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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, 2021
As of December 31, 2021, the number of shares outstanding of our Common Stock was 52,028,475.
As of September 30, 2021, the number of shares outstanding of our Common Stock was 51,895,143.
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
We previously were a shell company, therefore the exemption offered pursuant to Rule 144 is not
available. Anyone who purchased securities directly or indirectly from us or any of our affiliates in
a transaction or chain of transactions not involving a public offering cannot sell such securities in an
open market transaction.
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HEALTHWAREHOUSE.COM, INC.
Annual Report
Table of Contents
PART A
GENERAL COMPANY INFORMATION
Page
Item
1
Name of Issuer and its Predecessors
4
2
Address of Issuer’s principal executive office
4
3
Jurisdiction and date of incorporation
4
PART B
SHARE STRUCTURE
4
Title and class of securities outstanding
4
5
Par or stated value and description of securities
5
6
Number of shares or total amount of securities outstanding for
each class of securities authorized
5
7
Name and address of transfer agent
6
PART C
BUSINESS INFORMATION
8
Issuer’s business
6
9
Products and services offered
12
10
Issuer’s Facilities
13
PART D
MANAGEMENT STRUCTURE AND FINANCIAL
INFORMATION
11
Officers, Board of Directors, Control Persons
14
12
Financial information – For year ended December 31, 2021
18
13
Financial information – For year ended December 31, 2020 and
2019
18
14
Third Party Providers
18
15
Management’s Discussion and Analysis
19
PART E
ISSUANCE HISTORY
16
Securities offerings and shares issued in 2020 and 2021
24
PART F
EXHIBITS
17
Material contracts
25
18
Articles of Incorporation and Bylaws
26
19
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
26
20
Issuer’s Certifications
27
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PART II
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
29
Consolidated Balance Sheets – as of December 31, 2021 and
2020
30
Consolidated Statements of Operations – Years ended
December 31, 2021 and 2020
31
Consolidated Statements of Changes in Stockholders’
Deficiency – Years ended December 31, 2021 and 2020
32
Consolidated Statements of Cash Flows –Years ended
December 31, 2021 and 2020
33
Notes to the Consolidated Financial Statements
34
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PART A – GENERAL COMPANY INFORMATION
1) Name of the issuer and its predecessors (if any):
HealthWarehouse.com, Inc. (the “Company”, “Issuer” or “HEWA”).
Formerly Ion Networks, Inc., formed on August 5, 1998.
Name changed to Clacendix, Inc. on January 3, 2008.
Name changed to HealthWarehouse.com, Inc. on July 31, 2009.
2) Address of issuer’s principal executive offices.
7107 Industrial Road, Florence, KY 41042
Phone: (800)748-7001
www.healthwarehouse.com; www.healthwarehouse.pharmacy
Investor Relations contact: Daniel Seliga, CFO, dseliga@healthwarehouse.com, (800)748-7001 x7012
3) Jurisdiction and date of issuer’s incorporation
The Company is a Delaware corporation, organized on August 5, 1998. The Company is active and in good
standing.
PART B – SHARE STRUCTURE
4) Title and class of securities outstanding.
Title and Class of Security
Trading
Symbol
CUSIP
Common Stock
HEWA
42227G202
Series B Convertible
Preferred Stock
Not
Applicable
Not Applicable
Series C Convertible
Redeemable Preferred Stock
Not
Applicable
Not Applicable
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5) Par or stated value and description of security.
Title and Class of
Security
Par
Value
Description
Common Stock
$0.001
One (1) voting right per share; eligible for dividends if and when
declared; no preemptive rights.
Convertible
Preferred Stock –
Series B
$0.001
Issued at $9.45 per share in November 2010. Voting rights equal to one
vote for each common share equivalent. Liquidation preference equal to its
purchase price. Receives preferred dividends equal to 7% of all outstanding
shares in either cash or payment-in-kind. Convertible at option of holder at
any time at the dilution adjusted conversion price ($0.64 per share as of
December 31, 2021).
Convertible
Redeemable
Preferred Stock –
Series C
$0.001
Issued at $100 per share on October 11, 2011. One (1) voting right per
share. Liquidation value of $900,000 on December 31, 2021. Redeemable
after October 22, 2022. Convertible at option of holder into common shares
at a conversion price of $0.18 per share through December 31, 2021
(limited to 2,000 shares per quarter); and 80% of the 30-day weighted
average closing share price in 2022 (limited to 2,500 shares per quarter).
Mandatory conversion if 60-day weighted average closing share price is
$0.45 per share and minimum 60-day trading volume of 500,000 shares.
6) Number of shares or total amount of the securities outstanding for each class of securities authorized.
Security information as of December 31, 2021:
Title and
Class of
Security
Total
Shares
Authorized
Total
Shares
Outstanding
Public Float
Beneficial
Shareholders
owning >=
100 shares
Shareholders
of Record
Common
Stock
125,000,000
52,028,475
11,607,956
182
252
Preferred
Stock –
Series B
790,000
517,359
-0-
2
2
Preferred
Stock –
Series C
10,000
9,000
-0-
3
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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.
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
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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.
7) 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:
Regulatory authority: Securities and Exchange Commission
PART C – BUSINESS INFORMATION
8) Description of Issuer’s business operations:
HealthWarehouse.com, Inc. (the “Company”), a Delaware corporation, 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 (“OTC”)
products over the Internet. HealthWarehouse.com is currently 1 of 90 National Association of Boards of
Pharmacy (“NABP”) accredited digital pharmacies. In addition, the Company also provides fulfillment of
prescription medication and other services to customers of other healthcare providers including manufacturers
and telemedicine and online services companies (“Partner Services”). The Company’s primary SIC Code is
5912 - Drugstores and Proprietary Stores.
We process all orders from our distribution center in Florence, Kentucky, 15 miles south of Cincinnati, Ohio.
Processing from this location allows us to reach up to 80% of the U.S. population by standard ground shipping
in two days from shipment date. To maintain high customer satisfaction ratings and quality control over our
entire process, we avoid drop shipping orders. Due to the relatively short lead time required to fill orders for
our products, usually 24 to 48 hours, order backlog has not proven material to our business.
Our customer support representatives operate from our call center in Florence, Kentucky, available 8 a.m. to
8 p.m. Eastern Time, Monday through Friday, and 9 a.m. to 5 p.m. Eastern Time on Saturday. Customers
can contact us via e-mail, online chat, fax, and telephone, plus our online Help Center outlines store policies
and provides answers to customers’ frequently asked questions.
Historical Background
In March 2007, Hwareh.com, Inc. (“Old HW”), a Delaware corporation formerly named
HealthWarehouse.com, Inc., was incorporated to carry on the business of selling OTC products. In November
2007, we began to develop the proprietary software necessary for our business, and in February 2008, we
successfully launched our website (www.healthwarehouse.com) running on our own proprietary software. In
March 2008, as part of our expansion into prescription drugs, we completed construction of a full-service
licensed pharmacy within our warehouse in Loveland, Ohio. This pharmacy passed inspection by the Ohio
State Pharmacy Board in April 2008. On August 1, 2011, the Company transferred its operations to the
current facility located in Florence, Kentucky.
In August 2009, Old HW completed a reverse merger into Clacendix, Inc., a shell company formerly known
as Ion Networks, Inc., a Delaware corporation formed on August 5, 1998. As of the date of the reverse
merger, the Company no longer operated as a shell company, changed its corporate name to
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HealthWarehouse.com, Inc. and changed the name of its subsidiary to Hwareh.com, Inc. The Company has
a fiscal year end date of December 31.
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.
Reverse stock split
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.
Government Regulation
Federal and state laws and regulations govern many aspects of our business and are specific to pharmacies
and the sale of OTC drugs. Our pharmacy passed inspection by the Kentucky Board of Pharmacy and we are
presently licensed as a pharmacy authorized to dispense to patients in 50 states and the District of Columbia.
We ship our non-prescription products to all 50 states, U.S. Territories, and APO/FPO military and embassy
addresses.
We believe the Company is in substantial compliance with all existing legal and regulatory requirements
material to the operation of our business and have standard operating procedures and controls in place
designed to assist in ensuring compliance with existing contractual requirements and state and federal law.
We diligently monitor and audit our adherence to these procedures and controls and take prompt corrective
and disciplinary action when appropriate. However, we cannot predict how courts or regulatory agencies may
interpret existing laws or regulations or what additional federal or state legislation or regulatory initiatives
may be enacted in the future regarding healthcare or the pharmacy industry, and the application of complex
standards to the operation of our business creates areas of uncertainty.
In addition, although we presently do not accept insurance reimbursement nor do we participate in federal
and state programs such as Medicare and Medicaid, this may change in the future. If in the future we do
accept reimbursement from commercial or governmental payors, we would be subject to extensive
government regulation including numerous state and federal laws and corresponding regulations directed at
preventing fraud and abuse and regulating reimbursement.
Among the federal and state laws and regulations that currently affect or may reasonably affect in the future
aspects of our business are the following:
Regulation of Our Pharmacy Operations
The practice of pharmacy is generally regulated at the state level by state boards of pharmacy. Our pharmacy
must be licensed in the state in which it is located. In some states, regulations require compliance with
standards promulgated by the United States Pharmacopeia (USP). The USP creates standards in the
packaging, storage and shipping of pharmaceuticals. Also, many of the states where we deliver
pharmaceuticals, including controlled substances, have laws and regulations that require non-resident
pharmacies to register with that state’s board of pharmacy or similar regulatory body. In addition, some states
have proposed laws to regulate online pharmacies; we may be subject to this legislation if passed.
Furthermore, if our pharmacy dispenses durable medical equipment items, such as infusion pumps, that bear
a federal legend requiring dispensing pursuant to a prescription, we would also be regulated by applicable
state and federal durable medical equipment laws.
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Federal agencies further regulate our pharmacy operations. Pharmacies must register with the Drug
Enforcement Administration (DEA) and individual state-controlled substance authorities in order to dispense
controlled substances. We sell controlled substances and therefore require a DEA license and maintain said
DEA license. In addition, the FDA inspects facilities in connection with procedures to effect recalls of
prescription drugs. The Federal Trade Commission (FTC) also has requirements for interstate sellers of
goods. The U.S. Postal Service (USPS) has statutory authority to restrict the transmission of drugs and
medicines through the mail to a degree that could have an adverse effect on our mail-order operations. The
USPS historically has exercised this statutory authority only with respect to controlled substances. If the
USPS restricts our ability to deliver drugs through the mail, alternative means of delivery are available to us.
However, alternative means of delivery could be significantly more expensive. The Department of
Transportation has regulatory authority to impose restrictions on drugs inserted in the stream of commerce.
These regulations generally do not apply to the USPS and its operations.
Additionally, under the Omnibus Budget Reconciliation Act of 1990 and related state and local regulations,
our pharmacists are required to offer counseling to our customers about medication, dosage, delivery systems,
common side effects, adverse effects or interactions and therapeutic contraindications, proper storage,
prescription refill and other information deemed significant by the pharmacists. We are also subject to
requirements under the Controlled Substances Act and federal DEA regulations, as well as related state and
local laws and regulations, relating to our pharmacy operations, including registration, security,
recordkeeping and reporting requirements related to the purchase, storage and dispensing of controlled
substances, prescription drugs and some OTC drugs.
