10QSB 1 d10qsb.txt FORM 10-QSB FOR DECEMBER 31, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 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 Small Business Issuer as Specified in Its Charter) STATE OF NEVADA 34-1755390 --------------- ---------- (State or other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 12505 Starkey Road, Suite A, Largo, Florida 33773 ------------------------------------------------- (Address of Principal Executive Offices) (727) 533-0431 -------------- (Issuer's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No As of January 28, 2002, there were 7,121,833 shares of common stock, par value $0.001 per share, outstanding. The aggregate market value of such shares held by non-affiliates of the registrant (based upon the closing bid price of such shares on January 25, 2002) was approximately $18,353,085. Transitional Small Business Disclosure Formats (check one): Yes [_] No [X] DRUGMAX, INC. AND SUBSIDIARIES FORM 10-QSB FOR THE QUARTER ENDED DECEMBER 31, 2001 TABLE OF CONTENTS PART I Item 1. Financial Statements............................................................. 3 Condensed Consolidated Balance Sheets December 31, 2001 and March 31, 2001........................................ 3 Condensed Consolidated Statements of Operations Three and Nine Months Ended December 31, 2001 and 2000...................... 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended December 31, 2001 and 2000................................ 5 Notes to Condensed Consolidated Financial Statements..................................... 6 Item 2. Management's Discussion and Analysis or Plan of Operations...................... 12 Overview............................................................................ 13 Results of Operations............................................................... 13 Financial Condition, Liquidity and Capital Resources................................ 15 PART II Item 1. Legal Proceedings................................................................ 16 Item 2. Changes in Securities and Use of Proceeds........................................ 16 Item 3. Submission of Matters To a Vote of Security Holders.............................. 16 Item 4. Exhibits and Reports on Form 8-K................................................. 17 Signatures............................................................................... 20
2 PART I - FINANCIAL INFORMATION Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DRUGMAX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS December 31, 2001 March 31, 2001 ---------------------- ------------------ Current assets: Cash and cash equivalents $ 207,453 $ 384,307 Restricted cash 2,000,000 2,052,080 Accounts receivable, net of allowance for doubtful accounts of $303,199 and $381,944 15,869,306 14,864,396 Inventory 16,248,649 10,694,155 Due from affiliates 10,934 25,861 Net deferred income tax asset - current 397,780 - Prepaid expenses and other current assets 446,834 373,928 ------------------ ----------------- Total current assets 35,180,956 28,394,727 Property and equipment, net 1,060,953 504,906 Goodwill, net 25,479,525 25,179,255 Intangible assets, net 285,914 44 Stockholder notes receivable 100,000 100,000 Net deferred income tax asset - long-term 712,500 - Deferred financing costs, net 247,848 284,950 Other assets 144,888 159,888 Deposits 41,457 7,520 ------------------ ----------------- Total assets $ 63,254,041 $ 54,631,290 ================== ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,089,710 $ 11,448,473 Accrued expenses and other current liabilities 487,175 360,911 Credit lines payable 19,411,546 11,944,497 Notes payable - current portion 675,980 666,660 Due to affiliates 506,246 552,658 ------------------ ----------------- Total current liabilities 31,170,657 24,973,199 Notes payable - long-term portion 647,784 1,111,118 Other long-term liabilities - 1,968,750 ------------------ ----------------- Total liabilities 31,818,441 28,053,067 ------------------ ----------------- Commitments and contingencies 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 and 6,468,754 shares issued and outstanding 7,120 6,470 Additional paid-in capital 39,342,355 36,481,755 Accumulated deficit (7,913,875) (9,910,002) ------------------ ----------------- Total stockholders' equity 31,435,600 26,578,223 ------------------ ----------------- Total liabilities and stockholders' equity $ 63,254,041 $ 54,631,290 ================== =================
