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
Amended Annual Report
For the year ended December 31, 2019
As of September 30, 2019, the number of shares outstanding of our Common Stock was 50,081,465.
As of December 31, 2019, the number of shares outstanding of our Common Stock was 50,408,933.
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).
Yes No
Indicate by check mark if whether the company’s shell status has changed since the previous reporting period.
Yes No
Indicate by check mark whether a Change in Control of the company has occurred over this reporting period.
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, 2019 and
2018
Consolidated Statements of Operations – Years ended
December 31, 2019 and 2018
Consolidated Statements of Changes in Stockholders’
Deficiency – Years ended December 31, 2019 and 2018
Consolidated Statements of Cash Flows – Years ended
December 31, 2019 and 2018
Notes to the Consolidated Financial Statements
3
3
4
5
5
6
6
8
8
10
12
13
14
15
16
17
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”). The Company is an active
corporation and in good standing in Delaware.
Formerly Ion Networks, Inc., formed on August 5, 1998 as a Delaware company.
Name changed to Clacendix, Inc. on January 3, 2008.
Name changed to HealthWarehouse.com, Inc. on July 31, 2009.
Has the issuer or any of its predecessors ever been in bankruptcy, receivership, or any similar proceeding in the past
five years? Yes:
No:
2) Security Information
Security information as of December 31, 2019:
Title and
Class of
Security
Common
Stock
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
50,408,933
11,648,747
260
$0.001
Not
Applicable
Not
Applicable
$0.001
Not
Applicable
Not
Applicable
790,000
517,359
-0-
10,000
10,000
-0-
2
3
On April 14, 2017, HEWA filed a Form 15 with the Securities and Exchange Commission terminating the
registration of its Common Stock under Rule 12 g-4(a)(1) of the Securities Exchange Act of 1934. As of this date,
the Company has no plans to reregister the common stock under the Securities Exchange Act of 1934.
On September 26, 2019, the Board of Directors approved and the Company subsequently filed a Certificate of
Elimination of the Series A Preferred Stock of Healthwarehouse.com, Inc. with the state of Delaware on October
17, 2019 in order to reduce and eliminate the 200,000 authorized Preferred Shares – A Series. There were no
outstanding Preferred Shares – A Series at the time of the elimination.
Transfer Agent:
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Phone: (718) 921-8200
Is the Transfer Agent registered under the Exchange Act? Yes: X No:
3
Describe any trading suspension orders issued by the SEC in the past 12 months: None
List any stock split, stock dividend, recapitalization, merger, acquisition, spin-off, or reorganization either
currently anticipated or that occurred within the past 12 months: None.
3) Issuance History
A. Changes to the Number of Outstanding Shares
All shares issued in the transactions detailed above, contain a legend that states that the shares were issued in a
transaction not registered under the Securities Act of 1933 and may not be transferred unless registered or pursuant
to an exemption therefrom.
Please see Footnote 12 - Subsequent Events to the Company’s consolidated financial statements below for
information related to the Company’s issuance of common stock related to stock-based compensation for directors,
executives and key employees.
4
47,670,997 517,359 10,000 DateTransaction TypeNumber of Shares IssuedClass of SecuritiesValue of shares issued ($ per share) at issuanceIssued at discount to market at time of issuance?Individual/Entity Shares were issued to Reason for share issuance or Nature of Services ProvidedRestricted or Unrestricted as of this filing?Exemption or Registration Type1/10/18New 123,256 Common $0.43 NoDirectors (Scott, Heimbrock, Weiss, Britts)Stock Based CompensationRestricted2/1/18New 537,500 Common $0.25 YesEugene McKenna, Greg Matzel, James Wicklund, Michael McKenna, PJ Burbach, Will Gilbert, Hein TranCashless exercise of stock warrantsRestricted2/26/18New 274,219 Common $0.25 YesScott GreiperCashless exercise of stock warrantsRestricted3/14/18New 50,000 Common $0.60 NoJoseph PetersStock Based CompensationRestricted4/18/18New 86,884 Common $0.61 NoDirectors (Scott, Heimbrock, Weiss, Britts)Stock Based CompensationRestricted7/10/18New 96,364 Common $0.55 NoDirectors (Scott, Heimbrock, Weiss, Britts)Stock Based CompensationRestricted8/21/18New 10,000 Common $0.09 YesMelissa GreenleeExercise of stock optionRestricted10/17/18New 169,328 Common $0.31 NoDirectors (Scott, Heimbrock, Weiss, Britts)Stock Based CompensationRestricted1/8/19New 213,708 Common $0.25 NoDirectors (Scott, Heimbrock, Weiss, Britts)Stock Based CompensationRestricted2/11/19New 486,381 Common $0.26 NoExecutives (Peters, Seliga)Stock Based CompensationRestricted4/2/19New 155,424 Common $0.30 NoDirectors (Scott, Heimbrock, Weiss, Britts)Stock Based CompensationRestricted7/15/19New 174,344 Common $0.30 NoDirectors (Scott, Heimbrock, Weiss, Britts)Stock Based CompensationRestricted7/31/19New 33,060 Common $0.30 NoPickwick Capital Partners LLC (Doug Greenwood, President, has voting / investment control)Stock Based CompensationRestricted10/15/19New 227,468 Common $0.23 NoDirectors (Scott, Heimbrock, Weiss, Britts)Stock Based CompensationRestricted12/5/19New 100,000 Common $0.09 - $0.11YesRob GodwinExercise of stock optionRestricted 50,408,933 517,359 10,000 Preferred Series CEnding BalanceOpening BalanceNumber of Shares outstanding as of January 1, 2018Preferred Series BCommonPreferred Series CCommonPreferred Series BNumber of Shares outstanding as of December 31, 2019
B. Debt Securities, Including Promissory and Convertible Notes
Please see Footnote 6 – Notes Payable and Footnote 12 – Subsequent Events to the Company’s consolidated
financial statements for more information.