“Compendial standards,” which can also be called “official compendium,” means the standards for drugs
related to strength, purity, weight, quality, labeling and packing contained in the USP, official National
Formulary, or any supplement to any of them. Under the Food, Drug and Cosmetic Act of 1938, a drug
recognized by the Homeopathic Pharmacopeia of the United States must meet all compendial standards and
labeling requirements contained therein, or it will be considered adulterated (for example, lacking appropriate
strength, quality or purity; or containing poisonous or unsanitary ingredients) or misbranded (for example,
having a false or misleading label; or a label containing an inaccurate description of contents). If we add
homeopathic remedies to our product offerings, we will be required to comply with the Food, Drug and
Cosmetic Act. The distribution of adulterated or misbranded homeopathic remedies or other drugs is
prohibited under the Food, Drug and Cosmetic Act, and violations could result in substantial fines and other
monetary penalties, seizure of the misbranded or adulterated items, and/or criminal sanctions.
We also are required to comply with the Dietary Supplement Health and Education Act (DSHEA) when
selling dietary supplements and vitamins. The DSHEA generally governs the production, sale and marketing
(including labeling) of dietary supplements, and it requires reporting to the FDA of certain adverse events
regarding dietary supplements.
We believe that our operations have the appropriate licenses required under the laws of the states in which
they are located, and that we conduct our pharmacy operations in accordance with the laws and regulations
of these states.
Health Management Services Regulation
All states regulate the practice of medicine and require licensing under applicable state law. It is not our intent
to practice medicine and we have attempted to structure our website and our business to avoid violation of
state licensing requirements. However, the application of this area of the law to digital services such as ours
is not well established and, accordingly, a state regulatory authority could at some time allege that some
portion of our business violates these statutes. Any such allegation could harm our business. Further, any
liability based on a determination that we engaged in the unlawful practice of medicine may be excluded from
coverage under the terms of our general liability insurance policy.
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Consumer Protection Laws
Most states have consumer protection laws designed to ensure that information provided to consumers is
adequate, fair and not misleading. We believe that our practices conform to the requirements of state
consumer protection laws. However, we may be subject to further scrutiny under these laws as they are often
interpreted broadly.
Regulation Relating to Data Transmission and Confidentiality of Patient Identifiable Information
Dispensing of prescriptions and management of prescription drug benefits require the ability to utilize patient-
specific information. Government regulation of the use of patient identifiable information has grown
substantially over the past several years. At the federal level, Congress enacted the Health Insurance
Portability and Accountability Act of 1996 (HIPAA), which extensively regulates the transmission, use and
disclosure of health information by all participants in healthcare delivery, including physicians, hospitals,
insurers and other payers. To the extent that our pharmacy operations engage in certain electronic transactions
(including claims for reimbursement by third-party payors), we may be a covered entity which is directly
subject to these requirements. Additionally, regulation of the use of patient-identifiable information is likely
to increase. Many states have passed or are considering laws addressing the use and disclosure of health
information. These proposals vary widely, some relating to only certain types of information, others to only
certain uses, and yet others to only certain types of entities. These laws and regulations have a significant
impact on our operations, products and services, and compliance with them is a major operational
requirement. Regulations and legislation that severely restrict or prohibit our use of patient identifiable
information could materially adversely affect our business.
Sanctions for failing to comply with HIPAA standards include criminal and civil penalties. If we are found
to have violated any state or federal statute or regulation with regard to the confidentiality, dissemination or
use of patient medical information, we could be liable for significant damages, fines or penalties.
Fraudulent Billing, Anti-Kickback, Stark, Civil Monetary Penalties and False Claims Laws and Regulations
Our operations may in the future participate in federal and state programs such as Medicare and Medicaid. If
we do, we would be subject to extensive government regulation including numerous state and federal laws
and corresponding regulations directed at preventing fraud and abuse and regulating reimbursement. The
government’s Medicare and Medicaid regulations are complex and sometimes subjective and therefore may
require our management’s interpretation. If we were to participate in federal and state programs such as
Medicare and Medicaid, our compliance with Medicare and Medicaid regulations may be reviewed by federal
or state agencies, including the Department of Health and Human Services’ (HHS) Office of the Inspector
General (OIG), the Centers for Medicare and Medicaid Services (CMS), the Department of Justice (DOJ),
and the FDA. To ensure compliance with Medicare, Medicaid and other regulations, government agencies
conduct periodic audits to ensure compliance with various supplier standards and billing requirements.
Similarly, regional health insurance carriers routinely conduct audits and request patient records and other
documents to support claims submitted for payment.
Federal law prohibits the payment, offer, receipt or solicitation of any remuneration that is knowingly and
willfully intended to induce the referral of Medicare, Medicaid or other federal healthcare program
beneficiaries for the purchase, lease, ordering or recommendation of the purchase, lease or ordering of items
or services reimbursable under federal healthcare programs. These laws are commonly referred to as anti-
remuneration or anti-kickback laws. Several states also have similar laws, known as “all payor” statutes,
which impose anti-kickback prohibitions on services covered by any third-party payor (whether or not a
federal healthcare program). Anti-kickback laws vary between states, and courts have rarely interpreted them.
If in the future we accept third-party reimbursement, we may be more explicitly subject to these laws.
Courts, the OIG and some administrative tribunals have broadly interpreted the federal anti-kickback statute
and regulations. Courts have ruled that a violation of the statute may occur even if only one of the purposes
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of a payment arrangement is to induce patient referrals or purchases. Should we enter the government payor
sector, it is possible that our current practices in the commercial sector may not be appropriate in the
government payor sector.
The Ethics in Patient Referrals Law (Stark Law) prohibits physicians from making a referral for certain
Medicare-covered health items or services if they, or their family members, have a financial relationship with
the entity receiving the referral. No bill may be submitted in connection with a prohibited referral. Violations
are punishable by civil monetary penalties upon both the person making the referral and the provider
rendering the service. Such persons or entities are also subject to exclusion from Medicare and Medicaid.
Many states have adopted laws similar to the Stark Law, which restrict the ability of physicians to refer
patients to entities with which they have a financial relationship.
The Federal False Claims Act prohibits the submission of a false claim or the making of a false record or
statement in order to secure a reimbursement from a government-sponsored program. In recent years, the
federal government has launched several initiatives aimed at uncovering practices that violate false claims or
fraudulent billing laws. Civil monetary penalties may be assessed for many types of conduct, including
conduct that is outlined in the statutes above and other federal statutes in this section. Under the Deficit
Reduction Act of 2005 (DRA), states are encouraged to pass state false claims act laws similar to the federal
statute.
Sanctions for fraudulent billing, kickback violations, Stark Law violations or violations of the False Claims
Act include criminal and civil penalties. If we do accept third-party reimbursement and/or participate in
federal payor programs in the future and are found to have violated any state or federal kickback, Stark Law
or False Claims Act law, we could be liable for significant damages, fines or penalties and potentially be
ineligible to participate in federal payor programs.
Legislation and Regulation Affecting Drug Prices and Potentially Affecting the Market for Prescription
Benefit Plans and Reimbursement for Durable Medical Equipment
The federal government has increased its focus on methods drug manufacturers employ to develop pricing
information, which in turn is used in setting payments under the Medicare and Medicaid programs. One
element common to many payment formulas, the use of “average wholesale price” (AWP) as a standard
pricing unit throughout the industry, has been criticized as not accurately reflecting prices actually charged
and paid at the wholesale or retail level. The DOJ is conducting, and the House Commerce Committee has
conducted, an investigation into the use of AWP for federal program reimbursement, and whether the use of
AWP has inflated drug expenditures by the Medicare and Medicaid programs. Federal and state proposals
have sought to change the basis for calculating reimbursement of certain drugs by the Medicare and Medicaid
programs.
The DRA revised the formula used by the federal government to set the Federal Upper Limit (FUL) for
multiple source drugs by adopting 250 percent of the average manufacturer’s price (AMP) without regard to
customary prompt pay discounts to wholesalers for the least costly therapeutic equivalent. On July 17, 2006,
HHS published a Final Rule for the Medicaid Prescription Drug Program implementing the DRA in which
AMP was defined to exclude discounts and rebates to pharmacy benefit managers and include sales to mail-
order and specialty pharmacies in the AMP calculation by manufacturers.
These proposals and other legislative or regulatory adjustments that may be made to the program for
reimbursement of drugs by Medicare and Medicaid, if implemented, could affect our ability to negotiate
discounts with pharmaceutical manufacturers. They could also impact the reimbursement we may receive
from government payors in the future should we choose to participate in such programs. In addition, they
may affect our relationships with health plans. In some circumstances, they might also impact the
reimbursement that we would receive from managed care organizations that contract with government health
programs to provide prescription drug benefits or otherwise elect to rely on the revised pricing information.
Furthermore, private payers may choose to follow the government’s example and adopt different drug pricing
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bases. This could affect our ability to negotiate with plans, manufacturers and pharmacies regarding discounts
and rebates.
Relative to our durable medical equipment operations, The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (DIMA), established a program for the competitive acquisition of certain covered
items of durable medical equipment, prosthetics, orthotics and supplies (DMEPOS). Diabetes testing
supplies, including test strips and lancets, which are commonly supplied via mail-order delivery, are subject
to the competitive acquisition program. Only qualified suppliers that meet defined participation standards
specified in the final rule will be permitted to engage in the competitive acquisition program. In 2010, mail-
order diabetes testing supplies may be subject to a national or regional program, which would require mail-
order suppliers to bid on supplying certain DMEPOS items.
Medicare Part D and Part B; State Prescription Drug Assistance Programs
The DIMA also offers far-reaching changes to the Medicare program. The DIMA established a new Medicare
Part D outpatient prescription drug benefit for over 40 million Americans who are eligible for Medicare.
Qualified beneficiaries, including senior citizens and disabled individuals, have had the opportunity to enroll
in Medicare Part D since January 1, 2006.
In addition, many states have expanded state prescription drug assistance programs to increase access to drugs
by those currently without coverage and/or supplement the Medicare Part D benefit of those with coverage
to offer options for a seamless benefit. In accordance with applicable CMS requirements, to participate we
may have to enter into agreements with a number of state prescription drug assistance programs and
collaborate to coordinate benefits with Medicare Part D plans.
If we participate in these state and/or federal payor programs in the future, we will have to comply with the
applicable conditions of participation for such plans, may be subject to competitive bidding requirements
under such plans, and may be subject to adverse pricing limitations imposed by such plans (including the
DRA limits described above).
Industry Standards for Pharmacy Operations
The National Committee on Quality Assurance, the American Accreditation Health Care Commission
(known as URAC), the Joint Commission on Accreditation of Healthcare Organizations and other quasi-
regulatory and accrediting bodies have developed standards relating to services performed by pharmacies,
including mail order, formulary, drug utilization management and specialty pharmacy. While the actions of
these bodies do not have the force of law, pharmacy benefit managers and many clients for pharmacy benefit
manager services seek certification from them, as do other third parties. These bodies may influence the
federal government or states to adopt requirements or model acts that they promulgate. The federal
government and some states incorporate accreditation standards of these bodies, as well as the standards of
the National Association of Insurance Commissioners and the National Association of Boards of Pharmacy,
a coalition of state pharmacy boards, into their drug utilization review regulation. Future initiatives of these
bodies are uncertain and resulting standards or legislation could impose restrictions on us in a manner that
could significantly impact our business.
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.
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Employees
As of March 1, 2022, we employed 90 full-time employees and 14 part-time employees. None of our
employees are subject to a collective bargaining agreement and we believe that relations with our employees
are good. The Company, from time to time, also utilizes independent contractors to supplement its workforce.
9) Description of Issuer’s 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 of prescription medication and other services to customers
of other healthcare providers.
