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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q/A



Amendment
No. 1



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



For the quarterly period ended June 30, 2002



or



| ̈ |  | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
|- |  | ----------------------------------------------------------------



For the transition period from 
to



Commission File Number 1-15445





DRUGMAX, INC.,

(Formerly DrugMax.com, Inc.)

(Exact name of registrant as specified in its charter)





|NEVADA                                                         |  | 34-1755390                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)





12505 Starkey Road, Suite A, Largo, Florida 33773

(Address of principal executive offices)





(727) 533-0431

(Registrants telephone number, including area code)



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



As of July 31, 2002, there were 7,121,833 shares of common
stock, par value $0.001 per share, outstanding.



INTRODUCTORY NOTEThis Amendment No. 1 on Form 10-Q/A to the Registrants Form 10-Q for the quarter ended June 30, 2002, originally filed on August 14, 2002 is being filed for the purposes of giving effect to the
restatement of the Companys condensed consolidated balance sheets as of March 31, 2002 and June 30, 2002. See Note J to the condensed consolidated financial statements contained herein for a summary of the significant effects of the
restatement.



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DRUGMAX,
INC. AND SUBSIDIARIES

FORM 10-Q/A

FOR THE QUARTER ENDED JUNE 30, 2002





TABLE OF CONTENTS





|                             |  |                                                                                          |  | Page
|---------------------------- |  | ---------------------------------------------------------------------------------------- |  | ----
|                            
|PART I FINANCIAL INFORMATION |  |                                                                                         
|                            
|Item 1.                      |  | Financial Statements                                                                     |  |     
|                             |  | Condensed Consolidated Balance SheetsJune 30, 2002 and March 31, 2002                    |  | 3   
|                            
|                             |  | Condensed Consolidated Statements of OperationsThree Months Ended June 30, 2002 and 2001 |  | 4   
|                            
|                             |  | Condensed Consolidated Statements of Cash FlowsThree Months Ended June 30, 2002 and 2001 |  | 5   
|                            
|                             |  | Notes to Condensed Consolidated Financial Statements                                     |  | 6   
|                            
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations    |  | 12  
|                             |  | Financial Condition, Liquidity and Capital Resources                                     |  | 14  
|                            
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                               |  | 15  
|                            
|PART II OTHER INFORMATION    |  |                                                                                         
|                            
|Item 1.                      |  | Legal Proceedings                                                                        |  | 15  
|                            
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                         |  | 16  
|                            
|                             |  | Signature Page                                                                           |  | 19  
|                            
|                             |  | Section 302 Certification by Principal Executive Officer                                 |  | 20  
|                            
|                             |  | Section 302 Certification by Principal Financial Officer                                 |  | 21  



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PART IFINANCIAL
INFORMATION



Item 1.    CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS



DRUGMAX,
INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



|                                                                                                         |  | June 30, 2002 |             |   | March 31, 2002 |  
|-------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | -------------- | -
|                                                                                                         |  | (As Restated) |             |   | (As Restated)  |  
|                                                                                                         |  | (See Note J)  |             |   | (See Note J)   |  
|                                                                                                        
|ASSETS                                                                                                   |  |               |             |   |                |  
|Current assets:                                                                                          |  |               |             |   |                |  
|Cash and cash equivalents                                                                                |  | $             | 145,077     |   |                | $
|Restricted cash                                                                                          |  |               | 2,000,000   |   |                |  
|Accounts receivable, net of allowance for doubtful accounts of $1,237,575 and
$340,575                   |  |               | 14,081,000  |   |                |  
|Inventory                                                                                                |  |               | 15,273,734  |   |                |  
|Due from affiliates                                                                                      |  |               | 22,836      |   |                |  
|Net deferred income tax assetcurrent                                                                    |  |               | 756,632     |   |                |  
|Prepaid expenses and other current assets                                                                |  |               | 1,663,490   |   |                |  
|                                                                                                         |  |               |             |   |                |  
|Total current assets                                                                                     |  |               | 33,942,769  |   |                |  
|                                                                                                        
|Property and equipment, net                                                                              |  |               | 937,912     |   |                |  
|Goodwill                                                                                                 |  |               | 25,314,298  |   |                |  
|Intangible assets, net                                                                                   |  |               | 267,914     |   |                |  
|Shareholder notes receivable                                                                             |  |               | 100,000     |   |                |  
|Notes receivable                                                                                         |  |               | 703,085     |   |                |  
|Net deferred income tax assetlong term                                                                  |  |               | 689,545     |   |                |  
|Deferred financing costs, net                                                                            |  |               | 202,585     |   |                |  
|Other assets                                                                                             |  |               | 150,726     |   |                |  
|Deposits                                                                                                 |  |               | 41,567      |   |                |  
|                                                                                                         |  |               |             |   |                |  
|Total assets                                                                                             |  | $             | 62,350,401  |   |                | $
|                                                                                                         |  |               |             |   |                |  
|                                                                                                        
|LIABILITIES AND STOCKHOLDERS
EQUITY                                                                     |  |               |             |   |                |  
|Current liabilities:                                                                                     |  |               |             |   |                |  
|Accounts payable                                                                                         |  | $             | 12,145,392  |   |                | $
|Accrued expenses and other current liabilities                                                           |  |               | 334,018     |   |                |  
|Credit lines payable                                                                                     |  |               | 17,504,220  |   |                |  
|Current portion of long-term debt and capital leases                                                     |  |               | 676,634     |   |                |  
|Due to affiliates                                                                                        |  |               | 4,377       |   |                |  
|                                                                                                         |  |               |             |   |                |  
|Total current liabilities                                                                                |  |               | 30,664,641  |   |                |  
|Long-term debt and capital leases                                                                        |  |               | 309,294     |   |                |  
|Other long-term liabilities                                                                              |  |               | 501,561     |   |                |  
|                                                                                                         |  |               |             |   |                |  
|Total liabilities                                                                                        |  |               | 31,475,496  |   |                |  
|                                                                                                         |  |               |             |   |                |  
|Commitments and contingencies (Note F)                                                                   |  |               |             |   |                |  
|                                                                                                        
|Stockholders equity:                                                                                    |  |               |             |   |                |  
|Preferred stock, $.001 par value; 2,000,000 shares authorized; no preferred shares
issued or outstanding |  |               |            |   |                |  
|Common stock, $.001 par value; 24,000,000 shares authorized; 7,119,172 shares issued and
outstanding     |  |               | 7,120       |   |                |  
|Additional paid-in capital                                                                               |  |               | 40,967,355  |   |                |  
|Accumulated deficit                                                                                      |  |               | (10,099,570 | ) |                |  
|                                                                                                         |  |               |             |   |                |  
|Total stockholders equity                                                                               |  |               | 30,874,905  |   |                |  
|                                                                                                         |  |               |             |   |                |  
|Total liabilities and stockholders equity                                                               |  | $             | 62,350,401  |   |                | $
|                                                                                                         |  |               |             |   |                |  



See
accompanying notes to condensed consolidated financial statements.



