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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





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




| |  | For the quarterly period ended September 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





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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)





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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 November 16, 2002, there were 7,119,172 shares of common stock, par value $0.001 per share, outstanding.





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DRUGMAX, INC. AND SUBSIDIARIES


FORM 10-Q


FOR THE QUARTER ENDED SEPTEMBER 30, 2002





TABLE OF CONTENTS





Page #PART I    FINANCIAL INFORMATIONItem 1.

Financial StatementsCondensed Consolidated Balance Sheets September 30, 2002 and March 31, 2002

3Condensed Consolidated Statements of Operations Three and Six Months Ended September 30, 2002 and 2001

4Condensed Consolidated Statements of Cash Flows Six Months Ended September 30, 2002 and 2001

5Notes to Condensed Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

12Financial Condition, Liquidity and Capital Resources

15Item 3.

Quantitative and Qualitative Disclosures About Market Risk

16Item 4.

Controls and Procedures

16PART II    OTHER INFORMATIONItem 1.

Legal Proceedings

16Item 4.

Submission of Matters To a Vote of Security Holders

17Item 6.

Exhibits and Reports on Form 8-K

17Signature Page

20Section 302 Certification by Principal Executive Officer

21Section 302 Certification by Principal Financial Officer

22




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PART IFINANCIAL INFORMATION





Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





DRUGMAX, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(UNAUDITED)





September 30, 2002


March 31, 2002(As Restated-See Note I)ASSETSCurrent assets:Cash and cash equivalents

$
154,042


$
167,373Restricted cash


2,000,000



2,000,000Accounts receivable, net of allowance for doubtful accounts of $1,237,575 and $340,575


16,146,988



14,001,696Inventory


17,945,333



20,682,439Due from affiliates


22,871



23,498Net deferred income tax assetcurrent


748,000



465,630Prepaid expenses and other current assets


1,352,749



624,207Total current assets


38,369,983



37,964,843Property and equipment, net


900,647



989,921Goodwill


13,105,000



25,314,298Intangible assets, net






276,914Shareholder notes receivable


100,000



100,000Notes receivable


662,441



607,417Net deferred income tax assetlong term


749,336



637,918Deferred financing costs, net


182,101



215,477Other assets


151,091



151,226Deposits


42,307



44,743Total assets

$
54,262,906


$
66,302,757LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
15,477,516


$
13,844,766Accrued expenses and other current liabilities


368,342



421,318Credit lines payable


18,486,770



18,929,575Current portion of long-term debt and capital leases


684,965



676,365Due to affiliates


4,377



4,377Total current liabilities


35,021,970



33,876,401Long-term debt and capital leases


139,297



478,200Other long-term liabilities


525,263



501,561Total liabilities


35,686,530



34,856,162Commitments 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



7,120Additional paid-in capital


40,967,355



40,967,355Accumulated deficit


(22,398,099
)


(9,527,880
)Total stockholders equity


18,576,376



31,446,595Total liabilities and stockholders equity

$
54,262,906


$
66,302,757





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 Ended September 30, 2002


For the Three Months Ended September 30, 2001


For the Six Months Ended September 30, 2002


For the Six Months Ended September 30, 2001Revenues

$
73,736,121


$
66,187,701


$
136,839,940


$
137,064,013Cost of goods sold


71,456,335



64,510,873



132,579,328



133,585,897Gross profit


2,279,786



1,676,828



4,260,612



3,478,116Selling, general and administrative expenses


1,817,584



1,217,208



4,375,865



2,312,787Amortization expense


49,483



28,352



91,376



56,705Depreciation expense


73,615



50,235



147,529



100,054Goodwill impairment


12,209,298







12,209,298



Intangible asset impairment


258,914







258,914



Total operating expenses


14,408,894



1,295,795



17,082,982



2,469,546Operating (loss) income


(12,129,108
)


381,033



(12,822,370
)


1,008,570Other income (expense):Interest income


21,831



18,383



48,082



41,672Other income (expense)


16,335



(4,769
)


