HEALTHWAREHOUSE.COM, INC.
A Delaware Corporation
7107 Industrial Road
Florence, KY 41042
(800)748-7001
www.healthwarehouse.com
support@healthwarehouse.com
SIC Code: 5912 - Drugstores and Proprietary Stores
Annual Report
For the year ended December 31, 2020
As of December 31, 2020, the number of shares outstanding of our Common Stock was 51,500,635.
As of September 30, 2020, the number of shares outstanding of our Common Stock was 50,863,259.
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, 2020 and
2019
Consolidated Statements of Operations – Years ended
December 31, 2020 and 2019
Consolidated Statements of Changes in Stockholders’
Deficiency – Years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows –Years ended
December 31, 2020 and 2019
Notes to the Consolidated Financial Statements
3
3
4
5
5
6
6
7
8
9
11
12
13
14
15
16
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, 2020:
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
125,000,000
51,500,635
12,602,205
252
$0.001
Not
Applicable
Not
Applicable
790,000
517,359
$0.001
Not
Applicable
Not
Applicable
10,000
9,000
-0-
-0-
2
3
On April 14, 2017, HEWA filed a Form 15 with the Securities and Exchange Commission terminating the registration
of its Common Stock under Rule 12 g-4(a)(1) of the Securities Exchange Act of 1934. As of this date, the Company
has no plans to reregister the common stock under the Securities Exchange Act of 1934.
Transfer Agent:
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Phone: (718) 921-8200
Is the Transfer Agent registered under the Exchange Act? Yes: X No:
Describe any trading suspension orders issued by the SEC in the past 12 months: None
3
List any stock split, stock dividend, recapitalization, merger, acquisition, spin-off, or reorganization either currently
anticipated or that occurred within the past 12 months: In October 2020, at the annual meeting of stockholders
of the Corporation, the stockholders approved an amendment to the Corporation’s Certificate of
Incorporation to increase the number of authorized shares of common stock that may be issued to
125,000,000, which was effective on October 9, 2020. At the meeting, the stockholders also approved an
amendment to the Corporation’s Certificate of Incorporation to effect a reverse stock split of the Company’s
common stock at a ratio of 1-for-50 and to decrease the number of authorized shares of common stock in
proportion to the reverse stock split. However, the Board of Directors has not yet determined if or when to
effect the reverse stock split.
3) Issuance History
A. Changes to the Number of Outstanding Shares
Check this box to indicate there were no changes to the number of outstanding shares within the past two
completed fiscal years and any subsequent periods: ☐
4
49,018,548 517,359 10,000 DateTransaction TypeNumber of Shares IssuedClass of SecuritiesValue of shares issued ($ 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 Type1/8/19New 213,708 Common $0.25 NoDirectors (Scott, Heimbrock, Weiss, Britts)Stock Based CompensationRestrictedRule 7012/11/19New 486,381 Common $0.26 NoExecutives (Peters, Seliga)Stock Based CompensationRestrictedRule 7014/2/19New 155,424 Common $0.30 NoDirectors (Scott, Heimbrock, Weiss, Britts)Stock Based CompensationRestrictedRule 7017/15/19New 174,344 Common $0.30 NoDirectors (Scott, Heimbrock, Weiss, Britts)Stock Based CompensationRestrictedRule 7017/31/19New 33,060 Common $0.30 NoPickwick Capital Partners LLC (Doug Greenwood, President, has voting / investment control)Stock Based CompensationRestrictedRule 70110/15/19New 227,468 Common $0.23 NoDirectors (Scott, Heimbrock, Weiss, Britts)Stock Based CompensationRestrictedRule 70112/5/19New 100,000 Common $0.09 - $0.11YesRob GodwinExercise of stock optionRestrictedNon Public1/8/20New 279,213 Common $0.17 NoDirectors (Scott, Heimbrock, Reilly, Britts)Stock Based CompensationRestrictedRule 7014/22/20New 105,882 Common $0.17 NoDirectors (Heimbrock, Reilly, Britts)Stock Based CompensationRestrictedRule 7017/15/20New 69,231 Common $0.26 NoDirectors (Heimbrock, Reilly, Britts)Stock Based CompensationRestrictedRule 70110/14/20New 81,819 Common $0.22 NoDirectors (Heimbrock, Reilly, Britts)Stock Based CompensationRestrictedRule 70110/29/20Cancellation by Conversion 1,000 Series C Preferred $0.18 NoNew Atlantic Venture Fund III, L.P,; New Atlantic Entrepreneur Fund III, L.P.; NAV Managers Fund, LLC (Todd Hixon, Manager, Member and CFO of NAV entities)Conversion of Series C Preferred Shares into Common SharesN/AN/A10/29/20Issuance by Conversion 555,557 Common $0.18 NoNew Atlantic Venture Fund III, L.P,; New Atlantic Entrepreneur Fund III, L.P.; NAV Managers Fund, LLC (Todd Hixon, Manager, Member and CFO of NAV entities)Conversion of Series C Preferred Shares into Common SharesRestrictedRule 701 51,500,635 517,359 9,000 Preferred Series CNumber of Shares outstanding as of January 1, 2019Opening BalanceCommonPreferred Series BPreferred Series CNumber of Shares outstanding as of December 31, 2020Ending BalanceCommonPreferred Series B
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.
B. Debt Securities, Including Promissory and Convertible Notes
Check this box if there are no outstanding promissory, convertible notes or debt arrangements: ☐
Please see Footnote 6 – Notes Payable to the Company’s consolidated financial statements for more information.
4) Financial Statements
a) The following financial statements were prepared in accordance with U.S. GAAP.
b) The financial statements for this reporting period were prepared by Daniel Seliga, Chief Financial Officer
of the Company.
See PART II –CONSOLIDATED FINANCIAL STATEMENTS below.
5) Issuer’s Business, Products and Services
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 all 50 United States and the District of Columbia focusing on the out-of-pocket
prescription drug market, a market which is expected to continue to grow. The Company sells directly to
individual consumers who purchase prescription medications and over-the-counter products over the
Internet. HealthWarehouse.com is currently 1 of 74 National Association of Boards of Pharmacy
(“NABP”) accredited digital pharmacies. In addition, the Company also provides fulfillment services of
prescription medication to customers of other healthcare providers including telemedicine and online
services companies.