Customers
Direct-to-consumer (B2C): We sell directly to individual consumers who purchase prescription medications
and OTC products over the Internet. B2C revenues represented 90% and 85% of total revenues in 2020 and
2021, respectively. Uninsured consumers were predominantly our customers in our early years, while over
90% of our customers carry health insurance when purchasing from us today. Rising insurance co-pays and
high deductible plans due to the Affordable Care Act have caused more consumers to pay out-of-pocket. The
Company is not dependent on any one or a few B2C customers.
Partner Services: We provided fulfillment of prescription and over-the-counter medication and other services
to customers of other healthcare providers and manufacturers. In most cases, we bill the partner services
customer on a monthly basis for the services provided including fulfillment fees, product cost and shipping.
Credit terms with partner services customers range from Net 10 days to Net 45 days. Partner services
represented 8% and 15% of revenues in 2020 and 2021, respectively, and one customer represented 5% of
total revenues during 2020 and 2021.
Suppliers
There are a number of suppliers available for the pharmaceutical and non-pharmaceutical products that we
sell. Our principal suppliers are TopRx, Amerisource Bergen, Cardinal Health and Keysource. as well as
many direct manufacturers like Amneal, Prasco, Greenstone, Inspire, HPS Rx and National Vitamin
Company. While we source our supplies from a limited number of suppliers, we do not believe that our
business is dependent on any one supplier since most of the products that we sell are readily available from a
number of alternative suppliers. Even if a significant supplier were to no longer be available to us, we believe
that we could source replacement product through one or more alternative suppliers without having a
significant effect on our business.
Competition
The market for prescription and OTC health products is intensely competitive and highly fragmented.
However, there are fewer competitors focusing on the out-of-pocket prescription market. Our competitors in
the segment include chain drugstores, mail order pharmacies, pharmacy benefits managers (PBMs), mass
market retailers, warehouse clubs, supermarkets and other online retailers. Many of these potential
competitors in the market are also established organizations with greater access to resources and capital. In
addition, we face competition from foreign online pharmacies that can often sell drugs to U.S. residents at a
lower price because they do not comply with U.S. pharmacy regulations, are not subject to U.S. regulatory
oversight, or both. We also compete with Internet portals and online service providers that feature shopping
services and with other online or mail-order retailers that offer products similar or the same to those that we
sell.
We believe that the principal competitive factors in our market includes brand awareness and preference,
company credibility, product selection and availability, convenience, price, actual or perceived value, website
features, functionality and performance, ease of purchasing, customer service, privacy, quality and quantity
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of information supporting purchase decisions (such as product information and reviews), reliability and speed
of order shipment.
Trademarks
We filed for a trademark on the name “HealthWarehouse.com” on August 14, 2007 with the U.S. Patent and
Trademark Office, which trademark was granted with a registration date of May 19, 2009. We also rely on
trade secret law and contractual restrictions to protect our intellectual property, and we do not intend to seek
patent or copyright protection for our intellectual property at this time
10) 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.
14
PART D – MANAGEMENT STRUCTURE AND FINANCIAL INFORMATION
11) Officers, Directors and Control Persons
The following table sets forth certain information with respect to the directors and executive officers of the
Company as of December 31, 2021.
Name
Title
2021 Compensation (1)
Beneficial Ownership
Joseph B.
Peters
President and Chief
Executive Officer, Director
Cash: $192,584
Options: $198,089
(1,200,000 shares at $0.17
per share)
Common: 283,463 shares
Options: 1,832,666 shares
Beneficial Ownership: 3.9%
Daniel J.
Seliga
Chief Financial Officer
Cash: $183,584
Options: $198,089
(1,200,000 shares at $0.17
per share)
Common: 1,041,354 shares
Options: 1,466,666 shares
Beneficial Ownership: 4.7%
Tim Reilly
Director, Chairman
Cash: $12,000
Stock: $24,000 (131,960
shares at $0.17 to $0.20
per share)
Options: $40,000
(228,339 shares at $0.17 to
$0.20 per share)
Common: 4,522,813 shares
Options: 376,159 shares
Convertible Note of $1,000,000:
convertible into 8,333,334
common shares
Beneficial Ownership: 21.8%
Jack Britts
Director
Cash: $12,000
Stock: $24,000 (131,960
shares at $0.17 to $0.20
per share)
Options: $40,000
(228,339 shares at $0.17 to
$0.20 per share)
Common: 605,447 shares
Options: 376,159 shares
Beneficial Ownership: 1.9%
Joseph
Heimbrock
Director
Cash: $12,000
Stock: $24,000 (131,960
shares at $0.17 to $0.20
per share)
Options: $40,000
(228,339 shares at $0.17 to
$0.20 per share)
Common: 1,861,897 shares
Options: 406,887 shares
Series B Preferred: 494,913
shares (convertible to 7,324,713
common shares)
Beneficial Ownership: 16.7%
Sara Mannix
Director
Cash: $12,000
Stock: $24,000 (131,960
shares at $0.17 to $0.20
per share)
Options: $40,000
(228,339 shares at $0.17 to
$0.20 per share)
Common: 131,960 shares
Options: 228,339 shares
Beneficial Ownership: 0.7%
(1) The value of the stock and options issued was based on the thirty-day weighted average closing share
price as of the grant date. The value of the options was determined utilizing the Black-Scholes option
pricing model.
15
Control Persons
The following individuals and entities are the beneficial owners of more than five percent (5%) of HEWA’s
Common Stock as of December 31, 2021, in addition to the officers and directors disclosed above. If any of
the beneficial shareholders are corporate shareholders, the name and address of the person(s) owning or
controlling such corporate shareholders and the resident agents of the corporate shareholders are provided.
Name
Affiliation
Address
Number of
shares
owned
Share
Class
Ownership
Percentage
of Class
Outstanding
Beneficial
Ownership
Cormag Holdings, LTD and
Mark D. Scott, Director
>5%
104 Falcon Ridge Drive,
Winnipeg, Manitoba, Canada
R3Y1X6
5,699,929 Common
11.0%
11.0%
Dr. Bruce Bedrick
>5%
5375 Monterey Circle #32,
Delray Beach, FL 33484
3,990,000 Common
7.5%
7.5%
Lalit Dhadphale
>5%
182 Uccello Drive, Las
Vegas, NV 89138
3,022,479 Common
5.8%
5.8%
New Atlantic Venture Fund
III, LP
>5%
73 Wayside Road, Concord,
MA 01742
505,945 Common
1.0%
13.2%
Biographical Information of Executives and Directors
Joseph Peters, Chief Executive Officer, President and Director, age 36, was appointed Chief Executive
Officer effective January 1, 2018 after serving as interim Chief Executive Officer and President of the
HealthWarehouse.com since April 11, 2017. He joined the Board on July 24, 2017. Mr. Peters joined
HealthWarehouse.com in January of 2012, working in nearly every role in the company before becoming
Customer Service Manager in 2012, Human Resources Manager in 2013, Vice President of Operations in
2014 and President & Chief Executive Officer in 2017. With his unique experience at all levels of the
organization, Mr. Peters, who is also a Certified Pharmacy Technician (CpHT), currently oversees all aspects
of the company's operations, including pharmacy, engineering, customer service, and fulfillment. Prior to
joining HealthWarehouse.com, Mr. Peters was Director of Operations at ToneRite, Inc., a company producing
automatic musical instrument tuners sold on and offline. Mr. Peters oversaw multiple departments from
production and fulfillment to sales and promotion. Mr. Peters received his Bachelor’s Degree from the
University of Florida in Business Management in 2009 and a Master’s Degree in International Business in
2010. Mr. Peter’s business address is 7107 Industrial Road, Florence, KY 41042.
Daniel Seliga, Chief Financial Officer, age 56, became the Chief Financial Officer of the Company effective
January 1, 2018. Mr. Seliga was formerly Chief Operating Officer and Chief Financial Officer of the
Company from January 1, 2016 to October 9, 2016 and had provided financial and operational consulting
services to HealthWarehouse.com since August 2013. Prior to joining the Company full time, Mr. Seliga
was a Managing Director of Melrose Capital, the Company’s senior lender. From September 2010 to
December 2012, he was General Manager and Business Manager for MVI Enterprises, the largest truck
dealership network in Ohio. From November 1996 to July 2010, Mr. Seliga was the Chief Financial Officer
and Vice President of Operations for Mae Holding Company, a privately held wholesale distributor of
commercial construction materials and a retail home improvement company. Prior to 1996, Mr. Seliga served
as a commercial and real estate lending officer for Bank of New York and PNC Bank. Mr. Seliga received an
MBA in Finance from the University of Notre Dame and a BS in Accounting from Saint Vincent College.
Mr. Seliga’s business address is 7107 Industrial Road, Florence, KY 41042.
Tim Reilly, Chairman of the Board, age 58, is a business owner and investor with several business interests.
He was elected to the Board in September 2019. Mr. Reilly is currently Chairman of MVI Enterprises, Inc.,
a holding company with interests in transportation, finance and real estate. He is also the founder and
Managing Director of Melrose Capital Advisors LLC, a provider of capital and advisory services to small
16
and mid-sized businesses. Mr. Reilly was the former President and Owner of MVI Group, the largest network
of commercial truck and bus dealerships in the state of Ohio. After building a network of 10 locations, Mr.
Reilly sold MVI Group to Rush Enterprises, headquartered in New Braunfels, Texas, in 2012. Prior to his
time in the dealership industry, Mr. Reilly was President and Owner of the Dayton Bomber’s Professional
Hockey Team in Dayton, Ohio which he sold in 2005. Prior to acquiring the hockey team, Mr. Reilly enjoyed
a 17-year career in the commercial banking industry including Managing Director of PNC Capital Markets,
the investment banking unit of PNC Bank. Mr. Reilly’s business address is 1085 Gulf of Mexico Drive,
Longboat Key, FL 34228.
Jack Britts, age 62, currently serves as a business consultant and investor focusing on pharmaceutical and
healthcare companies. He has served on the Board since September 2017. Mr. Britts has over 30 years of
diverse experience including, serving as Co-Chief Executive Officer, Chief Operating Officer and Member
of the Board of Directors of Crown Laboratories from July 2012 through 2014, a fully integrated
pharmaceutical company. Prior to Crown and for more than five years, Mr. Britts was President and Chief
Executive Officer of Merz Pharmaceuticals LLC, a privately held multinational pharmaceutical company
specializing in neurology and dermatology. Mr. Britt’s business address is 7 Glen Falls Road, Ashville, NC
28804.
Sara Mannix, age 55, is the President of Mannix Marketing, Inc., a company she founded in 1996 with a focus
on organic search to help businesses “get found on the web”. Since then, her company has evolved into a
full-service digital marketing agency with a core focus of helping business grow by growing their website
traffic, conversions, leads and sales. Mannix Marketing has either been shortlisted or won the industry’s top
award for organic search “Best in Search US” for seven years in a row. The business is located in upstate
NY, employs a team of 25 digital marketing specialists and serves over 1000 clients nationwide. Ms. Mannix
graduated Summa Cum Laude from the University at Albany with a double major in Spanish and Italian. Ms.
Mannix’s business address is 11 Broad Street, Glen Falls, NY.
Joe Heimbrock, age 66, has served as a director since April 2016 and is the managing partner of MVI Partners,
LLC. Mr. Heimbrock has over 30 years of business experience in the commercial trucking industry, including
sales, marketing and operational management. He most recently served as the Regional General Manager in
Ohio for Rush Enterprises, Inc., which is headquartered in New Braunfels, Texas. Rush Enterprises owns and
operates the nation's largest network of commercial vehicle dealerships, including new and used trucks
through its Rush Truck Centers. Prior thereto, Mr. Heimbrock was Vice President of MVI Enterprises, the
largest truck dealership network in Ohio which was purchased by Rush Enterprises in 2012. Mr. Heimbrock’s
business address is 3299 Hughes Court, Taylor Mill, KY 41015.