25,692



(4,769
)Interest expense


(258,748
)


(275,431
)


(515,411
)


(536,639
)Total other expense


(220,582
)


(261,817
)


(441,637
)


(499,736
)(Loss) income before income tax benefit


(12,349,690
)


119,216



(13,264,007
)


508,834Income tax benefit


51,159



616,250



393,788



1,110,280Net (loss) income

$
(12,298,531
)

$
735,466


$
(12,870,219
)

$
1,619,114Net (loss) income per common sharebasic

$
(1.73
)

$
0.11


$
(1.81
)

$
0.23Net (loss) income per common sharediluted

$
(1.73
)

$
0.10


$
(1.81
)

$
0.23Weighted average shares outstandingbasic


7,119,172



6,968,754



7,119,172



6,968,754Weighted average shares outstandingdiluted


7,119,172



7,152,225



7,119,172



7,150,143





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 Six Months Ended September 30, 2002


For the Six Months Ended September 30, 2001Cash flows from operating activities:Net (loss) income

$
(12,870,219
)

$
1,619,114Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:Depreciation and amortization


238,905



156,759Goodwill impairment


12,209,298



Intangible asset impairment


258,914



Bad debt expense


908,558



47,899Loss on disposal of assets


1,121



4,769Increase in net deferred income tax asset


(393,788
)


(1,110,280
)Changes in operating assets and liabilities:Increase in accounts receivable


(3,255,047
)


(939,367
)Decrease (increase) in inventory


2,737,106



(1,105,691
)Decrease in due from affiliates


627



2,197(Increase) decrease in prepaid expenses and other current assets


(670,401
)


120,878Decrease in other assets


135



Decrease in notes receivable


88,032



Decrease in deposits


2,436



80Increase (decrease) in accounts payable


1,632,750



(1,397,574
)Decrease in accrued expenses and other current liabilities


(52,976
)


(4,143
)Net cash provided by (used in) operating activities


835,451



(2,605,359
)Cash flows from investing activities:Purchases of property and equipment


(30,530
)


(4,988
)Proceeds from sale of property and equipment


2,756



Net cash used in investing activities


(27,774
)


(4,988
)Cash flows from financing activities:Decrease in restricted cash






300,000Net change under revolving line of credit agreements


(442,805
)


3,057,086Increase in deferred financing costs


(40,000
)


Payments of long-term debt and capital leases


(338,203
)


(326,579
)Payments to affiliatesnet






(33,849
)Net cash (used in) provided by financing activities


(821,008
)


2,996,658Net (decrease) increase in cash and cash equivalents


(13,331
)


386,311Cash and cash equivalents at beginning of period


167,373



436,387Cash and cash equivalents at end of period

$
154,042


$
822,698Supplemental disclosures of cash flows information:Cash paid for interest

$
515,220


$
543,791Cash paid for income taxes

$



$
Supplemental schedule of non-cash activities:Conversion of accounts receivable to notes receivable

$
201,197Asset acquired through long-term financing

$
31,602





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 and Six Months Ended September 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), and Desktop Media Group, Inc.
(Desktop); and its 70% owned subsidiary VetMall, Inc. (VetMall), (collectively referred to as the Company). Beginning July 1, 2002 the operations of Discount have been reported as Valley South. All significant
intercompany accounts and transactions have been eliminated.





The accompanying unaudited condensed consolidated
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America 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.





NOTE BRECENTLY ISSUED AUTHORITATIVE GUIDANCE





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.





In August 2001, the Financial Accounting Standards Board 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.





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, and
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. Also in September 2000, the Company entered into a management
agreement with Dynamic Health Products, Inc. (Dynamic) (an affiliated company whose Chairman of the Board is Jugal K. Taneja, the Companys Chairman of the Board, Chief Executive Officer and majority shareholder), pursuant to which
Dynamic provided accounting support services to the Company in connection with the Companys management responsibilities relating to Penner. Pursuant to this agreement, Dynamic was entitled to receive one-third of all fees collected by the
Company from Penner. Both agreements were terminated in October 2001, in connection with the closing of the acquisition. 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, 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. The Company attained the gross profit goal for the first year of the Employment Agreement; therefore, 33,334 Options were issued to Johns on November 11, 2002, which was within the sixty-day period following the anniversary date of the
Employment Agreement. Since the fair value of the




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common stock was less than the exercise price on the date of grant, no compensation expense was recorded for issuance of these options.





