UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549









FORM
10-Q


(Mark
One)




x
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the quarterly period ended June 30, 2010




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




For
the transition period from 
to


Commission
File Number 0-13117




HealthWarehouse.com,
Inc.




(Exact
Name of Registrant as Specified in Its Charter)




Delaware
            
            22-2413505(State
      or Other Jurisdiction
            
            (I.R.S.
      Employerof
      Incorporation or Organization)
            
            Identification
      No.)




100 Commerce Boulevard,
Cincinnati,
Ohio                                                                                            45140




(Address
of Principal Executive
Offices)                                                                                         (Zip
Code)




(513)
618-0911


(Registrant’s
Telephone Number, Including Area Code)







(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)


Indicate  by
check mark whether the registrant (1) filed all reports required to
be  filed by Section 13 or 15(d) of the Exchange Act during the
past  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 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).     Yes   ̈    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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):




Large
Accelerated Filer o                                                                                     Accelerated
Filer  o




Non-accelerated
Filer o                                                                           Smaller
Reporting Company  x


(Do not
check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes   ̈    No  x





As of August 9, 2010, there were
10,162,682 shares of common stock outstanding.









HEALTHWAREHOUSE.COM,
INC.





QUARTERLY
REPORT ON FORM 10-Q


FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2010




TABLE OF
CONTENTS




PagePART
      I. FINANCIAL INFORMATIONITEM
      1. Financial Statements
            
            
            3ITEM
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            
            
            13ITEM
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            
            
            18ITEM
      4T. Controls and Procedures
            
            
            18PART
      II. OTHER INFORMATIONITEM
      1. Legal Proceedings
            
            
            20ITEM
      1A. Risk Factors
            
            
            20ITEM
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            
            
            20ITEM
      3. Defaults upon Senior Securities
            
            
            21ITEM
      4. Removed and Reserved
            
            
            21ITEM
      5. Other Information
            
            
            21ITEM
      6. Exhibits
            
            
            21SIGNATURES
            
            
            22




2





PART
I. FINANCIAL INFORMATION





ITEM
1. Financial Statements




ITEM
1. FINANCIAL STATEMENTS




The
condensed consolidated financial statements included herein have been prepared
by us without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. It is suggested
that these financial statements be read in conjunction with the audited
financial statements and the notes thereto for the year ended December 31, 2009
included in our annual report on Form 10-K as filed on April 15, 2010 with the
Securities and Exchange Commission.




3




HEALTHWAREHOUSE.COM,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS




AssetsJune
      30, 2010
              (unaudited)
            
            
            December
      31, 2009Current
      assetsCash
            
            $
            -
            
            
            $
            191,181Accounts
      receivable
            
            
            747,703
            
            
            
            277,716Inventories
      – finished goods
            
            
            566,732
            
            
            
            388,748Employee  advances
            
            
            51,429
            
            
            
            -Prepaid
      expenses and other current assets
            
            
            153,268
            
            
            
            190,999Total
      current assets
            
            
            1,519,132
            
            
            
            1,048,644Property
      and equipment, net
            
            
            309,184
            
            
            
            318,793Website
      development costs, net of accumulated amortization of  $89,375
      and $39,275
            
            
            111,021
            
            
            
            161,121Total  assets
            
            $
            1,939,337
            
            
            $
            1,528,558




Liabilities
      and Stockholders’ DeficiencyCurrent liabilitiesAccounts
      payable – related parties
            
            $
            313,611
            
            
            $
            73,254Accounts
      payable – trade
            
            
            704,471
            
            
            
            802,607Accrued
      expenses and other current liabilities
            
            
            119,153
            
            
            
            72,766Convertible
      notes, net of deferred debt discount of  $ 19,313 and $0 at June
      30, 2010 and December 31, 2009, respectively
            
            
            205,686
            
            
            
            -Notes
      payable, net of deferred debt discount of  $328,792 and $157,713
      at June 30, 2010 and December 31, 2009, respectively
            
            
            686,208
            
            
            
            357,287Notes
      payable, related party
            
            
            279,000
            
            
            
            -Total
      current liabilities
            
            
            2,308,129
            
            
            
            1,305,914Convertible
      notes, net of deferred debt discount of  $ 0 and
      $30,737  at June 30, 2010 and December 31, 2009,
      respectively
            
            
            50,000
            
            
            
            594,263Total
      liabilities
            
            
            2,358,129
            
            
            
            1,900,177Commitments
      and contingenciesStockholders’
      deficiencyPreferred
      stock – par value $.001 per share; authorized 1,000,000
      shares;
              200,000
      shares designated Series A; 107,501 shares issued and
              outstanding
      (aggregate liquidation preference $172,016)
            
            
            108
            
            
            
            108Common
      stock – par value $.001 per share; authorized 50,000,000
      shares;
              10,146,081
      and 9,881,768  shares issued and outstanding
            
            
            10,146
            
            
            
            9,882Additional
      paid-in capital
            
            
            3,656,651
            
            
            
            2,735,851Accumulated
      deficit
            
            
            (4,085,697
            )
            
            
            (3,117,460
            )Total
      stockholders’ deficiency
            
            
            (418,792
            )
            
            
            (371,619)Total
      liabilities and stockholders’ deficiency
            
            $
            1,939,337
            
            
            $
            1,528,558




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




4


HEALTHWAREHOUSE.COM,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)




For
      the Three Months Ended
                                June
      30, 2010
                              
                              For
      the Three Months Ended June
      30, 2009
                              
                              For
      the Six Months
      Ended June
      30, 2010
                              
                              
                              For
      the Six Months
      Ended June
      30, 2009Net
      sales
                              $
                              1,766,662
                              