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DRUGMAX,
INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)





|                                             |  | For the Three Months EndedJune 30, 2002 |            |   | For the Three Months EndedJune 30, 2001 |  
|-------------------------------------------- |  | --------------------------------------- | ---------- | - | --------------------------------------- | -
|Revenues                                     |  | $                                       | 63,103,819 |   |                                         | $
|Cost of goods sold                           |  |                                         | 61,122,993 |   |                                         |  
|                                             |  |                                         |            |   |                                         |  
|Gross profit                                 |  |                                         | 1,980,826  |   |                                         |  
|                                             |  |                                         |            |   |                                         |  
|Selling, general and administrative expenses |  |                                         | 2,558,281  |   |                                         |  
|Amortization expense                         |  |                                         | 41,893     |   |                                         |  
|Depreciation expense                         |  |                                         | 73,915     |   |                                         |  
|                                             |  |                                         |            |   |                                         |  
|Total operating expenses                     |  |                                         | 2,674,089  |   |                                         |  
|                                             |  |                                         |            |   |                                         |  
|Operating (loss) income                      |  |                                         | (693,263   | ) |                                         |  
|                                             |  |                                         |            |   |                                         |  
|                                            
|Other income (expense):                      |  |                                         |            |   |                                         |  
|Interest income                              |  |                                         | 26,251     |   |                                         |  
|Other income                                 |  |                                         | 9,356      |   |                                         |  
|Interest expense                             |  |                                         | (256,663   | ) |                                         |  
|                                             |  |                                         |            |   |                                         |  
|Total other expense                          |  |                                         | (221,056   | ) |                                         |  
|                                             |  |                                         |            |   |                                         |  
|(Loss) income before income tax benefit      |  |                                         | (914,319   | ) |                                         |  
|Income tax benefit                           |  |                                         | 342,629    |   |                                         |  
|                                             |  |                                         |            |   |                                         |  
|Net (loss) income                            |  | $                                       | (571,690   | ) |                                         | $
|                                             |  |                                         |            |   |                                         |  
|Net (loss) income per common sharebasic     |  | $                                       | (0.08      | ) |                                         | $
|                                             |  |                                         |            |   |                                         |  
|Net (loss) income per common sharediluted   |  | $                                       | (0.08      | ) |                                         | $
|                                             |  |                                         |            |   |                                         |  
|Weighted average shares outstandingbasic    |  |                                         | 7,119,172  |   |                                         |  
|                                             |  |                                         |            |   |                                         |  
|Weighted average shares outstandingdiluted  |  |                                         | 7,119,172  |   |                                         |  
|                                             |  |                                         |            |   |                                         |  









See accompanying notes to condensed consolidated financial statements.



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DRUGMAX,
INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                                                   |  | For the Three Months Ended June 30, 2002 |            |   | For the Three Months Ended June 30, 2001 |  
|-------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ---------- | - | ---------------------------------------- | -
|                                                                                                   |  |                                          |            |   |                                          |  
|Cash flows from operating activities:                                                              |  |                                          |            |   |                                          |  
|Net (loss) income                                                                                  |  | $                                        | (571,690   | ) |                                          | $
|                                                                                                   |  |                                          |            |   |                                          |  
|Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities: |  |                                          |            |   |                                          |  
|Depreciation and amortization                                                                      |  |                                          | 115,808    |   |                                          |  
|Bad debt expense                                                                                   |  |                                          | 909,800    |   |                                          |  
|Loss on disposal of assets                                                                         |  |                                          | 1,119      |   |                                          |  
|Increase in net deferred income tax asset                                                          |  |                                          | (342,629   | ) |                                          |  
|Changes in operating assets and liabilities:                                                       |  |                                          |            |   |                                          |  
|Increase in accounts receivable                                                                    |  |                                          | (1,190,301 | ) |                                          |  
|Decrease/(increase) in inventory                                                                   |  |                                          | 5,408,705  |   |                                          |  
|Decrease/(increase) in due from affiliates                                                         |  |                                          | 662        |   |                                          |  
|Increase in prepaid expenses and other current assets                                              |  |                                          | (981,142   | ) |                                          |  
|Decrease in other assets                                                                           |  |                                          | 500        |   |                                          |  
|Decrease in notes receivable                                                                       |  |                                          | 47,388     |   |                                          |  
|Decrease in deposits                                                                               |  |                                          | 3,176      |   |                                          |  
|(Decrease)/increase in accounts payable                                                            |  |                                          | (1,699,374 | ) |                                          |  
|(Decrease)/increase in accrued expenses and other current liabilities                              |  |                                          | (87,300    | ) |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|Net cash provided by (used in) operating activities                                                |  |                                          | 1,614,722  |   |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|Cash flows from investing activities:                                                              |  |                                          |            |   |                                          |  
|Purchases of property and equipment                                                                |  |                                          | (25,780    | ) |                                          |  
|Proceeds from sale of property and equipment                                                       |  |                                          | 2,754      |   |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|Net cash used in investing activities                                                              |  |                                          | (23,026    | ) |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|Cash flows from financing activities:                                                              |  |                                          |            |   |                                          |  
|Net change under revolving line of credit agreements                                               |  |                                          | (1,425,355 | ) |                                          |  
|Increase in deferred financing costs                                                               |  |                                          | (20,000    | ) |                                          |  
|Payments of long-term debt and capital leases                                                      |  |                                          | (168,637   | ) |                                          |  
|Payments to affiliatesnet                                                                         |  |                                          |           |   |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|Net cash (used in) provided by financing activities                                                |  |                                          | (1,613,992 | ) |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|Net decrease in cash and cash equivalents                                                          |  |                                          | (22,296    | ) |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|Cash and cash equivalents at beginning of period                                                   |  |                                          | 167,373    |   |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|Cash and cash equivalents at end of period                                                         |  | $                                        | 145,077    |   |                                          | $
|                                                                                                   |  |                                          |            |   |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|Supplemental disclosures of cash flows information:                                                |  |                                          |            |   |                                          |  
|Cash paid for interest                                                                             |  | $                                        | 263,591    |   |                                          | $
|                                                                                                   |  |                                          |            |   |                                          |  
|Cash paid for income taxes                                                                         |  |                                          |           |   |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  
|Supplemental schedule of non-cash activities:                                                      |  |                                          |            |   |                                          |  
|Conversion of accounts receivable to notes receivable                                              |  | $                                        | 201,197    |   |                                          |  
|                                                                                                   |  |                                          |            |   |                                          |  



See
accompanying notes to condensed consolidated financial statements.



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DrugMax,
Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)



For the Three Months Ended June 30, 2002 and 2001.





NOTE ABASIS OF PRESENTATION



The accompanying condensed consolidated financial statements include the accounts of DrugMax, Inc. (formerly
known as DrugMax.com, Inc.) and its wholly-owned subsidiaries, Discount Rx, Inc. (Discount), Valley Drug Company (Valley) and its wholly-owned subsidiary Valley Drug Company South (Valley South), Desktop Ventures,
Inc., and Desktop Media Group, Inc. (Desktop); and its 70% owned subsidiary VetMall, Inc. (VetMall), (collectively referred to as the Company). All significant intercompany accounts and transactions have been
eliminated.



The accompanying unaudited condensed
consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements
included in the Companys Form 10-KSB/A for the fiscal year ended March 31, 2002.



NOTE BRECENT ACCOUNTING PRONOUNCEMENTS



In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144), which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of, and was effective for the Company on April 1, 2002. The adoption of SFAS No. 144 did not have an impact on the results of operations or financial position of the Company.



