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 September 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 oNon-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 November 10, 2010, there
were 10,278,934 shares of common stock outstanding.









HEALTHWAREHOUSE.COM,
INC.





QUARTERLY
REPORT ON FORM 10-Q


FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 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
            
            
            14ITEM
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            
            
            19ITEM
      4T. Controls and Procedures
            
            
            19PART
      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
            
            
            20ITEM
      4. Removed and Reserved
            
            
            20ITEM
      5. Other Information
            
            
            20ITEM
      6. Exhibits
            
            
            21SIGNATURES
            
            
            22




2




PART
I. FINANCIAL INFORMATION





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




September
      30,
              2010
            
            
            December
      31, 2009(unaudited)AssetsCurrent
      assetsCash
            
            $
            -
            
            
            $
            191,181Accounts
      receivable, net of allowance of $30,000
            
            
            762,177
            
            
            
            277,716Inventories
      – finished goods
            
            
            562,925
            
            
            
            388,748Employee  advances
            
            
            55,871
            
            
            
            -Prepaid
      expenses and other current assets
            
            
            151,040
            
            
            
            190,999Total
      current assets
            
            
            1,532,013
            
            
            
            1,048,644Property
      and equipment, net
            
            
            308,643
            
            
            
            318,793Website
      development costs, net of accumulated amortization of  $114,425
      and $39,275
            
            
            85,971
            
            
            
            161,121Total  assets
            
            $
            1,926,627
            
            
            $
            1,528,558


Liabilities
      and Stockholders’ DeficiencyCurrent liabilitiesAccounts
      payable – related parties
            
            $
            698,476
            
            
            $
            73,254Accounts
      payable – trade
            
            
            884,640
            
            
            
            802,607Accrued
      expenses and other current liabilities
            
            
            189,524
            
            
            
            72,766Convertible
      notes, net of deferred debt discount of  $13,507 and $0 at
      September 30, 2010 and December 31, 2009, respectively
            
            
            186,493
            
            
            
            -Notes
      payable, net of deferred debt discount of  $157,713 at December
      31, 2009
            
            
            -
            
            
            
            357,287Notes
      payable, related party
            
            
            286,834
            
            
            
            -Total
      current liabilities
            
            
            2,245,967
            
            
            
            1,305,914Notes
      payable, net of deferred debt discount of  $211,640 at September
      30, 2010
            
            
            803,360
            
            
            
            -Convertible
      notes, net of deferred debt discount of  $ 0 and
      $30,737  at September 30, 2010 and December 31, 2009,
      respectively
            
            
            100,000
            
            
            
            594,263Total
      liabilities
            
            
            3,149,327
            
            
            
            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 and 0 shares issued
      andoutstanding
      (aggregate liquidation preference $172,016)
            
            
            108
            
            
            
            108Common
      stock – par value $.001 per share; authorized 50,000,000 shares;10,162,682
      and 9,881,768  shares issued and outstanding
            
            
            10,163
            
            
            
            9,882Additional
      paid-in capital
            
            
            3,808,592
            
            
            
            2,735,851Accumulated
      deficit
            
            
            (5,041,563
            )
            
            
            (3,117,460
            )Total
      stockholders’ deficiency
            
            
            (1,222,700
            )
            
            
            (371,619)Total
      liabilities and stockholders’ deficiency
            
            $
            1,926,627
            
            
            $
            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
      theThree
              
              
              For
      the Three
              
              
              For
      the Nine
              
              
              For
      the NineMonths
      Ended
              
              
              Months
      Ended
              
              
              Months
      Ended
              
              
              Months
      EndedSeptember
      30,
              
              
              September
      30,
              
              
              September
      30,
              
              
              September
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009Net
      sales
              
              $
              1,215,476
              
              
              $
              1,006,610
              
              
              $
              4,217,652
              
              
              $
              2,672,195Cost
      of sales
              
              
              709,999
              
              
              
