HEALTHWAREHOUSE.COM, INC.
A Delaware Corporation
7107 Industrial Road
Florence, KY 41042
(800)748-7001
www.healthwarehouse.com
support@healthwarehouse.com
SIC Code: 5912 - Drugstores and Proprietary Stores
Annual Report
For the year ended December 31, 2018
As of December 31, 2018, the number of shares outstanding of our Common Stock was 49,018,548.
Indicate by check mark whether the company is a shell company (as defined in Rule 405 of the Securities Act of 1933 and Rule
12b-2 of the Exchange Act of 1934).
(cid:31) Yes No
Indicate by check mark if whether the company’s shell status has changed since the previous reporting period.
(cid:31) Yes No
Indicate by check mark whether a Change in Control of the company has occurred over this reporting period.
(cid:31) Yes No
1
HEALTHWAREHOUSE.COM, INC.
Annual Report
Table of Contents
PART I
ENTITY AND SECURITY INFORMATION
Page
Section
1
2
3
4
5
6
7
8
9
10
Name of Issuer and its Predecessors
Security Information
Issuance History
Financial Statements
Issuer’s Business, Products and Services
Issuer’s Facilities
Officers, Directors and Control Persons
Legal/Disciplinary History
Third Party Providers
Issuer Certification
PART II
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – as of December 31, 2018 and
2017
Consolidated Statements of Operations – Years ended
December 31, 2018 and 2017
Consolidated Statement of Changes in Stockholders’
Deficiency – Years ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows – Years ended
December 31, 2018 and 2017
Notes to the Consolidated Financial Statements
3
3
4
5
5
6
6
8
8
10
12
13
14
15-16
17
18
2
PART I – ENTITY AND SECURITY INFORMATION
1) Name of the issuer and its predecessors (if any):
HealthWarehouse.com, Inc. (the “Company”, “Issuer” or “HEWA”)
Formerly Ion Networks, Inc., formed on August 5, 1998 as a Delaware company.
MicroFrame, Inc. was merged into Ion Networks, Inc. on March 16, 1999, with Ion Networks, Inc. as the
surviving entity.
Name changed to Clacendix, Inc. on January 3, 2008.
Name changed to HealthWarehouse.com, Inc. on July 31, 2009.
2) Security Information
Security information as of December 31, 2018:
Title and
Class of
Security
Common
Stock
Preferred
Stock –
Series A
Preferred
Stock –
Series B
Preferred
Stock –
Series C
Par
Value
Trading
Symbol
CUSIP
Total Shares
Authorized
Total
Shares
Outstanding
Public
Float
Shareholders
of Record
$0.001
HEWA
42227G202
100,000,000
49,018,548
11,417,172
259
$0.001
Not
Applicable
Not
Applicable
$0.001
Not
Applicable
Not
Applicable
$0.001
Not
Applicable
Not
Applicable
200,000
-0-
-0-
625,000
517,359
-0-
10,000
10,000
-0-
0
2
3
On April 14, 2017, HEWA filed a Form 15 with the Securities and Exchange Commission terminating the
registration of its Common Stock under Rule 12 g-4(a)(1) of the Securities Exchange Act of 1934. As of this date,
the Company has no plans to reregister the common stock under the Securities Exchange Act of 1934.
Transfer Agent:
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Phone: (718) 921-8200
Is the Transfer Agent registered under the Exchange Act? Yes: X No:
Describe any trading suspension orders issued by the SEC in the past 12 months: None
List any stock split, stock dividend, recapitalization, merger, acquisition, spin-off, or reorganization either
currently anticipated or that occurred within the past 12 months: None.
3
3) Issuance History
A. Changes to the Number of Outstanding Shares
Number of Shares
outstanding as of
January 1, 2017
Opening Balance
Common
Preferred Series B
Preferred Series C
42,582,613
517,359
10,000
Date
Transaction
Type
Number of
Shares Issue d
Class of
Securities
Value of
shares issued
($ per share)
at issuance
Issued at
discount to
market at
time of
issuance?
1/6/17
New
66,660
Common
$0.12
Yes
3/23/17
New
302,001
Common
$0.25
No
Individual/Entity Shares
were issued to
Daniel Seliga, former Employee
(current CFO)
Directors (Scott, Ross,
Heimbrock, Weiss)
4/3/17
New
400,000
Common
$0.22
4/6/17
New
411,490
Common
$0.16
No
No
Tom Bosse
Directors (Scott, Ross,
Heimbrock, Weiss, Smyjunas)
4/7/17
New
937,500
Common
$0.16
No
Joseph Heimbrock, Director
4/7/17
New
625,000
Common
$0.16
No
Cormag Holdings, Ltd. (Mark
Scott, Director)
4/7/17
8/24/17
9/1/17
9/7/17
11/9/17
New
New
New
New
New
312,500
16,667
Common
Common
210,652
1,000
1,000
Common
Common
Common
$0.16
$0.11
$0.25
$0.35
$0.35
No
Yes
No
Yes
Yes
11/13/17
New
66,660
Common
$0.09 - $0.11 Yes
10/5/17
10/27/17
New
New
103,920
300,000
Common
Common
$0.51
$0.20
No
Yes
11/10/17
New
1,333,334
Common
$0.24
Yes
1/10/18
New
123,256
Common
$0.43
No
2/1/18
New
537,500
Common
$0.25
Yes
Osgar Holdings Ltd.
Luke Hoffman, Employee
Directors (Scott, Heimbrock,
Weiss, Britts)
Terri Woods, Employee
China Childers, Employee
Sharon Highlander, Former
Employee
Directors (Scott, Heimbrock,
Weiss, Britts)
Plough Penny Partners L.P.
Cormag Holdings, Ltd. (Mark
Scott, Director)
Directors (Scott, Heimbrock,
Weiss, Britts)
Eugene McKenna, Greg Matzel,
James Wicklund, Michael
McKenna, PJ Burbach, Will
Gilbert, Hein Tran
2/26/18
New
274,219
Common
$0.25
Yes
Scott Greiper
Reason for share
issuance or Nature of
Services Provided
Restricted
or
Unre stricted
as of this
filing?
Exemption or
Registration
Type
Exercise of stock option
Restricted
Stock Based Compensation Restricted
Extinguishment of
Accounts Payable for
Legal services.
Restricted
Stock Based Compensation Restricted
Sales of stock under
Section 4(2) and Rule 506
of Regulation D under the
Securities Act of 1933
Sales of stock under
Section 4(2) and Rule 506
of Regulation D under the
Securities Act of 1933
Sales of stock under
Section 4(2) and Rule 506
of Regulation D under the
Securities Act of 1933
Exercise of stock option
Restricted
Restricted
Restricted
Restricted
Stock Based Compensation Restricted
Restricted
Restricted
Exercise of stock option
Exercise of stock option
Exercise of stock option
Restricted
Stock Based Compensation Restricted
Exercise of stock warrants Restricted
Exercise of stock warrants Restricted
Stock Based Compensation Restricted
Cashless deemed exercise
of stock warrants
Cashless exercise of stock
warrants
Restricted
Restricted
3/14/18
New
50,000
Common
$0.60
4/18/18
New
86,884
Common
$0.61
7/10/18
8/21/18
New
New
96,364
10,000
Common
Common
$0.55
$0.09
No
No
No
Yes
10/17/18
New
169,328
Common
$0.31
No
Joseph Peters
Directors (Scott, Heimbrock,
Weiss, Britts)
Directors (Scott, Heimbrock,
Weiss, Britts)
Melissa Greenlee
Directors (Scott, Heimbrock,
Weiss, Britts)
Stock Based Compensation Restricted
Stock Based Compensation Restricted
Stock Based Compensation Restricted
Restricted
Exercise of stock option
Stock Based Compensation Restricted
Number of Shares
outstanding as of
Decembe r 31, 2018
Ending Balance
Common
Preferred Series B
Preferred Series C
49,018,548
517,359
10,000
4
All shares issued in the transactions detailed above, contain a legend that states that the shares were issued in a
transaction not registered under the Securities Act of 1933 and may not be transferred unless registered or pursuant
to an exemption therefrom.
Please see Footnote 12 - Subsequent Events to the Company’s consolidated financial statements below for
information related to the Company’s issuance of common stock related to stock-based compensation for directors
and executives.
B. Debt Securities, Including Promissory and Convertible Notes
Outstanding
Balance ($)
as of
12/31/2018
Principal
Amount at
Issuance ($)
Date of Note
Issuance
Interest
Accrued
($)as of
12/31/2018 Maturity Date
Conversion
Terms
Name of Note Holder
Reason for Issuance
4/7/17
$ - $ 1,000,000
n/a
3/31/2018
None
Kapok Ventures Limited
10/31/17
$ 1,989,678 $ 2,000,000 $ -
12/6/17
$ - $ 400,000
n/a
5/31/18
$ 500,000 $ 500,000
$ -
9/30/2019, as
amended
5/31/2018, as
amended
9/30/2019, as
amended
None
Kapok Ventures Limited
None
Melrose Capital Advisors, LLC
None
Melrose Capital Advisors, LLC
Repay existing
indebtedness
Refinance existing loan
balance and partially fund
purchase of automation
equipment
To fund litigation
settlement
Refinance existing loan
balance and partially fund
purchase of automation
equipment
Please see Footnote 6 – Notes Payable to the Company’s consolidated financial statements for more information.
4) Financial Statements
a) The following financial statements were prepared in accordance with U.S. GAAP.
b) The financial statements for this reporting period were prepared by Daniel Seliga, Chief Financial
Officer of the Company.
See PART II –CONSOLIDATED FINANCIAL STATEMENTS below.
5) Issuer’s Business, Products and Service
A) Description of the Issuer’s business operations:
HealthWarehouse.com, Inc. is an online pharmacy, licensed and/or authorized to sell and deliver
prescriptions in 50 United States and the District of Columbia focusing on the out-of-pocket
prescription drug market, a market which is expected to continue to grow. The Company sells directly
to individual consumers who purchase prescription medications and OTC products over the Internet.
HealthWarehouse.com is currently 1 of 74 Verified Internet Pharmacy Practice Websites (“VIPPS”)
accredited by the National Association of Boards of Pharmacy (“NABP”).