See accompanying notes to condensed consolidated financial statements. 3 DRUGMAX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three For the Three For the Nine For the Nine Months Ended Months Ended Months Ended Months Ended December 31, 2001 December 31, 2000 December 31, 2001 December 31, 2000 ------------------ ------------------ ------------------ ------------------ Revenues $ 63,735,331 $ 54,697,214 $ 200,799,344 $ 122,473,558 Cost of goods sold 61,613,598 53,065,833 195,199,495 118,549,908 ------------------ ------------------ ------------------ ------------------ Gross profit 2,121,733 1,631,381 5,599,849 3,923,650 ------------------ ------------------ ------------------ ------------------ Selling, general and administrative expenses 1,443,509 1,201,801 3,756,295 3,871,038 Amortization expense 36,939 682,657 93,644 2,010,981 Depreciation expense 75,822 80,539 175,875 190,143 ------------------ ------------------ ------------------ ------------------ Total operating expenses 1,556,270 1,964,997 4,025,814 6,072,162 ------------------ ------------------ ------------------ ------------------ Operating income (loss) 565,463 (333,616) 1,574,035 (2,148,512) ------------------ ------------------ ------------------ ------------------ Other income (expense) Interest income 24,228 70,773 54,278 209,462 Other 5,207 - 12,060 375 Interest expense (217,888) (343,361) (754,527) (814,973) ------------------ ------------------ ------------------ ------------------ Total other income (expense) - net (188,453) (272,588) (688,189) (605,136) ------------------ ------------------ ------------------ ------------------ Income (loss) before income tax benefit 377,010 (606,204) 885,846 (2,753,648) Income tax benefit - - 1,110,280 - ------------------ ------------------ ------------------ ------------------ Net income (loss) $ 377,010 $ (606,204) $ 1,996,126 $ (2,753,648) ================== ================== ================== ================== Net income (loss) per common share - basic $ 0.05 $ (0.09) $ 0.28 $ (0.43) ================== ================== ================== ================== Net income (loss) per common share - diluted $ 0.05 $ (0.09) $ 0.28 $ (0.43) ================== ================== ================== ================== Weighted average shares outstanding - basic 7,089,742 6,419,384 7,007,412 6,404,079 ================== ================== ================== ================== Weighted average shares outstanding - diluted 7,325,095 6,419,384 7,220,725 6,404,079 ================== ================== ================== ==================
See accompanying notes to condensed consolidated financial statements. 4 DRUGMAX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine For the Nine Months Ended Months Ended December 31, December 31, 2001 2000 ---------------- --------------- Cash flows from operating activities: Net income (loss) $ 1,996,126 $ (2,753,648) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 269,519 2,201,117 Loss on disposal of assets 5,298 - Increase in net deferred income tax asset (1,110,280) - Changes in operating assets and liabilities: Increase in accounts receivable, net of allowance for doubtful accounts (1,598,462) (7,881,146) Increase in inventory (4,910,618) (4,283,443) Decrease/(increase) in due from affiliates 14,927 (36,785) Decrease/(increase) in prepaid expenses and other current assets 102,616 (528,905) Decrease in shareholder notes receivable - 70,000 Decrease in notes receivable - 37,614 (Increase)/decrease in deposits (27,786) 1,500 (Decrease)/increase in accounts payable (1,358,763) 5,962,349 Increase/(decrease) in accrued expenses and other liabilities 62,783 (155,165) ---------------- --------------- Net cash used in operating activities (6,554,640) (7,366,512) ---------------- --------------- Cash flows from investing activities: Purchases of property and equipment (69,871) (77,883) Proceeds from sale of property and equipment 2,655 - Cash paid for acquisitions, net (482,536) (1,757,481) ---------------- --------------- Net cash used in investing activities (549,752) (1,835,364) ---------------- --------------- Cash flows from financing activities: Decrease in restricted cash 52,080 - Net change under revolving line of credit agreements 7,467,049 6,814,457 Payments of long-term obligations - (296,575) Proceeds from issuance of note payable - 2,000,000 Repayment of principal on notes payable (494,680) (1,511,040) Increase in deferred financing costs (50,499) (276,466) (Decrease)/increase in due to affiliates (46,412) 38,348 ---------------- --------------- Net cash provided by financing activities 6,927,538 6,768,724 ---------------- --------------- Net decrease in cash and cash equivalents (176,854) (2,433,152) Cash and cash equivalents at beginning of period 384,307 6,020,129 ---------------- --------------- Cash and cash equivalents at end of period $ 207,453 $ 3,586,977 ================ =============== Supplemental disclosures of cash flows information: Cash paid for interest $ 754,527 $ 814,973 ================ =============== Cash paid for income taxes $ - $ - ================ =============== Supplemental schedule of non-cash investing and financing activities: In April 2000, the Company purchased all of the capital stock of Valley Drug Company for $1,757,481 in cash and 217,255 shares of Company common stock (fair value of $2,199,707) In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 14,059,822 Cash and stock issued for Valley capital stock 3,957,188 --------------- Liabilities assumed $ 10,102,634 =============== In July 2001, the Company released from escrow 500,000 shares of common stock (fair value of $1,968,750) due to Dynamic Health Products, Inc. earned through the contingent consideration clauses in conjunction with the acquisition of Becan Distributors, Inc. In October 2001, the Company purchased substantially all the net assets of Penner & Welsch, Inc. for $482,536 cash, 125,418 shares of the Company's common stock (fair value of $750,000), and $1,604,793 in forgiveness of debt owed to the Company. The Company also issued 25,000 shares of stock (fair value of $142,500) in conjunction with a non-compete agreement. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 3,083,975 Cash and stock issued for acquisition 1,375,036 Forgiveness of debt owed to the Company 1,604,793 ---------------- Liabilities assumed $ 104,146 ================
See accompanying notes to condensed consolidated financial statements. 5 Notes to Condensed Consolidated Financial Statements (Unaudited) For the Three- and Nine-Month Periods Ended December 31, 2001 and 2000. NOTE A-BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of DrugMax, Inc. (formerly known as DrugMax.com, Inc., Nutriceuticals and NuMed) 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 accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation S-B. 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 for the fiscal year ended March 31, 2001. NOTE B - RECENTLY ISSUED AUTHORITATIVE GUIDANCE Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instrument and Hedging Activities" ("SFAS No. 133"), is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133 effective April 1, 2001. The adoption of SFAS No. 133 did not have an impact on the financial position, results of operations, or cash flows of the Company. On June 29, 2001, SFAS No. 141, "Business Combinations" ("SFAS No. 141") was approved by the Financial Accounting Standards Board (FASB). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets with indefinite lives will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company implemented SFAS No. 141 on July 1, 2001. The adoption of SFAS No. 141 did not have an impact on the results of operations or financial position of the Company. As of April 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), 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. The provisions of this accounting standard also require 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. Upon adoption, the Company performed the transitional impairment test and determined that no impairment of goodwill existed. 6 In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective April 1, 2001. A reconciliation of previously reported net income (loss) and earnings (loss) per share to the amounts adjusted for the exclusion of goodwill amortization net of the related income (loss) tax effect follows:
For the Three For the Three For the Nine For the Nine Months Ended Months Ended Months Ended Months Ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 ---------------- -------------- --------------- ---------------- Reported net income (loss) $ 377,010 $ (606,204) $ 1,996,126 $ (2,753,648) Add: Goodwill amortization net of income tax - 661,763 - 1,975,647 ---------------- -------------- --------------- ---------------- Adjusted net income (loss) $ 377,010 $ 55,559 $ 1,996,126 $ (778,001) ================ ============== =============== ================ Basic earnings (loss) per common share Reported net income (loss) $ .05 $ (.09) $ .28 $ (.43) Goodwill amortization, net of income tax - .10 - .31 ---------------- -------------- --------------- ---------------- Adjusted net income (loss) $ .05 $ .01 $ .28 $ (.12) ================ ============== =============== ================ Diluted earnings (loss) per common share Reported net income (loss) $ .05 $ (.09) $ .28 $ (.43) Goodwill amortization, net of income tax - .10 - .31 ---------------- -------------- --------------- ---------------- Adjusted net income (loss) $ .05 $ .01 $ .28 $ (.12) ================ ============== =============== ================
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", 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 will be effective for the Company on April 1, 2002. The Company is assessing the impact, if any, SFAS No. 144 will have on the condensed consolidated financial statements. NOTE C - ACQUISITIONS On April 19, 2000, DrugMax Acquisition Corporation, a wholly owned subsidiary of the Company, Valley, Ronald J. Patrick ("Patrick") and Ralph A. Blundo ("Blundo") signed a Merger Purchase Agreement. In connection with the merger, Patrick and Blundo received 217,255 shares of the Company's common stock at $10.125 per share and cash in the amount of $1.7 million. The acquisition was accounted for using the purchase method of accounting and accordingly $3.6 million of goodwill was recorded. The results of operations of Valley are included in the condensed consolidated financial statements from its purchase date. On October 25, 2001, Discount (the "Buyer"), a wholly-owned subsidiary of the Company, purchased (the "Purchase") substantially all of the net assets of