In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146), which replaces Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity.SFAS No. 146 requires that liabilities associated with exit or disposal activities be recognized when they are incurred. Under EITF Issue No. 94-3, a liability for exit costs is recognized at the date of a
commitment to an exit plan. SFAS No. 146 also requires that the liability be measured and recorded at fair value. Accordingly, the adoption of this standard may affect the timing of recognizing future restructuring costs as well as the amounts
recognized. The Company will adopt the provisions of SFAS No. 146, for any restructuring activities initiated after December 31, 2002.



NOTE CACQUISITIONS



On October 25, 2001, Discount purchased substantially all of the net assets of Penner & Welsch, Inc. (Penner), a wholesale
distributor of pharmaceuticals based in Louisiana, pursuant to an Agreement for the Purchase and Sale of Assets dated October 12, 2001 (the Agreement). Penner was a Chapter 11 debtor which had voluntarily filed for Chapter 11 protection
in the US Bankruptcy Court Eastern Division of Louisiana. Prior to this acquisition, commencing in September 2000, the Company managed the day-to-day operations of Penner, in exchange for a management fee equal to a percentage of the gross revenues
of Penner each month. During the management period, the Company provided Penner with a collateralized revolving line of credit for the sole purpose of purchasing inventory from the Company. Pursuant to the Agreement, Penner received an aggregate of
125,418 shares of restricted common stock of the Company, valued at $5.98 per share, cash in the amount of $488,619, and forgiveness of $1,604,793 in trade accounts payable and management fees owed to Discount. The Agreement,



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including the nature and amount of the consideration paid to Penner, was negotiated between the parties
and, on October 15, 2001, was approved by the US Bankruptcy Court, Eastern Division of Louisiana.



On October 19, 2001, the Company entered into an Employment Agreement with Gregory M. Johns (Johns), former owner of Penner,
for an annual salary of $125,000, payable bi-weekly for an initial term of three years, through October 18, 2004, renewable for subsequent terms of one year thereafter. In accordance with the Employment Agreement, the Company agreed to issue a total
of 100,000 employee non-qualified stock options (the Options) to Johns at a price of $8.00 per share contingent upon the attainment of gross profit goals by Discount over the three year term of the Employment Agreement. The Options,
provided the goals are attained, would be issued one third of the total 100,000 each year for three years, and would be issued within sixty days of each anniversary date of the Employment Agreement. In conjunction with the Employment Agreement, on
October 19, 2001, Johns executed a Restrictive Covenants Agreement and Agreement Not to Compete (Non Compete Agreement) with the Company. The Non Compete Agreement constrains Johns during the minimum three year term of the Employment
Agreement in addition to a period of one year following his termination. In consideration for Johns execution of the Non Compete Agreement, the Company issued to Johns 25,000 shares of common stock of the Company, with a fair market value of
$142,500. The cost of the Non Compete Agreement was recorded as an intangible asset and is being amortized over a four-year period.



In October 2001, the Company executed a Commercial Lease Agreement (the Lease) with River Road Real Estate, LLC (River
Road), a Florida limited liability company, to house the operations of Discount in St. Rose, Louisiana. The officers of River Road are Jugal K. Taneja, a Director, Chief Executive Officer, Chairman of the Board and a majority shareholder of
the Company, William L. LaGamba, a Director and the President of the Company, Stephen M. Watters, a Director of the Company, and Gregory M. Johns. The Lease is for an initial period of five years with a base monthly lease payment of $15,000, and an
initial deposit of $15,000 made to River Road by the Company.



The business combination of Penner was accounted for by the purchase method of accounting. The result of the operations of the acquired business is included in the consolidated financial statements from the purchase date. The Company
acquired the following assets and liabilities in the Penner acquisition:



|Accounts receivable                               |  | $ | 1,180,756  |  
|------------------------------------------------- |  | - | ---------- | -
|Inventory                                         |  |   | 717,954    |  
|Property and equipment                            |  |   | 670,000    |  
|Other assets                                      |  |   | 94,391     |  
|Intangible assets                                 |  |   | 291,914    |  
|Goodwill                                          |  |   | 135,043    |  
|Assumption of liabilities                         |  |   | (104,146   | )
|                                                  |  |   |            |  
|Net value of purchased assets                     |  |   | 2,985,912  |  
|Forgiveness of trade payables and management fees |  |   | (1,604,793 | )
|Value of common stock issued                      |  |   | (892,500   | )
|                                                  |  |   |            |  
|Cash paid for acquisitions                        |  | $ | 488,619    |  
|                                                  |  |   |            |  



The
unaudited pro forma effect of the acquisition of Penner on the Companys revenue, net income (loss) and net income (loss) per share, for the three months ended June 30, 2001 had the acquisition occurred on April 1, 2001are as follows:



|                                     |  | For the Three Months EndedJune 30, 2001 |           
|------------------------------------ |  | --------------------------------------- | ----------
|Revenues                             |  | $                                       | 72,695,428
|Net loss                             |  |                                         | (15,432   
|Basic and diluted net loss per share |  |                                         | 0.00      



The
proforma information for the three months ended June 30, 2001, has been presented after the elimination of revenues and net income derived from the sales to Penner by Discount prior to the acquisition. In addition, the proforma information for the
three months ended June 30, 2001, has been presented after the elimination of non-recurring charges from the Penner operations as follows:



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|                |  | For the Three Months Ended June 30, 2001
|--------------- |  | ----------------------------------------
|Management fees |  | $312,501                                
|Trustee fees    |  | 10,000                                  
|Legal fees      |  | 63,425                                  



NOTE DGOODWILL
AND OTHER INTANGIBLE ASSETS



The
carrying value of goodwill did not change for the three months ended June 30, 2002. The Company has determined that it has one reporting unit in the distribution business. Management further has determined that the distribution reporting unit should
be reported in the aggregate based upon similar economic characteristics within each company within that segment. Management will perform the required annual impairment test during the second quarter in conjunction with its budgeting process, unless
indicators of impairment are present and suggest earlier testing is warranted.



The following table reflects the components of other intangible assets:





|                                   |  | June 30, 2002         |         | March 31, 2002          
|---------------------------------- |  | --------------------- | ------- | ------------------------
|                                   |  | Gross Carrying Amount |         | Accumulated Amortization
|Amortizable intangible assets:     |  |                       |         |                         
|Non compete agreement              |  | $                     | 142,500 |                         
|Domain name                        |  |                       |        |                         
|                                   |  |                       |         |                         
|Total                              |  | $                     | 142,500 |                         
|                                   |  |                       |         |                         
|Non-amortizable intangible assets: |  |                       |         |                         
|Domain name                        |  | $                     | 149,414 |                         
|                                   |  |                       |         |                         



Amortization expense for
the three months ended June 30, 2002 and 2001 was $9,000 and $26, respectively.



Estimated amortization expense for each of the fiscal years ended March 31, is as follows:



|     |  | Amount 
|---- |  | -------
|2003 |  | $36,000
|2004 |  | 36,000 
|2005 |  | 36,000 
|2006 |  | 19,500 



NOTE EINCOME
TAXES



The Company recognizes deferred
income tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Temporary differences giving rise to deferred income tax assets and
liabilities primarily include certain accrued liabilities and net operating loss carry forwards. The provision for income taxes includes the amount of income taxes payable for the period as determined by applying the provisions of the current tax
law to the taxable income for the period and the net change during the period in the Companys deferred income tax assets and liabilities. The Company continually reviews the adequacy of the valuation allowance and recognized deferred income
tax asset benefits only as reassessment indicated that it is more likely than not that the benefits will be realized.