4) Financial Statements
a) The following financial statements were prepared in accordance with U.S. GAAP.
b) The financial statements for this reporting period were prepared by Daniel Seliga, Chief Financial
Officer of the Company.
See PART II –CONSOLIDATED FINANCIAL STATEMENTS below.
5) Issuer’s Business, Products and Service
A) Description of the Issuer’s business operations:
HealthWarehouse.com, Inc. is an online pharmacy, licensed and/or authorized to sell and deliver
prescriptions in 50 United States and the District of Columbia focusing on the out-of-pocket
prescription drug market, a market which is expected to continue to grow. The Company sells directly
5
Date of Note IssuanceOutstanding Balance ($) as of 12/31/2019Principal Amount at Issuance ($)Interest Accrued ($) as of 12/31/2019Maturity DateConversion TermsName of Note HolderReason for Issuance4/7/17 $ - $ 1,000,000 n/a3/31/2018NoneKapok Ventures Limited, N.C. Kannan, DirectorRepay existing indebtedness10/31/17 $ 1,989,678 $ 2,000,000 $ 15,420 01/31/2020, as amendedNoneKapok Ventures Limited, N.C. Kannan, DirectorRefinance existing loan balance and partially fund purchase of automation equipment 12/6/17 $ - $ 400,000 n/a 5/31/2018, as amendedNoneMelrose Capital Advisors, LLC, Timothy E. Reilly, Managing MemberTo fund litigation settlement5/31/18 $ - $ 500,000 n/a 12/31/2019, as amendedNoneMelrose Capital Advisors, LLC, Timothy E. Reilly, Managing MemberRefinance existing loan balance and partially fund purchase of automation equipment 10/24/19 $ 500,000 $ 500,000 $ 4,247 12/31/2019NoneMillennium Trust Company LLC Custodian FBO Timothy E. Reilly IRARefinance existing loan balance1/31/20 n/a $ 750,000 n/a 2/10/2020NoneMelrose Capital Advisors, LLC, Timothy E. Reilly, Managing MemberRepay existing indebtedness 2/10/20 n/a $ 1,675,000 n/a 4/30/2022Convertible to shares of common stock at $0.12 per shareMillennium Trust Company LLC Custodian FBO Timothy E. Reilly IRA; Clocktower Holdings LLC, Stacey Stanley, Manager; QCT Holdings LLC, Aaron Haid, President; Kirt & Patricia Bjork; Patrick Mendenhall; Hudson Quinn Holdings LLC, Dr. David Cunningham, MemberRepay existing indebtedness; Conversion of Millenium Note; and General working capital purposes.
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”).
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. See Footnote 8 – Commitments and Contingencies for more details.
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, 2019. Please see detailed director
biographies contained in the Company’s 2019 Annual Meeting and Proxy Statement dated August 16, 2019
filed with the OTC Markets on February 24, 2020.
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.
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.
The Company held its 2019 Annual Meeting of Stockholders on September 26, 2019 and announced that its
shareholders had elected the nominees to new one-year terms on its Board of Directors and ratified the
appointment of its independent accounting firm for the 2019 fiscal year.
Re-elected to the Board of Directors at the stockholders’ meeting were Joseph Peters, Mark Scott and Jack
Britts. In addition, Tim Reilly replaced Dr. Stephen Weiss on the Board.
Holders of the Company’s Series B Preferred shares separately elected Joe Heimbrock, to the designated Series
B Preferred seat on the Board.
Effective November 29, 2019, Mr. Scott resigned from the Board of Directors.
6
Name
Joseph B. Peters
Daniel J. Seliga
Tim Reilly
Joseph Heimbrock
Jack Britts
B. Control Persons
Title
President and Chief Executive Officer, and
Director
Chief Financial Officer
Director, Chairman
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, 2019. 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.
7
Name AffiliationAddressNumber of shares ownedShare ClassOwnership Percentage of Class OutstandingBeneficial OwnershipMVI Partners and Joe HeimbrockDirector & >5%3299 Hughes Court, Taylor Mill, KY 41015494,913; 1,568,144Series B Common96%; 3.1%13.3% * Cormag Holdings, LTD and Mark D. Scott>5%104 Falcon Ridge Drive, Winnipeg, Manitoba, Canada R3Y1X6 5,649,163 Common11.2%11.2%Dellave Holdings, LLC, Melrose Capital Advisors LLC and Tim ReillyDirector & >5%1085 Gulf of Mexico Drive, Longboat Key, FL 34228 4,229,060 Common8.4%8.4%Dr. Bruce Bedrick>5%5375 Monterey Circle #32, Delray Beach, FL 33484 3,990,000 Common7.9%7.9%Lalit Dhadphale>5%182 Uccello Drive, Las Vegas, NV 89138 3,022,479 Common6.0%6.0%Jack BrittsDirector2021 Saint Andrews Road, Greensboro, NC 27408 311,694 Common0.5%0.6%Joseph B. PetersPresident and Chief Executive Officer, and Director9085 Braxton Drive, Union, KY 41091 283,463 Common0.6%1.3%Daniel J. SeligaChief Financial Officer and Principal Financial Officer3524 Paxton Avenue, Cincinnati, OH 45208 1,041,354 Common2.1%2.1%* Each Preferred B share is convertible into 11.97 common shares as of December 31, 2019.
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 5% 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 September 26, 2019, at the 2019 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, 2019.
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 26, 2020
/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 26, 2020
/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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its
operations and its cash flows for each of the two years in the period ended December 31, 2019, 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.