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
17
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
Judgment was filed by the Securities and Exchange Commission on December 22, 2017.
4. The entry of an order by a self-regulatory organization that permanently or temporarily barred
suspended or otherwise limited such person’s involvement in any type of business or securities
activities.
None
Related Party Transactions
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.
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.
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 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.
18
12) 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.
13) Financial Statements for 2 prior fiscal years:
The Consolidated Financial Statements for fiscal years ended December 31, 2019 and 2020 were filed with
the OTC Markets and can be found at www.otcmarkets.com as well as on the Company’s website.
14) Third Party Providers
Legal Counsel
General Counsel
Name:
Mark Kobasuk
Address 1:
7393 Pinehurst Drive
Address 2:
Cincinnati, OH 45244
Phone:
(513) 607-9078
Email:
mgklaw1@gmail.com
Securities Counsel
Name:
Kenneth Tabach
Firm:
Silver, Freedman, Taff & Tiernan LLP
Address 1:
3299 K Street, N.W. Suite 100
Address 2:
Washington, DC 20007
Phone:
(202) 295-4500
Email:
ktabach@sfttlaw.com
and
Name:
Mark J. Zummo
Firm:
Kohnen & Patton, LLP
Address 1:
201 East Fifth Street, Suite 800
Address 2:
Cincinnati, OH 45202
Phone:
(513) 381-0656
Email:
mzummo@kplaw.com
Accounting/Auditing Firm
Firm:
Marcum LLP
Address 1:
730 Third Avenue, 11th Floor
Address 2:
New York, NY 10017
Phone:
(212) 485-5500
19
15) Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The following discussion of results of operations and financial condition is based upon, and should be read in
conjunction with, our consolidated financial statements and accompanying notes thereto, included elsewhere in this
Annual Report.
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act
of 1995 that involve risks and uncertainties, many of which are beyond our control. Our actual results could differ materially and
adversely from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in this
report. Important factors that may cause actual results to differ from any forward-looking statements include any forward-looking
statements:
●
significant changes in consumer demand for our products, resulting in volatility of our operating results and
financial condition;
●
our ability to effectively respond to changing market conditions;
●
whether as a result of market conditions, or our financial condition or otherwise, the possibility that we will not
be able to raise sufficient additional capital needed to operate our business;
●
unexpected costs, lower than expected sales and revenues, and operating deficits;
●
our ability to obtain supply at favorable rates;
●
unexpected changes in our industry’s competitive forces including the manner and degree in which our
competitors serve our target market;
●
our ability to attract or retain qualified senior management personnel; and
●
the effects of the COVID-19 pandemic on our operations and financial results and the United States economy
in general.
All statements, other than statements of historical facts, included in this report regarding our strategy, future operations,
financial position, estimated revenue or losses, projected costs, prospects and plans and objectives of management are forward-
looking statements. When used in this report, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,”
“project,” “plan” and similar expressions are intended to identify forward-looking statements, although not all forward-looking
statements contain such identifying words. All forward-looking statements speak only as of the date of this report. We undertake
no obligation to update any forward-looking statements or other information contained herein. Stockholders and potential
investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions
and expectations reflected in or suggested by the forward-looking statements in this report are reasonable, we cannot assure
stockholders and potential investors that these plans, intentions or expectations will be achieved.
Overview
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 90 National
Association of Boards of Pharmacy (“NABP”) accredited digital pharmacies. In addition, the Company also provides
fulfillment of prescription medication and other services to customers of other healthcare providers including
telemedicine and online services companies and manufacturers.
Consumers who pay out of pocket for their prescriptions include those:
•
with no insurance coverage;
•
with high insurance deductibles or copays;
•
with Medicare Part D plans with high deductibles;
•
with Health Savings Accounts (HSA) or Flexible Savings Accounts (FSA);
•
with insurance through the Affordable Care Act (ACA) with high deductibles;
•
with drug exclusions and quantity restrictions placed by insurance companies.
20
Our objectives are to utilize our proprietary technology to make the pharmaceutical supply chain more
efficient and to pass the savings on to the consumer. We have become known by consumers as a convenient, reliable,
discount provider of over-the-counter products and prescription medication. We were named by Money.com one of
the five best online pharmacies of 2020. This popular personal finance website recognized that the Company has
earned a reputation for being one of the most affordable pharmaceutical options and highlighted the Company’s
customer service offering.
Results of Operations
For The Year Ended December 31, 2021 Compared to The Year Ended December 31, 2020
For year ended
% of
For year ended
% of
Ended December 31, 2021
Revenue
Ended December 31, 2020
Revenue
Net sales
16,143,906
$
100.0%
17,178,985
$
100.0%
Cost of sales
5,010,814
31.0%
5,831,003
33.9%
Gross profit
11,133,092
69.0%
11,347,982
66.1%
Selling, general & administrative
11,492,710
71.2%
11,397,106
66.3%
Loss from operations
(359,618)
(2.2%)
(49,124)
(0.3%)
Gain on debt forgiveness
-
0.0%
890,000
5.2%
Interest expense
(174,386)
(1.1%)
(199,550)
(1.2%)
Income (loss) before taxes
(534,004)
(3.3%)
641,326
3.7%
Income tax expense
(38,498)
(0.2%)
-
0.0%
Net income (loss)
(572,502)
$
(3.5%)
641,326
$
3.7%
Net Sales
For year ended
%
$
For year ended
December 31, 2021
Change
Change
December 31, 2020
$16,143,906
(6.0%)
($1,035,079)
$17,178,985
Net sales decreased from $17,178,985 for the year ended December 31, 2020 to $16,143,906 for the year
ended December 31, 2021 , a decrease of $1,035,079, or 6.0%. Prescription sales were $13,729,966 for the
year ended December 31, 2021, as compared to $13,404,587 for the year ended December 31, 2020, an
increase of $325,379, or 2.4%, due to an increase in new partner services business, offset by a reduction in
the direct-to-consumer (B2C) business. Over-the-counter net sales decreased by 36.7% from $3,347,395 in
the year ended December 31, 2020 to $2,117,839 in the year ended December 31, 2021. The reductions in
the B2C prescription and over-the-counter business were due to decreased website traffic and consumer
demand relative to the unprecedented high levels experienced in 2020 during the early months of the COVID
19 pandemic.
The Company will continue to focus on and dedicate resources toward customer acquisition, conversion and
retention while adding fulfillment partners in 2022.
Cost of Sales and Gross Margin
For year ended
%
$
For year ended
December 31, 2021
Change
Change
December 31, 2020
Cost of sales
$5,010,814
(14.1%)
(820,189)
$5,831,003
Gross margin $
$11,133,092
(1.9%)
(214,890)
$11,347,982
Gross margin %
69.0%
2.9%
66.1%
21
Cost of sales were $5,010,814 for the year ended December 31, 2021 as compared to $5,831,003 for the year
ended December 31, 2020, a decrease of $820,189 or 14.1%, primarily as a result of the reduction in order
volume and improved product acquisition costs realized through strategic purchasing efforts. Gross profit
for the year ended December 31, 2021 was $11,133,091, a $214,891 or 1.9%, decrease when compared to the
same period in 2020, due to the decrease in sales volume, offset by improved gross margins. Gross margin
percentage increased year-over-year from 66.1% for the year ended December 31, 2020 to 69.0% for the year
ended December 31, 2021, primarily due to the improved product acquisition costs discussed above and an
increase in the sales of higher margin products in our core direct-to-consumer (B2C) and partner services
sales.
Selling, General and Administrative Expenses
For year ended
%
$
For year ended
December 31, 2021
Change
Change
December 31, 2020
S,G&A
$11,492,710
0.8%
$95,604
$11,397,106
% of sales
71.2%
66.3%
Selling, general and administrative expenses totaled $11,492,710 for the year ended December 31, 2021
compared to $11,397,106 for the year ended December 31, 2020, an increase of $95,604, or 0.8%. For the
twelve months ended December 31, 2021, increased expenses included (a) a $235,086 increase in stock-based
compensation expense; (b) a $211,706 increase in salaries and related expenses (primarily increases in
engineering, marketing and customer outreach staffing); (c) a $68,829 increase in accounting services
expense; and (d) a $63,585 increase in employee benefits expense. The increases were partially offset by: (a)
a $179,253 decrease in shipping and shipping supplies expenses; (b) a $147,811 decrease in advertising and
marketing expenses; (c) a decrease in credit card fees of $79,806; and (d) a decrease of $56,258 in engineering
expense.
Gain on Forgiveness of debt
During the year ended December 31, 2020, we recorded a gain of $890,000 related to the forgiveness of the
Federal Paycheck Protection Program (PPP) loan that the Company received in May 2020.
Other Income and Expense
Net interest expense decreased from $199,550 in the year ended December 31, 2020 to $174,386 in the year
ended December 31, 2021, a decrease of $25,164, or 12.6%, primarily due to lower interest rates on the
Company’s outstanding convertible notes than on the short-term notes payable outstanding during 2020 and
interest income earned on excess cash balances. The decrease was partially offset by a $8,114 increase in
amortization of debt discounts related to the issuance of convertible notes. Interest income was $3,682 and
$2,814 for the years ended December 31, 2021 and 2020, respectively, as excess funds were invested in
interest bearing money market accounts.
Adjusted EBITDAS
We believe Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”),
a financial measure not included in accounting principles generally accepted in the United States of America
(“U.S. GAAP”), is useful in evaluating our operating performance compared to that of other companies in
our industry, as this metric generally eliminates the effects of certain items that may vary for different
companies for reasons unrelated to overall operating performance. We believe that:
•
Adjusted EBITDA provides investors and other users of our financial information consistency and
comparability with our past financial performance, facilitates period-to-period comparisons of operations
and facilitates comparisons with other companies, many of which use similar non-U.S. GAAP financial
measures to supplement their U.S. GAAP results; and
22
•
Adjusted EBITDA is useful because it excludes non-cash charges, such as depreciation and amortization,
stock-based compensation and one-time charges, which the amount of such expense in any specific period
may not directly correlate to the underlying performance of our business operations and these expenses
can vary significantly between periods.
We use Adjusted EBITDA in conjunction with traditional U.S. GAAP measures as part of our overall
assessment of our performance, to evaluate the effectiveness of our business strategies and to communicate
with our lenders, stockholders and board of directors concerning our financial performance.
Adjusted EBITDA should not be considered as a substitute for other measures of financial performance
reported in accordance with U.S. GAAP. There are limitations to using non-U.S. GAAP financial measures,
including that other companies may calculate these measures differently than we do. We compensate for the
inherent limitations associated with using Adjusted EBITDAS through disclosure of these limitations,
presentation of our financial statements in accordance with U.S. GAAP and reconciliation of Adjusted
EBITDA to the most directly comparable U.S. GAAP measure, specifically net loss.
The following provides a reconciliation of net income (loss) to Adjusted EBITDA:
2021
2020
Net income (loss)
(572,502)
$
641,326
$
Interest expense
174,386
199,550
Depreciation and amortization
134,855
133,576
EBITDA (non-GAAP)
(263,261)
974,452
Adjustments to EBITDA:
Stock-based compensation
744,379
509,293
Gain on debt forgiveness
-
(890,000)
Gain on extinguishment of payables
(20,631)
-
Adjusted EBITDA
460,487
$
593,745
$
For year ended December 31,
Off-Balance Sheet Arrangements
We have not entered into any transactions with unconsolidated entities in which we have financial guarantees,
subordinated retained interests, derivative instruments or other contingent arrangements that expose us to
material continuing risks, contingent liabilities or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
Impact of Inflation
We believe that inflation has not had a material impact on our results of operations for the years ended
December 31, 2021 and 2020. We cannot assure you that future inflation will not have an adverse impact on
our operating results and financial condition.