Penner & Welsch, Inc. ("Penner" or the "Seller"), 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"). As previously reported by the Company, the Seller was a Chapter 11 debtor which had voluntarily filed for Chapter 11 protection in the US Bankruptcy Court for Eastern Division of Louisiana. Pursuant to the Agreement, the Seller 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 $482,536, and forgiveness of $1,604,793 in trade accounts payable and management fees owed to the Buyer. The source of the funds used to acquire the Seller's net assets was the working capital of the Company. The Agreement, including the nature and amount of the consideration paid to the Seller, 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 a term of three years, terminating October 18, 2004. In accordance with the Employment Agreement, the Company agreed to issue a total 7 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. 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 at the date of issuance equal to $142,500. The cost of the Non Compete Agreement is an intangible asset and will be 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 acquisition of Penner's net assets was accounted for by the purchase method of accounting in accordance with SFAS No. 141. The Company is operating the business under Discount and the results of the operations are included in the condensed consolidated financial statements from the purchase date. The allocation of the purchase price of the net assets acquired in the Penner transaction is as follows: Accounts Receivable $ 1,091,884 Inventory 693,877 Property and Equipment 670,000 Other Current Assets 36,030 Intangible Assets 291,914 Goodwill 300,270 Assumption of liabilities (104,146) --------------------- Net value of purchased assets 2,979,829 Forgiveness of Trade Payables and Management fees (1,604,793) Value of common stock issued (892,500) --------------------- Cash paid for acquisition $ 482,536 ===================== The unaudited pro forma effect of the acquisitions of Valley and Penner on the Company's revenues, net income (loss) and net income (loss) per share, before the effects of the change in accounting for amortization of goodwill, had the acquisitions occurred on April 1, 2000 are as follows:
For the Nine Months For the Nine Months ended December 31, 2001 ended December 31, 2000 --------------------------------------------------------------- Revenues $ 203,455,915 $ 158,152,690 Net income (loss) 481,520 (5,379,454) Basic net income (loss) per share 0.07 (0.84) Diluted net income (loss) per share 0.07 (0.84)
8 The proforma information for the nine months ended December 31, 2001 and 2000, 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 nine months ended December 31, 2001 and 2000, has been presented after the elimination of non-recurring charges from the Penner operations as follows:
For the Nine Months ended For the Nine Months ended December 31, 2001 December 31, 2000 --------------------------------- ---------------------------------- Management fees $ 547,220 $ 435,742 Trustee fees 25,000 15,000 Legal fees 160,577 106,599
NOTE D - GOODWILL AND OTHER INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the nine-month period ended December 31, 2001, by operating segment, are as follows:
Distribution Software Total ------------------ --------------- ----------------- Balance as of March 31, 2001 $ 25,179,255 $ - $ 25,179,255 Goodwill acquired during the period 300,270 - 300,270 ------------------ --------------- ----------------- Balance as of December 31, 2001 $ 25,479,525 $ - $ 25,479,525 ================== =============== =================
The Company has determined that it has two reporting units principally based upon the distribution and software segments. Management further has determined that the distribution reporting units should be reported in the aggregate based upon similar economic characteristics within each company within that segment. The following table reflects the components of other intangible assets:
December 31, 2001 March 31, 2001 ------------------------------- ------------------------------ Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ---------------- -------------- ---------------- ------------- Amortized intangible assets: Noncompete agreement $ 142,500 $ 6,000 $ - $ - Domain name 200 200 200 156 --------- -------- -------- -------- Total $ 142,700 $ 6,200 $ 200 $ 156 ========= ======== ======== ======== Non-amortized intangible assets: Domain name $ 149,414 $ - $ - $ - ========= ======== ======== ========