5
B) The wholly-owned subsidiaries of HealthWarehouse.com, Inc. are Hwareh.com, Inc., Hocks.com, Inc.,
ION Holding NV, ION Belgium NV. Hocks.com, Inc., ION Holding NV and ION Belgium NV are
inactive subsidiaries.
C) Principal products and services: The Company sells directly to individual consumers who purchase
prescription medications and OTC products over the Internet. The Company offers over 6,200
prescription medications and over 6,000 OTC products.
6) Issuer’s Facilities
HealthWarehouse.com, Inc.’s corporate headquarters is located at 7107 Industrial Road, Florence, Kentucky,
41042 which also houses its inventory and pharmacy and customer service operations. The Company occupies
28,494 square feet of office, storage, and warehouse space under a lease with a monthly rental and the lease
expires December 31, 2024.
7) Officers, Directors, and Control Persons
A. Names of Officers and Directors
The following table sets forth certain information with respect to the directors and executive officers of the
Company as of the date of this information statement December 31, 2018. Please see detailed director
biographies contained in the Company’s 2018 Annual Meeting and Proxy Statement filed with the OTC
Markets on October 22, 2018.
Joseph Peters was appointed Interim President and Chief Executive Officer on April 11, 2017 and elected to the
Company’s Board of Directors on July 24, 2017.
Effective January 1, 2018, the Company entered into employment agreements with Mr. Peters and Daniel
Seliga appointing them as Chief Executive Officer and Chief Financial Officer, respectively. In addition, Mr.
Peters was named President of the Company in February 2018.
The Company held its 2018 Annual Meeting of Stockholders on October 17, 2018 and announced that its
shareholders had elected the nominees to new one-year terms on its Board of Directors, ratified a proposal to
modify an existing equity incentive plan and ratified the appointment of its independent accounting firm for
the 2018 fiscal year.
Re-elected to the Board of Directors at the stockholders’ meeting were Joseph Peters, Mark Scott, Dr. Stephen
Weiss and Jack Britts.
Holders of the Company’s Series B Preferred shares separately elected Joe Heimbrock, to the designated Series
B Preferred seat on the Board.
Effective September 1, 2018, Blair Magnus and Timothy Reilly were appointed to non-voting observer
positions to the Board of Directors as required by agreements with the Company’s lenders. See Note 6 – Notes
Payable to the consolidated financial statements for additional information.
6
Name
Joseph B. Peters
Daniel J. Seliga
Mark D. Scott
Dr. Stephen J. Weiss
Joseph Heimbrock
Jack Britts
B. Control Persons
Title
President and Chief Executive Officer, and
Director
Chief Financial Officer
Director
Director
Director
Director
The following individuals and entities are the beneficial owners of more than five percent (5%) of HEWA’s
Common Stock as of December 31, 2018. If any of the beneficial shareholders are corporate shareholders, the
name and address of the person(s) owning or controlling such corporate shareholders and the resident agents of
the corporate shareholders are provided.
If any of the beneficial shareholders are corporate shareholders, the name and address of the person(s) owning
or controlling such corporate shareholders and the resident agents of the corporate shareholders are provided.
If any of the beneficial shareholders are corporate shareholders, the name and address of the person(s) owning
or controlling such corporate shareholders and the resident agents of the corporate shareholders are provided.
Name
Affiliation
MVI Partners and Joe
Heimbrock, Director
Dr. Bruce Bedrick
Cormag Holdings, LTD
and Mark D. Scott,
Director
Dellave Holdings, LLC,
Melrose Capital Advisors
LLC and Tim Reilly
Lalit Dhadphale
Osgar Holdings and Hong
Penner
Director
>5%
Director
>5%
>5%
>5%
SCW Holdings LLP and
Dr. Stephen J. Weiss
Director
Jack Britts
Joseph B. Peters
Daniel J. Seliga
Director
President and
Chief Executive
Officer, and
Director
Chief Financial
Officer and
Principal Financial
Officer
Number of
shares
owne d
494,913;
1,375,408
Share
Class
Series B
Common
Ownership
Percentage
of Class
Outstandin
g
96%;
2.8%
Beneficial
Ownership
13.3% *
3,990,000 Common
8.1%
11.7%
5,456,427 Common
11.1%
11.1%
4,367,457 Common
8.9%
3,022,479 Common
6.2%
8.9%
6.2%
1,979,167 Common
4.0%
5.6%
1,020,566 Common
2.1%
118,958 Common
0.2%
2.7%
0.2%
Address
3299 Hughes Court, Taylor
Mill, KY 41015
5375 Monterey Circle #32,
Delray Beach, FL 33484
104 Falcon Ridge Drive,
Winnipeg, Manitoba, Canada
R3Y1X6
1085 Gulf of Mexico Drive,
Longboat Key, FL 34228
182 Uccello Drive, Las
Vegas, NV 89138
400 St. Mary Avenue, 9th
Floor, Winnipeg, Manitoba,
Canada R3C4K5
10405 East McDowell
Mountain Ranch Road,
Scottsdale, Arizona 85255
2021 Saint Andrews Road,
Greensboro, NC 27408
9085 Braxton Drive, Union,
KY 41091
50,000 Common
0.1%
1.2%
3524 Paxton Avenue,
Cincinnati, OH 45208
788,436 Common
1.6%
2.0%
* Each Preferred B share is convertible into 11.97 common shares as of December 31, 2018.
7
8) Legal/Disciplinary History
A. Please identify whether any of the persons listed above have, in the past ten years, been
the subject of:
1. A conviction in a criminal proceeding or named as a defendant in a pending criminal proceeding
(excluding traffic violations and other minor offenses);
None
2. The entry of an order, judgment, or decree, not subsequently reversed, suspended or vacated, by a court
of competent jurisdiction that permanently or temporarily enjoined, barred, suspended or otherwise
limited such person’s involvement in any type of business, securities, commodities, or banking
activities;
None
3. A finding or judgment by a court of competent jurisdiction (in a civil action), the Securities and
Exchange Commission, the Commodity Futures Trading Commission, or a state securities regulator
of a violation of federal or state securities or commodities law, which finding or judgment has
not been reversed, suspended, or vacated; or
Dr. Bruce Bedrick, a beneficial owner of 10% or more of the common stock, was subject to a Final
Judgment with the United States District Court, Central District of California, related to a
Complaint filed by the Securities and Exchange Commission on March 9, 2017. The Final
Judgement was filed by the Securities and Exchange Commission on December 22, 2017.
4. The entry of an order by a self-regulatory organization that permanently or temporarily barred
suspended or otherwise limited such person’s involvement in any type of business or securities
activities.
None
9) Third Party Providers
Legal Counsel
General Counsel
Name:
Address 1:
Address 2:
Phone:
Email:
Mark Kobasuk
7393 Pinehurst Drive
Cincinnati, OH 45244
(513) 607-9078
mgklaw1@gmail.com
Securities Counsel
Kenneth Tabach
Silver, Freedman, Taff & Tiernan LLP
3299 K Street, N.W. Suite 100
Name:
Firm:
Address 1:
Address 2: Washington, DC 20007
Phone:
Email:
(202) 295-4500
ktabach@sfttlaw.com
8
and
Name:
Firm:
Address 1:
Address 2:
Phone:
Email:
Mark J. Zummo
Kohnen & Patton, LLP
201 East Fifth Street, Suite 800
Cincinnati, OH 45202
(513) 381-0656
mzummo@kplaw.com
Accounting/Auditing Firm
Firm:
Address 1:
Address 2:
Phone:
Email:
Marcum LLP
750 Third Avenue, 11th Floor
New York, NY 10017
(212) 485-5500
info@marcumllp.com
On October 17, 2018, at the 2018 Annual Meeting of Stockholders, the stockholders ratified the selection of
Marcum LLP to serve as the Company’s independent registered public accounting firm for the year ended
December 31, 2018.
9
10) Issuer Certification
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Joseph Peters, certify that:
1.
2.
3.
I have reviewed this annual disclosure statement of HealthWarehouse.com, Inc.
Based on my knowledge, this disclosure statement does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this disclosure statement; and
Based on my knowledge, the financial statements, and other financial information included or incorporated by reference
in this disclosure statement, fairly present in all material respects the financial condition, results of operations and cash
flows of the issuer as of, and for, the periods presented in this disclosure statement.
Date: March 21, 2019
/s/ Joseph B. Peters
Joseph B. Peters
Chief Executive Officer and President
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Daniel Seliga, certify that:
1.
2.
3.
I have reviewed this annual disclosure statement of HealthWarehouse.com, Inc.
Based on my knowledge, this disclosure statement does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; and
Based on my knowledge, the financial statements, and other financial information included in this disclosure statement,
fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and
for, the periods presented in this disclosure statement.
Date: March 21, 2019
/s/ Daniel J. Seliga
Daniel J. Seliga
Chief Financial Officer
10
PART II –CONSOLIDATED FINANCIAL STATEMENTS
11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
HealthWarehouse.com, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Healthwarehouse.com, Inc. (the “Company”) as of December 31,
2018 and 2017, the related consolidated statements of operations, changes in stockholders’ deficiency and cash flows for each of the
two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018
and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in
conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph - Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant losses and needs
to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Marcum LLP
We have served as the Company’s auditor since 2009.