Liquidity and Capital Resources
The Company’s working capital deficiency increased from $495,751 at December 31, 2020 to $572,045 as
of December 31, 2021 and the stockholder deficiency increased from $2,655,362 at December 31, 2020 to
$2,785,275 as of December 31, 2021. For the year ended December 31, 2021, the Company had a net loss
of $572,502, but had net cash provided by operating activities of $400,506. As of December 31, 2021, the
Company had cash and liquid investments totaling $2,179,070.
During 2020, the Company reduced its current obligations by completing a convertible note issuance,
repaying short-term notes payable obligations, entering a Conversion and Standstill Agreement with the
23
holders of the Series C Redeemable Preferred Stock and receiving forgiveness of its PPP loan. In 2021, the
Company extended the original maturity date of the Convertible Notes to April 20, 2023, which reduced its
current obligations as of December 31, 2021. The primary component of the Company’s remaining current
obligations is the accrued dividends totaling $2,053,398 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.
As of December 31, 2021 and 2020, the Company had cash and restricted cash on hand of $2,179,070 and
$1,865,425, respectively. Our cash flow from operating, investing and financing activities during these
periods were as follows:
For the year ended December 31, 2021, cash flows included net cash provided by operating activities of
$400,506. This amount included a decrease in operating cash related to a net loss of $572,502, partially offset
by aggregate non-cash adjustments of $904,671, plus aggregate cash provided by changes in operating assets
and liabilities of $68,337 (primarily a result of an increase in accounts payable and accrued expenses and a
decrease in receivables). For the year ended December 31, 2020, cash flows included net cash provided by
operating activities of $250,869. This amount included an increase in operating cash related to net income
of $641,326, partially offset by aggregate non-cash adjustments of $209,177 and aggregate cash used by
changes in operating assets and liabilities of $181,280 (primarily a result of a reduction in accounts payable
and an increase in receivables).
For the years ended December 31, 2021 and 2020, net cash used in investing activities was $86,861 and
$10,080, respectively, used for capital expenditures.
There were no financing activities for the year ended December 31, 2021. For the year ended December 31,
2020, net cash provided by financing activities was $555,946. Cash was provided by $2,161,969 of net
proceeds from the issuance of convertible notes payable, $750,000 of net proceeds from the issuance of a
notes payable and $890,000 of proceeds from the PPP loan, partially offset by repayments of notes payable
of $3,239,678 and payments on equipment leases of $6,345.
Changes in Financial Condition
The Company’s total assets were $3,620,397 at December 31, 2021, an increase of $278,453 over the prior
year primarily due to increases in cash on hand, inventories and prepaid expenses, offset by a reduction in
accounts receivable and equipment due to depreciation. Total liabilities were $5,505,672 at December 31,
2021, an increase of $408,366, primarily due to increased accrued expenses (dividends) and accounts payable.
24
PART E: ISSUANCE HISTORY
16) Changes to the Number of Outstanding Shares
Check this box to indicate there were no changes to the number of outstanding shares within the past two
completed fiscal years and any subsequent periods: ☐
50,408,933
517,359
10,000
Date
Transaction
Type
Number of
Shares Issued
Class of
Securities
Value of
shares issued
($ per share) at
issuance
Issued at
discount to
market at time
of issuance?
Individual/Entity Shares were
issued to
Reason for share issuance
or Nature of Services
Provided
Restricted or
Unrestricted
as of this
filing?
Exemption or
Registration
Type
1/8/20
New
50,766
Common
$0.17
No
Mark Scott, Director
Stock Based Compensation
Restricted
Rule 701
1/8/20
New
76,149
Common
$0.17
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
1/8/20
New
76,149
Common
$0.17
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
1/8/20
New
76,149
Common
$0.17
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
4/22/20
New
35,294
Common
$0.17
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
4/22/20
New
35,294
Common
$0.17
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
4/22/20
New
35,294
Common
$0.17
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
7/15/20
New
23,077
Common
$0.26
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
7/15/20
New
23,077
Common
$0.26
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
7/15/20
New
23,077
Common
$0.26
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
10/14/20
New
27,273
Common
$0.22
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
10/14/20
New
27,273
Common
$0.22
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
10/14/20
New
27,273
Common
$0.22
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
10/29/20
Conversion
954
Series C
Preferred
$0.18
No
New Atlantic Venture Fund III,
L.P. (Todd Hixon, Manager,
Member and CFO)
Conversion of Series C
Preferred Shares into
Common Shares
N/A
N/A
10/29/20
Conversion
35
Series C
Preferred
$0.18
No
New Atlantic Entrepreneur Fund
III, L.P. (Todd Hixon, Manager,
Member and CFO)
Conversion of Series C
Preferred Shares into
Common Shares
N/A
N/A
10/29/20
Conversion
11
Series C
Preferred
$0.18
No
NAV Managers Fund, LLC
(Todd Hixon, Manager, Member
and CFO)
Conversion of Series C
Preferred Shares into
Common Shares
N/A
N/A
10/29/20
Conversion
530,000
Common
$0.18
No
New Atlantic Venture Fund III,
L.P. (Todd Hixon, Manager,
Member and CFO)
Conversion of Series C
Preferred Shares into
Common Shares
Restricted
Rule 701
10/29/20
Conversion
19,445
Common
$0.18
No
New Atlantic Entrepreneur Fund
III, L.P. (Todd Hixon, Manager,
Member and CFO)
Conversion of Series C
Preferred Shares into
Common Shares
Restricted
Rule 701
10/29/20
Conversion
6,112
Common
$0.18
No
NAV Managers Fund, LLC
(Todd Hixon, Manager, Member
and CFO)
Conversion of Series C
Preferred Shares into
Common Shares
Restricted
Rule 701
1/6/21
New
35,294
Common
$0.17
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
1/6/21
New
35,294
Common
$0.17
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
1/6/21
New
35,294
Common
$0.17
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
1/6/21
New
35,294
Common
$0.17
No
Sara Mannix, Director
Stock Based Compensation
Restricted
Rule 701
4/21/21
New
30,000
Common
$0.20
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
4/21/21
New
30,000
Common
$0.20
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
4/21/21
New
30,000
Common
$0.20
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
4/21/21
New
30,000
Common
$0.20
No
Sara Mannix, Director
Stock Based Compensation
Restricted
Rule 701
7/7/21
New
33,333
Common
$0.18
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
7/7/21
New
33,333
Common
$0.18
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
7/7/21
New
33,333
Common
$0.18
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
7/7/21
New
33,333
Common
$0.18
No
Sara Mannix, Director
Stock Based Compensation
Restricted
Rule 701
10/11/21
New
33,333
Common
$0.18
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
10/11/21
New
33,333
Common
$0.18
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
10/11/21
New
33,333
Common
$0.18
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
10/11/21
New
33,333
Common
$0.18
No
Sara Mannix, Director
Stock Based Compensation
Restricted
Rule 701
52,028,475
517,359
9,000
Preferred Series C
Number of Shares
outstanding as of
January 1, 2020
Opening Balance
Common
Preferred Series B
Preferred Series C
Number of Shares
outstanding as of
December 31, 2021
Ending Balance
Common
Preferred Series B
25
All shares issued in the transactions detailed above, contain a legend that states that the shares were issued in a
transaction not registered under the Securities Act of 1933 and may not be transferred unless registered or pursuant
to an exemption therefrom.
Please see Footnote 12 - Subsequent Events to the Company’s consolidated financial statements below for information
related to the Company’s issuance of common stock related to stock-based compensation for directors.
Debt Securities, Including Promissory and Convertible Notes
Check this box if there are no outstanding promissory, convertible notes or debt arrangements: ☐
Date of Note
Issuance
Outstanding
Balance ($)
as of
12/31/2021
Principal
Amount at
Issuance ($)
Interest
Accrued ($)
as of
12/31/2021
Maturity Date
Conversion
Terms
Name of Note Holder
Reason for Issuance
2/10/20
$ 1,675,000 $ 1,675,000 $ -
4/30/2023
Convertible to
shares of
common stock
at $0.12 per
share
Millennium 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, Member
Repay existing indebtedness;
Conversion of previous note
to Millenium Trust
Company LLC; and
General working capital
purposes.
4/14/20
$ 525,000 $ 525,000 $ -
4/30/2023
Convertible to
shares of
common stock
at $0.14 per
share
Robert B. Ford; Thomas J.
Daley 2019 Trust, Thomas J.
Daley, Trustee; John Pauly;
Marian Pauly; Dwayne Stephens
Repay existing indebtedness
and General working capital
purposes.
Please see Footnote 6 – Notes Payable to the Company’s consolidated financial statements for more information.
PART F: EXHIBITS
17) Material Contracts (as of December 31, 2021):
The Company is party to convertible note purchase agreements and a security agreement, as amended, on
February 7, 2020 and April 12, 2020, and convertible secured promissory notes on February 10, 2020 and
April 12, 2020 (collectively the “Convertible Note Agreements”). Under the terms of the Convertible Note
Agreements, the Company borrowed an aggregate of $2,200,000 from a group of eleven investors. See Note
6 to the Consolidated Financial Statements.
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. See Note 7 to the Consolidated
Financial Statements.
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. See Note 8 to the Consolidated Financial
Statements.
The Company adopted the 2014 Equity Incentive Plan, as amended, (the “2014 Plan”) in August 2014 which
provided for 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 was amended in 2020 and 2021 to increase the number
of shares available to 28,000,000 shares. See Note 7 to the Consolidated Financial Statements.
26
Effective January 1, 2020, the Company entered into employment agreements with Joseph Peters and Daniel
Seliga contracts. See Note 8 to the Consolidated Financial Statements.
The Company has contracts with various suppliers of prescription and over-the-counter medications that
specify the term and conditions for purchasing and returning product, payment terms and other items.
The Company has contracts with various partner services customers that specify the obligations of each party,
the services to be provided, pricing for the services, payment terms and other items.
The Company has contracts with various providers of services, including but not limited to software, internet,
data storage, that specify the term and conditions for providing the services, payment terms and other items.
18) Articles of Incorporation and Bylaws:
The Company’s Articles of Incorporation and Bylaws are posted in the Investor Relations section of the
Company’s website. www.healthwarehouse.com/investors-relations
19) Purchases of Equity Securities by the Issuer and Affiliated Purchasers: None.
27
20) Issuer Certifications
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Joseph Peters, certify that:
1.
I have reviewed this annual disclosure statement of HealthWarehouse.com, Inc.
2.
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
3.
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 17, 2022 /s/ Joseph B. Peters
Joseph B. Peters
Chief Executive Officer and President
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Daniel Seliga, certify that:
1.
I have reviewed this annual disclosure statement of HealthWarehouse.com, Inc.
2.
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
3.