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. As a result of the Companys annual impairment
testing, the unamortized balance of $109,500 for the Non Compete Agreement was recorded as an impairment loss in the Companys second quarter for fiscal year 2003. (See Note D).





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, Gregory M. Johns, an employee of the Company, and Stephen M. Watters, a former Director of the Company. 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

$
1,180,756Inventory


717,954Property and equipment


670,000Other assets


94,391Intangible assets


291,914Goodwill


135,043Assumption of liabilities


(104,146
)Net value of purchased assets


2,985,912Forgiveness 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 and six months ended September 30, 2001 had the acquisition occurred on April 1, 2001 are as follows:





For the Three Months Ended September 30, 2001


For the Six Months Ended September 30, 2001Revenues

$
66,811,391


$
139,506,819Net loss


(160,396
)


(175,830
)Basic net loss per share


(0.02
)


(0.03
)Diluted net loss per share


(0.02
)


(0.02
)





The proforma information for the three and six months ended
September 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 and six months ended September 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 September 30, 2001

For the Six Months Ended September 30, 2001Management fees

$
209,659

$
522,160Trustee fees


10,000


20,000Legal fees


72,679


136,104





NOTE DGOODWILL AND OTHER INTANGIBLE ASSETS





In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which addresses the financial accounting and
reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from
other intangible assets in the statement of financial position and no longer be amortized, but tested for impairment on a periodic basis. SFAS No. 142 also requires the completion of a transitional impairment test within six months of adoption with
any impairments identified treated as a cumulative effect of a change in accounting principle. On April 1, 2001, the Company adopted SFAS No. 142, performed its transitional impairment test and determined that no impairment of goodwill existed. 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.





During the second quarter of fiscal 2003, the Company completed its annual two-step
process of the goodwill impairment test prescribed in SFAS No. 142, based upon September 30, 2002 values. The first step of the impairment test was the measurement of the Companys fair market value versus book value, as defined under SFAS No.
142. Because the Companys fair market value, as determined by independent valuation using a discounted cash flow approach, was below book value at September 30, 2002, the Company was required to perform the second step of the impairment test.
The second step involved comparing the implied fair value of the Companys goodwill to its fair market value to measure the amount of impairment. The goodwill impairment test resulted in the Company recognizing a non-cash goodwill impairment
loss of approximately $12.2 million relating to the goodwill recorded with the acquisitions of Becan Distributors, Inc. (Becan) in November 1999, Valley in April 2000 and Penner in October 2001. During the second quarter of fiscal 2003,
the Company also reviewed for impairment the Non-Compete Agreement and the domain name that were recorded as a result of the acquisition of Penner in October 2001. These other intangible assets were determined by an independent appraisal to have no
value. Accordingly, the Company recognized an impairment loss of $258,914 related to these other intangible assets.





Management believes that the circumstances leading to the impairments were principally related to declines in market conditions and valuations of wholesale pharmaceutical distribution companies since the acquisitions of Becan, Valley
and Penner.





The change in the carrying value of goodwill and other intangible assets for the six
months ended September 30, 2002 is as follows:








Goodwill

Domain Name

Non Compete AgreementBalance as of March 31, 2002

$
25,314,298

$
149,414

$
127,500Amortization








18,000Impairment loss


12,209,298


149,414


109,500Balance as of September 30, 2002

$
13,105,000

$


$





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The following table reflects the components of other intangible assets as of
March 31, 2002:





Gross Carrying Amount

Accumulated AmortizationAmortizable intangible assets:Non compete agreement

$
142,500

$
15,000Domain name


200


200Total

$
142,700

$
15,200Non-amortizable intangible assets:Domain name

$
149,414

$






Amortization expense for the six months ended September 30, 2002
and 2001 was $18,000 and $20,000, respectively.