New York, NY
March 21, 2019
MarcumLLPn750 Third Avenuen11th FloornNew York, New York10017nPhone212.485.5500nFax212.485.5501nmarcumllp.com HEALTHWAREHO USE.CO M, INC. AND SUBSIDIARIES
CO NSO LIDATED BALANCE SHEETS
December 31,
2018
December 31,
2017
Assets
Current assets:
Cash
Restricted cash
Accounts receivable
Inventories
Prepaid expenses and other current assets
T otal current assets
Deposit
Property and equipment, net
Web development costs, net
T otal assets
Liabilities and Stockholders’ Deficiency
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Current portion of capital lease payable
Notes payable, net of debt discount of $12,262 as of December 31, 2018 and $0 as of December 31, 2017
Note payable and other advances – related parties
Redeemable preferred stock - Series C; par value $0.001 per share;
10,000 designated Series C: 10,000 issued and outstanding as of
December 31, 2018 and 2017 (aggregate liquidation preference of $1,000,000)
T otal current liabilities
Long term liabilities:
Notes payable, net of debt discount of $61,312 as of December 31, 2017
Capital lease payable - non-current
T otal long term liabilities
T otal liabilities
Commitments and contingencies
Stockholders’ deficiency:
$
2,934
425,513
127,861
209,607
104,041
869,956
-
1,174,814
-
$
2,044,770
$
853,693
1,427,727
5,736
2,477,416
-
1,000,000
5,764,572
-
6,557
6,557
5,771,129
$
3,349
378,708
79,030
253,420
108,096
822,603
440,000
309,096
1,053
1,572,752
$
$
792,824
1,071,439
-
400,000
29,102
1,000,000
3,293,365
1,378,688
-
1,378,688
4,672,053
Preferred stock – par value $0.001 per share; authorized 1,000,000 shares; issued and outstanding
as of December 31, 2018 and 2017 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 shares issued and
outstanding as of December 31, 2018 and 2017 (aggregate liquidation preference
of $5,915,742 and $5,573,509 as of December 31, 2018 and 2017, respectively)
Common stock – par value $0.001 per share; authorized 100,000,000 shares; 50,197,760 and 48,850,209 shares issued
and 49,018,548 and 47,670,997 shares outstanding as of December 31, 2018 and 2017, respectively
Additional paid-in capital
T reasury stock, at cost, 1,179,212 shares as of December 31, 2018 and 2017
Accumulated deficit
T otal stockholders’ deficiency
T otal liabilities and stockholders’ deficiency
-
517
-
517
50,197
33,682,223
(3,419,715)
(34,039,581)
(3,726,359)
2,044,770
$
48,850
33,151,341
(3,419,715)
(32,880,294)
(3,099,301)
1,572,752
$
T he accompanying notes are an integral part of these consolidated financial statements.
13
HEALTHW AREHO USE.C O M, INC . AND SUBSIDIARIES
C O NSO LIDATED STATEMENTS O F O PERATIO NS
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative expenses
Impairment of fixed assets
T otal Operating Expenses
For the Ye ars Ende d
De ce mbe r 31,
2018
2017
$
15,748,162
$
14,847,262
5,526,865
5,009,663
10,221,297
9,837,599
10,598,867
9,359,593
170,000
-
10,768,867
9,359,593
Income (loss) from operations
(547,570)
478,006
Interest expense
Net income (loss)
Preferred stock:
(269,484)
(106,231)
(817,054)
371,775
Series B convertible preferred stock contractual dividends
(342,233)
(342,232)
Net income (loss) attributable to common stockholders
$
(1,159,287)
$
29,543
Per share data:
Net income (loss) – basic
Net income (loss) – diluted
Series B convertible preferred stock contractual dividends
$
(0.02)
(0.02)
(0.01)
0.01
0.01
(0.01)
Net income (loss) attributable to common stockholders - basic
$
(0.02)
$
0.00
Net income (loss) attributable to common stockholders - diluted
$
(0.02)
$
0.00
Weighted average number of common shares outstanding - basic
Weighted average number of common shares outstanding - diluted
48,695,935
48,695,935
45,214,968
51,880,200
T he accompanying notes are an integral part of these consolidated financial statements.
14
HEALTHWAREHO USE.C O M, INC. AND SUBSIDIARIES
CO NSO LIDATED STATEMENT O F CHANGES IN STO CKHO LDERS' DEFICIENC Y
FO R THE YEAR ENDED DECEMBER 31, 2017
Series B
Convertible
Prefe rre d Stock
Common Stock
Shares
Amount
Share s
Amount
Additional
Paid-In Capital
Treasury Stock
Shares
Amount
Accumulated
De ficit
Total
Stockholders’
Deficiency
Balances, January 1, 2017
517,359
$
517
43,761,825
$
43,762
$
32,014,629
1,179,212
$
(3,419,715)
$
(32,909,837)
$
(4,270,644)
Stock-based compensation
Exercise of options into common stock
Warrants issued in exchange for extension
of notes payable
Stock issued in exchange for services
Sale of common stock for cash
Contractual dividends on Series B convertible
preferred stock
Warrants issued as debt discount in
connection with notes payable
Inducement charge for warrants exercised
at discount
Exercise of warrants into common stock
Net income
-
-
-
-
-
-
-
-
-
-
-
-
-
1,028,063
1,028
267,048
151,987
-
400,000
152
-
400
17,647
7,100
87,600
1,875,000
1,875
298,125
-
-
-
-
1,633,334
1,633
-
-
-
65,400
15,425
378,367
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
268,076
17,799
7,100
88,000
300,000
(342,232)
(342,232)
-
-
371,775
65,400
15,425
380,000
371,775
Balances, December 31, 2017
517,359
$
517
48,850,209
$
48,850
$
33,151,341
1,179,212
$
(3,419,715)
$
(32,880,294)
$
(3,099,301)
15
HEALTHWAREHO USE.CO M, INC. AND SUBSIDIARIES
CO NSO LIDATED STATEMENT O F CHANGES IN STO CKHO LDERS' DEFICIENCY (continue d)
FO R THE YEAR ENDED DECEMBER 31, 2018
Se rie s B
C onve rtible
Pre fe rre d Stock
Common Stock
Share s
Amount
Share s
Amount
Additional
Paid-In Capital
Tre asury Stock
Share s
Amount
Accumulate d
De ficit
Total
Stockholde rs’
De ficie ncy
Balances, December 31, 2017
517,359
$
517
48,850,209
$
48,850
$
33,151,341
1,179,212
$
(3,419,715)
$
(32,880,294)
$
(3,099,301)
Stock-based compensation
Exercise of options into common stock
Contractual dividends on Series B convertible
preferred stock
Exercise of warrants into common stock
Net loss
-
-
-
-
-
-
-
-
525,832
10,000
811,719
-
525
10
812
-
530,804
890
(812)
-
-
-
-
-
-
-
-
-
-
-
-
-
531,329
900
(342,233)
(342,233)
-
-
(817,054)
(817,054)
Balances, December 31, 2018
517,359
$
517
50,197,760
$
50,197
$
33,682,223
1,179,212
$
(3,419,715)
$
(34,039,581)
$
(3,726,359)
T he accompanying notes are an integral part of these consolidated financial statements.
16
HEALTHWAREHO USE.C O M, INC . AND SUBSIDIARIES
C O NSO LIDATED STATEMENTS O F C ASH FLO W S
C ash flows from ope rating activiti e s
Net loss
Adjust ment s to reconcile net loss to net cash used in operating activities:
Depreciat ion and amort izat ion
Stock-based compensation
Impairment loss on website development costs
Loss on disposition of equipment
Gain on set tlement of accrued expenses
Amortization of debt discount
Impairment of fixed assets
Write off of web development costs
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Net cash provided by (used in) operating activities
C ash flows from inve sting activitie s
Capital expenditures
Progress payments deposited with equipment manufacturer
Net cash used in investing activities
C ash flows from financing activiti e s
Repayment of capital lease
Proceeds from exercise of stock options
Proceeds from issuance of notes payable
Repayment of notes payable
Proceeds from the exercise of warrant s
Proceeds from sale of common stock
Repayment of notes payable and other advances – related parties
Net cash provided by financing act ivities
Net decrease in cash
Cash and restricted cash - beginning of period
For the Ye ars Ende d
De ce mbe r 31
2018
2017
$
(817,054)
$
371,775
123,862
626,329
-
7,807
-
49,050
170,000
-
(48,831)
43,813
4,055
60,869
(80,945)
138,955
(1,148,304)
440,000
(708,304)
(5,737)
649,678
-
900
-
(29,102)
615,739
77,065
351,076
15,425
-
(139,479)
4,088
13,700
(13,599)
(44,005)
(12,520)
(960,724)
(243,570)
(580,768)
(33,254)
(450,000)
(483,254)
-
17,799
1,840,000
(1,300,000)
380,000
300,000
(38,803)
1,198,996
46,390
134,974
382,057
247,083
Cash and restricted cash - end of period
$
428,447
$
382,057
Cash paid for:
Int erest
Non-cash inve sting and fi nancing activitie s:
Cashless exercise of warrants into common st ock
Conversion of accounts payable to common stock
Acquisition of capital equipment under capital lease
Warrant s issued in connection with notes payable
Warrant s issued for extension of not es payable
Accrual of contractual dividends on Series B convert ible preferred stock
Common stock issued to satisfy accrued directors' fees
Common stock issued to satisfy accrued non-cash executive bonus
Writ e-off of fully-depreciat ed asset
$
269,484
$
106,231
$ 812
$ -
$ 18,030
$ -
$ 342,233
$ 53,000
$ 30,000
$ 13,383
$ -
$ 88,000
$ -
$ 65,400
$ 7,100
$ 342,232
$ 247,750
$ -
$ -
T he accompanying notes are an integral part of these consolidat ed financial statements.
17 of 38
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to 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 and/or authorized to sell and deliver prescriptions in all 50 United States and the District of
Columbia focusing on the out-of-pocket prescription drug market. The Company is a 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.
2. Going Concern and Management’s Liquidity Plans
The Company has financed its operations primarily through debt and equity financings. Additional borrowings from
the Company’s lenders during 2017 and 2018 have not been sufficient to satisfy the Company’s current obligations. As of
December 31, 2018, the Company had a working capital deficiency of $4,894,616 and a stockholder deficiency of $3,726,359.
The Company has historically incurred significant net losses, including a net loss of $817,054 for the year ended December 31,
2018. Although the Company generated cash from operating activities of $138,955 during 2018, that amount was not sufficient
to meet its current obligations. These conditions indicate that there is substantial doubt about the Company’s ability to continue
as a going concern within one year after the date that the financial statements are issued.
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 meet its payment obligations. There is no
assurance that additional financing will be available when needed, that management will be able to obtain financing on terms
acceptable to the Company or that the Company will become profitable and generate positive operating cash flow in an amount
sufficient to meet its obligations. If the Company is unable to raise or generate sufficient additional funds, it will have to develop
and implement a plan to attempt to extend note repayments, attempt to negotiate the preferred stock redemption 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
operations, and /or seek reorganization under the U.S. bankruptcy code.