                              $
                              858,443
                              
                              $
                              3,002,176
                              
                              
                              $
                              1,665,585Cost
      of sales
                              
                              1,282,831
                              
                              
                              615,131
                              
                              
                              1,890,246
                              
                              
                              
                              1,188,820Gross
      profit
                              
                              483,831
                              
                              
                              243,312
                              
                              
                              1,111,930
                              
                              
                              
                              476,765Operating
      expenses:Selling,
      general and administrative expenses
                              
                              1,054,667
                              
                              
                              625,806
                              
                              
                              1,935,450
                              
                              
                              
                              1,250,704Loss
      from operations
                              
                              (570,836
                              )
                              
                              (382,494
                              )
                              
                              (823,520
                              )
                              
                              
                              (773,939
                              )Gain
      on litigation settlement
                              
                              48,887
                              
                              
                              -
                              
                              
                              48,887
                              
                              
                              
                              -Interest
      income/(expense)
                              
                              (127,380
                              )
                              
                              (13,777
                              )
                              
                              (193,601
                              )
                              
                              
                              (13,402
                              )Net
      loss
                              $
                              (649,329
                              )
                              $
                              (396,271
                              )
                              $
                              (968,234
                              )
                              
                              $
                              (787,341
                              )Per
      share dataNet
      loss per common share basic and diluted
                              $
                              (0.07)
                              ))))
                              $
                              (0.05
                              )
                              $
                              (0.10
                              )
                              
                              $
                              (0.10
                              )Weighted
      average number of common shares outstandingBasic
      and diluted
                              
                              9,984,334
                              
                              
                              8,612,868
                              
                              
                              9,937,806
                              
                              
                              
                              8,184,612





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




5





HEALTHWAREHOUSE.COM,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





For
      the Six Months
                    Ended
      June 30, 2010
                  
                  
                  For
      the Six Months Ended June 30, 2009Cash
      flows from operating activitiesNet
      loss
                  
                  $
                  (968,234
                  )
                  
                  $
                  (787,341
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  44,957
                  
                  
                  
                  21,224Amortization
      of web development costs
                  
                  
                  50,100
                  
                  
                  
                  -Non-cash
      stock-based compensation
                  
                  
                  216,846
                  
                  
                  
                  125,641Amortization
      of deferred debt discount
                  
                  
                  144,381
                  
                  
                  
                  15,420Bad
      debt
                  
                  
                  18,358
                  
                  
                  
                  -Gain
      on extinguishment of debt
                  
                  
                  (48,887
                  )
                  
                  
                  -Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  (488,345
                  )
                  
                  
                  (129,555
                  )Inventories
                  
                  
                  (177,984
                  )
                  
                  
                  (355,390
                  )Prepaid
      expenses and other current assets
                  
                  
                  37,731
                  
                  
                  
                  (183,861
                  )Accounts
      payable – trade
                  
                  
                  (49,299
                  )
                  
                  
                  (26,078
                  )Accounts
      payable – related parties
                  
                  
                  240,357
                  
                  
                  
                  217,999Accrued
      expenses and other current liabilities
                  
                  
                  46,615
                  
                  
                  
                  37,227Net
      cash (used in) operating activities
                  
                  
                  (933,404
                  )
                  
                  
                  (1,064,714
                  )Cash
      flow from investing activitiesCash
      received in share exchange
                  
                  
                  -
                  
                  
                  
                  1,220,520Employee
      advance
                  
                  
                  (51,429
                  )
                  
                  
                  -Acquisition
      of property and equipment
                  
                  
                  (35,348
                  )
                  
                  
                  (100,093
                  )Expenses
      paid in conjunction with share exchange
                  
                  
                  -
                  
                  
                  
                  (225,000
                  )Website
      development costs
                  
                  
                  -
                  
                  
                  
                  (38,367
                  )Net
      cash (used in) provided by investing activities
                  
                  
                  (86,977
                  )
                  
                  
                  857,060Cash
      flows from financing activitiesProceeds
      from notes payable
                  
                  
                  500,000
                  
                  
                  
                  -Proceeds
      from sale of common stock
                  
                  
                  -
                  
                  
                  
                  50,196Proceeds
      from option/warrant exercises
                  
                  
                  -
                  
                  
                  
                  15,058Proceeds
      from sale of convertible notes
                  
                  
                  50,000
                  
                  
                  
                  1,200,000Advances
      from former director
                  
                  
                  422,000
                  
                  
                  
                  -Repayment
      of advances from former director
                  
                  
                  (143,000
                  )
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  829,000
                  
                  
                  
                  1,265,254Net
      (decrease) increase in cash
                  
                  
                  (191,181
                  )
                  
                  
                  1,057,600Cash
      – beginning of period
                  
                  
                  191,181
                  
                  
                  
                  357,938Cash
      – end of period
                  
                  $
                  -
                  
                  
                  $
                  1,415,538




Non-cash
      investing and financing activities:Net
      assets received in share exchangeAccounts
      payable
                  
                  $
                  -
                  
                  
                  $
                  (147,276
                  )Accrued
      expenses
                  
                  
                  -
                  
                  
                  $
                  (168,531
                  )Net
      assets
                  
                  $
                  -
                  
                  
                  $
                  904,713Conversion of debt to common
      stock
                  
                  $
                  400,000
                  
                  
                  $
                  -Warrants
      issued in financing transaction
                  
                  $
                  304,037
                  
                  
                  $
                  -


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




6




HEALTHWAREHOUSE.COM,
INC. AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(unaudited)





1.
 Organization, Basis of Presentation and Reverse Re
capitalization




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 7,759,728 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 7.05 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.