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 recognizes deferred income tax asset benefits only as reassessment indicates 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 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.





During the three and six months ended September 30, 2002, the Company recorded income tax benefit of $51,159 and $393,788, respectively. During the three and six months ended September 30, 2001, the
Company recorded deferred income tax benefit of $616,250 and $1,110,280, respectively, which represented the reversal of $656,250 and $1,312,500 of the valuation allowance, respectively, offset by $40,000 and $202,220 deferred income tax expense,
respectively. As of September 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.





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




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facility bears interest at the floating rate of 0.25% per annum over 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 cash 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 October 28, 2002, the Company executed a Fourth Amendment and Modification to Loan and Security Agreement
with Standard. The amendment extends the contract period of the loan and security agreement to expire on October 24, 2004, from the original contract period which would have expired on October 24, 2003. In addition, the amendment modified the
borrowing base, quarterly and annual net income, net worth and current ratio covenants commencing with the fiscal quarter ending September 30, 2002, and the applicable interest rate margin commencing April 1, 2003. The amendment also imposes certain
accounts receivable limitations and institutes a new indebtedness to net worth ratio for the fiscal month ending March 31, 2003 and for each fiscal month end thereafter. The Company was not in compliance with the net worth, stand-alone net income,
and quarterly net income covenants as of September 30, 2002. Standard has provided an amendment to amend the net worth, stand-alone net income, and quarterly net income (loss) covenants for the three months ended September 30, 2002 to achieve
compliance. The interest rate on the term loan was 6.0%, and the interest rate on the revolving credit facility was 4.75% at September 30, 2002. The outstanding balances on the revolving line of credit and term loan were approximately $18.5 million
and $.8 million, respectively, as of September 30, 2002. The availability on the line of credit at September 30, 2002 was approximately $2.9 million, based on eligible borrowing limits at that date.





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 unaudited 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 September 30, 2002, no warrants had been issued to GAF. As of November 19, 2002, GAF had not instituted any legal proceedings against the Company, and
the Company cannot reasonably estimate future possible loss as a result of this matter. The Company has made no provision in the accompanying unaudited condensed consolidated financial statements for resolution of this matter.





NOTE GSEGMENT INFORMATION




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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 and six
months ended September 30, 2002 and 2001.





The Company distributes product both within and outside the United
States. Revenues from distribution within the United States represented approximately 99.5% of gross revenues for the three and six months ended September 30, 2002. Foreign revenues were generated primarily from distribution to customers in Puerto
Rico through Valley South which was acquired by the Company in October 2001.





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 and six months ended September 30, 2002 and 2001:





For the Three Months Ended September 30, 2002

For the Three Moths Ended September 30, 2001

For the Six Months Ended September 30, 2002

For the Six Months Ended September 30, 2001Revenue from:Branded pharmaceuticals

$
65,575,073

$
61,884,595

$
123,253,403

$
128,162,465Generic pharmaceuticals


3,913,729


2,557,635


7,616,244


5,409,803Over the counter and other


4,247,319


1,745,471


5,970,293


3,491,745Total revenues

$
73,736,121

$
66,187,701

$
136,839,940

$
137,064,013





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 and six months ended September 30, 2001 includes the effect of 183,471 and 181,389, respectively, dilutive common stock options. The Company had issued and outstanding 1,563,643 and 1,513,398 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 and
six months ended September 30, 2002. 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 September 30, 2002

For the Three Months Ended September 30, 2001

For the Six Months Ended September 30, 2002

For the Six Months Ended September 30, 2001Basic shares

7,119,172

6,968,754

7,119,172

6,968,754Additional shares assuming effect of dilutive stock options



183,471



181,389Diluted shares

7,119,172

7,152,225

7,119,172

7,150,143





NOTE IRESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS





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




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Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25. 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 $677,083 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 its 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 sheet as of March 31, 2002 has been restated from the amounts previously reported. The Company expects to file an amended March 31, 2002 Form 10-KSB and an amended June 30, 2002 Form 10-Q as soon as practicable.





