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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, 2023
As of December 31, 2023, the number of shares outstanding of our Common Stock was 54,683,768.
As of September 30, 2023, the number of shares outstanding of our Common Stock was 54,483,768.
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, 2023
17
13
Financial information – For year ended December 31, 2022 and
2021
17
14
Third Party Providers
18
15
Management’s Discussion and Analysis
18
PART E
ISSUANCE HISTORY
16
Securities offerings and shares issued in 2022 and 2023
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, 2023 and
2022
31
Consolidated Statements of Operations – Years ended
December 31, 2023 and 2022
32
Consolidated Statements of Changes in Stockholders’
Deficiency – Years ended December 31, 2023 and 2022
33
Consolidated Statements of Cash Flows –Years ended
December 31, 2023 and 2022
34
Notes to the Consolidated Financial Statements
35
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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
Check box if principal executive office and the principal place of business are the same address
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
$7,626,907 at December 31, 2023, which is the sum of the original purchase
price of $3,451,754, the value of shares issued as payment-in-kind
dividends of $1,437,289 and accrued dividends of $2,737,864. 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, 2023).
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 $650,000 on December 31, 2023. The holder
can exercise redemption rights at $100 per share after October 29, 2022.
Convertible at option of holder into common shares at a conversion price
of 80% of the 30-day weighted average closing share price (limited to 2,500
shares per quarter). Mandatory conversion if 60-day weighted average
closing share price of the common stock is $0.45 per share or above and
minimum 60-day trading volume of at least 500,000 shares.
6) Number of shares or total amount of the securities outstanding for each class of securities authorized.
Security information as of (a) December 31, 2023 and (b) December 31, 2022:
Title and
Class of
Security
Total Shares
Authorized
Total Shares
Outstanding
Public Float
Beneficial
Shareholders
owning >=
100 shares
Shareholders
of Record
Common
Stock
(a)175,000,000
(b)175,000,000
(a) 54,683,768
(b) 54,060,240
(a) 13,709,183
(b) 13,916,728
(a) 178
(b) 182
(a) 244
(b) 249
Preferred
Stock –
Series B
(a) 790,000
(b) 790,000
(a) 517,359
(b) 517,359
(a) -0-
(b) -0-
(a) 2
(b) 2
(a) 2
(b) 2
Preferred
Stock –
Series C
(a) 10,000
(b) 10,000
(a) 6,500
(b) 6,500
(a) -0-
(b) -0-
(a) 3
(b) 3
(a) 3
(b) 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
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.
In July 2022, at the annual meeting of stockholders of the Company, the stockholders approved an amendment
to the Company’s Certificate of Incorporation to increase the number of authorized shares of common stock
that may be issued to 175,000,000, which was effective on July 28, 2022.
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 86 National Association of Boards of
Pharmacy (“NABP”) accredited digital pharmacies. In addition, the Company also provides fulfillment of
prescription medication, medical devices 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. The Company’s fiscal year end
is December 31.
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.
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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
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 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:
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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.
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.
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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.
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.
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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
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.
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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
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
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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, except as described below.
On March 31, 2023, a class action complaint was filed in the United States District Court, Southern
District of California against the Company (Shahnaz Zarif, individually and on behalf of others similarly
situated, Plaintiff, v. Hwareh.com, Inc., Defendant). The Complaint alleges the Company conducted the
unauthorized interception, collection, recording and dissemination of communications and data in violation
of the Federal Wiretap Act, 18 U.S.C. Section 2510 et seq, the California Invasion of Privacy Act, Cal. Pen.
Code Section 631; the California Confidentiality of Medical Information Act, Cal. Civ. Code Section 56, et
seq; and the California Consumer Privacy Act Cal. Civ. Code Section 1798.100, et seq. The Plaintiff seeks
to certify several classes of similarly situated persons and is suing for, among other things, injunctive relief,
statutory monetary damages and attorneys’ fees. After retaining local counsel, on May 22, 2023, the
Company responded to the complaint by filing a motion to transfer venue to the Eastern District of Kentucky
and a motion to dismiss the complaint for failure to state a claim and lack of personal jurisdiction. On June
12, 2023, Plaintiff filed an amended complaint alleging the same claims in lieu of an opposition to the
Company’s motions. On July 10, 2023, the Company filed a motion to transfer venue to the Eastern District
of Kentucky and a motion to dismiss the amended complaint for failure to state a claim and lack of personal
jurisdiction. On July 21, 2023, the Plaintiff responded with an opposition to the Company’s motions to which
the Company replied on August 15, 2023. On August 15, 2023, the Judge granted the Company’s Motion to
Dismiss all claims on the basis that the plaintiff had failed to adequately allege personal jurisdiction over the
Company. The Plaintiff amended their complaint on September 4, 2023 and the Company filed a renewed
motion to dismiss on September 18, 2023. Plaintiff’s opposition to our motion was filed on October 30, 2023
and the Company filed a response on November 6, 2023. The matter is fully briefed and before the Court.
The Company believes the Complaint is without merit and intends to contest this matter vigorously.
Employees
As of March 1, 2024, we employed 92 full-time employees and 11 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, medical devices and other
services to customers of other healthcare providers and manufacturers.
Customers
Direct-to-consumer (B2C): We sell directly to individual consumers who purchase prescription medications
and OTC products over the Internet. B2C net sales represented 73% and 67% of total net sales in 2022 and
13
2023, 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, medical devices
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 27% and 33% of net sales in 2022 and 2023, respectively, and one customer
represented 9% of total net sales during 2022 and two customers represented 9% and 7% of net sales during
2023.
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, with three representing
approximately 73% of purchases in 2023, 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
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
14
lease. See Footnote 8 – Commitments and Contingencies to the Company’s consolidated financial statements
for more details.
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, 2023.
Name
Title
2023 Compensation (1)
Beneficial Ownership
Joseph B.
Peters
President and Chief
Executive Officer, Director
Cash: $222,000
Options: $152,282
(1,000,000 shares at $0.17
per share)
Common: 283,463 shares
Options: 4,100,999 shares
Beneficial Ownership: 7.5%
Daniel J.
Seliga
Chief Financial Officer
Cash: $213,000
Options: $121,826
(800,000 shares at $0.17
per share)
Common: 1,041,354 shares
Options: 3,599,999 shares
Beneficial Ownership: 8.0%
Tim Reilly
Director, Chairman
Cash: $12,000
Stock: $24,000 (155, 882
shares at $0.12 to $0.17
per share)
Options: $40,000
(298,803 shares at $0.12 to
$0.17 per share)
Common: 4,818,989 shares
Options: 935,171 shares
Warrants: 63,000 shares
Convertible Note of $1,050,000:
convertible into 9,545,456
common shares
Beneficial Ownership: 23.6%
Jack Britts
Director
Cash: $12,000
Stock: $24,000 (155, 882
shares at $0.12 to $0.17
per share)
Options: $40,000
(298,803 shares at $0.12 to
$0.17 per share)
Common: 901,623 shares
Options: 935,171 shares
Beneficial Ownership: 3.3%
Joseph
Heimbrock
Director
Cash: $12,000
Stock: $24,000 (155, 882
shares at $0.12 to $0.17
per share)
Options: $40,000
(298,803 shares at $0.12 to
$0.17 per share))
Common: 2,158,073 shares
Options: 965,899 shares
Warrants: 604,581shares
Series B Preferred: 494,913
shares (convertible to 7,324,713
common shares)
Beneficial Ownership: 17.4%
Sara Mannix
Director
Cash: $12,000
Stock: $24,000 (155, 882
shares at $0.12 to $0.17
per share)
Options: $40,000
(298,803 shares at $0.12 to
$0.17 per share)
Common: 428,136 shares
Options: 787,351 shares
Beneficial Ownership: 2.2%
(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, 2023, 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
New Atlantic Venture Funds
and Todd Hixon,
>5%
11911 Freedom Drive Suite
1080, Reston, VA 20190
1,470,589 Common
2.7%
12.2%
Managing Partner
6,500 Preferred -
Series C
100.0%
Cormag Holdings, LTD and
Mark D. Scott
>5%
104 Falcon Ridge Drive,
Winnipeg, Manitoba, Canada
R3Y1X6
5,387,588 Common
9.9%
9.9%
Dr. Bruce Bedrick
>5%
5375 Monterey Circle #32,
Delray Beach, FL 33484
3,900,000 Common
7.1%
7.1%
Lalit Dhadphale
>5%
182 Uccello Drive, Las
Vegas, NV 89138
3,022,479 Common
5.5%
5.5%
Biographical Information of Executives and Directors
Joseph Peters, Chief Executive Officer, President and Director, age 38, 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 58, 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
16
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 60, 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
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 64, 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 590 Windsor Road, Ashville, NC
28804.