Accordingly, the accompanying consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (“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 consolidated financial statements do not necessarily represent realizable or
settlement values. The 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 consolidated financial statements include the accounts of HealthWarehouse.com, Inc., Hwareh.com, Inc.,
Hocks.com, Inc., ION Holding NV, ION Belgium NV, its wholly-owned subsidiaries. ION Holding NV and ION Belgium NV
are inactive subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of 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
18 of 38
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, the net realizable value of inventory, the recoverability and useful lives of long-lived assets and website development
costs, the valuation allowance related to deferred tax assets, the valuation of equity instruments, debt discounts and
contingencies.
Reclassifications
Certain accounts in the prior period consolidated financial statements have been reclassified for comparison purposes
to conform to the presentation of the current period consolidated financial statements. These reclassifications had no effect on
the previously reported net loss.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased
to be cash equivalents. As of December 31, 2018 and 2017, the Company did not have any cash equivalents.
Restricted Cash
Restricted cash represents cash held by the Company’s credit card processor as a reserve to cover potential future
refunds and funds held by the senior lender as collateral for the Company’s Senior Note. See Note 6 – Notes Payable to the
consolidated financial statements for additional information. Cash and Restricted Cash, as presented on the consolidated
statements of cash flows, consists of $2,934 and $425,513, as of December 31, 2018, respectively, and $3,349 and $378,708 as
of December 31, 2017, respectively.
Accounts Receivable and Allowance for Doubtful Accounts Receivable
The Company’s management has established an allowance for doubtful accounts sufficient to cover probable and
reasonably estimable losses. The nature of the business is that the majority of payments are received before the product is
shipped. If the financial conditions of customers were to materially deteriorate, an increase in the allowance amount could be
required. The allowance for doubtful accounts considers several factors, including collection experience, current economic
trends, estimates of forecasted write-offs, aging of the accounts receivable, and other factors. The Company has determined
that an allowance for doubtful accounts was not necessary as of December 31, 2018 and 2017.
Inventories
The Company measures inventory at the lower of cost or net realizable value, defined as estimated selling prices in the
ordinary course of business, less reasonably predictable costs of disposal. The Company performs regular reviews of inventory
quantities on hand and evaluates the realizable value of its inventories. The valuation process for excess or slow-moving
inventory contains uncertainty because management must use judgment to estimate when the inventory will be sold and the
quantities and prices at which the inventory will be sold in the normal course of business. The Company adjusts the carrying
value of the inventory as necessary with estimated valuation reserves for excess, obsolete, and slow-moving inventory by
comparing the individual inventory items to forecasted product demand, taking into account current risks, trends and changes
in industry conditions. The inventory is valued at the lower of cost or net realizable value with cost determined using the first-
in, first-out method.
Property and Equipment, net
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-
line method over the estimated useful lives of the assets. The costs of additions and betterments are capitalized and expenditures
for repairs and maintenance, which do not extend the economic useful life of the related assets, are expensed in the period
incurred. Gains or losses on disposal of property and equipment are reflected in the statements of operations in the period of
disposal.
19 of 38
Impairment of Long-Lived Assets
The Company reviews the carrying value of intangibles and other long-lived assets for impairment at least annually or
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets is measured by comparing the carrying amount of the asset or asset group to the undiscounted
cash flows that the asset or asset group is expected to generate. If the undiscounted cash flows of such assets are less than the
carrying amount, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if
any, exceeds its fair value. During the year ended December 31, 2018, the Company replaced its existing automation equipment
with new automation equipment. The Company intends to sell the old equipment and as a result, recognized a loss of $170,000
to reduce the book value of the equipment to its estimated salvage value.
Website Development Costs
The Company capitalizes costs associated with the development of its website. During the years ended December 31,
2018 and 2017, the Company did not capitalize any of its website development costs. The Company is amortizing the website
development costs on a three-year straight-line basis and incurred amortization expense of $1,053 and $21,148 during the years
ended December 31, 2018 and 2017, respectively. In addition, the Company recognized a $13,700 impairment loss in June 2017
as the result of a project not being implemented. As of December 31, 2018, unamortized website development costs totaled $0.
Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. These fair value measurements apply to all financial instruments that are
measured and reported on a fair value basis.
Based on the observability of the inputs used in the valuation techniques, financial instruments are categorized
according to the fair value hierarchy, which ranks the quality and reliability of the information used to determine fair
values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1 - Observable inputs such as quoted prices in active markets.
Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop
its own assumptions.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such
cases, the assignment of an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant
to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement
in its entirety requires judgment, and considers factors specific to the asset or liability.
The carrying value of items included in the Company’s working capital approximates fair value because of the
relatively short maturity of these instruments. The Company’s notes payable approximate fair value because the terms are
substantially similar to comparable debt in the marketplace.
Income Taxes
Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and
liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years
in which the temporary differences are expected to reverse.
U.S. GAAP prescribes a recognition threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in
the Company’s financial statements as of December 31, 2018 and 2017. The Company does not expect any significant changes
in the unrecognized tax benefits within twelve months of the reporting date.
20 of 38
The Company classifies interest expense and any related penalties related to income tax uncertainties as a component
of income tax expense. No interest or penalties have been recognized during the years ended December 31, 2018 and 2017.
Debt Discounts
The Company records, as a discount to notes and convertible notes, the relative fair value of warrants issued in
connection with the issuances and the intrinsic value of any conversion options based upon the differences between the fair
value of the underlying common stock at the commitment date of the note transaction and the effective conversion price
embedded in the note. Debt discounts under these arrangements are amortized to interest expense using the interest method over
the earlier of the term of the related debt or their earliest date of redemption.
Revenue Recognition
Revenues for the sales of products are recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectability is reasonably assured. The Company defers revenue when cash
has been received from the customer, but delivery has not yet occurred. Such amounts are reflected as deferred revenues in the
accompanying consolidated financial statements.
Shipping and Handling Costs
The Company policy is to provide free standard shipping and handling for most orders. Shipping and handling costs
incurred are recognized in selling, general and administrative expenses. Such amounts aggregated $1,626,049 and $1,692,736
for the years ended December 31, 2018 and 2017, respectively.
In certain circumstances, shipping and handling costs are charged to the customer and recognized in Net Sales. The
amounts recognized in Net Sales for the years ended December 31, 2018 and 2017 were $373,638 and $480,444, respectively.
Advertising and Marketing Expenses
The Company expenses all advertising and marketing costs as incurred and were $1,315,616 and $1,225,763 for the
years ended December 31, 2018 and 2017, respectively.
Sales Taxes
The Company accounts for sales taxes imposed on its goods and services on a net basis in the consolidated statements
of operations. During 2018 and continuing into 2019, various states have enacted or are considering enacting legislation to
require the collection of sales tax on ecommerce transactions shipped to their state. Such requirements vary by state and are
subject to specified de minimis levels and various exclusions, including prescription medication. Compliance with current
legislation enacted is not expected to have a material impact on the Company’s future operations or results.
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 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.
21 of 38
Numerator
Net income (loss) attributable to common shareholders
$
(1,159,287)
$
29,543
December 31
2018
2017
Denominator:
Weighted-average common shares, basic
Weighted-average common shares, diluted*
Net income (loss) per common share:
Basic
Diluted
48,695,935
48,695,935
45,214,968
51,880,200
$
$
(0.02)
(0.02)
$
$
0.00
0.00
* The diluted earnings per common share in 2017 included the weighted-average effect of 701,667 stock options and 6,027,784
stock warrants that are potentially dilutive to earnings per share for the year ended December 31, 2017, since the exercise price
of such securities was less than the weighted average market price of $0.31 during the period.
Potentially dilutive securities are excluded from the computation of net earnings per share if their inclusion would be
anti-dilutive and consist of the following:
Options
Warrants
Series B Convertible Preferred Stock
Total potentially dilutive shares
Stock-Based Compensation
December 31,
2018
2,954,845
4,866,151
6,192,788
14,013,784
2017
1,021,345
6,541,151
6,192,788
13,755,284
Stock-based compensation expense for all stock-based payment awards is based on the estimated fair value of the
award. For employees and directors, the award is measured on the grant date. For non-employees, the award is measured on
the grant date and is then remeasured at each vesting date and financial reporting date. The Company recognizes the estimated
fair value of the award as compensation cost over the requisite service period of the award, which is generally the option vesting
term. The Company generally issues new shares of common stock to satisfy option and warrant exercises.
Preferred Stock
Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at
fair value. The Company classifies conditionally redeemable preferred shares, which includes preferred shares that feature
redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain
events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred
shares in stockholders’ deficiency.
Convertible Instruments
U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as
free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the
economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument
and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with
changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded
derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is
deemed to be conventional as that term is described under applicable U.S. GAAP.
22 of 38
When the Company has determined that the embedded conversion options should not be bifurcated from their host
instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options
embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the
commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these
arrangements are amortized over the term of the related debt to their stated date of redemption. The Company also records, when
necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the
differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective
conversion price embedded in the preferred shares.
Common Stock Warrants and Other Derivative Financial Instruments
The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii)
provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share
settlement) providing that such contracts are indexed to the Company's own stock. The Company classifies as assets or liabilities
any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and
if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in
shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants
and other free-standing derivatives at each reporting date to determine whether a change in classification between assets and
liabilities is required.
