UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K




x
            ANNUAL REPORT PURSUANT TO SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934




For the Fiscal Year Ended December 31,
2009




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the transition period from
__________________




Commission file number
0-13117




HEALTHWAREHOUSE.COM,
INC.


(Exact name of registrant as specified
in its charter)





Delaware
            22-2413505(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)100
      Commerce Boulevard, Cincinnati, Ohio
            45140(Address
      of principal executive offices)
            (Zip
      Code)




Registrant’s telephone number,
including area code:(513)
618-0911




Securities registered pursuant to
Section 12(b) of the Act:





Title
      of Class
            Name
      of each exchange on which registeredNone
            None





Securities
registered pursuant to Section 12(g) of the Act:




Common
Stock, $.001 par value


(Title of
Class)







Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.               o
 Yes     x  No




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.            o
 Yes     x  No




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.    Yes x  No  ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  o









Indicate by check mark whether
      the registrant has submitted electronically and posted on its corporate
      Web site, if any, every Interactive Data File required to be submitted and
      posted pursuant to Rule 405 of Regulation S-T (§232.405 of
      this chapter) during the preceding 12 months (or for such shorter period
      that the registrant was required to submit and post such
      files).        o Yes    o No







Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of
the Act. (Check one):




Large
accelerated filer  o     Accelerated
filer   ̈     Non-accelerated
filer  Smaller reporting
company  x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).




Yes
 ̈  No
x




The
aggregate market value of voting and nonvoting stock held by non-affiliates,
based on the closing price of the Common Stock, par value $0.001 (the “Common
Stock”) on June 30, 2009 of $0.165, as reported on the OTC Bulletin Board was
$11,236,247. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for any other
purpose.




There
were 197,965,731 shares of Common Stock outstanding as of April 7,
2010.






DOCUMENTS
INCORPORATED BY
REFERENCE:                                                                                                           None




2




Information
Regarding Forward-Looking Statements




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 projections include, but are not limited to, for example:




·
            adverse
      economic conditions;




·
            inability
      to raise sufficient additional capital to operate our
      business;




·
            unexpected
      costs, lower than expected sales and revenues, and operating
      deficits;




·
            adverse
      results of any legal proceedings;




·
            the
      volatility of our operating results and financial
    condition;




·
            inability
      to attract or retain qualified senior management personnel;
      and




·
            other
      specific risks that may be referred to in this
  report.







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.  We disclose important factors that
could cause our actual results to differ materially from our expectations under
“Risk Factors” and elsewhere in this report.  These cautionary
statements qualify all forward-looking statements attributable to us or persons
acting on our behalf.





Information
regarding market and industry statistics contained in this report is included
based on information available to us that we believe is accurate. It is
generally based on academic and other publications that are not produced for
purposes of securities reports or economic analysis.  Forecasts and
other forward-looking information obtained from these sources are subject to the
same qualifications and the additional uncertainties accompanying any estimates
of future market size, revenue and market acceptance of products and services.
We have no obligation to update forward-looking information to reflect actual
results or changes in assumptions or other factors that could affect those
statements. See “Risk
Factors” for a more detailed discussion of risks and uncertainties that may have
an impact on our future results.





3




PART
I





Item 1: Business.





Overview





We are a
U.S. licensed virtual retail pharmacy and healthcare e-commerce company that
sells discounted brand name and generic prescription drugs and over-the-counter
(OTC) medical products. Our web address is http://www.healthwarehouse.com. At
present, we sell:




·
            a
      range of prescription drugs (we are licensed as a mail-order pharmacy for
      sales to 45 states and the District of
  Columbia);




·
            diabetic
      supplies including glucometers, lancets, syringes and test
      strips;




·
            OTC
      medications covering a range of conditions from allergy and sinus to pain
      and fever to smoking cessation
aids;




·
            home
      medical supplies including incontinence supplies, first aid kits and
      mobility aids; and




·
            diet
      and nutritional products including supplements, weight loss aids, and
      vitamins and minerals.




Our
objective is to make the pharmaceutical supply chain more efficient by
eliminating costs and passing on the savings to the consumer.  We are
becoming known by consumers as a convenient, reliable, discount provider of
over-the-counter and prescription medications and products. We intend to
continue to expand our product line as our business grows. We are presently
licensed as a mail-order pharmacy for sales to 45 states and the District of
Columbia, and we intend to apply for and obtain licenses to sell prescriptions
in all 50 states by June 30, 2010.




We have
begun accepting health insurance as part of our prescription program, initially
contracting with a limited number of insurance providers based on customer
demand and business opportunity. Our customers tend to be under- or uninsured
consumers who rely on our service for their daily medications.  In
addition, due to the savings we pass on to the consumer, our prices are often
below insurance co-pay, making insurance unnecessary when purchasing from us. We
intend to continue expanding the number of health insurance providers we accept
as customer demand warrants.




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, version 1 of the
http://www.healthwarehouse.com website was successfully launched running on our
own proprietary software.




In March
2008, as part of our expansion into prescription drugs, we completed
construction of a full service pharmacy within our warehouse in Cincinnati,
Ohio. The pharmacy includes a machine which counts and packages
prescriptions.  This machine can fill up to 1,200 prescriptions per
day. Our pharmacy passed inspection by the Ohio State Pharmacy Board in April
2008.




4




Our
growth strategy includes:




·
            aggressively
      marketing our website to customers both online and
  offline,




·
            expanding
      and hiring key personnel, and




·
            continuing
      to develop our proprietary software and
  technology.




Corporate
Information and History




On May
14, 2009, we completed a share exchange transaction (the “Exchange”) with
Clacendix, Inc. (“Clacendix”) pursuant to the terms of a Securities Exchange
Agreement.  Under the Securities Exchange Agreement, we acquired all
the outstanding capital stock of Old HW.  The consideration issued in
the Exchange was determined as a result of arm’s-length negotiations between the
parties.




As a
result of the Exchange, Old HW became our subsidiary, with Old HW’s former
stockholders acquiring 155,194,563 shares, or approximately 82.4% of the then
outstanding shares of our common stock.  This transaction was
accounted for as a reverse recapitalization, whereby old HW is deemed to be the
accounting acquirer for accounting purposes.  Following the closing of
the Exchange, the business of Hwareh.com continues as our sole line of business.
Effective August 5, 2009, we changed our corporate name to HealthWarehouse.com,
Inc. simultaneously, with our name change, we changed the corporate name of our
subsidiary to Hwareh.com, Inc.  In connection with the name change, we
also obtained a new ticker symbol for quotation on the OTC Bulletin Board (OTC
BB), which is “HEWA.OB.”




As part
of the closing of the Exchange, we assumed Old HW’s rights and obligations under
Old HW convertible promissory notes with a principal value of $1,200,000 and Old
HW warrants to purchase common stock.  The Old HW convertible
promissory notes and the Old HW warrants relate to Old HW’s private placement in
April and May 2009, under which Old HW completed a private placement to 18
investors of convertible promissory notes, for gross proceeds of
$1,200,000.  The convertible promissory notes are convertible into
15,855,227 shares of our common stock at a conversion price of $0.0756848 per
share.  During our fourth quarter ended December 31, 2009, holders of
convertible notes in an aggregate principal amount of $575,000 elected to
voluntarily convert their notes, and received a total of approximately 7,597,000
shares of our common stock in exchange.  As part of the private
placement, Old HW issued warrants expiring on May 31, 2009, June 30, 2009 and
December 31, 2009 to purchase up to a maximum of 927,833, 3,570,182 and
3,570,182 shares, respectively, of our common stock (or an aggregate of
8,068,197 shares of our common stock) at an exercise price of $0.0010778,
$0.0560196 and $0.0560196 per share, respectively.  Of those Old HW
warrants, the warrant to purchase 927,833 shares of our common stock has been
exercised, and the two warrants to purchase up to 3,570,182 shares of our common
stock expired without being exercised.




Prior to
the share exchange, Clacendix’s predecessor company was formed as a New Jersey
corporation in 1982 as MicroFrame, Inc. In March 1999 MicroFrame, Inc. was
reincorporated in the State of Delaware and in the process changed its name to
ION Networks, Inc.   In December 2007, ION sold substantially all
of its operating assets to Cryptek, Inc., a Delaware
corporation.  Pursuant to the Cryptek sale, ION changed its name to
Clacendix, Inc.  Following the date of the Cryptek sale and until the
closing of our share exchange transaction with Old HW, Clacendix existed as a
shell company with no operations that was seeking a target company with which to
merge or to complete a business combination.




5




Our
Business Model




We break
down our business model into three components: commerce, content and
community.  We seek to build traffic and sales by focusing on these
components.  We expect that the combination of these three components
of our business model will result in proprietary data that can be stripped of
personal information for privacy concerns, and then used to help marketers
target advertisers.




The
commerce aspect of our business model involves sourcing products at the lowest
possible prices, or manufacturing the products ourselves in FDA-approved
facilities, and selling them direct to the consumer.  Our aim is to
collapse the current healthcare channel, which typically involves three layers
of intermediate costs before reaching the consumer, to one which goes straight
from the manufacturer to the consumer.




Current
      Healthcare Distribution Model
            Our
      Distribution
              ModelManufacturer
              ‚
            Manufacturer
              ‚Wholesaler
            ‚‚
            ‚Distributor
            HealthWarehouse.com‚
            ‚Pharmacy
            ‚‚
            ‚Consumer
            Consumer





We have
found that consumers will volunteer information where drug prices are the
cheapest.  Accordingly, we market our prescription and OTC drugs at
what we believe are some of the lowest prices available through the Internet in
order to gain customers.  This is possible because typically we source
them at the wholesale level from the manufacturer, eliminating layers of cost in
the healthcare channel.





The
content aspect of our business model is a means by which we plan to generate
traffic and interest in our website.  We intend to purchase side
effect and drug interaction data for over 115,000 drugs from a content provider
to build out our content library.  We believe that consumers’ search
for relevant information will generate traffic and search engine optimization
opportunities for us.





In
addition to purchasing content, we intend to augment this information base by
building applications to enhance the purchased content value to consumers. We
envision that consumers will be able to write their own content on drugs
(personal experiences, etc.) and we will consider creating an application
programming interface (API) that will allow that data to be shared with other
websites and developers.  As consumers recognize the value of these
applications, it is our belief that they will have a beneficial impact on
driving traffic to our product sales site and will increase sales.




6




Our
Online Pharmacy




We
operate a full-service mail-order pharmacy within our warehouse in Cincinnati,
Ohio.  The pharmacy includes a machine which counts and packages
prescriptions that can fill up to 1,200 prescriptions per day.  Our
pharmacy passed inspection by the Ohio State Pharmacy Board and we are presently
licensed as a mail-order pharmacy for sales to 45 states and the District of
Columbia, and we intend to apply for and obtain licenses to sell prescriptions
in all 50 states by June 30, 2010.  We have also begun accepting
health insurance as part of our prescription program, initially contracting with
insurance providers based on customer demand and business
opportunity.




Our
online pharmacy offers the following advantages:




·
            Legitimacy.  We
      have obtained certifications to separate ourselves from the many
      uncertified “rogue” pharmacies which exist. Our Pharmacy Checker ID
      certification allows us to advertise prescription drugs on Google,
      Microsoft and Yahoo. In addition, we have applied for Verified Internet
      Pharmacy Practice Sites (VIPPS) accreditation from the National
      Association of Boards of Pharmacy.




·
            Convenience.  Our
      online store is available to consumers 24 hours a day, seven days a week
      through the Internet.  All of our products are also available
      for purchase by phone. We offer additional convenience to our customers
      through an easy-to-use website, robust search technology, and a variety of
      features such as multiple checkout options including Google
      Checkout.




·
            Selection.  Due
      to our online structure, we are able to offer a significantly broader
      assortment of products, with greater depth in each product category,
      because we do not have the shelf display space limitations of
      brick-and-mortar drugstores.




·
            Information.  We
      provide a broad array of interactive tools and information on our website
      to help consumers make informed purchasing decisions. Our information
      services include detailed product information pages, product user manuals
      and brochures, links to manufacturer websites, detailed product
      descriptions which contain the manufacturer’s phone number, and customer
      reviews.  Our customer care representatives are available by
      phone or email to provide personal guidance and answer customers’
      questions.




·
            Privacy.  When
      shopping at a brick-and-mortar drugstore, many consumers may feel
      embarrassed or uncomfortable about buying items or asking questions that
      may reveal personally sensitive aspects of their health or lifestyle to
      pharmacists, store personnel, or other shoppers.  Our customers
      avoid these problems by shopping from the privacy of their home or
      office.




7




·
            Value.  Our
      goal is to offer shoppers a broad assortment of generic drugs and health
      products with competitive pricing.  We strive to improve our
      operating efficiencies and to leverage our fixed costs so that we can pass
      along the savings to our customers in the form of lower prices and
      exclusive deals.  Since we have drugs manufactured specifically
      for us or source them direct from the manufacturer at the wholesale level,
      we believe that we have lower costs than traditional pharmacies which
      allows us to provide consumers with the better values.  We also
      strive to inform customers of additional cost-saving opportunities when
      they become available.  For example, we show the generic
      equivalents of all brand name
products.




·
            Customer
      Service.  Our focus has been on customer service and we
      endeavor to lead the industry in our policies and
      procedures.  We currently offer a satisfaction guarantee with
      what we believe is an industry-leading 90-day return policy with no
      restocking fees, and 100% free standard shipping on all orders. As of
      March 23, 2010, our positive customer satisfaction lifetime rating on
      Amazon.com was 99%.




Our
customer support representatives operate from our call center in Cincinnati,
Ohio.  Our customer support specialists are available 9 a.m. to 5 p.m.
Eastern Standard Time, Monday through Friday, via e-mail, fax or telephone to
handle customer inquiries and assist customers in finding desired
products.  Our online Help Center outlines store policies and provides
answers to customers’ frequently asked questions.




We ship
our OTC products to all 50 states, the U.S. Territories, and APO/FPO military
and embassy addresses. We process all orders from our primary distribution
center in Cincinnati, Ohio. We based our logistics operation there to maintain
proximity to UPS, located 90 miles away in Louisville, Kentucky, and FedEx,
located in Memphis, Tennessee.  Processing from this location allows
us to reach 80% of the U.S. population by standard ground shipping in two
days.  In order to try to maintain high customer satisfaction ratings
and quality control over the process, we do not drop ship 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.






Marketing
and Sales




Our
marketing strategy aims to build brand recognition, increase customer traffic to
our online store, add new customers, build strong customer loyalty, maximize
repeat purchases and develop incremental revenue opportunities.  It is
centered on Internet-based advertising.




Our
online advertising campaigns focus on the following areas:




·
            Search Engines: Google,
      MSN and Yahoo;




·
            Price Comparison
      Engines: Become, Google Product Search, NexTag, PriceGrabber.com,
      Pronto, Shopping.com, Shopzilla, Smarter and Yahoo Shopping;
      and




·
            Social Networking:
      Facebook, MySpace and Twitter.




8




To date,
our online advertising has proven to be an effective sales strategy for our
business.  Apart from any personnel involved with our online
advertising campaigns, we do not have a dedicated sales force.




Suppliers




There are
a number of suppliers available for the pharmaceutical and non-pharmaceutical
products that we sell. Our principal suppliers are Masters Pharmaceutical, Inc.,
from which we source the majority of our supplies, and Allison Medical, Inc.,
The Harvard Drug Group, LLC, Masters Healthcare, LLC and Prescription Supply,
Inc. While we source our supplies from a limited number of suppliers, we do not
believe that our business is dependent on any one supplier since the products
that we sell are readily available from a number of alternative
suppliers.  If a supplier, even if a significant supplier such as
Masters Pharmaceutical, were to no longer be available to us, we believe that we
could source replacement product through one or more alternative
suppliers.




Customers




We sell
directly to the individual consumers of the pharmaceutical and
non-pharmaceutical products that we sell.  Accordingly, we are not
dependent on any one or any few major customers.




Seasonality




Historically,
the largest amount of our net sales occurs during our fourth
quarter.  As a result, we sometimes experience an increase in our
shipping cost due to complimentary upgrades, split-shipments, and additional
long-zone shipments necessary to ensure timely delivery during this time of
year.




Competition




The
market for prescription and OTC health products is intensely competitive and
highly fragmented.  Our competitors in the segment include chain
drugstores, mail order pharmacies, mass market retailers, warehouse clubs and
supermarkets. Many of these potential competitors in the market are also
established organizations with greater access to resources and capital than we
have. 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 segments include
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), and reliability and speed of order
shipment.




9




Intellectual
Property and Technology




We filed
for a trademark on the name “HealthWarehouse.com” on August 14, 2007 with the
Patent and Trade 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.




We have
implemented a broad array of services and systems for website management,
product searching, customer interaction, transaction processing, and order
fulfillment functions. These services and systems use a combination of our own
proprietary technologies, open-source technologies and commercially-available,
licensed technologies.




We focus
our internal development efforts on creating and enhancing the specialized,
proprietary software that is unique to our business.  For example, our
core merchandise catalog, as well as our customer interaction, order collection,
fulfillment and back-end systems are proprietary to us. Our systems are designed
to provide real-time connectivity to our distribution center systems for both
pharmacy and OTC products. They include an inventory tracking system, a
real-time order tracking system, an executive information system and an
inventory replenishment system.




Our
website at http://www.healthwarehouse.com is hosted on the Amazon EC2 platform
due to the platform’s perceived cost effectiveness and scalability. EC2 allows
us to pay only for bandwidth used. In addition, due to Amazon’s lengthy
experience at running servers capable of serving one of the largest commerce
sites on the web, our site remains scalable on days where our traffic
spikes.




Our
website was developed using 100% open source code. We use a 100% open source
platform which runs on Linux, Apache, MySQL and PHP (LAMP).




In
addition, we have utilized open source software from other vendors to speed up
our development time. For management of our content and commerce catalog, we
utilize Magento, an open source e-commerce platform.  For our
reporting and tools, we utilize Google Analytics. Our checkout process has two
options including Google Checkout for OTC orders and our own proprietary
checkout for OTC and prescription orders which uses Authorize.net.






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 Ohio State Pharmacy Board and we are presently licensed as a mail-order
pharmacy for sales to 45 states and the District of Columbia, and we intend to
apply for and obtain licenses to sell prescriptions in all 50 states by June 30,
2010. We ship our non-prescription products to all 50 states, the U.S.
Territories, and APO/FPO military and embassy addresses.




We
believe we are in substantial compliance with all existing legal and regulatory
requirements material to the operation of our business.  We have
standard operating procedures and controls 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
we 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.




10




In
addition, we 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.




Among the
federal and state laws and regulations that currently affect or may reasonably
affect in the future aspects of our business are the following:




Regulation of Our Pharmacy
Operations.




The
practice of pharmacy is generally regulated at the state level by state boards
of pharmacy. Our pharmacy must be licensed in the state in which it is located.
In some states, regulations require compliance with standards promulgated by the
United States Pharmacopeia (USP).  The USP creates standards in the
packaging, storage and shipping of pharmaceuticals.  Also, many of the
states where we deliver pharmaceuticals, including controlled substances, have
laws and regulations that require out-of-state mail-order 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, and we may be
subject to this legislation if it is 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. Currently, we
do not sell any controlled substances and therefore do not require a 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 mail-order 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.




11




“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 official Pharmacopeia of the United States, 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 when
selling dietary supplements and vitamins.




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.




Drug
Importation




In the
face of escalating costs for plan sponsors providing a prescription drug benefit
for their employees, and uninsured individuals seeking to lower their drug
costs, the issue of importing drugs from Canada or other foreign countries has
received significant attention. Drug importation, sometimes called drug
re-importation, occurs when prescription medicines from other countries are
imported for personal use or commercial distribution. Individual importation
activities are generally prohibited under U.S. law, and the FDA has issued
warnings and safety alerts to a number of entities seeking to promote or
facilitate systematic importation activities.  However, there has been
considerable legislative and political activity seeking to change the FDA
requirements to enable drug importation, and we are evaluating appropriate
actions if such legislation were to be enacted.






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 tried to
structure our website and our business to avoid violation of state licensing
requirements.  However, the application of this area of the law to
Internet 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.




12




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 payors.  Our pharmacy operations are covered entities, which
are directly subject to these requirements.  Additionally, regulation
of the use of patient-identifiable information is likely to increase. Congress
is currently reviewing proposals that would alter HIPAA, which would create
additional administrative burdens. Many states have passed or are considering
laws addressing the use and disclosure of health information. These proposals
vary widely, some relating to only certain types of information, others to only
certain uses, and yet others to only certain types of entities.  These
laws and regulations have a significant impact on our operations, products and
services, and compliance with them is a major operational
requirement.  Regulations and legislation that severely restrict or
prohibit our use of patient identifiable information could materially adversely
affect our business.




Sanctions
for failing to comply with HIPAA standards include criminal and civil penalties.
If we are found to have violated any state or federal statute or regulation with
regard to the confidentiality, dissemination or use of patient medical
information, we could be liable for significant damages, fines or
penalties.






Fraudulent
Billing, Anti-Kickback, Stark, Civil Monetary Penalties and False Claims Laws
and Regulations




Our
operations may in the future participate in federal and state programs such as
Medicare and Medicaid. If we do, we would be subject to extensive government
regulation including numerous state and federal laws and corresponding
regulations directed at preventing fraud and abuse and regulating reimbursement.
The government’s Medicare and Medicaid regulations are complex and sometimes
subjective and therefore may require our management’s interpretation. If we were
to participate in federal and state programs such as Medicare and Medicaid, our
compliance with Medicare and Medicaid regulations may be reviewed by federal or
state agencies, including the Department of Health and Human Services’ (HHS)
Office of the Inspector General (OIG), the Centers for Medicare and Medicaid
Services (CMS), the Department of Justice (DOJ), and the FDA. To ensure
compliance with Medicare, Medicaid and other regulations, government agencies
conduct periodic audits to ensure compliance with various supplier standards and
billing requirements. Similarly, regional health insurance carriers routinely
conduct audits and request patient records and other documents to support claims
submitted for payment.




