                   September 30, 2012       Change        September 30, 2011
Other income        $            1,300         54.4 %     $             842
Interest expense    $         (288,631 )       66.2 %     $        (173,681 )

Interest expense increased from $173,681 in the three months ended September 30, 2011 to $288,631 in the three months ended September 30, 2012, primarily due to the recognition of the non-cash accretion of debt discount for the three months ended September 30, 2012 of $215,711 compared to $138,716 for the same period in 2011. Contractual loan interest expense increased to $72,920 for the three months ended September 30, 2012 compared to $34,965 in the three months ended September 30, 2011, mainly due to increases in the average outstanding balances of our convertible notes payable and notes payable.

The nine months ended September 30, 2012 compared to the nine months ended

September 30, 2011

                                     The nine                         The nine
                                   months ended                     months ended
                                   September 30,        % of        September 30,        % of
                                       2012           Revenue           2011           Revenue

Revenue                            $   8,785,114          100.0 %   $   7,587,513          100.0 %
Gross profit                           4,175,531           47.5 %       3,339,208           44.0 %
Selling, general &
administrative expenses                8,072,560           91.9 %       6,471,723           85.3 %
Loss from operations                  (3,897,029 )       (44.4) %      (3,132,515 )       (41.3) %
Other income                               5,058              - %           3,639              - %
Interest expense                        (867,213 )        (9.9) %        (379,355 )        (5.0) %
Net loss                           $  (4,759,184 )       (54.2) %      (3,508,231 )       (46.2) %



Revenue
                                                                                 The nine
                                                 The nine                         months
                                               months ended                       ended
                                                September           %           September
                                                 30, 2012         Change         30, 2011
Total revenue                                  $  8,785,114           15.8 %   $  7,587,513
Total average net sales per order              $      54.22          (8.6) %   $      59.33

Total Revenue

Revenues for the nine months ended September 30, 2012 increased to $8,785,114 from $7,587,513 for the nine months ended September 30, 2011. The increase in revenue for the nine months ended September 30, 2012 compared to the prior year was the result of higher prescription, OTC, and freight revenue. The increase in revenue was tapered by lower sales at Hocks. During the nine months ended September 30, 2012, revenues from the Hocks acquisition totaled $1,311,936 compared to the nine months ended September 30, 2011 of $2,044,754.

During the nine months ended September 30, 2012, our websites attracted over 2,625,603 visits with over 9,172,833 pageviews compared to 2,922,148 visits and 10,288,336 pageviews during the nine months ended September 30, 2011. The decrease in visits is due to a reduction in advertising.

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Prescription Revenue

Prescription drug revenue increased to $5,033,573 for the nine months ended September 30, 2012 from $3,521,574 for the nine months ended September 30, 2011. The increase is attributable to advertising expenses in the first half of the year attracting new customers, and recurring purchases from current customers.

OTC Revenue

Revenue related to over-the-counter orders declined to $3,448,457 for the nine
months ended September 30, 2012 from $3,842,725 nine months ended September 30,
2011. The decrease in OTC revenue is attributable to a decline in sales at
Hocks.

Cost of Sales and Gross Margin

                                                 The nine                           The nine
                                               months ended                       months ended
                                                September            %           September 30,
                                                 30, 2012         Change              2011
Total cost of sales                            $  4,609,583             8.5 %    $    4,248,305
Total gross profit dollars                     $  4,175,531            25.0 %    $    3,339,208
Total gross margin percentage                          47.5 %           3.5 %              44.0 %

Total cost of sales increased to $4,609,583 for the nine months ended September 30, 2012 as compared to $4,248,305 for the nine months ended September 30, 2011 as a result of growth in prescription order volume and revenue. Gross margin percentage increased year-over-year from 44.0% for the nine months ended September 30, 2011 to 47.5% for the nine months ended September 30, 2012. The increase in gross profit margins was due primarily to an 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 nine                          The nine
                                               months ended                      months ended
                                                September            %          September 30,
                                                 30, 2012         Change             2011
Selling, general and administrative expenses   $  8,072,560            24.7 %   $  6,471,723
Percentage of revenue                                  91.9 %           6.6 %           85.3 %

Selling, general and administrative expenses increased by $1,600,837 in the nine months ended September 30, 2012 compared to the same period in 2011, an increase of 24.7%. During the nine months ended September 30, 2012, expense increases were due primarily to increases in legal expenses of $345,782, shipping expenses of $287,849, health insurance expenses of $189,078, contract labor of $183,521 and accounting expenses of $150,252 compared to the nine months ended September 30, 2011. In addition, the recognition of the following expenses for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011: (a) $818,584 for non-cash stock based compensation expense compared to $674,993, (b) and depreciation and amortization expenses of $515,162 compared to $186,498. The significant increase in depreciation and amortization expenses from previous periods is due to the write-down of intangibles related to customer assets to $197,776 during the third quarter of 2012. We expect that our selling, general and administrative expenses will decrease in future periods as we anticipate our legal and professional fees will decrease.

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Other income (expense)

                        The nine                               The nine
                      months ended             %             months ended
                   September 30, 2012       Change        September 30, 2011
Other income        $            5,058         39.0 %     $           3,639
Interest expense    $         (867,213 )      128.6 %     $        (379,355 )

Interest expense increased from $379,355 in the nine months ended September 30, 2011 to $867,213 in the nine months ended September 30, 2012, primarily due to the recognition of the non-cash accretion of debt discount for the nine months ended September 30, 2012 of $647,133 compared to $308,107 for the same period in 2011. Contractual loan interest expense increased to $220,080 for the nine months ended September 30, 2012 compared to $71,248 in the nine months ended September 30, 2011, mainly due to increases in the average outstanding balances of our convertible notes payable and notes payable.