On May 5,
2010, the Company announced that its Board of Directors had approved a 1-for-20
reverse split of its common stock, pursuant to previously obtained stockholder
authorization. This reverse stock split became effective, on July 16, 2010,
which reduced the number of shares of the Company’s common stock issued and
outstanding from 203,253,640 to 10,162,682 and reduced the number of authorized
shares of common stock from 750 million to 50 million.  All share
amounts included in the condensed consolidated financial statements and notes
thereto have been retroactively adjusted for the reverse stock split. Impacted
amounts include shares of common stock authorized and outstanding, common share
issuances, shares of common stock underlying stock options and warrants, common
shares reserved and loss per share.




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 products.





The
Company is presently licensed as a mail-order pharmacy for sales to 49 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 September 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.





The
condensed consolidated financial statements have been prepared in accordance
with U.S. GAAP for certain financial information and the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, the condensed consolidated
balance sheet as of June 30, 2010 and the condensed consolidated statements of
operations for the three and six months ended June 30, 2010 and 2009 and cash
flows for the six months ended June 30, 2010 and 2009, have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include normal recurring adjustments) necessary to make the Company’s financial
position, results of operations and cash flows at June 30, 2010 and for the six
months ended June 30, 2010 and 2009 not misleading have been made.  The
results of operations for the three and six months ended June 30, 2010 and 2009
are not necessarily indicative of results that would be expected for the full
year or any other interim period.




Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. It is suggested that
these financial statements be read in conjunction with the financial statements
and notes thereto included in the current report on Form 10-K filed with the
Securities and Exchange Commission on April 15, 2010.




2.
Going Concern and Management’s Liquidity Plans





As of
June 30, 2010, the Company had limited cash and a working capital deficiency of
$788,997.  During the three and six months ended June 30, 2010, the
Company generated revenue of $1,766,662 and $3,002,176 and a net loss
of $649,329 and $968,234, respectively.  For the six months ended
June 30, 2010, cash flows included net cash used in operating activities
of $933,404, net cash used by investing activities of $86,977 and net cash
provided by financing activities of $829,000.




7





Since
inception, the Company has financed its operations primarily through product
sales to customers, debt and private equity investments by existing
stockholders, officers and directors and cash received upon closing of the
reverse recapitalization.  During the six months ended June 30, 2010,
the Company’s cash was reduced by approximately $191,000.





Based
upon projected operating expenses, the Company believes that its resources
as of June 30, 2010 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
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 it.  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 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
condensed consolidated financial statements include the accounts of
HealthWarehouse.com, Inc., Hwareh.com, Inc., ION Holding NV, and ION Belgium
NV.  ION Holding NV and ION Belgium NV are wholly-owned inactive
subsidiaries of the Company. All material inter-company balances and
transactions have been eliminated in consolidation.





Use
of Estimates





The
preparation of condensed 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, debt discounts and deferred tax
assets, which have been offset by a valuation allowance because it is more
likely than not that the deferred tax assets will not be realized in future
periods.





Reclassifications




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




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 2,486,690 at June 30, 2010 are excluded from the computation of diluted net
loss per share as their inclusion would be anti-dilutive. These potentially
dilutive securities consist of stock options to purchase up to 1,659,300 shares
of common stock, warrants to purchase up to 625,000 shares of common stock,
convertible promissory notes convertible into 148,639 shares of common stock and
convertible preferred stock convertible into 53,751 shares of common stock. The
Company had no potentially dilutive securities at March 31, 2009.





Stock-Based Compensation





The
Company accounts for stock-based compensation in accordance with the fair value
recognition provisions of Accounting Standards Codification (“ASC”) 718.
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.




8




Stock-based
compensation was recorded in the condensed consolidated statements of operations
in selling general and administrative line item and totaled $119,757 and
$125,641 for the three months ended June 30, 2010 and 2009, respectively and
$216,846 and $125,641 for the six months ended June 30, 2010 and June 30, 2009,
respectively.





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




For
      the Three and Six
              Months
      Ended
              June
      30, 2010Risk-free
      interest rate
            
            2.39%
      to 2.71%Dividend
      yield
            
            N/AExpected
      volatility
            
            57.6%Expected
      life in years
            
            6.00Expected
      forfeiture rate (through term)
            
            0%





4.
Convertible Debt





During
the year ended December 31, 2009, the Company received the proceeds of
$1,200,000 relating to certain convertible promissory notes (“Convertible
Debentures”).  During the three and six months ended June 30, 2010 the
Company amortized $5,680 and $11,360, respectively, of amortization of debt
discount. For the three and six months ended June 30, 2009, the Company did not
recognize amortization of the deferred debt discount. During the six months
ended June 30, 2010, Convertible Debentures in the amount of $400,000 were
converted to 264,264 shares of common stock.





During
the six months ended June 30, 2010, the Company sold two convertible debentures
for $25,000 each for an aggregate amount of $50,000. Each convertible debenture
carries a term of two years, bears a 10% per annum interest rate payable
annually and is convertible into 12,500 shares of the Company‘s common stock.
The Lender has customary “piggy-back” registration rights with respect to the
common stock issued or issuable upon the exercise of the convertible
debenture.





5.
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”).  On
May 3, 2010, the Company exercised its right to borrow an additional $500,000
(the “Second Loan”) from the Lender upon the Company’s request, after achieving
positive cash flow for the month of March.  The proceeds of the Loans
will be used by us for working capital purposes.  Each Loan is
evidenced by a promissory note (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 each of the two loans, the Company granted the Lender a
warrant to purchase 312,500 shares.  As of August 6, 2010, the Lender
was granted warrants to purchase an aggregate of 625,000 shares of common stock
at an exercise price of $1.60 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
relative fair value of the warrants was estimated at $304,037 using the Black
Scholes method. During the six months ended June 30, 2010 and 2009 the Company
recognized   $132,958 and $0, respectively, of amortization of
the deferred debt discount on short term debt. For the three months ended June
30, 2010 and 2009, the Company recognized $91,815 and $0, respectively, of
amortization of the deferred debt discount on short term debt.