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Date of Note IssuanceOutstanding Balance ($) as of 12/31/2020Principal Amount at Issuance ($)Interest Accrued ($) as of 12/31/2020Maturity DateConversion TermsName of Note HolderReason for Issuance2/10/20 $ 1,675,000 $ 1,675,000 $ 25,125 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 previous note to Millenium Trust Company LLC; and General working capital purposes.4/14/20 $ 525,000 $ 525,000 $ 7,875 4/30/2022Convertible to shares of common stock at $0.14 per shareRobert B. Ford; Thomas J. Daley 2019 Trust, Thomas J. Daley, Trustee; John Pauly; Marian Pauly; Dwayne StephensRepay existing indebtedness and General working capital purposes.
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. The Company also provides fulfillment services
of prescription medication to customers of other healthcare providers.
6) Issuer’s Facilities
HealthWarehouse.com, Inc.’s corporate headquarters is located at 7107 Industrial Road, Florence, Kentucky,
41042 which also houses its inventory, 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. The monthly lease rate ranges between $7,955 and $9,498 during the term of the
lease. See Footnote 8 – Commitments and Contingencies to the Company’s consolidated financial statements for
more details.
7) Officers, Directors and Control Persons
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 December 31, 2020. Please see detailed director biographies contained in the Company’s 2020
Annual Meeting and Proxy Statement dated August 28, 2020, filed with the OTC Markets on August 31, 2020.
Name
Joseph B. Peters
Daniel J. Seliga
Tim Reilly
Jack Britts
Joseph Heimbrock
Sara Mannix
Control Persons
Title
President and Chief Executive Officer,
Director
Chief Financial Officer
Director, Chairman
Director
Director
Director
The following individuals and entities are the beneficial owners of more than five percent (5%) of HEWA’s
Common Stock as of December 31, 2020. 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.
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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.
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Name AffiliationAddressNumber of shares ownedShare ClassOwnership Percentage of Class OutstandingBeneficial OwnershipDellave Holdings, LLC, Melrose Capital Advisors LLC, Millenium Trust Company LLC Custodian FBO Timothy E. Reilly and Tim ReillyDirector and >5%1085 Gulf of Mexico Drive, Longboat Key, FL 34228 4,390,853 Common8.6%21.7%MVI Partners and Joe Heimbrock, DirectorDirector and >5%3299 Hughes Court, Taylor Mill, KY 41015 494,913 1,729,937Series B Common96.0% 3.4%* 16.5%Cormag Holdings, LTD and Mark D. Scott, Director>5%104 Falcon Ridge Drive, Winnipeg, Manitoba, Canada R3Y1X6 5,699,929 Common11.2%11.2%Dr. Bruce Bedrick>5%5375 Monterey Circle #32, Delray Beach, FL 33484 3,990,000 Common7.8%7.8%Lalit Dhadphale>5%182 Uccello Drive, Las Vegas, NV 89138 3,022,479 Common5.9%5.9%Jack BrittsDirector7 Glen Falls Road Asheville, NC 28804 473,487 Common0.9%1.2%Joseph B. PetersPresident and Chief Executive Officer and Director9085 Braxton Drive, Union, KY 41091 283,463 Common0.6%2.0%Daniel J. SeligaChief Financial Officer 3524 Paxton Avenue, Cincinnati, OH 45208 1,041,354 Common2.0%2.8%* Each Preferred B share is convertible into 14.8 common shares as of December 31, 2020.
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
B. Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to
the business, to which the issuer or any of its subsidiaries is a party or of which any of their property is the subject
of:
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.
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
Kenneth Tabach
Silver, Freedman, Taff & Tiernan LLP
3299 K Street, N.W. Suite 100
Securities Counsel
Name:
Firm:
Address 1:
Address 2: Washington, DC 20007
Phone:
Email:
(202) 295-4500
ktabach@sfttlaw.com
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:
Marcum LLP
750 Third Avenue, 11th Floor
New York, NY 10017
(212) 485-5500
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10) Issuer Certification
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Joseph Peters, certify that:
1.
2.
3.
I have reviewed this quarterly 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 29, 2021
/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 quarterly 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 29, 2021
/s/ Daniel J. Seliga
Daniel J. Seliga
Chief Financial Officer
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PART II – CONSOLIDATED FINANCIAL STATEMENTS
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11
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December 31,December 31,20202019AssetsCurrent assets:Cash and cash equivalents1,815,638$ 2,355$ Restricted cash 49,787 1,066,335 Accounts receivable246,518 118,613 Inventories 232,748 247,768 Prepaid expenses and other current assets114,450 65,882 Total current assets2,459,141 1,500,953 Property and equipment, net882,803 1,006,299 Total assets 3,341,944$ 2,507,252$ Liabilities and Stockholders’ DeficiencyCurrent liabilities:Accounts payable 626,528$ 808,125$ Accrued expenses and other current liabilities2,328,364 1,808,944 Current portion of equipment lease payable- 5,736 Notes payable- 2,489,678 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 (aggregate liquidation preference of $1,000,000)- 1,000,000 Total current liabilities2,954,892 6,112,483 Long term liabilities:Capital lease payable - non-current- 609 Convertible notes payable, net of debt discount of $57,586 as of December 31, 20202,142,414 - Total long term liabilities2,142,414 609 Total liabilities5,097,306 6,113,092 Commitments and contingenciesConvertible redeemable preferred stock - Series C; par value $0.001 per share; 10,000 shares designated Series C: 9,000 issued and outstanding as of December 31, 2020 (aggregate liqidation preference of $900,000)900,000 - Stockholders’ deficiency: Preferred stock – par value $0.001 per share; authorized 1,000,000 shares; issued and outstanding as of December 31, 2020 and December 31, 2019 as follows:Convertible preferred stock - Series B – 790,000 shares designated Series B; 517,359 shares issued and outstanding as of December 31, 2020 and December 31, 2019 (aggregate liquidation preference of $6,600,207 and $6,257,975 as of December 31, 2020 and December 31, 2019, respectively)517 517 Common stock – par value $0.001 per share; 125,000,000 and 100,000,000 shares authorized as of December 31, 2020and 2019, respectively; 52,679,847 and 51,588,145 shares issued and 51,500,635 and 50,408,933 shares outstanding as of December 31, 2020 and December 31, 2019, respectively52,679 51,587 Additional paid-in capital34,893,278 34,242,985 Treasury stock, at cost, 1,179,212 shares as of December 31, 2020 and December 31, 2019(3,419,715) (3,419,715) Accumulated deficit(34,182,121) (34,481,214) Total stockholders’ deficiency (2,655,362) (3,605,840) Total liabilities and stockholders’ deficiency3,341,944$ 2,507,252$ The accompanying notes are an integral part of these consolidated financial statements.HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS
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20202019Total net sales17,178,985$ 15,755,577$ Cost of sales5,831,003 5,394,390 Gross profit11,347,982 10,361,187 Selling, general and administrative expenses11,397,106 10,205,484 Income (loss) from operations(49,124) 155,703 Other income (expense):Gain on debt forgiveness890,000- Interest expense(199,550) (255,103) Total other income (expense)690,450 (255,103) Net income (loss)641,326 (99,400) Preferred stock:Series B convertible preferred stock contractual dividends(342,233) (342,233) Net income (loss) attributable to common stockholders299,093$ (441,633)$ Per share data:Net income (loss) – basic 0.01$ (0.00) Net income (loss) – diluted0.01 (0.00) Series B convertible preferred stock contractual dividends(0.01) (0.01) Net income (loss) attributable to common stockholders - basic 0.01$ (0.01)$ Net income (loss) attributable to common stockholders - diluted0.00$ (0.01)$ Weighted average number of common shares outstanding - basic50,900,26749,923,926Weighted average number of common shares outstanding - diluted70,309,97449,923,926The accompanying notes are an integral part of these consolidated financial statements.HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSFor the Year EndedDecember 31,
14
TotalAdditional AccumulatedStockholders’SharesAmountSharesAmountSharesAmountPaid-In CapitalSharesAmountDeficitDeficiencyBalances, January 1, 2019- -$ 517,359 517$ 50,197,760 50,197$ 33,682,223$ 1,179,212 (3,419,715)$ (34,039,581)$ (3,726,359)$ Stock-based compensation- - - - 557,236 557 372,794 - - - 373,351 Exercise of options into common stock- - - - 100,000 100 10,700 - - - 10,800 Common shares issued for previously accrued compensation- - - - 700,089 700 177,301 - - - 178,001 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, 2019- -$ 517,359 517$ 51,588,145 51,587$ 34,242,985$ 1,179,212 (3,419,715)$ (34,481,214)$ (3,605,840)$ Balances, January 1, 2020- -$ 517,359 517$ 51,588,145 51,587$ 34,242,985$ 1,179,212 (3,419,715)$ (34,481,214)$ (3,605,840)$ Stock-based compensation- - - - 256,932 257 445,036 - - - 445,293 Common Shares issued for previouslyaccrued compensation- - - - 279,213 279 48,304 - - - 48,583 Contractual dividends on Series B convertiblepreferred stock- - - - - - - - - (342,233) (342,233) Reclassification of Series C Preferred due toretraction of redemption notice10,000 1,000,000 - - - - - - - - - Conversion of Series C Preferred shares to Commonshares(1,000) (100,000) 555,557 556 99,444 - - - 100,000 Warrants issued as debt discount inconnection with convertible notes payable- - - - - - 57,509 - - - 57,509 Net income- - - - - - - - - 641,326 641,326 Balances, December 31, 20209,000 0900,000$ 517,359 517$ 52,679,847 52,679$ 34,893,278$ 1,179,212 (3,419,715)$ (34,182,121)$ (2,655,362)$ The accompanying notes are an integral part of these consolidated financial statements.Redeemable and ConvertibleConvertiblePreferred StockPreferred StockCommon StockTreasury StockSeries CSeries BHEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCYFOR THE YEAR ENDED DECEMBER 31, 2020 AND 2019
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20202019Cash flows from operating activitiesNet income (loss)641,326$ (99,400)$ Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization133,576 163,653 Stock-based compensation509,293 421,935 Gain on sale of equipment- (28,979) Gain on debt forgiveness(890,000) - Gain on extinguishment of accounts payable(52,630) Amortization of debt discount37,954 12,262 Changes in operating assets and liabilities:Accounts receivable(127,905) 9,248 Inventories 15,020 (38,161) Prepaid expenses and other current assets(48,568) 38,159 Accounts payable(181,597) 7,062 Accrued expenses and other current liabilities161,770 168,401 Net cash provided by operating activities250,869 601,550 Cash flows from investing activitiesCapital expenditures(10,080) (1,159) Proceeds from sale of equipment- 35,000 Net cash provided by (used in) investing activities(10,080) 33,841 Cash flows from financing activitiesRepayment of capital lease(6,345) (5,948) Repayment of notes payable (3,239,678) - Proceeds from the exercise of stock options- 10,800 Proceeds from note payable750,000 - Proceeds from note payable - refundable890,000 - Proceeds from convertible notes payable2,161,969 - Net cash provided by financing activities555,946 4,852 Net increase in cash 796,735 640,243 Cash, cash equivalents and restricted cash - beginning of period1,068,690 428,447 Cash, cash equivalents and restricted cash - end of period1,865,425$ 1,068,690$ Cash paid for: Interest152,490$ 242,840$ Non-cash investing and financing activities:Cashless exercise of warrants into common stock $ - $ 33 Warrants issued in connection with convertible notes payable $ 57,509 $ - Accrual of contractual dividends on Series B convertible preferred stock $ 342,233 $ 342,333 Common stock issued to satisfy accrued directors' fees $ 102,583 $ 212,000 Options issued to satisfy accrued directors' fees $ 90,000 $ - Common stock issued to satisfy non-cash executive bonus $ - $ 125,000 Conversion of notes payable to convertible notes payable $ 500,000 $ - Conversion of shares of Series C Preferred to common share $ 100,000 $ - HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Year 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. Liquidity and Capital Resources
The Company’s working capital deficiency reduced from $4,611,530 at December 31, 2019 to $495,751 as of
December 31, 2020 and the stockholder deficiency improved from $3,605,840 at December 31, 2019 to $2,655,362 as of
December 31, 2020. For the year ended December 31, 2020, the Company earned net income of $641,326, which included an
$890,000 gain on the forgiveness of the PPP loan, and had net cash provided by operating activities of $250,869 for the year
ended December 31, 2020. As of December 31, 2020, the Company had cash, cash equivalents and restricted cash totaling
$1,865,425.