The Company evaluated its free-standing warrants to purchase common stock to assess their proper classification in
the consolidated balance sheet as of December 31, 2018 and 2017 using the applicable classification criteria enumerated under
U.S. GAAP and determined that the common stock purchase warrants contain fixed settlement provisions.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, “Revenue from Contracts
with Customers”, which provides guidance for revenue recognition. The standard requires that an entity recognizes revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which delayed
the effective date of the new revenue guidance by one year. As a result, the provisions of ASU 2014-09, and subsequent
amendments, are effective for the Company for annual reporting periods beginning after December 15, 2018. The Company is
in the process of evaluating the impact of adoption of this update on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize
the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a
liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for
the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class
of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize
and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Public business
entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2019. Early application is
permitted for all public business entities and all nonpublic business entities upon issuance. The Company is in the process of
evaluating the impact of adoption of this update on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation” (Topic 718): Improvements
to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. ASU 2016-09 is effective for the Company beginning January 1, 2018. The
Company does not expect that the impact of adoption of this update will be significant on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic
230)”. ASU 2016-15 adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of
cash flows, reducing the existing diversity in practice that has resulted from the lack of consistent principles on this topic. ASU
23 of 38
2016-15 is effective for the Company beginning January 1, 2018. Early adoption is permitted. The Company does not expect
that the impact of adoption of this update will be significant on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU
2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and
amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as
restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning
and ending balances shown on the statement of cash flows. The guidance is effective for the Company in the first quarter of
2019 and early adoption is permitted. ASU 2016-18 must be applied retrospectively to all periods presented. The Company
adopted ASU 2016-18 in the presentation of its statement of cash flows for the year ended December 31, 2018 and
retrospectively to the year ended December 31, 2017.
In June 2018, the FASB issued ASU 2018-07, Stock Compensation (Topic 718); Improvements to Non-employer
Share-Based Payment Accounting. The amendment aligns the accounting for share based payments issued to employees and
non-employees. The amendments in this update are effective for public companies for annual periods beginning after December
15, 2018, including interim periods within those periods. The Company is currently reviewing the impact of the adoption of
ASU 2018-07 on its consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). These amendments
provide clarifications and corrections to certain ASC subtopics including the following: Income Statement - Reporting
Comprehensive Income – Overall (Topic 220-10), Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing
Liabilities from Equity – Overall (Topic 480-10), Compensation - Stock Compensation - Income Taxes (Topic 718-740),
Business Combinations - Income Taxes (Topic 805-740), Derivatives and Hedging – Overall (Topic 815- 10), and Fair Value
Measurement – Overall (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods
beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on
its consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-
10”). The amendments in ASU 2018-10 provide additional clarification and implementation guidance on certain aspects of the
previously issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) and have the same effective and transition
requirements as ASU 2016-02. Upon the effective date, ASU 2018-10 will supersede the current lease guidance in ASC Topic
840, Leases. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases,
a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis.
Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use,
or control the use of, a specified asset for the lease term. ASU 2018-10 is effective for emerging growth companies for interim
and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The guidance is required to be
applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest
comparative periods presented in the financial statements. The Company is currently assessing the impact this guidance will
have on its consolidated financial statements.
In July 2018, the FASB issued Accounting Standards Update No. 2018-11, “Leases (Topic 842): Targeted
Improvements,” (“ASU 2018-11”). The amendments in ASU 2018-11 related to transition relief on comparative reporting at
adoption affect all entities with lease contracts that choose the additional transition method and separating components of a
contract affect only lessors whose lease contracts qualify for the practical expedient. The amendments in ASC Topic 842 are
effective for emerging growth companies for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.
There were no other recent accounting standard updates that the Company has not yet adopted that we believe would
have a material impact on our consolidated financial statements.
4. Property and Equipment, Net
Property and equipment, net consisted of the following:
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Computer Software
Equipment
Office Furniture and Equipment
Computer Hardware
Leasehold Improvements
Total
Less: Accumulated Depreciation
Property and Equipment, Net
(a) Lesser of useful life or initial term of lease
December 31,
2018
2017
Useful Life
(Years)
$
$
230,299
1,529,714
102,443
50,998
322,973
2,236,427
(1,061,613)
1,174,814
5 years
10 years
7 years
5 years
(a)
230,299
551,015
98,192
50,997
322,973
1,253,476
(944,380)
309,096
$
$
Depreciation expense for the above assets for the years ended December 31, 2018 and 2017 was $122,809 and $55,918,
respectively.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
December 31,
2018
2017
Salaries and Benefits
Dividend Payable
Accrued Interest
Accrued Rent
Severance
Accrued Director Fees
Deferred Revenue
Other
6. Notes Payable
Notes payable consisted of the following:
$
$
240,264
1,026,699
28,436
6,169
-
53,000
4,399
68,760
1,427,727
186,340
684,465
28,436
2,850
72,986
53,000
11,206
32,156
1,071,439
$
$
Melrose Note
Kapok Promissory Note
Less debt discount
Total debt
Less current portion
December 31,
2018
2017
$
500,000
$
400,000
1,989,678
(12,262)
2,477,416
(2,477,416)
1,440,000
(61,312)
1,778,688
(400,000)
Long-term debt, less current portion
$
-
$
1,378,688
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Kapok Promissory Note
The Company is a party to a promissory note (the "Kapok Promissory Note" or “Senior Note”) and a security agreement
(the "Kapok Security Agreement") with Kapok Ventures Limited, which commenced in 2017. Under the terms of the Kapok
Promissory Note, the Company may borrow up to an aggregate of $2,000,000 (as amended) from Kapok. The Kapok Promissory
Note bears interest on the unpaid principal balance until the full amount of principal has been paid at a variable rate equal to the
prime rate plus four and one-quarter percent (4.25%) per annum (9.75% at December 31, 2018). During the year ended
December 31, 2018, Kapok advanced $549,678 to the Company. Under the terms of the Kapok Promissory Note, the Company
has agreed to make monthly payments of accrued interest on the first day of every month, through the September 30, 2019
maturity date.
The investor rights agreement of the Company’s Series B preferred shares limits the total debt of the Company to $1
million. The Company has received waivers to temporarily exceed the limit in connection with the extensions and increase of
the Kapok Promissory Note. The waiver related to the Kapok Promissory Note expires on September 30, 2019.
Pursuant to the Kapok Security Agreement, the Company granted Kapok a first priority security interest in all of the
Company's assets, in order to secure the Company's obligation to repay the Kapok Promissory Note, including a Deposit Account
Control Agreement, dated as of June 30, 2017, which granted the Lender a security interest in certain bank accounts of the
Company. The Kapok Loan Agreements contain customary negative covenants restricting the Company's ability to take certain
actions without Kapok's consent, including incurring additional indebtedness, transferring or encumbering assets, paying
dividends or making certain other payments, and acquiring other businesses. The repayment of the Kapok Promissory Note may
be accelerated prior to the maturity date upon certain specified events of default, including failure to pay, bankruptcy, breach of
covenant, and breach of representations and warranties.
The proceeds from the Kapok Promissory Note were used to partially repay existing indebtedness and to partially fund
the acquisition of pharmacy automation equipment.
On December 6, 2017, the Company issued to Kapok five-year warrants to purchase 40,000 shares of common stock
at an exercise price of $0.35 per share for an aggregate grant date value of $11,911 which was record as stock-based
compensation during the year ended December 31, 2017. The warrants were issued as a requirement of their waiver to allow
for the Melrose Promissory Note (detailed below).
As part of a consent provided by Kapok related to the extension of the maturity date of the Melrose Promissory Note,
the Company granted Kapok, effective September 1, 2018, the right to appoint a representative to a non-voting observer position
to the Board of Directors until the full balance of the Kapok Promissory Note is repaid. The Company is required to provide
compensation of $1,000 per month to the Kapok representative.
Melrose Promissory Note
The Company is a party to a promissory note (the "Melrose Promissory Note") and a security agreement (the "Melrose
Security Agreement") with Melrose Capital Advisors, LLC. Under the terms of the Melrose Promissory Note, the Company
borrowed an aggregate of $500,000 from Melrose (the "Melrose Loan") as of December 31, 2018. The Melrose Promissory
Note bears interest on the unpaid principal balance until the full amount of principal has been paid at a fixed rate equal to 10%
per annum. During the year ended December 31, 2018, Melrose advanced $100,000 to the Company. Under the terms of the
Melrose Promissory Note, 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 Melrose Promissory Note is payable on September 30,
2019.
Pursuant to the Melrose Security Agreement, the Company granted a junior security interest in all of the Company's
assets, in order to secure the Company's obligation to repay the Melrose Promissory Note. The Melrose security interest is junior
to the Kapok security interest. The Melrose Loan Agreements contain customary negative covenants restricting the Company's
ability to take certain actions without Melrose's consent, including incurring additional indebtedness, transferring or
encumbering assets, paying dividends or making certain other payments, and acquiring other businesses. The repayment of the
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Melrose Promissory Note may be accelerated prior to the maturity date upon certain specified events of default, including failure
to pay, bankruptcy, breach of covenant, and breach of representations and warranties.
The proceeds from the Melrose Promissory Note were used to repay a portion of the settlement amount related to the
Taft litigation and to partially fund the acquisition of pharmacy automation equipment. See Section 8 Commitments and
Contingent Liabilities – Litigation.
The investor rights agreement of the Company’s Series B preferred shares limits the total debt of the Company to $1
million. The Company has received waivers to temporarily exceed the limit to allow for the Melrose Promissory Note. The
waiver related to the Melrose Promissory Note expires on March 31, 2019.
As part of an agreement related to the extension of the maturity date of the Melrose Promissory Note, the Company
granted Melrose, effective September 1, 2018, the right to appoint a representative to a non-voting observer position to the
Board of Directors until August 31, 2019. The Company is required to provide compensation of $1,000 per month to the
Melrose representative.
7. Stockholders’ Deficiency
The Company is authorized to issue up to 100,000,000 shares of common stock with a par value of $0.001 per share
and 1,000,000 shares of preferred stock with a par value of $0.001 per share.
OTC Market Tier Change
On April 14, 2017, the Company filed a Form 15 with the Securities and Exchange Commission terminating the
registration of its common stock under Rule 12 g-4(a)(1) of the Securities Exchange Act of 1934. The Company transitioned
to the OTC Pink Sheets – Current Information tier of the OTC Market on July 10, 2017.
Common Stock
On April 3, 2017, the Company issued 400,000 shares of common stock in exchange for the extinguishment of $88,000
of accounts payable balance for legal services. The shares were valued at $0.22 per share which was the closing price of the
shares on the date of the grant.
Effective April 7, 2017 the Company entered into Subscription Agreements (the "Subscription Agreements") with three
affiliated accredited investors, namely Joseph Heimbrock, Cormag Holdings, Ltd. and Osgar Holdings Ltd. (collectively, the
"Investors") and sold 1,875,000 shares of the Company's common stock, at $0.16 per share for an aggregate price of $300,000.