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 nine months ended September 30, 2012 and 2011. 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, the Company has financed its operations primarily through product sales to customers, debt and equity financing agreements, and advances from stockholders. As of September 30, 2012 and December 31, 2011, the Company had negligible cash and a working capital deficiency of $7,659,552 and $2,404,464, respectively. For the nine months ended September 30, 2012, cash flows included net cash used in operating activities of $831,903 net cash provided by investing activities of $136,990 and net cash provided by financing activities of $698,181. These conditions raise substantial doubt about the Company's ability to continue as a going concern.

On December 31, 2012 and January 15, 2013, the Company failed to make required payments aggregating $3,000,000 in principal and approximately $373,000 of accrued interest due on certain notes and convertible note agreements dated November 9, 2010 and September 2, 2011. Accordingly, the Company was in default of its obligations under the loan documents. In February 2013, the Company issued 3,501,975 shares of common stock in two private placements for aggregate proceeds of $3,501,975 (see Note 9). Substantially all of these proceeds were used by the Company to satisfy its obligations under the notes and convertible notes payable which were previously in default. Also, subsequent to September 30, 2012, the Company received proceeds from the sale of common stock in the amount of $100,000 and advances from a member of management in the amount of approximately $98,000. In February 2013, the Company also converted an aggregate $833,000 of notes payable and other advances from stockholders and accounts payable outstanding into 833,000 units at a price of $1.00 per unit (see Note 9).

On February 13, 2013, the Company received a Notice of Redemption from the holders of all 10,000 authorized and outstanding shares of Series C Preferred Stock, which redemption would result in an aggregate payment of $1,000,000. The Notice of Redemption was provided by the Series C Preferred Stock holders pursuant to the terms of the Certificate of Designation of Preferences, Rights, and Limitations of Series C Preferred Stock entered into on October 14, 2010 ("Series C Certificate of Designation"), which provides for the Company to, within ten (10)business days after receipt of the Notice of Redemption, apply all of its assets for any such redemption, and to no other corporate purpose, except to the extent prohibited by Delaware law governing distributions to stockholders (other than those assets required to pay its debts as they come due, including the Senior Convertible Notes and Senior Secured Notes and to continue as a going concern under applicable Delaware law). To the extent that Delaware law governing distributions to stockholders prevents the Company from redeeming all shares of Series C Preferred Stock, the Series C Certificate of Designation provides for the Company to ratably redeem the maximum number of shares that it may redeem consistent with Delaware law as soon as it may lawfully do so. The Company has determined that no corporate funds are available under Delaware law for the redemption of any shares of Series C Preferred Stock. The Company is currently reviewing its alternatives, including, but not limited to, raising capital in order to satisfy its obligations related to the Series C Redeemable Preferred Stock. There is no assurance that our plan will be successful or that the Company will be able to satisfy the redemption notice. See Note 7 to the Company's unaudited condensed consolidated financial statements for additional information.

As discussed in Note 9, the Company entered into a Loan and Security Agreement (the "Loan Agreement") dated March 28, 2013 with a lender (the "Lender"). Under the terms of the Loan Agreement, the Company borrowed $500,000 from the Lender (the "Loan"). The Loan will be evidenced by a promissory note (the "Note"), and will bear 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 four and one-quarter percent (4.25%) per annum with a default rate equal to five percent (5.0%) per annum above the otherwise applicable interest rate. 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, beginning on May 1, 2013. The principal amount and all accrued interest on the Promissory Note is payable on March 1, 2015, or earlier on an 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. In consideration of the Loan, the Company granted the Lender a warrant to purchase 750,000 shares of common stock at a purchase price of $0.35 per share.

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The Company recognizes it will need to raise additional capital in order to reduce its debt, potentially renegotiate debt terms 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 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.

Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the 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.

For the nine months ended September 30, 2012, cash flows included net cash used in operating activities of $831,903. 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 $1,492,462, stock-based compensation of $818,585, amortization of deferred debt discount of $647,133, and accrued expenses and other current liabilities of $283,946. 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 nine months ended September 30, 2011, cash flows included net cash used in operating activities of $2,166,516. 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 $1,299,598 and larger increases in accounts payable compared to increases in current assets.

For the nine months ended September 30, 2012, net cash provided by investing activities was $136,990 related to net employee advances. For the nine months ended September 30, 2011, net cash used in investing activities was $910,450 primarily due to the acquisition of equipment and leasehold improvements of $668,893 and the $200,000 cash portion of the Hocks.com acquisition.

For the nine months ended September 30, 2012, net cash provided by financing activities was $698,181, due primarily to advances from certain stockholders of $605,000, of which $293,812 has been repaid to certain stockholders and proceeds from common shares issued of $425,004, offset in part by capital lease payments of $43,518 and a cash overdraft of $71,155. For the nine months ended September 30, 2011, net cash provided by financing activities was $1,892,526. The financing activities for the nine months ended September 30, 2011 were provided by the sale of 428,572 shares of the Company's common stock for cash proceeds of $1,482,241, two notes payable for an aggregate amount of $3,000,000, and advances from a stockholder in the amount of $300,000 offset by the use of cash to purchase 1,179,212 shares of the Company's common stock from Rock Castle Holdings, Inc.

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.

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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.

. . .

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