During 2020, the Company reduced its current obligations by completing the Convertible Note issuance, repaying
short-term notes payable obligations, entering a Conversion and Standstill Agreement with the holders of the Series C
Redeemable Preferred stock and receiving forgiveness of its PPP loan. The primary component of the Company’s remaining
current obligations is the accrued dividends totaling $1,711,165 to the holders of the Series B Preferred shares. The Company
believes it would satisfy a majority if not all of such dividends through the issuance of additional shares of the Series B Preferred
stock versus a required cash outlay, which is at the Company’s discretion. As such, the Company believes that its current
financial resources are sufficient to satisfy the Company’s estimated liquidity needs for at least twelve months from the date of
issuance of these consolidated financial statements.
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.
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.
16
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, 2020, the Company had $1,652,795 of cash equivalents which were money market
accounts held at banks and other financial institutions.
Restricted Cash
Restricted cash represented 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. The Company’s Senior Note was repaid in full in June 2020 which
terminated the cash collateral requirement and the Company’s excess funds no longer had to be classified as restricted cash.
Cash and cash equavalents and Restricted Cash, as presented on the consolidated statements of cash flows, consists of
$1,815,638 and $49,787, as of December 31, 2020, respectively, and $2,355 and $1,066,335 as of December 31, 2019,
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 direct-to-consumer business, its largest business segment, is that the majority of
payments are received before the product is shipped. The Company does have accounts receivable related to its fulfilment
business as it has extended terms to its fulfillment customers ranging from 10 to 30 days. If the financial conditions of
fulfillment 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, 2020 and 2019.
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.
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.
17
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, 2020 and 2019. The Company does not expect any significant changes
in the unrecognized tax benefits within twelve months of the reporting date.
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, 2020 and 2019.
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.
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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 of other healthcare providers. 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 either prepaid by the customer or paid by check or electronic funds transfer upon receipt
of a monthly invoice. The Company extends terms to some fulfillment customers ranging from 10 to 30 days.
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. The Company had contract liabilities of $0 and $9,378 as of December
31, 2020 and 2019, respectively, which represented refundable customer deposits and was recorded as a reduction of accounts
receivable. Other than accounts receivable, there were no contract assets as of December 31, 2020.
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 $1,795,668 and $1,520,759
for the years ended December 31, 2020 and 2019, 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, 2020 and 2019 were $460,107 and $332,795, respectively.
Advertising and Marketing Expenses
The Company expenses all advertising and marketing costs as incurred and were $1,872,831 and $1,532,366 for the
years ended December 31, 2020 and 2019, 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. Beginning in 2018 and continuing into 2020, 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.
19
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 includes
potentially dilutive securities such as outstanding options, warrants and convertible notes, using the if-converted method in the
determination of dilutive shares outstanding during each reporting period.
* The diluted earnings per common share in 2020 included the weighted-average effect of 3,324,247 stock options, 500,000 stock
warrants, convertible notes, as if converted to 17,708,338 shares and Series C Convertible Redeemable Preferred Stock, as if
converted to 5,000,000 shares, that are potentially dilutive to earnings per share for the year ended December 31, 2020, since the
exercise price of such securities was less than the weighted average market price of $0.21 during the period.
The following table sets forth potential common shares issuable upon the exercise of outstanding options, the exercise
of warrants and the conversion of notes, all of which have been excluded from the computation of diluted weighted average
shares outstanding as they would be anti-dilutive:
Stock-Based Compensation
Stock-based compensation expense for all stock-based payment awards is based on the estimated fair value of the
award. For employees, directors and non-employees, the award is measured on the grant date. The Company recognizes the
estimated fair value of the award as compensation cost over the requisite service period of the award, which is generally the
option vesting term. The Company generally issues new shares of common stock to satisfy option and warrant exercises.
Preferred Stock
Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at
fair value. The Company classifies conditionally redeemable preferred shares, which includes preferred shares that feature
redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain
events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred
shares in stockholders’ deficiency.
Convertible Instruments
U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as
free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the
economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic
20
20202019Net income (loss) attributable to common shareholders299,093$ (441,633)$ Weighted-average common shares, basic50,900,267 49,923,926 Weighted-average common shares, diluted*70,309,974 49,923,926 Net income (loss) per common share, basic 0.01$ (0.01)$ Net income (loss) per common share, diluted0.00$ (0.01)$ December 3120202019Options2,408,108 2,694,395 Warrants473,367 473,367 Series B Convertible Preferred Stock7,656,914 6,192,788 Total potentially dilutive shares10,538,389 9,360,550 December 31,
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, 2020 and 2019 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.
Risks and Undertainties
COVID-19 Pandemic: In March 2020, the World Health Organization declared the outbreak of a novel coronavirus
(COVID-19) as a pandemic which continues to spread throughout the United States. There are no comparable recent events
which may provide guidance as to the effect of the spread of COVID-19 and a potential pandemic, and, as a result, the ultimate
impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain and subject to change. We do not yet know
the full extent of potential delays or impacts on our business, our operations or the global economy as a whole. Possible effects
may include, but are not limited to, mandates from federal, state and local governments that would directly prohibit our ability
to conduct business, absenteeism in the Company’s labor workforce and limitations on availability of products and supplies.
The effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely.
To date, the pandemic has had a limited impact on our business operations due to our classification as an essential
business in Kentucky. The Company has implemented policies and procedures based on recommended guidelines provided by
the CDC in order to limit the possibility of the infection of employees, including transitioning over 50% of our staff of
approximately 110 employees to telecommuting from their homes. These efforts increased our expenses during the first half of
2020. Changes in consumer purchasing behavior during the first half of 2020 increased demand and, in turn, resulted in
increased sales compared to the first half of last year. The increased demand resulted in shortages of various prescription and
over-the-counter medications during the first half of 2020 which impacted our order conversions and processing times during
that period. The Company continues to experience shortages in the supply of medications, albeit to a lesser extent than was
experienced during the first half of the year.
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Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize
the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a
liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for
the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class
of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize
and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This update and
related amendments are effective for nonpublic entities for annual periods beginning after December 15, 2021. The Company
is currently assessing the impact this guidance will have on its consolidated financial statement.
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.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes”. ASU 2019-12 removes specific exceptions to the general principles in Topic 740 in U.S. GAAP. It eliminates
the need for an organization to analyze whether the following apply in a given period:
-Exception to the incremental approach for intraperiod tax allocation;
-Exceptions to accounting for basis differences when there are ownership changes in foreign investments; and
-Exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.