Sara Mannix, age 57, 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 68, 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 five 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
17
otherwise limited such person’s involvement in any type of business, securities, commodities, or
banking activities;
None
3. A finding or judgment by a court of competent jurisdiction (in a civil action), the Securities and
Exchange Commission, the Commodity Futures Trading Commission, or a state securities
regulator of a violation of federal or state securities or commodities law, which finding or
judgment has not been reversed, suspended, or vacated; or
None
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 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.
The Company entered Into an agreement with Mannix Marketing, Inc. In March 2023 to provide various
marketing services including digital advertising and branding. During 2023, Mannix Marketing invoiced
$33,000 to the Company for those services which was included in selling, general and administrative
expenses, of which the Company paid $28,500 as of December 31, 2023. Sarah Mannix is President of
Mannix Marketing, Inc. and is a director of the Company. As such, the services provided by Mannix
Marketing are related party transactions.
12) Financial Statements
a) The following consolidated financial statements were prepared in accordance with U.S. GAAP.
b) The consolidated 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, 2021 and 2022 were filed with
the OTC Markets and can be found at www.otcmarkets.com as well as on the Company’s website.
18
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
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;
19
●
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, loss of a large customer 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., a technology company with a focus on healthcare e-commerce, sells and delivers
prescription and over-the-counter medications to all 50 states as an Approved Digital Pharmacy through the National
Association of Boards of Pharmacy (NABP). HealthWarehouse.com provides a platform focused on increasing access
and reducing costs of healthcare products for consumers and business partners nationwide.
The Company sells directly to individual consumers who purchase prescription medications and over-the-
counter products over the Internet. HealthWarehouse.com is currently one of 86 National Association of Boards of
Pharmacy (“NABP”) accredited digital pharmacies. In addition, the Company also provides fulfillment services of
prescription medication and medical devices 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 (I) 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.
Our objective is 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.
20
Results of Operations
For The Year Ended December 31, 2023 Compared to The Year Ended December 31, 2022
For year ended
% of
For year ended
% of
In thousands
Ended December 31, 2023
Revenue
Ended December 31, 2022
Revenue
Net sales
20,283
$
100.0%
18,143
$
100.0%
Cost of sales
8,109
40.0%
6,202
34.2%
Gross profit
12,174
60.0%
11,941
65.8%
Selling, general & administrative
13,796
68.0%
12,725
70.1%
Loss from operations
(1,622)
(8.0%)
(784)
(4.3%)
Interest expense
(152)
(0.7%)
(164)
(0.9%)
Loss before taxes
(1,774)
(8.7%)
(948)
(5.2%)
Income tax expense
-
0.0%
(4)
(0.0%)
Net loss
(1,774)
$
(8.7%)
(952)
$
(5.2%)
Net Sales
For year ended
%
$
For year ended
December 31, 2023
Change
Change
December 31, 2022
In thousands
$20,283
11.8%
$2,140
$18,143
Net sales increased from $18.1 million for the year ended December 31, 2022 to $20.2 million for the year
ended December 31, 2023, an increase of $2.1 million, or 11.8%. Prescription sales were $17.4 million for
the year ended December 31, 2023, as compared to $14.7 million for the year ended December 31, 2022, an
increase of $2.7 million, or 18.2%, due to increases in order volume in partner services and higher average
sales per order in the direct-to-consumer (B2C) business resulting from a higher volume of brand medication
sales. Over-the-counter net sales decreased by 17.9% from $3.2 million in the year ended December 31, 2022
to $2.6 million in the year ended December 31, 2023. The reduction in the B2C over-the-counter sales was
primarily due to lower marketplace sales, partially offset by higher partner services sales.
Cost of Sales and Gross Margin
For year ended
%
$
For year ended
December 31, 2023
Change
Change
December 31, 2022
In thousands
Cost of sales
$8,109
30.7%
1,907
$6,202
Gross margin $
$12,174
2.0%
233
$11,941
Gross margin %
60.0%
-5.9%
65.8%
Cost of sales were $8.1 million for the year ended December 31, 2023 as compared to $6.2 million for the
year ended December 31, 2022, an increase of $1.9 million or 30.7%, primarily as a result of the increase in
order volume, higher costs for DTC prescription business products and the write down of certain inventory
items to market value. Gross profit for the year ended December 31, 2023 was $12.2 million, a $233,000 or
2.0%, increase when compared to the same period in 2022, due to the increase in sales volume and offset by
21
lower gross margins. Gross margin percentage decreased year-over-year from 65.8% for the year ended
December 31, 2022 to 60.0% for the year ended December 31, 2023, primarily due to (i) the lower margin
partner services business (relative to the direct-to-consumer business) representing a higher percentage of
sales, (ii) decreased year-over-year margins in the DTC prescription business due to higher prescription
brand drug sales which have higher costs. and (iii) a $61,000 write down of inventory to market value.
Selling, General and Administrative Expenses
For year ended
%
$
For year ended
December 31, 2023
Change
Change
December 31, 2022
In thousands
S,G&A
$13,796
8.4%
$1,071
$12,725
% of sales
68.5%
70.1%
Selling, general and administrative expenses totaled $13.8 million for the year ended December 31, 2023
compared to $12.7 million for the year ended December 31, 2022, an increase of $1.1 million, or 8.4%. For
the year ended December 31, 2023, increased expenses included (a) a $489,000 increase in salaries and related
expenses, primarily in pharmacy, engineering and customer support; (b) a $428,000 increase in bad debt
expense; (c) a $255,000 increase in shipping and shipping supplies expenses; (d) an $147,000 increase in
software and engineering expense; (e) a $128,000 increase in stock-based compensation expense; (f) a
$115,000 increase in depreciation and amortization expense; (g) an $106,000 increase in telephone expense;
and (h) a $61,000 increase in employee benefit expenses. Those increases were offset by a $691,000
reduction in advertising and marketing expenses. Approximately $191,000 of the increase in shipping and
salary expenses can be attributed to the operational disruption and additional costs incurred related to the
implementation of new software.
Other Income and Expense
Net interest expense decreased from $164,000 in the year ended December 31, 2022 to $152,000 in the year
ended December 31, 2023, a decrease of $12,000, or 7.4%, primarily due to a reduction in amortization of
debt discount related to the issuance of convertible notes and higher interest income earned on excess cash
balances, offset by an increase in interest expense on the outstanding Convertible Notes. Interest income was
$15,000 and $7,000 for the years ended December 31, 2023 and 2022, respectively, as excess funds were
invested in interest bearing money market accounts which offered higher interest rates in 2023 despite lower
average balances invested.
Net Loss
Net loss increased from $952,000 in the year ended December 31, 2022 to $1.8 million in the year ended
December 31, 2023, an increase of $822,000, or 86.3% primarily as a result of increased cost of sales and
selling, general and administrative expenses.
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 loss to Adjusted EBITDA:
2023
2022
Net loss
(1,774)
$
(952)
$
Interest expense
152
164
Depreciation and amortization
254
139
EBITDA (non-GAAP)
(1,368)
(649)
Adjustments to EBITDA:
Stock-based compensation
924
796
Bad debt expense
428
-
Adjusted EBITDA
(16)
$
147
$
For the Year Ended
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
While the inflationary environment experienced in 2022 and 2023 increased our shipping, packaging and
labor costs, we believe that inflation did not have a material impact on our results of operations for the years
ended December 31, 2023 and 2022. We cannot assure 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 $1.5 million at December 31, 2022 to $2.7 million
as of December 31, 2023 and the stockholder deficiency increased from $3.0 million at December 31, 2022
to $4.0 million as of December 31, 2023. For the year ended December 31, 2023, the Company had a net
loss of $1.8 million and net cash used by operating activities of $164,000. As of December 31, 2023, the
Company had cash and liquid investments totaling $568,000.