Amortization expense for the three and nine-months ended December 31, 2001 was $36,939 and $93,644 respectively, and $682,657 and $ 2,010,981 for the three and nine-months ended December 31,2000, respectively. Estimated amortization expense for each of the five succeeding fiscal years is as follows: Fiscal year ended March 31 Amount -------------------------- ------ 2002 $144,507 2003 167,568 2004 156,604 2005 30,000 2006 - 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 is recognizing deferred income tax asset benefits only as reassessment indicates that it is more likely than not that the benefits will be realized. The Company's assessment of its deferred income tax asset valuation allowance indicated that it is more likely than not that future taxable income would be sufficient to utilize the carry forward tax benefits associated with its historical net operating losses. Accordingly, and taking into account reasonable and prudent tax planning strategies and future income projections, the Company reduced the full valuation allowance of $1,312,500 in the nine months ended December 31, 2001. During the three- and nine-month periods ended December 31, 2001, the Company recorded income tax expense of approximately $146,000, which was fully offset by recording the tax benefit associated with additional net operating loss carry forwards not previously recognized by the Company, and $202,220, respectively, which was offset by the change in the valuation allowance of $1,458,500 for a net income tax benefit of $1,110,280. A revision to the estimate of available net operating losses was made by the Company as a result of finalizing prior year tax returns during the quarter ended December 31, 2001. During the three- and nine-month periods ended December 31, 2000, the 9 Company recorded no income tax expense. The resulting current and long-term portions of the net deferred income tax asset of $397,780 and $712,500, respectively, have been reported on the accompanying condensed consolidated balance sheet as of December 31, 2001, and represent the amount that management believes more likely than not will be realized over the remaining life of the net operating loss carry forwards. Failure to achieve forecasted taxable income would affect the ultimate realization of the net deferred income tax assets. 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. 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. The credit facility imposes financial covenants on the Company's net worth, net income (loss) and working capital ratios on a quarterly basis. The Company was not in compliance with the net worth, working capital, and quarterly net income ratios as of December 31, 2001. Standard has provided a letter to waive the net worth, working capital and quarterly net income (loss) covenants for the three-months ended December 31, 2001. 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 all fess previously paid to GAF. At December 31, 2001, no warrants had been issued to GAF. As of February 14, 2002, GAF had not instituted any legal proceedings against the Company, and the Company has made no provision in the accompanying financial statements for resolution of this matter. On October 1, 2001, the Company entered into an Employment Agreement with Jugal K. Taneja ("Taneja"), Chief Executive Officer, Chairman of the Board, and majority shareholder, for an annual salary of $144,500, payable bi-weekly, for a term of fifteen months, terminating December 31, 2002. The Employment Agreement terminated the Consulting Agreement by and between Taneja and the Company dated August 16, 1999. 10 NOTE G - SEGMENT INFORMATION During the three- and nine-month periods ended December 31, 2000, the Company operated two business segments: wholesale distribution and computer software development. During the three- and nine-month periods ended December 31, 2001, the Company did not operate the software development segment and has made the determination to concentrate on the Company's core wholesale distribution businesses. The following table reports financial data that management uses in its business segment analysis:
For the Three For the Three For the Nine For the Nine Months Ended Months Ended Months Ended Months Ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 ----------------------------------------------------------------------------- Revenues from external customers Distribution $ 63,735,331 $ 54,697,214 $ 200,799,344 $ 122,336,075 Software Development - - - 137,483 ----------------------------------------------------------------------------- Total $ 63,735,331 $ 54,697,214 $ 200,799,344 $ 122,473,558 ============================================================================= Income (loss) from operations by segment Distribution $ 565,463 $ (176,904) $ 1,574,035 $ (2,177,611) Software Development - (156,712) - 29,099 ----------------------------------------------------------------------------- Total $ 565,463 $ (333,616) $ 1,574,035 $ (2,148,512) =============================================================================
December 31, March 31, 2001 2001 ----------------------------------- Assets Distribution $ 63,231,145 $ 54,568,796 Software Development 22,896 62,494 ----------------------------------- Total $ 63,254,041 $ 54,631,290 ===================================