13




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 not covered by federal healthcare programs.
Anti-kickback laws vary between states, and courts have rarely interpreted
them.




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 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’s law violations or
violations of the False Claims Act include criminal or civil penalties. If we do
participate in federal payor programs 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




14




Recently,
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 currently conducting, and the House Commerce Committee has conducted,
an investigation into the use of AWP for federal program reimbursement, and
whether the use of AWP has inflated drug expenditures by the Medicare and
Medicaid programs. Federal and state proposals have sought to change the basis
for calculating reimbursement of certain drugs by the Medicare and Medicaid
programs.




The DRA
revised the formula used by the federal government to set the Federal Upper
Limit (FUL) for multiple source drugs by adopting 250 percent of the average
manufacturer’s price (AMP) without regard to customary prompt pay discounts to
wholesalers for the least costly therapeutic equivalent. On July 17, 2006, HHS
published a Final Rule for the Medicaid Prescription Drug Program implementing
the DRA in which AMP was defined to exclude discounts and rebates to pharmacy
benefit managers and include sales to mail-order and specialty pharmacies in the
AMP calculation by manufacturers.




These
proposals and other legislative or regulatory adjustments that may be made to
the program for reimbursement of drugs by Medicare and Medicaid, if implemented,
could affect our ability to negotiate discounts with pharmaceutical
manufacturers. They could also impact the reimbursement we may receive from
government payors in the future. 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 payors 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.




15




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.




Industry
Standards for Pharmacy Operations




The
National Committee on Quality Assurance, the American Accreditation Health Care
Commission (known as URAC), the Joint Commission on Accreditation of Healthcare
Organizations and other quasi-regulatory and accrediting bodies have developed
standards relating to services performed by pharmacies, including mail order,
formulary, drug utilization management and specialty pharmacy. While the actions
of these bodies do not have the force of law, pharmacy benefit managers and many
clients for pharmacy benefit manager services seek certification from them, as
do other third parties. These bodies may influence the federal government or
states to adopt requirements or model acts that they promulgate. The federal
government and some states incorporate accreditation standards of these bodies,
as well as the standards of the National Association of Insurance Commissioners
and the National Association of Boards of Pharmacy, a coalition of state
pharmacy boards, into their drug utilization review regulation. Future
initiatives of these bodies are uncertain, and resulting standards or
legislation could impose restrictions on us in a manner that could significantly
impact our business.




The
National Association of Boards of Pharmacy has also developed a program, the
Verified Internet Pharmacy Practice Sites, as a model for self-regulation for
online pharmacies. We intend to comply with its criteria for
certification.





Employees





As of April 1, 2010, we employed 17
full-time employees and no part-time employees. None of our employees is subject
to a collective bargaining agreement and we believe that relations with our
employees are good.








Item 1A: Risk
Factors.





Risks
Relating to Our Business and Industry




We have a limited operating history,
a history of generating significant losses, and may not be able to sustain
profitability.




Old HW,
which now constitutes our principal business, was formed in March 2007 and has a
limited operating history upon which you can evaluate our business and
prospects. To date, we have not been profitable, and we may never achieve
profitability on a full-year or consistent basis. We incurred net losses of
$2,439,502 for the year ended December 31, 2009 and $667,301 for the year ended
December 31, 2008.  Although our management anticipates that we should
achieve operating cash flow breakeven during the second quarter of 2010, if our
plans or assumptions change or prove to be inaccurate, we may continue to incur
net losses in 2010, and possibly longer.  As a result, investors may
lose all or a part of their investment.




16




We may experience significant
fluctuations in our operating results and rate of growth.




Our
evolving business model and the unpredictability of our industry make it
difficult for us to forecast accurately the level or source of our revenues and
our rate of growth. Our financial projections are based on assumptions and
estimates that inherently are subject to significant business, economic,
competitive, regulatory and operational uncertainties, contingencies and risks,
many of which are beyond our control. Our projections assume the success of our
business strategy. The success of this strategy is subject to uncertainties and
contingencies beyond our control, and we cannot assure you that the strategy
will be successful or that the anticipated benefits from the strategy will be
realized in the manner or during the periods reflected in our projections or at
all. These uncertainties may result in material changes in our financial
condition and results of operations, which may differ materially from our
projections.




Our revenues and operating results
may vary significantly from quarter to quarter.




Our
revenues and operating results may vary significantly from quarter to quarter
due to a number of factors, including:




·
            our
      ability to retain and increase sales to existing customers, attract new
      customers, and satisfy our customers’
demands;




·
            the
      frequency and size of customer orders and the quantity and mix of OTC and
      prescription products our customers
purchase;




·
            changes
      in demand with respect to existing and new OTC and prescription
      products;




·
            changes
      in consumer acceptance and usage of the Internet, online services, and
      e-commerce;




·
            the
      price we charge for our OTC and prescription products and for shipping
      those products, or changes in our pricing policies or the pricing policies
      of our competitors;




·
            the
      extent to which we offer free shipping or other promotional discounts to
      our customers;




·
            our
      ability to acquire merchandise, manage inventory, and fulfill
      orders;




·
            technical
      difficulties, system downtime, or
interruptions;




·
            timing
      and costs of upgrades and developments in our systems and
      infrastructure;




·
            timing
      and costs of marketing and other
investments;




·
            disruptions
      in service by shipping carriers;




·
            the
      introduction by our competitors of new websites, products, or
      services;




·
            the
      extent of reimbursements available from third-party payors;
      and




17




·
            changes
      in government regulation.




In
addition, our operating expenses are largely based on anticipated revenue trends
and a high percentage of our expenses are fixed in the short term.  As
a result, a delay in generating or recognizing revenue for any reason could
result in substantial additional operating losses.




We face significant competition from
both traditional and online domestic pharmaceutical and medical product
retailers.




The
market segments in which we compete are rapidly evolving and intensely
competitive, and we have many competitors in different industries, including
both the retail and e-commerce services industries. These competitors include
chain drugstores, mass market retailers, warehouse clubs, supermarkets,
specialty retailers, major department stores, insurers and health care
providers, mail-order pharmacies, Internet portals and online service providers
that feature shopping services, and various online stores that offer products
within one or more of our product categories. Many of our current and potential
competitors have longer operating histories, larger customer bases, greater
brand recognition, and significantly greater financial, marketing, and other
resources than we have.  They may be able to secure merchandise from
vendors on more favorable terms, operate with a lower cost structure, adopt more
aggressive pricing policies, or devote more resources to technology development
and marketing than we do. In addition, other companies in the retail and
e-commerce service industries may enter into business combinations or alliances
that would strengthen their competitive positions and prevent them, their
affiliated companies, or their strategic partners from entering into
relationships with us. For example, our inability to enter into or maintain
relationships with major insurance companies or managed care organizations could
be a major competitive disadvantage to us.




We face competition from online
pharmacies outside the United States.




Although
it is currently illegal to re-import prescription drugs into the United States
from any foreign country, we nonetheless face competition from online pharmacies
outside the United States. A growing number of U.S. consumers seek to fill their
prescriptions through Canadian and other foreign online pharmacies, and a number
of state and local governments have set up websites directing their constituents
to Canadian pharmacies. The FDA has taken only limited action to date, and may
not take aggressive action in the future, against those who illegally re-import
prescription drugs or support or facilitate illegal
re-importation.  In the U.S. Congress, legislation allowing for
re-importation of prescription drugs by individuals for personal use has
repeatedly been introduced.  If such legislation were to be enacted,
or if consumers increasingly use foreign-based online prescription drug websites
instead of U.S.-based online pharmacies, such as ours, to fill their
prescription needs, our business and operating results could be
harmed.




We may be unable to increase the
migration of consumers of health and pharmacy products from brick-and-mortar
stores to our online solution, which would harm our revenues and prevent us from
becoming profitable.




If we do
not attract and retain higher volumes of customers to our Internet store at a
reasonable cost, we will not be able to increase our revenues or achieve
consistent profitability. Our success depends on our ability to continue to
convert a large number of customers from traditional shopping methods to online
shopping for health and pharmacy products. Specific factors that could prevent
widespread customer acceptance of our online solution include:




18




·
            delivery
      time associated with Internet orders, as compared to the immediate receipt
      of products at a brick-and-mortar
store;




·
            lack
      of consumer awareness of our
website;




·
            additional
      steps and delays in verifying prescriptions and ensuring insurance
      coverage for prescription products;




·
            non-participation
      in the networks of some insurance
carriers;




·
            regulatory
      restrictions or reform at the state and federal levels that could affect
      our ability to serve our customers;




·
            the
      general acceptance or legalization of prescription drug
      re-importation;




·
            customer
      concerns about the security of online transactions, identity theft, or the
      privacy of their personal
information;




·
            product
      damage from shipping or shipments of wrong or expired products from us or
      other vendors, resulting in a failure to establish, or loss of, customers’
      trust in buying drugstore items
online;




·
            inability
      to serve the acute care needs of customers, including emergency
      prescription drugs and other urgently needed
  products;




·
            delays
      in responses to customer inquiries;




·
            difficulties
      or delays in returning or exchanging orders;
and




·
            activity
      that diminishes a user’s online experience or subjects online shoppers to
      security risks, such as viruses, spam, spyware, phishing (spoofing e-mails
      directed at Internet users), “denial of service” attacks directed at
      Internet service providers and online businesses, and breaches of data
      security.




If our marketing efforts are not
effective at attracting and retaining customers at an acceptable cost, we will
be unable to achieve profitability.




If we do
not maintain our brand and continue to increase awareness of our Internet
shopping presence, we may not build a critical mass of customers. Promoting and
positioning our brand depends largely on the success of our marketing efforts
and our ability to provide consistent, high quality customer experiences. We
believe that, because we are a small company with low public brand awareness,
achieving significant market awareness will require significant marketing
expense. To promote our brand and our products and services, we have incurred
and expect to continue to incur substantial expense in our marketing efforts
both to attract and to retain customers. Our promotional activities may not be
effective at building our brand awareness and customer base to the extent
necessary to generate sufficient revenue to become consistently profitable.
Search engine and other online marketing initiatives comprise a substantial part
of our marketing efforts, and our success depends in part on our ability to
manage costs associated with these initiatives, or to find other channels to
acquire and retain customers cost-effectively. The demand for and cost of online
advertising has been increasing and may continue to increase.  An
inability to acquire and retain customers at a reasonable cost would increase
our operating costs and prevent us from achieving profitability.




19




Since our business is Internet-based,
we are vulnerable to system interruption and damage, which would harm our
operations and reputation.




Our
ability to receive and fulfill orders promptly and accurately is critical to our
success and largely depends on the efficient and uninterrupted operation of our
computer and communications hardware and software systems. We experience
periodic system interruptions that impair the performance of our transaction
systems or make our website inaccessible to our customers. These systems
interruptions delay us from efficiently accepting and fulfilling orders, sending
out promotional e-mails and other customer communications in a timely manner,
introducing new products and features on our website, promptly responding to
customers, or providing services to third parties.  Frequent or
persistent interruptions in our services could cause current or potential
customers to believe that our systems are unreliable, which could cause them to
avoid our website, drive them to our competitors, and harm our reputation. To
minimize future system interruptions, we need to continue to add software and
hardware and to improve our systems and network infrastructure to accommodate
increases in website traffic and sales volume, to replace aging hardware and
software, and to make up for two years of underinvestment in technology. We may
be unable to promptly and effectively upgrade and expand our systems and
integrate additional functionality into our existing systems. Any unscheduled
interruption in our services could result in fewer orders, additional operating
expenses, or reduced customer satisfaction, any of which would harm our revenues
and operating results and could delay or prevent our becoming consistently
profitable. In addition, the timing and cost of upgrades to our systems and
infrastructure may substantially affect our ability to achieve or maintain
profitability.




All of our fulfillment operations and
inventory are located in our distribution facility, and any significant
disruption of this center’s operations would hurt our ability to make timely
delivery of our products.




We
conduct all of our fulfillment operations from our distribution facility in
Cincinnati, Ohio, which houses our entire product inventory.  A
natural disaster or other catastrophic event, such as an earthquake, fire,
flood, severe storm, break-in, server or systems failure, terrorist attack, or
other comparable event at this facility, would cause interruptions or delays in
our business and loss of inventory and could render us unable to process or
fulfill customer orders in a timely manner, or at all.  Further, we
have no formal disaster recovery plan, and our business interruption insurance
may not adequately compensate us for losses that may occur.  In the
event that a significant part of this facility was destroyed or our operations
were interrupted for any extended period of time, our business, financial
condition, and operating results would be harmed.




Our operating results will be harmed
if we are unable to manage and sustain our growth.




Our
business is unproven on a large scale and actual operating margins may be less
than expected. If we are unable to scale capacity efficiently, we may fail to
achieve expected operating margins, which would have an adverse effect on our
operating results.




20




If we are unable to obtain shipments
of products from our vendors, our business and results of operations would be
harmed.




We have
significant vendors that are important to our sourcing of pharmaceutical and
non-pharmaceutical products. We do not have long-term arrangements with most of
our vendors to guarantee availability of merchandise, particular payment terms,
or extension of credit limits. If our current vendors were to stop selling
merchandise to us on acceptable terms, we may not be able to acquire merchandise
from other vendors in a timely and efficient manner and on acceptable terms, or
at all.




We have significant inventory
risk.




We must
maintain sufficient inventory levels to operate our business successfully and to
meet our customers’ expectations that we will have the products they order in
stock. However, we must also guard against the risk of accumulating excess
inventory.  We are exposed to significant inventory risk as a result
of rapid changes in product cycles, changes in consumer tastes, uncertainty of
success of product launches, seasonality, manufacturer backorders, and other
vendor-related problems. In order to be successful, we must accurately predict
these trends and events, which we may be unable to do, and avoid over- or
under-stocking products. In addition, demand for products can change
significantly between the time product inventory is ordered and the time it is
available for sale. When we begin selling a new product, it is particularly
difficult to forecast product demand accurately. A failure to optimize inventory
would increase our expenses if we have too much inventory, and would harm our
margins by requiring us to make split shipments for backordered items or pay for
expedited delivery from the manufacturer if we had insufficient inventory. In
addition, we may be unable to obtain certain products for sale on our website as
a result of general shortages (for example, in the case of some prescription
drugs), manufacturer policies (for example, in the case of some contact lenses
and prestige beauty items), manufacturer or distributor problems, or popular
demand. Failure to have inventory in stock when a customer orders it could cause
us to lose that order or that customer. The acquisition of some types of
inventory, or inventory from some of our sources, may require significant lead
time or prepayment, and this inventory may not be returnable. We carry a broad
selection of products and significant inventory levels of a substantial number
of products, and we may be unable to sell this inventory in sufficient
quantities or during the relevant selling seasons.  The occurrence of
one or more of these inventory risks may adversely affect our business and
operating results.




If we make an error in filling or
packaging the prescription drugs that we sell, we would be subject to liability
and negative publicity.




Errors
relating to prescriptions, dosage, and other aspects of the prescription
medication could result in liability for us that our insurance may not cover.
Because we distribute pharmaceutical products directly to the consumer, we are
one of the most visible participants in the distribution chain and therefore
have increased exposure to liability claims. Our pharmacists are required by law
to offer counseling, without additional charge, to our customers about
medication, dosage, delivery systems, common side effects, and other information
deemed significant by the pharmacists. Our pharmacists may have a duty to warn
customers regarding any potential adverse effects of a prescription drug if the
warning could reduce or negate those effects. This counseling is in part
accomplished through e-mails to our customers and inserts included with the
prescription, which may increase the risk of miscommunication because the
customer is not personally present to receive the counseling or advice or may
not have provided us with all relevant information. Although we also post
product information on our website, customers may not read this information.
Providing information on pharmaceutical and other products creates the potential
for claims to be made against us for negligence, personal injury, wrongful
death, product liability, malpractice, invasion of privacy, or other legal
theories based on our product or service offerings. Our general liability and
business owners liability insurance may not cover potential claims of this type
or may not be adequate to protect us from all liabilities that may be imposed if
any such claims were to be successful. In addition, errors by either us or our
competitors may also produce significant adverse publicity either for us or for
the online pharmacy industry in general, which could result in an immediate
reduction in the amount of orders we receive and would harm our ability to
conduct and sustain our business.




21




Security breaches would damage our
reputation, expose us to liability and otherwise harm our
business.




Our
security measures may not prevent security breaches that could harm our
business. To succeed, we must provide a secure transmission of confidential
information over the Internet and protect the confidential customer and patient
information we retain, such as credit card numbers and prescription records. A
third party who compromises or breaches the physical and electronic security
measures we use to protect transaction data and customer records could
misappropriate proprietary information, cause interruptions in our operations,
damage our computers or those of our customers, or otherwise harm our business.
Any of these would harm our reputation and expose us to a risk of loss or
litigation and possible liability. We may need to expend significant resources
to protect against security breaches or to address problems caused by
breaches.




We may be unable to obtain the
additional financing we need in the future to sustain our operations or support
our growth. Accordingly,
the report from our independent registered public accounting firm included in
the accompanying financial statements is contains an explanatory paragraph that
expresses substantial doubt about our ability to continue as a going
concern.




Based upon projected
operating expenses, the Company believes that its working capital as of
December 31, 2009 may not be sufficient to fund its plan of operations for the
next twelve months.  The Company anticipates that it will need to
raise additional capital in order to meet operations and execute its business
plans.  Management has indicated that the Company is in discussions
with certain parties regarding various financing opportunities including selling
additional capital stock and/or entering into debt
facilities.  However, the Company does not know at this time whether
any such transactions between the Company and any third party, will be
consummated and, if consummated, when it might occur, or if the terms would be
acceptable to us.  In addition, the SEC’s penny-stock rules may
further impact the Company’s ability to obtain debt and or equity financing.If
the Company cannot raise sufficient funds on acceptable terms, it may have to
curtail its level of expenditures and scope of operations.


These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. Accordingly, the accompanying consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America, which contemplate 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 financial statements do not necessarily purport to
represent realizable or settlement values. The accompanying financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.




22




Management
has indicated that the Company is taking certain steps to improve its operations
and cash flows, including the re-launch of its corporate website, improved
inventory management and an increase in the number of suppliers.  The
enhanced website’s functionality is providing a greatly improved total customer
experience, our conversion rate has improved, which we believe will translate
into significant growth of both our OTC product and prescription sales. In
addition, the launching of our first direct partnership with a health care
provider began in January of 2010 and as anticipated has begun to provide
increasing revenues.





In
addition, our cash needs to fund the anticipated growth should be mitigated
somewhat since we are often able to source items in 24 hours, thereby reducing
the amount of required inventory on-hand.  Furthermore, our customers
usually purchase their products with an upfront credit card payment, and we
typically have terms of up to 30 days with our suppliers.  With our
anticipated growth in revenues, we expect that our cash flow from operating
activities will be a growing source of funds for us. We have increased our
number of suppliers, increasing competition, lowering our product acquisition
costs along with an increase in our prescription business is having a positive
impact on gross margin due to increased competition.






Expanding the breadth and depth of
our product offerings is expensive and difficult, and we may receive no benefit
from our expansion.




We intend
to continue to expand the breadth and depth of our prescription and OTC product
offerings by promoting new or complementary products or sales formats. Expansion
of our offerings in this manner could require significant additional
expenditures and could strain our management, financial, and operational
resources. For example, we may need to incur significant marketing expenses,
develop relationships with new fulfillment partners or manufacturers, or comply
with new regulations. We may be unable to expand our product offerings or sales
formats in a cost-effective or timely manner, and any new offerings or formats
may not generate satisfactory revenues to offset the costs involved.
Furthermore, any new product offering or sales format that is not favorably
received by consumers could damage the reputation of our brand. A lack of market
acceptance of our efforts or our inability to generate sufficient revenues to
offset the cost of expanded offerings would harm our business.




We face uncertainty related to
pharmaceutical costs and pricing, which could affect our revenues and
profitability.




Sales of
our pharmacy products depend in part on the availability of reimbursement from
third-party payors such as government health administration authorities, private
health insurers, managed care organizations, pharmacy benefit managers and other
organizations. These organizations are increasingly challenging the price and
cost-effectiveness of medical products and services. The efforts of third-party
payers to contain costs often place downward pressures on profitability from
sales of prescription drugs. In addition, our products or services may not be
considered cost-effective, and adequate third-party reimbursement may not be
available to enable us to maintain price levels sufficient to realize a profit.
Our revenues from prescription drug sales may also be affected by health care
reform initiatives of federal and state governments, including proposals
designed to address other government programs, prescription drug discount card
programs, changes in programs providing for reimbursement for the cost of
prescription drugs by third-party payers, and regulatory changes related to the
approval process for prescription drugs. These initiatives could lead to the
enactment of additional federal and state regulations that may adversely affect
our prescription drug pricing, sales and profitability.




23




The implementation of the Medicare
Part D prescription drug benefit has and will likely continue to adversely
affect drug pricing, which decreases our profitability.




In 2006,
the Medicare Part D prescription drug benefit under the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 (“DIMA”) became effective. The
Medicare Part D prescription drug benefit has negatively affected, and is likely
to continue to have a negative impact on, our business. Medicare Part D
prescription drug coverage will likely increase the number of senior citizens
with prescription drug coverage and reduce the number of customers who pay for
their prescription drugs themselves. Customers who choose to obtain coverage
under a Medicare Part D plan will likely purchase fewer drugs, or no longer
purchase drugs, from us. Because we are not currently processing claims for
Medicare Part D, we will be able to serve Medicare D customers only when those
customers elect to purchase outside of their Medicare Part D plan and purchase
their prescriptions out-of-pocket, such as when the particular medication is not
covered by the customer’s Medicare plans or when the customer’s purchase is not
covered because of a deductible, co-payment, or other exclusion. Moreover, the
DIMA calls for significant changes to the formulas the Medicare program uses to
calculate its payments for prescription drugs, as well as introduction of
managed care elements and changes to the administration of the drug benefit
program. When fully implemented, these changes could exert downward pressure on
prescription drug prices and payments by the government, even as the number of
people who use the Medicare benefits to pay for prescription drugs increases.
All of these factors could adversely affect our drug prices and dispensing fees,
and ultimately could reduce our profit margins.