The Company had an estimated gross deferred income tax asset and valuation allowance of approximately $1.5 million at March 31, 2001,
which primarily represented the potential future tax benefit associated with its operating losses through the fiscal year ended March 31, 2001. In assessing the realizability of deferred income tax assets, management considers whether it is more
likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation



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of future taxable income during the periods in which those temporary differences become deductible.
Management evaluated the scheduled reversal of deferred income tax liability, the Companys profitability for the year ended March 31, 2002, reviewed the Companys business model, and future earnings projections, and believes the evidence
indicates that the Company will be able to generate sufficient taxable income to utilize the deferred income tax asset; therefore, the Company recognized the full $1.5 million deferred income tax asset, offset by deferred income tax expense of $.4
million, for a net deferred income tax benefit of $1.1 million for the year ended March 31, 2002. As of June 30, 2002, management continues to believe that it is more likely than not that the Company will be able to generate sufficient taxable
income to utilize the deferred income tax asset.



During the three months ended June 30, 2002, the Company recorded deferred income tax benefit of $342,629. During the three months ended June 30, 2001, the Company recognized a deferred income tax asset of $494,030, which represented
the reversal of $656,000 of the valuation allowance, offset by $162,000 deferred income tax expense.



NOTE FCOMMITMENTS AND CONTINGENCIES



On October 24, 2000, the Company obtained from Mellon Bank N.A. (Mellon) a $15 million line of credit and a $2 million term
loan to refinance its prior bank indebtedness, to provide additional working capital and for other general corporate purposes. The line of credit enabled the Company to borrow a maximum of $15 million, with borrowings limited to 85% of eligible
accounts receivable and 65% of eligible inventory. The revolving credit facility bears interest at the floating rate of 0.25% per annum above the base rate. The term loan is payable over a 36-month period with interest at 0.75% per annum over the
base rate, which is the higher of Mellons prime rate or the effective federal funds rate plus 0.50% per annum. In conjunction with the closing of the credit facility, the Company deposited $2 million in a restricted account with Mellon. The
credit facility prohibits the payment of dividends. On October 29, 2001, the Company executed a loan modification agreement modifying the original Mellon line of credit with Standard Federal Bank National Association (Standard), formerly
Michigan National Bank as successor in interest to Mellon, increasing the line to $23 million. On June 6, 2002, the Company executed a Third Amendment and Modification to Loan and Security Agreement (the Amended Agreement) with Standard
modifying the original Mellon line of credit. The Amended Agreement permitted the Company to exceed the calculated line availability, by an amount of up to $2 million (the out-of-formula advance), for the period commencing June 5, 2002
through August 5, 2002 (the Repayment Date), unless cancelled upon request by the Company prior to August 5, 2002. However, at no time shall the total line of credit be advanced beyond $23,000,000. The Amended Agreement also provided
that the Companys borrowing base include the excess of the restricted cash account over the outstanding principal balance of the existing term loan. The Amended Agreement modified the financial covenants imposed on the Companys net
income, net worth and working capital ratios through March 31, 2004. On August 2, 2002, the Company executed a letter amending the Amended Agreement which amended the Repayment Date as defined in the Amended Agreement from August 5, 2002 to
September 5, 2002. The Company exercised the out-of-formula provision from May 28, 2002 through June 4, 2002, pursuant to the terms of the Amended Agreement. The Company did not request out-of-formula advances against the line of credit from June 5,
2002 through August 12, 2002. On June 27, 2002, Standard provided an amendment modifying the covenants in the Loan and Security Agreement. The amendment modified the net worth covenant commencing March 31, 2002 through June 29, 2002. The Company was
not in compliance with the net worth, working capital ratio, and quarterly net income covenants as of June 30, 2002. Standard has provided an amendment to amend the net worth, working capital ratio and quarterly net income (loss) covenants for the
three months ended June 30, 2002 to achieve compliance. Loan costs for the original loan and subsequent amendments of approximately $420,000 were capitalized and are being amortized over the life of the term loan. The interest rate on the term loan
was 6.0%, and the interest rate on the revolving credit facility was 4.75% at June 30, 2002. The outstanding balances on the revolving line of credit and term loan were $17,504,220 and $951,199, respectively, as of June 30, 2002. The availability on
the line of credit at June 30, 2002 was approximately $1.5 million.



On June 12, 2002, Jugal K. Taneja (Taneja), Chairman of the Board, CEO and a Director of the Company, executed an Amended and Restated Continuing Unconditional Guaranty (the guaranty) in favor of
Standard, which replaced a Continuing Unconditional Guaranty dated May 30, 2002. The guaranty provides Standard with Tanejas unconditional guaranty for any out-of-formula advances against the line of credit.



In March 2000, the Company acquired all of the issued and
outstanding shares of common stock of Desktop Corporation, a Texas corporation located in Dallas, Texas, pursuant to an Agreement and Plan of Reorganization by and among the Company, K. Sterling Miller, Jimmy L. Fagala and HCT Capital Corp. (the



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Reorganization Agreement). On February 7, 2002, Messrs. Miller and Fagala filed a complaint
against the Company in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida, alleging, among other things, that the Company had breached the Reorganization Agreement by failing to pay 38,809 shares of the
Companys common stock to plaintiffs. The complaint also includes a count of conversion and further alleges that the Company breached its employment agreements with Messrs. Miller and Fagala, for which the plaintiffs seek monetary damages. On
March 11, 2002, the Company filed its answer, affirmative defenses and counterclaim against plaintiffs and HCT Capital Corp., in which it alleged, among other things, that plaintiffs had breached the Reorganization Agreement by misrepresenting the
state of the acquired business, that the Company was entitled to set off its damages against the shares which the plaintiffs are seeking and further seeking contractual indemnity against the plaintiffs. On April 16, 2002, HCT Capital Corp. filed its
answer, counterclaim against the Company and cross-claim against the plaintiffs. The Company intends to vigorously defend the actions filed against it and to pursue its counterclaim. The Company cannot reasonably estimate any future possible loss as
a result of this matter. The Company has made no provision in the accompanying condensed consolidated financial statements for resolution of this matter.



The Company previously executed an engagement letter with GunnAllen Financial (GAF) with an effective date of August 20, 2001,
for consulting services over a three month period from the effective date, and renewable month to month thereafter until terminated by either party with a thirty day notice. The GAF agreement required that the Company pay to GAF, for consulting
services performed, $5,000 per month plus expenses capped at $2,000 per month, and further required the Company to issue a warrant to GAF exercisable for a period of five years to purchase 100,000 shares of the Companys common stock at an
exercise price of $5.80 per share. However, on October 12, 2001, the Company terminated the agreement with GAF and informed GAF that GAF was in breach of contract under the Agreement and that, accordingly, no warrants would be issued to GAF and no
further fees would be paid to GAF. The Company also demanded the return of fees in the amount of $10,000 previously paid to GAF. At June 30, 2002, no warrants had been issued to GAF. The Company cannot reasonably estimate any future possible loss as
a result of this matter. As of August 12, 2002, GAF had not instituted any legal proceedings against the Company, and the Company has made no provision in the accompanying consolidated financial statements for resolution of this matter.