There were no inter-segment sales or transfers during either the three- and nine-month periods ended December 31, 2001 or 2000. Operating income (loss) by business segment excludes interest income, interest expense, other income and expenses and income taxes. NOTE H - SIGNIFICANT EVENTS On October 30, 2001, the Company filed Form RW with the Securities and Exchange Commission requesting consent to withdraw the Company's Registration Statement on Form SB-2 originally filed on November 1, 2000. On November 7, 2001, the Company announced that it has reached an initial agreement with India-based Morepen Laboratories Ltd. ("Morepen"), to form a joint venture company, MorepenMax, Inc. ("MorepenMax"). Morepen will be the majority shareholder of MorepenMax. The Company expects to own 40% of MorepenMax. MorepenMax is still in its initial development stage and, to date, the Company has not funded its obligation to the joint venture. MorepenMax plans to utilize the Morepen facilities to develop low-cost generic pharmaceuticals in the United States. The Company will be the exclusive distributor throughout the United States of the products developed by MorepenMax. 11 NOTE I - INCOME (LOSS) PER SHARE Basic net income (loss) per common share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. 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 For the Three For the Nine For the Nine Months Ended Months Ended Months Ended Months Ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 --------------------- -------------------- ----------------- ------------------ Basic shares 7,089,742 6,419,384 7,007,412 6,404,079 Additional shares assuming effect of dilutive stock options 235,353 - 213,313 - --------------------- -------------------- ----------------- ------------------ Diluted shares 7,325,095 6,419,384 7,220,725 6,404,079 ===================== ==================== ================= ==================
Note J - SUBSEQUENT EVENTS. On or about January 22, 2002, K. Sterling Miller ("Miller") and Jimmy L. Fagala ("Fagala" together with Miller the "Plaintiffs") filed a complaint naming the Company as a defendant in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida. In the complaint, the Plaintiffs seek damages from the Company alleging, among other things, that the Company inappropriately failed to release a total of approximately 39,000 shares of the Company's stock to the Plaintiffs in connection with the Company's acquisition of Desktop Corporation. The Plaintiffs also allege that the Company breached its employment agreements with Miller and Fagala. The Company intends to vigorously defend these allegations. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. The following management discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements presented elsewhere in this Form 10-QSB. Certain oral statements made by management from time to time and certain statements 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 or Plan 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 demand 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 industry; (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 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) new product introductions, product sales mix and the geographic mix of sales and (vi) customers' willingness to accept the Company's Internet platform. Further information relating to 12 factors that could cause actual results to differ from those anticipated is included but not limited to information under the headings "Business" and "Risk Factors" in the Company's Form 10-KSB for the year ended March 31, 2001, as well as information contained in this Form 10-QSB. 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. is a full-line, wholesale distributor of pharmaceuticals, over-the-counter products, health and beauty care products, and nutritional supplements. The Company expects that it will continue to derive a significant portion of its revenue from its traditional "brick and mortar" full-line wholesale distribution business. However, the Company is also one of the early entrants into the Internet business-to-business pharmaceutical market. The Company utilizes its online capabilities to leverage its existing infrastructure, technology, relationships, marketing and management resources and, accordingly, believes that the combination of its traditional wholesale distribution business with its online wholesale distribution business provides the "click and mortar" combination that will allow it to aggressively market and distribute its products and services. In general, 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 and retailers. The Company maintains an inventory of over 20,000 stock-keeping units, to serve its growing customer base. In addition, since the early December 1999 launch of its web site, www.drugmax.com, over 9,400 independent pharmacies, small regional pharmacy chains, wholesalers and distributors have registered to purchase products through the Company's web site. The Company believes it has been successful in attracting potential customers to its web site because it has designed its web site as an online source for a select group of products, typically higher cost and margin products, which make up a large percentage of the Company's targeted customers sales. On