If we are unable to obtain insurance
reimbursement coverage for our customers, our ability to sell pharmacy products
online could decrease, which would harm our revenues.




To obtain
reimbursement on behalf of our customers for the prescription products that they
purchase on our website, we must maintain relationships with insurance
companies, managed health organizations, and pharmacy benefit managers. Many of
our planned direct agreements with insurance companies, pharmacy benefit
managers and third-party benefits companies are short-term, may be terminated
with less than 30 days’ prior notice, and are subject to unilateral amendment by
the other party. If we are unable to establish, maintain, and leverage our
direct relationships with insurers, pharmacy benefit managers and third-party
benefit companies, and if these relationships do not extend to cover the
prescriptions we process, our ability to obtain reimbursement coverage for our
customers would be reduced. This would reduce the number of customers that fill
prescriptions through our website, which would harm our business, financial
condition, and results of operations.




Government regulation of our business
is extensive, and our failure to comply fully with regulations could result in
civil and criminal penalties for us.




Our
business is subject to extensive federal, state and local
regulations.  For example:




24




·
            entities
      engaging in the practice of pharmacy are subject to numerous federal and
      state regulatory requirements, including those relating to pharmacy
      licensing and registration, the dispensing of prescription drugs, pharmacy
      record keeping and reporting, and the confidentiality, security, storage,
      and release of patient records; and




·
            the
      sale, advertisement, and promotion of, among other things, prescription,
      OTC and homeopathic medications, dietary supplements, medical devices,
      cosmetics, foods, and other consumer products that we sell are subject to
      regulation by the FDA, the FTC, the Consumer Product Safety Commission,
      and state regulatory authorities, as the case may
  be.




As we
expand our product offerings and more non-pharmaceutical products become subject
to FDA, FTC and other regulation, more of our products will likely be subject to
regulation. In addition, regulatory requirements to which our business is
subject may expand over time, and some of these requirements may have a
disproportionately negative effect on Internet pharmacies.  For
example, the federal government and a majority of states now regulate the retail
sale of OTC products containing pseudoephedrine that might be used as precursors
in the manufacture of illegal drugs. As a result, we are currently unable to
sell these products to customers residing in states that require retailers to
obtain a physical form of identification or maintain a signature log. Some
members of Congress have proposed additional regulation of Internet pharmacies
in an effort to combat the illegal sale of prescription drugs over the Internet,
and state legislatures could add or amend legislation related to the regulation
of nonresident pharmacies. In addition to regulating the claims made for
specific types of products, the FDA and the FTC may attempt to regulate the
format and content of websites that offer products to consumers. The laws and
regulations applicable to our business often require subjective interpretation,
and we cannot be certain that our efforts to comply with these regulations will
be deemed sufficient by the appropriate regulatory agencies. Violations of any
regulations could result in various civil and criminal penalties, including
suspension or revocation of our licenses or registrations, seizure of our
inventory, or monetary fines, any of which could harm our business, financial
condition, or operating results. Compliance with new laws or regulations could
increase our expenses or lead to delays as we adjust our website and
operations.




Increasing concern about privacy,
spam, and the use and security of customer information could restrict our
marketing efforts and harm our business.




Internet
retailers are also subject to increasing regulation and scrutiny relating to
privacy, spam, and the use and security of personal user information. These
regulations, along with increased governmental or private enforcement (for
example, by Internet service providers), may increase the cost of growing our
business. Current and proposed regulations and enforcement efforts may restrict
our ability to collect and use demographic and personal information from users
and send promotional e-mails, which could be costly or harm our marketing
efforts. For example, if one or more Internet service providers were to block
our promotional e-mails to customers, our ability to generate orders and revenue
could be harmed. Further, any violation of privacy, anti-spam, or data
protection laws or regulations may subject us to fines, penalties, and damages
and may otherwise have a material adverse effect on our business, results of
operations, and financial condition.




If people or property is harmed by
the products we sell, product liability claims could damage our business and
reputation.




25




Some of
the products we sell may expose us to product liability claims relating to
personal injury, death, or property damage caused by these products and may
require us to take actions such as product recalls. Any such product liability
claim or product recall may result in adverse publicity regarding us and the
products we sell, which may harm our reputation. If we are found liable under
product liability claims, we could be required to pay substantial monetary
damages. Further, even if we successfully defend ourselves against this type of
claim, we could be forced to spend a substantial amount of money in litigation
expenses, our management could be required to spend valuable time in the defense
against these claims, and our reputation could suffer, any of which could harm
our business. Our current vendors do not, and future vendors may not, indemnify
us against product liability. Further, our liability insurance may not be
adequate to protect us from all liability that may be imposed as a result of
these claims, and we cannot be certain that insurance will continue to be
available to us on economically reasonable terms, or at all. Any imposition of
product liability that is not covered by vendor indemnification or our insurance
could harm our business, financial condition, and operating
results.  We do not have vendor indemnification clauses with our
current vendors.




If we are required to collect sales
and use taxes on the products we sell in additional jurisdictions, we may be
subject to liability for past sales and our future sales may
decrease.




In
accordance with current industry practice, historically we have not collected
sales and use taxes or other taxes with respect to shipments of goods into
states other than Ohio and Nevada. The operation of our distribution center, the
operations of any future distribution centers and other aspects of our evolving
business, however, may result in additional sales and use tax collection
obligations.  In addition, one or more other states may successfully
assert that we should collect sales and use or other taxes on the sale of our
products in that state. One or more states or the federal government may seek,
either through unilateral action or through federal legislation, to impose sales
or other tax collection obligations on out-of-jurisdiction companies that engage
in electronic commerce as we do.  Moreover, one or more states could
begin to impose sales taxes on sales of prescription products, which are not
generally taxed at this time, or impose sales taxes on sales of certain
prescription products. The imposition of additional tax obligations on our
business by state and local governments could create significant administrative
burdens for us, decrease our future sales, and harm our cash flow and operating
results.




We are dependent on key personnel and
their loss would adversely affect our ability to conduct our
business.




In order
to execute our business plan, we must be able to keep our existing management
and professionals and, when necessary, hire additional personnel who have the
expertise we need. We cannot assure you that we will be able to this, and our
failure to do so could have a material adverse effect on our business, results
of operations and financial condition. We are particularly dependent on the
services of Lalit Dhadphale, our Chief Executive Officer and President. We do
not carry key-man life insurance for our benefit on Mr. Dhadphale or on any
other employee of our company.




Our post-share exchange company may
not be able to realize the tax savings benefits for the entire amount of our
deferred tax assets.




26




As of
December 31, 2009, we had a deferred tax asset of $1,060,000 primarily relating
to federal net operating loss carry forwards of approximately $3,200,000
available to offset future taxable income through 2029. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become
deductible.  We consider projected future taxable income and tax
planning strategies in making this assessment. At present, we do not have a
sufficient history of income to conclude that it is more likely than not that we
will be able to realize all of our tax benefits in the near future and therefore
a valuation allowance was established in the full value of the deferred tax
asset.




A
valuation allowance will be maintained until sufficient positive evidence exists
to support the reversal of any portion or all of the valuation allowance. Should
we be profitable in future periods with supportable trends, the valuation
allowance will be reversed accordingly.




Furthermore,
our ability to utilize net operating losses, which we refer to as NOLs, to
offset our future taxable income is limited as the Exchange constituted an
“ownership change” within the meaning of Section 382 of the Internal Revenue
Code.  In general, an “ownership change” occurs whenever the
percentage of the stock of a corporation owned by “5-percent shareholders”
(within the meaning of Section 382 of the Internal Revenue Code) increases by
more than 50 percentage points over the lowest percentage of the stock of such
corporation owned by such “5-percent shareholders” at any time over a three-year
testing period.  When a corporation undergoes an ownership change
within the meaning of Section 382 of the Internal Revenue Code, its ability to
utilize NOLs and other tax benefits is subject to an annual
limitation.




We are a public company and, as such,
are subject to the reporting requirements of federal securities laws, which are
expensive and may divert resources from other projects, thus impairing our
ability to grow.




We are a
public reporting company and, accordingly, are subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and other U.S. federal securities laws, including compliance
with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).Compliance with
these obligations requires significant time and resources from our management
and increases our legal, insurance and financial compliance costs. It is also
time consuming and costly for us to develop and implement the internal controls
and reporting procedures required by Section 404 of the Sarbanes-Oxley Act.
Additionally, the requirements of the Sarbanes-Oxley Act Section 404B if not
further deferred, will add additional expense which could prove costly for the
Company. If we are unable to comply with the requirements of the Sarbanes-Oxley
Act, then we may not be able to obtain the independent registered public
accountant certifications required by the Sarbanes-Oxley Act, which may preclude
us from keeping our filings with the SEC current. Non-current reporting
companies may be subject to various restrictions, such as the inability to be
quoted on the OTC BB.  See “If we fail to remain current in
our reporting requirements, we could be removed from the OTC BB, which would
limit the ability of broker-dealers to sell our securities and the ability of
our shareholders to sell their securities in the secondary
market.”




We must comply with Section 404 of
the Sarbanes-Oxley Act, which requires us to document and test our internal
controls over financial reporting.  Any delays or difficulty in
satisfying these requirements, could adversely affect our future stock
price.




27




Section
404 of the Sarbanes-Oxley Act requires us to establish and maintain internal
control over financial reporting, to document and test the effectiveness of our
internal control over financial reporting in accordance with an established
control framework and to report, as of the end of our fiscal year, on our
management’s conclusion as to the effectiveness of these internal controls over
financial reporting. We will also be required to have our independent registered
public accounting firm express an opinion on the effectiveness of such controls
for the fiscal year ending December 31, 2010 and subsequent years.




Our
independent registered public accounting firm identified certain material
weaknesses in our internal control over financial reporting.  These
material weaknesses primarily relate to our lack of appropriate resources to
both manage the financial close process on a timely basis and to handle the
accounting for the Exchange and other transactions, which was due in part to the
small size of our company prior to the Exchange. These weaknesses also led to
the late filing of our Form 10-Q for the quarterly period ended June 30, 2009,
which was ultimately filed on August 24, 2009. To ensure the proper remediation
of the above-mentioned material weaknesses, we intend to hire additional staff
as necessary to mitigate these weaknesses, as well as to implement other planned
improvements.  Additional staff will enable us to document and apply
transactional and periodic controls procedures, permit a better review and
approval process and improve quality of financial reporting.




Despite
our efforts to remediate the above-mentioned weaknesses, we may in the future
discover areas of internal controls over financial reporting that need
improvement. There can be no assurance that remedial measures will result in
adequate internal controls over financial processes and reporting in the future.
Any failure to implement the required new or improved controls, or difficulties
encountered in their implementation, could materially adversely affect our
results of operations or could cause us to fail to meet our reporting
obligations. If we are unable to conclude that we have effective internal
controls over financial reporting, or if our independent registered public
accounting firm is unable to provide an unqualified report regarding the
effectiveness of internal controls over financial reporting as required by
Section 404 of the Sarbanes-Oxley Act, investors may lose confidence in the
reliability of our financial statements, which could result in a decrease in our
stock price. We may also incur significant costs to comply with these
requirements. In addition, failure to comply with Section 404 of the
Sarbanes-Oxley Act could potentially subject us to sanctions or investigation by
the SEC or other regulatory authorities, which would require additional
financial and management resources.






Public company compliance makes it
more difficult for us to attract and retain officers and
directors.




The
Sarbanes-Oxley Act and the related rules subsequently implemented by the SEC
have required changes in corporate governance practices of public companies. As
we are a public company, these new rules and regulations have increased and may
continue to increase our compliance costs in the future and make certain
activities more time consuming and costly. As a public company, these rules and
regulations may make it more difficult and expensive for us to obtain director
and officer liability insurance in the future, or we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified persons to serve on our board of directors or as
executive officers.




28




Risks
Related to Our Common Stock




Because we became public through a
share exchange transaction (or reverse recapitalization), we may not be able to
attract the attention of major brokerage firms.




Additional
risks are associated with Old HW becoming public through a share exchange
transaction (or reverse recapitalization).  For example, security
analysts of major brokerage firms may not provide coverage of us since there is
no incentive to brokerage firms to recommend the purchase of our common stock.
We cannot assure you that brokerage firms will want to conduct any public
offerings on our behalf in the future.




Our common stock may be considered a
“penny stock” and may be difficult to sell.




The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market or exercise price of less than $5.00 per share,
subject to specific exemptions. The market price of our common stock has been
below $5.00 per share and therefore we are designated as a “penny stock”
according to SEC rules. This designation requires any broker or dealer selling
these securities to disclose certain information concerning the transaction,
obtain a written agreement from the purchaser and determine that the purchaser
is reasonably suitable to purchase the securities. These rules restrict the
ability of brokers or dealers to sell our common stock and may affect the
ability of our stockholders to sell their shares. In addition, since our common
stock is quoted on the OTC BB, our stockholders may find it difficult to obtain
accurate quotations of our common stock and may find few buyers to purchase the
stock or a lack of market makers to support the stock price.




Our stock price may continue to be
volatile and may decrease in response to various factors, which could adversely
affect our business and cause our stockholders to suffer significant
losses.




Our
common stock is very illiquid, and its price has been and may continue to be
volatile in the indefinite future.  Following the Exchange and through
December 31, 2009, the high and low sale prices of our common stock were $0.35
and $0.01, respectively.  The price of our stock could fluctuate
widely in response to various factors, many of which are beyond our control,
including the following:




·
            changes
      in our industry;




·
            government
      regulations;




·
            competitive
      pricing pressures;




·
            our
      ability to obtain working capital;




·
            additions
      or departures of key personnel;




29




·
            limited
      “public float” in the hands of a small number of persons, whose sales or
      lack of sales could result in positive or negative pricing pressure on the
      market price for our common stock;




·
            sales
      of our common stock;




·
            our
      ability to execute our business
plan;




·
            operating
      results that fall below
expectations;




·
            loss
      of any strategic relationship;




·
            economic
      and other external factors; and




·
            period-to-period
      fluctuations in our financial
results.




In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.




If we fail to remain current in our
reporting requirements, we could be removed from the OTC BB, which would limit
the ability of broker-dealers to sell our securities and the ability of our
shareholders to sell their securities in the secondary
market.




Companies
trading on the OTC BB, such as us, must be reporting issuers under Section 12 of
the Exchange Act, and must be current in their reports under Section 13 of the
Exchange Act, in order to maintain price quotation privileges on the OTC
BB.  We failed to file our Form 10-Q for the quarterly period ended
June 30, 2009 on time, although we ultimately filed it on August 24,
2009.  If we continue to fail to remain current in our reporting
requirements, we could be removed from the OTC BB. As a result, the market
liquidity for our securities could be adversely affected by limiting the ability
of broker-dealers to sell our securities and the ability of our shareholders to
sell their securities in the secondary market. See “We must comply with Section 404
of the Sarbanes-Oxley Act, which requires us to document and test our internal
controls over financial reporting.  Any delays or difficulty in
satisfying these requirements could adversely affect our future stock
price.”






Our officers, directors and 5% or
greater stockholders have significant voting power.




Our
executive officers, directors, and our 5% or greater stockholders beneficially
own approximately 58% of our outstanding voting securities.  If these
stockholders act together, they will be able to exert significant control over
our management and affairs requiring stockholder approval, including approval of
significant corporate transactions.




30




We could issue “blank check”
preferred stock without stockholder approval with the effect of diluting then
current stockholder interests and impairing their voting rights and provisions
in our charter documents could discourage a takeover that stockholders may
consider favorable.




Our
certificate of incorporation authorizes the issuance of up to 1,000,000 shares
of “blank check” preferred stock with designations, rights and preferences as
may be determined from time to time by our board of directors. To date, we have
designated 200,000 of these shares as Series A Preferred Stock, leaving 800,000
shares of “blank check” preferred stock available for designation and issuance.
Our board of directors is empowered, without stockholder approval, to issue a
series of preferred stock with dividend, liquidation, conversion, voting or
other rights which could dilute the interest of, or impair the voting power of,
our common stockholders. The issuance of a series of preferred stock could be
used as a method of discouraging, delaying or preventing a change in control.
For example, it would be possible for our board of directors to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of our company.




We may engage in additional financing
that could lead to dilution of existing stockholders.




To date,
we have financed our activities through revenues from our online sales, the
proceeds from sales of our equity securities in private placement financings and
the proceeds from the issuance of our promissory notes in private
financings.  Any future financings by us may result in substantial
dilution of the holdings of existing stockholders and could have a negative
impact on the market price of our common stock.  Furthermore, we
cannot assure you that such future financings will be possible.




We do not anticipate paying dividends
in the foreseeable future; you should not buy our stock if you expect
dividends.




We
currently intend to retain our future earnings to support operations and to
finance expansion and, therefore, we do not anticipate paying any cash dividends
on our common stock in the foreseeable future.





Item 1B. Unresolved Staff
Comments.





Not applicable.








Item 2.
Properties.





Our
corporate headquarters, which also house our pharmacy and customer service
operations as well as our inventory, are located at 100 Commerce Boulevard,
Cincinnati, Ohio 45140. We occupy 16,000 square feet of warehouse space under a
lease with a monthly rental rate of $9,417 that expires in March
2011.





Item 3. Legal
Proceedings.




31




In the
ordinary course of business, we may become subject to lawsuits and other claims
and proceedings. Such matters are subject to uncertainty and outcomes are often
not predictable with assurance. Our management does not presently expect that
any such matters will have a material adverse effect on the Company’s financial
condition or results of operations. We are not currently involved any pending or
threatened material litigation or other material legal proceedings, except the
following.





On or about January 15, 2010, the
Company's former outside counsel, Duval & Stachenfeld LLP, commenced
litigation against the Company in federal court in New York, New York asserting
that the Company owes Duval & Stachenfeld LLP $213,887.20 in unpaid legal
fees.  Duval & Stachenfeld LLP is also seeking to recover interest and
its fees in connection with the litigation.  The Company has denied that it
owes Duval & Stachenfeld LLP the amount sought and has filed an answer to
the complaint and asserted counterclaims against Duval & Stachenfeld LLP for
malpractice, breach of contract, and breach of the covenant of good faith
and fair dealing.  The litigation is in its early stages, and the Company
is vigorously asserting its claims and defenses.





Item
4- Reserved.





PART
II





Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.





Market
Information





Our
shares of common stock are currently quoted on the OTC BB under the symbol
HEWA.OB.  Our symbol prior to the closing of the Exchange and until
August 5, 2009, when we changed it, was IONN.OB.





The
following table sets forth the high ask and low bid prices for our common stock
for the periods indicated as reported by the OTC BB:








Quarter
            
            Year
      ended
              December 31, 2008
            
            
            Year
      ended
              December 31, 2009High
            
            
            Low
            
            
            High
            
            
            LowFirst
            
            $
            0.05
            
            
            $
            0.02
            
            
            $
            0.04
            
            
            $
            0.02Second
            
            $
            0.09
            
            
            $
            0.03
            
            
            $
            0.35
            
            
            $
            0.01Third
            
            $
            0.09
            
            
            $
            0.04
            
            
            $
            0.17
            
            
            $
            0.11Fourth
            
            $
            0.05
            
            
            $
            0.01
            
            
            $
            0.14
            
            
            $
            0.07








On March 31, 2010, the closing bid
price of our common stock, as reported by the OTC BB, was $0.12 per
share.




32




These bid prices represent prices
quoted by broker-dealers on the OTC BB.  The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions, and may
not represent actual transactions.





As of April 7, 2010, there were
197,965,731 shares of our common stock outstanding.





Holders





As of
March 31, 2010, there were approximately 366 holders of record of our common
stock.  However, we believe that there are significantly more
beneficial holders of our common stock as many beneficial holders hold their
stock in “street name.”





Dividends





We have
never declared cash dividends on our common stock, nor do we anticipate paying
any dividends on our common stock in the future.








Recent
Sales of Unregistered Securities





On December 16, 2009, a holder of
48,056 shares of our Series A Preferred Stock elected to voluntarily convert the
preferred shares, at a conversion ratio of one preferred share for ten common
shares, and received 480,560 shares of our common stock in
exchange.  The issuance of the common stock upon the conversion of the
preferred shares was made without registration in reliance on the exemptions
from registration afforded by Sections 3(a)(9) and 4(2) under the Securities Act
and corresponding provisions of state securities laws, which exempt the exchange
by an issuer of a security with an existing security holder where no commission
or other remuneration is paid or given for soliciting the exchange, and exempt
transactions by an issuer not involving any public offering.





Item 6. Selected Financial
Data.





Not applicable.





Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operation.





Overview




On May
14, 2009, we completed a share exchange transaction with Hwareh.com, Inc.
pursuant to the terms of a Securities Exchange Agreement, dated as of May 14,
2009. Under the Securities Exchange Agreement, we acquired all the outstanding
capital stock of Hwareh.com, Inc. (formerly named HealthWarehouse.com, Inc.). As
a result of the exchange, the former stockholders of Hwareh.com, Inc. owned
approximately 82.4% of the outstanding shares of our common stock. This
transaction was accounted for as a reverse recapitalization, whereby Hwareh.com,
Inc. is deemed to be the accounting acquirer for accounting purposes. Following
the closing of the share exchange transaction with Hwareh.com, we succeeded to
the business of Hwareh.com as our sole line of business.  Effective
August 5, 2009, we changed our corporate name to HealthWarehouse.com,
Inc.