MarcumLLPn750 Third Avenuen11th FloornNew York, New York10017nPhone212.485.5500nFax212.485.5501nmarcumllp.com 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 24, 2020
13
December 31,December 31,20192018AssetsCurrent assets:Cash 2,355$ 2,934$ Restricted cash 1,066,335 425,513 Accounts receivable118,613 127,861 Inventories 247,768 209,607 Prepaid expenses and other current assets65,882 104,041 Total current assets1,500,953 869,956 Property and equipment, net1,006,299 1,174,814 Total assets 2,507,252$ 2,044,770$ Liabilities and Stockholders’ DeficiencyCurrent liabilities:Accounts payable 808,125$ 853,693$ Accrued expenses and other current liabilities1,808,944 1,427,727 Current portion of equipment lease payable5,736 5,736 Notes payable, net of debt discount of $0 as of December 31, 2019 and $12,262 as of December 31, 20182,489,678 2,477,416 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, 2019 and December 31, 2018 (aggregate liquidation preference of $1,000,000)1,000,000 1,000,000 Total current liabilities6,112,483 5,764,572 Long term liabilities:Capital lease payable - non-current609 6,557 Total long term liabilities609 6,557 Total liabilities6,113,092 5,771,129 Commitments and contingencies Stockholders’ deficiency: Preferred stock – par value $0.001 per share; authorized 1,000,000 shares; issued and outstanding as of December 31, 2019 and December 31, 2018 as follows:Convertible preferred stock - Series B – 790,000 shares designated Series B; 517,359 shares issued and outstanding as of December 31, 2019 and December 31, 2018 (aggregate liquidation preference of $6,257,975 and $5,915,742 as of December 31, 2019 and December 31, 2018, respectively)517 517 Common stock – par value $0.001 per share; authorized 100,000,000 shares; 51,588,145 and 50,197,760 sharesissued and 50,408,933 and 49,018,548 shares outstanding as of December 31, 2019 and December 31, 2018, respectively51,587 50,197 Additional paid-in capital34,242,985 33,682,223 Treasury stock, at cost, 1,179,212 shares as of December 31, 2019 and December 31, 2018(3,419,715) (3,419,715) Accumulated deficit(34,481,214) (34,039,581) Total stockholders’ deficiency (3,605,840) (3,726,359) Total liabilities and stockholders’ deficiency2,507,252$ 2,044,770$ HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETSThe accompanying notes are an integral part of these consolidated financial statements.
14
20192018Net sales15,755,577$ 15,748,162$ Cost of sales5,394,390 5,526,865 Gross profit10,361,187 10,221,297 Operating expenses:Selling, general and administrative expenses10,205,484 10,598,867 Impairment of fixed assets -170,000 Total Operating Expenses10,205,484 10,768,867 Income (loss) from operations155,703 (547,570) Interest expense(255,103) (269,484) Net loss(99,400) (817,054) Preferred stock:Series B convertible preferred stock contractual dividends(342,233) (342,233) Net loss attributable to common stockholders(441,633)$ (1,159,287)$ Per share data:Net loss – basic & diluted(0.00)$ (0.01) Series B convertible preferred stock contractual dividends(0.01) (0.01) Net loss attributable to common stockholders - basic & diluted(0.01)$ (0.02)$ Weighted average number of common shares outstanding - basic & diluted49,923,92648,695,935HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSThe accompanying notes are an integral part of these consolidated financial statements.For Years EndedDecember 31,
15
TotalAdditional AccumulatedStockholders’SharesAmountSharesAmountPaid-In CapitalSharesAmountDeficitDeficiencyBalances, January 1, 2018517,359 517$ 48,850,209 48,850$ 33,151,341$ 1,179,212 (3,419,715)$ (32,880,294)$ (3,099,301)$ Stock-based compensation- - 525,832 525 530,804 - - - 531,329 Exercise of options into common stock- - 10,000 10 890 - - - 900 Contractual dividends on Series B convertiblepreferred stock- - - - - - - (342,233) (342,233) Inducement charge for warrants exercised at discount- Exercise of warrants into common stock- - 811,719 812 (812) - - - - Net loss - - - - - - - (817,054) (817,054) Balances, December 31, 2018517,359 517$ 50,197,760 50,197$ 33,682,223$ 1,179,212 (3,419,715)$ (34,039,581)$ (3,726,359)$ Balances, January 1, 2019517,359 517$ 50,197,760 50,197$ 33,682,223$ 1,179,212 (3,419,715)$ (34,039,581)$ (3,726,359)$ Stock-based compensation- - 1,257,325 1,257 550,095 - - - 551,352 Exercise of options into common stock- - 100,000 100 10,700 10,800 Contractual dividends on Series B convertiblepreferred stock- - - - - - - (342,233) (342,233) Exercise of warrants into common stock- - 33,060 33 (33) - - - - Net loss- - - - - - - (99,400) (99,400) Balances, December 31, 2019517,359 517$ 51,588,145 51,587$ 34,242,985$ 1,179,212 (3,419,715)$ (34,481,214)$ (3,605,840)$ Series BHEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCYFOR THE MONTH ENDED DECEMBER 31, 2019 AND 2018The accompanying notes are an integral part of these consolidated financial statements.ConvertiblePreferred StockCommon StockTreasury Stock
16 of 36
20192018Cash flows from operating activitiesNet loss(99,400)$ (817,054)$ Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization163,653 123,862 Stock-based compensation421,935 626,329 Gain on sale of equipment(28,979) - Loss on disposition of equipment- 7,807 Gain on extinguishment of accounts payable52,630 - Amortization of debt discount12,262 49,050 Impairment of fixed assets- 170,000 Changes in operating assets and liabilities:Accounts receivable9,248 (48,831) Inventories (38,161) 43,813 Prepaid expenses and other current assets38,159 4,055 Accounts payable(98,198) 60,869 Accrued expenses and other current liabilities168,401 (80,945) Net cash provided by operating activities601,550 138,955 Cash flows from investing activitiesCapital expenditures(1,159) (1,148,304) Proceeds from sale of equipment35,000 Progress payments deposited with equipment manufacturer- 440,000 Net cash provided by (used in) investing activities33,841 (708,304) Cash flows from financing activitiesRepayment of capital lease(5,948) (5,737) Proceeds from issuance of notes payable- 649,678 Repayment of notes payable - - Proceeds from offering prior to reaching minimum offering amount- - Proceeds from exercise of stock options10,800 900 Repayment of notes payable and other advances – related parties- (29,102) Net cash provided by financing activities4,852 615,739 Net increase in cash 640,243 46,390 Cash and restricted cash - beginning of period428,447 382,057 Cash and restricted cash - end of period1,068,690$ 428,447$ Cash paid for: Interest242,840$ 269,484$ Non-cash investing and financing activities:Cashless exercise of warrants into common stock $ 33 $ 812 Acquisition of capital equipment under capital lease $ - $ 18,030 Accrual of contractual dividends on Series B convertible preferred stock $ 342,233 $ 342,233 Common stock issued to satisfy accrued directors' fees $ 212,000 $ 53,000 Common stock issued to satisfy non-cash executive bonus $ 125,000 $ 30,000 Write-off of fully depreciated asset $ - $ 13,383 The accompanying notes are an integral part of these consolidated financial statements.HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor Years EndedDecember 31
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 2018 and 2019 have not been sufficient to satisfy the Company’s current obligations. As of
December 31, 2019, the Company had a working capital deficiency of $4,611,530 and a stockholder deficiency of $3,605,840.