ASU 2019-12 also improves financial statement preparers’ application of income tax-related guidance and simplifies
U.S. GAAP for:
-Franchise taxes that are partially based on income;
-Transactions with a government that result in a step up in the tax basis of goodwill;
-Separate financial statements of legal entities that are not subject to tax; and
-Enacted changes in tax laws in interim periods.
This standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. If early
adoption is elected, the entity should adopt all amendments in the same period. The Company is currently assessing the impact
this guidance will have on its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments
and Contracts in an Entity’s Own Equity”. ASU 2020-06 simplifies accounting for convertible instruments by removing major
separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a
single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for
embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify
for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the
diluted earnings per share (EPS) calculation in certain areas. This standard is effective for fiscal years beginning after December
15, 2023, with early adoption permitted. The Company is currently assessing the impact this guidance will have on its
consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, “Codification Improvements” (“ASU 2020-10”). This ASU contains
amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure
Section (Section 50). Many of the amendments arose because the FASB provided an option to give certain information either
on the face of the financial statements or in the notes to financial statements and that option only was included in the Other
Presentation Matters Section (Section 45) of the Codification. The option to disclose information in the notes to financial
22
statements should have been codified in the Disclosure Section as well as the Other Presentation Matters Section (or other
Section of the Codification in which the option to disclose in the notes to financial statements appears). This standard is effective
for annual periods beginning after December 15, 2021, with early adoption permitted. The Company is currently assessing the
impact this guidance will have on its consolidated financial statements.
There were no other recent accounting standard updates that the Company has not yet adopted that we believe would
have a material impact on our consolidated financial statements.
4. Property and Equipment, Net
Property and equipment, net consisted of the following:
Depreciation expense for the above assets for the years ended December 31, 2020 and 2019 was $133,576
and $163,653, respectively.
During the year ended December 31, 2019, the Company sold equipment for $35,000 and recognized a gain on the sale
of $28,979 which was included in selling, general and administrative expenses.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
23
Useful Life20202019(Years)Computer Software240,379$ 230,299$ 5 yearsEquipment1,257,456 1,257,456 10 yearsOffice Furniture and Equipment103,602 103,602 7 yearsComputer Hardware50,998 50,998 5 yearsLeasehold Improvements322,973 322,973 (a)Total1,975,408 1,965,328 Less: Accumulated Depreciation(1,092,605) (959,029) Property and Equipment, Net882,803$ 1,006,299$ (a) Lesser of useful life or initial term of leaseDecember 31, December 31, December 31, 20202019Salaries and Benefits172,363$ 166,002$ Dividend Payable1,711,165 1,368,932 Accounting59,738 95,980 Accrued Interest28,435 28,435 Accrued Rent16,334 12,705 Sales Tax Payable117,863 24,909 Advertising50,700 20,000 Accrued Engineering Fees47,000 - Accrued Director Fees64,000 48,583 Deferred Revenue2,387 3,621 Other58,379 39,777 2,328,364$ 1,808,944$
6. Notes Payable
Notes payable consisted of the following:
Kapok Promissory Note
The Company was 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 could borrow up to an aggregate of $1,000,000 (as amended) from Kapok. The Kapok
Promissory Note bore interest on the unpaid principal balance until the full amount of principal had been paid at a variable rate
equal to the prime rate plus four and one-quarter percent (4.25%) per annum (7.5% at June 30, 2020). The Company repaid
$1,000,000 of the outstanding balance on January 31, 2020 and the amount of the Promissory Note was reduced from $2,000,000
to $1,000,000 on that date. Under the terms of the Kapok Promissory Note, the Company agreed to make monthly payments
of accrued interest on the first day of every month, through the June 30, 2020 maturity date. The outstanding principal balance
on the Kapok Promissory Note and accrued interest were repaid in full on June 20, 2020.
Millennium Promissory Note
The Company was a party to 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, which
commenced in 2019. 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 bore interest on the unpaid principal balance until
the full amount of principal had been paid at a fixed rate equal to 10% per annum. Under the terms of the Millennium Promissory
Note, the Company agreed to make monthly payments of accrued interest on the first day of every month. The principal amount
of the Millenium Promissory Note was converted into a new loan in connection with the issuance of convertible notes detailed
below on February 12, 2020 and all accrued interest was repaid on February 28, 2020. The Timothy E. Reilly IRA is 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.
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 $750,000. The Melrose Unsecured Note bore interest on the
unpaid principal balance at a fixed rate equal to 10% per annum. The principal amount and all unpaid accrued interest on the
Melrose Unsecured Note were due on February 10, 2020. The proceeds of the Melrose Unsecured Note were used to repay a
portion of the Kapok Promissory Note. The Melrose Unsecured Note was repaid in February 2020 in connection with the
issuance of convertible notes detailed below. Melrose Capital Advisors, LLC is controlled by Tim Reilly who is Chairman of
24
December 31,December 31,20202019Millenium Note-$ 500,000$ Kapok Promissory Note- 1,989,678 Convertible Promissory Note2,200,000 - Less debt discount(57,586) - Total debt2,142,414 2,489,678 Less current portion- (2,489,678) Long-term debt, less current portion2,142,414$ -$
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.
Convertible Promissory Notes
The Company executed convertible note purchase agreements (the”Convertible Purchase Agreements”) and a security
agreement, as amended, (the “Convertible Security Agreement”) on February 7, 2020 and April 12, 2020, and convertible
secured promissory notes on February 10, 2020 and April 12, 2020 (the “Convertible Notes”) (collectively the “Convertible
Note Agreements”). Under the terms of the Convertible Notes, the Company borrowed an aggregate of $2,200,000 from a
group of eleven 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 Notes is payable on April 30, 2022.
As of December 31, 2020, the outstanding principal balance on the Convertible Promissory Notes was $2,142,414, net of the
debt discount of $57,586, and accrued interest was $33,000.
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 conversion rates ranging between $0.12 and $0.14 per share (the “Conversion
Rate”) which was the 30-day weighted average closing share price on the closing dates. 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. 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 an aggregate of $1,661,969 of cash proceeds, net of costs associated with the transaction,
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 incurred costs associated with the issuance of the Convertible Promissory Notes which totaled $38,031
which was recognized as a debt discount. The debt discount is being amortized using the effective interest method over the
term of the Convertible Promissory Note.
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 were issued 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 which was the 30-day weighted average closing share price on the grant date and had an aggregate grant date value of
$57,509 which was recognized as a debt discount. The debt discount is being amortized using the effective interest method over
the term of the Convertible Note.