33




We are a
licensed U.S. pharmacy and healthcare e-commerce company that sells discounted
brand name and generic prescription drugs and over-the-counter (OTC) medical
products. Our web address is http://www.healthwarehouse.com. At present, we
sell:




·
            a
      range of prescription drugs;




·
            diabetic
      supplies including glucometers, lancets, syringes and test
      strips;




·
            OTC
      medications covering a range of conditions from allergy and sinus to pain
      and fever to smoking cessation
aids;




·
            home
      medical supplies including incontinence supplies, first aid kits and
      mobility aids; and




·
            diet
      and nutritional products including supplements, weight loss aids, and
      vitamins and minerals.




Our
objective is to make the pharmaceutical supply chain more efficient by
eliminating costs and passing on the savings to the consumer.  We are
becoming known by consumers as a convenient, reliable, discount provider of over
the counter and prescription medications and products. We intend to continue to
expand our product line as our business grows. We are presently licensed as a
mail-order pharmacy for sales to 45 states and the District of Columbia, and we
intend to apply for and obtain licenses to sell prescriptions in all 50 states
by June of 2010.




We have
begun accepting health insurance as part of our prescription program, initially
contracting with a limited number of insurance providers based on customer
demand and business opportunity. Our customers tend to be under or uninsured
consumers who rely on our service for their daily medications.  In
addition, due to the savings we pass on to the consumer, our prices are often
below insurance co-pay amounts making insurance unnecessary when purchasing from
us. We intend to continue expanding the number of health insurance providers
that we accept as customer demand warrants.




To date,
we have incurred operational losses for all historic periods.  We have
financed our activities to date through revenues from our online sales, the
proceeds from sales of our equity securities in private placement financings and
the proceeds from the issuance of our promissory notes in private
financings.




34




Results
of Operations




The
year ended December 31, 2009 compared to the year ended December 31,
2008.




The
      year ended December 31, 2009
            
            
            %
      of
              Revenue
            
            
            The
      year ended December 31, 2008
            
            
            %
      of RevenueRevenue
            
            $
            3,783,542
            
            
            
            100.0
            %
            
            $
            1,270,527
            
            
            
            100.0
            %Cost
      of sales
            
            
            2,635,258
            
            
            
            69.7
            %
            
            
            970,627
            
            
            
            76.4
            %Gross
      profit
            
            
            1,148,284
            
            
            
            30.4
            %
            
            
            299,900
            
            
            
            23.6
            %Selling,
      general & administrative  expenses
            
            
            3,646,915
            
            
            
            96.3
            %
            
            
            969,837
            
            
            
            76.3
            %Loss
      from operations
            
            
            (2,498,631
            )
            
            
            (63.1
            )%
            
            
            (669,937
            )
            
            
            (52.7
            )%Other
      income (expense)
            
            
            59,129
            
            
            
            (1.6
            )%
            
            
            2,636
            
            
            
            .2
            %Net
      loss before taxes
            
            
            (2,439,502
            )
            
            
            (64.5
            )%
            
            
            (667,301
            )
            
            
            (52.5
            )%Income
      tax expense
            
            
            -
            
            
            
            -
            %
            
            
            -
            
            
            
            -
            %Net
      loss
            
            $
            (2,439,502
            )
            
            
            (64.5
            )%
            
            $
            (667,301
            )
            
            
            (52.5
            )%







Revenue


The
      year ended December 31, 2009
            
            
            %
      Change
            
            
            The
      year ended December 31, 2008Total
      revenue
            
            $
            3,783,542
            
            
            
            197.8
            %
            
            $
            1,270,527Total
      average net sales per order
            
            $
            46.20
            
            
            
            (16.5
            )
      %
            
            $
            55.36





Revenues
for the year ended December 31, 2009 grew to $3,783,542 from $1,270,527 for the
year ended December 31, 2008. Revenues increased for the year ended December 31,
2009 compared to the prior year as a result of an increase in order
volume.  This increase is due primarily to the maturing of business
activities from a company with limited operating activities, the initial rollout
of our prescription business model at the end of 2008, the impact of increased
advertising and the issuance of new licenses to sell prescription drugs by
additional states.




Another
indicator of increased business activity was that our website attracted over
1,104,190 visits with over 4,057,959 pageviews during the year ended December
31, 2009 compared to 301,760 visits and 1,144,189 pageviews during the year
ended December 31, 2008.




Costs
and Expenses




Cost
of Sales and Gross Margin






The
      year ended December 31, 2009
            
            
            %
              Change
            
            
            The
      year ended December 31,
              2008Total
      cost of sales
            
            $
            2,635,258
            
            
            
            171.5
            %
            
            $
            970,627Total
      gross profit dollars
            
            $
            1,148,284
            
            
            
            282.9
            %
            
            $
            299,900Total
      gross margin percentage
            
            
            30.4
            %
            
            
            7
            %
            
            
            23.6
            %




35




Total
cost of sales increased to $2,635,258 for the year ended December 31, 2009 as
compared to $970,627 for the year ended December 31, 2008 as a result of growth
in order volume and revenue. Gross margin percentage increased year-over-year
from 23.6% for the year ended December 31, 2008 to 30.4% for the year ended
December 31, 2009, due to a more representative relationship between revenues
and cost of sales per our business model as the amount of low-priced generic
prescription products became a larger portion of our mix of
revenues.




Selling,
General and Administrative Expenses




The
      year ended December 31, 2009
            
            
            %
              Change
            
            
            The
      year ended December 31, 2008Selling,
      general and administrative expenses
            
            $
            3,646,915
            
            
            
            276.0
            %
            
            $
            969,837Percentage
      of revenue
            
            
            96.3
            %
            
            
            20.0
            %
            
            
            76.3
            %





Selling,
general and administrative expenses increased by $2,677,078 in the year ended
December 31, 2009 compared to the same period in 2008, an increase of
276.0%.  The expense increases were due primarily to expenses related
to the maturing of business activities including increases of approximately
$1,783,402 for payroll, advertising, legal, shipping and fulfillment expenses
related to revenue growth compared to the year ended December 31, 2008. In
addition the recognition of $260,319 for non-cash based stock compensation
expense compared to zero in the year ended December 31, 2008.




Off-Balance
Sheet Arrangements




We have
not entered into any transactions with unconsolidated entities in which we have
financial guarantees, subordinated retained interests, derivative instruments or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or
credit risk support.




Impact
of Inflation




We
believe that inflation has not had a material impact on our results of
operations for the years ended December 31, 2009 and 2008. We cannot assure you
that future inflation will not have an adverse impact on our operating results
and financial condition.









Liquidity and Capital
Resources




As of
December 31, 2009, the Company had $191,181 in cash and cash equivalents and a
working capital deficit of $257,270.  During the year ended December
31, 2009, the Company generated revenue of $3,783,542 and a net loss of
approximately $2,439,502.  For the year ended December 31, 2009, cash
flows included net cash used in operating activities of $2,810,461 net cash
provided by investing activities of $854,593 and net cash provided by financing
activities of $1,789,111.





Since
inception, the Company has financed its operations primarily through product
sales to customers, and debt and private equity investments by existing
stockholders, officers and directors.  During the year ended December
31, 2009, the Company’s cash and cash equivalents were reduced by approximately
$166,757.  Our sources and uses of funds during this period were as
follows:




36




For the
year ended December 31, 2009, cash flows included net cash used in operating
activities of $2,810,461.  This amount included a decrease in
operating cash related to a net loss of $2,439,502 and additions for the
following items: (i) depreciation and amortization, $122,379; (ii) stock-based
compensation expense, $260,318(iii) accounts payable, $388,279. The increase in
cash used in operating activities in 2009 was primarily offset by the following
decreases: (i) accounts payable-related parties $(307,024),
(ii)accounts  receivable, $(265,399); (iii) prepaid expenses and other
current assets, $(191,001); and (iv) inventories, $(304,268).  For the
year ended December 31, 2008, net cash used in operating activities was
$308,269. This amount included decreases in operating cash related to a net loss
of $667,301 and increase in accounts receivable of $(57,622) and in inventories
of $(84,480) offset by an increase in accounts payable of $435,874.




For the
year ended December 31, 2009, net cash provided by investing activities
was  $854,593 and was attributable to cash received in share exchange
of $1,220,520, offset by expenses paid in conjunction with share exchange of
$150,000; acquisitions of property and equipment of $85,928 and website
development costs of $129,999.  For the year ended December 31, 2008,
net cash used in investing activities was $(239,953) and was attributable to
acquisition of property and equipment of $169,556 and website development costs
$70,397.




For the
year ended December 31, 2009, net cash provided by financing activities was
$1,789,111, consisting of a sale of convertible notes and prommisory notes of
$1,715,000; sale of common stock of $50,196 and proceeds from option and warrant
exercises of $23,915. For the year ended December 31, 2008, net cash provided by
financing activities was $873,332 from sale of common stock.




Going
Concern




Based
upon projected operating expenses, the Company believes that its working
capital as of December 31, 2009 may not be sufficient to fund its plan of
operations for the next twelve months.  The Company anticipates that
it will need to raise additional capital in order to meet operations and execute
its business plans.  Management has indicated that the Company is in
discussions with certain parties regarding various financing opportunities
including selling additional capital stock and/or entering into debt
facilities.  However, the Company does not know at this time whether
any such transactions between the Company and any third party, will be
consummated and, if consummated, when it might occur, or if the terms would be
acceptable to us.  In addition, the SEC’s penny-stock rules may
further impact the Company’s ability to obtain debt and/or equity
financing.  If the Company cannot raise sufficient funds on acceptable
terms, it may have to curtail its level of expenditures and scope of
operations.




These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. Accordingly, the accompanying consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America, which contemplate 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 financial statements do not necessarily purport to
represent realizable or settlement values. The accompanying financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.




Management
has indicated that the Company is taking certain steps to improve its operations
and cash flows, including the re-launch of its corporate website, improved
inventory management and an increase in the number of suppliers.  The
enhanced website’s functionality is providing a greatly improved total customer
experience, our conversion rate has improved, which we believe will translate
into significant growth of both our OTC product and prescription sales. In
addition, the launching of our first direct partnership with a health care
provider began in January of 2010 and as anticipated has begun to provide
increasing revenues.




In
addition, our cash needs to fund the anticipated growth should be mitigated
somewhat since we are often able to source items in 24 hours, thereby reducing
the amount of required inventory on-hand.  Furthermore, our customers
usually purchase their products with an upfront credit card payment, and we
typically have terms of up to 30 days with our suppliers.  With our
anticipated growth in revenues, we expect that our cash flow from operating
activities will be a growing source of funds for us. We have increased our
number of suppliers increasing competition lowering our product acquisition
costs this with along with an increase in our prescription business is having a
positive impact on gross margin due to increased competition.




37




Critical
Accounting Policies and Estimates




The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires our management to exercise its judgment. We exercise considerable
judgment with respect to establishing sound accounting policies and in making
estimates and assumptions that affect the reported amounts of our assets and
liabilities, our recognition of revenues and expenses, and disclosures of
commitments and contingencies at the date of the financial
statements.




On an
ongoing basis, we evaluate our estimates and judgments. We base our estimates
and judgments on a variety of factors including our historical experience,
knowledge of our business and industry, current and expected economic
conditions, the composition of our products/services and the regulatory
environment.  We periodically re-evaluate our estimates and
assumptions with respect to these judgments and modify our approach when
circumstances indicate that modifications are necessary.




While we
believe that the factors we evaluate provide us with a meaningful basis for
establishing and applying sound accounting policies, we cannot guarantee that
the results will always be accurate.   Since the determination of
these estimates requires the exercise of judgment, actual results could differ
from such estimates.




We
account for stock-based compensation in accordance with the fair value
recognition provisions of Accounting Standards Codification (“ASC”) 718 ( prior
authoritative literature: SFAS No. 123R, “Share-Based Payment”, for all
stock-based payment awards is based on the estimated grant-date fair value. We
recognize these compensation costs over the requisite service period of the
award, which is generally the option vesting term.  Option valuation models
require the input of highly subjective assumptions including the expected life
of the option. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
our management’s opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of our employee stock options. The
fair value of stock-based payment awards was estimated using the Black-Scholes
option pricing model using a volatility figure derived from an index of
comparable entities.  Our management will review this assumption as our
trading history becomes a better indicator of value. We account for the expected
life of options in accordance with the “simplified” method provisions of SEC
Staff Accounting Bulletin (“SAB”) No. 110, which enables the use of the
simplified method for “plain vanilla” share options as defined in SAB No.
107.




38




Recently-issued
Accounting Pronouncements




The
information contained in Footnote 12 to the Company’s consolidated financial
statements included in, Item 8 to this annual report is incorporated herewith by
reference.





Item 7A. Quantitative and Qualitative
Disclosure About Market Risk.





Not applicable.





Item 8. Financial Statements and
Supplementary Data.





The financial statements required
hereby are located on pages 67 through 82.





Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure.





NONE




ITEM
9A. CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by our Company is recorded,
processed, summarized and reported, within the time periods specified in the
rules and forms of the SEC. Our Chief Executive Officer and Chief Financial
Officer are responsible for establishing and maintaining disclosure controls and
procedures for our Company.




Our
management has evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2009 (under the supervision and with the
participation of the Chief Executive Officer and the Chief Financial Officer),
pursuant to Rule 13a–15(b) promulgated under the Securities Exchange Act of
1934, as amended. As part of such evaluation, management considered the
matters discussed below relating to internal control over financial reporting.
Based on this evaluation, our Company’s Chief Executive Officer and Chief
Financial Officer have concluded that our Company’s disclosure controls and
procedures were not effective as of December 31, 2009.






Changes
in Internal Control Over Financial Reporting




During
the three months ended December 31, 2009, there was no change in our internal
control over financial reporting or in other factors that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.




39




Report
of Management Assessment of Internal Control over Financial
Reporting






The term
“internal control over financial reporting” is defined as a process designed by,
or under the supervision of, the registrant’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
registrant’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:




·
            pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      registrant;


·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the
      registrant are being made only in accordance with authorizations of
      management and directors of the registrant;
and


·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the registrant’s assets
      that could have a material effect on the financial
    statements.




In
connection with the audit of our financial statements as of December 31, 2009
and for the year then ended, our independent registered public accountants have
identified certain matters involving our internal control over financial
reporting that constitute a material weakness under standards established by the
Public Company Accounting Oversight Board ("PCAOB").




The PCAOB
defines a material weakness as a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood that a
material misstatement of our annual or interim financial statement will not be
presented or detected by our employees. A significant deficiency is defined as a
control deficiency, or a combination of control deficiencies, that adversely
affects the company's ability to initiate, authorize, record, process, or report
external financial data reliably in accordance with generally accepted
accounting principles such that there is more than a remote likelihood that a
misstatement of the company's annual or interim financial statements that is
more than inconsequential will not be prevented or detected. A control
deficiency exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned
functions, to prevent or detect misstatements on a timely basis. A deficiency in
design exists when:




·
            a
      control necessary to meet the control objective is missing;
    or


·
            an
      existing control is not properly designed so that, even if the control
      operates as designed, the control objective is not always
    met.




A
deficiency in operation exists when a properly designed control does not operate
as designed, or when the person performing the control does not possess the
necessary authority or qualifications to perform the control
effectively.




Specifically,
as of December 31, 2009, the following material weaknesses existed:




40




·
            Financial Reporting
      Systems:  We did not maintain a fully integrated
      financial consolidation and reporting system throughout the year and as a
      result, extensive manual analysis, reconciliation and adjustments were
      required in order to produce financial statements for external reporting
      purposes.


·
            Accounting for Complex
      Transactions:  We lack adequately trained accounting
      personnel with appropriate United States generally accepted accounting
      principles (US GAAP) expertise for complex
  transactions.


·
            Segregation of
      Duties:  We do not currently have a sufficient complement
      of technical accounting and external reporting personnel commensurate to
      support standalone external financial reporting under public company or
      SEC requirements.  Specifically, the Company did not effectively
      segregate certain accounting duties due to the small size of its
      accounting staff, and maintain a sufficient number of adequately trained
      personnel necessary to anticipate and identify risks critical to financial
      reporting and the closing process.  In addition, there were
      inadequate reviews and approvals by the Company's personnel of certain
      reconciliations and other processes in day-to-day operations due to the
      lack of a full complement of accounting
staff.


·
            Policies and
      Procedures:  We have not commenced design, implementation
      and documentation of the policies and procedures used for external
      financial reporting, accounting and income tax
  purposes.


·
            Assessment of Internal
      Control:  We did not perform a complete assessment of
      internal control over financial reporting as outlined Section 13(a) or
      15(d) of the Act.


Management
conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting based on the criteria in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  Based on this evaluation under the
criteria in Internal Control-Integrated Framework, and upon consideration of the
above-described material weaknesses, management concluded that the Company’s
internal control over financial reporting was not effective as of December 31,
2009.





We are in
the process of implementing changes to strengthen our internal
controls.  To ensure the proper remediation of the above-mentioned
material weaknesses, we intend to hire additional senior staff, as necessary, to
mitigate these weaknesses, as well as to implement other planned
improvements.  Additional senior staff will enable us to document and
apply transactional and periodic control procedures, permit a better closing,
review and approval process, and improve the quality of our financial
reporting.




Additional
measures may be necessary and the measures we expect to take to improve our
internal controls may not be sufficient to address the issues identified, to
ensure that our internal controls are effective or to ensure that such material
weakness or other material weaknesses would not result in a material
misstatement of our annual or interim financial statements. In addition, other
material weaknesses or significant deficiencies may be identified in the future.
If we are unable to correct deficiencies in internal controls in a timely
manner, our ability to record, process, summarize and report financial
information accurately and within the time periods specified in the rules and
forms of the SEC will be adversely affected. This failure could negatively
affect the market price and trading liquidity of our common stock, cause
investors to lose confidence in our reported financial information, subject us
to civil and criminal investigations and penalties, and generally materially and
adversely impact our business and financial condition.




41




Our
internal control system is designed to provide reasonable assurance to our
management and board of directors regarding the preparation and fair
presentation of published financial statements. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their
costs.  In addition, because of changes in conditions, the
effectiveness of internal control may vary over time.




This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to a temporary rule of the
Securities and Exchange Commission that permits the Company to provide only
management’s report in this Annual Report.








Item 9B. Other
Information.





None.








PART
III





Item 10. Directors, Executive
Officers and Corporate Governance.





Executive
Officers and Directors





The names, ages and positions of our
executive officers and directors as of April 1, 2010 are as
follows:





Name
            
            Age
            
            PositionLalit
      Dhadphale
            
            38
            
            President,
      Chief Executive Officer and
              DirectorPatrick
      E. Delaney
            
            56
            
            Chief
      Financial Officer, Treasurer
              and
      SecretaryYoussef
      Bennani
            
            44
            
            DirectorNorman
      E.
      Corn
            
            63
            
            Director




42




The
principal occupations for the past five years (and, in some instances, for prior
years) of each of our executive officers and directors are as
follows:





Lalit Dhadphale became our
President and Chief Executive Officer and a member of our board of directors on
May 14, 2009, and has served as the President and Chief Executive Officer and a
member of the board of directors of Old HW since its inception in March 2007.
Prior to that, from 2003 until February 2007, he founded and managed Placa De
Rei Partners, LLC, a company specializing in residential real estate development
in the United States and Asia.  Before that, Mr. Dhadphale accumulated
more than 15 years of experience developing internet websites and applications.
He served as Vice President of Product Development, Chief International Officer
and later as Chief Operating Officer of Zengine, Inc. from founding in 1999
through its sale in 2002. Under his day-to-day leadership, Zengine grew from
start-up to $30+ million in annualized sales, achieving profitability in its
second quarter as a public company in the first quarter of 2001. Prior to
co-founding Zengine, Mr. Dhadphale was a co-founder of Excite Japan, where he
was involved with product development, internationalization and localization of
web sites and Internet products. He produced the launch of both Excite Japan and
Netscape Netcenter Japan. Prior thereto, Mr. Dhadphale was International
Business Development Manager for CNET, securing relationships throughout Asia
and the Pacific Rim. His prior experience includes international trade,
entertainment and real estate development for P.O.V. Associates (Nissho Iwai
Group). Mr. Dhadphale received his BA degree from the University of Michigan,
Ann Arbor in Japanese Language & Literature and Asian Studies.





Patrick E. Delaney became our
Chief Financial Officer, Treasurer and Secretary on since May 14, 2009, and
served as the Chief Financial Officer of Clacendix from September 2003 to the
merger date.  Prior to joining our company, from 2000 until 2003, Mr.
Delaney was the President of Taracon, Inc. a privately owned independent
consulting firm that provides management consulting for early and mid-stage
technology and financial services companies. Mr. Delaney also served as Chief
Financial Officer for two publicly traded telecommunications providers, Pointe
Communications Corporation from 1993 to 2000 and Advanced Telecommunications
Corporation from 1986 to 1993. Mr. Delaney has served other companies in
executive capacities including RealCom Communications, Argo Communications and
ACF Industries.







Youssef Bennanibecame a
member of our Board of Directors on November 11, 2009.  Mr. Bennani is a
Senior Managing Director in Kaufman Bros., L.P.’s Investment Banking department
which he joined in 1995.  His responsibilities range from public and
private financing transactions to general financial advisory for mergers and
acquisition, restructuring, acquisition financing and recapitalization.
 Prior to joining Kaufman Bros., L.P., Mr. Bennani was an investment banker
at Barington Capital, L.P., where primary industry focus was technology. Mr.
Bennani received his MBA in international finance from New York University’s
Stern School of Business. He also received his Masters in computer science as
well as a BS in mathematics and physics from the University of Pierre and Marie
Curie in Paris.  In addition to the international and investment
banking experiences, Mr. Bennani brings a depth of knowledge of finance that
permits him to qualify as the “financial expert” on the Board of
Directors.