9




6. Stockholders’ Deficiency





Stock
Option Plans





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, 2010
            
            
            1,514,300
            
            
            $
            1.80Granted
            
            
            232,500
            
            
            
            2.80
            
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            -Canceled
            
            
            (87,500)
            
            
            
            2.00
            
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Options
      outstanding at June 30, 2010
            
            
            1,659,300
            
            
            $
            2.00
            
            
            
            7.27
            
            $
            1,458,100Options
      exercisable at June 30, 2010
            
            
            577,033
            
            
            $
            1.51
            
            
            
            5.98
            
            $
            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
      – 2.00
            
            
            
            421,800
            
            
            
            6.37
            
            
            $
            0.80
            
            
            
            281,200
            
            
            $
            0.80$
            2.00
      –5.00
            
            
            
            1,237,500
            
            
            
            7.57
            
            
            $
            2.40
            
            
            
            275,833
            
            
            $
            2.38$
            0.00
      – $5.00
            
            
            
            1,659,300
            
            
            
            7.23
            
            
            $
            2.00
            
            
            
            577,033
            
            
            $
            1.51




On April
6, 2010, the Company granted to a consultant for services, options to purchase
an aggregate of 15,000 shares of common stock with an exercise price of $2.50
per share for a total fair value of approximately $18,602 under a previously
approved option plan.




On April
22, 2010, the Company granted to a consultant for services, options to purchase
12,500 shares of common stock with an exercise price of $2.40 per share for a
total fair value of approximately $14,882 under a previously approved option
plan.




On May 3,
2010, the Company granted to employees and consultants options to purchase an
aggregate of 122,500 shares of common stock with an exercise price of $3.60 per
share for a total fair value of approximately $243,000 under a previously
approved option plan.





Warrants





Details
of outstanding warrants are as follows:




Shares
            
            
            Weighted
      Average Exercise Price ($)
            
            
            Weighted-
              Average
              Remaining
              Contractual
              Term
            
            
            Aggregate
              Intrinsic
              ValueWarrants
      outstanding at December 31, 2009
            
            
            312,500
            
            
            $
            1.60
            
            
            
            4.96Granted
            
            
            312,500
            
            
            
            1.60Expired
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      outstanding at June 30, 2010
            
            
            625,000
            
            
            $
            1.60
            
            
            
            4.64
            
            
            $
            750,000





On May 3,
2010, as disclosed in Note 5, the Company borrowed an additional $500,000 under
the Loan Agreement and in consideration of this loan the Company granted the
Lender an additional warrant to purchase 312,500 shares of the Company’s common
stock at a purchase price of $1.60 per share.  The warrant may be exercised
in whole or in part from time to time for a term of five years from its grant
date.




10





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 9). The sublease has a current monthly rental rate
approximately of $9,417(as amended) through March 31, 2011, the expiration date.
During the six months ended June 30, 2010 and 2009, the Company recorded rent
expense of $21,000 and $42,000, respectively, and for the three months ended
June 30, 2010 and 2009, approximately $9,000 and $17,000,
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 was also seeking to recover interest and its fees
in connection with the litigation.  On May 25, 2010 the Company and Duval
settled all litigation by the payment by the Company to Duval in the amount of
$165,000.  The Company, for the period ending December 31, 2009 had
previously established a reserve in the amount of $213,887. Pursuant to the
settlement agreement, the Company reflected a benefit equal to $48,887 during
the three and six months ended June 30, 2010. All legal fees related to this
action were 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.
Related Party Transactions





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 $441,973 and
$997,043 of supplies during the six months ended June 30, 2010 and 2009,
respectively, representing approximately 23% and 83.8% of total
purchases.  For the six months ended June 30, 2010 and 2009, The
Company had sales to Masters Pharmaceuticals of $425,555 and $75,777,
respectively.  As of June 30, 2010 and December 31, 2009, the Company
had amounts due to Masters Pharmaceuticals in the amount of $312,796 and
$73,254, respectively.





Ron
Ferguson, a former Hwareh.com director, has guaranteed the Company’s obligation
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 June 30, 2010, there was $815 due to
Prescription Supply Inc.





During
the six months ended June 30, 2010, a former director advanced $422,000 in short
term financing to the Company.  A payment of $143,000 was made during the
six months ended June 30, 2010. The amount of $279,000 was outstanding at June
30, 2010.





10.
 Sales Concentrations





During
the six months ended June 30, 2010 Masters Pharmaceuticals was approximately12.2
% and for the three month ended June 30, 2010 South Pointe was 10.1 % of
respective revenue for the periods. The loss of any of these customers or a
significant decline in sales volumes from any of these customers could have a
material adverse effect on the Company's financial position, results of
operations and cash flows.





11.  New Accounting
Pronouncements





In
January 2010, the FASB issued new accounting guidance under ASC Topic 820 on
Fair Value Measurements and Disclosures, which requires new disclosures and
clarifies some existing disclosure requirements about fair value measurement.
Under the new guidance, a reporting entity should (a) disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers, and (b) present
separately information about purchases, sales, issuances, and settlements in the
reconciliation for fair value measurements using significant unobservable
inputs. This guidance was effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements which are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
adoption of the guidance effective for interim and annual reporting periods
beginning after December 15, 2009 did not have a material impact upon the
Company’s consolidated financial position or results of operations. The adoption
of the guidance effective for fiscal years beginning after December 15, 2010 is
not expected to have a material effect on the Company’s consolidated financial
position or results of operations.