25
PPP Promissory Note
The Company entered into a business loan agreement (the “First Financial Loan Agreement”) and a promissory note
(the “First Financial Note”) (together, the “First Financial Loan Documents”) on May 1, 2020 with First Financial Bank as the
lender (the “Lender”), pursuant to which the Lender agreed to make a loan to the Company under the Paycheck Protection
Program (the "First Financial Loan") offered by the U.S. Small Business Administration (the “SBA”) in a principal amount of
$890,000 pursuant to Title 1 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The interest rate
on the First Financial Note was a fixed rate of 1% per annum. In the event that the proceeds are used to pay for qualified
expenses including salaries, commissions, and similar compensation, group health care benefits, and paid leaves; rent; utilities;
and interest on certain other outstanding debt, the First Financial Loan would be forgiven. To the extent that the amounts owed
under the First Financial Loan, or a portion of them, are not forgiven, the Company would be required to make principal and
interest payments in monthly installments of $50,086 beginning on December 1, 2020. The First Financial Note had a maturity
date of May 1, 2022.
For the year ended December 31, 2020, the Company had utilized $890,000 of the proceeds to cover the qualified
expenses referenced above. The Company prepared and submitted the PPP Loan Forgiveness Application and the supporting
documents in November 2020. On December 11, 2020, the Company received notice from the Lender that the SBA had reviewed
the application and had granted forgiveness of the full amount of the loan. As a result of the forgiveness, the Company
recognized the $890,000 as a gain on forgiveness of debt during the quarter ended December 31, 2020.
7. Stockholders’ Deficiency
The Company is authorized to issue up to 125,000,000 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. The authorized shares of common shares was
increased from 100,000,000 to 125,000,000 following the approval of the Board of Directors and stockholders and the Company
subsequently filed a Certificate of Amendment with the Secretary of State of Delaware on October 9, 2020.
In October 2020, at the annual meeting of stockholders of the Corporation, the stockholders of the Corporation
approved an amendment to the Corporation’s Certificate of Incorporation to effect a reverse stock split of the Company’s
common stock at a ratio of 1-for-50 and to decrease the number of authorized shares of common stock in proportion to the
reverse stock split. However, the Board of Directors has not yet determined if or when to effect the reverse stock split.
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, 2020 and 2019, the Company issued an aggregate of 536,145 and 770,944 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 values of $102,584 and $212,000 for the years ended December 31, 2020 and
2019, respectively, of which $48,584 and $53,000 had been accrued and included in accrued expenses and other current
liabilities at December 31, 2020 and 2019, respectively. The shares were valued at the 30-day weighted average closing share
price on the grant date which ranged between $0.17 and $0.26 per share in 2020 and between $0.23 and $0.34 in 2019.
During the year ended December 31, 2020, the Company issued an aggregate of 555,557 shares of common stock to
the holders of the Series C Preferred Stock related to the holders’ election to convert 1,000 of their Series C Preferred shares
which had a principal amount of $100,000. The conversion was affected at $0.18 per share. See Preferred Stock – Series C
Preferred Stock below.
During the year ended December 31, 2019, the Company issued 486,381 shares of common stock 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 for the year ended December 31, 2019. Such amount was included in accrued
26
expenses and other current liabilities as of December 31, 2018. The shares were valued at the 30-day weighted average closing
prices for the Company’s common stock on the date of grant which was $0.26 per share.
Stock-based compensation expense related to common stock issued was recorded in the condensed consolidated
statements of operations as a component of selling, general and administrative expenses and totaled $78,000 and $207,583 for
the years ended December 31, 2020 and 2019, respectively.
Preferred Stock
Series A Preferred Stock
The Company had designated 200,000 of the 1,000,000 authorized shares of preferred stock as Series A Convertible
Preferred Stock (“Series A Preferred Stock”). 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 of the Company
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, 2020 and 2019, Series B holders were entitled to convert into 14.8 and 11.97 shares, respectively, 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, 2020, an incremental 5,070,118 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 $12,796,979.
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,
2020 and 2019. 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.
The Convertible Note transactions disclosed above triggered the anti-dilution provisions of the Series B Preferred
Stock, whereby the conversion price is to be reduced pursuant to a pre-defined formula. As a result, the conversion price
decreased from $0.79 to $0.67 per share of the Company’s common stock effective April 14, 2020.
As of December 31, 2020 and 2019, the Company had accrued contractual dividends of $1,711,165 and $1,368,932,
respectively, related to the Series B Preferred Stock.
27
Series C Preferred Stock
The Company’s Certificate of Designation designates 10,000 shares of the Company's preferred stock as Series C
Preferred Stock to be issued at an original issue price of $100 per share. The Series C Preferred Stock has voting rights equal to
one vote for each share held, has a liquidation preference equal to its purchase price, and has certain redemption rights available
at the option of the holder. The Series C Preferred Stock is non-convertible and does not pay dividends.
On October 17, 2011, the Company received net cash proceeds of $1,000,000 for the sale of 10,000 shares of Series C
Preferred Stock to a greater than 10% stockholder of the Company. Since certain of the Company’s preferred shares contain
redemption rights which are not solely within the Company’s control, these issuances of preferred stock were initially presented
as temporary equity. On February 13, 2013, the Company received a Notice of Redemption of Series C Preferred Stock and as
a result, the shares were classified as a current liability as of December 31, 2019 in the Company’s consolidated balance sheet.
On October 29, 2020, the Company entered into a Conversion and Standstill Agreement with the holders of $1,000,000
principal amount of the Company’s Series C Preferred Stock (10,000 shares). Pursuant to the terms of the Agreement, the
holders agreed (i) to retract the redemption request previously submitted to the Company until October 29, 2022 and (ii) to
convert up to $100,000 of the Series C Preferred Stock valued at its original issue price of $9.45 per share into shares of the
Company’s common stock at a conversion price of $0.18 per share. The 30-day weighted average closing common share price
as of the date of the Agreement was $0.20 per share. In addition, the holders may elect to convert up to $200,000 of the Series
C Preferred Stock valued at its original issue price into shares of common stock of the Company each calendar quarter in 2021
and $250,000 each calendar quarter in 2022. The conversion price will be $0.18 per share through December 31, 2021 and at
80% of the thirty (30) day weighted average closing price of a share of common stock on the OTC Market in 2022. The
Company, at its discretion, may initiate the conversion of the remaining outstanding shares of Series C Preferred Stock if the
sixty (60) day weighted average closing price exceeds $0.45 per share and the cumulative trading volume during the same 60-
day period exceeds 500,000 shares. The Agreement includes other terms, including provisions relating to change of control and
terms related to stock splits, reorganizations, subsequent issuance of preferred stock and piggyback registration rights.