              658,376
              
              
              
              2,600,245
              
              
              
              1,847,196Gross
      profit
              
              
              505,477
              
              
              
              348,234
              
              
              
              1,617,407
              
              
              
              824,999Operating
      expenses:Selling,
      general and administrative expenses
              
              
              1,303,744
              
              
              
              963,745
              
              
              
              3,239,194
              
              
              
              2,221,655Loss
      from operations
              
              
              (798,267
              )
              
              
              (615,511
              )
              
              
              (1,621,787
              )
              
              
              (1,396,656
              )Gain
      on litigation settlement
              
              
              -
              
              
              
              -
              
              
              
              48,887
              
              
              
              -Interest
      income/(expense)
              
              
              (157,602
              )
              
              
              (3,603
              )
              
              
              (351,203
              )
              
              
              (9,799
              )Net
      loss
              
              $
              (955,869
              )
              
              $
              (619,114
              )
              
              $
              (1,924,103
              )
              
              $
              (1,406,455
              )Per
      share dataNet
      loss per common share basic and diluted
              
              $
              (0.09
              )
              
              $
              (0.07
              )
              
              $
              (0.19
              )
              
              $
              (0.16
              )Weighted
      average number of common sharesoutstanding
      Basic and diluted
              
              
              10,159,727
              
              
              
              9,471,849
              
              
              
              10,011,745
              
              
              
              8,627,679





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 Nine
              
              
              For
      the NineMonths
      Ended
              
              
              Months EndedSeptember
      30,
              
              
              September
      30,2010
              
              
              2009Cash
      flows from operating activitiesNet
      loss
              
              $
              (1,924,103
              )
              
              $
              (1,406,455
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              70,500
              
              
              
              37,504Amortization
      of web development costs
              
              
              75,150
              
              
              
              -Non-cash
      stock-based compensation
              
              
              343,806
              
              
              
              211,797Amortization
      of deferred debt discount
              
              
              267,340
              
              
              
              19,424Provision
      for doubtful accounts
              
              
              48,358Gain
      on extinguishment of debt
              
              
              (48,887
              )
              
              
              -Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (532,820
              )
              
              
              (37,948
              )Inventories
              
              
              (174,177
              )
              
              
              (337,316
              )Prepaid
      expenses and other current assets
              
              
              39,959
              
              
              
              (187,399
              )Accounts
      payable – trade
              
              
              131,118
              
              
              
              (286,992
              )Accounts
      payable – related parties
              
              
              625,222
              
              
              
              (384,282
              )Accrued
      expenses and other current liabilities
              
              
              116,741
              
              
              
              16,260Net
      cash used in operating activities
              
              
              (961,793
              )
              
              
              (2,355,407
              )Cash
      flow from investing activitiesCash
      received in share exchange
              
              
              -
              
              
              
              1,220,520Acquisition
      of property and equipment
              
              
              (60,351
              )
              
              
              (150,580
              )Employee
      advance
              
              
              (55,871
              )
              
              
              -Expenses
      paid in conjunction with share exchange
              
              
              -
              
              
              
              (225,000
              )Website
      development costs
              
              
              -
              
              
              
              (109,772
              )Net
      cash (used in) provided by investing activities
              
              
              (116,222
              )
              
              
              735,168Cash
      flows from financing activitiesProceeds
      from notes payable
              
              
              500,000
              
              
              
              -Proceeds
      from sale of common stock
              
              
              -
              
              
              
              50,196Proceeds
      from option/warrant exercises
              
              
              -
              
              
              
              23,915Proceeds
      from sale of convertible notes
              
              
              100,000
              
              
              
              1,200,000Advances
      from former director
              
              
              521,000
              
              
              
              -Repayment
      of advances from former director
              
              
              (234,166
              )
              
              
              -Net
      cash provided by financing activities
              
              
              886,834
              
              
              
              1,274,111Net
      decrease in cash
              
              
              (191,181
              )
              