43





Norman E. Corn became a member
of our board of directors on May 14, 2009. Mr. Corn served as Director of
Clacendix from November 2005 through May 14, 2009, and served as the Chief
Executive Officer of Clacendix from August 2003 to May 14, 2009. From 2000 until
2003, Mr. Corn was Executive Vice President of Liquent, Inc., a
Pennsylvania-based software company that provides electronic publishing
solutions, focused on the life sciences industry. Mr. Corn also served from 1994
to 2000 as CEO of TCG Software, Inc., an offshore software services organization
providing custom development to large corporate enterprises in the United
States. Over the course of his career, Mr. Corn has led other companies,
including Axiom Systems Group, The Cobre Group, Inc., The Office Works, Inc. and
Longview Results, Inc., and spent the early part of his career in sales,
marketing and executive positions at AT&T and IBM.  Mr. Corn’s
combination of both small and large business experience provides the Company a
skill set which should be invaluable it grows.





All
directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors.  Officers are
appointed annually by the board of directors and serve at the discretion of the
board.








Committees
of the Board of Directors





Our board
of directors had previously established an audit committee and a compensation
committee, and a nominating committee. In conjunction with the Exchange, we
disbanded these committees. On April 8, 2010, our board of directors by written
consent recreated an audit committee and during 2010 the Board expects to
recreate a compensation committee, in compliance with established corporate
governance requirements.








Audit
Committee





The
Company established an audit committee of the board of directors. The audit
committee’s duties are to recommend to the board of directors the engagement of
independent registered public accountants to audit our financial statements and
to review our accounting and auditing principles. The audit committee will
review the scope, timing and fees for the annual audit and the results of audits
performed by the independent registered public accountants, including their
recommendations to improve the system of accounting and internal controls. The
audit committee will at all times be composed exclusively of directors who are,
in the opinion of the board of directors, free from any relationship which would
interfere with the exercise of independent judgment as a committee member and
who possess an understanding of financial statements and generally accepted
accounting principles. Mr. Youssef Bennani will serve as the “audit committee
financial expert,” as defined under securities laws.





Compensation
Committee





We plan
to reestablish a compensation committee of the board of directors. The
compensation committee would review and approve our salary and benefits
policies, including compensation of executive officers.  The
compensation committee would also administer our 2009 Incentive Compensation
Plan, and recommend and approve grants of stock options and restricted stock
under that plan.




44




Nominating
Committee





We do not
plan to reestablish a standing nominating committee. Nominations for election to
our board of directors may be made by the board of directors or by any
stockholder entitled to vote for the election of directors in accordance with
our bylaws and Delaware law.





Board
Operation and Leadership Structure





The Board has adopted Corporate
Governance Principles which along with the Charters for of its Committees and
the Company Code of Business Conduct and Ethics, provides a framework for the
governance of the Company. The Company’s Corporate Governance Principles address
matters such as the responsibilities and composition of the Board, Director
Independence and the conduct of Board and Committee meetings.  The
Company’s Code of Business Conduct and Ethics sets forth guiding principles of
business ethics and certain legal requirements applicable to all Company
employees and Directors.





Currently,
the Company’s Chief Executive Officer also holds the position of Chairman of the
Board of Directors.  In the future, however, the Board may reconsider
whether its Chief Executive Officer should also serve as Board
Chairman.





Code
of Ethics





We have
adopted a code of ethics that applies to all of our employees, including our
principal executive officer, principal financial officer, and principal
accounting officer or controller. A copy of the Company's code of ethics will be
provided free of charge, upon written request to 100 Commerce Boulevard,
Cincinnati, Ohio 45140, and our telephone number is (513) 618-0911.








Indebtedness
of Directors and Executive Officers





None of
our executive officers or directors, or their respective associates or
affiliates, is indebted to us.





Legal
Proceedings





As of
April 8, 2010, there were no material proceedings to which any of our directors,
executive officers, affiliates or stockholders is a party adverse to
us.





Family
Relationships





There are
no family relationships among our executive officers and directors.





Compliance
with Section 16(a) of the Exchange Act





Each of Norman E. Corn, a director, and
Patrick E. Delaney, our chief financial officer, treasurer and secretary, failed
to timely file a Form 4 with respect to the grant to each such person of options
to purchase 4,218,000 shares of common stock on May 15, 2009.  The
Form 4s were filed one day late.




45




Stockholder
Recommendations of Board Nominees





There have been no material changes to
the procedures by which our stockholders may recommend nominees to our board of
directors since out last proxy statement filed with the SEC.





Item 11. Executive
Compensation.





The table below summarizes the
compensation earned for services rendered to Clacendix and Old HW, as
applicable, in all capacities, for the years indicated, by its Chief Executive
Officer and two most highly-compensated officers other than the Chief Executive
Officer.





Summary
Compensation Table





Name
      and
              Principal
      Position
            Year
            Salary
              ($)
            Option
      Awards
              ($)
      (1)
            All
      Other
              Compensation
              ($)
            Total
              ($)Lalit
      Dhadphale
              President
      and Chief Executive Officer
            2009
              2008
            59,982
              11,535
            48,487
      (1)
              0
            0
              0
            108,469
              11,535Norman
      E. Corn (2)
              former
      Chief
              Executive
      Officer
            2009
              2008
            42,000
              167,083
            71,372
      (1)
              3,585   (1)
            2,150
      (3)
              6,429
      (3)
            115,522
              177,097Patrick
      E. Delaney
              Chief
      Financial
              Officer,
      Treasurer
              and
      Secretary
            2009
              2008
            90,000
              150,000
            76,468
      (1)
              3,585   (1)
            5,700
      (3)
              5,700
      (3)
            172,168
              159,285





(1)           The
amounts in the “Option Awards” column reflect the dollar amounts recognized as
compensation expense for financial statement reporting purposes for stock
options for the fiscal years ended December 31, 2009 and 2008 in accordance with
ASC Topic 718 (previous authoritative literature: SFAS No. 123(R). The
assumptions we used to calculate these amounts are discussed in the notes to our
consolidated financial statements included in this report on Form
10-K.





(2)           Mr.
Corn resigned as an officer of our company on May 14, 2009.  He
continues to serve as a director.





(3)           Includes
life insurance and disability insurance premiums paid by Company for
executives.





46





Narrative
Disclosure to the Summary Compensation Table





On May
15, 2009, we awarded Mr. Corn 4,218,000 non-qualified stock options to purchase
common stock at $0.04 per share. One-half of these stock options vested on the
grant date and have a five year term.  The remainder of the stock
options granted vest 331⁄3% on the first anniversary of the grant date, and then
81⁄3% on the last day of each calendar quarter beginning June 30, 2010, and have a
ten year term.





In
connection with the closing of the Exchange, effective May 15, 2009, we adjusted
Mr. Delaney’s compensation to an annualized base salary of $84,000. Mr. Delaney
remains eligible to receive reimbursement for medical benefits and life and
disability insurance, as well as reimbursement for reasonable business
expenses.





On May
15, 2009, we awarded Mr. Delaney 4,218,000 incentive stock options to purchase
common stock at $0.04 per share. One-half of these stock options vested on the
grant date, and have a five year term.  The remainder of the stock
options granted vest 331⁄3% on the first anniversary of the grant date, and then
81⁄3% on the last day of each calendar quarter beginning June 30, 2010, and have a
ten year term.





On
November 11, 2009, we awarded Mr. Delaney 2,000,000 incentive stock options to
purchase common stock at $0.125 per share, all of which have a ten year
term.  These options vest in equal annual installments on November 11,
2010, November 11, 2011 and November 11, 2012.





On May
20, 2009, we awarded Mr. Dhadphale 5,000,000 incentive stock options to purchase
common stock at $0.11 per share, all of which have a five year
term.  These options vest in equal annual installments on May 20,
2010, May 20, 2011 and May 20, 2012.





Outstanding
Equity Awards at Fiscal Year End





The
following table summarizes equity awards outstanding at December 31, 2009, for
each of the executive officers named in the Summary Compensation Table
above:





Option
      AwardsName
            
            Number
                of
                Securities
      Underlying Unexercised Options
                (#)
                Exercisable
            
            Number
      of Securities Underlying Unexercised Options
                (#)
                Unexercisable
            
            Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options
              (#)
            
            Option
      Exercise Price
                ($)
            
            Option
      Expiration DateLalit
      Dhadphale
              Chief
      Executive Officer and President
            
            --
            
            5,000,000(1)
            
            --
            
            0.11
            
            5/20/14Norman
      E. Corn
              former
      Chief Executive Officer (2)
            
            250,000(3)
              2,109,000(4)
              --
            
            --
              --
              2,109,000(5)
            
            --
              --
              --
            
            0.18
              0.04
              0.04
            
            1/23/11
              5/15/14
              5/15/19Patrick
      E. Delaney
              Chief
      Financial Officer and Treasurer
            
            250,000
      (3)
              2,109,000(4)
              --
              --
            
            --
              --
              2,109,000(5)
              2,000,000(6)
            
            --
            
            0.18
              0.04
              0.04
              0.125
            
            1/23/11
              5/15/14
              5/15/19
              11/11/14




47




(1)           Options
vest 331⁄3% on each of May 20, 2010, May 20, 2011 and May 20, 2012.





(2)           Mr.
Corn resigned as an officer of our Company on May 14, 2009.  He
continues to serve as a director.





(3)           Options
vested 34% on 12 months from date of grant, and then vested in 8 equal
installments of 8.25% at the end of every three month period following the 12
month anniversary of the grant date.





(4)
              All
      options were fully vested as of the grant
date.





(5)           Options
vest 331⁄3% on May 15, 2010, then 81⁄3% on the last day of each calendar quarter
beginning June 30, 2010.





(6)           Options
vest 331⁄3% on each of November 11, 2010, November 11, 2011, and November 11,
2012.







Employment
Agreements





None of
our employees are subject to employment agreements with us at the moment. We
intend to enter into employment agreements with Lalit Dhadphale, our President
and Chief Executive Officer, and Patrick E. Delaney, our Chief Financial Officer
and Treasurer, in the near future.





Severance
and Change in Control Arrangements





We do not
have any agreements or arrangements providing for payments to any of our
officers and directors in the event of a change in control or
termination.





Director
Compensation





We expect
to compensate non-management directors through stock option or restricted stock
grants under our stock option plans, though we have not determined the exact
number of options or stock to be granted at this time. Directors are expected to
timely and fully participate in all regular and special board meetings, and all
meetings of committees that they may serve on.





The table
below summarizes the compensation we paid to non-management directors for the
fiscal year ended December 31, 2009.





48





Name
            
            Option
      Awards
                ($)
      (2)
            
            
            Total
      ($)Youssef
      Bennani (1)
            
            
            7,798
            
            
            
            7,798





(1)           Mr.
Bennani was elected to our Board effective November 11, 2009.  In
connection with his election, we granted Mr. Bennani options to purchase
3,000,000 shares of our common stock, at an exercise price of $0.125 per share,
and with a term of ten years.  The options vest 331⁄3% on each of
November 11, 2010, November 11, 2011, and November 11, 2012.





(2)           The
amounts in the “Option Awards” column reflect the dollar amounts recognized as
compensation expense for financial statement reporting purposes for stock
options for the fiscal year ended December 31, 2008 in accordance with ASC Topic
718 (previous authoritative literature: SFAS123(R).





Equity
Compensation Plan Information





On May
15, 2009, we adopted our 2009 Incentive Compensation Plan (the 2009 Plan). The
total number of shares of common stock that may be subject to the granting of
awards under the 2009 Plan is 30,000,000, plus 3,628,500 shares that remained
available on May 15, 2009 under our 2006 Stock Option Plan.  The 2009
Plan imposes individual limitations on the amount of certain awards. Under these
limitations, during any fiscal year of our company, the number of options, stock
appreciation rights, shares of restricted stock, shares of deferred stock,
performance shares and other stock based-awards granted to any one participant
under the 2009 Plan may not exceed 5,000,000 shares, subject to adjustment in
certain circumstances. The maximum amount that may be paid out as performance
units in any 12-month performance period is $2,000,000, and the maximum amount
that may be paid out as performance units in any performance period greater than
12 months is $4,000,000. The maximum term of each option or stock appreciation
right, the times at which each option or stock appreciation right will be
exercisable, and provisions requiring forfeiture of unexercised options or stock
appreciation rights at or following termination of employment generally are
fixed by the Board, 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 Board, 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. As of December 31,
2009, stock options to purchase up to 29,786,000 shares of common stock have
been awarded under the 2009 Plan, with exercise prices ranging from $0.04 to
$0.125 per share, of which 4,718,000 are exercisable. All of these options have
a five or ten year term.





In
January 2006, we adopted our 2006 Stock Option Plan (the 2006
Plan).  The aggregate number of shares of common stock for which
options may be granted under the 2006 Plan was 4,000,000.  Effective
May 15, 2009, the 3,628,500 shares that remained available under the 2006 Plan
were incorporated into the 2009 Plan. Accordingly, there will be no more
issuances under the 2006 Plan. The maximum number of options which could be
granted to an employee during any calendar year under the 2006 Plan was
300,000.  The term of these non-transferable stock options could not
exceed ten years. The exercise price of these stock options could not be less
than 100% (110% if the person granted such options owned more than ten percent
of the outstanding common stock) of the fair value of one share of common stock
on the date of grant.  As of December 31, 2009, 250,000 options are
outstanding under the 2006 Plan, with an exercise price of $0.18 per share, all
of which are exercisable. Per the terms of the 2006 Plan, the remaining options
were incorporated in the 2009 Plan.




49




In June
1998, we adopted our 1998 Stock Option Plan (the 1998 Plan). The aggregate
number of shares of common stock for which options may be granted under the 1998
Plan is 3,000,000. The maximum number of options which may be granted to an
employee during any calendar year under the 1998 Plan is 400,000. The term of
these non-transferable stock options may not exceed ten years.  The
exercise price of these stock options may not be less than 100% (110% if the
person granted such options owns more than ten percent of our outstanding common
stock) of the fair value of one share of common stock on the date of grant. As
of December 31, 2009, 250,000 options are outstanding under the 1998 Plan, with
an exercise price of $0.18 per share, all of which are
exercisable.  The 1998 Plan terminated on June 16, 2008. Per the terms
of the 1998 Plan, the remaining options were incorporated in the 2009
Plan.








Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.





Securities
Authorized for Issuance Under Equity Compensation Plans




The
following table provides information as of December 31, 2009, with respect to
the shares of common stock that may be issued under our existing equity
compensation plan.








Equity
Compensation Plan Information





Plan
      category
            Number
      of shares of common stock to be issued upon exercise of outstanding
      options, warrants and rights
              (a)
            Weighted-average
      exercise price of outstanding options, warrants and rights
              (b)
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
              (c)Equity
      compensation plans approved by security holders
            30,286,000
      (1)
            $0.09
            3,842,500
      (2)Equity
      compensation plans not approved by security holders (3)
            6,250,000
            $0.08
            6,250,000Total
            36,536,000
            $0.088
            10,092,500




50




(1)
            Includes
      options to purchase 29,786,000 shares of our common stock granted under
      our 2009 Incentive Compensation Plan (the “2009 Plan”), options to
      purchase 250,000 shares of our common stock granted under our 2006 Stock
      Option Plan (the “2006 Plan”), and options to purchase 250,000 shares of
      our common stock granted under our 1998 Stock Option Plan, with exercise
      prices ranging from $0.04 to $0.18 per
share.




(2)
            Remaining
      shares available as of December 31, 2009 for future issuance under our
      2009 Plan (including 3,628,500 shares that remained available on May 15,
      2009 under our 2006 Plan and that are now available for issuance under our
      2009 Plan).




(3)
            Description
      of equity compensation plans not approved by security
    holders:




On
December 15, 2009, we entered into a Loan and Security Agreement (the “Loan
Agreement”) with HWH Lending LLC, a Delaware limited liability company (the
“Lender”).  Under the terms of the Loan Agreement, we borrowed
$515,000 from the Lender on December 15, 2009 (the “First Loan”).  We
have the right to borrow an additional $500,000 from the Lender upon our
request, after the end of the first calendar month in which we realize positive
cash flow (the “Second Loan”, and together with the First Loan, the
“Loans”).  In addition, the Lender has the right to require us to
accept the Second Loan upon notice, after the end of the first month in which we
realize positive cash flow.  The Lender’s right and obligation to make
the Second Loan terminate on the later of 12 months after the date of the First
Loan, or 12 months after we first realize positive cash flow.  The
proceeds of the Loans will be used by us for working capital
purposes.  The Loans will be evidenced by promissory notes (the
“Notes”), and will bear interest at the rate of 12% per annum, payable at
maturity.  The maturity date of each Loan is one year from the date of
the Loan.  The Loans may be prepaid in whole or in part at any time by
us without penalty, upon 15 days notice.




In
consideration of the First Loan, we granted the Lender a warrant to purchase
6,250,000 shares of our common stock at a purchase price of $0.08 per
share.  If we receive the Second Loan, we will grant the Lender an
additional warrant to purchase 6,250,000 shares of common stock at a purchase
price of $.08 per share.  Each warrant may be exercised in whole or in
part and from time to time for a term of five years from its grant
date.  The Lender has customary “piggy-back” registration rights with
respect to the common stock issued or issuable upon the exercise of the warrants
(the “Warrant Shares”).  In addition, the Lender has demand
registration rights with respect to the Warrant Shares, so that upon written
request of the Lender, we will be obligated to prepare and file with the U.S.
Securities and Exchange Commission a registration statement sufficient to permit
the resale of the Warrant Shares.  The Lenders’ registration rights
terminate on the date on which all of the Warrant Shares may be sold under Rule
144 of the Securities Act of 1933 without any limitations.  The
warrants contain customary anti-dilution and purchase price adjustment
provisions.  The warrants are transferable in whole or in part, so
long as the transfers comply with applicable securities laws.




51




Security
Ownership of Certain Beneficial Owners and Management





The
following table sets forth certain information regarding the ownership of our
Common Stock as of April 8, 2010 by: (a) each current director;
(b) each executive officer; (c) all of our current executive officers
and directors as a group; and (d) all those known by us to be beneficial
owners of more than five percent of our Common Stock.





Name(1)
            
            Number
      of
              Shares
              Beneficially
              Owned(2)
            
            
            Percentage
      of
              Shares
              Beneficially
              Owned(3)5%
      or Greater Stockholders:Cape
      Bear Partners, LLC (4)
            
            
            26,662,800
            
            
            
            13.5
            %Jason
      Smith (5)
            
            
            47,873,486
            
            
            
            24.2
            %Executive
      Officers and Directors:Lalit
      Dhadphale (6)
            
            
            38,814,992
            
            
            
            19.6
            %Patrick
      E. Delaney (7)
            
            
            2,609,100
            
            
            
            1.3
            %Youssef
      Bennani  (8)
            
            
            -0-
            
            
            
            0
            %Norman
      E. Corn (9)
            
            
            2,635,596
            
            
            
            1.3
            %All
      executive officers and directors as a group (4 persons)
            
            
            44,059,688
            
            
            
            21.7
            %




(1)
            The
      address of each officer and director is c/o HealthWarehouse.com, Inc., 100
      Commerce Boulevard, Cincinnati, Ohio
45140.




(2)
            This
      table is based upon information supplied by officers, directors and
      principal stockholders and Schedules 13D and 13G filed with the
      SEC.  Unless otherwise indicated, includes shares owned by a
      spouse, minor children and relatives sharing the same home, as well as the
      entities owned or controlled by the named person.  Also includes
      shares if the named person has the right to acquire those shares within 60
      days after March 12, 2010, by the exercise of any warrant, stock option or
      other right.  Unless otherwise indicated in the footnotes to
      this table and subject to community property laws where applicable, we
      believe that each of the stockholders named in this table has sole voting
      and investment power with respect to the shares indicated as beneficially
      owned.




(3)
            Applicable
      percentages are based on 197,965,731 shares of Common Stock outstanding on
      March 12, 2010, adjusted as required by rules promulgated by the
      SEC.    Does not include 107,501 shares of Series A
      Preferred outstanding on March 12, 2010, which shares are convertible into
      1,075,010 shares of Common Stock.  The shares of common stock
      and shares underlying convertible preferred stock and stock options or
      warrants are deemed outstanding for purposes of computing the percentage
      of the person holding such convertible preferred stock and/or stock
      options or warrants but are not deemed outstanding for the purpose of
      computing the percentage of any other
person.




(4)
            Lynn
      Peppel is the Managing Member of Cape Bear Partners LLC and has sole
      voting and investment power over the shares owned by Cape Bear Partners
      LLC. Address Cape Bear  LLC 703 Solana Shores Drive, Apt 406B
      Cape Canaveral, Fl 32920




(5)
            Includes
      (i) 2,820,160 shares owned directly by Jason Smith, and (ii) 45,053,326
      shares owned by Rock Castle Holdings, LLC.  Does not include
      stock options to purchase 2,000,000 and 5,000,000 shares of common stock
      held by Jason Smith and Rock Castle, respectively, that are not currently
      exercisable.  As the Manager of Rock Castle, Jason Smith has
      sole voting and investment power over the shares owned by Rock Castle and,
      as such, is deemed to beneficially own such shares.  Address
      Rock Castle Holdings,LLC 6434 Hamilton Mason Road Hamilton , Ohio
      45069




52




(6)
            Does
      not include stock options to purchase 5,000,000 shares of common stock
      that are not currently exercisable.(7)
            Includes
      stock options to purchase 2,359,000 shares of common stock. Does not
      include stock options to purchase 4,109,000 shares of common stock that
      are not currently exercisable.(8)
            Does
      not include stock options to purchase 3,000,000 shares of common stock
      that are not currently exercisable.(9)
            Includes
      stock options to purchase 2,359,000 shares of common
      stock.  Does not include options to purchase 2,109,000 shares of
      common stock that are not currently
exercisable.





Item 13. Certain Relationships and
Related Transactions, and Director Independence.