A summary of the significant effects of the restatement on the Companys consolidated balance sheet as of March 31, 2002 is as
follows:





As of March 31, 2002As Previously Reported


Adjustments


As RestatedAdditional paid-in capital

$
39,342,355


$
1,625,000


$
40,967,355Accumulated deficit


(7,902,880
)


(1,625,000
)


(9,527,880
)Total stockholder equity


31,446,595







31,446,595





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





As discussed in Note I to the unaudited condensed consolidated financial statements included in Item 1, the Company has restated its consolidated balance sheet as of March 31, 2002 for the incorrect accounting for warrants issued to
a director. The Company intends to amend 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 and its Quarterly Report on Form
10-Q for the quarter ended June 30, 2002, as soon as practicable.





A summary of the significant effects of the restatement on the
Companys annual consolidated statement of operations is as follows:





Year Ended March 31, 2001

Year Ended March 31, 2000As Previously Reported

Adjustments

As Restated

As Previously Reported

Adjustments

As RestatedInterest expense

$
1,124,242

$
812,500

$
1,936,742

$
107,095

$
135,417

$
242,512Loss before extraordinary item


7,816,583


812,500


8,629,083


1,988,944


135,417


2,124,361Extraordinary loss on extinguishment of debt





677,083


677,083








Net loss


7,816,583


1,489,583


9,306,166


1,988,944


135,417


2,124,361Net loss per common share  basic and diluted:Loss before extraordinary item

$
1.22

$
0.12

$
1.34

$
0.51

$
0.04

$
0.55Extraordinary loss on extinguishment of debt





0.11


0.11








Net loss per common share  basic and diluted

$
1.22

$
0.23

$
1.45

$
0.51

$
0.04

$
0.55





A summary of the significant effects of the restatement on the Companys consolidated
balance sheets as of March 31, 2002, 2001, and 2000 is as follows:





As of March 31, 2002


As of March 31, 2001


As of March 31, 2000As Previously Reported


Adjustments


As Restated


As Previously Reported


Adjustments


As Restated


As Previously Reported


Adjustments


As RestatedDeferred financing costs

























$



$
1,489,583


$
1,489,583Total current assets


























11,682,581



1,489,583



13,172,164Total assets


























38,513,912



1,489,583



40,003,495Additional paid-in capital

$
39,342,355


$
1,625,000


$
40,967,355


$
36,481,755


$
1,625,000


$
38,106,755



34,079,957



1,625,000



35,704,957Accumulated deficit


(7,902,880
)


(1,625,000
)


(9,527,880
)


(9,910,002
)


(1,625,000
)


(11,535,002
)


(2,093,419
)


(135,417
)


(2,228,836
)Total stockholders equity


31,446,595







31,446,595



26,578,223







26,578,223



31,992,740



1,489,583



33,482,323Total liabilities and stockholders equity


























38,513,912



1,489,583



40,003,495





A summary of the significant effects of the restatement on the Companys consolidated
balance sheet as of June 30, 2002 is as follows:





As of June 30, 2002As Previously Reported

Adjustments

As RestatedAdditional paid-in capital

$
39,342,355

$
1,625,000

$
40,967,355Accumulated deficit


8,474,570


1,625,000


10,099,570Total stockholders equity


30,874,905





30,874,905





The following management discussion and analysis takes into account
the effects of the restatement. The following management discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements presented elsewhere in this Form 10-Q.





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 timing of the filing of the Companys Form 10-KSB/A; 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




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environment and the availability of capital; (iii) changes in the competitive marketplace that could affect the 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 for the year ended March 31, 2002, as well as information contained in this Form 10-Q. 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 Largo, 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 and Six Months Ended September 30, 2002 and 2001.