Following the Agreement, the shares were reclassified from a current liability to mezzanine equity as of December 31, 2020 in
the Company’s consolidated balance sheet.
The Series C Conversion and Standstill Agreement triggered the anti-dilution provisions of the Series B Preferred
Stock, whereby the conversion price is to be reduced pursuant to a pre-defined formula. As a result, the conversion price
decreased from $0.67 to $0.64 per share of the Company’s common stock effective October 29, 2020.
On October 29, 2020, the Company received notice that the holders elected to convert 1,000 of the shares of the Series
C Preferred Stock with a principal amount of $100,000 at the $0.18 conversion price. The Company has subsequently issued
555,557 shares of common stock to the holders and the number of outstanding shares of Series C Preferred Stock was reduced
to 9,000 shares.
In accounting for the modification of the Series C Preferred as a result of the Conversion and Standstill Agreement, it
was determined that the difference was immaterial.
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
28
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.
Following the approval of the Board of Directors and stockholders of record as of August 18, 2020, 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 18,000,000.
Stock Options
Grants
The weighted average fair value of the stock options granted during the year ended December 31, 2020 was $0.11.
During the year ended December 31, 2020, the Company granted options to key employees and executives of the
Company to purchase an aggregate of 2,650,000 shares of common stock under a previously approved plan at exercise price of
$0.12 per share for an aggregate grant date value of $309,870. The options vest over a three-year period and have a term of ten
years.
During the year ended December 31, 2020, the Company granted options to directors of the Company to purchase an
aggregate of 443,460 shares of common stock under a previously approved plan at exercise price ranging from $0.17 to $0.26
per share for an aggregate grant date value of $90,000. The options vested on the grant date and have a term of ten years.
During the year ended December 31, 2019, the Company granted options to key employees and executives 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
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 was immaterial.
Valuation
In applying the Black-Scholes option pricing model to stock options granted during the years ended December 31,
2020 and 2019, the Company used the following weighted average assumptions:
29
Stock-based compensation expense related to stock options was recorded in the condensed consolidated statements of
operations as a component of selling, general and administrative expenses and totaled $431,293 and $214,353 for the years
ended December 31, 2020 and 2019, respectively.
As of December 31, 2020, stock-based compensation expense related to stock options of $439,195 remains
unamortized which is being amortized over the weighted average remaining period of 1.6 years.
Summary
A summary of the stock option activity during the years ended December 31, 2020 and 2019 is presented below:
The following table presents information related to stock options outstanding and exercisable at December 31, 2020:
30
20202019Risk-free interest rate0.33% to 1.37%2.45%Expected dividend yield0.0%0.0%Expected volatility179.0% to 181.0%183.0%Weighted average expected life (contractual term) in years5.5 to 6.06.0 Year Ended December 31 Outstanding, January 1, 20192,954,845 0.59$ Granted 1,250,000 0.32 Exercised(100,000) 0.11 Forfeited (1,410,450) 0.47 Outstanding, January 1, 20202,694,395 0.41$ Granted 3,093,460 0.11 Exercised- - Forfeited (55,500) 0.36 Outstanding, December 31, 20205,732,355 0.26$ 7.9 128,279$ Exercisable, December 31, 20202,040,691 0.41$ 6.4 21,767$ Weighted Average Exercise PriceWeighted Average Remaining Contractual Term (Years)Number of OptionsAggregate Intrinsic Value
Warrants
Valuation
In applying the Black-Scholes option pricing model to stock warrants granted, the Company used the following
weighted average assumptions:
Grants
During the year ended December 31, 2020, the Company issued warrants to purchase an aggregate of 500,000 shares
of common stock to the holders of the Series B Preferred as part of the agreement to extend the waiver of the debt limitation.
The warrants were issued at an exercise price of $0.11 which was the 30-day weighted average closing share price. The warrants
have a term of five years and an aggregate grant date value of $57,509 which was recognized as a debt discount on the grant
date. See Footnote 5 – Notes Payable.
A summary of the stock warrant activity during the years ended December 31, 2020 and 2019 is presented below:
31
WeightedWeightedWeightedRange ofAverageOutstandingAverageAverageExercisableExerciseExerciseNumber ofExerciseRemaining LifeNumber ofPricePriceOptionsPriceIn YearsOptions$0.09 - $0.200.11$ 3,324,247 0.12$ 5.8674,247 $0.22 - $0.350.32$ 2,288,108 0.31$ 7.11,246,444 $0.53 - $1.600.87$ 66,000 0.87$ 2.766,000 $4.10 - $6.995.85$ 54,000 5.85$ 1.054,000 $0.09 - $6.990.26$ 5,732,355 0.41$ 6.42,040,691 .Options OutstandingOptions Exercisable20202019Risk-free interest rate1.41%n/aExpected dividend yield0.00%n/aExpected volatility181.0%n/aWeighted average expected life (contractual term) in years5.0n/a Year Ended December 31
The following table presents information related to stock warrants at December 31, 2020:
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. The final lease payment was
made in December 2020 and the Company satisfied all obligations under the lease.
Operating Leases
The Company is a party to a lease agreement for office and storage space for its headquarters in Florence, Kentucky.
On July 30, 2018, the Company entered into an amendment of the lease agreement which extended the lease for an additional
five years to December 31, 2024. The amended monthly lease rate will range between $7,955 and $9,498.
The Company accounts for rent expense using the straight-line method of accounting, deferring the difference between
actual rent due and the straight-line amount. Deferred rent payable of $16,334 and $12,705 as of December 31, 2020 and
December 31, 2019, respectively, has been included in accrued expenses and other current liabilities on the consolidated balance
sheets.