NOTE GSEGMENT INFORMATION



The Company has adopted SFAS No. 131, Disclosures About
Segments of Enterprise and Related Information, which established standards for reporting information about a Companys operating segments. Operating segments are defined as components of an enterprise for which separate financial
information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance of the segment.



The Company has determined that it has one reportable segment
because all distribution subsidiaries have similar economic characteristics, such as margins, products, customers, distribution networks and regulatory oversight. The distribution line of business represents 100% of consolidated revenues in the
three months ended June 30, 2002 and 2001. The accounting policies of the operating segment are those discussed in Note 2 of the Companys consolidated financial statements included in the Form 10-KSB/A for the year ended March 31, 2002.



The Company distributes product both within and
outside the United States. Revenues from distribution within the United States represented approximately 99.8% of gross revenues for the three months ended June 30, 2002 and 2001. Foreign revenues were generated primarily from distribution to
customers in Puerto Rico.



The following table
presents distribution revenues from the Companys only segment for each of the Companys three primary product lines for the three months ended June 30, 2002 and 2001:



|                             |  | 2002 |            | 2001
|---------------------------- |  | ---- | ---------- | ----
|                             |  |      |            |     
|Revenue from:                |  |      |            |     
|Branded pharmaceuticals      |  | $    | 57,678,330 |     
|Generic pharmaceuticals      |  |      | 3,702,515  |     
|Over the counter and general |  |      | 1,722,974  |     
|                             |  |      |            |     
|Total revenues               |  | $    | 63,103,819 |     
|                             |  |      |            |     



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NOTE HEARNINGS PER
SHARE



Basic earnings per share
(EPS) is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of shares
of common stock outstanding for the period, adjusted for the dilutive effect of options and warrants, using the treasury stock method. Diluted EPS for the three months ended June 30, 2001 includes the effect of 138,447 dilutive common stock options.
At June 30, 2002 and 2001, the Company had 1,295,400 and 283,800 options, respectively, to purchase shares of the Companys common stock, in addition to warrants to purchase 350,000 shares of the Companys common stock, which were
anti-dilutive and not included in the computation of diluted EPS for the three months ended June 30, 2002 and 2001. These anti-dilutive shares could potentially dilute the basic EPS in the future.



A reconciliation of the number of shares of common stock used
in calculation of basic and diluted net income (loss) per share is presented below:



|                                                            |  | For the Three Months Ended June 30, 2002 |  |  | For the Three Months Ended June 30, 2001
|----------------------------------------------------------- |  | ---------------------------------------- |  |  | ----------------------------------------
|                                                            |  |                                          |  |  |                                         
|Basic shares                                                |  | 7,119,172                                |  |  | 6,968,754                               
|Additional shares assuming effect of dilutive stock options |  |                                         |  |  | 138,447                                 
|                                                            |  |                                          |  |  |                                         
|Diluted shares                                              |  | 7,119,172                                |  |  | 7,107,201                               
|                                                            |  |                                          |  |  |                                         



NOTE
ISIGNIFICANT EVENTS



On April 15,
2002, the Company arranged a note maturing on December 1, 2005 with one of its customers for an account receivable. The note bears interest at 7%, is unsecured, and requires the customer to purchase at least $7,000 generic and $20,000 branded
pharmaceuticals each month on COD terms, in addition to the repayment of the note balance. The outstanding balance on the note at June 30, 2002 was $183,405, of which $48,705, representing the portion due within one year, is included in other
current assets.



On May 1, 2002, the Company
filed suit against an established customer of the Companys Pittsburgh distribution center for collection of a past due account receivable. The Company has an unconditional personal guaranty signed by the customers owner. On March 31,
2002, the outstanding accounts receivable balance from the customer was approximately $1 million, of which approximately $806,000 was subsequently paid by the customer. Sales subsequent to March 31, 2002, and prior to the voluntary filing, created
an accounts receivable balance of approximately $897,000. On May 23, 2002, the customer filed a voluntary petition in bankruptcy in the U.S. Bankruptcy Court, under Chapter Eleven of the United States Bankruptcy Act, subsequent to which the customer
failed to file the proper financial data with the court, causing the voluntary bankruptcy filing to be withdrawn. During the three months ended June 30, 2002, the Company recorded an expense of $916,132 to establish the allowance for the account
receivable balance and to accrue for the associated legal fees relative to the suit. The Company will continue to pursue all opportunities to collect the outstanding balance; however, it can make no assurances that any or all of the account
receivable will be recovered.



NOTE JRESTATEMENT



Subsequent to the issuance of the
Companys consolidated financial statements as of and for the year ended March 31, 2002, the Company determined that the accounting treatment for a warrant issued to a director and non-employee consultant on January 23, 2000 as a result of the
director acting as a guarantor of the Companys $5,000,000 Merrill Lynch line of credit was not in accordance with guidance established under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25.



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Because the warrants were issued to a non-employee director for services outside his role as a director,
the warrants should have been accounted for under SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, the fair value of the warrants of $1,625,000 should have been recognized as deferred financing costs in January 2000 and
amortized to interest expense over the one-year term of the line of credit, beginning in March 2000. The Merrill Lynch line of credit was paid in full on October 24, 2000 with proceeds from the new Mellon credit facility; therefore, the unamortized
balance of the financing costs of $572,244 should have been recognized as an extraordinary loss on the early extinguishment of debt in October 2000. The Company has not treated the warrant expense as a deductible item in its tax returns, and has
concluded that the warrant expense will be treated as a permanent difference, which does not create tax benefits for the Company. As a result, the accompanying condensed consolidated balance sheets as of March 31, 2002 and June 30, 2002 have been
restated from the amounts previously reported.



A
summary of the significant effects of the restatement on the Companys condensed consolidated balance sheets is as follows:



|                           |  | As of March 31, 2002   |            |   | As of June 30, 2002 |  
|-------------------------- |  | ---------------------- | ---------- | - | ------------------- | -
|                           |  | As Previously Reported |            |   | Adjustments         |  
|Additional paid-in capital |  | $                      | 39,342,355 |   |                     | $
|Accumulated deficit        |  |                        | (7,902,880 | ) |                     |  
|Total stockholders equity |  |                        | 31,446,595 |   |                     |  





|Item 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- |  | --------------------------------------------------------------------------------------



As discussed in Note J to the unaudited condensed consolidated financial statements included in Item 1, the Company has restated its
consolidated balance sheets as of March 31, 2002 and June 30, 2002 for the incorrect accounting for warrants issued to a director. The Company has amended its Annual Report on Form 10-KSB for the year ended March 31, 2002 to include the restated
consolidated financial statements for fiscal years ended March 31, 2002 and 2001.



The following management discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto presented elsewhere in this Form 10-Q/A.



Certain oral statements made by management from
time to time and certain statements contained in press releases and periodic reports issued by the Company, including those contained herein, that are not historical facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements, including those
in Managements Discussion and Analysis of Financial Condition and Results of Operations, are statements regarding the intent, belief or current expectations, estimates or projections of the Company, its Directors or its Officers about the
Company and the industry in which it operates, and assumptions made by management, and include among other items, (a) the Companys strategies regarding growth and business expansion, including future acquisitions; (b) the Companys
financing plans; (c) trends affecting the Companys financial condition or results of operations; (d) the Companys ability to continue to control costs and to meet its liquidity and other financing needs; (e) the declaration and payment
of dividends; and (f) the Companys ability to respond to changes in customer demands and regulations. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that the anticipated
results will occur. When used in this report, the words expects, anticipates, intends, plans, believes, seeks, estimates, and similar expressions are generally
intended to identify forward-looking statements.