23
On December 31, 2023, the Company extended the maturity date of the Convertible Notes to April 20, 2025,
which reduced its current obligations as of December 31, 2023. The primary component of the Company’s
remaining current obligations is the accrued dividends totaling $2,737,864 to the holders of the Series B
Preferred shares. The dividends continue to accrue as Company is restricted from paying dividends if there
is no surplus in equity per Delaware law. 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, when allowable under Delaware law.
Although there was net cash used by operating activities in 2023, the Company believes it has sufficient cash
balances. The Company anticipates improvement in cash from operations as (i) its 2023 results were
negatively impacted from various exceptional expenses that will not be recurring in 2024 and (ii) the
Company expects its 2024 sales to increase from two recently executed pharmacy provider agreements that
could generate an additional $5.0 million of revenue. Therefore, the Company is anticipating an improvement
in cash from operations and cash balances in 2024.
Management believes its plans and expected improvement in cash from operations alleviate the substantial
doubt about the Company’s ability to continue as a going concern. 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, 2023, the Company had cash on hand of $568,000. Our cash flow from operating,
investing and financing activities during these periods were as follows:
For the year ended December 31, 2023, cash flows included net cash used by operating activities of $164,000.
This amount included a decrease in operating cash related to a net loss of $1.8 million, partially offset by
aggregate non-cash adjustments of $1.8 million, plus aggregate cash used by changes in operating assets and
liabilities of $163,000 (primarily a result of an increase in accounts receivable and inventory, partially offset
by an increase in accounts payable and accrued expenses). For the year ended December 31, 2022, cash flows
included net cash used by operating activities of $624,000. This amount included a decrease in operating
cash related to a net loss of $952,000, partially offset by aggregate non-cash adjustments of $1.3 million, plus
aggregate cash used by changes in operating assets and liabilities of $960,000 (primarily a result of an increase
in accounts receivable and inventory, partially offset by increased in accounts payable and accrued expenses).
For the years ended December 31, 2023 and 2022, net cash used in investing activities was $310,000 and
$513,000, respectively, used for capital expenditures and capitalization of software development costs.
There were no financing activities for the year ended December 31, 2023 and 2022.
Changes in Financial Condition
The Company’s total assets were $3.2 million at December 31, 2023, a decrease of $759,000 from the prior
year primarily due to decreases in cash on hand, accounts receivable and the operating lease right of use asset,
offset by an increase in software development costs. Total liabilities were $6.6 million at December 31, 2023,
an increase of $214,000 over the prior year, primarily due to increased accrued dividends and expenses,
accounts payable, offset by a reduction in the operating lease liability.
24
PART E: ISSUANCE HISTORY
16) Changes to the Number of Outstanding Shares
Check this box to indicate there were no changes to the number of outstanding shares within the past two
completed fiscal years and any subsequent periods: ☐
52,028,475
517,359
9,000
Date
Transaction
Type
Number of
Shares Issued
Class of
Securities
Value of
shares issued
($ 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
1/17/22
New
37,500
Common
$0.16
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
1/17/22
New
37,500
Common
$0.16
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
1/17/22
New
37,500
Common
$0.16
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
1/17/22
New
37,500
Common
$0.16
No
Sara Mannix, Director
Stock Based Compensation
Restricted
Rule 701
4/7/22
New
37,500
Common
$0.16
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
4/7/22
New
37,500
Common
$0.16
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
4/7/22
New
37,500
Common
$0.16
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
4/7/22
New
37,500
Common
$0.16
No
Sara Mannix, Director
Stock Based Compensation
Restricted
Rule 701
6/6/22
Conversion
2,384
Series C
Preferred
$0.17
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
6/6/22
Conversion
89
Series C
Preferred
$0.17
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
6/6/22
Conversion
27
Series C
Preferred
$0.17
No
NAV Managers Fund, LLC
(Todd Hixon, Manager, Member
and CFO)
Conversion of Series C
Preferred Shares into
Common Shares
N/A
N/A
6/6/22
Conversion
1,402,353
Common
$0.17
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
6/6/22
Conversion
52,353
Common
$0.17
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
6/6/22
Conversion
15,883
Common
$0.17
No
NAV Managers Fund, LLC
(Todd Hixon, Manager, Member
and CFO)
Conversion of Series C
Preferred Shares into
Common Shares
Restricted
Rule 701
7/11/22
New
30,000
Common
$0.20
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
7/11/22
New
30,000
Common
$0.20
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
7/11/22
New
30,000
Common
$0.20
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
7/11/22
New
30,000
Common
$0.20
No
Sara Mannix, Director
Stock Based Compensation
Restricted
Rule 701
10/13/22
New
35,294
Common
$0.17
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
10/13/22
New
35,294
Common
$0.17
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
10/13/22
New
35,294
Common
$0.17
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
10/13/22
New
35,294
Common
$0.17
No
Sara Mannix, Director
Stock Based Compensation
Restricted
Rule 701
2/6/23
New
35,294
Common
$0.17
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
2/6/23
New
35,294
Common
$0.17
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
2/6/23
New
35,294
Common
$0.17
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
2/6/23
New
35,294
Common
$0.17
No
Sara Mannix, Director
Stock Based Compensation
Restricted
Rule 701
4/17/23
New
35,294
Common
$0.17
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
4/17/23
New
35,294
Common
$0.17
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
4/17/23
New
35,294
Common
$0.17
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
4/17/23
New
35,294
Common
$0.17
No
Sara Mannix, Director
Stock Based Compensation
Restricted
Rule 701
7/14/23
New
35,294
Common
$0.17
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
7/14/23
New
35,294
Common
$0.17
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
7/14/23
New
35,294
Common
$0.17
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
7/14/23
New
35,294
Common
$0.17
No
Sara Mannix, Director
Stock Based Compensation
Restricted
Rule 701
10/9/23
New
50,000
Common
$0.12
No
Joe Heimbrock, Director
Stock Based Compensation
Restricted
Rule 701
10/9/23
New
50,000
Common
$0.12
No
Tim Reilly, Director
Stock Based Compensation
Restricted
Rule 701
10/9/23
New
50,000
Common
$0.12
No
Jack Britts, Director
Stock Based Compensation
Restricted
Rule 701
10/9/23
New
50,000
Common
$0.12
No
Sara Mannix, Director
Stock Based Compensation
Restricted
Rule 701
54,683,768
517,359
6,500
Preferred Series C
Number of Shares
outstanding as of
January 1, 2022
Opening Balance
Common
Preferred Series B
Preferred Series C
Number of Shares
outstanding as of
December 31, 2023
Ending Balance
Common
Preferred Series B
25
All shares issued in the transactions detailed above, contain a legend that states that the shares were issued in a
transaction not registered under the Securities Act of 1933 and may not be transferred unless registered or pursuant
to an exemption therefrom.
Please see Footnote –2 - Subsequent Events to the Company’s consolidated financial statements below for information
related to the Company’s issuance of common stock related to stock-based compensation for directors.