The Company has historically incurred significant net losses, including a net loss of $99,400 for the year ended December 31,
2019. Although the Company generated cash from operating activities of $601,550 during 2019, 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
the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
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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, 2019 and 2018, 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 $2,355 and $1,066,335, as of December 31, 2019, respectively, and $2,934 and $425,513
as of December 31, 2018, 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, 2019 and 2018.
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. Obsolescence of inventory items has historically been immaterial. 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.
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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 recognized a loss of $170,000 during the year ended December 31, 2018 to
reduce the book value of the old equipment to its estimated salvage value. The old equipment was sold for $35,000 during the
year ended December 31, 2019 and the Company recognized a gain on the sale of $28,979.
Website Development Costs
The Company capitalizes costs associated with the development of its website. During the years ended December 31,
2019 and 2018, 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 $0 and $1,053 during the years ended
December 31, 2019 and 2018, respectively. As of December 31, 2019, 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, 2019 and 2018. The Company does not expect any significant changes
in the unrecognized tax benefits within twelve months of the reporting date.
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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, 2019 and 2018.
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.
Revenue is generated through the sale of over-the-counter medication and prescription medication. The Company also
generates revenue by providing fulfillment services of prescription medication to customers. These revenue streams culminate
in a single performance obligation to provide the products and the service, and revenue is recorded in an amount that reflects
the net consideration that the Company expects to receive for each revenue stream. Prices for the products are based on agreed
upon rates with customers and do not include financing components or noncash consideration. The amount of consideration
received and revenue recognized is variable for fulfillment services offered to customers and is impacted by volume rebates,
which are generally tied to the number of prescriptions filled during the fulfillment process by the Company and settled on a
monthly basis.
The Company recognizes revenue when performance obligations under the terms of a contract with a customer are
satisfied in an amount that reflects the consideration the Company expects to receive in exchange for the product or service. For
all customers, revenue is recognized at a point-in-time (at the time the medication is shipped or at the time the fulfillment service
is performed) based on the agreed upon terms with each customer when customer has control.
Payments by customers to the Company for the sale of over-the-counter medication and prescription medication are
typically made by credit card payment and received by the Company within 24-48 hours. Payments by customers to the
Company for fulfillment services are typically prepaid by the customer on a bi-monthly basis.
Taxes assessed by a governmental authority that the Company collects from customers that are both imposed on and
concurrent with revenue producing activities (such as sales tax, value-added tax, and excise taxes) are excluded from revenue.
Contract assets and liabilities
Contract liabilities are recorded for arrangements where the Company has received customer deposits from the
customer but has not yet provided the fulfillment services.. As of December 31, 2019, the Company had a contract liability of
$43,453 amount representing refundable customer deposits. Other than accounts receivable, there were no contract assets as
December 31, 2019
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 $1,520,759 and $1,626,049
for the years ended December 31, 2019 and 2018, 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, 2019 and 2018 were $332,795 and $373,638, respectively.
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Advertising and Marketing Expenses
The Company expenses all advertising and marketing costs as incurred and were $1,532,366 and $1,315,616 for the
years ended December 31, 2019 and 2018, 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.
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:
Stock-Based Compensation
Stock-based compensation expense for all stock-based payment awards is based on the estimated fair value of the
award. For employees, directors and non-employees, the award is measured on the grant 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
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20192018NumeratorNet loss attributable to common shareholders(441,633)$ (1,159,287)$ Denominator:Weighted-average common shares, basic and diluted49,923,926 48,695,935 Net income (loss) per common share:Basic and diluted(0.01)$ (0.02)$ December 3120192018Options2,694,395 2,954,845 Warrants473,367 4,866,151 Series B Convertible Preferred Stock6,192,788 6,192,788 Total potentially dilutive shares9,360,550 14,013,784 December 31,
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.
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, 2019 and 2018 using the applicable classification criteria enumerated under
U.S. GAAP and determined that the common stock purchase warrants contain fixed settlement provisions, therefore they have
been classified as equity.