              
              (346,128
              )Cash
      – beginning of period
              
              
              191,181
              
              
              
              357,938Cash
      – end of period
              
              $
              -
              
              
              $
              11,810




Non-cash
      investing and financing activities:Net
      assets received in share exchangeCash
              
              $
              -
              
              
              $
              1,220,520Accounts
      payable
              
              
              -
              
              
              
              (147,276
              )Accrued
      expenses
              
              
              -
              
              
              
              (168,531
              )Net
      assets
              
              $
              -
              
              
              $
              904,713Conversion of debt to common
      stock
              
              $
              425,000
              
              
              $
              -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
Recapitalization




On May
14, 2009, Hwareh.com, Inc. completed a share exchange transaction with
Clacendix, Inc. (“Clacendix”), pursuant to the terms of a Securities
Exchange Agreement, dated as of May 14, 2009.  Under the Securities
Exchange Agreement, Clacendix acquired all the outstanding capital stock of
Hwareh.com, Inc. As a result of the exchange, the former stockholders of
Hwareh.com, Inc. owned 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 retail mail order pharmacy (“RMP”) 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 December 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 September 30, 2010 and the condensed consolidated statements
of operations for the three and nine months ended September 30, 2010 and 2009
and cash flows for the nine months ended September 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 September
30, 2010 and for the nine months ended September 30, 2010 and 2009 not
misleading have been made.  The results of operations for the three and
nine months ended September 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.  Management’s
Liquidity Plans





As of
September 30, 2010, the Company had limited cash and a working capital
deficiency of $713,954.  During the three and nine months ended
September 30, 2010, the Company generated revenue of $1,215,476 and $4,217,652
and a net loss of $955,869 and $1,924,103, respectively.  For the
nine months ended September 30, 2010, cash flows included net cash used in
operating activities of $961,793, net cash used in investing activities of
$116,222 and net cash provided by financing activities of $886,834.




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 nine months ended September 30,
2010, the Company’s cash was reduced by approximately $191,000.





On November 8, 2010, the Company
received net cash proceeds of approximately $3,100,000 for the sale of 349,392
shares of Series B Preferred Stock and restructured $1,000,000 in short term
debt to long term (see Note 12).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. Considering the new financial
resources, current operating projections and additional potential funding
sources the Company believes that it should be able to secure sufficient
financial resources through the next fiscal year.





There is
no assurance that additional financing will be available when needed or that
management will be able to obtain financing on terms acceptable to the Company
and whether the Company will be able to turn into a profitable position and
generate positive operating cash flow. If the Company is unable to raise
sufficient additional funds, it will have to develop and implement a plan to
extend payables and reduce overhead until sufficient additional capital is
raised to support further operations. There can be no assurance that such a plan
will be successful. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.





3.
Summary of Significant Accounting Policies




Principles
of Consolidation





The
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 2,460,170 at September 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 1,599,300 shares
of common stock, warrants to purchase up to 625,000 shares of common stock,
convertible promissory notes convertible into 182,118 shares of common stock and
convertible preferred stock convertible into 53,752 shares of common
stock.





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 $126,959 and $86,157
for the three months ended September 30, 2010 and 2009, respectively and
$343,806 and $211,797 for the nine months ended September 30, 2010 and September
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 Nine
              Months
      Ended
              September
      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 nine months ended September 30, 2010
the Company amortized $5,870 and $17,230, respectively, of amortization of debt
discount. For the three and nine months ended September 30, 2009, the Company
recorded amortization of $4,003 and $19,424, respectively.  During the nine
months ended September 30, 2010, Convertible Debentures in the amount of
$425,000 were converted to 280,784 shares of common stock.