11





In
October 2009, the FASB issued new accounting guidance, under ASC Topic 605, on
revenue recognition which addresses the accounting for multiple-deliverable
arrangements to enable vendors to account for products or services
(deliverables) separately rather than as a combined unit. Specifically, this
guidance amends the criteria for Subtopic 605-25, Revenue Recognition-Multiple
Element Arrangements, for separating consideration in multiple-deliverable
arrangements. This guidance establishes a selling price hierarchy for
determining the selling price of a deliverable, which is based on: (a)
vendor-specific objective evidence, (b) third-party evidence, or (c) estimates.
This guidance also eliminates the residual method of allocation and requires
that arrangement consideration be allocated at the inception of the arrangements
to all deliverables using the relative selling price method and also requires
expanded disclosures. This guidance is effective for all new or materially
modified arrangements entered into on or after January 1, 2011 with earlier
application permitted as of the beginning of a fiscal year. Full retrospective
application of the new guidance is optional.  The Company has not
completed its assessment of this new guidance on its consolidated financial
position or results of operations.





In
October 2009, the FASB issued new accounting guidance, under ASC Topic 985 on
software, which amends the scope of existing software revenue recognition
accounting. Tangible products containing software components and non-software
components that function together to deliver the product’s essential
functionality would be scoped out of the accounting guidance on software and
accounted for based on other appropriate revenue recognition
guidance.  This guidance is effective for all new or materially
modified arrangements entered into on or after January 1, 2011 with earlier
application permitted as of the beginning of a fiscal year. Full retrospective
application of this new guidance is optional. This guidance must be adopted in
the same period that the company adopts the amended accounting for arrangements
with multiple deliverables described in the preceding paragraph. The Company has
not completed its assessment of this new guidance on its consolidated financial
position or results of operations.





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
is effective as of January 1, 2010.   The adoption of this
pronouncement did not have a material impact on the Company’s condensed
consolidated financial position and results of operations.








The FASB has issued Accounting Standard Update (ASU)
2009-17, Consolidations (Topic
810) - Improvements to
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
2009-17was effective at the start of the Company’s first fiscal year beginning
after November 15, 2009. The adoption of this standard has had no material
impact on the Company’s consolidated financial position and results of
operations.




12. Subsequent
Events





The
Company evaluates events that have occurred after the balance sheet date through
the date the financial statements are issued.  Based upon the
evaluation, the Company did not identify any non-recognized subsequent events
that would require adjustment to or disclosure in the consolidated financial
statements.





Subsequent
to June 30, 2010, the Company sold two convertible debentures for $25,000 each
for an aggregate amount of $50,000. Each convertible debenture carries a term of
two years bearing a 10% per annum interest rate payable annually and is
convertible into 12,500 shares of the Company‘s common stock.





Subsequent
to June 30, 2010, convertible debentures in the amount of $25,000 have been
converted into 16,520 shares of common stock.




12





Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations





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.




On May 5,
2010, the Company announced that its Board of Directors had approved a 1-for-20
reverse split of its common stock, pursuant to previously obtained stockholder
authorization. This reverse stock split became effective, on July 16, 2010,
which reduced the number of shares of the Company’s common stock issued and
outstanding from 203,253,640 to 10,162,682 and reduced the number of authorized
shares of common stock from 750 million to 50 million.  All share
amounts included in the condensed consolidated financial statements and notes
thereto have been retroactively adjusted for the reverse stock split. Impacted
amounts include shares of common stock authorized and outstanding, common share
issuances, shares of common stock underlying stock options and warrants, common
shares reserved and loss per share.




We are a licensed U.S. licensed virtual
retail pharmacy and healthcare e-commerce company that sells brand name and
generic prescription drugs and 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
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
prescription medications and over the counter 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 49 states and the District of Columbia, and we
have applied for the remaining state and hope to obtain such license in the near
future.




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 underinsured 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.




13




Results of
Operations




The
three months ended June 30, 2010 compared to the three months ended June 30,
2009.




The
      three months ended June 30, 2010
              
              
              %
      of
                Revenue
              
              
              The
      three months ended June 30, 2009
              
              
              %
      of RevenueNet
      sales
              
              $
              1,766,662
              
              
              
              100.0
              %
              
              $
              858,443
              
              
              
              100.0
              %Cost
      of sales
              
              
              1,282,831
              
              
              
              72.6
              %
              
              
              615,131
              
              
              
              71.7
              %Gross
      profit
              
              
              483,832
              
              
              
              27.4
              %
              
              
              243,312
              
              
              
              28.3
              %Selling,
      general & administrative  expenses
              
              
              1,054,667
              
              
              
              59.7
              %
              
              
              625,806
              
              
              
              72.9
              %Loss
      from operations
              
              
              (570,835
              )
              
              
              (32.3)
              %
              
              
              (382,494
              )
              
              
              (44.6)%Gain
      on litigation settlement
              
              
              48,887
              
              
              
              2.8
              %
              
              
              -
              
              
              
              -Interest
      income(expense)
              
              
              (127,380
              )
              
              
              (7.2)
              %
              
              
              (13,777
              )
              
              
              (1.6)%Net
      loss
              
              $
              (649,329
              )
              
              
              (36.8
              )%
              
              $
              (396,271
              )
              
              
              (46.2)
              )%




Net
Sales




The
      three months ended June 30, 2010
            
            
            %
      Change
            
            
            The
      three months ended June 30, 2009Total
      net sales
            
            $
            1,766,662
            
            
            
            105.8%
            
            
            $
            858,443Total
      average net sales per order
            
            $
            58.92
            
            
            
            43.7%
            
            
            $
            41.00







Revenues
for the three months ended June 30, 2010 grew to $1,766,662 from $858,443 for
the three months ended June 30, 2009. Revenues increased for the three ended
June 30, 2010 compared to the prior year as a result of an increase in order
volume to consumers and expansion of sales to other business manufacturers.
Consumer prescription revenues increased while the sale of over-the-counter
declined slightly during the quarter ending June 30, 2010 compared to the
quarter ended June 30, 2009, while revenue generated from and resale of certain
prescription products to business manufacturers increased significantly
accounting for approximately 49% of all revenue for the quarter ended June 30,
2010 compared to less than 10% for the same period last year.