Related
Party Transactions





Lalit
Dhadphale, our President and Chief Executive Officer, and Cape Bear Partners
LLC, the beneficial owner of 13.5% of our common stock, have guaranteed Old HW’s
obligations under certain Old HW convertible promissory notes with an original
principal value of approximately $1,200,000, which notes we assumed in
connection with the Exchange. The guarantees state that Mr. Dhadphale and Cape
Bear Partners LLC each guarantee the full payment of principal and interest
under the notes. The guarantees terminate with respect to each note upon the
earlier of repayment of principal and interest under each note or conversion of
the note to equity. In the event of note conversion, the guarantees remain in
place with respect to any interest due and unpaid through the date of conversion
until that interest has been paid. During the fourth quarter of 2009, the
holders of notes in an aggregate principal amount of $575,000 elected to convert
their notes.  The maximum principal exposure of each of Mr. Dhadphale
and Cape Bear Partners LLC pursuant to the guarantees as of December 31, 2009 is
$625,000 plus interest.





On December 15, 2009, we entered into a
Loan and Security Agreement (the “Loan Agreement”) with HWH Lending LLC, a
Delaware limited liability company (the “Lender”).  Under the terms of
the Loan Agreement, we borrowed $515,000 from the Lender on December 15, 2009
(the “First Loan”).  We have the right to borrow an additional
$500,000 from the Lender upon our request, after the end of the first calendar
month in which we realize positive cash flow (the “Second Loan”, and together
with the First Loan, the “Loans”).  In addition, the Lender has the
right to require us to accept the Second Loan upon notice, after the end of the
first month in which we realize positive cash flow.  The Lender’s
right and obligation to make the Second Loan terminate on the later of 12 months
after the date of the First Loan, or 12 months after we first realize positive
cash flow.  The proceeds of the Loans will be used by us for working
capital purposes.  The Loans will be evidenced by promissory notes
(the “Notes”), and will bear interest at the rate of 12% per annum, payable at
maturity.  The maturity date of each Loan is one year from the date of
the Loan.  The Loans may be prepaid in whole or in part at any time by
the Company without penalty, upon 15 days notice.  Lalit Dhadphale,
our President and Chief Executive Officer, has personally guaranteed our payment
and other obligations under the Loan Agreement and the Notes.  Mr.
Dhadphale has also entered into a Lock-up Agreement with the Lender prohibiting
Mr. Dhadphale from selling or transferring 12,500,000 shares of our common stock
until the Loans are repaid in full, subject to certain exceptions, such as
gifts.




As of
March 12, 2010, Jason Smith is the beneficial owner of 47,873,486 shares, or
24.2% of our common stock, of which 2,820,160 shares are owned by him directly,
and 45,053,326 shares are beneficially owned by Rock Castle Holdings, LLC (“Rock
Castle”).  As the Manager of Rock Castle, Jason Smith has sole voting
and investment power over the shares owned by Rock Castle and, as such, is
deemed to beneficially own such shares.




53




We are a
party to oral consulting agreements with Jason Smith and Rock Castle under which
Jason Smith and affiliates of Rock Castle provide purchasing and advisory
services to us.   Pursuant to these consulting agreements, on May
20, 2009, we granted to Jason Smith and Rock Castle, respectively, non-qualified
options to purchase 2,000,000 and 5,000,000 shares of our common stock, all with
a ten year term. These options vest in equal annual installments on May 20,
2010, May 20, 2011 and May 20, 2012.  The consulting agreements are
terminable at will.





The
Company occupies approximately 16,000 square feet of office and storage space
under a Commercial Sublease Agreement with 100 Commerce Boulevard LLC, an entity
that is also controlled by Jason Smith. The sublease currently has a monthly
rental rate of $9,417, through March 2011, its expiration
date.   The rent expense under the sublease for the years ended
December 31, 2009 and December 31, 2008 was $93,750 and $16,700,
respectively.





Jason
Smith is also the son of Dennis Smith, the controlling stockholder of Masters
Pharmaceutical, Inc., one of the Company’s principal suppliers.  We
purchased from Masters Pharmaceutical, Inc., $1,342,997 and $1,033,623 of
supplies during the years ended December 31, 2009 and 2008,
respectively.  Wayne A. Corona, formerly our Secretary and a member of
our board of directors, is Vice President of Business Development at Masters
Pharmaceutical, Inc.





On April
29, 2009, as a part of the Old HW private financing completed before the
Exchange, we issued to Wayne A Corona, formerly our Secretary and a member of
our board of directors, $75,000 in principal amount of convertible promissory
notes convertible into 991,005 shares of our common stock in consideration of
$75,000 in cash.  On the same date, we issued to MKW Partners, LLC, of
which Mr. Corona is the Manager, $50,000 in principal amount of convertible
promissory notes convertible into 660,623 shares of our common stock in
consideration of $50,000 in cash.  Mr. Corona and MKW Partners elected
to convert these notes in the fourth quarter of 2009, and received an aggregate
of 1,651,628 shares of our common stock in exchange.





On April
30, 2009, also as a part of such Old HW private financing, we issued to Kip
Ferguson, the brother of a former Old HW director, Ron Ferguson, $25,000 in
principal amount of convertible promissory notes convertible into 330,382 shares
of our common stock in consideration of $25,000 in cash.  Mr. Ferguson
elected to convert his note in the fourth quarter of 2009, and received 330,382
shares of our common stock in exchange.





On May 8,
2009, also as a part of such Old HW private financing, we issued to Rock Castle
$300,000 in principal amount of convertible promissory notes convertible into
3,963,594 shares of our common stock in consideration of $300,000 in
cash.  Rock Castle elected to convert its promissory note in the
fourth quarter of 2009, and received 3,963,594 shares of our common stock in
exchange.





On May
20, 2009, we granted Mr. Corona non-qualified options to purchase 5,000,000
shares of our common stock, all with a five year term.  These options
would have vested in equal annual installments on May 20, 2010, May 20, 2011 and
May 20, 2012.  These options terminated on November 9, 2009, the date
Mr. Corona resigned from our Board.




54




Ron
Ferguson, a former Old HW director, has guaranteed Old HW’s obligations to
supplier Prescription Supply Inc.  Mr. Ferguson is the spouse of Diane
Ferguson, a stockholder of our company.  The guarantee, and Mr.
Ferguson’s maximum exposure under the guarantee, does not have a fixed dollar
limit.  As of December 31, 2009, there was $6,172 due to Prescription
Supply Inc.





Although
we have not adopted formal procedures for the review, approval or ratification
of transactions with related persons, we adhere to a general policy that such
transactions should only be entered into if they are on terms that, on the
whole, are no more favorable, or no less favorable, than those available from
unaffiliated third parties and their approval is in accordance with applicable
law. Such transactions require the approval of our board of
directors.








Director
Independence





Our board
of directors has determined that Youssef Bennani is “independent” within the
meaning of Rule 5605(a)(2) of the National Association of Securities Dealers’
Marketplace Rules of the Nasdaq Stock Market (the “NASDAQ Rules”), and that he
is also “independent” for purposes of Rule 10A-3 of the Exchange Act. Lalit
Dhadphale and Norman E. Corn are not “independent” within the meaning of Rule
5605(a)(2) of the NASDAQ Rules.  In addition, Frank S. Russo and
Stephen M. Deixler, who resigned from our board of directors effective May 14,
2009 and June 27, 2009, respectively, and who were formerly members of our audit
committee, compensation committee and nominating committee, were “independent”
within the meaning of Rule 5605(a)(2) of the NASDAQ Rules and for purposes of
Rule 10A-3 of the Exchange Act.





In making
each of these independence determinations, our board of directors considered and
broadly assessed, from the standpoint of materiality and independence, all of
the information provided by each director in response to detailed inquiries
concerning the director’s independence and any direct or indirect business,
family, employment, transactional or other relationship or affiliation of such
director with our company





Item 14. Principal Accounting Fees
and Services.





The
following table presents fees for professional services rendered by the
Company’s principal accountants.  Prior to May 14, 2009, Clark
Schaeffer Hackett LLP served as principal accountants. Marcum LLP, formerly
known as Marcum & Kliegman LLP (“Marcum”) became our principal accountant on
May 14, 2009 the table below represents amounts billed for the audit of the
Company’s annual consolidated financial statements for the years ended December
31, 2009, and December 31, 2008, and fees billed for other services rendered by
our principal accountants during those periods.




Year
      Ended
            
            
            Year
      EndedDecember 31, 2009
            
            
            December 31, 2008Audit
      Fees (1)
            
            $
            95,628
            
            
            $
            18,190Audit
      Related Fees (2)
            
            
            -
            
            
            
            -Tax
      Fees (3)
            
            
            -
            
            
            
            -All
      Other Fees (4)
            
            
            -
            
            
            
            -




55





(1)           Audit
fees were principally for audit work performed on our annual
financial   statements and review of our interim financial
statements





(2)           There
were no “audit-related services” during the period.





(3)           There
were no “tax services” during the period.





(4)           There
were no “other services” during the period.





During
the year ended December 31, 2009, the Company did not have an audit committee.
An audit committee was formed on April 8, 2010 (see item 10 of this report).
However, all audit and non-audit services performed by Marcum were pre-approved
by the Board of Directors.







PART
IV





Item 15. Exhibits, Financial
Statement Schedules.





(a)           Exhibits:





Exhibit
      No.
            Description2.1
            Share
      Exchange Agreement, dated May 14, 2009, between Clacendix, Inc. and
      HealthWarehouse.com, Inc. (1)3.1
            Certificate
      of Incorporation of the Company, as amended through December 31, 2005
      (2)3.2
            Certificate
      of Amendment of the Certificate of Incorporation of the Company, filed on
      January 4, 2008 (3)3.3
            Certificate
      of Amendment of the Certificate of Incorporation of the Company, filed on
      July 14, 2008 (4)3.4
            Certificate
      of Amendment of the Certificate of Incorporation of the Company, filed on
      July 31, 2009 (5)




56




3.5
            By-Laws
      of the Company (6)4.1
            Form
      of Old HW Convertible Promissory Note*4.2
            Senior
      Secured Promissory Note dated December 15, 2009 in the principal amount of
      $515,000 payable by the Company to the order of HWH Lending, LLC
      (7)4.3
            Warrant
      to Purchase 6,250,000 Shares of the Common Stock of the Company, dated
      December 15, 2009 and issued to HWH Lending, LLC (7)10.1
            1998
      Stock Option Plan of the Company (6) +10.2
            2000
      Stock Option Plan of the Company (2) +10.3
            2006
      Stock Option Plan of the Company (2) +10.4
            Form
      of Incentive Stock Option Agreement under 2006 Stock Option Plan of the
      Company (8) +10.5
            Old
      HW Convertible Promissory Note Subscription Agreement*10.6
            Old
      HW Convertible Promissory Note and Warrants to Purchase Common Stock
      Subscription Agreement*10.7
            2009
      Incentive Compensation Plan (9) +10.8
            Form
      of Stock Option Agreements under 2009 Incentive Compensation Plan*
      +10.9
            Loan
      and Security Agreement dated December 15, 2009 among HealthWarehouse.com,
      Inc. and Hwareh.com, Inc. as Borrowers, and HWH Lending LLC, as Lender
      (7)16.1
            Letter
      of Clark, Schaefer, Hackett & Co.(10)21.1
            Subsidiaries
      of the Registrant *23.1
            Consent
      of Marcum LLP*23.2
            Consent
      of Clark, Schaefer, Hackett & Co.*31.1
            Certification
      of CEO Pursuant to Section 302 of the Sarbanes Oxley Act of
      2002*




57




31.2
            Certification
      of CFO Pursuant to Section 302 of the Sarbanes Oxley Act of
      2002*32.1
            Certification
      of CEO Pursuant to Section 906 of the Sarbanes Oxley Act of
      2002*32.2
            Certification
      of CFO Pursuant to Section 906 of the Sarbanes Oxley Act of
      2002*





* Filed
herewith.





+ Denotes
Management Compensatory Plan or Contract.





(1)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on May 15,
      2009.





(2)
            Incorporated
      by reference to the Company’s Annual Report on Form 10-K SB filed on March
      29, 2006.





(3)
            Incorporated
      by reference to the Company’s Annual Report on Form 10-K filed on March
      27, 2009.





(4)
            Incorporated
      by reference to the Company’s Annual Report Amendment on Form 10-KA filed
      on May 14, 2009.





(5)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on August
      6, 2009.





(6)
            Incorporated
      by reference to the Company’s Registration Statement on Form S-8 filed on
      April 22, 1999.





(7)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on December
      17, 2009.





(8)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on November
      14, 2006.





(9)
            Incorporated
      by reference to the Company’s Current Report Amendment on Form 8-KA filed
      on May 26, 2009.





(10)
            Incorporated
      by reference to the Company’s Current Report Amendment on Form 8-KA filed
      on August 17, 2009.




58




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




Dated:
      April 15, 2010
            HEALTHWAREHOUSE.COM,
      INC.
              By:/s/ Lalit
      Dhadphale
              Lalit Dhadphale
              President and Chief Executive
      Officer
              (principal executive
      officer)




59




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




Name
              
              Title
              
              Date/s/
      Lalit
      Dhadphale
                Lalit
      Dhadphale
              
              President,
      Chief Executive Officer and Director
                (principal
      executive officer)
              
              April
      15, 2010/s/
      Youssef
      Bennani
                Youssef
      Bennani
              
              Director
              
              April
      15, 2010/s/
      Norman E.
      Corn
                Norman
      E. Corn
              
              Director
              
              April
      15, 2010/s/
      Patrick E.
      Delaney
                Patrick
      E. Delaney
              
              Chief
      Financial Officer, Treasurer
                Secretary
      (principal financial and
                Accounting
      officer)
              
              April
      15, 2010
  60




Healthwarehouse,
Inc. and Subsidiaries





Index
to Consolidated Financial Statements


For the Years Ended December
31, 2009 and 2008





Page(s)Reports
      of Independent Registered Public Accounting Firms
                  
                  
                  62-63Consolidated
      Financial Statements:Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                  
                  
                  64Consolidated
      Statements of Operations for the Years Ended December 31, 2009 and
      2008
                  
                  
                  65Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009 and
      2008
                  
                  
                  66Consolidated
      Statements of Stockholders' Equity for the Years Ended December 31, 2009
      and 2008
                  
                  
                  67Notes
      to Consolidated Financial Statements
                  
                  
                  68-79




61




Report of
Independent Registered Public Accounting Firm





To
      the Audit Committee of the Board of Directors and Stockholders
      ofHealthwarehouse.com,
      Inc.We
      have audited the accompanying consolidated balance sheet of
      Healthwarehouse.com, Inc. and Subsidiaries (the “Company”) as of December
      31, 2009, and the related consolidated statement of operations,
      stockholders’ deficiency and cash flows for the year then ended. These
      consolidated financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audit.We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that
      we plan and perform the audit to obtain reasonable assurance about whether
      the financial statements are free of material misstatement. The Company is
      not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting. Our audit included
      consideration of internal control over financial reporting as a basis for
      designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we
      express no such opinion. An audit also includes examining, on a test
      basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant
      estimates made by management, as well as evaluating the overall financial
      statement presentation. We believe that our audit provides a reasonable
      basis for our opinion.In
      our opinion, the consolidated financial statements referred to above
      present fairly, in all material respects, the consolidated financial
      position of Healthwarehouse.com, Inc. and Subsidiaries as of December 31,
      2009, and the results of their operations and their cash flows for the
      year then ended, in conformity with accounting principles generally
      accepted in the United States of America.
              
              The
      accompanying financial statements have been prepared assuming that the
      Company will continue as a going concern. As more fully described in
      Note 2, the Company has incurred significant operating losses and may
      need to raise additional funds to meet its obligations and sustain its
      operations.  These conditions raise substantial doubt about the
      Company’s ability to continue as a going concern. Management’s plans in
      regard to these matters are also described in Note 2. The financial
      statements do not include any adjustments that might result from the
      outcome of this uncertainty./s/ Marcum
      LLPNew
      York, NYApril
      15, 2010




62




Report of
Independent Registered Public Accounting Firm




To the
Board of Directors and


Stockholders
of Healthwarehouse.com, Inc.:






We have
audited the accompanying balance sheet of Healthwarehouse.com, Inc. as of
December 31, 2008, and the related statements of income, stockholders’ equity,
and cash flows for the year ended December 31, 2008. Healthwarehouse.com, Inc.’s
management is responsible for these financial statements. Our responsibility is
to express an opinion on these financial statements based on our
audit.






We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.






In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Healthwarehouse.com, Inc. as of
December 31, 2008, and the results of its operations and its cash flows for the
year ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.




/s/Clark, Schaefer,
      Hackett & Co.Cincinnati,
      Ohio
              March
      16, 2009
              (except
      for Note 1, as to which the date is April 15, 2010 for the effect of the
      reverse acquisition discussed in Note 1)




63




HEALTHWAREHOUSE.COM,
INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS











AssetsDecember 31, 2009
            
            
            December
      31, 2008Current
      assetsCash
            
            $
            191,181
            
            
            $
            357,938Accounts
      receivable
            
            
            277,716
            
            
            
            12,317Inventories
            
            
            388,748
            
            
            
            84,480Prepaid
      expenses and other current assets
            
            
            190,999
            
            
            
            -Total
      current assets
            
            $
            1,048,644
            
            
            $
            454,735Property
      and equipment, net
            
            
            318,793
            
            
            
            315,969Website
      development costs, net of accumulated amortization of  $39,275
      and $0
            
            
            161,121
            
            
            
            70,397Total  assets
            
            $
            1,528,558
            
            
            $
            841,101








Liabilities
      and Stockholders’ (Deficiency)EquityCurrent
      liabilitiesAccounts
      payable – related parties
            
            $
            73,254
            
            
            $
            380,279Accounts
      payable – trade
            
            
            802,607
            
            
            
            156,448Accrued
      expenses
            
            
            72,766
            
            
            
            -Note
      payable, net of deferred debt discount of $157,713
            
            
            357,287
            
            
            
            -Total
      current liabilities
            
            $
            1,305,914
            
            
            $
            536,727Convertible
      notes, net of deferred debt discount of $30,737
            
            
            594,263
            
            
            
            -Total
      liabilities
            
            $
            1,900,177
            
            
            $
            536,727Commitments
      and contingenciesStockholders’
      (deficiency)equityPreferred
      stock – par value $.001 per share; authorized 1,000,000
      shares;
              200,000
      shares designated Series A; 107,501 and 0 shares issued and
              outstanding
      (aggregate liquidation preference $172,016)
            
            
            108
            
            
            
            -Common
      stock – par value $.001 per share; authorized 750,000,000
      shares;
              197,635,349
      and 154,876,449 shares issued and outstanding
            
            
            197,635
            
            
            
            154,876Additional
      paid-in capital
            
            
            2,548,098
            
            
            
            827,456Accumulated
      deficit
            
            
            (3,117,460
            )
            
            
            (677,958
            )Total
      stockholders’ (deficiency) equity
            
            
            (371,619
            )
            
            
            304,374Total
      liabilities and stockholders’ (deficiency) equity
            
            $
            1,528,558
            
            
            $
            841,101





The
accompanying notes are an integral part of these consolidated financial
statements.





64




HEALTHWAREHOUSE.COM,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS





For
      the Year Ended
              December
      31, 2009
            
            
            For
      the Year Ended
              December
      31, 2008Net
      sales
            
            $
            3,783,542
            
            
            $
            1,270,527Cost
      of sales
            
            
            2,635,258
            
            
            
            970,627Gross
      profit
            
            
            1,148,284
            
            
            
            299,900Operating
      expenses:Selling,
      general and administrative expenses
            
            
            3,646,915
            
            
            
            969,837Loss
      from operations
            
            
            (2,498,631
            )
            
            
            (669,937
            )Interest
      Expense
            
            
            (37,545
            )
            
            
            -Other
      income (expense)
            
            
            96,674
            
            
            
            2,636Net
      loss
            
            $
            (2,439,502
            )
            
            $
            (667,301
            )Per
      share data:Net
      loss per common shareBasic
      and diluted
            
            $
            (0.01
            )
            
            $
            (0.00
            )Weighted
      average number of common shares outstandingBasic
      and diluted
            
            
            177,696,871
            
            
            
            154,876,449








The
accompanying notes are an integral part of these consolidated financial
statements.





65





HEALTHWAREHOUSE.COM,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS








For
      the Year
              Ended
      December 31, 2009
            
            
            For
      the Year
              Ended
      December 31, 2008Cash
      flows from operating activitiesNet
      loss
            
            $
            (2,439,502
            )
            
            $
            (667,301
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Bad
      Debt
            
            
            -
            
            
            
            54,753Depreciation
      and amortization
            
            
            83,104
            
            
            
            10,612Amortization
      of web development costs
            
            
            39,275
            
            
            
            -Non-cash
      stock-based compensation
            
            
            260,318
            
            
            
            -Amortization
      of deferred debt discount
            
            
            21,574
            
            
            
            -Extinguishment
      of debt
            
            
            (96,069
            )
            
            
            -Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (265,399
            )
            
            
            (57,622
            )Inventories
            
            
            (304,268
            )
            
            
            (84,480
            )Prepaid
      expenses and other current assets
            
            
            (191,001
            )
            
            
            -Accounts
      payable – trade
            
            
            388,279
            
            
            
            435,874Accounts
      payable – related parties
            
            
            (307,024
            )
            
            
            -Accrued
      expenses
            
            
            252
            
            
            
            (105
            )Net
      cash used in operating activities
            
            
            (2,810,461
            )
            
            
            (308,269
            )Cash
      flow from investing activitiesCash
      received in share exchange
            
            
            1,220,520
            
            
            
            -Acquisition
      of property and equipment
            
            
            (85,928
            )
            
            
            (169,556
            )Expenses
      paid in conjunction with share exchange
            
            
            (150,000
            )
            
            
            -Website
      development costs
            
            
            (129,999
            )
            
            
            (70,397
            )Net
      cash provided by (used in) investing activities
            
            
            854,593
            
            
            
            (239,953
            )Cash
      flows from financing activitiesProceeds
      from notes payable
            
            
            515,000
            
            
            
            -Proceeds
      from sale of common stock
            
            
            50,196
            
            
            
            873,332Proceeds
      from option/warrant exercises
            
            
            23,915
            
            
            
            -Proceeds
      from sale of convertible notes
            
            
            1,200,000
            
            
            
            -Advances
      from former director
            
            
            25,000
            
            
            
            -Repayment
      of advances from former director
            
            
            (25,000
            )
            
            
            -Net
      cash provided by financing activities
            
            
            1,789,111
            
            
            
            873,332Net
      increase(decrease) in cash
            
            
            (166,757
            )
            
            
            325,110Cash
      – beginning of year
            
            
            357,938
            
            
            
            32,828Cash
      – end of year
            
            $
            191,181
            
            
            $
            357,938Cash
      paid for:Interest
            
            $
            1,680
            
            
            
            -Taxes
            
            $
            -
            
            
            
            -




Non-cash
      investing and financing activities:Equipment
      purchased note payable and common stock
              
              $
              -
              
              
              $
              150,000Conversion
      of debt to common stock
              
              $
              575,000
              
              
              $
              -Warrants
      issued in financing transaction
              
              $
              210,024
              
              
              $
              -Share
      exchange expenses included in accounts payable
              
              $
              110,656
              
              
              $
              -Net assets received in share
    exchange:Cash
              
              $
              1,220,520Accounts
      payable
              
              
              (147,276
              )Accrued
      expenses
              
              
              (168,531
              )Net
      assets
              
              $
              904,713




The
accompanying notes are an integral part of these consolidated financial
statements.