Debt Securities, Including Promissory and Convertible Notes
Check this box if there are no outstanding promissory, convertible notes or debt arrangements: ☐
Date of Note
Issuance
Outstanding
Balance ($)
as of
12/31/2023
Principal
Amount at
Issuance ($)
Interest
Accrued ($)
as of
12/31/2023
Maturity Date
Conversion
Terms
Name of Note Holder
Reason for Issuance
2/10/20
$ 1,675,000 $ 1,675,000 $ -
4/30/2025
Convertible to
shares of
common stock
at $0.11 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 $ -
4/30/2025
Convertible to
shares of
common stock
at $0.11 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, 2023):
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 8 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 7 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, 2021 and 2023 to increase the
number of shares available to 43,000,000 shares. See Note 8 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 9 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 22, 2024 /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 22, 2024 /s/ Daniel J. Seliga
Daniel J. Seliga
Chief Financial Officer
28
PART II – CONSOLIDATED FINANCIAL STATEMENTS
29
December 31,
December 31,
2023
2022
Assets
Current assets:
Cash and cash equivalents
567,959
$
1,041,766
$
Accounts receivable
608,122
847,566
Inventories
509,116
502,482
Prepaid expenses and other current assets
158,146
174,134
Total current assets
1,843,343
2,565,948
Property and equipment, net
910,727
937,036
Software development costs, net
354,556
272,000
Operating lease right of use asset
99,880
192,530
Total assets
3,208,506
$
3,967,514
$
Liabilities and Stockholders’ Deficiency
Current liabilities:
Accounts payable
901,257
$
807,860
$
Accrued dividends
2,737,864
2,395,631
Accrued expenses and other current liabilities
835,632
753,423
Operating lease liability
108,776
98,274
Total current liabilities
4,583,529
4,055,188
Long term liabilities:
Operating lease liability, non-current
-
108,776
Convertible notes payable, net of debt discount of $218,859 and $12,990
as of December 31, 2023 and 2022, respectively
1,981,141
2,187,010
Total long term liabilities
1,981,141
2,295,786
Total liabilities
6,564,670
6,350,974
Commitments and contingencies
Convertible redeemable preferred stock - Series C; par value $0.001 per share; 10,000 shares designated Series C:
issued and outstanding 6,500 as of December 31, 2023 and 2022 (aggregate liqidation preference
of $650,000 as of December 31, 2023 and 2022)
650,000
650,000
Stockholders’ deficiency:
Preferred stock – par value $0.001 per share; authorized 1,000,000 shares; issued and outstanding
as of December 31, 2023 and 2022 as follows:
Convertible preferred stock - Series B – 790,000 shares designated Series B; 517,359 shares issued and
outstanding as of December 31, 2023 and 2022 (aggregate liquidation preference
of $7,626,907 and $7,284,673 as of December 31, 2023 and 2022, respectively)
517
517
Common stock – par value $0.001 per share; 175,000,000 shares authorized as of December 31, 2023 and
2022; 55,862,980 and 55,239,452 shares issued and 54,683,768 and 54,060,240
shares outstanding as of December 31, 2023 and 2022, respectively
55,863
55,240
Additional paid-in capital
37,864,102
36,721,616
Treasury stock, at cost, 1,179,212 shares as of December 31, 2023 and 2022
(3,419,715)
(3,419,715)
Accumulated deficit
(38,506,931)
(36,391,118)
Total stockholders’ deficiency
(4,006,164)
(3,033,460)
Total liabilities and stockholders’ deficiency
3,208,506
$
3,967,514
$
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
30
2023
2022
Total net sales
20,283,336
$
18,142,633
$
Cost of sales
8,109,419
6,201,282
Gross profit
12,173,917
11,941,351
Selling, general and administrative expenses
13,795,597
12,725,433
Loss from operations
(1,621,680)
(784,082)
Interest expense, net
(151,900)
(164,115)
Net loss before income tax expense
(1,773,580)
(948,197)
Income tax expense
-
(3,832)
Net loss
(1,773,580)
(952,029)
Preferred stock:
Series B convertible preferred stock contractual dividends
(342,233)
(342,233)
Net loss attributable to common stockholders
(2,115,813)
$
(1,294,262)
$
Per share data:
Net loss – basic and diluted
(0.03)
$
(0.01)
$
Series B convertible preferred stock contractual dividends
(0.01)
(0.01)
Net loss attributable to common stockholders - basic and diluted
(0.04)
$
(0.02)
$
Weighted average number of common shares outstanding - basic and diluted
54,397,354
53,207,093
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,
31
Total
Additional
Accumulated
Stockholders’
Shares
Amount
Shares
Amount
Shares
Amount
Paid-In Capital
Shares
Amount
Deficit
Deficiency
Balances, January 1, 2022
9,000
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)
$
Stock-based compensation, including options
-
-
-
-
411,176
412
771,665
-
-
-
772,077
Common shares issued for previously
accrued compensation
-
-
-
-
150,000
150
23,850
-
-
-
24,000
Contractual dividends on Series B convertible
preferred stock
-
-
-
-
-
-
-
-
-
(342,233)
(342,233)
Conversion of Series C Preferred shares to Common
(2,500)
(250,000)
1,470,589
1,471
248,529
250,000
shares
Net loss
-
-
-
-
-
-
-
-
-
(952,029)
(952,029)
Balances, December 31, 2022
6,500
650,000
$
517,359
517
$
55,239,452
55,240
$
36,721,616
$
1,179,212
(3,419,715)
$
(36,391,118)
$
(3,033,460)
$
Balances, January 1, 2023
6,500
650,000
$
517,359
517
$
55,239,452
55,240
$
36,721,616
$
1,179,212
(3,419,715)
$
(36,391,118)
$
(3,033,460)
$
Stock-based compensation, including options
-
-
-
-
482,352
482
899,768
-
-
-
900,250
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)
Change in fair value of embedded conversion feature
related to convertible notes payable
-
-
-
-
198,859
-
-
-
198,859
Warrants issued as debt discount in
connection with convertible notes payable
-
-
-
-
-
-
20,000
-
-
-
20,000
Net loss
-
-
-
-
-
-
-
-
-
(1,773,580)
(1,773,580)
Balances, December 31, 2023
6,500
650,000
$
517,359
517
$
55,862,980
55,863
$
37,864,102
$
1,179,212
(3,419,715)
$
(38,506,931)
$
(4,006,164)
$
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 TWELVE MONTHS ENDED DECTEMBER 31, 2023 AND 2022
32
2023
2022
Cash flows from operating activities
Net loss
(1,773,580)
$
(952,029)
$
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
253,723
138,624
Stock-based compensation
924,250
796,077
Amortization of debt discount
12,990
38,971
Write down of inventory to net realizable value
61,000
177,814
Amortization of operating lease right of use asset
92,650
86,124
Bad debt expense
427,726
-
Changes in operating assets and liabilities:
Accounts receivable
(188,282)
(699,191)
Inventories
(67,634)
(399,044)
Prepaid expenses and other current assets
15,988
2,757
Accounts payable
93,397
136,397
Accrued expenses and other current liabilities
82,209
137,620
Operating Lease Liabilities
(98,274)
(88,573)
Net cash used in operating activities
(163,837)
(624,453)
Cash flows from investing activities
Capital expenditures
(55,881)
(240,851)
Software and website development costs
(254,089)
(272,000)
Net cash used in investing activities
(309,970)
(512,851)
Net decrease in cash
(473,807)
(1,137,304)
Cash and cash equivalents - beginning of year
1,041,766
2,179,070
Cash and cash equivalents - end of year
567,959
$
1,041,766
$
Cash paid for:
Interest
154,000
$
132,000
$
Income Taxes
-
$
7,347
$
Non-cash investing and financing activities:
Accrual of contractual dividends on Series B convertible preferred stock
$ 342,233
$ 342,233
Common stock issued to satisfy accrued directors' fees
$ 96,000
$ 96,000
Options issued to satisfy accrued directors' fees
$ 160,000
$ 160,000
Warrants issued in connection with convertible notes payable
$ 20,000
$ -
Conversion of shares of Series C Preferred to common share
$ -
$ 250,000
Operating lease right-of-use asset
$ -
$ 278,655
Operating lease liability, current and non-current
$ -
$ 295,623
The accompanying notes are an integral part of these condensed consolidated financial statements.
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31
33
HEALTHWAREHOUSE.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statement.
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 increased from $1,489,240 at December 31, 2022 to $2,740,186 as of
December 31, 2023 and the stockholder deficiency increased from $3,033,460 at December 31, 2022 to $4,006,164 as of
December 31, 2023. For the year ended December 31, 2023, the Company had a net loss of $1,773,580 and net cash used by
operating activities of $163,837. As of December 31, 2023, the Company had cash and liquid investments totaling $567,959.
On December 31, 2023, the Company extended the maturity date of the Convertible Notes to April 20, 2025, which
reduced its current obligations as of December 31, 2023. The primary component of the Company’s remaining current
obligations is the accrued dividends totaling $2,737,864 to the holders of the Series B Preferred shares. The dividends continue
to accrue as Company is restricted from paying dividends if there is no surplus in equity per Delaware law. 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, when allowable under Delaware law.
Although there was net cash used by operating activities in 2023, the Company believes it has sufficient cash balances.
The Company anticipates improvement in cash from operations as (i) its 2023 results were negatively impacted from various
exceptional expenses that will not be recurring in 2024 and (ii) the Company expects its 2024 sales to increase from two recently
executed pharmacy provider agreements that could generate an additional $5.0 million of revenue. Therefore, the Company is
anticipating an improvement in cash from operations and cash balances in 2024.
Management believes its plans and expected improvement in cash from operations alleviate the substantial doubt about
the Company’s ability to continue as a going concern. As such, the Company believes that its current financial resources are
sufficient to satisfy the Company’s estimated liquidity needs for at least twelve months from the date of issuance of these
consolidated financial statements.