Another
indicator of business activity was that our website attracted 267,099 visits
with 876,772 pageviews during the three months ended June 30, 2010 compared to
318,258 visits and 1,162,215 pageviews during the three months ended June 30,
2009 this decline was due primarily to reduced advertising expenditures for
over-the-counter products.








Costs
and Expenses




Cost
of Sales and Gross Margin




The
      three months ended June 30, 2010
            
            
            %
              Change
            
            
            The
      three months ended June 30,2009Total
      cost of sales
            
            $
            1,282,831
            
            
            
            108.5%
            
            
            $
            615,131Total
      gross profit dollars
            
            $
            483,832
            
            
            
            98.9%
            
            
            $
            243,312Total
      gross margin percentage
            
            
            27.4
            %
            
            
            
            
            
            
            28.3
            %




Total cost of sales increased to $1,282,831 for the three months
ended June 30, 2010 as compared to $615,131 for the three months ended June 30,
2009 as a result of growth in consumer prescription order volume and revenue,
and the significant growth in business to business revenue.  Gross
margin percentage decreased slightly year-over-year from 28.3% for the three
months ended June 30, 2010 to 27.4% for the three months ended June 30,
2010.




14





Selling,
General and Administrative Expenses




The
      three
              months
      ended June 30, 2010
            
            
            %
              Change
            
            
            The
      three months ended June 30, 2009Selling,
      general and administrative expenses
            
            $
            1,054,667
            
            
            
            68.5%
            
            
            $
            625,806Percentage
      of revenue
            
            
            59.7
            %
            
            
            
            
            
            
            72.9
            %





Selling,
general and administrative expenses increased by $428,861in the three months
ended June 30, 2010 compared to the same period in 2009, an increase of
68.5%.  The expense increases were due primarily to expenses related
to the maturing of business activities including increases of approximately
$159,561 for payroll, advertising, legal, shipping and fulfillment expenses
related to revenue growth compared to the three months ended June 30, 2009. In
addition the recognition of $119,757 for non-cash based stock compensation
expense compared to $125,641 in the three months ended June 30, 2009 and
software engineering for approximately $64,549 for the three months ended June
20, 2010 and zero for the three months ended June 30, 2009 due to
capitalization.





The
six months ended June 30, 2010 compared to the six months ended June 30,
2009.




The
      six
              months
      ended June 30, 2010
            
            
            %
      of
              Revenue
            
            
            The
      six months ended June 30, 2009
            
            %
      of RevenueNet
      sales
            
            $
            3,002,176
            
            
            
            100.0
            %
            
            $
            1,665,585
            
            100.0
            %Cost
      of sales
            
            
            1,890,246
            
            
            
            63.0
            %
            
            
            1,188,820
            
            71.4
            %Gross
      profit
            
            
            1,111,930
            
            
            
            37.0
            %
            
            
            476,765
            
            28.6
            %Selling,
      general & administrative  expenses
            
            
            1,935,450
            
            
            
            64.5
            %
            
            
            1,250,704
            
            75.1
            %Loss
      from operations
            
            
            (823,520
            )
            
            
            (27.4)
            %
            
            
            (773,939
            )
            (46.5)%
            )%Gain
      on litigation settlement
            
            
            48,887
            
            
            
            1.6
            %
            
            
            -
            
            -Interest
      income(expense)
            
            
            (193,601
            )
            
            
            (6.4)
            %
            
            
            (13,402
            )
            (0.8
            )%Net
      loss
            
            $
            (968,234
            )
            
            
            (32.3
            )%
            
            $
            (787,341
            )
            (47.3)
            %




Net
Sales




The
      six
              months
      ended June 30, 2010
            
            
            %
      Change
            
            
            The
      six
              months
      ended June 30, 2009Total
      net sales
            
            $
            3,002,176
            
            
            
            80.2%
            
            
            $
            1,665,585Total
      average net sales per order
            
            $
            53.15
            
            
            
            11.2%
            
            
            $
            47.80




Revenues
for the six months ended June 30, 2010 grew to $3,002,176 from $1,665,585 for
the six months ended June 30, 2009. Revenues increased for the six months ended
June 30, 2010 compared to the prior year as a result of an increase in order
volume to consumers and expansion of sales to other business manufacturers.
Consumer prescription revenues increased while the sale of over-the-counter
declined slightly during the quarter ended June 30, 2010 compared to the quarter
ended June 30, 2009, while revenue generated from sales of certain prescription
products to business manufacturers increased significantly, accounting for
approximately 39% of all revenue for the quarter ended June 30, 2010, compared
to less than 10% for the same period last year.




Another
indicator of business activity was that our website attracted 519,773 visits and
1,786,556 pageviews during the six months ended June 30, 2010 compared to
546,840 visits and 2,047,426 pageviews during the six months ended June 30, 2009
this decline was due primarily to reduced advertising expenditures for
over-the-counter products.




15




Costs
and Expenses




Cost
of Sales and Gross Margin




The
      six
              months
      ended June 30, 2010
            
            
            %
              Change
            
            
            The
      six months ended June 30,2009Total
      cost of sales
            
            $
            1,890,246
            
            
            
            59.0%
            
            
            $
            1,188,820Total
      gross profit dollars
            
            $
            1,111,930
            
            
            
            133.2%
            
            
            $
            476,765Total
      gross margin percentage
            
            
            37.0
            %
            
            
            
            
            
            
            28.6
            %






Total
cost of sales increased to $1,890,246 for the six months ended June 30, 2010 as
compared to$1,188,820 for the six months ended June 30, 2009 as a result of
growth in consumer prescription, order volume and revenue and the significant
growth in business to business revenue. Gross margin percentage increased
year-over-year from 28.6% for the six months ended June 30, 2009 to 37.0% for
the six months ended June 30, 2010, the improvement in gross profit margins was
due primarily to the product mix from primarily OTC products sales in the six
months ended March 31, 2010 to an increase in the revenues for prescription
drugs and the revenue generated from the sale of certain prescription products
to manufacturers.