Important factors that could cause the actual results to differ materially from those in the forward-looking statements include, among other items, (i) changes in the regulatory and general economic environment related to the health
care and pharmaceutical industries, including possible changes in reimbursement for healthcare products and in manufacturers pricing or distribution policies; (ii) conditions in the capital markets, including the interest rate environment and
the availability of capital; (iii) changes in the competitive marketplace that could affect the



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Companys revenue and/or cost bases, such as increased competition, lack of qualified marketing,
management or other personnel, and increased labor and inventory costs; (iv) changes in technology or customer requirements, which could render the Companys technologies noncompetitive or obsolete; (v) changes regarding the availability and
pricing of the products which the Company distributes, as well as the loss of one or more key suppliers for which alternative sources may not be available, (vi) changes in the Companys estimates and assumptions relating to its critical
accounting policies; and (vii) the Companys ability to integrate recently acquired businesses. Further information relating to factors that could cause actual results to differ from those anticipated is included but not limited to information
under the headings Business, particularly under the subheading, Risk Factors, and Managements Discussion and Analysis of Financial Condition and Results of Operations in the Companys Form 10-KSB/A for
the year ended March 31, 2002, as well as information contained in this Form 10-Q/A. The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or
otherwise.



Overview



DrugMax, Inc. (Nasdaq: DMAX) is a full-line, wholesale
distributor of pharmaceuticals, over-the-counter products, health and beauty care aids, and nutritional supplements. The Company is headquartered in Clearwater, Florida and maintains distribution centers in Pennsylvania, Ohio, and Louisiana. The
Company distributes its products primarily to independent pharmacies in the continental United States, and secondarily to small and medium-sized pharmacy chains, alternative care facilities and other wholesalers. The Company maintains an inventory
in excess of 20,000 stock keeping units from leading manufacturers and holds licenses to ship to all 50 states and Puerto Rico.



Results of Operations



For the Three Months Ended June 30, 2002 and 2001.



Revenues.    The Company generated revenues of $63.1 million and $70.9 million for the three months ended June
30, 2002 and 2001, respectively. The decline in revenues for the three months ended June 30, 2002 as compared to the three months ended June 30, 2001 reflects the net impact of several factors including the loss of a major vendor contract which
accounted for approximately $3 million in revenues per quarter. The Company has concentrated its overall emphasis to promote the sales of its generic products which traditionally produce a higher profit margin. Total revenues declined approximately
11% for the three months ended June 30, 2002 as compared to the three months ended June 30, 2001; however, gross margin increased from 2.5% to 3.1% for the same three month period.



Gross Profit.    The Company achieved gross profit of $2.0 million and $1.8
million for the three months ended June 30, 2002 and 2001, respectively.



Operating Expense.    The Company incurred operating expenses of $2.7 million and $1.2 million for the three months ended June 30, 2002 and 2001, respectively. These expenses include various
administrative, sales, marketing and other direct operating expenses of approximately $2.6 million and $1.1 million for the three months ended June 30, 2002 and 2001, respectively, and approximately $.1 million and $.08 million in combined
amortization and depreciation expense for the three months ended June 30, 2002 and 2001, respectively. The percentage of operating expenses increased from 1.7% of gross revenues for the three months ended June 30, 2001, to 4.2% of gross revenues for
the three months ended June 30, 2002. The increase in operating expense is due partially to the operations of Discount representing .8% of gross revenues, which prior to its acquisition of Penner had extremely low operating expenses. In addition,
during the three months ended June 30, 2002, the Company established an allowance for an account receivable of $897,000 and accrued $19,132 for legal costs, which amounted to 1.5% of gross revenues.



Interest expense.    Interest
expense was approximately $257,000 and $261,000 for the three months ended June 30, 2002 and 2001, respectively. The decrease was due to more favorable interest terms under the Companys revolving line of credit and term loan with Standard.



Net income (loss) per
share.    EPS is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted
average number of shares of common stock outstanding for the period, adjusted for the



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dilutive effect of options and warrants, using the treasury stock method. The net loss per share for the
three months ended June 30, 2002 was $.08 for both the basic and diluted shares, compared to a net income of $.13 and $.12 per basic and diluted shares, respectively, for the three months ended June 30, 2001. At March 31, 2001, the Company had a
deferred income tax asset valuation allowance of approximately $1.5 million. During the three-month period ended June 30, 2001, the Company reduced the valuation allowance by $.5 million, and recorded deferred income tax expense of $.2 million,
which provided the Company with net income of $.07 per basic and diluted share for the three months ended June 30, 2001.



Diluted EPS for the three months ended June 30, 2001 includes the effect of 138,447 dilutive common stock options. At June 30, 2002 and
2001, the Company had 1,295,400 and 283,800 options, respectively, to purchase shares of the Companys common stock, in addition to warrants to purchase 350,000 shares of the Companys common stock, which were anti-dilutive and not
included in the computation of diluted EPS for the three months ended June 30, 2002 and 2001, respectively. These anti-dilutive shares could potentially dilute the basic EPS in the future.



Income Taxes.    The Company had an estimated gross deferred income tax asset and
valuation allowance of approximately $1.5 million as of the fiscal year ended March 31, 2001, which primarily represented the potential future tax benefit associated with its operating losses through the fiscal year ended March 31, 2001. Management
evaluated the available evidence regarding the Companys future taxable income and other possible sources of realization of deferred income tax assets and recognized the full $1.5 million deferred income tax asset, offset by deferred income tax
expense of $.4 million, for a net deferred income tax benefit of $1.1 for the year ended March 31, 2002. During the three months ended June 30, 2002, the Company recorded deferred income tax benefit of $342,629. During the three months ended June
30, 2001, the Company recognized a deferred income tax benefit of $494,030, which represented the reversal of $656,000 of the valuation allowance, offset by $162,000 deferred income tax expense. As of June 30, 2002, management continues to believe
that it is more likely than not that the Company will be able to generate sufficient taxable income to utilize the deferred income tax asset.



Inflation and Seasonality.    Management believes that there was no material effect on operations or the
financial condition of the Company as a result of inflation for the three months ended June 30, 2002 and 2001. Management also believes that its business is not seasonal; however, significant promotional activities can have a direct impact on sales
volume in any given quarter.



Financial Condition, Liquidity and Capital Resources



The Companys net loss reduced by non-cash expenses produced positive cash flow for the quarter ended June 30, 2002. The Company has working capital and cash and cash equivalents of $3.3 million
and $.1 million, respectively, and restricted cash of $2 million at June 30, 2002.



The Companys principal commitments at June 30, 2002 included the Standard credit facility and leases on its office and warehouse space. There were no material commitments for capital expenditures
at that date.



Net cash provided by
operating activities was $1,614,722 for the three months ended June 30, 2002. Cash was provided primarily by decreases in inventory and notes receivable, offset by increases in accounts receivable, prepaid expenses and other current assets, and
decreases in accounts payable and accrued expenses and other current liabilities.



Net cash used in investing activities was $23,026 for the three months ended June 30, 2002. Cash was invested in property and equipment in the amount of $25,780, and $2,754 was received for the sale of
miscellaneous property and equipment no longer used by the Company.