Recently Issued Accounting Pronouncements
In May 2014, FASB issued ASU 2014-09 - Revenue from Contracts with Customers (Topic 606), as modified by
subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively ASU 2014-09). ASU 2014-09
superseded the revenue recognition requirements in ASC (Topic 605) Revenue Recognition, and most industry specific
guidance. This ASU also supersedes some cost guidance included in ASC 605-35 Revenue Recognition Construction Type and
Production Type Contracts. Similar to the previous guidance, the Company makes significant estimates related to variable
consideration at the point of sale, including chargebacks, rebates, product returns, and other discounts and allowances. Revenue
is recognized at a point in time upon the transfer of control of the Company's products, which occurs upon delivery for
substantially all of the Company's sales. The Company adopted the standard effective January 1, 2019, using the modified
retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial
position, results of operations, equity or cash flows as of the adoption date or for the year ended December 31, 2019.
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
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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. This update and
related amendments are effective for nonpublic entities for annual periods beginning after December 15, 2020.
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 Company’s adoptions of this standard on January 1, 2019 did not have a material impact on the
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 were effective in annual periods
beginning after December 15, 2018. The Company’s adoptions of this standard on January 1, 2019 did not have a material
impact on the consolidated financial statements.
In April 2019, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments.” ASU 2016-13 will replace the incurred loss impairment methodology with a
methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable
information to inform credit loss estimates. In connection with recognizing credit losses on receivables and other financial
instruments, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model.
This standard is effective for annual periods beginning after December 15, 2022, with early adoption permitted. The adoption
of this standard will be through a cumulative-effect adjustment to retained earnings as of the effective date. 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 would have a
material impact on our consolidated financial statements.
4. Property and Equipment, Net
Property and equipment, net consisted of the following:
Depreciation expense for the above assets for the years ended December 31, 2019 and 2018 was $163,653
and $122,809, respectively.
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Useful Life20192018(Years)Computer Software230,299$ 230,299$ 5 yearsEquipment1,257,456 1,699,714 10 yearsOffice Furniture and Equipment103,602 102,443 7 yearsComputer Hardware50,998 50,998 5 yearsLeasehold Improvements322,973 322,973 (a)Total1,965,328 2,406,427 Less: Accumulated Depreciation(959,029) (1,231,613) Property and Equipment, Net1,006,299$ 1,174,814$ (a) Lesser of useful life or initial term of leaseDecember 31,
During the year ended December 31, 2019, the Company sold equipment for $35,000 and recognized a gain on the sale
of $28,979 which was included in selling, general and administrative expenses. The Company recognized an impairment loss
of $170,000 related to the equipment during the year ended December 31, 2018.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
6. Notes Payable
Notes payable consisted of the following:
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 (9.0% at December 31, 2019). 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 January 31, 2020 maturity date. See
Section 12 – Subsequent Events.
The investor rights agreement of the Company’s Series B preferred shares limits the total debt of the Company to $1
million. The Company has received waivers to temporarily exceed the limit in connection with the extensions and increase of
the Kapok Promissory Note. The waiver related to the Kapok Promissory Note expired on January 31, 2020. See Section 12 –
Subsequent Events.
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20192018Salaries and Benefits166,002$ 240,264$ Dividend Payable1,368,932 1,026,699 Accounting95,980 35,000 Accrued Interest28,435 28,436 Accrued Rent12,705 6,169 Sales Tax Payable24,909 162 Advertising20,000 - Accrued Director Fees48,583 53,000 Deferred Revenue3,621 4,399 Other39,777 33,598 1,808,944$ 1,427,727$ December 31, 20192018Millenium Note500,000$ -$ Melrose Note-$ 500,000$ Kapok Promissory Note1,989,678 1,989,678 Less debt discount- (12,262) Total debt2,489,678 2,477,416 Less current portion(2,489,678) (2,477,416) Long-term debt, less current portion-$ -$ December 31,
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 were repaid on October 24, 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
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.
The investor rights agreement of the Company’s Series B preferred shares limits the total debt of the Company to $1
million. The Company received waivers to temporarily exceed the limit to allow for the Melrose Promissory Note. The waiver
related to the Melrose Promissory Note expired on December 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. Following the repayment of the Melrose Promissory Note on October 24, 2019, Melrose no longer had
the right to appoint a representative to the Board of Directors and the compensation no longer is required.
Millennium Promissory Note
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Effective October 24, 2019, the Company executed a promissory note (the "Millennium Promissory Note") and a
security agreement (the "Millennium Security Agreement") (collectively, the Millennium Promissory Note and the Millennium
Security Agreement, the "Millennium Loan Agreements") with Millennium Trust Company LLC Custodian FBO Timothy E.
Reilly IRA. Under the terms of the Millennium Promissory Note, the Company borrowed an aggregate of $500,000 from
Millennium (the "Millennium Loan"). The Millennium 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. Under the terms of the Millennium 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 Millennium Promissory Note is payable on December 31, 2019. See Section 12
– Subsequent Events.
Pursuant to the Millennium 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 Millennium Promissory Note. The Millennium security interest
is junior to the Kapok security interest. The Millennium Loan Agreements contain customary negative covenants restricting
the Company's ability to take certain actions without Millennium'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 Millennium 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 Millennium Promissory Note, were used to repay the outstanding balance of the Melrose
Promissory Note held by Melrose Capital Advisors, LLC. Both Melrose Capital Advisors, LLC and the Timothy E. Reilly IRA
are owned and controlled by Tim Reilly who is Chairman of the Company and a beneficial owner of more than 5% of the
Company’s outstanding shares of common stock. As such, the Millennium transaction is a related party transaction.
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
During the years ended December 31, 2019 and 2018, the Company issued 486,381 and 50,000 shares of common
stock, respectively, to executives of the Company for payment of the noncash portion of their annual bonuses per the terms of
their employment agreements. The shares had an aggregate grant date value of $125,000 and $30,000 for the years ended
December 31, 2019 and 2018, respectively. Such amounts were included in accrued expenses and other current liabilities as of
December 31, 2018 and 2017. The shares were valued at the 30-day weighted average closing prices for the Company’s common
stock on the dates of grant which ranged between $0.26 and $0.60 per share.