During
the nine months ended September 30, 2010, the Company sold four convertible
debentures for $25,000 each for an aggregate amount of $100,000. 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.
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
were 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.  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
nine months ended September 30, 2010 and 2009 the Company
recognized   $250,110 and $0, respectively, of amortization of
the deferred debt discount on short term debt. For the three months ended
September 30, 2010 and 2009, the Company recognized $117,152 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:




Weighted-Weighted
              
              
              AverageAverage
              
              
              Remaining
              
              
              AggregateExercise
              
              
              Contractual
              
              
              IntrinsicShares
              
              
              Price
      ($)
              
              
              Term
              
              
              ValueOptions
      outstanding at January 1, 2010
              
              
              1,514,300
              
              
              $
              1.80Granted
              
              
              232,500
              
              
              
              2.80
              
              
              
              -
              
              
              
              -Expired
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Canceled
              
              
              (147,500
              )
              
              
              2.43
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Options
      outstanding at September 30, 2010
              
              
              1,599,300
              
              
              $
              1.95
              
              
              
              6.92
              
              
              $
              -Options
      exercisable at September 30, 2010
              
              
              547,867
              
              
              $
              1.49
              
              
              
              5.57
              
              
              $
              337,440




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
            
            
            
            6.12
            
            
            $
            0.80
            
            
            
            281,200
            
            
            $
            0.80$
            2.00
      –5.00
            
            
            
            1,177,500
            
            
            
            7.20
            
            
            $
            2.37
            
            
            
            266,667
            
            
            $
            2.21$
            0.00
      – $5.00
            
            
            
            1,599,300
            
            
            
            6.92
            
            
            $
            1.95
            
            
            
            547,867
            
            
            $
            1.49




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 September 30, 2010
            
            
            625,000
            
            
            $
            1.60
            
            
            
            4.40
            
            
            $
            250,000





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 of
$9,417(as amended) through March 31, 2011, the expiration date.





During
the nine months ended September 30, 2010 and 2009, the Company recorded rent
expense of $71,447 and $70,434, respectively, and for the three months ended
September 30, 2010 and 2009, approximately $50,447 and $28,251,
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 ended 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 nine months ended September 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 $761,539 and
$1,124,610 of supplies during the nine months ended September 30, 2010 and 2009,
respectively, representing approximately 29.2% and 50.9% of total
purchases.  For the nine months ended September 30, 2010 and 2009, the
Company had sales to Masters Pharmaceuticals of $448,893 and $125,985,
respectively.  As of September 30, 2010 and December 31, 2009, the
Company had amounts due to Masters Pharmaceuticals and affiliates in the amount
of approximately $698,000 and $73,000, respectively.





Ron
Ferguson, a former Hwareh.com director, has guaranteed the Company’s obligation
to two suppliers Prescription Supply Inc. and Harvard Drug Group. 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 September 30, 2010, there was $815 due to Prescription
Supply Inc. and $4,297 was due to Harvard Drug Group.





During
the nine months ended September 30, 2010, a former director advanced $521,000 in
short term financing to the Company.  A payment of $234,166 was made during
the nine months ended September 30, 2010. The amount of $286,834 was outstanding
at September 30, 2010.





10.
 Sales Concentrations





During
the nine months ended September 30, 2010 sales to Masters Pharmaceuticals were
approximately 10.6 % of net sales. The loss of this customers or a significant
decline in sales volumes from this customer 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 September 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 September 30, 2010, the Company granted its investment advisor, as part of
the compensation related to securing the $515,000 loan in December 2009 and
$500,000 loan in May 2010, a warrant to purchase 18,750 shares of the Company’s
common stock at a purchase price of $1.60 per share for a total fair value of
$25,245. The warrant may be exercised in whole or in part from time to time for
a term of five years from its grant date.  The chairman of the Company's
audit committee is a senior managing director of this investment advisory
firm.





Subsequent
to September 30, 2010, five convertible debentures in the amount of $125,000
have been converted into 62,500 shares of common stock.




12





Subsequent
to September 30, 2010, all outstanding Series A Preferred Stock of 107,501
shares were converted into 53,752 shares of the Company’s common
stock.