Net cash used in financing activities was $1,613,992 for the three months ended June 30, 2002, representing a net decrease in the Companys revolving line of credit of $1,425,355, payments of long-term debt and capital
leases of $168,637, and financing costs of $20,000 associated with the modification of the credit line with Standard.



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Recent Accounting
Pronouncements



In August 2001, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), which addresses
the financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, and was effective
for the Company on April 1, 2002. The adoption of SFAS No. 144 did not have an impact on the results of operations or financial position of the Company.



In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No.
146), which replaces Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.SFAS No. 146 requires that liabilities associated
with exit or disposal activities be recognized when they are incurred. Under EITF Issue No. 94-3, a liability for exit costs is recognized at the date of a commitment to an exit plan. SFAS No. 146 also requires that the liability be measured and
recorded at fair value. Accordingly, the adoption of this standard may affect the timing of recognizing future restructuring costs as well as the amounts recognized. The Company will adopt the provisions of SFAS No. 146, for any restructuring
activities initiated after December 31, 2002.



|Item 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- |  | ------------------------------------------------------------



The Company is subject to market risk from exposure to changes in interest rates based on its financing and cash management
activities, which could effect its results of operations and financial condition. At June 30, 2002, the Companys outstanding debt with Standard was approximately $17,504,000 on the line of credit and $951,000 on the term loan. The interest
rates charged on the line of credit and term loan are floating rates subject to periodic adjustment. At June 30, 2002, the interest rates charged on the line of credit and term loan were 4.75% and 6.0%, respectively. See Managements Discussion
and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital Resources. The Company holds several notes receivable from its customers which do not carry variable interest rates. The Company does
not currently utilize derivative financial instruments to address market risk.





PART IIOTHER INFORMATION



|Item 1. |  | LEGAL PROCEEDINGS.
|------- |  | ------------------



In March 2000, the Company acquired all of the issued and outstanding shares of common stock of Desktop Corporation, a Texas corporation located in Dallas, Texas, pursuant to an Agreement and Plan of Reorganization by and among the
Company, K. Sterling Miller, Jimmy L. Fagala and HCT Capital Corp. (the Reorganization Agreement). On February 7, 2002, Messrs. Miller and Fagala filed a complaint against the Company in the Circuit Court of the Sixth Judicial Circuit in
and for Pinellas County, Florida, alleging, among other things, that the Company had breached the Reorganization Agreement by failing to pay 38,809 shares of the Companys common stock to plaintiffs. The complaint also includes a count of
conversion and further alleges that the Company breached its employment agreements with Messrs. Miller and Fagala, for which the plaintiffs seek monetary damages. On March 11, 2002, the Company filed its answer, affirmative defenses and counterclaim
against plaintiffs and HCT Capital Corp., in which it alleged, among other things, that plaintiffs had breached the Reorganization Agreement by misrepresenting the state of the acquired business, that the Company was entitled to set off its damages
against the shares which the plaintiffs are seeking and further seeking contractual indemnity against the plaintiffs. On April 16, 2002, HCT Capital Corp. filed its answer, counterclaim against the Company and cross-claim against the plaintiffs. The
Company intends to vigorously defend the actions filed against it and to pursue its counterclaim. The Company cannot reasonably estimate any future possible loss as a result of this matter. The Company has made no provision in the accompanying
condensed consolidated financial statements for resolution of this matter.



The Company previously executed an engagement letter with GunnAllen Financial (GAF) with an effective date of August 20, 2001, for consulting services over a three month period from the
effective date, and renewable month to month thereafter until terminated by either party with a thirty day notice. The GAF agreement required that the Company pay to GAF, for consulting services performed, $5,000 per month plus expenses capped



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at $2,000 per month, and further required the Company to issue a warrant to GAF exercisable for a period
of five years to purchase 100,000 shares of the Companys common stock at an exercise price of $5.80 per share. However, on October 12, 2001, the Company terminated the agreement with GAF and informed GAF that GAF was in breach of contract
under the Agreement and that, accordingly, no warrants would be issued to GAF and no further fees would be paid to GAF. The Company also demanded the return of fees in the amount of $10,000 previously paid to GAF. At June 30, 2002, no warrants had
been issued to GAF. The Company cannot reasonably estimate any future possible loss as a result of this matter. As of August 12, 2002, GAF had not instituted any legal proceedings against the Company, and the Company has made no provision in the
accompanying consolidated financial statements for resolution of this matter.



On May 1, 2002, the Company filed suit against an established customer of the Companys Pittsburgh distribution center for collection of a past due account receivable. The Company has an
unconditional personal guaranty signed by the customers owner. On March 31, 2002, the outstanding accounts receivable balance from the customer was approximately $1 million, of which approximately $806,000 was subsequently paid by the
customer. Sales subsequent to March 31, 2002, and prior to the voluntary filing, created an accounts receivable balance of approximately $897,000. On May 23, 2002, the customer filed a voluntary petition in bankruptcy in the U.S. Bankruptcy Court,
under Chapter Eleven of the United States Bankruptcy Act, subsequent to which the customer failed to file the proper financial data with the court, causing the voluntary bankruptcy filing to be withdrawn. During the three months ended June 30, 2002,
the Company recorded an expense of $916,132 to establish the allowance for the account receivable balance and to accrue for the associated legal fees relative to the suit. The Company will continue to pursue all opportunities to collect the
outstanding balance; however, it can make no assurances that any or all of the account receivable will be recovered.



The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of
business. The Company believes that none of the claims that were outstanding as of June 30, 2002 should have a material adverse impact on its financial position, results of operations, or cash flows.



|Item 6. |  | EXHIBITS AND REPORTS ON FORM 8-K.
|------- |  | ---------------------------------



(a)  Exhibits.



| |  | The following exhibits are filed with this report:
| |  | --------------------------------------------------



|* |  | Filed herewith.
|- |  | ---------------



|2.1 |  | Agreement and Plan of Merger by and between NuMed Surgical, Inc. and Nutriceuticals.com Corporation, dated as of January 15, 1999. (1)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------



|2.2 |  | Agreement and Plan of Reorganization dated September 8, 1999 by and between Nutriceuticals.com Corporation and Dynamic Health Products, Inc. (2)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



|2.3 |  | Agreement and Plan of Reorganization between DrugMax.com, Inc., Jimmy L. Fagala, K. Sterling Miller, and HCT Capital Corp. dated as of March 20, 2000. (3)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



|2.4 |  | Stock Purchase Agreement between DrugMax.com, Inc. and W.A. Butler Company dated as of March 20, 2000. (3)
|--- |  | ----------------------------------------------------------------------------------------------------------



|2.5 |  | Merger Purchase Agreement between DrugMax.com, Inc., DrugMax Acquisition Corporation, and Valley Drug Company, Ronald J. Patrick and Ralph A. Blundo dated as of
April 19, 2000. (4)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2.6 |  | Agreement for Purchase and Sale of Assets by and between Discount Rx, Inc., and Penner & Welsch, Inc., dated October 12, 2001. (11)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------



|3.1 |  | Articles of Incorporation of NuMed Surgical, Inc., filed October 18, 1993. (1)
|--- |  | ------------------------------------------------------------------------------



|3.2 |  | Articles of Amendment to the Articles of Incorporation of NuMed Surgical, Inc., filed March 18, 1999. (1)
|--- |  | ---------------------------------------------------------------------------------------------------------



|3.3 |  | Articles of Merger of NuMed Surgical, Inc. and Nutriceuticals.com Corporation, filed March 18, 1999. (1)
|--- |  | --------------------------------------------------------------------------------------------------------