Accordingly, the accompanying consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (“U.S. GAAP”), which contemplates continuation of the Company
as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying
amounts of assets and liabilities presented in the consolidated financial statements do not necessarily represent realizable or
settlement values. The consolidated financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
3. Summary of Significant Accounting Policies
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. The Company has chosen to round
certain dollar amounts within this Annual Report and in these notes to the consolidated financial statements for simplicity of
presentation.
34
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. Hocks.com, Inc., 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 net sales and expenses during the reporting period.
Actual results could differ from those estimates. The Company’s significant estimates include reserves related to accounts
receivable, the net realizable value of inventory, the recoverability and useful lives of long-lived assets and website development
costs, the valuation allowance related to deferred tax assets, the valuation of equity instruments, debt discounts and
contingencies.
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, 2023 and 2022, the Company had money market accounts held at banks and other
financial institutions which are classified as cash equivalents.
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
partner services 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 historical collection and credit loss experience, current
and expected economic trends, estimates of forecasted write-offs, aging of the accounts receivable, and other factors. During
the year ended December 31, 2023, the Company experienced a credit loss of $427,726 related to one partner services customer
that filed bankruptcy in the fourth quarter of 2023 after year long negotiations to acquire certain assets of the company failed to
result in a transaction. As a result, the company recorded the amount as bad debt expense in the fourth quarter of 2023. All
other partner services customers are paying on time or within a reasonable variance of the credit terms extended. In addition,
the Company is not aware of any economic trends that would have a significant impact on the creditworthiness of the remaining
partner services customers. Therefore, the Company has determined that an allowance for doubtful accounts was not necessary
as of December 31, 2023 and 2022.
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. During the years ended December 31, 2023 and 2022, the Company wrote down the value of
certain inventory items to net realizable value resulting in reductions in the inventory value of those items of $61,000 and
$177,814, respectively. The inventory is valued at the lower of cost or net realizable value with cost determined using the first-
in, first-out method.
35
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. For the years ended December 31, 2023 and 2022, the Company did not record any impairment of property and
equipment.
Leases
The Company determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets are
included in right-of-use assets on the consolidated balance sheets. The current and long-term components of operating lease
liabilities are included in the current operating lease liabilities and noncurrent operating lease liabilities, respectively, on the
consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future
minimum lease payments over the lease term. The Company uses the rate implicit in the lease or an incremental borrowing rate
based on the information available at the commencement date in determining the present value of future payments. Certain
leases may include options to extend or terminate the lease. Lease expense for minimum lease payments is recognized on a
straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Impairment of Long-Lived Assets
The Company reviews the carrying value of intangibles and other long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived
assets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that the asset or
asset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount, the
impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair
value. For the years ended December 31, 2023 and 2022, the Company did not record any impairment of long-lived assets.
Software and Website Development Costs
The Company capitalizes costs associated with the development of its proprietary software and website for internal use
in accordance with ASC 350 – Intangibles, Goodwill and Other. During the years ended December 31, 2023 and 2022, the
Company capitalized $254,089 and $272,000, respectively, of website development costs. The Company began to amortize the
software and website development costs on a three year straight-line basis beginning in June 2023 as the related software was
substantially completed and implemented. Amortization expense for the above capitalized costs is recognized in selling, general
and administrative expenses and totaled $44,344 for the year ended December 31, 2023.
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.
36
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 fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820,
“Fair Value Measurement”, approximates the carrying amounts reported in the accompanying balance sheets, primarily due to
their short-term nature.
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, 2023 and 2022. 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, 2023 and 2022.
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
The Company records revenue in accordance with ASC 606, Revenue from Contracts with Customers, by analyzing
exchanges with its customers using a five-step analysis: (i) identify the contract, (ii) identify performance obligations, (iii)
determine the transaction price, (iv) allocate the transaction price and (v) recognize revenue.
Revenue is generated through the sale of over-the-counter medication and prescription medication directly to the
consumer. The Company also generates revenue by providing fulfillment of prescription medication, medical devices 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 records an estimate for provisions of discounts and other adjustments for its product shipments and are
reflected as contra revenues in arriving at reported net revenues. The Company’s discounts are known at the time of sale;
correspondingly, the Company reduces gross product sales for such discounts. The Company’s returns have historically been
immaterial, therefore, the Company does not record a provision for returns.
The Company has determined that there is one performance obligation, which is the shipment and delivery of the
product; this performance obligation is transferred at a discrete point in time. The Company recognizes revenue when
37
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. The Company defers revenue when cash has been received from the
customer, but shipment has not yet occurred. Such amounts are reflected as deferred revenues within accrued expenses in the
accompanying consolidated financial statements.
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.
The Company receives upfront payments to offset set up costs related to new partner services contracts, which may
include engineering time, setting up workflow, and purchasing computer equipment for a dedicated processing station. The
setup costs are incurred to generate and/or enhance resources that will be used to satisfy performance obligations of the customer
in the future through the services provided via the contract entered into with the customer. As such, the set up costs are recorded
as deferred revenue and recognized over the term of the contract with the customer. The Company had $12,500 and $14,333 of
these costs included in the deferred revenue balance at December 31, 2023 and 2022, respectively.
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.
Disaggregation of Net Sales
Net sales are primarily generated through the sale of over-the-counter medication, prescription medication and
medical devices (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 and manufacturers (“Partner Services”). The following
table summarizes net sales for the years ended December 31, 2023 and 2022.
2023
2022
B2C Sales
$13,558,868
$13,160,691
Partner Services Sales
6,703,096
4,933,822
Other Sales
21,372
48,120
Total Sales
$20,283,336
$18,142,633
For the years ended December 31,
Contract assets and liabilities
Contract liabilities are recorded for arrangements where the Company (i) has received customer deposits from the
customer but has not yet provided the fulfillment services and (ii) has received an upfront payment from the customer to cover
set up costs including equipment and engineering resources. The Company had total contract liabilities of $80,125 and $45,183
recorded in accrued expenses as of December 31, 2023 and 2022, respectively, which were comprised of (i) customer deposits
of $67,625 and $30,850 as of December 31, 2023 and 2022, respectively, which represented refundable customer deposits that
were recorded as deferred revenue and (ii) deferred revenue of $12,500 and $14,333 as of December 31, 2023 and 2022,
respectively, related to upfront payments received from customers that are being amortized over the term of the contract. During
the years ended December 31, 2023 and 2022, the Company recognized net sales of $16,833 and $43,667, respectively, related
to the amortization of the upfront payments. Other than accounts receivable, there were no contract assets as of December 31,
2023 and 2022.
38
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 $2,304,927 and $2,060,600
for the years ended December 31, 2023 and 2022, respectively.
In certain circumstances, shipping and handling costs are charged to the customer and recognized in Net Sales. The
amounts recognized in Net Sales for the years ended December 31, 2023 and 2022 were $331,806 and $352,692, respectively.
Advertising and Marketing Expenses
The Company expenses all advertising and marketing costs as incurred which was $1,067,081 and $1,757,696 for the
years ended December 31, 2023 and 2022, respectively, and recorded in selling, general and administrative expenses.
Sales Taxes
The net sales of the Company do not include sales tax imposed on its goods and services because the Company is a
pass-through conduit for collecting and remitting sales taxes. Beginning in 2018 and continuing into 2023, 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 Loss Per Share of Common Stock
Basic net 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 loss 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.
2023
2022
Net loss attributable to common shareholders
(2,115,813)
$
(1,294,262)
$
Weighted-average common shares, basic and diluted
54,397,354
53,207,093
Net loss per common share, basic and diluted
(0.04)
$
(0.02)
$
December 31
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:
2023
2022
Options
21,773,925
15,834,335
Warrants
940,127
764,000
Series B Convertible Preferred Stock
7,656,914
7,656,914
Series C Convertible Redeemable Preferred Stock *
5,909,091
5,000,000
Convertible Notes Payable
20,000,006
17,708,338
Total potentially dilutive shares
56,280,063
46,963,587
December 31,
39
* The amount of Series C Convertible Redeemable Preferred Stock as if converted shares of 5,000,000 was calculated based on a
conversion price of 80% of the 30 day weighted average closing price of $0.14 and $0.16 as of December 31, 2023 and 2022,
respectively.
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.