Revenues.    The Company generated revenues of $73.7 million and $66.2 million for the three months ended September 30, 2002 and 2001, respectively, and $136.8 million and
$137.1 million for the six months ended September 30, 2002 and 2001, respectively. Revenues for the three months ended September 30, 2002 increased approximately 11.4% over the three months ended September 30, 2001. Revenues for the six months ended
September 30, 2002 decreased approximately .2% as compared to the revenues for the six months ended September 30, 2001. The Company generated sales growth in all three product lines for the three months ended September 30, 2002 compared to the three
months ended September 30, 2001, and growth in the generic and over- the- counter and other product lines for the six months ended September 30, 2002 compared to the six months ended September 30, 2001, as a result of aggressive marketing, expanded
sales efforts and cross selling to common customers, and the Companys commitment to expand its generic and over- the- counter and other products lines. The Companys sales of brand pharmaceuticals declined in the six months ended
September 30, 2002 as compared to the same period of 2001 as a result of the Companys commitment to expand its generic and over- the- counter and other product lines. The following schedule details sales achieved in the Companys three
product lines:





For the Three Months Ended September 30, 2002

For the Three Moths Ended September 30, 2001

For the Six Months Ended September 30, 2002

For the Six Months Ended September 30, 2001Revenue from:Branded pharmaceuticals

$
65,575,073

$
61,884,595

$
123,253,403

$
128,162,465Generic pharmaceuticals


3,913,729


2,557,635


7,616,244


5,409,803Over- the- counter and other


4,247,319


1,745,471


5,970,293


3,491,745Total revenues

$
73,736,121

$
66,187,701

$
136,839,940

$
137,064,013





Gross Profit.    The Company achieved
gross profit of $2.3 million and $1.7 million for the three months ended September 30, 2002 and 2001, respectively, and $4.3 million and $3.5 million for the six months ended September 30, 2002 and 2001, respectively. The Companys margin, as a
percentage of revenue, was 3.1% for both the three and six months ended September 30, 2002, compared to 2.5% for both the three months and six months ended September 30, 2001, reflecting an increase in gross profit of approximately .6% for both the
three and six




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months ended September 30, 2002 as compared to the same periods ended September 30, 2001. The improvement in gross margins is a direct result of
the Companys focus on increasing sales of generic and over the counter and other products as detailed in the schedule shown above, which traditionally yields a higher gross margin than the brand pharmaceuticals.





Operating Expense.    The Company incurred operating expenses of $14.4 million and $1.3 million for the three
months ended September 30, 2002 and 2001, respectively. These expenses include various administrative, sales, marketing and other direct operating expenses of approximately $1.8 million, depreciation and amortization expenses of approximately $.1
million, and a goodwill and other intangible assets impairment loss of approximately $12.5 million recorded for the three months ended September 30, 2002, compared to approximately $1.2 in various administrative, sales, marketing and other direct
operating expenses and depreciation and amortization expenses of approximately $.08 million for the three months ended September 30, 2001. The Company incurred operating expenses of approximately $17.1 million and $2.5 million for the six months
ended September 30, 2002 and 2001, respectively. These expenses include various administrative, sales, marketing and other direct operating expenses of approximately $4.4 million, depreciation and amortization expenses of approximately $.2 million,
and a goodwill impairment loss of approximately $12.2 million, and other intangible assets impairment loss of approximately $.3 million for the six months ended September 30, 2002, compared to approximately $2.3 million and various administrative,
sales, marketing and other direct operating expenses, and depreciation and amortization expenses of approximately $.2 million for the six months ended September 30, 2001. During the second quarter of fiscal 2003, the Company completed its annual
goodwill and other intangible asset impairment tests prescribed in SFAS No. 142, based upon September 30, 2002 values. The impairment test resulted in the Company recognizing non-cash goodwill and other intangible assets impairment losses of
approximately $12.5 million. Management believes that the circumstances leading to the impairments were principally related to declines in market conditions and valuations of wholesale pharmaceutical distribution companies since the acquisitions of
Becan, Valley and Penner.