Selling,
General and Administrative Expenses




The
      six
              months
      ended June 30, 2010
            
            
            %
              Change
            
            
            The
      six
              months
      ended June 30, 2009Selling,
      general and administrative expenses
            
            $
            1,935,450
            
            
            
            54.7%
            
            
            $
            1,250,704Percentage
      of revenue
            
            
            64.5
            %
            
            
            
            
            
            
            75.1
            %





Selling,
general and administrative expenses increased by $684,746 in the six months
ended June 30, 2010 compared to the same period in 2009, an increase of
54.7%.  The expense increases were due primarily to expenses related
to the maturing of business activities including increases of approximately
$189,969 for payroll, advertising, legal, shipping and fulfillment expenses
related to revenue growth compared to the six months ended June 30, 2009. In
addition the recognition of $216,846 for non-cash based stock compensation
expense compared to $125,641 in the six months ended June 30, 2009 and software
engineering for approximately $100,965 for the three months ended June 20, 2010
and zero for the three months ended June 30, 2009 due to
capitalization.




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 three and six months ended June 30, 2010 and 2009. 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
June 30, 2010, the Company had limited cash and a working capital deficiency of
$788,997.  During the three and six months ended June 30, 2010, the
Company generated revenue of $1,766,662 and $3,002,176 and a net loss
of $649,329 and $968,234, respectively.  For the six months ended
June 30, 2010, cash flows included net cash used in operating activities
of $933,404, net cash used by investing activities of $86,977 and net cash
provided by financing activities of $829,000.





Since
inception, the Company has financed its operations primarily through product
sales to customers, debt and private equity investments by existing
stockholders, officers and directors.  During the six months ended
June 30, 2010, the Company’s cash and cash equivalents were reduced by
approximately $191,181.  Our sources and uses of funds during this
period were as follows:




16




For the six months ended June 30, 2010, cash flows included net
cash used in operating activities of $933,404.  This amount included a
decrease in operating cash related to a net loss of $968,234 and additions for
the following items: (i) amortization of debt discount, $144,381(ii)
depreciation and amortization, $95,057; (iii) stock-based compensation expense,
$216,846;(iv) accounts payable related parties and trade, net, $191,058. The
increase in cash used in operating activities in the first six months of 2010
was primarily offset by the following decreases: (i) accounts receivable,
$(488,345) and (ii) inventories, $(177,984).  For the six months ended
June 30, 2009, net cash used in operating activities was $1,064,714. This amount
included decreases in operating cash related to a net loss of $787,341 and
increase in accounts receivable of $(129,555) and in inventories of $(355,390)
offset by an increase in accounts payable of $217,999.





For the
six months ended June 30, 2010, net cash used in investing activities was
$86,977. For the six months ended June 30, 2009, net cash provided by investing
activities was $857,060 and was attributable to cash received in share exchange
of $1,220,520,




For the
six ended June 30, 2010, net cash provided by financing activities was $829,000,
$422,000 from an advance from a former director and $500,000 from proceeds of
notes payable. For the six months ended June 30, 2009, net cash provided by
financing activities was $1,265,254, consisting mainly of a sale of convertible
notes of $1,200,000.





Going
Concern




Based
upon projected operating expenses, the Company believes that its working
capital as of June 30, 2010 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.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.




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.




17




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.




Recently-issued Accounting Pronouncements




The
information contained in Footnote 9 to the Company’s consolidated financial
statements included in, Item 8 to this annual report is incorporated herewith by
reference.





ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk





Not
required.





ITEM
4T. 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, with the participation of our Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of our
“disclosure controls and procedures” (as defined in the Securities Exchange Act
of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this quarterly report on Form 10-Q (the “Evaluation Date”).
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures are not effective to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act (i) is
recorded, processed, summarized and reported, within the time periods specified
in the SEC rules and forms and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
Specifically, management’s evaluation was based on the following material
weaknesses, which existed as of June 30, 2010:





·
            Financial Reporting
      Systems : We did not maintain a fully integrated
      financial consolidation and reporting system throughout the period 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.




18





Changes in Internal Control Over
Financial Reporting




During
the three months ended June 30, 2010, 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.





Disclosure
Controls and Procedures





Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. 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. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected.




19




PART II. OTHER INFORMATION





ITEM
1. Legal Proceedings





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(“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 was also seeking to recover interest and its fees
in connection with the litigation.  On May 25, 2010 the Company and Duval
settled all litigation by the payment by the Company to Duval in the amount of
$165,000.  The Company for the period ending December 31, 2009 had
previously established a reserve in the amount of $213,887. Pursuant to the
settlement agreement, the Company reflected a benefit equal to $48,887 during
the three and six months ended June 30, 2010. All legal fees related to this
action were expensed as incurred.





ITEM 1A.
Risk Factors





Not
required.





ITEM
2. Unregistered Sales of Equity Securities and Use of Proceeds





Unregistered
Sales of Equity Securities during the six months ended June 30,
2010





On April 14, 2010, we issued a convertible
promissory note in the principal amount of 25,000 to an accredited
investor.  The note is convertible at any time into 250,000 shares of
our common stock.  The issuance of the note was made without
registration in reliance on the exemption from registration afforded by Section
4(2) under the Securities Act of 1933 and corresponding provisions of state
securities laws, which exempt transactions by an issuer not involving any public
offering.