66




Healthwarehouse.com,
Inc. and Subsidiaries


Consolidated
Statements of Stockholders’ (Deficiency)Equity


For
the Years Ended December 31, 2009 and 2008




Preferred
                
                
                Common
                
                
                Additional
                  Paid-In
                  Capital
                
                
                Accumulated
      Deficit
                
                
                Total
                  Stock
      Stockholders’ EquityShares
                
                
                Stock
                
                
                Shares
                
                
                Stock
                
                
                
                
                
                
                
                
                (Deficiency)Balances,
      January 1, 2008
                
                
                -
                
                
                $
                -
                
                
                
                141,008
                
                
                $
                141
                
                
                $
                8,859
                
                
                $
                (10,657
                )
                
                $
                (1,657
                )Common
      stock issued in Private Placement
                
                
                
                
                
                
                
                
                
                
                138,952,426
                
                
                
                138,952
                
                
                
                734,380
                
                
                
                
                
                
                
                873,332Common
      Stock issued for equipment
                
                
                
                
                
                
                
                
                
                
                15,783,015
                
                
                
                15,783
                
                
                
                84,217
                
                
                
                
                
                
                
                100,000Net
      Loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (667,301
                )
                
                
                (667,301
                )Balances,
      December 31, 2008
                
                
                -
                
                
                
                -
                
                
                
                154,876,449
                
                
                
                154,876
                
                
                $
                827,456
                
                
                $
                (677,958
                )
                
                $
                304,374Common
      Stock issued in Private Placement
                
                
                
                
                
                
                
                
                
                
                318,114
                
                
                
                318
                
                
                
                49,878
                
                
                
                
                
                
                
                50,196Effects
      of  reverse recapitalization
      on May 14, 2009
                
                
                155,557
                
                
                
                156
                
                
                
                33,056,161
                
                
                
                33,056
                
                
                
                871,501
                
                
                
                
                
                
                
                904,713Costs
      Associated with reverse recapitalization
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (260,656
                )
                
                
                
                
                
                
                (260,656
                )Exercise
      of Stock Options and Warrants, net
                
                
                
                
                
                
                
                
                
                
                1,306,833
                
                
                
                1,307
                
                
                
                22,607
                
                
                
                
                
                
                
                23,914Conversion
      of Preferred Stock
                
                
                (48,056
                )
                
                
                (48
                )
                
                
                480,560
                
                
                
                481
                
                
                
                (433
                )
                
                
                
                
                
                
                -Conversion
      of convertible Debentures into common stock
                
                
                
                
                
                
                
                
                
                
                7,597,232
                
                
                
                7,597
                
                
                
                567,403
                
                
                
                
                
                
                
                575,000Debt
      Discount - convertible debentures
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                45,453
                
                
                
                
                
                
                
                45,453Debt
      Discount – Note Payable
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                164,571
                
                
                
                
                
                
                
                164,571Non-cash
      stock-based compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                260,318
                
                
                
                
                
                
                
                260,318Net
      Loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,439,502
                )
                
                
                (2,439,502
                )Balances,
      December 31, 2009
                
                
                107,501
                
                
                $
                108
                
                
                
                197,635,349
                
                
                $
                197,635
                
                
                $
                2,548,098
                
                
                $
                (3,117,460
                )
                
                $
                (371,619
                )





The
accompanying notes are an integral part of these consolidated financial
statements.




67




HEALTHWAREHOUSE.COM,
INC. AND SUBSIDIARIES


Notes to Consolidated Financial
Statements





1.
 Organization, Basis of Presentation and Reverse
Recapitalization








On May
14, 2009, Hwareh.com, Inc. completed a share exchange transaction with
Clacendix, Inc. (“Clacendix”), pursuant to the terms of a Securities
Exchange Agreement, dated as of May 14, 2009.  Under the Securities
Exchange Agreement, Clacendix acquired all the outstanding capital stock of
Hwareh.com, Inc. As a result of the exchange, the former stockholders of
Hwareh.com, Inc. owned 155,194,563 shares or approximately 82.4% of the
outstanding shares of common stock of Clacendix. Each share of Hwareh.com which
was previously outstanding was exchanged for 141.008 shares of Clacendix. This
transaction was accounted for as a reverse recapitalization, whereby Hwareh.com,
Inc. is deemed to be the accounting acquirer for accounting purposes. The
net assets received in the share exchange transaction were recorded at
historical costs. Following the closing of the share exchange transaction with
Hwareh.com, Clacendix succeeded to the business of Hwareh.com as its sole line
of business.  Effective August 5, 2009, Clacendix changed its
corporate name to HealthWarehouse.com, Inc. The financial statements set forth
in this report for all periods prior to the reverse re-capitalization are the
historical financial statements of Healthwarehouse.com Inc. and subsidiaries
(“The Company”), and have been retroactively restated to give effect to the
share exchange transaction.  The operations of Clacendix from the date
of the share exchange transaction through December 31, 2009 have been included
in operations.





Prior to
the share exchange, Clacendix’s predecessor company was formed as a New Jersey
corporation in 1982 as MicroFrame, Inc. In March 1999 MicroFrame, Inc. was
reincorporated in the State of Delaware and in the process changed its name to
ION Networks, Inc.   In December 2007, ION sold substantially all
of its operating assets to Cryptek, Inc., a Delaware
corporation.  Pursuant to the Cryptek sale, ION changed its name to
Clacendix, Inc.  Following the date of the Cryptek sale and until the
closing of our share exchange transaction with Hwareh.com, Clacendix existed as
a shell company with no operations that was seeking a target company with which
to merge or to complete a business combination.




The
Company is a U.S. licensed virtual retail pharmacy (“VRP”) and healthcare
e-commerce company that sells brand name and generic prescription drugs as well
as over-the-counter (“OTC”) medical products. The Company’s objective is to be
viewed by individual healthcare product consumers as a low-cost, reliable and
hassle-free provider of prescription drugs and OTC medical
products.





The
Company is presently licensed as a mail-order pharmacy for sales to 45 states
and the District of Columbia, and intends to apply for and obtain licenses to
sell prescriptions in all 50 states by the end of June 2010. The Company has
begun accepting health insurance as part of its prescription program,
contracting with insurance providers based on customer demand and business
opportunity.





2.
Going Concern and Management’s Liquidity Plans





As of
December 31, 2009, the Company had $191,181 in cash and cash equivalents and a
working capital deficiency of $257,272.  During the year ended
December 31, 2009, the Company generated revenue of $3,783,542 and a net loss
of  $2,439,502.  For the year ended December 31, 2009, cash
flows included net cash used in operating activities of  $2,810,461
net cash provided by investing activities of $854,593 and net cash provided by
financing activities of $1,789,111.





Since
inception, the Company has financed its operations primarily through product
sales to customers, and debt and private equity investments by existing
stockholders, officers and directors.  During the year ended December
31, 2009, the Company’s cash and cash equivalents were reduced by approximately
$166,757.





Based
upon projected operating expenses, the Company believes that its working
capital as of December 31, 2009 may not be sufficient to fund its plan of
operations for the next twelve months.  The Company anticipates that
it will need to raise additional capital in order to meet operations and execute
its business plans.  Management has also indicated that the Company is
taking certain steps to improve its operations and cash flows, including the
re-launch of its corporate website, improved inventory management and an
increase in the number of suppliers.   Management has indicated
that the Company is in discussions with certain parties regarding various
financing opportunities including selling additional capital stock and/or
entering into debt facilities.  However, the Company does not know at
this time whether the any such transactions between the Company and any third
party, will be consummated and, if consummated, when it might occur, or if the
terms would be acceptable to us.  In addition, the SEC’s penny stock
rules may further impact the Company’s ability to obtain debt and or equity
financing.  If the Company cannot raise sufficient funds on acceptable
terms, it may have to curtail its level of expenditures and scope of
operations.




68




These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. Accordingly, the accompanying consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America, which contemplate 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 financial statements do not necessarily purport to
represent realizable or settlement values. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.





3.
Summary of Significant Accounting Policies




Principles
of Consolidation





The
consolidated financial statements include the accounts of HealthWarehouse.com,
Inc. and Hwareh.com, Inc., ION Holding NV, ION Belgium NV its wholly-owned
inactive subsidiaries. All material inter-company balances and transactions have
been eliminated in consolidation.





Use
of Estimates





The
preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.  The Company’s
significant estimates include depreciation, stock-based compensation, valuation
of warrants, and deferred tax assets, which have been offset by a valuation
allowance as of December 31, 2009 and 2008.




Reclassifications




Certain accounts in the prior period
financial statements have been reclassified for comparison purposes to conform
to the presentation of the current period financial statements.  These
reclassifications had no effect on the previously reported loss.




Cash





The
Company considers all highly liquid investments with a maturity of three months
or less at the time of purchase to be cash equivalents.





Property
and Equipment





Property
and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Expenditures
for maintenance and repairs, which do not extend the economic useful life of the
related assets, are charged to operations as incurred. Gains or losses on
disposal of property and equipment are reflected in the statements of operations
in the period of disposal.





Impairment
of Long-Lived Assets




The
Company reviews for the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.  An impairment loss would be recognized when estimated
future cash flows expected to result from the use of the asset and its eventual
disposition are less than its carrying amount.  The Company has not
identified any such impairment losses.







Website
Development Costs





In
accordance with Accounting Standards Codification (“ASC”) 350-50 (prior
authoritative literature: Emerging Issues Task Force (“EITF”) Issue No. 00-2,
“Accounting for Web Site Development Costs”) the Company capitalized $129,999
and $70,397 of website development costs for the years ended December 31, 2009
and 2008, respectively. During the years ended December 31, 2009 and 2008, the
Company recorded amortization expense of $39,275 and zero, relating to these
projects, respectively. The Company is amortizing the website development costs
on a straight-line basis over a three year period.





69




Shipping
and Handling Costs





Shipping
and handling costs incurred are not billed to the customer and are recognized in
selling, general and administrative expenses. Such amounts aggregated $280,728
and $128,536 for years ended December 31, 2009 and 2008
respectively.





Fair
Value of Financial Instruments





The
carrying value of items included in working capital approximates fair value
because of the relatively short maturity of these instruments. The convertible
debt approximates fair value because the terms are substantially similar to
comparable debt in the marketplace.





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.  At December 31,
2009 and 2008, the Company did not hold any Level 1 investments.




Level 2 -
Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly. At December 31, 2009 and 2008, the Company
did not hold any level 2 investments.




Level 3 -
Unobservable inputs in which there is little or no market data, which require
the reporting entity to develop its own assumptions.  At December 31, 2009
and 2008, the Company did not hold any Level 3 investments.




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.




Allowance
for Doubtful Accounts Receivable




As of December 31, 2009 and 2008, the
Company did not reduce accountsreceivable by an allowance to estimate
the amount that will actually be collected from our customers because the nature
of the business requires the majority of the paymentsto be made prior to the product being
shipped.  If the financial condition of customers were to materially
deteriorate or the nature of the business were to change from prepayment to post
payment, resulting in an impairment of their ability to make payments, allowances could be required in the
future.  Senior management reviews accountsreceivable on a current basis to
determine if any receivables should be written off.  The Company includes
any accountsreceivable balance that are determined
to be uncollectible, along with a general reserve based on historical
experience, in itsoverall allowance for doubtful
accounts.  During the years ended December
31, 2009 and 2008, the Company incurred bad debtsof $0 and approximately $55,000,
respectively.







Inventories





Inventory
consists primarily of finished goods. The inventories were stated at the lower
of cost (average cost) or market. No reserves for slow moving and obsolete
inventories are provided based on historical experience and current product
demand. If the Company’s estimate of future demand is not correct or if its
customers place significant order cancellations, inventory reserves could be
required in the future.





70




Convertible
Debentures




The
Company records, as a discount to convertible notes, the intrinsic value of such
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 over the term of the related debt to their earliest
date of redemption.




Income Taxes




Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between their financial statement carrying amounts
and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The
Company’s ability to utilize its net operating loss (“NOL”) carry-forwards may
be subject to an annual limitation in future periods pursuant to Section 382 of
the Internal Revenue Code of 1986, as amended.  Although we have federal
and state net operating losses available for income tax purposes that may be
carried forward to offset future taxable income, the deferred tax assets are
subject to a 100% valuation allowance because it is more likely than not that
the deferred tax assets will not be realized in future periods.




Revenue
Recognition




Revenue
for the sales of products are recognized at the time products are delivered and
title passes to customers. The sources of revenue are recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed and
determinable and collectability is probable.




Advertising




The
Company expenses all advertising costs as incurred.  Advertising
expense for the years ended December 31, 2009 and 2008 was approximately
$586,354 and $321,353, respectively.




Sales
Taxes




The
Company accounts for sales taxes imposed on its goods and services on a net
basis in the statement of operations.


Net
Loss per Share of Common Stock





Basic net
loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding during
the period.  Diluted net loss per share reflects the potential dilution
that could occur if securities or other instruments to issue common stock were
exercised or converted into common stock.  Potentially dilutive securities
of 45,869,005 at December 31, 2009 are excluded from the computation of diluted
net loss per share as their inclusion would be antidilutive. These potentially
dilutive securities consist of stock options to purchase up to 30,286,000 shares
of common stock, warrants to purchase up to 6,250,000 shares of common stock,
convertible promissory notes convertible into 8,257,995 shares of common stock
and convertible preferred stock convertible into 1,075,010 shares of common
stock. The Company had no potentially dilutive securities at December 31,
2008.








Stock-Based
Compensation





The
Company accounts for stock-based compensation in accordance with the fair value
recognition provisions of ASC 718 (prior authoritative literature: SFAS 123R,
“Share-Based Payment”) . Stock-based compensation expense for all stock-based
payment awards is based on the estimated grant-date fair value. The Company
recognizes these compensation costs over the requisite service period of the
award, which is generally the option vesting term.  Option valuation models
require the input of highly subjective assumptions including the expected life
of the option. Because the Company’s employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management’s opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The fair value
of stock-based payment awards was estimated using the Black-Scholes option
pricing model using a volatility figure derived from an index of comparable
entities.  Management will review this assumption as the Company’s trading
history becomes a better indicator of value. The Company accounts for the
expected life of options in accordance with the “simplified” method provisions
of SEC Staff Accounting Bulletin (“SAB”) No. 110, which enables the use of the
simplified method for “plain vanilla” share options as defined in SAB No.
107.




71




Stock-based
compensation for the year ended December 31, 2009 was recorded in the
consolidated statements of operations in selling general and administrative line
item and totaled $260,318.  There was no stock-based compensation
incurred during the year ended December 31, 2008.





The fair
value of stock-based payment awards was estimated using the Black-Scholes
pricing model with the following assumptions and weighted average fair values
ranges as follows:


For
      the Year Ended
              December
      31, 2009Risk-free
      interest rate
            
            1.09%
      to 2.65%Dividend
      yield
            
            N/AExpected
      volatility
            
            57.6%Expected
      life in years
            
            2.5
      to 6.00Expected
      forfeiture rate (through term)
            
            0%







4.
Property and Equipment






Property
and equipment consist of the following:






December
      31,
            
            Estimated2009
            
            
            2008
            
            Useful
      LifeComputer
      software
            
            $
            128,198
            
            
            $
            73,661
            
            5  yearsEquipment
            
            
            158,508
            
            
            
            150,000
            
            15  yearsOffice
      furniture and equipment
            
            
            10,093
            
            
            
            4,000
            
            7
      yearsComputer
      hardware
            
            
            25,163
            
            
            
            11,006
            
            5
      yearsLeasehold
      improvements
            
            
            87,914
            
            
            
            87,914
            
            (a)Total
            
            
            409,876
            
            
            
            326,581Less:
      accumulated depreciation and amortization
            
            
            (91,083
            )
            
            
            (10,612
            )Property
      and equipment, net
            
            $
            318,793
            
            
            $
            315,969




(a)
            Lesser
      of useful life or initial term of
lease






Depreciation
and amortization expense for the years ended December 31, 2009 and 2008 was
approximately $83,000 and $11,000, respectively.




5.
Convertible Debt





In
contemplation of and contingent to closing the share exchange transaction, in
the quarter ended June 30, 2009, Hwareh.com, Inc. received the proceeds of
convertible promissory notes aggregating $1,200,000(“Convertible
Debentures”). The notes have a maturity date of two years from the date of
issuance and bear interest at 3.25% per annum, payable quarterly in arrears and
in full upon conversion. The notes are convertible into 15,855,227 shares of the
Company’s common stock at an effective conversion price of $0.0756848 per
share.  The notes are convertible at any time at the option of the
holder. The Company can also cause the conversion of the notes at its option at
any time before maturity and after the shares of the Company’s common stock that
are issuable upon conversion of the notes have been registered for resale
pursuant to an effective registration statement. The notes have customary
anti-dilution provisions in connection with any split, subdivision or
combination of our common stock. Payment of principal, if not converted, and
interest under the notes has been guaranteed by the Company’s President and
Chief Executive Officer and a 10% or greater stockholder. (See Note10.) The debt
discount applicable to the notes from the issuance of warrants along with the
notes was $45,453 (see below). As of December 31, 2009, $575,000 of the
Hwareh.com convertible promissory notes had been converted .into 7,597,232
shares of common stock. The Company has accrued approximately $25,000
of  interest relating to these notes and is in technical default since
interest payments were not paid as of the balance sheet date; however the
default is not triggered unless notice is given by one of the convertible
debenture holders. The Company would have fifteen days to cure the
default.




72




In
connection with the issuance of the Hwareh.com convertible promissory notes,
Hwareh.com, Inc. also issued warrants to purchase common stock for up to
8,068,197 shares of the Company’s common stock (warrants expiring on May 31,
2009, June 30, 2009 and December 31, 2009 to purchase up to a maximum of
927,833, 3,570,182 and 3,570,182 shares, respectively, of the Company’s common
stock at an exercise price of $0.0010778, $0.0560196 and $0.0560196 per share,
respectively). Of these warrants, warrants to purchase 927,833 shares of the
Company’s common stock were exercised on May 31, 2009, warrants to purchase up
to 3,570,182 shares of the Company’s common stock expired on June 30, 2009 and
warrants to purchase up to 3,570,182 shares of the Company’s common stock
expired on December 31, 2009 without being exercised.  The warrants
had customary anti-dilution provisions in connection with any split, subdivision
or combination of the Company’s common stock. The fair value of the
warrants was estimated as $45,453 using the Black-Scholes option pricing
model.  During the year ended December 31, 2009, the Company
recognized $14,716 of amortization of the deferred debt
discount.





The
convertible promissory notes and warrants have registration rights with respect
to the shares of the Company’s common stock that are issuable upon conversion or
exercise of the notes or warrants, respectively. The Company was obligated to
file an initial registration statement providing for the resale of the shares of
the Company’s common stock underlying the convertible promissory notes and
warrants by August 12, 2009, and to use its best efforts to have the
registration statement declared effective as soon as practicable thereafter.
Since the Company did not file on or before August 12, 2009, it must pay
liquidated damages of $12,000 in the aggregate, an amount equal to 1% of the
aggregate investment amount; such amount has been recorded in the accompanying
consolidated financial statements, however, the Company continues to discuss
with the holders to waive these penalties.








6.
Short Term Debt





On
December 15, 2009, we entered into a Loan and Security Agreement (the “Loan
Agreement”) with HWH Lending LLC, a Delaware limited liability company (the
“Lender”).  Under the terms of the Loan Agreement, we borrowed
$515,000 from the Lender on December 15, 2009 (the “First Loan”).  We
have the right to borrow an additional $500,000 from the Lender upon our
request, after the end of the first calendar month in which we realize positive
cash flow (the “Second Loan”, and together with the First Loan, the
“Loans”).  In addition, the Lender has the right to require us to
accept the Second Loan upon notice, after the end of the first month in which we
realize positive cash flow.  The Lender’s right and obligation to make
the Second Loan terminate on the later of 12 months after the date of the First
Loan, or 12 months after we first realize positive cash flow.  The
proceeds of the Loans will be used by us for working capital
purposes.  The Loans will be evidenced by promissory notes (the
“Notes”), and will bear interest at the rate of 12% per annum, payable at
maturity.  The Loans are collateralized by substantially all of the
Company’s assets.  The maturity date of each Loan is one year from the
date of the Loan.  The Loans may be prepaid in whole or in part at any
time by us without penalty, upon 15 days notice.