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|3.4 |  | Certificate of Decrease in Number of Authorized Shares of Common Stock of Nutriceuticals.com Corporation, filed October 29, 1999. (5)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------



|3.5 |  | Articles of Amendment to Articles of Incorporation of Nutriceuticals.com Corporation, filed January 11, 2000. (8)
|--- |  | -----------------------------------------------------------------------------------------------------------------



|3.6 |  | Articles and Plan of Merger of Becan Distributors, Inc. and DrugMax.com, Inc., filed March 29, 2000. (8)
|--- |  | --------------------------------------------------------------------------------------------------------



|3.7 |  | Amended and Restated Bylaws, dated November 11, 1999. (5)
|--- |  | ---------------------------------------------------------



|4.2 |  | Specimen of Stock Certificate. (8)
|--- |  | ----------------------------------



|10.1 |  | Employment Agreement by and between Nutriceuticals.com Corporation and William L. LaGamba dated January 1, 2000. (7)
|---- |  | --------------------------------------------------------------------------------------------------------------------



|10.2 |  | Employment Agreement by and between Valley Drug Company and Ronald J. Patrick dated April 19, 2000 (8)
|---- |  | ------------------------------------------------------------------------------------------------------



|10.3 |  | Employment Agreement by and between DrugMax, Inc. and Jugal K. Taneja, dated October 1, 2001. (12)
|---- |  | --------------------------------------------------------------------------------------------------



|10.4 |  | Consulting Agreement by and between DrugMax.com, Inc. and Stephen M. Watters dated August 10, 2000. (9)
|---- |  | -------------------------------------------------------------------------------------------------------



|10.5 |  | Loan and Security Agreement among DrugMax.com, Inc. and Valley Drug Company and Mellon Bank, N.A., dated October 24, 2000. (9)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------



|10.6 |  | Second Amended Loan and Security Agreement among DrugMax, Inc., Valley Drug Company, Discount Rx, Inc., Valley Drug Company South, and Standard Federal Bank National
Association, as successor in interest to Mellon Bank, N.A., dated October 22, 2001. (12)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.7 |  | Third Amendment and Modification to Loan and Security Agreement among DrugMax, Inc., Valley Drug Company, Discount Rx, Inc, Valley Drug Company South and Standard
Federal Bank National Association, dated June 5, 2002. (14)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.8 |  | DrugMax.com, Inc. 1999 Incentive and Non-Statutory Stock Option Plan. (8)
|---- |  | -------------------------------------------------------------------------



|10.9 |  | Amendment No. 1 to DrugMax, Inc. 1999 Incentive and Non-Statutory Stock Option Plan, dated June 5, 2002. (14)
|---- |  | -------------------------------------------------------------------------------------------------------------



|21.0 |  | Subsidiaries of DrugMax.com, Inc. (9)
|---- |  | -------------------------------------



|99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
|---- |  | -------------------------------------------------------------------------------------------------------------------------



|99.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
|---- |  | -------------------------------------------------------------------------------------------------------------------------



---

|(1) |  | Incorporated by reference to the Companys Registration Statement on Form SB-2, filed June 29, 1999, File Number 0-24362, as amended.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Incorporated by reference to Amendment No. 1 to the Companys Registration Statement on Form SB-2, filed on September 13, 1999, File No. 0-24362.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Incorporated by reference to the Companys Report on Form 8-K, filed April 6, 2000, File Number 0-24362.
|--- |  | --------------------------------------------------------------------------------------------------------



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##### Table of Contents



|(4) |  | Incorporated by reference to the Companys Report on Form 8-K, filed May 3, 2000, File Number 0-24362.
|--- |  | ------------------------------------------------------------------------------------------------------



|(5) |  | Incorporated by reference to Amendment No. 2 to the Companys Registration Statement on Form SB-2, filed on November 12, 1999, File No. 0-24362.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | Incorporated by reference to the Companys Report on Form 8-K, filed February 8, 2000, File No. 0-24362.
|--- |  | --------------------------------------------------------------------------------------------------------



|(7) |  | Incorporated by reference to the Companys Form 10-KSB, filed June 29, 2000, File No. 0-24362.
|--- |  | ----------------------------------------------------------------------------------------------



|(8) |  | Incorporated by reference to the Companys Form 10-KSB/A, filed July 14, 2000, File No. 0-24362.
|--- |  | ------------------------------------------------------------------------------------------------



|(9) |  | Incorporated by reference to the Companys Registration Statement on Form SB-2, filed on November 1, 2000.
|--- |  | ----------------------------------------------------------------------------------------------------------



|(10) |  | Incorporated by reference to the Companys Form 10-QSB, filed November 14, 2000, File No. 1-15445.
|---- |  | --------------------------------------------------------------------------------------------------



|(11) |  | Incorporated by reference to the Companys Report on Form 8-K, filed November 9, 2001.
|---- |  | --------------------------------------------------------------------------------------



|(12) |  | Incorporated by reference to the Companys Form 10-QSB, filed November 14, 2001.
|---- |  | --------------------------------------------------------------------------------



|(13) |  | Incorporated by reference to the Companys Form 10-QSB, filed February 14, 2002.
|---- |  | --------------------------------------------------------------------------------



|(14) |  | Incorporated by reference to the Companys Form 10-KSB, filed July 1, 2002.
|---- |  | ---------------------------------------------------------------------------





(b)  Reports on Form 8-K.



During the three months ended June 30, 2002, the Company
filed no reports on Form 8-K.



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SIGNATURES



In accordance with the
requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



DrugMax, Inc.



|Date:  April 24, 2003 |  |  |  | By:    /S/    JUGAL K.
TANEJAJugal K. Taneja Chief Executive Officer                                                       
|--------------------- |  |  |  | ---------------------------------------------------------------------------------------------------------------------------
|                      |  |  |  |                                                                                                                            
|Date:  April 24, 2003 |  |  |  | By:    /S/    RONALD J.
PATRICKRonald J. Patrick Chief Financial Officer, VicePresident of Finance, Secretary and Treasurer
|                      |  |  |  |                                                                                                                            
|Date:  April 24, 2003 |  |  |  | By:    /S/    WILLIAM L.
LAGAMBAWilliam L. LaGamba President and Chief Operations Officer                                  











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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002



I, Jugal K. Taneja, certify that:



1.    I have reviewed this quarterly report on Form 10-Q/A of DrugMax, Inc.;



2.    Based on my knowledge, this
quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this quarterly report; and



3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this quarterly report.



|Dated: April 24, 2003 |  | By: |  | /S/    JUGAL K. TANEJAJugal K. Taneja Chief Executive Officer
|--------------------- |  | --- |  | -------------------------------------------------------------



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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002





I, Ronald J. Patrick, certify that:



1.    I have reviewed this quarterly
report on Form 10-Q/A of DrugMax, Inc.;



2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this quarterly report; and



3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.





By:

/s/  RONALD J. PATRICKRonald J. PatrickChief Financial Officer


|Dated: |  | April 24, 2003
|------ |  | --------------



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