During the years ended December 31, 2019 and 2018, the Company issued an aggregate of 770,944 and 475,832 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 for the years ended December 31, 2019 and 2018, of which
$53,000 had been accrued at December 31, 2018 and 2017. The shares were valued at the closing prices for the Company’s
common stock on the dates of grant which ranged between $0.23 and $0.61 per share.
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 $207,583 and $337,000 for the years
ended December 31, 2019 and 2018, respectively.
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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. On September 26, 2019, the Board of Directors approved and the
Company subsequently filed a Certificate of Elimination of the Series A Preferred Stock of Healthwarehouse.com, Inc. with the
state of Delaware on October 17, 2019 in order to reduce and eliminate the 200,000 authorized Preferred Shares – A Series.
There were no outstanding Series A Preferred Shares at the time of the elimination.
Series B Preferred Stock
The Company has designated 790,000 of the 1,000,000 authorized shares of preferred stock as Series B Convertible
Preferred Stock (“Series B Preferred Stock”). On July 16, 2019, the Board of Directors approved and the Company subsequently
filed a Certificate of Increase of Series B Preferred Stock of Healthwarehouse.com, Inc. with the state of Delaware in order to
increase in the number of authorized shares from 625,000 shares to 790,000 shares. 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. MVI Partners, LLC owns a majority of the outstanding shares of the Series B
Preferred Stock. Joe Heimbrock is the managing partner of MVI Partners, LLC and serves as a director appointed by the Series
B Preferred Stock shareholders.
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, 2019 and 2018, 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, 2019, 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,
2019 and 2018. 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, 2019 and 2018, the Company had accrued contractual dividends of $1,368,932
and $1,026,699, 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.
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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, 2019 in the Company’s consolidated balance sheet.
Incentive Compensation / Stock Option Plans
The Company had sponsored 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 terminated effective May 15, 2019 per the terms of the Plan documents.
The 2009 Plan imposed 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, 2019, the Company granted options to executives and key employees of the
Company to purchase an aggregate of 1,250,000 shares of common stock under a previously approved plan at exercise price of
$0.32 per share for an aggregate grant date value of $415,423. The options vest over a three-year period and have a term of ten
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years. The options granted included options to purchase an aggregate of 1,200,000 shares of common stock that were issued to
replace options previously issued to key employees during 2018. In accounting for the modification of the options, it was
determined that the difference in fair value was immaterial.
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.
Exercise
During the year ended December 31, 2019, the Company received proceeds of $10,800 from the exercise of options to
purchase 100,000 shares of common stock. The options had exercise prices ranging between $0.09 and $0.11 per share.
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.
The aggregate intrinsic value of the options exercised was $7,200 and $3,100 for the years ended December 31, 2019
and 2018, 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, 2019 and 2018, respectively.
In applying the Black-Scholes option pricing model to stock options granted, the Company used the following weighted
average assumptions:
Stock-based compensation expense related to stock options was recorded in selling, general and administrative
expenses in the consolidated statements of operations and totaled $214,353 and $289,329 for the years ended December 31,
2019 and 2018, respectively.
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20192018Risk-free interest rate2.45%2.49% to 2.89%Expected dividend yield0.00%0.00%Expected volatility183.0%185.0% to 191.0%Weighted average expected life (contractual term) in years6.06.0 Year Ended December 31,
As of December 31, 2019, stock-based compensation expense related to stock options of $430,614 remains
unamortized which is being amortized over the weighted average remaining period of 2.1 years.
Summary
A summary of the stock option activity during the years ended December 31, 2019 and 2018 is presented below:
The following table presents information related to stock options outstanding and exercisable at December 31, 2019:
Warrants
Valuation
In applying the Black-Scholes option pricing model to stock warrants granted, the Company used the following
weighted average assumptions:
Exercise
During the year ended December 31, 2019, the Company issued an aggregate of 33,060 shares of common stock to
holders of 66,120 warrants upon exercise on a cashless basis. The warrants had an exercise price of $0.15 per share. The
aggregate intrinsic value of the warrants exercised was $9,918 for the year ended December 31, 2019.
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Outstanding, January 1, 20181,021,345 0.59$ Granted *2,800,000 0.47 Exercised(10,000) 0.09 Forfeited *(856,500) 0.61 Outstanding, December 31, 20182,954,845 0.47$ Granted **1,250,000 0.32 Exercised(100,000) 0.11 Forfeited **(1,410,450) 0.47 Outstanding, December 31, 20192,694,395 0.41$ 8.0 38,517$ Exercisable, December 31, 2019769,395 0.60$ 5.4 38,517$ ** Includes 1,200,000 options reissued to executivesWeighted Average Exercise PriceWeighted Average Remaining Contractual Term (Years)Number of OptionsAggregate Intrinsic Value * Includes 750,000 options reissued to key employeesWeightedWeightedWeightedRange ofAverageOutstandingAverageAverageExercisableExerciseExerciseNumber ofExerciseRemaining LifeNumber ofPricePriceOptionsPriceIn YearsOptions$0.09 - $0.120.10$ 491,667 0.10$ 5.5491,667 $0.22 - $0.350.33 2,082,728 0.27 7.2157,728 $0.53 - $1.600.87 66,000 0.87 3.766,000 $4.10 - $6.995.85 54,000 5.85 2.054,000 $0.09 - $6.990.41$ 2,694,395 0.60$ 5.4769,395 Options OutstandingOptions Exercisable
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.
As of December 31, 2019 and 2018, 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, 2019 and 2018, respectively, is presented
below:
During the year ended December 31, 2019, 4,326,664 warrants issued to investors in 2014 expired
The following table presents information related to stock warrants at December 31, 2019:
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 $18,030.