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 17, 2022 /s/ Daniel J. Seliga
Daniel J. Seliga
Chief Financial Officer
28
PART II – CONSOLIDATED FINANCIAL STATEMENTS
29
30
December 31,
December 31,
2021
2020
Assets
Current assets:
Cash and cash equivalents
2,179,070
$
1,815,638
$
Restricted cash
-
49,787
Accounts receivable
148,375
246,518
Inventories - net
281,252
232,748
Prepaid expenses and other current assets
176,891
114,450
Total current assets
2,785,588
2,459,141
Property and equipment, net
834,809
882,803
Total assets
3,620,397
$
3,341,944
$
Liabilities and Stockholders’ Deficiency
Current liabilities:
Accounts payable
671,463
$
626,528
$
Accrued expenses and other current liabilities
2,686,170
2,328,364
Total current liabilities
3,357,633
2,954,892
Long term liabilities:
Convertible notes payable, net of debt discount of $51,961 and $57,586 as of December 31, 2021 and
2020, respectively
2,148,039
2,142,414
Total long term liabilities
2,148,039
2,142,414
Total liabilities
5,505,672
5,097,306
Commitments and contingencies
Convertible 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, 2021 and December 31, 2020 (aggregate liqidation preference
of $900,000)
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, 2021 and December 31, 2020 as follows:
Convertible preferred stock - Series B – 790,000 shares designated Series B; 517,359 shares issued and
outstanding as of December 31, 2021 and December 31, 2020 (aggregate liquidation preference
of $6,942,441 and $6,600,207 as of December 31, 2021 and December 31, 2020, respectively)
517
517
Common stock – par value $0.001 per share; 125,000,000 shares authorized as of December 31, 2021 and
December 31, 2020; 53,207,687 and 52,679,847 shares issued and 52,028,475 and 51,500,635
shares outstanding as of December 31, 2021 and December 31, 2020, respectively
53,207
52,679
Additional paid-in capital
35,677,572
34,893,278
Treasury stock, at cost, 1,179,212 shares as of December 31, 2021 and December 31, 2020
(3,419,715)
(3,419,715)
Accumulated deficit
(35,096,856)
(34,182,121)
Total stockholders’ deficiency
(2,785,275)
(2,655,362)
Total liabilities and stockholders’ deficiency
3,620,397
$
3,341,944
$
The accompanying notes are an integral part of these consolidated financial statements.
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
31
2021
2020
Total net sales
16,143,906
$
17,178,985
$
Cost of sales
5,010,814
5,831,003
Gross profit
11,133,092
11,347,982
Selling, general and administrative expenses
11,492,710
11,397,106
Loss from operations
(359,618)
(49,124)
Other income (expense):
Gain on debt forgiveness
-
890,000
Interest expense, net
(174,386)
(199,550)
Total other income (expense)
(174,386)
690,450
Income (loss) before income tax expense
(534,004)
641,326
Income tax expense
(38,498)
-
Net income (loss)
(572,502)
641,326
Preferred stock:
Series B convertible preferred stock contractual dividends
(342,233)
(342,233)
Net income (loss) attributable to common stockholders
(914,735)
$
299,093
$
Per share data:
Net income (loss) – basic
(0.01)
$
0.01
Net income (loss) – diluted
(0.01)
0.01
Series B convertible preferred stock contractual dividends
(0.01)
(0.01)
Net income (loss) attributable to common stockholders - basic
(0.02)
$
0.01
$
Net income (loss) attributable to common stockholders - diluted
(0.02)
$
0.00
$
Weighted average number of common shares outstanding - basic
51,817,243
50,900,267
Weighted average number of common shares outstanding - diluted
51,817,243
70,309,974
The accompanying notes are an integral part of these consolidated financial statements.
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
32
Total
Additional
Accumulated
Stockholders’
Shares
Amount
Shares
Amount
Shares
Amount
Paid-In Capital
Shares
Amount
Deficit
Deficiency
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 previously
accrued compensation
-
-
-
-
279,213
279
48,304
-
-
-
48,583
Contractual dividends on Series B convertible
preferred stock
-
-
-
-
-
-
-
-
-
(342,233)
(342,233)
Reclassification of Series C Preferred due to
retraction of redemption notice
10,000
1,000,000
-
-
-
-
-
-
-
-
-
Conversion of Series C Preferred shares to Common
shares
(1,000)
(100,000)
555,557
556
99,444
-
-
-
100,000
Warrants issued as debt discount in connection
with convertible notes payable
-
-
-
-
-
-
57,509
-
-
57,509
Net income
-
-
-
-
-
-
-
-
-
641,326
641,326
Balances, December 31, 2020
9,000
900,000
$
517,359
517
$
52,679,847
52,679
$
34,893,278
$
1,179,212
(3,419,715)
$
(34,182,121)
$
(2,655,362)
$
Balances, January 1, 2021
9,000
900,000
$
517,359
517
$
52,679,847
52,679
$
34,893,278
$
1,179,212
(3,419,715)
$
(34,182,121)
$
(2,655,362)
$
Stock-based compensation
-
-
-
-
386,664
387
719,992
-
-
-
720,379
Common Shares issued for previously
accrued compensation
-
-
-
-
141,176
141
23,859
-
-
-
24,000
Contractual dividends on Series B convertible
preferred stock
-
-
-
-
-
-
-
-
-
(342,233)
(342,233)
Warrants issued as debt discount in connection
with convertible notes payable
-
-
-
-
-
-
40,443
-
-
-
40,443
Net loss
-
-
-
-
-
-
-
-
-
(572,502)
(572,502)
Balances, December 31, 2021
9,000
0
900,000
$
517,359
517
$
53,207,687
53,207
$
35,677,572
$
1,179,212
(3,419,715)
$
(35,096,856)
$
(2,785,275)
$
The accompanying notes are an integral part of these consolidated financial statements.
Convertible Redeemable
Convertible
Preferred Stock
Preferred Stock
Common Stock
Treasury Stock
Series C
Series B
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED DECEMBER 31, 2021 AND 2020
33
2021
2020
Cash flows from operating activities
Net income (loss)
(572,502)
$
641,326
$
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
134,855
133,576
Stock-based compensation
744,379
509,293
Gain on debt forgiveness
-
(890,000)
Gain on extinguishment of accounts payable
(20,631)
-
Amortization of debt discount
46,068
37,954
Changes in operating assets and liabilities:
Accounts receivable
98,143
(127,905)
Inventories
(48,504)
15,020
Prepaid expenses and other current assets
(62,441)
(48,568)
Accounts payable
65,566
(181,597)
Accrued expenses and other current liabilities
15,573
161,770
Net cash provided by operating activities
400,506
250,869
Cash flows from investing activities
Capital expenditures
(86,861)
(10,080)
Net cash used in investing activities
(86,861)
(10,080)
Cash flows from financing activities
Repayment of capital lease
-
(6,345)
Repayment of notes payable
-
(3,239,678)
Proceeds from note payable
-
750,000
Proceeds from note payable - refundable
-
890,000
Proceeds from convertible notes payable
-
2,161,969
Net cash provided by financing activities
-
555,946
Net increase in cash
313,645
796,735
Cash, cash equivalents and restricted cash - beginning of period
1,865,425
1,068,690
Cash, cash equivalents and restricted cash - end of period
2,179,070
$
1,865,425
$
Cash paid for:
Interest
132,000
$
152,490
$
Non-cash investing and financing activities:
Warrants issued in connection with convertible notes payable
$ 40,443
$ 57,509
Accrual of contractual dividends on Series B convertible preferred stock
$ 342,233
$ 342,233
Common stock issued to satisfy accrued directors' fees
$ 96,000
$ 102,583
Options issued to satisfy accrued directors' fees
$ 160,000
$ 90,000
Conversion of note payable to convertible note payable
$ -
$ 500,000
Conversion of shares of Series C Preferred to common share
$ -
$ 100,000
The accompanying notes are an integral part of these consolidated financial statements.
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31
34
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 was $572,045 and the stockholder deficiency was $2,785,275 as of
December 31, 2021. For the year ended December 31, 2021, the Company had a net loss of $572,502, but generated net cash
provided by operating activities of $400,506. As of December 31, 2021, the Company had cash and cash equivalents totaling
$2,179,170.
During 2020, the Company reduced its current obligations by completing a 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. In 2021, the Company extended the original maturity date of the
Convertible Notes to April 30, 2023, which reduced its current obligations as of December 31, 2021. The primary component
of the Company’s remaining current obligations is the accrued dividends totaling $2,053,398 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 filing of these audited 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
Basis of Presentation
The Company operates in one segment considering the nature of the Company’s products and services, methods used
to distribute the product and the regulatory environment in which the Company operates.
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
35
costs, the valuation allowance related to deferred tax assets, the valuation of equity instruments, debt discounts and
contingencies.
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, 2021 and 2020, the Company had money market accounts held at banks and other
financial institutions which are classified as cash equivalents.
Restricted Cash
Restricted cash represented cash held by the Company’s credit card processor as a reserve to cover potential future
refunds. During the year ended December 31, 2021, the credit card processor refunded the balance of the funds held, net of
fees. Cash and cash equivalents and Restricted Cash, as presented on the consolidated statements of cash flows, consists of
$2,179,070 and $0, as of December 31, 2021, respectively, and $1,815,638 and $49,787 as of December 31, 2020, 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 (B2C) 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 partner services customers ranging from 10 to 45 days. If the financial
conditions of partner services 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, 2021 and 2020.
Inventories
The Company’s inventory is comprised of finished goods. 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
36
any, exceeds its fair value. For the years ended December 31, 2021 and 2020, the Company did not record any impairment of
long lived assets.
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, 2021 and 2020. 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, 2021 and 2020.
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
37
has been received from the customer, but delivery has not yet occurred. Such amounts are reflected as deferred revenues within
accrued expenses in the accompanying consolidated financial statements.
Revenue is generated through the sale of over-the-counter medication and prescription medication. The Company also
generates revenue by providing fulfillment of prescription medication and over-the-counter products and other services to
customers of other healthcare providers (“Partner Services”). 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 services offered to partner services 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 or
other 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 partner 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 partner services customers ranging from 10 to 45 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
and recorded as sales tax payable in accrued expenses. See also Sales Tax paragraph.
Disaggregation of Revenue
Revenue is primarily generated through the sale of over-the-counter medication and prescription medication (i) sold
directly to consumers through the Company’s website and call center (“B2C”) and (ii) through fulfillment and other services
provided to other healthcare providers (“Partner Services”). The following table summarizes revenue for the years ended
December 31, 2021 and 2020.
2021
2020
B2C Sales
$13,633,842
$15,515,381
Partner Services Sales
2,504,106
1,657,523
Other Sales
5,958
6,081
Total Sales
$16,143,906
$17,178,985
For the years ended December 31,
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 or other services to partners. The Company had contract liabilities of $75,765
and $0 as of December 31, 2021 and 2020, 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, 2021.
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 $1,660,777 and $1,795,668
for the years ended December 31, 2021 and 2020, respectively.
38
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, 2021 and 2020 were $375,999 and $460,107, respectively.
Advertising and Marketing Expenses
The Company expenses all advertising and marketing costs as incurred which was $1,725,020 and $1,872,831 for the
years ended December 31, 2021 and 2020, 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 2021, various states have enacted or are considering enacting legislation
to require the collection of sales tax on ecommerce transactions shipped to their state. Such requirements vary by state and are
subject to specified de minimis levels and various exclusions, including prescription medication. Compliance with current
legislation enacted is not expected to have a material impact on the Company’s future operations or results.
Net Earnings (Loss) Per Share of Common Stock
Basic net earnings (loss) per share is computed by dividing net earnings (loss) attributable to common stockholders by
the weighted average number of common shares outstanding during the period. Diluted net earnings per share 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.
2021
2020
Net income (loss) attributable to common shareholders
(941,735)
$
299,093
$
Weighted-average common shares, basic
51,817,243
50,900,267
Weighted-average common shares, diluted*
51,817,243
70,309,974
Net income (loss) per common share, basic
(0.02)
$
0.01
$
Net income (loss) per common share, diluted
(0.02)
$
0.00
$
December 31
* 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 2020.