Through MVI Partners, LLC, Mr. Heimbrock holds substantially all of the Company's outstanding shares of Series B
Preferred Stock and Mr. Heimbrock is a member of the Company's Board of Directors. Cormag Holdings, Ltd. is owned by
Mark D. Scott, the Company's Chairman of the Board of Directors and owns greater than 5% of the Company's outstanding
shares of common stock. Osgar Holdings Ltd. is the beneficial owner of more than 5% of the Company's outstanding shares of
common stock. Hong Penner is the President and sole shareholder of Osgar Holdings Ltd. and she and her husband Brent Penner
have loaned Kapok Limited Ventures, a British Columbia corporation ("Kapok") $250,000 for purposes of financing the
Company’s Kapok Promissory Note.
On March 14, 2018, the Company issued 50,000 shares of common stock to an executive of the Company for payment
of the noncash portion of his 2017 bonus per the terms of his employment agreement. The shares had a grant date value of
$30,000. Such amount was included in accrued expenses and other current liabilities as of December 31, 2017.
During the years ended December 31, 2018 and 2017, the Company issued an aggregate of 475,832 and 1,028,063
shares of common stock, respectively, to directors of the Company for payment of their accrued noncash portion of their
director’s fees. The shares had an aggregate grant date value of $212,000 and $247,750 for the years ended December 31, 2018
and 2017, respectively, of which $53,000 and $75,500 had been accrued at December 31, 2017 and 2016, respectively. The
shares were valued at the closing prices for the Company’s common stock on the dates of grant which ranged between $0.16
and $0.61 per share.
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Stock-based compensation expense related to common stock issued was recorded in the consolidated statements of
operations as a component of selling, general and administrative expenses and totaled $212,000 and $259,667 for the years
ended December 31, 2018 and 2017, respectively.
Preferred Stock
Series A Preferred Stock
The Company has designated 200,000 of the 1,000,000 authorized shares of preferred stock as Series A Convertible
Preferred Stock (“Series A Preferred Stock”). The Series A Preferred Stock is non-voting, has a liquidation preference equal to
its purchase price, and does not pay dividends. The holders can call for the conversion of the Series A Preferred Stock at any
time and are entitled to half a share of the Company’s common stock for each share of Series A Preferred Stock converted. As
of December 31, 2018, 44,443 shares of Series A Preferred Stock are available to be issued. There were no shares of Series A
Preferred Stock outstanding as of December 31, 2018 or 2017.
Series B Preferred Stock
The Company has designated 625,000 of the 1,000,000 authorized shares of preferred stock as Series B Convertible
Preferred Stock (“Series B Preferred Stock”). The Series B Preferred Stock has voting rights equal to one vote for each common
share equivalent, has a liquidation preference equal to its purchase price, and receives preferred dividends equal to 7% of all
outstanding shares in either cash or payment-in-kind. The holders can call for the conversion of the Series B Preferred Stock at
any time and are entitled to five shares of the Company’s common stock for each share of Series B Preferred Stock converted.
In addition, the Series B Preferred Stock is subject to weighted average anti-dilution protection whereby if shares of
common stock are sold below the current conversion price, the conversion price is reduced pursuant to a pre-defined formula.
As of December 31, 2018 and 2017, Series B holders were entitled to convert into 11.97 shares of the Company’s common
stock for each share of Series B Preferred Stock due to the anti-dilution provision. The anti-dilution provision represents a
beneficial conversion feature. As of December 31, 2018, an incremental 3,605,993 shares of common stock are issuable at
conversion of the Series B Convertible Preferred Stock as compared to the original terms. Using the commitment date common
stock price in effect, the commitment date value of the incremental shares is $9,101,527.
However, recognition of beneficial conversion features is limited to the aggregate gross proceeds allocated to the
preferred stock of $3,199,689 (422,315 shares of Series B Convertible Preferred Stock times $9.45 per share less the proceeds
allocated to the warrants of $791,188) less the $1,666,967 beneficial conversion feature already recognized on the original
365,265 shares of Series B Preferred Stock (prior to the issuance of additional shares as payment-in-kind in lieu of cash
dividends). Due to these limitations, no beneficial conversion feature value was recorded for the years ended December 31,
2018 and 2017. The investor rights agreement of the Company’s Series B preferred shares limits the total debt of the Company
to $1 million. The agreement also limits the ability to raise preferred equity at current market conversion rates.
As of the years ended December 31, 2018 and 2017, the Company had accrued contractual dividends of $1,026,699
and $684,465, respectively, related to the Series B Preferred Stock.
Series C Preferred Stock
The Company’s Certificate of Designation designates 10,000 shares of the Company's preferred stock as Series C
Preferred Stock to be issued at an original issue price of $100 per share. The Series C Preferred Stock has voting rights equal to
one vote for each share held, has a liquidation preference equal to its purchase price, and has certain redemption rights available
at the option of the holder. The Series C Preferred Stock is non-convertible and does not pay dividends.
On October 17, 2011, the Company received net cash proceeds of $1,000,000 for the sale of 10,000 shares of Series C
Preferred Stock to a greater than 10% stockholder of the Company. Since certain of the Company’s preferred shares contain
redemption rights which are not solely within the Company’s control, these issuances of preferred stock were initially presented
as temporary equity. On February 13, 2013, the Company received a Notice of Redemption of Series C Preferred Stock and as
a result, the shares are classified as a current liability as of December 31, 2018 in the Company’s consolidated balance sheet.
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Incentive Compensation / Stock Option Plans
The Company sponsors an Incentive Compensation Plan (the “2009 Plan”) which was approved by the Board of
Directors and the Company’s Stockholders, and initially allowed the total number of shares of common stock issuable pursuant
to the 2009 Plan to be 2,881,425 shares.
The 2009 Plan imposes individual limitations on the amount of certain awards. Under these limitations during any
fiscal year of the Company, the number of options, stock appreciation rights, shares of restricted stock, shares of deferred stock,
performance shares and other stock based-awards granted to any one participant under the 2009 Plan may not exceed 250,000
shares, subject to adjustment in certain circumstances. The maximum amount that may be paid out as performance units in any
12-month performance period is an aggregate value of $2,000,000, and the maximum amount that may be paid out as
performance units in any performance period greater than 12 months is an aggregate value of $4,000,000. The maximum term
of each option or stock appreciation right, the times at which each option or stock appreciation right will be exercisable, and
provisions requiring forfeiture of unexercised options or stock appreciation rights at or following termination of employment
generally are fixed by the board of directors or committee of the Company’s board of directors designated to administer the
2009 Plan (the “Committee”), except that no option or stock appreciation right may have a term exceeding ten years. The
exercise price per share subject to an option and the grant price of a stock appreciation rights are determined by the Committee,
but in the case of an incentive stock option (ISO) must not be less than the fair market value of a share of common stock on the
date of grant.
Following the approval of the Board of Directors and stockholders of record as of August 25, 2014, the Company
adopted the 2014 Equity Incentive Plan (the “2014 Plan”) which made a total of 6,000,000 shares of common stock authorized
and available for issuance pursuant to awards granted under the 2014 Plan.
The 2014 Plan limit imposes individual limitations on the amount of certain awards. Under these limitations during
any fiscal year of the Company, the number of options, stock appreciation rights, shares of restricted stock, shares of deferred
stock, performance shares and other stock based-awards granted to any one participant under the 2014 Plan may not exceed
1,500,000 shares, subject to adjustment in certain circumstances. The maximum number of shares that may be awarded that are
not subject to performance targets is an aggregate of 1,200,000 shares. The maximum term of each option or stock appreciation
right, the times at which each option or stock appreciation right will be exercisable, and provisions requiring forfeiture of
unexercised options or stock appreciation rights at or following termination of employment generally are fixed by the Committee
designated to administer the 2014 Plan, except that no option or stock appreciation right may have a term exceeding ten years.
The exercise price per share subject to an option and the grant price of a stock appreciation rights are determined by the
Committee, but in the case of an incentive stock option (ISO) must not be less than the fair market value of a share of common
stock on the date of grant.
Following the approval of the Board of Directors and stockholders of record as of October 17, 2018, the Company
modified certain terms of the 2014 Plan including an increase in the total of shares of common stock authorized and available
for issuance pursuant to awards granted under the 2014 Plan to 12,000,000 and an increase in the maximum number of shares
that may be awarded that are not subject to performance targets to 6,000,000.
Stock Options
Grants
During the year ended December 31, 2018, the Company granted options to executives and key employees of the
Company to purchase an aggregate of 2,800,000 shares of common stock under a previously approved plan at exercise price
ranging between $0.36 and $0.61 per share for an aggregate grant date value of $1,301,983. The options vest over a three-year
period and have a term of ten years. The options granted included options to purchase an aggregate of 750,000 shares of common
stock that were issued to replace options previously issued to key employees during the same year.
During the year ended December 31, 2017, the Company granted options to an officer of the Company to purchase an
aggregate of 100,000 shares of common stock under the 2014 Plan at an exercise price of $0.22 per share for an aggregate grant
date value of $21,493. The options vested immediately and have a term of ten years.
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Exercise
During the year ended December 31, 2018, the Company received proceeds of $900 from the exercise of options to
purchase 10,000 shares of common stock. The options had exercise prices of $0.09 per share.
During the year ended December 31, 2017, the Company received proceeds of $17,799 from the exercise of options to
purchase 151,987 shares of common stock. The options had exercise prices ranging from $0.09 and $0.35 per share.
The aggregate intrinsic value of the options exercised was $3,100 and $36,821 for the years ended December 31, 2018
and 2017, respectively.
Valuation and Amortization
Option valuation models require the input of highly subjective assumptions. The fair value of the stock-based payment
awards is estimated utilizing the Black-Scholes option model. The volatility component of this calculation is derived from the
historical trading prices of the Company’s own common stock. The Company accounts for the expected life of options in
accordance with the “simplified” method for “plain vanilla” share options. The risk-free interest rate was determined from the
implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options.