Operating Leases
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WeightedWeighted AverageAverageRemainingAggregateNumber ofExerciseLifeIntrinsicWarrantsPriceIn YearsValueOutstanding, January 1, 20186,541,151 0.31$ Granted- - Exercised(1,525,000) 0.25 Forfeited(150,000) 0.35 Outstanding, December 31, 20184,866,151 0.33$ Granted- - Exercised(66,120) 0.15 Forfeited(4,326,664) 0.30 Outstanding, December 31, 2019473,367 0.66$ 2.5 -$ Exercisable, December 31, 2019473,367 0.66$ 2.5 -$ WeightedWeightedWeightedRange ofAverageOutstandingAverageAverageExercisableExerciseExerciseNumber ofExerciseRemaining LifeNumber ofPricePriceWarrantsPriceIn YearsWarrants$0.15 - $0.250.24$ 110,000 0.24$ 1.4110,000 $0.30 - $0.350.41 333,367 0.41 2.9333,367 $4.954.95 30,000 4.95 2.830,000 $0.15 - $4.950.66$ 473,367 0.66$ 2.5473,367 Warrants OutstandingWarrants Exercisable
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 $12,705 and $6,169 as of December 31, 2019 and 2018,
respectively, has been included in accrued expenses and other current liabilities on the consolidated balance sheets.
The aggregate future minimum lease payments for operating leases, excluding renewal periods, and capital leases as
of December 31, 2019 were as follows:
During the years ended December 31, 2019 and 2018, the Company recorded aggregate rent expense of $139,494 and
$120,460, respectively.
Employment Agreement
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.
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 $500,000. The suit is in the early stages and, as such, any potential liability cannot be determined at this
time. The Company’s most recent answer to the complaint asserted numerous counterclaims against the former employee for
damages and injunctive relief. Management believes that the Plaintiff’s claims are groundless and the Company intends to
contest this matter vigorously.
On March 6, 2019, the Company was named in a class action complaint filed against the Company in the United States
District Court by an individual alleging, among other items, violation of the Americans with Disabilities Act, claiming the
Company’s website is not fully accessible and independently usable to a visually impaired and legally blind individual. On
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Operating LeasesCapital Leases 202099,793 6,508 2021102,787 - 2022105,871 - Thereafter221,365 - Total529,816$ 6,508$ Less: Amount representing interest(190) Present value of minimum lease payments6,318$
August 13, 1019, the Company entered into a settlement agreement with the individual. The settlement amount, which was not
material, was included in the selling, general and administrative expenses during the year ended December 31, 2019.
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, 2019, three suppliers represented 35%, 23% and 21% of total inventory purchases.
During the year ended December 31, 2018, three suppliers represented 29%, 25% and 21% of total inventory purchases.
Two vendors represented 23% and 14% of the accounts payable balance as of December 31, 2019. One vendor
represented 23% of the accounts payable balance at December 31, 2018.
10. Related Party Transactions
Effective October 24, 2019, the Company entered into a transaction with Millennium Trust Company LLC Custodian
FBO Timothy E. Reilly IRA whereby the Company borrowed an aggregate of $500,000 from Millennium (the "Millennium
Loan"). The proceeds from the Millennium Promissory Note, were used to repay the outstanding balance of the Melrose
Promissory Note held by Melrose Capital Advisors, LLC. Both Melrose Capital Advisors, LLC and the Timothy E. Reilly IRA
are owned and controlled by Tim Reilly who is Chairman of the Company and a beneficial owner of more than 5% of the
Company’s outstanding shares of common stock. As such, the Millennium transaction is a related party transaction. See Note
6 – Notes Payable and Note 12 – Subsequent Events.
11. Income Taxes
The income tax provision (benefit) for the years ended December 31, 2019 and 2018 was as follows:
The effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of
December 31, 2019 and 2018 are as follows:
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20192018Federal: Current-$ 7,642$ Deferred31,448 (109,066) State and local: Current- - Deferred- 56,423 31,448 (45,001) Change in valuation allowance(31,448) 52,643 Income tax provision (benefit)-$ 7,642$ Year Ended December 31,
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. 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, 2019
and 2018.
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 2015 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, 2019. When these returns are filed for the year ended
December 31, 2019, the Company will have $17,210,209 and $17,188,600 of federal net operating loss carryforwards that may
be available to offset future taxable income as of December 31, 2019 and 2018, 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, 2019 and 2018, the Company had
approximately $9,980,505 and $9,968,160 of state net operating loss carryforwards available to offset future taxable income.
The state NOLs, if not utilized, will expire beginning in 2031.
In accordance with Section 382 of the Internal Revenue code, the usage of the Company’s net operating loss
carryforwards could be limited in the event of a change in ownership. Based upon a study that analyzed the Company’s stock
ownership, a change of ownership was deemed to have occurred in 2011. This change of ownership created an annual limitation
on the usage of the Company’s losses which are available through 2031. A full Section 382 analysis has not been prepared
since 2011 and any NOLs arising since 2011 could be subject to limitation under Section 382.
For the years ended December 31, 2019 and 2018, the expected tax expense (benefit) based on the statutory rate is
reconciled with the actual tax expense (benefit) as follows:
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20192018Deferred tax assets: Net operating loss carryforwards4,013,364$ 4,012,472$ Stock-based compensation469,179 469,178 Inventory reserves7,039 7,040 Deferred Revenue905 1,100 Deferred Rent3,176 1,542 Total deferred tax assets4,493,663 4,491,332 Valuation allowance(4,424,877) (4,456,325) Deferred tax assets, net of valuation allowance68,786 35,007 Deferred tax liabilities: Property and equipment(68,786) (35,007) Web development- - Deferred tax liabilities(68,786)$ (35,007)$ Net deferred tax assets-$ -$ Change in valuation allowance(31,448)$ 52,643$ December 31,
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, 2020, the Company issued an aggregate of 279,213 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 2019. The shares had an aggregate
grant date value of $48,583 and were valued at $0.17 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, 2019.