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 sheets as of December 31, 2023 and 2022 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
Current Wars: Management continues to evaluate the impact of the current wars in Ukraine and Gaza on the
industry and has concluded that it is reasonably possible that the wars could have a negative effect on the Company’s financial
40
position or results of its operations. Further, the impact of these actions and related sanctions on the world economy are not
determinable as of the date of these financial statements and the specific impact on the Company’s financial condition, results
of operations, and cash flows is also not determinable as of the date of these financial statements.
Inflation Reduction Act Excise Tax: On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was
signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1% excise tax on certain repurchases
of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign
corporations occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing corporation itself, not its
stockholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the
shares repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing
corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock
repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of the
Treasury (the “Treasury”) has been given authority to provide regulations and other guidance to carry out and prevent the
abuse or avoidance of the excise tax. Any share redemption or other share repurchase that occurs after December 31, 2022, in
connection with a Business Combination, extension vote or otherwise, may be subject to the excise tax. Whether and to what
extent the Company would be subject to the excise tax in connection with a Business Combination, extension vote or
otherwise will depend on a number of factors, including (i) the fair market value of the redemptions and repurchases in
connection with a Business Combination, extension or otherwise, (ii) the structure of a Business Combination, (iii) the nature
and amount of any “PIPE” or other equity issuances in connection with a Business Combination (or otherwise issued not in
connection with a Business Combination but issued within the same taxable year of a Business Combination) and (iv) the
content of regulations and other guidance from the Treasury. In addition, because the excise tax would be payable by the
Company and not by the redeeming stockholder, the mechanics of any required payment of the excise tax have not been
determined. The foregoing could reduce the cash available on hand. The IR Act had limited to no impact on the results of
operations and cashflows during the year ended December 31, 2023 nor the financial condition as of December 31, 2023.
Recently Issued Accounting Pronouncements
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.
The Company adopted this standard effective January 1, 2023, which had no cumulative-effect adjustment to retained
earnings as of the effective date.
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 adopted ASU 2020-06 effective January 1,
2023 utilizing the modified retrospective method and the adoption had no impact on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax
Disclosures”. ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures. The
amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the
rate reconciliation and income taxes paid information. A public entity should apply the amendments in ASU 2023-09
prospectively to all annual periods beginning after December 15, 2024. For entities other than public business entities, the
amendments are effective for annual periods beginning after December 15, 2025 Early adoption and retrospective application
are permitted. The Company has not adopted ASU 2023-09 and does not know the impact it will have on its consolidated
financial statements and related disclosures.
41
There were no other recent accounting standard updates that the Company has not yet adopted that we believe would
have a material impact on our consolidated financial statements.
4. Property and Equipment, Net
Property and equipment, net consisted of the following:
Useful Life
2023
2022
(Years)
Computer Software
547,566
$
420,378
$
5 years
Equipment
1,314,022
1,310,279
10 years
Office Furniture and Equipment
132,845
132,845
7 years
Computer Hardware
103,136
50,997
5 years
Leasehold Improvements
250,115
250,115
(a)
Total
2,347,684
2,164,614
Less: Accumulated Depreciation
(1,436,957)
(1,227,578)
Property and Equipment, Net
910,727
$
937,036
$
(a) Lesser of useful life or initial term of lease
December 31,
Depreciation and amortization expense for the above assets for the years ended December 31, 2023 and 2022 was
$253,723 and $138,624, respectively.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
December 31,
December 31,
2023
2022
Salaries and Benefits
197,256
$
192,279
$
Sales Tax Payable
179,970
132,423
Accounting
136,200
114,938
Deferred Revenue
82,377
52,307
Accrued Corporate & Property Taxes
71,776
47,511
Accrued Director Fees
64,000
64,000
Advertising
38,090
57,900
Accrued Legal
37,080
19,000
Accrued Interest
28,435
28,435
Accrued Shipping
-
28,850
Other
448
15,780
835,632
$
753,423
$
.
42
6. Notes Payable
Notes payable consisted of the following:
December 31,
December 31,
2023
2022
Convertible Promissory Note
2,200,000
2,200,000
Less debt discount
(218,859)
(12,990)
Total debt
1,981,141
2,187,010
Less current portion
-
-
Long-term debt, less current portion
1,981,141
$
2,187,010
$
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 was originally payable on
April 30, 2022, which was extended annually and effective December 31, 2023 was extended to April 30, 2025 as noted below.
As of December 31, 2023, the outstanding principal balance on the Convertible Promissory Notes was $2,200,000 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.
43
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 was 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, 2024 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 was 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
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 $20,213 which was recognized as a debt discount on the grant date. The debt discount was 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 was 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.
Effective December 31, 2022, the Company entered into amendments to the Convertible Purchase Agreements (the
“Second 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, 2024.
As part of the agreement to extend of the maturity date, the Company agreed to increase the interest rate from 6% to 7%,
effective December 31,2022.
On December 31, 2022, 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. The waiver extended the limitation on indebtedness of
$3,000,000 to April 30, 2024.
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.
Effective December 31, 2023, the Company entered into amendments to the Convertible Purchase Agreements (the
“Third 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, 2025. As part of
the agreement to extend the maturity date, the Company agreed to change the existing conversion rates from $0.12 and $0.14
per share to $0.11 per share. Because the conversion rate was set below the 30-day weighted average closing share price of
$0.14 at the time of the amendment, the change in the conversion rate represents a change in the fair value of the conversion
option. At the amended conversion rate, an incremental 2,291,668 shares of common stock are issuable at conversion of the
Convertible Notes as compared to the original terms. Utilizing the Black-Scholes option pricing model, the increase in value of
44
the embedded conversion option due to the change in the conversion rate was $198,859, which is being recognized as a debt
discount and will be amortized over the term of the Convertible Note.
On December 31, 2023, 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. The waiver extended the limitation on indebtedness of
$3,000,000 to April 30, 2025. As part of the agreement to extend the waiver of the debt limitation to April 30, 2025 and maintain
the limitation on indebtedness at $3,000,000, the Series B Preferred shareholders were issued warrants to purchase 176,127
shares of common stock at an exercise price equal to $0.13 per share. The 30-day weighted average closing share price on the
grant date was $0.13. The warrants have a term of five years and an aggregate grant date value of $20,000 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.
7. 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 has
an option to extend the term by three years, however, the Company determined that it was not reasonably certain to exercise the
renewal option and such renewal was excluded from the operating lease right-of-use, or ROU, asset and operating lease liability
recorded for this lease.
The Company is responsible for real estate taxes, maintenance and other operating expenses applicable to the leased
premises which are recognized as variable lease expense in the period when incurred.
This lease is classified as an operating lease and is included in operating lease ROU assets and operating lease liabilities.
Since the Company's lease did not provide an implicit rate, the Company used its estimated incremental borrowing rate based
on the lease term and other information available at the commencement date in determining the present value of lease payments.
Supplemental balance sheet information as of December 31, 2023 is as follows:
Operating lease right-of-use assets
278,655
$
Accumulated amortization
(178,775)
Net operating right-of-use-assets
99,880
$
Current operating lease liabilities
108,776
$
Noncurrent operating lease liabilities
0
Total operating lease liabilities
108,776
$
Weighted-average remaining lease term (years)
1.0
Weighted-average discount rate
7.0%
The aggregate future minimum lease payments for operating leases as of December 31, 2023 were as follows:
45
2024
112,318
Total gross lease payment
112,318
$
Less: Imputed interest
(3,542)
Total lease liabilities, reflecting present
value of future minimum lease payments
108,776
$
During the years ended December 31, 2023 and 2022, the Company recorded aggregate lease expense was $153,170
and $162,447, respectively.
8. Stockholders’ Deficiency
The Company is authorized to issue up to 175,000,000 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. In July 2022, the authorized shares of common
stock was increased from 125,000,000 to 175,000,000 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, which was effective on
July 28, 2022.
In October 2020, at the annual meeting of stockholders of the Corporation, the stockholders of the Corporation
approved an amendment to the Corporation’s Certificate of Incorporation to effect a reverse stock split of the Company’s
common stock at a ratio of 1-for-50 and to decrease the number of authorized shares of common stock in proportion to the
reverse stock split. However, the Board of Directors has not yet determined if or when to effect the reverse stock split.