The percentage of operating expenses, excluding the non-cash impairment loss,
increased from 2.0% of gross revenues for the three months ended September 30, 2001, to 2.6% of gross revenues for the three months ended September 30, 2002, and from 1.8% for the six months ended September 30, 2001 to 3.4% for the six months ended
September 30, 2002. The increase in operating expense is due partially to the operations of Valley South whose operating expenses represent approximately 33% and 25% of the total operating expenses for the three and six months ended September 30,
2002, respectively. Prior to the acquisition of Penner in October 2001, Discount, now operating as Valley South, had extremely low operating expenses. In addition, in the first fiscal quarter of 2003, the Company established an allowance for an
account receivable of $897,000 and accrued $19,132 for legal costs, which amounted to approximately .7% of gross revenues for the six months ended September 30, 2002. Excluding the non-cash impairment loss, the operating expenses of Valley South,
the bad debt allowance of $897,000 and the accrued legal costs of $19,132 recorded during the three and six months ended September 30, 2002, the remaining operating expenses remained relatively constant at $2.4 million and $2.3 million during the
six months ended September 30, 2002 and 2001, respectively, and $1.2 million during the three months ended September 30, 2002 and 2001.





Interest expense.    Interest expense was approximately $259,000 and $275,000 for the three months ended September 30, 2002 and 2001, respectively, and approximately $515,000 and $537,000 for the
six months ended September 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 dilutive effect of options and warrants, using the treasury
stock method. The net (loss) per share for the three and six months ended September 30, 2002 was ($1.73) and ($1.81), respectively, for both the basic and diluted shares. Net income per share for the three and six months ended September 30, 2001 was
$.11 and $.23 per share, respectively, for the basic shares, and $.10 and $.23 per share, respectively, for the diluted shares. At March 31, 2001, the Company had a deferred income tax asset valuation allowance of approximately $1.5 million. During
the three and six month periods ended September 30, 2001, the Company reduced the entire valuation allowance, and recognized $616,250 and $1,110,280 deferred income tax benefit, respectively, net of deferred income tax expense of $40,000 and
$202,220, respectively, which provided the Company with net income of $.09 and $.16 per basic and diluted share, respectively. During the second quarter of fiscal 2003, the Company completed its annual impairment tests prescribed in SFAS No. 142,
based upon September 30, 2002 values. The results of these tests indicated an




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impairment of approximately $12.5 million to goodwill and other intangible assets during the quarter ended September 30, 2002, which accounts
for net loss of $1.75 per basic and diluted share during the three and six months ended September 30, 2002, respectively.





Diluted EPS for the three and six months ended September 30, 2001 includes the effect of 183,471 and 181,389, respectively, dilutive common stock options. The Company had issued and outstanding 1,563,643 and 1,513,398 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 and
six months ended September 30, 2002. 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 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 for the year ended March 31, 2002. During the three and six months ended
September 30, 2002, the Company recorded income tax benefit of $51,159 and $393,788, respectively. During the three and six months ended September 30, 2001, the Company recorded deferred income tax benefit of $616,250 and $1,110,280, respectively,
which represented the reversal of $656,250 and $1,312,500 of the valuation allowance, respectively, offset by $40,000 and $202,220 deferred income tax expense, respectively. As of September 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 and six months ended
September 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,
increased by non-cash expenses, produced positive cash flow for the quarter ended September 30, 2002. The Company has working capital of approximately $3.3 million September 30, 2002. Working capital includes cash and cash equivalents of $.2 million
and restricted cash of $2 million at September 30, 2002.





The Companys principal commitments at September
30, 2002 were 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 $835,451 for the six months ended September 30, 2002. Cash was provided primarily by decreases in inventory and notes receivable, and an increase in accounts payable, offset by increases
in accounts receivable, and prepaid expenses and other current assets, and a decrease in accrued expenses and other current liabilities.





Net cash used in investing activities was $27,774 for the six months ended September 30, 2002. Cash was invested in property and equipment in the amount of $30,530, and $2,756 was received for the sale
of miscellaneous property and equipment no longer used by the Company.