Issuance of Options to Employees and Executives
On February 1, 2020, the Company granted stock options to purchase an aggregate of 2,650,000 shares of common
stock under the 2014 Plan to key employees and executives of the Company as recognition of their contributions to the Company.
The options had an exercise price of $0.12 per share which was the 30-day weighted average closing price for the Company’s
common stock on the date of grant. The options vest over a three-year period and have a term of ten years. The options had an
aggregate grant date value of $309,870.
Melrose Unsecured Note
On January 31, 2020, the Company executed an unsecured promissory note with Melrose Capital Advisors, LLC (the
"Melrose Unsecured Note") whereby the Company borrowed $750,000. The Melrose Unsecured Note bears interest on the
unpaid principal balance at a fixed rate equal to 10% per annum. The principal amount and all unpaid accrued interest on the
Melrose Unsecured Note were due on February 10, 2020. The proceeds of the Melrose Unsecured Note were used to repay a
portion of the Kapok Promissory Note. The Melrose Unsecured Note was repaid in February 2020 in connection with the
issuance of convertible notes detailed below. Melrose Capital Advisors, LLC is controlled by Tim Reilly who is Chairman of
the Company and a beneficial owner of more than 5% of the Company’s outstanding shares of common stock. As such, the
Melrose transaction is a related party transaction. See Amendment to Kapok Promissory Note and Convertible Promissory
Notes sections below.
Amendment to Kapok Promissory Note
On January 31, 2020, the Company executed an amendment to Kapok Promissory Note (the “Amendment”). Per the
terms of the Amendment, (a) the principal amount of the Kapok Promissory Note was reduced from $2,000,000 to $1,000,000
and (2) the Maturity Date was extended from January 31, 2020 to June 30, 2020. The remaining terms of the Kapok
Promissory Note were unchanged. As part of the transaction, the outstanding principal balance of the Kapok Loan was
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20192018US federal statutory rate(21.0%) (21.0%)State tax rate, net of federal benefit(4.0%)(4.0%)Permanent differences: Stock based compensation53.9%8.9% Other 2.7%(0.1%) Change in State Tax Rate0.0%10.7%Change in valuation allowance(31.6%)6.4%Income tax provision (benefit)0.0% 0.9% Year Ended December 31,
reduced by $1,000,000. The Company utilized the proceeds of the Melrose Unsecured Note and excess cash balances to repay
$1,000,000 of the Kapok Loan balance. Following the repayment, the Kapok Loan had an outstanding balance of $989,678.
Convertible Promissory Notes
On February 10, 2020, the Company executed a convertible note purchase agreement (the”Convertible Purchase
Agreement”), convertible secured promissory notes (the “Convertible Notes”) and a security agreement (the “Convertible
Security Agreement”) (collectively the “Convertible Note Agreements”). Under the terms of the Convertible Notes, the
Company borrowed an aggregate of $1,675,000 from a group of six investors. The Convertible Notes bear interest on the unpaid
principal balance until the full amount of principal has been paid or converted to common shares at a fixed rate equal to 6% per
annum. Under the terms of the Convertible Notes, the Company has agreed to make quarterly payments of accrued interest on
the last day of every calendar quarter beginning on March 31, 2020. The principal amount and all unpaid accrued interest on
the Convertible Note is payable on April 30, 2022.
At any time prior to the maturity date, each purchaser may convert their Convertible Note balance, in whole or in part,
into shares of the Company’s common stock at a conversion rate of $0.12 per share (the “Conversion Rate”). The Company
may initiate the conversion of the Convertible Notes at any time prior to the maturity date in the event that the 60-day weighted
average price of a share of the Company’s common stock as reported on OTC Markets exceeds $0.30 per share. The Conversion
Price is subject to adjustment in the event of future dilutive transactions.
Pursuant to the Convertible 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 Convertible Notes. The Convertible Note security interest is
junior to up to $1,000,000 of senior security interests, currently the Kapok security interest. The Convertible Loan Agreements
contain customary negative covenants restricting the Company's ability to take certain actions without the consent of the agent
for the Convertible Note holders, including incurring additional indebtedness, transferring or encumbering assets, paying
dividends or making certain other payments, and acquiring other businesses. The repayment of the Convertible Promissory
Notes 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 Company received cash proceeds of $1,175,000, including $500,000 from Millennium Trust Company LLC
Custodian FBO Timothy E. Reilly IRA. The cash proceeds from the Convertible Promissory Note were used to repay the
outstanding balance of the Melrose Unsecured Note of $750,000. In addition, the Company exchanged the Millenium
Promissory Note with an outstanding balance of $500,000 for a like amount of Convertible Notes. Both Melrose Capital
Advisors, LLC and the Timothy E. Reilly IRA are owned and controlled by Tim Reilly who is Chairman of the Company and
a beneficial owner of more than 5% of the Company’s outstanding shares of common stock. As such, the Millennium investment
in the Convertible Notes transaction is a related party transaction.
The Company received a waiver from the majority holder of the Series B convertible preferred stock prior to completing the
Convertible Note transaction. As part of the agreement to extend the waiver of the debt limitation to April 30, 2022 and
increase the limitation on indebtedness from $2,500,000 to $3,000,000, the Series B Preferred shareholders required the
issuance of warrants to purchase 500,000 shares of common stock at an exercise price equal to the 30-day weighted average
closing price for the Company’s common stock on the date of issuance. The warrants were issued on March 5, 2020 at an
exercise price of $0.11 per share.
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