OTC Market Tier Change
On April 14, 2017, the Company filed a Form 15 with the Securities and Exchange Commission terminating the
registration of its common stock under Rule 12 g-4(a)(1) of the Securities Exchange Act of 1934. The Company transitioned
to the OTC Pink Sheets – Current Information tier of the OTC Market on July 10, 2017. 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, 2023 and 2022, the Company issued an aggregate of 623,528 and 561,716 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 for the years ended December 31, 2023 and 2022, of which
$24,000 had been accrued and included in accrued expenses and other current liabilities at December 31, 2022 and 2021. The
shares were valued at the 30-day weighted average closing share price on the grant date which ranged between $0.12 and $0.17
per share in 2023 and between $0.16 and $0.20 in 2022.
During the year ended December 31, 2022, the Company issued an aggregate of 1,470,589 shares of common stock to
the holders of the Series C Preferred Stock related to the holders’ election to convert 2,500 of their Series C Preferred shares
which had a principal amount of $250,000. The conversion was affected at $0.17 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 for the years ended December
31, 2023 and 2022. Stock-based compensation of $24,000 is included in accrued expenses as other liabilities as of December
31, 2023 and 2022.
46
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, 2023 and 2022, 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. The investor rights agreement of the Company’s Series B preferred shares limits the
total debt of the Company to $1 million. See Note 6 for the waivers of the limitation of debt to April 30, 2025.
As of December 31, 2023 and 2022, the Company had accrued contractual dividends of $2,737,864 and $2,395,631,
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 not entitled to 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. The Company’s Series C preferred shares are considered to
be an equity host with a conversion option that is clearly and closely related to the equity host. However, the Series C Preferred
shares contain redemption rights which are not solely within the Company’s control, therefore, the Series C Preferred stock is
presented as temporary equity. On February 13, 2013, the Company received a Notice of Redemption of Series C Preferred
Stock.
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 in 2013 to the Company, (ii) not to
issue a redemption notice until after October 29, 2022 and (iii) to convert up to $100,000 of the Series C Preferred Stock valued
at its original issue price of $100.00 per share into shares of the Company’s common stock at a conversion price of $0.18 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 beginning
in 2022. The conversion price was $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 and thereafter. 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
47
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. 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 into 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.
On June 6, 2022, the Company received notice that the holders elected to convert 2,500 of the shares of the Series C
Preferred Stock with a principal amount of $250,000 at the $0.17 conversion price. The Company has subsequently issued
1,470,589 shares of common stock to the holders and the number of outstanding shares of Series C Preferred Stock was reduced
to 6,500 shares.
Incentive Compensation / Stock Option Plans
In 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 September 1, 2021 and May 8, 2023,
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 and 43,000,000, respectively. In
addition, an extension of the term of the 2014 Plan was to April 19, 2033 was approved in May 2023.
Stock Options
Grants
The weighted average fair value of the stock options granted during the year ended December 31, 2023 was $0.12.
During the year ended December 31, 2023, the Company granted options to key employees and executives of the
Company to purchase an aggregate of 5,100,000 shares of common stock under a previously approved plan at an exercise price
$0.17 per share for an aggregate grant date value of $776,639. 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, 2023 was $232,653.
During the year ended December 31, 2023, the Company granted options to directors of the Company to purchase an
aggregate of 1,195,212 shares of common stock under a previously approved plan at exercise price ranging from $0.12 to $0.17
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, 2023 was $160,000, of which $40,000 was
included in accrued expenses and other liabilities as of December 31, 2022.
During the year ended December 31, 2022, the Company granted options to key employees and executives of the
Company to purchase an aggregate of 4,700,000 shares of common stock under a previously approved plan at an exercise price
of $0.16 per share for an aggregate grant date value of $728,354. The options vest over a three-year period and have a term of
ten years. Stock based compensation related to these grants for the years ended December 31, 2023 and 2022 was $230,301
and $217,817, respectively.
48
During the year ended December 31, 2022, the Company granted options to directors of the Company to purchase an
aggregate of 1,040,836 shares of common stock under a previously approved plan at exercise price ranging from $0.16 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, 2022 was $160,000, of which $40,000 was
included in accrued expenses and other liabilities as of December 31, 2021.
Valuation
In applying the Black-Scholes option pricing model to stock options granted during the years ended December 31,
2023 and 2022, the Company used the following weighted average assumptions:
2023
2022
Risk-free interest rate
3.82% to 4.75%
1.59% to 4.12%
Expected dividend yield
0.0%
0.0%
Expected volatility
128.0% to 132.3%
132.0% to 175.0%
Weighted average expected life in years
5.0 to 6.0
5.0 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 $0.12 and $0.17 per share in
2023 and between $0.16 and $0.20 in 2022.
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 $828,250 and $700,078 for the years ended December
31, 2023 and 2022, respectively. Stock-based compensation of $40,000 is included in accrued expenses and other liabilities as
of December 31, 2023.
As of December 31, 2023, stock-based compensation expense related to stock options of $823,084 remains
unamortized which is being amortized over the weighted average remaining period of 1.7 years.
Summary
A summary of the stock option activity during the years ended December 31, 2023 and 2022 is presented below:
49
Outstanding, January 1, 2022
10,313,044
0.21
$
Granted
5,740,836
0.15
Exercised
-
-
Forfeited
(223,333)
1.26
Outstanding, January 1, 2023
15,830,547
0.18
$
Granted
6,295,212
0.16
Exercised
-
-
Forfeited
(351,834)
0.30
Outstanding, December 31, 2023
21,773,925
0.17
$
7.4
101,524
$
Exercisable, December 31, 2023
12,623,921
0.18
$
6.7
101,524
$
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, 2023:
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
0.16
$
19,490,317
0.15
$
7.1
10,340,313
$0.22 - $0.36
0.32
$
2,283,608
0.32
$
4.6
2,283,608
$0.09 - $0.36
0.17
$
21,773,925
0.18
$
6.7
12,623,921
.
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:
2023
2022
Risk-free interest rate
3.84%
n/a
Expected dividend yield
0.00%
n/a
Expected volatility
132.2%
n/a
Weighted average expected life
(contractual term) in years
5.0
n/a
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 was $0.13 per share in 2023.
50
Grants
During the year ended December 31, 2023, the Company issued warrants to purchase an aggregate of 176,127 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 $0.13 which was the 30-day weighted average closing share price on the grant
date. The warrants have a term of five years and an aggregate grant date value of $20,000 which was recognized as a debt
discount on the grant date. See Footnote 6 – Notes Payable.
There were no warrants issued during the year ended December 31, 2022.
A summary of the stock warrant activity during the years ended December 31, 2023 and 2022 is presented below:
Weighted
Weighted
Average
Average
Remaining
Aggregate
Number of
Exercise
Life
Intrinsic
Warrants
Price
In Years
Value
Outstanding, January 1, 2022
1,162,367
0.33
$
Granted
-
-
Exercised
-
-
Forfeited
(398,367)
0.74
Outstanding, January 1, 2023
764,000
0.11
$
Granted
176,127
0.13
Exercised
-
-
Forfeited
-
-
Outstanding, December 31, 2023
940,127
0.12
$
2.4
21,411
$
Exercisable, December 31, 2023
940,127
0.12
$
2.4
21,411
$
The following table presents information related to stock warrants at December 31, 2023:
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 - $0.14
0.12
$
940,127
0.12
$
2.4
940,127
Warrants Outstanding
Warrants Exercisable
9. Commitments and Contingent Liabilities
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 Agreements include a term of one year beginning on
January 1, 2020 with an extension provision allowing for automatic one-year extensions unless the Company or the employee
provides advanced written notice of non-renewal, the titles and positions of Chief Executive Officer and Chief Financial Officer,
respectively, an initial base salary of $128,000 and $124,000 per year, respectively, subject to certain bonus and severance
provisions. Effective January 1, 2023, the Compensation Committee approved an increase in the base salaries for Mr. Peters
and Mr. Seliga to $162,000 and $158,000 per year, respectively. Each of the officers are bound by restrictive covenants
51
contained in the Employment Agreements regarding disclosure of confidential information, non-solicitation and employee non-
competition.
On February 8, 2023, 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 $0.17 per share for an aggregate grant date value of
$274,108. The options vest over a three-year period and have a term of ten years. 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 17, 2024, Mr. Peters and Mr. Seliga were granted options to purchase 4,200,000 and 3,600,000 shares of
common stock, respectively, under the 2014 Plan at an exercise price of $0.13 per share for an aggregate grant date value of
$274,108. The options vest over a three-year period and have a term of ten years. The options granted included options to
purchase an aggregate of 6,000,000 shares of common stock that were issued to replace options previously issued to executives
in 2021, 2022 and 2023. See Footnote 12 – Subsequent Events.