In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those
shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the
remaining lives of unvested options, and the number of vested options as a percentage of total options outstanding. If the
Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the
future, the stock-based compensation expense could be significantly different from what the Company has recorded in the
current period. The Company estimated forfeitures related to option grants at a weighted average annual rate of 0% per year
for options granted during the years ended December 31, 2018 and 2017, respectively.
In applying the Black-Scholes option pricing model to stock options granted, the Company used the following weighted
average assumptions:
Risk-free interest rate
Expected dividend yield
Expected volatility
Weighted average expected life
(contractual term) in years
Year Ended December 31,
2018
2017
2.49% to 2.89%
0.00%
185.0% to 191.0%
6.0
2.00%
0.00%
192.0%
5.5
Stock-based compensation expense related to stock options was recorded in selling, general and administrative
expenses in the consolidated statements of operations and totaled $289,329 and $46,247 for the years ended December 31, 2018
and 2017, respectively.
As of December 31, 2018, stock-based compensation expense related to stock options of $606,149 remains
unamortized which is being amortized over the weighted average remaining period of 2.3 years.
Summary
A summary of the stock option activity during the years ended December 31, 2018 and 2017 is presented below:
30 of 38
Number of
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
Outstanding, January 1, 2017
Granted
Exercised
Forfeited
Outstanding, December 31, 2017
Granted
Exercised
Forfeited
Outstanding, December 31, 2018
1,294,204
100,000
(151,987)
(220,872)
1,021,345
2,800,000
(10,000)
(856,500)
2,954,845
$
$
$
0.51
0.22
0.12
0.28
0.59
0.47
0.09
0.61
0.47
Exercisable, December 31, 2018
1,004,845
$
0.60
8.1
5.8
$
90,133
$
90,133
The following table presents information related to stock options outstanding and exercisable at December 31, 2018:
Options Outstanding
Weighted
Average
Exercise
Price
$
0.10
0.34
0.49
5.80
0.47
Outstanding
Number of
Options
591,667
917,728
1,388,450
57,000
2,954,845
Weighted
Average
Exercise
Price
Options Exercisable
Weighted
Average
Remaining Life
In Years
$
0.10
0.27
0.87
5.80
0.60
6.5
8.2
2.2
3.1
5.8
$
$
Exercisable
Number of
Options
591,667
167,728
188,450
57,000
1,004,845
Range of
Exercise
Price
$0.09 - $0.12
$0.22 - $0.35
$0.53 - $1.60
$4.10 - $6.99
$0.09 - $6.99
Warrants
Valuation
In applying the Black-Scholes option pricing model to stock warrants granted, the Company used the following
weighted average assumptions:
Grants
Risk-free interest rate
Expected dividend yield
Expected volatility
Ccontractual term in years
Year Ended December 31,
2018
2017
n/a
n/a
n/a
n/a
1.58% to 2.11%
0.00%
191.0% to 200.0%
5.00
During the year ended December 31, 2017, the Company issued to a financial consultant five-year warrants to purchase
93,367 shares of common stock at exercise prices ranging between $0.33 and $0.50 per share for an aggregate grant date value
of $33,131.
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During the year ended December 31, 2017, the Company issued to a lender five-year warrants to purchase 35,000
shares of common stock at an exercise price of $0.225 per share for a grant date value of $7,100. See Note 6 – Notes Payable
for additional information.
During the year ended December 31, 2017, the Company issued to a lender five-year warrants to purchase 240,000
shares of common stock at exercise prices ranging between $0.35 and $0.43 per share for an aggregate grant date value of
$77,391.
The weighted average fair value of the stock warrants granted during the year ended December 31, 2017 was $0.32 per
share.
Exercise
During the year ended December 31, 2018, the Company issued an aggregate of 811,719 shares of common stock to
holders of 1,525,000 warrants upon exercise on a cashless basis. The warrants had an exercise price of $0.25 per share. The
aggregate intrinsic value of the warrants exercised was $444,250 for the year ended December 31, 2018.
During the year ended December 31, 2017, the Company notified certain holders of warrants of an offer to exercise
their warrants at a discounted exercise price of up to 80% of the existing exercise price of their warrants. As a result of the
offer, the Company received proceeds of $380,000 from the exercise of warrants to purchase an aggregate of 1,633,334 shares
of common stock for cash, including 1,333,334 warrants exercised by a director of the Company. The warrants had exercise
prices ranging between $0.20 and $0.24 per share. The aggregate intrinsic value of the warrants exercised was $294,333 for the
year ended December 31, 2017. The Company recognized inducement expense upon the acceptance of the offer which resulted
in $15,425 of expense included in the statement of operations for the year ended December 31, 2017.
As of December 31, 2018 and 2017, there was no stock-based compensation expense related to warrants that remains
unamortized.
A summary of the stock warrant activity during the years ended December 31, 2018 and 2017, respectively, is presented
below:
Outstanding, January 1, 2017
Granted
Exercised
Forfeited
Outstanding, December 31, 2017
Granted
Exercised
Forfeited
Outstanding, December 31, 2018
Number of
Warrants
7,806,118
368,367
(1,633,334)
-
6,541,151
-
(1,525,000)
(150,000)
4,866,151
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life
In Years
Aggregate
Intrinsic
Value
$
$
0.30
0.39
0.29
-
0.31
-
0.25
0.35
0.33
$
1.0
$
7,487
Exercisable, December 31, 2018
4,866,151
$
0.33
1.0
$
7,487
The following table presents information related to stock warrants at December 31, 2018:
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Warrants Outstanding
Weighted
Average
Exercise
Price
$
0.23
0.31
4.95
0.33
$
Outstanding
Number of
Warrants
326,120
4,510,031
30,000
4,866,151
Weighted
Average
Exercise
Price
Warrants Exercisable
Weighted
Average
Remaining Life
In Years
$
$
0.23
0.31
4.95
0.33
1.3
0.9
3.8
1.0
Exercisable
Number of
Warrants
326,120
4,510,031
30,000
4,866,151
Range of
Exercise
Price
$0.15 - $0.25
$0.30 - $0.35
$4.95
$0.15 - $4.95
8. Commitments and Contingent Liabilities
Capital Lease
On January 11, 2018, the Company entered a three-year lease agreement related to a forklift. The terms of the lease
agreement require monthly payments of $542 with the option to purchase the forklift on the lease termination date for $1. The
transaction was recognized as a fixed asset acquisition and capital lease obligation of $18,030.
Operating Leases
The Company is a party to a lease agreement for office and storage space for its headquarters in Florence, Kentucky.
On July 30, 2018, the Company entered into an amendment of the lease agreement which extended the lease for an additional
five years to December 31, 2024. The amended monthly lease rate will range between $7,955 and $9,498.
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 $6,169 and $2,850 as of December 31, 2018 and 2017,
respectively, has been included in accrued expenses and other current liabilities on the consolidated balance sheets.
The Company was a party to a three-year lease for $1,000 per month to house an office, pharmacy and inventory
located in Lawrenceburg, Indiana, which had a termination date of June 7, 2018. In January 2014, the Company closed and
vacated the Lawrenceburg facility. In August 2017, the Company paid $3,000 cash to the landlord to settle the amounts owed
under the lease and recognized a $48,665 gain which is recorded in Other Expense within Selling, General and Administrative
expenses in the Statements of Operations.
The aggregate future minimum lease payments for operating leases, excluding renewal periods, and capital leases as
of December 31, 2018 were as follows:
Operating Leases
Capital Leases
2019
2020
2021
2022
Thereafter
Total
Less: Amount representing interest
Present value of minimum lease payments
$
$
96,887
99,793
102,787
105,871
221,365
626,703
$
6,508
6,508
-
-
-
13,016
(723)
12,293
$
$
During the years ended December 31, 2018 and 2017, the Company recorded aggregate rent expense of $120,460 and
$107,445, respectively.
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Employment Agreement
On March 15, 2017, the Company entered into a settlement agreement (the “Settlement Agreement”) by and between
the Company and Lalit Dhadphale (“Dhadphale”) relating to a claim filed by Dhadphale in Lalit Dhadphale v.
Healthwarehouse.com, Inc., Boone County, Kentucky Circuit Court, Civil Action No. 16-CI-01628 (the “Complaint”) alleging
failure to pay certain severance payments pursuant to the employment agreement by and between the Company and Dhadphale.
Pursuant to the Settlement Agreement, the Company agreed to pay Dhadphale $200,000 in return for a full release of any and
all future claims and a dismissal with prejudice of the Complaint within seven business days of the execution of the Settlement
Agreement. The Company has agreed to pay Mr. Dhadphale $30,000 within sixty days of the execution of the Agreement with
the remaining $170,000 payable in equal semi-monthly payments over eighteen months beginning March 15, 2017. As of
December 31, 2017, the Company had accrued $72,986 related to this liability and as of December 31, 2018, the Company fully
satisfied its obligations under the agreement.
Effective January 16, 2017, Mr. Jeffrey Holtmeier, resigned his position as Chief Executive Officer and a director of
the Company. On January 19, 2017, the Company and Mr. Holtmeier entered into a Separation and Release Agreement in
connection with his departure where Mr. Holtmeier was paid his current salary for the period up to and including the day which
is thirty days after his resignation date. In addition, the Company paid Mr. Holtmeier a $43,750 annual bonus for 2016 which
was accrued as of December 31, 2016. The bonus was paid in ten equal monthly payments beginning February 1, 2017. In
addition, as of December 31, 2016, the Company had accrued $66,950 of costs related to Mr. Holtmeier’s out-of-pocket expenses
which was paid in ten equal monthly payments during 2017.
On January 18, 2017, the Board of Directors of the Company appointed John C. Pauly as the Chief Operating Officer
and interim President and Chief Executive Officer of the Company. Subsequently, the Company and Mr. Pauly entered into a
written agreement outlining compensation and other terms of Mr. Pauly’s employment by which Mr. Pauly was to be paid an
annual salary of $100,000. The term of Mr. Pauly’s employment with the Company was to be for a period commencing on
January 18, 2017, and continuing through the close of business on December 31, 2017, unless and until terminated as provided.
Effective March 31, 2017, Mr. Pauly resigned from the Company.