On April
21, 2010, two holders of convertible promissory notes in the aggregate principal
amount of $50,000 converted their notes, at a conversion price of $0.0757 per
share, and received a total of 660,623 shares of the Company’s common
stock.  The issuance of the common stock upon conversion of the notes
was made without registration in reliance on the exemptions from registration
afforded by Section 4(2) under the Securities Act of 1933 and corresponding
provisions of state securities laws, which exempt transactions by an issuer not
involving any public offering.





On
June 2, 2010, three holders of convertible promissory notes in the aggregate
principal amount of $175,000 converted their notes, at a conversion price of
$0.0757 per share, and received a total of 2,312,250 shares of the Company’s
common stock.  The issuance of the common stock upon conversion of the
notes was made without registration in reliance on the exemptions from
registration afforded by Section 4(2) under the Securities Act of 1933 and
corresponding provisions of state securities laws, which exempt transactions by
an issuer not involving any public offering.





On June
4, 2010, the Company issued 1,000 shares of its common stock to a consultant as
a fee in connection with its consulting services.  The issuance of the
common stock was made without registration in reliance on the exemption from
registration afforded by Section 4(2) under the Securities Act of 1933 and
corresponding provisions of state securities laws, which exempt transactions by
an issuer not involving any public offering.





On June
9, 2010, the holder of a convertible promissory note in the principal amount of
$100,000 converted the note, at a conversion price of $0.0757 per share, and
received a total of 1,321,245 shares of the Company’s common
stock.  The issuance of the common stock upon conversion of the notes
was made without registration in reliance on the exemptions from registration
afforded by Section 4(2) and Rule 506 under the Securities Act of 1933 and
corresponding provisions of state securities laws, which exempt transactions by
an issuer not involving any public offering.





On June
10, 2010, the holder of a convertible promissory note in the principal amount of
$50,000 converted the note, at a conversion price of $0.0757 per share, and
received a total of 660,623 shares of the Company’s common stock.  The
issuance of the common stock upon conversion of the note was made without
registration in reliance on the exemptions from registration afforded by Section
4(2) and Rule 506 under the Securities Act of 1933 and corresponding provisions
of state securities laws, which exempt transactions by an issuer not involving
any public offering.





On June
16, 2010, we issued a convertible promissory note in the principal amount of
25,000 to an accredited investor.  The note is convertible at any time
into 250,000 shares of our common stock.  The issuance of the note was
made without registration in reliance on the exemption from registration
afforded by Section 4(2) under the Securities Act of 1933 and corresponding
provisions of state securities laws, which exempt transactions by an issuer not
involving any public offering.




20





On July
6, 2010, the holder of a convertible promissory note in the principal amount of
$25,000 converted the note at a conversion price of $0.0757 per share and
received a total of 330,382 shares of the Company’s common stock.  The
issuance of the common stock upon conversion of the notes was made without
registration in reliance on the exemptions from registration afforded by Section
4(2) and Rule 506 under the Securities Act of 1933 and corresponding provisions
of state securities laws, which exempt transactions by an issuer not involving
any public offering.





On July
14, 2010, we issued a convertible promissory note in the principal amount of
25,000 to an accredited investor.  The note is convertible at any time
into 250,000 shares of our common stock.  The issuance of the note was
made without registration in reliance on the exemption from registration
afforded by Section 4(2) under the Securities Act of 1933 and corresponding
provisions of state securities laws, which exempt transactions by an issuer not
involving any public offering.





On July
27, 2010, we issued a convertible promissory note in the principal amount of
25,000 to an accredited investor.  The note is convertible at any time
into 250,000 shares of our common stock.  The issuance of the note was
made without registration in reliance on the exemption from registration
afforded by Section 4(2) under the Securities Act of 1933 and corresponding
provisions of state securities laws, which exempt transactions by an issuer not
involving any public offering.





ITEM
3. Defaults upon Senior Securities





None.





ITEM
4. (Removed and Reserved)





ITEM
5. Other Information





On July 16, 2010, the Company filed a Certificate of
Amendment to its Certificate of Incorporation with the Secretary of State of the
State of Delaware.  The Certificate of Amendment effected a reverse
split or combination of the Company’s $0.001 par value common stock (the “Common
Stock”) of one (1) share for every twenty (20) shares outstanding.  As
a result of the reverse split, every twenty (20) shares of Common Stock
outstanding before the reverse split will represent one share of Common Stock
after the Reverse Split, with any fractional shares to be rounded up to the next
whole share (the “Reverse Split”).  The Financial Industry Regulatory
Authority confirmed that the reverse split became effective for trading purposes
on the OTC Bulletin Board effective at the open of business on July 29,
2010.  The Certificate of Amendment also reduced the number of
authorized shares of the Company’s Common Stock from 750,000,000 to
50,000,000.  A more detailed description of the Reverse Split and the
reduction in the number of authorized shares of Common Stock is contained in the
Company’s Definitive Information Statement on Schedule 14C filed with the U.S.
Securities and Exchange Commission on June 22, 2010, and the Company’s Current
report on Form 8-K filed with the U.S. Securities and Exchange Commission on
July 21, 2010.




ITEM
6. Exhibits





The
following exhibits are filed as part of this quarterly report:





Exhibit
      Number and Description31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.32.1
            Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act.32.2
            Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act.




21




SIGNATURES




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




Dated:
 August 16, 2010




HEALTHWAREHOUSE.COM,
      INC.By:
            /s/
      Lalit DhadphaleLalit
      DhadphalePresident
      and Chief Executive Officer(principal
      executive officer)By:
            /s/
      Patrick E. DelaneyPatrick
      E. DelaneyChief
      Financial Officer and Treasurer(principal
      financial and accounting officer)





22