Subsequent
to September 30, 2010, the Company granted options to purchase an aggregate of
122,000 shares of common stock with an exercise price of $2.75 per share for a
total fair value of $166,429 under a previously approved option
plan.





Subsequent
to September 30, 2010, the Company granted options to purchase an aggregate of
250,000 shares of common stock with an exercise price of $3.03 per share for a
total fair value of $323,736 under a previously approved option
plan.





On
November 8, 2010, the Company received net cash proceeds of approximately
$3,100,000 for the sale of 349,392 shares of Series B Preferred Stock. In
addition, to the preferred shares, the Company issued five year immediately
exercisable warrants to purchase 943,106 shares of the Company’s common
stock at an exercise price of $3.00 per share.





In
addition, on November 8, 2010, the Company refinanced $1,000,000 of short term
notes bearing a 12% per annum interest rate into two year secured convertible
debentures bearing a 7% per annum interest rate compounded annually. The
principal and accrued interest owing under these notes may be converted in
Series B Preferred Stock shares by dividing the amount owing by $9.45. In
connection with the new notes, the Company issued five year immediately
exercisable warrants to purchase 285,638 shares of the Company’s common stock at
an exercise price of $3.00 per share.  In accordance with ASC 470, the
Company reclassified this debt to long term on the balance sheet as of September
30, 2010 due to the event occurring after the financial statement date but
before the financial statements were issued.




13





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 retail
mail order 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.




14




Results
of Operations




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




The
      three
              
              
              
              
              
              The
      threemonths
      ended
              
              
              
              
              
              months
      endedSeptember
      30,
              
              
              %
      of
              
              
              September
      30,
              
              
              %
      of2010
              
              
              Revenue
              
              
              2009
              
              
              RevenueNet
      sales
              
              $
              1,215,476
              
              
              
              100.0
              %
              
              $
              1,006,610
              
              
              
              100.0
              %Cost
      of sales
              
              
              709,999
              
              
              
              58.4
              %
              
              
              658,376
              
              
              
              65.4
              %Gross
      profit
              
              
              505,477
              
              
              
              41.6
              %
              
              
              348,234
              
              
              
              34.6
              %Selling,
      general & administrative expenses
              
              
              1,303,744
              
              
              
              107.3
              %
              
              
              963,745
              
              
              
              95.7
              %Loss
      from operations
              
              
              (798,267
              )
              
              
              (65.7
              )
      %
              
              
              (615,511
              )
              
              
              (61.1
              )
      %Gain
      on litigation settlement
              
              
              -
              
              
              
              0
              %
              
              
              -
              
              
              
              -
              %Interest
      income(expense)
              
              
              (157,602
              )
              
              
              (13.0
              )
      %
              
              
              (3,603
              )
              
              
              (0.4
              )Net
      loss
              
              $
              (955,869
              )
              
              
              (78.6
              )%
              
              $
              (619,114
              )
              
              
              (61.5
              )
      %




Net
Sales




The
      threemonths ended
              September
      30,2010
            
            
            %
      Change
            
            
            The
      three months ended
              September
      30,2009Total
      net sales
            
            $
            1,215,476
            
            
            
            20.7%
            
            
            $
            1,006,610Total
      average net sales per order
            
            $
            62.67
            
            
            
            2.8%
            
            
            $
            60.94





Revenues
for the three months ended September 30, 2010 grew to $1,215,476 from $1,006,610
for the three months ended September 30, 2009. Revenues increased for the three
months ended September 30, 2010 compared to the prior year as a result of an
increase in order volume to consumers. Higher margin prescription revenues
increased by 291.8% while lower margin over-the-counter products declined by
26.5% for the three months ended September 30, 2010 compared to the same period
in 2009.