The following table sets forth potential common shares issuable upon the exercise of outstanding options, the exercise
of warrants and the conversion of preferred stock and notes, all of which have been excluded from the computation of diluted
weighted average shares outstanding as they would be anti-dilutive:
2021
2020
Options
10,313,044
2,408,108
Warrants
1,162,367
473,367
Series B Convertible Preferred Stock
7,656,914
7,656,914
Series C Convertible Redeemable Preferred Stock *
7,352,942
-
Convertible Notes Payable
17,708,338
-
Total potentially dilutive shares
44,193,605
10,538,389
December 31,
* The amount of Series C Convertible Redeemable Preferred Stock as if converted shares of 7,352,942 was calculated based on a
conversion price of 80% of the 30 day weighted average closing price of $0.153 as of December 31, 2021.
39
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
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, 2021 and 2020 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 Uncertainties
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
40
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. The Company continues to experience shortages in the
supply of medications, particularly over-the-counter, albeit to a lesser extent than was experienced during the beginning of the
pandemic in 2020.
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.
41
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 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.
In May 2021, the FASB issued ASU 2021-04, “Earnings per Share (Topic 260), Debt – Modifications and
Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging –
Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of
Freestanding Equity-Classified Written Call Options”. This ASU provides guidance for a modification or an exchange of a
freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses:
-How an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-
classified written call option that remains equity classified after modification or exchange;
- How an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written
call option that remains equity classified after modification or exchange; and
- How an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified
written call option that remains equity classified after modification or exchange.
This standard is effective for fiscal years 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 the Company
believes would have a material impact on its consolidated financial statements.
42
4. Property and Equipment, Net
Property and equipment, net consisted of the following:
Useful Life
2021
2020
(Years)
Computer Software
297,474
$
240,379
$
5 years
Equipment
1,287,223
1,257,456
10 years
Office Furniture and Equipment
103,602
103,602
7 years
Computer Hardware
50,997
50,998
5 years
Leasehold Improvements
322,973
322,973
(a)
Total
2,062,269
1,975,408
Less: Accumulated Depreciation
(1,227,460)
(1,092,605)
Property and Equipment, Net
834,809
$
882,803
$
(a) Lesser of useful life or initial term of lease
December 31,
Depreciation expense for the above assets for the years ended December 31, 2021 and 2020 was $134,855
and $133,576, respectively.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
December 31,
December 31,
2021
2020
Salaries and Benefits
197,935
$
172,363
$
Dividend Payable
2,053,398
1,711,165
Accounting
97,138
59,738
Accrued Corporate Taxes
34,002
5,903
Accrued Interest
28,435
28,435
Accrued Rent
16,969
16,334
Sales Tax Payable
51,658
117,863
Advertising
35,700
50,700
Accrued Engineering Fees
47,000
47,000
Accrued Director Fees
64,000
64,000
Deferred Revenue
803
2,387
Other
59,132
52,476
2,686,170
$
2,328,364
$
43
6. Notes Payable
Notes payable consisted of the following:
December 31,
December 31,
2021
2020
Convertible Promissory Note
2,200,000
2,200,000
Less debt discount
(51,961)
(57,586)
Total debt
2,148,039
2,142,414
Less current portion
-
-
Long-term debt, less current portion
2,148,039
$
2,142,414
$
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
44
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,
which was extended to April 30, 2023 as noted below. As of December 31, 2021, the outstanding principal balance on the
Convertible Promissory Notes was $2,148,039, net of the debt discount of $51,961, and accrued interest was $0.
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 note 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 on February 10, 2020 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.
Effective December 31, 2021, the Company entered into amendments to the Convertible Purchase Agreements (the
“Amendments to the Convertible Notes”) and issued amended and restated Convertible Promissory Notes (the “Amended
Notes”) to the Convertible Note investors, whereby the maturity dates of the notes were extended to April 30, 2023. As part of
the agreement to extend of the maturity date, the Company agreed to issue warrants to the holders to purchase 1,500 shares of
45
common stock for each $25,000 increment of their convertible note. On December 31, 2021, warrants to purchase an aggregate
of 132,000 shares of common stock were issued to the holders of the Convertible Notes. The warrants were issued at exercise
prices ranging between $0.12 and $0.14, matching the conversion prices of the underlying Convertible Note. The 30-day
weighted average closing share price on the grant date was $0.15. The warrants have a term of five years and an aggregate grant
date value of $20,230 which was recognized as a debt discount on the grant date. The debt discount is being amortized using
the effective interest method over the term of the Convertible Promissory Note.
On December 31, 2021, the Company received a waiver from the majority holder of the Series B convertible preferred
stock prior to completing the Amendment to the Convertible Notes. As part of the agreement to extend the waiver of the debt
limitation to April 30, 2023 and maintain the limitation on indebtedness at $3,000,000, the Series B Preferred shareholders were
issued warrants to purchase 132,000 shares of common stock at an exercise price equal to $0.12 per share. The 30-day weighted
average closing share price on the grant date was $0.15. The warrants have a term of five years and an aggregate grant date
value of $20,230 which was recognized as a debt discount on the grant date. The debt discount is being amortized using the
effective interest method over the term of the Convertible Note.
It was determined that the debt was not substantially different as a result of the amendment, therefore, it was accounted
for as a modification of debt.
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 were 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, were 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
46
to the OTC Pink Sheets – Current Information tier of the OTC Market on July 10, 2017. On May 11, 2021, the Company was
approved for listing and began trading on the OTCQB Market.
Common Stock
During the years ended December 31, 2021 and 2020, the Company issued an aggregate of 527,840 and 536,145 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 $96,000 and $102,584 for the years ended December 31, 2021 and 2020,
respectively, of which $24,000 and $48,584 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 $0.20 per share in 2021 and between $0.17 and $0.26 in 2020.
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.
Stock-based compensation expense related to common stock issued was recorded in the consolidated statements of
operations as a component of selling, general and administrative expenses and totaled $96,000 and $78,000 for the years ended
December 31, 2021 and 2020, respectively. Stock-based compensation of $24,000 and 48,584 is included in accrued expenses
as other liabilities as of December 31, 2021 and 2020, 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, 2021 and 2020, Series B holders were entitled to convert into 14.8 shares of the Company’s common stock
for each share of Series B Preferred Stock due to the anti-dilution provision. The anti-dilution provision represents a beneficial
conversion feature. As of December 31, 2021, 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
47
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,
2021 and 2020. 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. See Note 6 for
the waiver of the limitation of debt to April 30, 2023.
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, 2021 and 2020, the Company had accrued contractual dividends of $2,053,398 and $1,711,165,
respectively, related to the Series B Preferred Stock.
Series C Preferred Stock
The Company’s Certificate of Designation designates 10,000 shares of the Company's preferred stock as Series C
Preferred Stock to be issued at an original issue price of $100 per share. The Series C Preferred Stock has voting rights equal to
one vote for each share held, has a liquidation preference equal to its purchase price, and has certain redemption rights available
at the option of the holder. The Series C Preferred Stock is non-convertible and does not pay dividends.
On October 17, 2011, the Company received net cash proceeds of $1,000,000 for the sale of 10,000 shares of Series C
Preferred Stock to a greater than 10% stockholder of the Company. Since certain of the Company’s preferred shares contain
redemption rights which are not solely within the Company’s control, these issuances of preferred stock were initially presented
as temporary equity. On February 13, 2013, the Company received a Notice of Redemption of Series C Preferred Stock and as
a result, the shares were subsequently classified as a current liability in the Company’s consolidated balance sheet.
On October 29, 2020, the Company entered into a Conversion and Standstill Agreement (the “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 temporary equity as of December 31,
2020 and 2021 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.
48
Incentive Compensation / Stock Option Plans
The Company had sponsored an Incentive Compensation Plan (the “2009 Plan”) which was approved by the Board of
Directors and the Company’s stockholders, and initially allowed the total number of shares of common stock issuable pursuant
to the 2009 Plan to be 2,881,425 shares. The 2009 Plan terminated effective May 15, 2019 per the terms of the Plan documents.
The 2009 Plan imposed individual limitations on the amount of certain awards. Under these limitations during any
fiscal year of the Company, the number of options, stock appreciation rights, shares of restricted stock, shares of deferred stock,
performance shares and other stock based-awards granted to any one participant under the 2009 Plan may not exceed 250,000
shares, subject to adjustment in certain circumstances. The maximum amount that may be paid out as performance units in any
12-month performance period is an aggregate value of $2,000,000, and the maximum amount that may be paid out as
performance units in any performance period greater than 12 months is an aggregate value of $4,000,000. The maximum term
of each option or stock appreciation right, the times at which each option or stock appreciation right will be exercisable, and
provisions requiring forfeiture of unexercised options or stock appreciation rights at or following termination of employment
generally are fixed by the board of directors or committee of the Company’s board of directors designated to administer the
2009 Plan (the “Committee”), except that no option or stock appreciation right may have a term exceeding ten years. The
exercise price per share subject to an option and the grant price of a stock appreciation rights are determined by the Committee,
but in the case of an incentive stock option (ISO) must not be less than the fair market value of a share of common stock on the
date of grant.
Following the approval of the Board of Directors and stockholders of record as of August 25, 2014, the Company
adopted the 2014 Equity Incentive Plan (the “2014 Plan”) which made a total of 6,000,000 shares of common stock authorized
and available for issuance pursuant to awards granted under the 2014 Plan.
The 2014 Plan limit imposes individual limitations on the amount of certain awards. Under these limitations during
any fiscal year of the Company, the number of options, stock appreciation rights, shares of restricted stock, shares of deferred
stock, performance shares and other stock based-awards granted to any one participant under the 2014 Plan may not exceed
1,500,000 shares, subject to adjustment in certain circumstances. The maximum number of shares that may be awarded that are
not subject to performance targets is an aggregate of 1,200,000 shares. The maximum term of each option or stock appreciation
right, the times at which each option or stock appreciation right will be exercisable, and provisions requiring forfeiture of
unexercised options or stock appreciation rights at or following termination of employment generally are fixed by the Committee
designated to administer the 2014 Plan, except that no option or stock appreciation right may have a term exceeding ten years.
The exercise price per share subject to an option and the grant price of a stock appreciation rights are determined by the
Committee, but in the case of an incentive stock option (ISO) must not be less than the fair market value of a share of common
stock on the date of grant.
Following the approval of the Board of Directors and stockholders of record as of October 17, 2018, the Company
modified certain terms of the 2014 Plan including an increase in the total of shares of common stock authorized and available
for issuance pursuant to awards granted under the 2014 Plan to 12,000,000 and an increase in the maximum number of shares
that may be awarded that are not subject to performance targets to 6,000,000.
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.
Following the approval of the Board of Directors and stockholders of record as of September 1, 2021, 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 28,000,000.
Stock Options
Grants
The weighted average fair value of the stock options granted during the year ended December 31, 2021 was $0.16.
49
During the year ended December 31, 2021, the Company granted options to key employees and executives of the
Company to purchase an aggregate of 3,875,000 shares of common stock under a previously approved plan at exercise prices
ranging between $0.16 and $0.17 per share for an aggregate grant date value of $625,347. The options vest over a three-year
period and have a term of ten years. Stock based compensation related to these grants for the year ended December 31, 2021
was $182,231.
During the year ended December 31, 2021, the Company granted options to directors of the Company to purchase an
aggregate of 913,356 shares of common stock under a previously approved plan at exercise price ranging from $0.17 to $0.20
per share for an aggregate grant date value of $160,000. The options vested on the grant date and have a term of ten years.