Litigation
In the ordinary course of business, we may become subject to lawsuits and other claims and proceedings that might
arise from litigation matters or regulatory audits. Such matters are subject to uncertainty and outcomes are often not predictable
with assurance. Our management does not presently expect that any current outstanding matters will have a material adverse
effect on the Company’s consolidated financial condition or consolidated results of operations. We are not currently involved
in any pending or threatened material litigation or other material legal proceedings nor have we been made aware of any penalties
from regulatory audits, except as described below.
On March 31, 2023, a class action complaint was filed in the United States District Court, Southern District of
California against the Company (Shahnaz Zarif, individually and on behalf of others similarly situated, Plaintiff, v. Hwareh.com,
Inc., Defendant). The Complaint alleges the Company conducted the unauthorized interception, collection, recording and
dissemination of communications and data in violation of the Federal Wiretap Act, 18 U.S.C. Section 2510 et seq, the California
Invasion of Privacy Act, Cal. Pen. Code Section 631; the California Confidentiality of Medical Information Act, Cal. Civ. Code
Section 56, et seq; and the California Consumer Privacy Act Cal. Civ. Code Section 1798.100, et seq. The Plaintiff seeks to
certify several classes of similarly situated persons and is suing for, among other things, injunctive relief, statutory monetary
damages and attorneys’ fees. After retaining local counsel, on May 22, 2023, the Company responded to the complaint by filing
a motion to transfer venue to the Eastern District of Kentucky and a motion to dismiss the complaint for failure to state a claim
and lack of personal jurisdiction. On June 12, 2023, Plaintiff filed an amended complaint alleging the same claims in lieu of an
opposition to the Company’s motions. On July 10, 2023, the Company filed a motion to transfer venue to the Eastern District
of Kentucky and a motion to dismiss the amended complaint for failure to state a claim and lack of personal jurisdiction. On
July 21, 2023, the Plaintiff responded with an opposition to the Company’s motions to which the Company replied on August
15, 2023. On August 15, 2023, the Judge granted the Company’s Motion to Dismiss all claims on the basis that the plaintiff
had failed to adequately allege personal jurisdiction over the Company. The Plaintiff amended their complaint on September 4,
2023 and the Company filed a renewed motion to dismiss on September 18, 2023. Plaintiff’s opposition to our motion was filed
on October 30, 2023 and the Company filed a response on November 6, 2023. The matter is fully briefed and before the Court.
The Company believes the Complaint is without merit and intends to contest this matter vigorously.
10. Concentrations
The Company maintains deposits in financial institutions which are insured by the Federal Deposit Insurance
Corporation (“FDIC”). At various times, the Company has deposits in these financial institutions in excess of the amount
insured by the FDIC.
During the year ended December 31, 2023, two customers represented 9% and 6% of total sales. During the year ended
December 31, 2022, one customer represented 9% of total sales.
Three customers represented 25%, 24%, and 22% of the accounts receivable balance as of December 31, 2023. Three
customers represented 46%, 15%, and 10% of the accounts receivable balance as of December 31, 2022. The customers noted
above are related to Partner Services sales.
52
During the year ended December 31, 2023, three suppliers represented 35%, 26% and 12% of total inventory purchases.
During the year ended December 31, 2022, the same three suppliers represented 33%, 32% and 11% of total inventory purchases.
Two vendors represented 26% and 16% of the accounts payable balance as of December 31, 2023. One vendor
represented 45% of the accounts payable balance at December 31, 2022.
11. Related Party Transactions
The Company executed convertible note purchase agreements (the”Convertible Purchase Agreements”) and a security
agreement, as amended, (the “Convertible Security Agreement”) on February 7, 2020 and April 12, 2020, and convertible
secured promissory notes on February 10, 2020 and April 12, 2020 (the “Convertible Notes”) (collectively the “Convertible
Note Agreements”). The Company received an aggregate of $1,661,969 of cash proceeds, net of costs associated with the
transaction, including $500,000 from Millennium Trust Company LLC Custodian FBO Timothy E. Reilly IRA, in 2020. 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 LLC. MVI Partners LLC is the
majority owner of the Series B Preferred shares. When combined, Mr. Heimbrock and MVI Partners LLC beneficially own
more than 5% of the Company. As such, MVI Partners LLC is deemed to be a related party to the Company.
The Company entered into an agreement with Mannix Marketing, Inc. in March 2023 to provide various marketing
services including digital advertising and branding. During 2023, Mannix Marketing invoiced $33,000 to the Company for
those services which was included in selling, general and administrative expenses, of which the Company paid $28,500 as of
December 31, 2023. Sarah Mannix is President of Mannix Marketing, Inc. and is a director of the Company. As such, the
services provided by Mannix Marketing are related party transactions.
12. Income Taxes
The income tax provision (benefit) for the years ended December 31, 2023 and 2022 was as follows:
2023
2022
Federal:
Current
-
$
-
$
Deferred
(202,032)
(108,370)
State and local:
Current
-
3,832
Deferred
(12,103)
(2,085)
(214,135)
(106,623)
Change in valuation allowance
214,135
110,455
Income tax provision (benefit)
-
$
3,832
$
For The Years Ended
December 31,
53
The effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December
31, 2023 and 2022 are as follows:
December 31,
2023
2022
Deferred tax assets:
Net operating loss carryforwards
$ 4,188,591
$ 4,025,055
Stock-based compensation
368,221
334,893
Inventory reserves
1,451
1,461
Deferred revenue
3,293
4,407
Deferred rent
-
-
Accruals
69,321
13,409
Amortization of Debt Discount
-
30,406
Lease Liability
1,986
3,264
Total deferred tax assets
4,632,863
4,412,895
Valuation allowance
(4,564,821)
(4,350,686)
Deferred tax assets, net of valuation allowance
68,042
62,209
Deferred tax liabilities
Property and equipment
(68,042)
(62,209)
Deferred tax liabilities
(68,042)
(62,209)
Net deferred tax assets
$ -
$ -
Change in valuation allowance
$ 214,135
$ 110,454
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, 2023
and 2022.
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 2019 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, 2023. When these returns are filed for the year ended
December 31, 2023, the Company will have $18,112,893 and $17,388,528 of federal net operating loss (NOL’s) carryforwards
that may be available to offset future taxable income as of December 31, 2023 and 2022, respectively. The federal net operating
loss carryforwards generated prior to 2018, if not utilized, will expire from 2027 to 2037. The federal net operating loss
carryforwards generated in 2018 will carryforward indefinitely. As of December 31, 2023 and 2022, the Company had
approximately $9,524,943 and $9,336,637 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. Such limitation would not have
a material impact on the financial statements given that the deferred tax assets for the NOL’s are fully offset by the valuation
allowance.
54
For the years ended December 31, 2023 and 2022, the expected tax expense (benefit) based on the statutory rate is
reconciled with the actual tax expense (benefit) as follows:
2023
2022
US federal statutory rate
21.0%
21.0%
State tax rate, net of federal benefit
1.3%
1.5%
Permanent differences
- Stock based compensation
(8.4%)
(12.8%)
- Other Permanent adjustments
(0.1%)
0.0%
Other true ups
(0.3%)
(0.6%)
Utilization of PY NOLs
0.0%
3.9%
Adjustment to PY NOLs
(1.6%)
(1.6%)
Impact of taxes based upon gross receipts
(0.6%)
(1.7%)
Change in State Tax Rate
(0.1%)
0.0%
Change in valuation allowance
(12.1%)
(11.6%)
Income tax provision (benefit)
(0.9%)
(1.8%)
For The Years Ended
December 31,
13. 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 15, 2024, the Company issued an aggregate of 184,616 shares of common stock and options to purchase
353,960 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 2023. The shares had an aggregate grant date value of $24,000 and were valued at $0.13 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 $0.13 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, 2023.
Issuance of Options to Executives
On January 17, 2024, the Company granted stock options to purchase an aggregate of 7,800,000 shares of common
stock under the 2014 Plan to executives of the Company as recognition of their contributions to the Company. The options had
an exercise price of $0.13 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 $915,833. The options granted included options to purchase an aggregate of 6,000,000 shares of common stock
that were issued to replace options previously issued to executives in 2021, 2022 and 2023.