Another
indicator of business activity was that our website attracted 446,689 visits
with 1,480,984 page views during the three months ended September 30, 2010
compared to 310,396 visits and 1,111,595 page views during the three months
ended September 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
              September
      30,
              2010
            
            
            %
              Change
            
            
            The
      three
              months ended
              September
      30,
              2009Total
      cost of sales
            
            $
            709,999
            
            
            
            7.8%
            
            
            $
            658,376Total
      gross profit dollars
            
            $
            505,477
            
            
            
            45.2%
            
            
            $
            348,234Total
      gross margin percentage
            
            $
            41.6%
            
            
            
            
            
            
            $
            34.6%




Total cost of sales increased to $709,999 for the three months
ended September 30, 2010 as compared to $658,376 for the three months ended
September 30, 2009. The decrease of the cost of sales as a percentage of revenue
from 65.4% to 58.4% was due to the favorable product mix of higher margin
prescription revenue as a higher percentage of total revenue compared to higher
percentage of lower margin over-the-counter product for the same period in 2009.
Gross margin percentage increased year-over-year from 34.6% for the three months
ended September 30, 2009 to 41.6% for the three months ended September 30,
2010.




15




Selling,
General and Administrative Expenses




The
      three
              months
      ended
              September
      30,
              2010
            
            
            %
              Change
            
            
            The
      three
              months
      ended
              September
      30,
              2009Selling,
      general and administrative expenses
            
            $
            1,303,744
            
            
            
            35.3%
            
            
            $
            963,745Percentage
      of revenue
            
            
            107.3%
            
            
            
            
            
            
            
            95.7%





Selling,
general and administrative expenses increased by $339,999 in the three months
ended September 30, 2010 compared to the same period in 2009, an increase of
35.3%.  The three months ended September 30, 2010 expense increases
were due primarily to expenses related to the maturing of business activities
including increased headcount and increases of approximately $456,700 for
payroll, legal, bad debt, rent, contract labor, shipping and fulfillment, and
travel related expenses offset in part by a reduction in advertising expenses of
$201,298 compared to the three months ended September 30, 2009. In addition, the
recognition of $126,959 for non-cash based stock compensation expense compared
to $86,157 in the three months ended September 30, 2009 and software engineering
for approximately $49,239 and amortization of capitalized software expenses of
$25,050 for the three months ended September 20, 2010 and zero for both in the
three months ended September 30, 2009 due to capitalization.





The
nine months ended September 30, 2010 compared to the nine months ended September
30, 2009.




The
      nine
                months
      ended
                September
      30,
                2010
              
              
              % of
                Revenue
              
              
              The
      nine
                months
      ended
                September
      30,
                2009
              
              
              %
      of
                RevenueNet
      sales
              
              $
              4,217,652
              
              
              
              100.0
              %
              
              $
              2,672,195
              
              
              
              100.0
              %Cost
      of sales
              
              
              2,600,245
              
              
              
              61.7
              %
              
              
              1,847,196
              
              
              
              69.1
              %Gross
      profit
              
              
              1,617,407
              
              
              
              38.3
              %
              
              
              824,999
              
              
              
              30.9
              %Selling,
      general & administrative expenses
              
              
              3,239,194
              
              
              
              76.8
              %
              
              
              2,221,655
              
              
              
              83.1
              %Loss
      from operations
              
              
              (1,621,787
              )
              
              
              (38.5
              )
      %
              
              
              (1,396,656
              )
              
              
              (52.2
              )%Gain
      on litigation settlement
              
              
              48,887
              
              
              
              1.2
              %
              
              
              -
              
              
              
              -Interest
      income(expense)
              
              
              (351,203
              )
              
              
              (8.3
              )
      %
              
              
              (9,799
              )
              
              
              (0.4
              )%Net
      loss
              
              $
              (1,924,103
              )
              
              
              (45.6
              )%
              
              $
              (1,406,455
              )
              
              
              (52.6
              )
      %




Net
Sales




The
      nine months ended September 30,
              2010
            
            
            %
      Change
            
            
            The
      nine months ended September 30,
              2009Total
      net sales
            