On July 10, 2017, the Company entered into an employment agreement with Mr. Joseph Peters. The terms of the
Employment Agreement include the titles and positions of Interim Chief Executive Officer and President, an initial base salary
of $104,000 per year, subject to certain bonus and severance provisions. In addition, the Company granted to Mr. Peters stock
options to purchase an aggregate of 100,000 shares of common stock under a previously approved plan at exercise price of $0.22
per share for an aggregate grant date value of $21,493. Mr. Peters’ agreement was bound by restrictive covenants regarding
disclosure of confidential information, non-solicitation and employee non-competition.
Effective January 1, 2018, the Company entered into employment agreements with Joseph Peters and Daniel Seliga
contracts (the “Employment Agreements”). The terms of the Employment Agreement include a term of one year beginning on
January 1, 2018 with an extension provision allowing for automatic one-year extensions, the titles and positions of Chief
Executive Officer and Chief Financial Officer, respectively, an initial base salary of $100,000 per year, subject to certain bonus
and severance provisions. Each of the Employment Agreements are 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 current outstanding matters will have a material adverse
effect on the Company’s consolidated financial condition or consolidated results of operations. We are not currently involved
in any pending or threatened material litigation or other material legal proceedings nor have we been made aware of any penalties
from regulatory audits, except as described below.
Taft Stettinius & Hollister LLC (“Taft”) filed a complaint against the Company on May 13, 2016 in the Hamilton
County Court of Common Pleas, Case No. A1602800, alleging the Company owes legal fees and costs in the amount of
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$935,392, together with accrued prejudgment interest. The Company answered the complaint, denying the material allegations
therein, and asserted several affirmative defenses, including excessive legal fees and charges, unauthorized and improper fees,
and related defects in performance by Taft. On September 29, 2017, the Company announced that it had reached agreement
with Taft for the settlement and resolution of all claims. As part of the settlement agreement, the Company paid $950,000 to
Taft on December 6, 2017.
On April 9, 2018, the Company and its President and Chief Executive Officer were named in a legal complaint filed in
the United States District Court by a former employee alleging, among other items, violation of the Fair Labor Standards Act,
breach of contract and unjust enrichment related to nonpayment of commissions and overtime compensation and requesting a
judgment in excess of $500,000. The suit is in the early stages and, as such, any potential liability cannot be determined at this
time. Management believes that the Plaintiff’s claims are groundless and we intend to contest this matter vigorously.
9. Concentrations
The Company maintains deposits in financial institutions which are insured by the Federal Deposit Insurance
Corporation (“FDIC”). At various times, the Company has deposits in these financial institutions in excess of the amount
insured by the FDIC.
During the year ended December 31, 2018, three suppliers represented 29%, 25% and 21% of total inventory purchases.
During the year ended December 31, 2017, three suppliers represented 32%, 27% and 15% of total inventory purchases.
10. Related Party Transactions
On October 3, 2016, the Company reached a settlement with a related party in regard to certain balances of accounts
receivables from and accounts payable to the related party. The Company agreed to pay $77,606, payable in twenty-four
monthly payments of $3,234, with no interest, beginning October 15, 2016. The Company made payments of $29,103 and
$38,803 in related to this payable during the years ended December 31, 2018 and 2017, respectively.
The Company was a party to a master services agreement for information technology and marketing analytics projects
with a company that Mr. Jeff T. Holtmeier, the Company’s former President and Chief Executive Officer, holds a minority
ownership interest and chairman of its board of directors. During the years ended December 31, 2017 and 2016, the Company
incurred $87,704 and $49,376 of costs under the agreement, respectively, which were recognized as web development costs.
Amounts due under this agreement of approximately $4,000 have been included in accounts payable as of December 31, 2017.
The agreement terminated on December 31, 2017.
11. Income Taxes
The income tax provision (benefit) for the years ended December 31, 2018 and 2017 was as follows:
Federal:
Current
Deferred
State and local:
Current
Deferred
Change in valuation allowance
Income tax provision (benefit)
Year Ended December 31,
2018
2017
$
7,642
(109,066)
$
-
2,548,015
-
56,423
(45,001)
52,643
7,642
$
-
(65,238)
2,482,777
(2,482,777)
$
-
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The effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of
December 31, 2018 and 2017 are as follows:
Deferred tax assets:
Net operating loss carryforwards
Stock-based compensation
Inventory reserves
Allowance for bad debt
Deferred Revenue
Deferred Rent
Charitable contribution carryforwards
Accruals
Total deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Property and equipment
Web development
December 31,
2018
2017
$
4,012,472
469,178
7,040
-
1,100
1,542
-
-
4,491,332
(4,456,325)
35,007
$
3,912,308
483,067
5,989
-
2,884
734
234
15,284
4,420,500
(4,403,683)
16,817
(35,007)
-
(15,183)
(1,634)
Deferred tax liabilities
$
(35,007)
$
(16,817)
Net deferred tax assets
$
-
$
-
Change in valuation allowance
$
52,643
$
(2,482,777)
The Company assesses the likelihood that deferred tax assets will be realized. To the extent that realization is not
likely, a valuation allowance is established. While the Company has had a history of generating losses, the Company operated
at a profit in 2017. Management believes that it is more likely than not that all of the future benefits of deferred tax assets may
not be realized and has established a full valuation allowance for the years ended December 31, 2018 and 2017.
The Company files income tax returns in the U.S. Federal jurisdiction and various state and local jurisdictions, and its
federal, state and local income tax returns for the tax years beginning in 2012 remain subject to examination. The Company
does not currently have any Federal or State audit examinations in process by taxing authorities. The Company is in the process
of filing its federal and state tax returns for the year ended December 31, 2018. When these returns are filed for the year ended
December 31, 2018, the Company will have $17,205,159 and $16,548,522 of federal net operating loss carryforwards that may
be available to offset future taxable income as of December 31, 2018 and 2017, respectively. The federal net operating loss
carryforwards generated prior to 2018, if not utilized, will expire from 2028 to 2037. The federal net operating loss
carryforwards generated in 2018 will carryforward indefinitely. As of December 31, 2018 and 2017, the Company had
approximately $9,984,721 and $9,337,347 of state net operating loss carryforwards available to offset future taxable income.
The state NOLs, if not utilized, will expire beginning in 2031.
In accordance with Section 382 of the Internal Revenue code, the usage of the Company’s net operating loss
carryforwards could be limited in the event of a change in ownership. Based upon a study that analyzed the Company’s stock
ownership, a change of ownership was deemed to have occurred in 2011. This change of ownership created an annual limitation
on the usage of the Company’s losses which are available through 2031. A full Section 382 analysis has not been prepared
since 2011 and any NOLs arising since 2011 could be subject to limitation under Section 382.
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On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (“TCJA”). The TCJA made broad and complex changes to the U.S. tax code including, but not limited to, a
reduction of the federal income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017. This
change required the Company to remeasure our deferred tax assets and liabilities based on the rates at which they are expected
to reverse in the future, which generally is 21% for federal income tax purposes. As permitted by the SEC Staff Accounting
Bulletin 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act”, we recorded a provisional estimate of the
effects from TCJA on our existing deferred tax balances as of December 31, 2017, and recognized a provisional amount of $2.4
million. Since the Company had a full valuation allowance, there was no impact to income tax expense. After further analysis,
we do not have any material subsequent adjustments to the amounts booked as of December 31, 2017.
For the years ended December 31, 2018 and 2017, the expected tax expense (benefit) based on the statutory rate is
reconciled with the actual tax expense (benefit) as follows:
US federal statutory rate
State tax rate, net of federal benefit
Permanent differences:
Stock based compensation
Other
Change in Federal Tax Rate
Change in State Tax Rate
Change in valuation allowance
Year Ended December 31,
2018
2017
(21.0%)
(4.0%)
8.9%
(0.1%)
0.0%
10.7%
6.4%
34.0%
4.0%
4.7%
2.2%
622.9%
0.0%
(667.8%)
Income tax provision (benefit)
0.9%
0.0%
12. 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 consolidated financial statements, except as disclosed.
Issuance of Common Stock to Directors
On January 8, 2019, the Company issued an aggregate of 213,708 shares of common stock to directors of the Company
for payment of their accrued noncash portion of their director’s fees for the fourth quarter of 2018. The shares had an aggregate
grant date value of $53,000 and were valued at $0.25 per share, which was the 30 day weighted average closing price for the
Company’s common stock on the date of grant. Such amount is included in accrued expenses as other liabilities as of December
31, 2018.
Issuance of Common Stock to Executives
On February 11, 2019, the Company issued 486,381 shares of common stock to executives of the Company for payment
of the noncash portion of their bonus for 2018 per the terms of their employment agreements. The shares had a grant date value
of $125,000 and were valued at $0.26 per share, which was the 30 day weighted average closing price for the Company’s
common stock on the date of grant. Such amount is included in accrued expenses as other liabilities as of December 31, 2018.
Extension of Kapok & Melrose Promissory Notes
On March 20, 2019, the Company entered into amendments to the Promissory Notes provided by Kapok Ventures and
Melrose Capital Advisors. The amendments extended the maturity date for both promissory notes from March 31, 2019 to
September 30, 2019. The remaining terms of the Kapok and Melrose Promissory Notes were not modified. The Company
received a waiver from the majority holder of the Series B convertible preferred stock prior to executing the amendment.
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Litigation
On March 6, 2019, the Company was named in a class action complaint filed against the Company in the United States
District Court by Kevin Garey alleging, among other items, violation of the Americans with Disabilities Act, claiming the
Company’s website is not fully accessible and independently usable to a visually impaired and legally blind individual. The
suit is in the early stages and, as such, any potential liability cannot be determined at this time. Management and its legal counsel
are reviewing and assessing the Plaintiff’s claims to prepare a response.
Issuance of Options to Employee and Executives
On March 12, 2019, the Company granted stock options to purchase an aggregate of 1,250,000 shares of common stock
under a previously issued incentive plan to an employee and two executives of the Company as recognition of their contributions
to the Company. The options had an exercise price of $0.32 per share. The options vest over a three-year period and have a
term of ten years. The options were issued to the executives were replacements for the options issued to the same executives in
January 2018.
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