Stock based compensation related to these grants for the year ended December 31, 2021 was $160,000, of which $40,000 was
included in accrued expenses and other liabilities as of December 31, 2020.
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. Stock based compensation related to these grants for the year ended December 31, 2021 and 2020 was $99,717 and
$94,683, respectively.
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. Stock
based compensation related to these grants for the year ended December 31, 2020 was $90,000.
Valuation
In applying the Black-Scholes option pricing model to stock options granted during the years ended December 31,
2021 and 2020, the Company used the following weighted average assumptions:
2021
2020
Risk-free interest rate
0.32% to 1.14%
0.33% to 1.37%
Expected dividend yield
0.0%
0.0%
Expected volatility
176.0% to 178.0%
179.0% to 181.0%
Weighted average expected life
(contractual term) in years
5.5 to 6.0
5.5 to 6.0
Year Ended December 31
The expected volatility is calculated using the historical volatility of our stock using the daily closing price of our
shares. Forfeitures are accounted for as they occur. The expected life of our employee stock options are calculated by using the
“simplified” method, whereby, the expected life equals the average of the vesting term and the original contractual term of the
option. The risk-free interest rates were based on the U.S. Treasury yield curve in effect during the period the options were
granted and based on a maturity similar to the expected life of the option. The stock price used on the grant date was calculated
using the 30-day weighted average closing share price on the grant date which ranged between $0.16 and $0.20 per share in
2021 and between $0.12 and $0.26 in 2020.
Stock-based compensation expense related to stock options was recorded in the consolidated statements of operations
as a component of selling, general and administrative expenses and totaled $648,380 and $431,293 for the years ended December
31, 2021 and 2020, respectively. Stock-based compensation of $40,000 is included in accrued expenses and other liabilities as
of December 31, 2021.
As of December 31, 2021, stock-based compensation expense related to stock options of $564,511 remains
unamortized which is being amortized over the weighted average remaining period of 1.8 years.
50
Summary
A summary of the stock option activity during the years ended December 31, 2021 and 2020 is presented below:
Outstanding, January 1, 2020
2,694,395
0.41
$
Granted
3,093,460
0.11
Exercised
-
-
Forfeited
(55,500)
0.36
Outstanding, January 1, 2021
5,732,355
0.26
$
Granted
4,788,356
0.16
Exercised
-
-
Forfeited
(207,667)
0.43
Outstanding, December 31, 2021
10,313,044
0.21
$
7.9
125,649
$
Exercisable, December 31, 2021
4,446,376
0.28
$
7.0
58,604
$
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(Years)
Number of
Options
Aggregate
Intrinsic
Value
The following table presents information related to stock options outstanding and exercisable at December 31, 2021:
Weighted
Weighted
Weighted
Range of
Average
Outstanding
Average
Average
Exercisable
Exercise
Exercise
Number of
Exercise
Remaining Life
Number of
Price
Price
Options
Price
In Years
Options
$0.09 - $0.20
0.15
$
7,920,936
0.14
$
7.7
2,470,935
$0.22 - $0.35
0.32
$
2,287,108
0.32
$
6.4
1,870,441
$0.53 - $1.60
0.87
$
66,000
0.87
$
1.7
66,000
$4.10 - $6.99
6.52
$
39,000
6.52
$
0.4
39,000
$0.09 - $6.99
0.21
$
10,313,044
0.28
$
7.0
4,446,376
.
Options Outstanding
Options Exercisable
Warrants
Valuation
In applying the Black-Scholes option pricing model to stock warrants granted, the Company used the following
weighted average assumptions:
51
2021
2020
Risk-free interest rate
1.26%
1.41%
Expected dividend yield
0.00%
0.00%
Expected volatility
175.0%
181.0%
Weighted average expected life
(contractual term) in years
5.0
5.0
Year Ended December 31
The expected volatility is calculated using the historical volatility of our stock using the daily closing price of our
shares. The expected life of the warrants is based on the original contractual term of the warrant. The risk-free interest rates
were based on the U.S. Treasury yield curve in effect during the period the warrants were granted and based on a maturity
similar to contractual term of the warrant. The stock price used on the grant date was calculated using the 30-day weighted
average closing share price on the grant date which ranged between $0.16 per share in 2021 and $0.11 in 2020.
Grants
During the year ended December 31, 2021, the Company issued warrants to purchase an aggregate of 132,000 shares
of common stock to the holders of the Convertible Notes as part of the agreement to extend the maturity date of the notes. The
warrants were issued at exercise prices ranging between $0.12 and $0.14 which matched the conversion prices of the underlying
Convertible Note. The 30-day weighted average closing share price on the grant date was $0.15. The warrants have a term of
five years and an aggregate grant date value of $20,230 which was recognized as a debt discount on the grant date. See Footnote
5 – Notes Payable.
During the year ended December 31, 2021, the Company issued warrants to purchase an aggregate of 132,000 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 $0.12. The 30-day weighted average closing share price on the grant date was
$0.15. The warrants have a term of five years and an aggregate grant date value of $20,230 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, 2021 and 2020 is presented below:
Weighted
Weighted
Average
Average
Remaining
Aggregate
Number of
Exercise
Life
Intrinsic
Warrants
Price
In Years
Value
Outstanding, January 1, 2020
473,367
0.66
$
Granted
500,000
0.11
Exercised
-
-
Forfeited
-
-
Outstanding, January 1, 2021
973,367
0.38
$
Granted
264,000
0.12
Exercised
-
-
Forfeited
(75,000)
0.25
Outstanding, December 31, 2021
1,162,367
0.33
$
2.8
27,290
$
Exercisable, December 31, 2021
1,162,367
0.33
$
2.8
27,290
$
52
The following table presents information related to stock warrants at December 31, 2021:
Weighted
Weighted
Weighted
Range of
Average
Outstanding
Average
Average
Exercisable
Exercise
Exercise
Number of
Exercise
Remaining Life
Number of
Price
Price
Warrants
Price
In Years
Warrants
$0.11 - $0.25
0.12
$
799,000
0.12
$
3.6
799,000
$0.30 - $0.50
0.41
$
333,367
0.41
$
0.9
333,367
$4.95
4.95
$
30,000
4.95
$
0.8
30,000
$0.11 - $4.95
0.33
$
1,162,367
0.33
$
2.8
1,162,367
Warrants Outstanding
Warrants Exercisable
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 $16,969 and $16,334 as of December 31, 2021 and
December 31, 2020, respectively, has been included in accrued expenses and other current liabilities on the consolidated balance
sheets.
The aggregate future minimum lease payments for operating leases, excluding renewal periods, and capital leases as
of December 31, 2021 were as follows:
Operating Leases
2022
105,871
2023
109,047
2024
112,318
Total
327,236
$
During the years ended December 31, 2021 and 2020, the Company recorded aggregate rent expense of $148,588 and
$152,758, 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
53
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 28, 2022, Mr. Peters and Mr. Seliga were granted options to purchase 1,000,000 and 800,000 shares of
common stock, respectively, under the 2014 Plan at an exercise price of $0.15 per share for an aggregate grant date value of
$278,941. The options vest over a three-year period and have a term of ten years. 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.
9. Concentrations
The Company maintains deposits in financial institutions which are insured by the Federal Deposit Insurance
Corporation (“FDIC”). At various times, the Company has deposits in these financial institutions in excess of the amount
insured by the FDIC.
During the years ended December 31, 2021 and 2020, one customer represented 5% and 6% of total sales, respectively.
Three customers represented 42%, 21%, and 18% of the accounts receivable balance as of December 31, 2021. Four
customers represented 41%, 19%, 13% and 12% of the accounts receivable balance as of December 31, 2020. The customers
noted above are related to Partner Services sales.
During the year ended December 31, 2021, three suppliers represented 34%, 34% and 12% of total inventory purchases.
During the year ended December 31, 2020, three suppliers represented 41%, 21% and 20% of total inventory purchases.
Two vendors represented 40% and 13% of the accounts payable balance as of December 31, 2021. One vendor
represented 29% of the accounts payable balance at December 31, 2020.
10. Related Party Transactions
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
54
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.
Joe Heimbrock, a director of the Company, is the manager member of MVI Partners LC and a beneficial owner of
more than 5%. As such, MVI Partners LLC may be deemed to be a related party to the Company.
11. Income Taxes
The income tax provision (benefit) for the years ended December 31, 2021 and 2020 was as follows:
2021
2020
Federal:
Current
-
$
-
$
Deferred
(85,964)
196,954
State and local:
Current
38,498
-
Deferred
44,724
51,648
(2,742)
248,602
Change in valuation allowance
41,240
(248,602)
Income tax provision (benefit)
38,498
$
-
$
For The Years Ended
December 31,
The effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December
31, 2021 and 2020 are as follows:
December 31,
2021
2020
Deferred tax assets:
Net operating loss carryforwards
$ 3,964,611
$ 3,961,750
Stock-based compensation
300,786
275,699
Inventory reserves
1,470
7,169
Deferred revenue
182
544
Deferred rent
3,838
3,723
Accruals
21,030
-
Amortization of Debt Discount
21,780
11,444
Total deferred tax assets
4,313,697
4,260,329
Valuation allowance
(4,240,232)
(4,176,275)
Deferred tax assets, net of valuation allowance
73,465
84,054
Deferred tax liabilities
Property and equipment
(73,465)
(84,054)
Deferred tax liabilities
(73,465)
(84,054)
Net deferred tax assets
$ -
$ -
Change in valuation allowance
$ 63,957
$ (248,602)
55
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, 2021
and 2020.
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 2018 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, 2021. When these returns are filed for the year ended
December 31, 2021, the Company will have $17,232,770 and $16,969,621 of federal net operating loss (NOL’s) carryforwards
that may be available to offset future taxable income as of December 31, 2021 and 2020, respectively. The federal net operating
loss carryforwards generated prior to 2018, if not utilized, will expire from 2027 to 2039. The federal net operating loss
carryforwards generated in 2018 will carryforward indefinitely. As of December 31, 2021 and 2020, the Company had
approximately $9,334,565 and $9,953,258 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, 2021 and 2020, the expected tax expense (benefit) based on the statutory rate is
reconciled with the actual tax expense (benefit) as follows:
2021
2020
US federal statutory rate
21.0%
21.0%
State tax rate, net of federal benefit
1.6%
1.8%
Permanent differences
- Stock based compensation
(21.7%)
41.8%
- Payroll Protection Program debt extinguishment
0.0%
(31.6%)
- Other Permanent adjustments
0.0%
0.4%
Other true ups
(2.5%)
(0.6%)
Utilization of PY NOLs
(4.5%)
0.0%
Adjustment to PY NOLs
6.7%
0.0%
Change in State Tax Rate
0.0%
6.0%
Change in valuation allowance
(6.8%)
(38.8%)
Income tax provision (benefit)
(6.2%)
0.0%
For The Years Ended
December 31,
56
12. Subsequent Events
The Company evaluates events that have occurred after the balance sheet date through the date 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 17, 2022, the Company issued an aggregate of 150,000 shares of common stock and options to purchase
260,000 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 2021. The shares had an aggregate grant date value of $24,000 and were valued at $0.16 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 $0.16 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, 2021.
Issuance of Options to Employees and Executives
On January 28,2022, the Company granted stock options to purchase an aggregate of 4,700,000 shares of common
stock under the 2014 Plan to key employees and executives of the Company as recognition of their contributions to the Company.
The options had an exercise price of $0.16 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 $728,354.