            $
            4,217,652
            
            
            
            57.8%
            
            
            $
            2,672,195Total
      average net sales per order
            
            $
            88.09
            
            
            
            50.7%
            
            
            $
            58.44







Revenues
for the nine months ended September 30, 2010 grew to $4,217,652 from $2,672,195
for the nine months ended September 30, 2009. Revenues increased for the nine
months ended September 30, 2010 compared to the prior year as a result of an
increase in order volume to consumers. Consumer prescription revenues increased
while the sale of over-the-counter declined slightly during the nine months
ended September 30, 2010 compared to the nine months ended September 30, 2009,
while revenue generated from the sales of certain prescription products to
business manufacturers increased significantly accounting for approximately
28.1% of all revenue for the nine months ended September 30, 2010, compared to
less than 10% for the same period last year. Higher margin prescription revenues
increased by 25% while lower margin over-the-counter products declined by 25%
for the nine months ended September 30, 2010 compared to the same period in
2009.




Another
indicator of business activity was that our website attracted 966,462 visits and
3,267,540 page views during the nine months ended September 30, 2010 compared to
857,200 visits and 3,159,000 page views during the nine months ended September
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
      nine months ended
              September
      30,
              2010
            
            
            %
              Change
            
            
            The
      nine months ended
              September
      30,
              2009Total
      cost of sales
            
            $
            2,600,245
            
            
            
            40.8%
            
            
            $
            1,847,196Total
      gross profit dollars
            
            $
            1,617,407
            
            
            
            96.1%
            
            
            $
            824,999Total
      gross margin percentage
            
            
            38.3
            %
            
            
            
            
            
            
            30.9
            %




16




Total
cost of sales increased to $2,600,245 for the nine months ended September 30,
2010 as compared to $1,847,196 for the nine months ended September 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 30.9% for the nine months ended September 30, 2009
to 38.3% for the nine months ended September 30, 2010. The improvement in gross
profit margins was due primarily to the shift in product mix from primarily
lower margin OTC product sales for the nine months ended September 30, 2009 to
an increase in higher margin revenue for prescription drugs and the sale of
certain prescription products to manufacturers.




Selling,
General and Administrative Expenses




The
      nine months ended
              September
      30,
              2010
            
            
            %
              Change
            
            
            The
      nine months ended
              September
      30, 2009Selling,
      general and administrative expenses
            
            $
            3,239,194
            
            
            
            46.0%
            
            
            $
            2,221,655Percentage
      of revenue
            
            
            76.8
            %
            
            
            
            
            
            
            83.1
            %





Selling,
general and administrative expenses increased by $1,017,539 in the nine months
ended September 30, 2010 compared to the same period in 2009, an increase of
45.8%.  The 2010 expense increases were due primarily to expenses
related to the maturing of business activities including increased headcount and
increases of approximately $802,100 for payroll, legal, bad debt, rent, contract
labor, shipping and fulfillment, and travel related expenses offset in part by a
reduction in advertising expenses of $223,535 compared to the nine months ended
September 30, 2009. In addition the recognition of $343,806 for non-cash based
stock compensation expense compared to $211,797 in the nine months ended
September 30, 2009 and software engineering for approximately $150,205 and
amortization of capitalized software expenses of $75,150 for the nine months
ended September 30, 2010 and zero for both in the nine months ended September
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 year ended December 31, 2009 and through September 30, 2010.
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
September 30, 2010, the Company had limited cash and a working capital
deficiency of $713,954.  During the three and nine months ended
September 30, 2010, the Company generated revenue of $1,215,476 and $4,217,652
and net losses of $955,869 and $1,924,103, respectively.  For the
nine months ended September 30, 2010, cash flows included net cash used in
operating activities of $961,793, net cash used by investing activities of
$116,222 and net cash provided by financing activities of $886,834.