32
WeightedWeighted AverageAverageRemainingAggregateNumber ofExerciseLifeIntrinsicWarrantsPriceIn YearsValueOutstanding, January 1, 20194,866,151 0.31$ Granted- - Exercised(66,120) 0.25 Forfeited(4,326,664) 0.35 Outstanding, January 1, 2020473,367 0.66$ Granted500,000 0.11 Exercised- - Forfeited- - Outstanding, December 31, 2020973,367 0.38$ 2.9 20,000$ Exercisable, December 31, 2020973,367 0.38$ 2.9 20,000$ WeightedWeightedWeightedRange ofAverageOutstandingAverageAverageExercisableExerciseExerciseNumber ofExerciseRemaining LifeNumber ofPricePriceWarrantsPriceIn YearsWarrants$0.11 - $0.250.13$ 610,000 0.13$ 3.5610,000 $0.30 - $0.500.41$ 333,367 0.41$ 1.9333,367 $4.954.95$ 30,000 4.95$ 1.830,000 $0.11 - $4.950.38$ 973,367 0.38$ 2.9973,367 Warrants OutstandingWarrants Exercisable
The aggregate future minimum lease payments for operating leases, excluding renewal periods, and capital leases as
of December 31, 2020 were as follows:
During the years ended December 31, 2020 and 2019, the Company recorded aggregate rent expense of $152,758 and
$139,494, respectively.
Employment Agreement
Effective January 1, 2020, 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, 2020 with an extension provision allowing for automatic one-year extensions unless the Company or the employee
provides advanced written notice of non-renewal, the titles and positions of Chief Executive Officer and Chief Financial Officer,
respectively, an initial base salary of $128,000 and $124,000 per year, respectively, subject to certain bonus and severance
provisions. Effective January 1, 2021, the Compensation Committee approved an increase in the base salaries for Mr. Peters
and Mr. Seliga to $138,000 and $134,000 per year, respectively. Each of the Employment Agreements are bound by restrictive
covenants regarding disclosure of confidential information, non-solicitation and employee non-competition.
On January 21, 2021, Mr. Peters and Mr. Seliga were each granted options to purchase 1,200,000 shares of common
stock under the 2014 Plan at an exercise price of $0.17 per share for an aggregate grant date value of $396,178. The options
vest over a three-year period and have a term of ten years. On February 1, 2020, Mr. Peters and Mr. Seliga were each granted
options to purchase 1,000,000 shares of common stock under the 2014 Plan at an exercise price of $0.12 per share for an
aggregate grant date value of $233,864. The options vest over a three-year period and have a term of ten years.
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 $500,000. The suit is in the early stages and, as such, any potential liability cannot be determined at this
time. The Company’s most recent answer to the complaint asserted numerous counterclaims against the former employee for
damages and injunctive relief. Management believes that the Plaintiff’s claims are groundless and the Company intends to
contest this matter vigorously.
9. Concentrations
The Company maintains deposits in financial institutions which are insured by the Federal Deposit Insurance
Corporation (“FDIC”). At various times, the Company has deposits in these financial institutions in excess of the amount
insured by the FDIC.
33
Operating Leases 2021102,787$ 2022105,871 2023109,047 2024112,318 Total430,023$
Four customers represented 41%, 19%, 13% and 12% of the accounts receivable balance as of December 31, 2020.
During the year ended December 31, 2020, three suppliers represented 41%, 21% and 20% of total inventory purchases.
During the year ended December 31, 2019, three suppliers represented 35%, 23% and 21% of total inventory purchases.
One vendor represented 29% of the accounts payable balance at December 31, 2020. Two vendors represented 23%
and 14% of the accounts payable balance as of December 31, 2019.
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.
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 bore 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 Note 6 – Notes Payable.
The Company executed convertible note purchase agreements (the”Convertible Purchase Agreements”) and a security
agreement, as amended, (the “Convertible Security Agreement”) on February 7, 2020 and April 12, 2020, and convertible
secured promissory notes on February 10, 2020 and April 12, 2020 (the “Convertible Notes”) (collectively the “Convertible
Note Agreements”). The Company received an aggregate of $1,661,969 of cash proceeds, net of costs associated with the
transaction, 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. See Note 6 – Notes Payable.
11. Income Taxes
The income tax provision (benefit) for the years ended December 31, 2020 and 2019 was as follows:
34
The effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of
December 31, 2020 and 2019 are as follows:
Deferred tax assets:
Net operating loss carryforwards
Stock-based compensation
Inventory reserves
Deferred revenue
Deferred rent
Amortization of Debt Discount
Total deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities
Property and equipment
Deferred tax liabilities
December 31,
2020
2019
$ 3,961,750
275,699
7,169
544
3,723
11,444
4,260,329
(4,176,275)
84,054
$ 4,013,364
469,179
7,039
905
3,176
-
4,493,663
(4,424,877)
68,786
(84,054)
(84,054)
68,786)
(68,786)
Net deferred tax assets
$ -
$ -
Change in valuation allowance
$ (248,602)
$ (31,448)
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, 2020
and 2019.
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 2016 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, 2020. When these returns are filed for the year ended
35
20202019Federal: Current-$ -$ Deferred196,954 31,448 State and local: Current- Deferred51,648 - 248,602 31,448 Change in valuation allowance(248,602) (31,448) Income tax provision (benefit)-$ -$ For The Years EndedDecember 31,
December 31, 2020, the Company will have $16,969,621 and $17,210,209 of federal net operating loss carryforwards that may
be available to offset future taxable income as of December 31, 2020 and 2019, 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, 2020 and 2019, the Company had
approximately $9,953,258 and $9,980,505 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, 2020 and 2019, the expected tax expense (benefit) based on the statutory rate is
reconciled with the actual tax expense (benefit) as follows:
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 noted below:
Issuance of Common Stock and Options to Directors
On January 6, 2021, the Company issued an aggregate of 141,176 shares of common stock and options to purchase
244,196 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 2020. The shares had an aggregate grant date value of $24,000 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. The options had
an exercise price of $0.17 per share and had a grant date value of $40,000. The aggregate amount of the grant date value of the
common stock and options is included in accrued expenses as other liabilities as of December 31, 2020.
Issuance of Options to Employees and Executives
On January 21,2021 and February 12, 2021, the Company granted stock options to purchase an aggregate of 3,875,000
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 prices ranging between $0.16 and $0.17 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 $625,347.
36
20202019US federal statutory rate21.0%(21.0%)State tax rate, net of federal benefit1.8%(4.0%)Permanent differences - Stock based compensation41.8%53.9% - Payroll Protection Program debt extinguishment(31.6%)0.0% - Other Permanent adjustments0.4%3.0%Other(0.6%)(0.3%)Change in State Tax Rate6.0%0.0%Change in valuation allowance(38.8%)(31.6%)Income tax provision (benefit)0.0%0.0%For The Years EndedDecember 31,