In
consideration of the First Loan, we granted the Lender a warrant to purchase
6,250,000 shares of our common stock at a purchase price of $0.08 per
share.  If we receive the Second Loan, we will grant the Lender an
additional warrant to purchase 6,250,000 shares of common stock at a purchase
price of $.08 per share.  Each warrant may be exercised in whole or in
part and from time to time for a term of five years from its grant
date.  The Lender has customary “piggy-back” registration rights with
respect to the common stock issued or issuable upon the exercise of the warrants
(the “Warrant Shares”).  In addition, the Lender has demand
registration rights with respect to the Warrant Shares, so that upon written
request of the Lender, we will be obligated to prepare and file with the U.S.
Securities and Exchange Commission a registration statement sufficient to permit
the resale of the Warrant Shares.  The Lenders’ registration rights
terminate on the date on which all of the Warrant Shares may be sold under Rule
144 of the Securities Act of 1933 without any limitations.  The
warrants contain customary anti-dilution and purchase price adjustment
provisions. The warrants are transferable in whole or in part, so long as the
transfers comply with applicable securities laws. The fair value of the warrants
was estimated using the Black Scholes method.  The debt discount
associated with these warrants as of December 31, 2009 was $164,571, of which
$6,858 was amortized during 2009.




73





7.
Stockholders’ (Deficiency) Equity





Common
Stock





During
the year ended December 31, 2008, the Company sold 138,952,426 shares of common
stock in a private placement and received proceeds of $873,333.





During
the year ended December 31, 2008, the Company issued 15,783,015 shares of common
stock plus a $50,000 note and received equipment valued at
$150,000.





From
January 1, 2009 to May 13, 2009, Hwareh.com, Inc. sold 318,114 shares of common
stock in a private placement and received proceeds of $50,196.





On May
31, 2009, the holder of a warrant exercised  that warrant, at an
exercise price of $0.0010778 per share or $1,000, and received 927,833 shares of
the Company’s common stock.





On June
10, 2009, a former director and holder of a warrant exercised that entire
warrant, at an exercise price of $0.05 per share or $6,250, and received 125,000
shares of the Company’s common stock.  In a separate transaction on
the same day, the same person exercised stock options to purchase 89,500 shares
of common stock at an average price of $0.0869 per share or $7,807.





On August
31, 2009, the holder of a warrant exercised that warrant, at an exercise price
of $0.05 per share or $5,000 in the aggregate, and received 100,000 shares of
the Company’s common stock.





On
September 16, 2009, a former director exercised stock options to purchase 64,500
shares of common stock at an average price of $0.06 per share or
$3,858.





On November 17, 2009, the Company issued 3,963,594 common shares per conversion of
Note to Rock Castle Holdings, LLC.





On
November 20, 2009, the Company issued 991,005 common shares per conversion of
Note to a former director and an additional 2,642,633 common shares per
conversion of Notes to various other note holders.





Preferred
Stock





The
Company has designated 200,000 of the 1,000,000 authorized shares of preferred
stock as Series A Preferred Stock (“Preferred Stock”). The Preferred Stock is
non-voting, has a liquidation preference equal to its purchase price, and does
not pay dividends. As of December 31, 2009, there were 107,501 shares of
Preferred Stock outstanding, which are convertible into 1,075,010 shares of
common stock. The holders can call the conversion of the Preferred Stock at any
time.





On
December 16, 2009, the Company issued 480,560 shares to a shareholder upon
conversion of 48,056 shares of Series A Preferred Stock.





Incentive Compensation/Stock Option
Plans





On May
15, 2009, the Company adopted its 2009 Incentive Compensation Plan (the “2009
Plan”). The total number of shares of common stock that may be subject to the
granting of awards under the 2009 Plan is 30,000,000, plus 3,628,500 shares that
remained available to be issued on May 15, 2009 and were assumed as part of the
share exchange from Clacendix’ previously existing stock option plans. The 2009
Plan imposes individual limitations on the amount of certain awards. Under these
limitations, during any fiscal year of the Company, the number of options, stock
appreciation rights, shares of restricted stock, shares of deferred stock,
performance shares and other stock based-awards granted to any one participant
under the 2009 Plan may not exceed 5,000,000 shares, subject to adjustment in
certain circumstances. The maximum amount that may be paid out as performance
units in any 12-month performance period is an aggregate value of $2,000,000,
and the maximum amount that may be paid out as performance units in any
performance period greater than 12 months is an aggregate value of $4,000,000.
The maximum term of each option or stock appreciation right, the times at which
each option or stock appreciation right will be exercisable, and provisions
requiring forfeiture of unexercised options or stock appreciation rights at or
following termination of employment generally are fixed by the board of
directors or committee of the Company’s board of directors designated to
administer the 2009 Plan (the “committee”), except that no option or stock
appreciation right may have a term exceeding ten years. The exercise price per
share subject to an option and the grant price of a stock appreciation rights
are determined by the committee, but in the case of an incentive stock option
(ISO) must not be less than the fair market value of a share of common stock on
the date of grant.




74




On
May 15, 2009, the Company granted to one board member and one executive
officer options to purchase an aggregate of8,436,000 shares of
common stock with an exercise price of $0.04 per share for a total fair value of
approximately $158,000 under a previously approved option plan.





On May
20, 2009, the Company granted to one board member, employees and
consultants options to purchase an aggregate of16,250,000 shares of
common stock with an exercise price of $0.10 per share for a total fair value of
approximately $936,000 under a previously approved option plan, including
7,000,000 options granted pursuant to consulting agreements with certain related
parties. See Note 10.





On May
20, 2009, the Company granted an executive officer options to purchase an
aggregate of 5,000,000 shares of common stock with an exercise price of $0.11
for a total fair value of $237,000 under a previously approved option
plan.





On
November 11, 2009, the Company granted one board member, one executive officer
and one employee options to purchase an aggregate of 5,100,000 shares of common
stock with an exercise price of $0.125 for a total fair value of $316,000 under
a previously approved option plan.





As of
December 31, 2009, stock options to purchase up to 30,286,000 shares of common
stock have been awarded under the 2009 Plan and prior plans, with exercise
prices ranging from $0.04 to $0.125 per share, of which 4,718,000 are
exercisable. These grants were valued at approximately $1,296,000, of which
$1,036,000 remains unamortized as of December 31, 2009; such amount is being
amortized on a straight-line basis over three years. The weighted average
grant-date fair value of options issued during the year ended December 31, 2009
was $0.07.





Details
of the options outstanding under all plans are as follows:





Shares
            
            
            Weighted
      Average Exercise Price ($)
            
            
            Weighted-
              Average
              Remaining
              Contractual
              Term
            
            
            Aggregate
              Intrinsic
              ValueOptions
      outstanding at January 1, 2008
            
            
            --
            
            
            
            -
            
            
            
            
            
            -Granted
            
            
            -
            
            
            
            -
            
            
            
            
            
            -Expired
            
            
            -
            
            
            
            -Cancelled
            
            
            -
            
            
            
            -
            
            
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            
            
            -Options
      outstanding at January 1, 2009
            
            
            -
            
            
            
            -
            
            
            
            
            
            -Assumed
      in exchange
            
            
            689,500
            
            
            $
            0.14
            
            
            
            -
            
            
            -Granted
            
            
            34,786,000
            
            
            $
            0.09
            
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            -Canceled
            
            
            (5,035,500
            )
            
            
            -
            
            
            
            -
            
            
            -Exercised
            
            
            (154,000
            )
            
            $
            0.08
            
            
            
            -
            
            $
            111,736Options
      outstanding at December 31, 2009
            
            
            30,286,000
            
            
            $
            0.09
            
            
            
            7.48
            
            $
            336,000Options
      exercisable at December 31, 2009
            
            
            4,718,000
            
            
            $
            0.05
            
            
            
            4.02
            
            $
            45,000







Range
      of Exercise
            
            Number
              Outstanding
            
            
            Weighted
      Average Remaining Years of Contractual Life
            
            
            Weighted
      Average Exercise Price
            
            
            Number
      Exercisable
            
            
            Weighted
      Average Exercise Price$0.00
      – 0.10
            
            
            8,436,000
            
            
            
            6.87
            
            
            $
            0.04
            
            
            
            4,218,000
            
            
            $
            0.04$0.10
      – 0.25
            
            
            21,850,000
            
            
            
            7.71
            
            
            $
            0.11
            
            
            
            500,000
            
            
            $
            0.11$0.00
      – $0.25
            
            
            30,286,000
            
            
            
            7.48
            
            
            $
            0.09
            
            
            
            4,718,000
            
            
            $
            0.05




75




Warrants





Details
of outstanding warrants are as follows:





Shares
            
            
            Weighted
      Average Exercise Price ($)
            
            
            Weighted-
              Average
              Remaining
              Contractual
              Term
            
            
            Aggregate
              Intrinsic
              ValueWarrants
      outstanding at January 1, 2008
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Expired
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      outstanding at January 1, 2009
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -Assumed
      in exchange
            
            
            275,000
            
            
            $
            0.05
            
            
            
            
            
            
            
            -Granted
            
            
            14,318,197
            
            
            
            0.06
            
            
            
            -
            
            
            
            -Expired
            
            
            (7,190,364
            )
            
            
            0.06
            
            
            
            -
            
            
            
            -Exercised
            
            
            (1,152,833
            )
            
            
            0.01
            
            
            
            -
            
            
            
            -Warrants
      outstanding at December 31, 2009
            
            
            6,250,000
            
            
            $
            0.08
            
            
            
            4.96
            
            
            $
            62,500





7.
Commitments





Operating
Leases





The
Company occupies approximately 16,000 square feet of office and storage space
under a Commercial Sublease Agreement with 100 Commerce Boulevard LLC, a related
party (see Note 10). The sublease has a current monthly rental rate of
$9,417(as amended) through March 31, 2011, the expiration date. The annual
obligation under the sublease is $113,004 in the year ended December 31, 2010
and $28,251 in the year ending December 31, 2011. During the years ended
December 31, 2009 and 2008, the Company recorded rent expense of $93,750 and
$16,700, respectively.





8.
Contingent Liabilities





On or
about January 15, 2010, the Company's former outside counsel, Duval &
Stachenfeld LLP(“Duval”), commenced litigation against the Company in federal
court in New York, New York asserting that the Company owes Duval $213,887 in
unpaid legal fees.  Duval is also seeking to recover interest and its fees
in connection with the litigation.  The Company has denied that it owes
Duval the amount sought and has filed an answer to the complaint and asserted
counterclaims against Duval for malpractice, breach of contract, and breach
of the covenant of good faith and fair dealing.  The litigation is in its
early stages, and the Company is vigorously asserting its claims and
defenses.  The Company has accounted for this action in accordance
with ASC 450.  Legal fees relating to this action are being expensed
as incurred.





In the
normal course of business the Company may be involved in legal proceedings,
claims and assessments arising in the ordinary course of business. Such matters
are subject to many uncertainties, and outcomes are not predictable with
assurance. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company’s business
financial position or results of operations.





9.
Concentrations





The
Company maintains deposits in a financial institution which is insured by the
Federal Deposit Insurance Corporation (“FDIC”). At various times, the Company
has deposits in this financial institution in excess of the amount insured by
the FDIC.





As of
December 31, 2009, a substantial portion of the Company’s accounts receivable
related to three customers, which comprise approximately 42.7%, 32.2%,
13.1% of the total accounts receivable,respectively.





10.
Related Party Transactions




76




Lalit
Dhadphale, the Company’s President and Chief Executive Officer, and Cape Bear
Partners LLC, a 10% or greater stockholder, have guaranteed the Company’s
obligations under certain convertible promissory notes with a principal value of
$1,200,000. The guarantees state that Mr. Dhadphale and Cape Bear Partners LLC
each guarantee the full payment of principal and interest under the notes. The
guarantees terminate with respect to each note upon the earlier of repayment of
principal and interest under each note or conversion of the note to equity. In
the event of note conversion, the guarantees remain in place with respect to any
interest due and unpaid through the date of conversion until that interest has
been paid.  The aggregate maximum exposure of Mr. Dhadphale and Cape
Bear Partners LLC pursuant to the guarantees is a principal amount of $1,200,000
plus interest. During the quarter ended December 31, 2009 convertible promissory
notes with a principal value of $575,000 were converted into 7,597,232 common
shares of stock reducing Mr. Dhadphale’s exposure. On December 15, 2009, the
Company borrowed $515,000 from HWH Lending, LLC, which Mr. Dhadphale guaranteed
the Company’s obligation under this agreement.





The
Company occupies approximately 16,000 square feet of office and storage space
under a Commercial Sublease Agreement with 100 Commerce Boulevard LLC, an entity
controlled by Jason Smith.  Mr. Smith is also the Manager of Rock
Castle Holdings, LLC, a 10% or greater stockholder in the Company. Mr. Smith is
the son of the controlling stockholder of Masters Pharmaceutical, Inc., one of
the Company’s principal suppliers from whom the Company purchased
$1,342,997 and $1,033,623 of supplies during the years ended December 31, 2009
and 2008, respectively, representing approximately 45.6% and 92.4% of total
purchases.  For the years ended December 31, 2009 and 2008 the Company had
sales to Masters Pharmaceuticals of $230,628 and $65,682,
respectively.  As of December 31, 2009 and 2008, the Company had
amounts due to Masters Pharmaceuticals in the amount of $73,254 and
$380,279.


The
Company is also a party to oral consulting with Mr. Smith and Rock Castle
Holdings LLC, relating to certain purchasing and advising services. Pursuant to
these agreements, the Company granted certain stock options to these related
parties. See Note 7.


Ron
Ferguson, a former Hwareh.com director, has guaranteed the Company’s obligations
to supplier Prescription Supply Inc. Mr. Ferguson is the spouse of Diane
Ferguson, a stockholder of the Company. The guarantee, and Mr. Ferguson’s
maximum exposure under the guarantee, does not have a fixed dollar limit. As of
December 31, 2009 and 2008, there was $6,172 and zero due to Prescription Supply
Inc., respectively.






11.
 Income Taxes




The Company
adopted the provisions of ASC Topic 740-10 (prior authoritative literature: FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109).  ASC 740-10 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be more
likely than not to be sustained upon examination by taxing authorities.
Differences between tax positions taken or expected to be taken in a tax return
and the benefit recognized and measured pursuant to the interpretation are
referred to as “unrecognized benefits.” A liability is recognized (or amount of
net operating loss carry forward or amount of tax refundable is reduced) for an
unrecognized tax benefit because it represents an enterprise’s potential future
obligation to the taxing authority for a tax position that was not recognized as
a result of applying the provisions of ASC 740-10.




In
accordance with ASC 740-10, interest costs related to unrecognized tax benefits
are required to be calculated (if applicable) and would be classified as
“Interest expense” in the consolidated statements of operations. Penalties would
be recognized as a component of “Selling, general and administrative
expenses.”




In many
cases, the Company’s tax positions are related to tax years that remain
subject to examination by relevant tax authorities. The Company files income tax
returns in the United States (federal) and in various state and local
jurisdictions. In most instances, the Company is no longer subject to federal,
state and local income tax examinations by tax authorities for years prior to
2006.




The
adoption of the provisions of ASC 740-10 on January 1, 2009 did not have a
material impact on the Company’s consolidated financial position and
results of operations. As of December 31, 2009, the Company believes that there
are no significant uncertain tax positions requiring recognition in these
consolidated financial statements.




As
discussed in Note 1, the Company consummated a share exchange transaction with
Hwareh.com, Inc on May 14, 2009. The share exchange transaction is being
accounted for as a “reverse recapitalization,” since the former stockholders of
Hwareh.com own a majority of the outstanding shares of the Company’s common
stock immediately following the transaction, and Hwareh.com is deemed to be the
accounting acquirer in the transaction. As a result, due to the change in
control under Section 382 of the Internal Revenue Code, utilization of any
pre-share exchange tax benefits would be substantially limited.  As of
December 31,2009, the Company has net operating losses aggregating $3,200,000,
substantially expiring in 2029.




The
Company’s deferred tax assets and deferred tax liabilities consisted of the
following:




77




2009
            
            
            2008Non
      Qualified stock options
            
            
            48,280Operating
      loss carryforwards
            
            $
            1,024,771
            
            
            $
            270,695Total
      deferred tax assets
            
            
            1,073,051
            
            
            
            270,695Deferred
      tax liabilities:Property
      and Equipment
            
            
            (71,222
            )
            
            
            (51,037
            )Total
      deferred tax liabilities
            
            
            (71,222
            )
            
            
            (51,037
            )Deferred
      tax assets – net of deferred tax liabilities
            
            
            1,001,829
            
            
            
            219,658Valuation
      Allowance
            
            
            (1,001,829
            )
            
            
            (219,658
            )Deferred
      tax assets – net of valuation allowance
            
            $
            —
            
            
            $
            —Change
      in valuation allowance
            
            $
            782,171
            
            
            $
            219,658




The
Company has recorded a full valuation allowance against its deferred tax assets
since management believes that based upon currently available objective evidence
it is more likely than not that the deferred tax asset will not be
realized.  The provision for income taxes using the statutory federal
tax rate as compared to the Company's effective tax rate is summarized as
follows:






December 31,2009
            
            
            2008Tax
      expense (benefit) at statutory rate
            
            
            (34.0
            )%
            
            
            (34.0)
            %Non-deductible
      expenses
            
            
            2.0
            %
            
            
            3.0
            %Change
      in valuation allowance
            
            
            32.0
            %
            
            
            31.
            0%Effective
      income tax rate
            
            
            —
            
            
            
            —






12.
 New Accounting Pronouncements





On
September 30, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board (FASB) to the authoritative hierarchy of GAAP. These
changes establish the FASB Accounting Standards Codification (“Codification”) as
the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with GAAP. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The FASB will no longer issue
new standards in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts; instead the FASB will issue Accounting Standards
Updates. Accounting Standards Updates will not be authoritative in their own
right as they will only serve to update the Codification. These changes and the
Codification itself do not change GAAP. Other than the manner in which new
accounting guidance is referenced, the adoption of these changes had no impact
on the financial statements.





In
June 2009, the FASB issued ASC810 (prior authoritative literature, SFAS 167
“Amendments to FASB Interpretation No. 46(R)”) ASC810 eliminates
Interpretation 46(R)’s exceptions to consolidating qualifying special-purpose
entities, contains new criteria for determining the primary beneficiary, and
increases the frequency of required reassessments to determine whether a company
is the primary beneficiary of a variable interest entity. ASC810 also contains a
new requirement that any term, transaction, or arrangement that does not have a
substantive effect on an entity’s status as a variable interest entity, a
company’s power over a variable interest entity, or a company’s obligation to
absorb losses or its right to receive benefits of an entity must be disregarded
in applying Interpretation 46(R)’s provisions. The elimination of the qualifying
special-purpose entity concept and its consolidation exceptions means more
entities will be subject to consolidation assessments and reassessments. ASC810
will be effective January 1, 2010.   The Company is in the
process of evaluating the impact of this pronouncement on its consolidated
financial position and results of operations.





78





In
May 2009, the FASB issued ASC 855 (prior authoritative literature: SFAS
No. 165, “Subsequent Events”).  This Statement sets forth: 1) the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements; 2) the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet date in its financial statements; and 3) the disclosures that
an entity should make about events or transactions that occurred after the
balance sheet date. This Statement is effective for interim and annual periods
ending after June 15, 2009. This Statement did not impact the Company’s
consolidated financial position and results of operations.





In
April 2009, the FASB issued ASC 820 (prior authoritative literature: “Staff
Position (“FSP”) No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments”). This standard requires disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies that were previously only required in annual financial statements.
This standard is effective for interim reporting periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. The adoption of this provision did not have a material
impact on the Company’s financial position and results of
operations.





In
June 2008, the FASB issued updates to ASC 815-40 (prior authoritative
literature: Issue No. 07-5, “Determining Whether an Instrument (or Embedded
Feature) is Indexed to an Entity’s Own Stock” (“ASC 815-40”). This Issue
addresses the determination of whether an instrument (or an embedded feature) is
indexed to an entity’s own stock, which is the first part of the scope exception
in paragraph 11(a) of ASC 815. ASC 815-40 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. The adoption of ASC 815-40 did not
have a material impact on the Company’s results of operations and financial
condition.





In
December 2007, the FASB issued ASC 805 (prior authoritative literature: SFAS No.
141R, "Business Combinations").   ASC 805 establishes principles
and requirements for determining how an enterprise recognizes and measures the
fair value of certain assets and liabilities acquired in a business combination,
including noncontrolling interests, contingent consideration, and certain
acquired contingencies. ASC 805 also requires acquisition-related transaction
expenses and restructuring costs be expensed as incurred rather than capitalized
as a component of the business combination. ASC 805 will be applicable
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. ASC 805 would have an impact on accounting for any businesses
acquired after the effective date of this pronouncement.




In
April 2009, the FASB issued new accounting guidance, under ASC Topic 820 on
fair value measurements and disclosures, which established the requirements for
estimating fair value when market activity has decreased and on identifying
transactions that are not orderly.  Under this guidance, entities are
required to disclose in interim and annual periods the inputs and valuation
techniques used to measure fair value. This guidance is effective for
interim and annual periods ending after June 15, 2009. The adoption of this
guidance did not have a material impact on the Company’s consolidated financial
position or results of operations.






The
FASB has issued Accounting Standard Update (ASU) 2009-17, Consolidations (Topic 810) -
Improvementsto Financial Reporting by
Enterprises Involved with Variable Interest Entities. ASU 2009-17 changes
how a reporting entity determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. This determination is based on, among other things, the other
entity’s purpose and design and the Company’s  ability to direct the
activities of the other entity that most significantly impact the other entity’s
economic performance.  ASU 2009-17 is effective at the start of the
Company’s first fiscal year beginning after November 15, 2009. The adoption of
this standard is not expected to have a material impact on the Company’s
consolidated financial position and results of operations.






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 non-recognized subsequent
events that would require adjustment or disclosure in the consolidated financial
statements.




On
February 10, 2010, the Company granted to consultants options to purchase
an aggregate of1,650,000 shares of
common stock with an exercise price of $0.14 per share for a total fair value of
approximately $130,000 under a previously approved option plan.





Subsequent
to December 31, 2009, convertible debentures in the amount of $25,000 have been
converted to approximately 330,000 shares of common stock.





79