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 nine months ended
September 30, 2010, the Company’s cash and cash equivalents were reduced by
$191,181.  Our sources and uses of funds during this period were as
follows:




For the nine months ended September 30, 2010, cash flows included
net cash used in operating activities of $961,793.  This amount
included a increase in operating cash related to a net loss of $1,924,103 and
additions for the following items: (i) amortization of debt discount,
$267,340(ii) depreciation and amortization, $145,650; (iii) stock-based
compensation expense, $343,806;(iv) accounts payable related parties and trade,
net, $756,340. The decrease in cash used in operating activities in the first
nine months of 2010 was primarily offset by the following increases: (i)
accounts receivable, $(532,820) and (ii) inventories, $(174,177). For the
nine months ended September 30, 2009, cash flows included net cash used in
operating activities of $(2,355,407) a decrease in operating cash related to a
net loss of approximately $1,406,000 and additions for the following items: (i)
depreciation and amortization, $37,504; (ii) stock-based compensation expense,
$211,797; The increase in cash used in operating activities in 2009 was
primarily offset by the following decreases: (i) accounts payable related
parties and trade, net, $671,274; (ii) accounts receivable, $37,948; (iii)
prepaid expenses and other current assets, $187,399; and (iv) inventories,
$337,316.




17





For the
nine months ended September 30, 2010, net cash used in investing activities was
$116,222. For the nine months ended September 30, 2009, net cash provided by
investing activities was approximately $735,000 and was attributable to cash
received in share exchange of $1,220,520, offset by expenses paid in conjunction
with share exchange of $225,000; acquisitions of property and equipment of
$150,580 and website development costs of $109,772.




For the
nine months ended September 30, 2010, net cash provided by financing activities
was $886,834, $521,000 from an advance from a former director and $500,000 from
proceeds of notes payable. For the nine months ended September 30, 2009, net
cash provided by financing activities was approximately $1,274,000, consisting
of a sale of convertible notes of $1,200,000; sale of common stock of $50,196
and proceeds from option and warrant exercises of $23,915.





On November 8, 2010, the Company
received net cash proceeds of approximately $3,100,000 for the sale of 349,392
shares of Series B Preferred Stock and restructured $1,000,000 in short term
debt to long term.   Management believes 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.Considering the new financial
resources, current operating projections and additional potential funding
sources the Company believes that it should be able to secure sufficient
financial resources through the next fiscal year.





There is
no assurance that additional financing will be available when needed or that
management will be able to obtain financing on terms acceptable to the Company
and whether the Company will be able to turn into a profitable position and
generate positive operating cash flow. If the Company is unable to raise
sufficient additional funds, it will have to develop and implement a plan to
extend payables and reduce overhead until sufficient additional capital is
raised to support further operations. There can be no assurance that such a plan
will be successful. The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.







Critical Accounting Policies and Estimates




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




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





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




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




Recently-issued Accounting Pronouncements




The
information contained in Footnote 11 to the Company’s condensed consolidated
financial statements included in, Item 1 to this quarterly report is
incorporated herewith by reference.




18




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 September 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.




We
believe that our internal control risks are mitigated by the fact that our Chief
Executive Officer reviews and approves substantially all of our major
transactions. We believe that our weaknesses in internal control over financial
reporting and our disclosure controls relate in part to the fact that we are an
emerging business with limited personnel. Management and the audit committee of
the Board of Directors believe that the company must allocate additional human
and financial resources to address these matters. Throughout the year, the
Company has been continuously improving its monitoring of current reporting
systems and its personnel and has recently hired a corporate controller to
support the Company in its compliance process. The Company intends to continue
making necessary changes until its material weaknesses are
remediated.





Changes in Internal Control Over
Financial Reporting




During
the three months ended September 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, at this time.





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 ended 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 nine months ended September 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 nine months ended September 30,
2010





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 $1.51 per share and received a total of 16,520 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 12,500 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 12,500 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.




20





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:
 November 15, 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