Net cash used in financing activities was
$821,008 for the six months ended September 30, 2002, representing a net decrease in the Companys revolving line of credit of $442,805, payments of long-term debt and capital leases of $338,203, and financing costs of $40,000 associated with
the modification of the credit line with Standard.




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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 September 30, 2002, the Companys outstanding debt
with Standard was approximately $18.5 million on the line of credit and $.8 million on the term loan. The interest rates charged on the line of credit and term loan are floating rates subject to periodic adjustment. At September 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.





Item 4.
CONTROLS AND PROCEDURES.





Based on their most recent evaluation, which was completed
within 90 days of the filing of this Form 10-Q, the Companys Chief Executive Officer and Chief Financial Officer believe that the Companys disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are
effective to ensure that information required to be disclosed by the Company in this report which it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Companys management, including
its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. There were no significant changes in the Companys internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation.





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 unaudited condensed consolidated financial statements for resolution
of this matter.





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 September 30, 2002 should have a material adverse impact on its financial position, results of operations, or cash flows.




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Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.





The Annual Meeting of the
Stockholders of the Company was held on September 20, 2002. At the meeting, the following actions were taken by the shareholders:





Jugal K. Taneja, William L. LaGamba, Ronald J. Patrick, Howard L. Howell, DDS, Martin Sperber, Robert G. Loughrey and Sushil Suri were elected as Directors to serve until the next annual meeting and until their respective successors
are elected and qualified or until their earlier resignation, removal from office or death. Jeffrey K. Peterson and Stephen M. Watters did not seek re-election to the Board. The votes cast for and against each were as follows:





For

Against

AbstainJugal K. Taneja

6,103,732

-0-

10,544William L. LaGamba

6,105,737

-0-

8,539Ronald J. Patrick

6,105,747

-0-

8,529Howard L. Howell, DDS

6,105,747

-0-

8,529Martin Sperber

6,105,747

-0-

8,529Robert G. Loughrey

6,105,747

-0-

8,529Sushil Suri

6,105,747

-0-

8,529





Proposal to approve an Amendment to the Companys 1999
Incentive and Non-Statutory Stock Option Plan to increase by 600,000 the number of shares of Common Stock available thereunder.





For

Against

Abstain

Not Voted4,362,022

68,499

1,925

1,681,830





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)




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##### Table of Contents




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)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)10.10

Fourth 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 October 28, 2002.*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.*


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##### Table of Contents

| | (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.
| | --- |  | --------------------------------------------------------------------------------------------------------




| | (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
September 30, 2002, the Company filed no reports on Form 8-K.





Subsequent to September 30, 2002, the Company filed the following one (1)
reports on Form 8-K.





Form 8-K, dated October 17, 2002, with respect to the Companys press release to
announce second quarter revenues.




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##### Table of Contents




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:

November 19, 2002

By:

/s/    Jugal K. TanejaJugal K. Taneja Chief Executive OfficerDate:

November 19, 2002

By:

/s/    Ronald J. PatrickRonald J. Patrick Chief Financial Officer, Vice President of Finance, Secretary and TreasurerDate:

November 19, 2002

By:

/s/    William L. LaGambaWilliam L. LaGamba President and Chief Operations Officer




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##### Table of Contents




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 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;





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;





4.    The registrants other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:





a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others, particularly during
the period in which this quarterly report is being prepared;





b)    evaluated
the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;





5.    The registrants other certifying
officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):





a)    all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and





b)    any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal controls; and





6.    The registrants
other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Dated: November 19, 2002

By:

/s/  Jugal K. TanejaJugal K. Taneja Chief Executive Officer




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##### Table of Contents




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 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;





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;





4.    The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:





a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others, particularly during
the period in which this quarterly report is being prepared;





b)    evaluated
the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;





5.    The registrants other certifying
officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):





a)    all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and





b)    any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal controls; and





6.    The registrants
other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Dated: November 19, 2002

By:

/s/  Ronald J. PatrickRonald J. Patrick Chief Financial Officer




22