October 25, 2001, Discount (the "Buyer"), purchased (the "Purchase") substantially all of the net assets Penner & Welsch, Inc. ("Penner" or the "Seller"), 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"). As previously reported by the Company, the Seller was a Chapter 11 debtor which had voluntarily filed for Chapter 11 protection in the US Bankruptcy Court for Eastern Division of Louisiana. Pursuant to the Agreement, the Seller 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 $482,536, and forgiveness of $1,604,793 in trade accounts payable and management fees owed to the Buyer. In addition, the Company issued 25,000 shares of restricted common stock of the Company valued at $142,500 to obtain a non- compete agreement with the former owner of Penner. The source of the funds used to acquire the Seller's net assets was the working capital of the Company. The Agreement, including the nature and amount of the consideration paid to the Seller, was negotiated between the parties and, on October 15, 2001, was approved by the US Bankruptcy Court, Eastern Division of Louisiana. The Company is operating the business of the Seller under its subsidiary Discount. 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, Chief Operating Officer, and the President of the Company, Stephen M. Walters, 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. Results of Operations For the Three- and Nine-Month Periods Ended December 31, 2001 and 2000. Revenues. The Company generated revenues of $63.7 million and $200.8 million for the three- and nine-month periods ended December 31, 2001, respectively, compared to $54.7 million and $122.5 million, respectively, for the three- and nine-month periods ended December 31, 2000. The increase is attributable to the operations of the Pittsburgh division of the Company and Discount, acquired in November 1999, and Valley acquired in April 2000. The Company's Pittsburgh distribution facility generated revenues of $31.7 million and $102.3 million for the three- and nine-month periods ended December 31, 2001, respectively, compared to $28.4 million and $69.6 million, respectively, for the three- and nine-month periods ended December 31, 2000. Discount generated revenues of $7.4 million and $22.4 million for the three- and nine- month periods ended December 31, 2001, respectively, compared to $8.1 million and $10.5 million, respectively, for the three- and nine-month periods ended December 31, 2000. The increase in the nine-month revenue for Discount is attributable to its management of Penner beginning in the third fiscal quarter ended December 31, 2000, and through its acquisition of Penner in October 2001. Valley generated revenues of $24.7 million and $75.8 million for the three- and nine-month periods ended December 31, 13 2001, compared $17.9 million and $41.9 million, respectively, from its acquisition through the three-and nine-month periods ended December 31, 2000. In addition, approximately $.02 million and $.36 million and $.25 million and $.46 million of gross revenues were generated for the three- and nine-months periods ended December 31, 2001 and 2000, respectively, from the Company's remaining operations. The Company's warehouse locations through acquisitions generated double digit growth and achieved record sales in the nine months ended December 31, 2001, by expanding sales territories through acquisitions, cross selling to common customers, and aggressive marketing. Gross Profit. The Company achieved gross profits of $2.1 million and $5.6 million for the three- and nine-month periods ended December 31, 2001, respectively, compared to $1.6 million and $3.9 million, respectively, for the three- and nine-month periods ended December 31, 2000. The increase is attributable to $.6 million and $1.5 million, respectively, in gross profit generated by the Company's Pittsburgh distribution facility for the three- and nine-month periods ended December 31, 2001 compared to $.4 million and $1.0 million, respectively, for the three- and nine-month periods ended December 31, 2000. Discount generated $.5 million and $.6 million, respectively, in gross profit for the three- and nine-month periods ended December 31, 2001, compared to $.1 million for each the three- and nine-month periods ended December 31, 2000. Gross profit generated by Valley for the three- and nine-month periods ended December 31, 2001, respectively, were $1.0 million and $3.1 million, compared to $.9 million and $2.5 million, respectively, from its acquisition through the three- and nine-month periods ended December 31, 2000. Approximately $.02 million, $.36 million, $.2 million and $.3 million in gross profit for the three- and nine-month periods ended December 31, 2001 and 2000, respectively, were generated from the Company's remaining operations. Operating Expense. The Company incurred operating expenses of $1.6 million and $4.0 million for the three- and nine-month periods ended December 31, 2001, respectively, compared to $1.3 million and $4.1 million, respectively, for the three- and nine-month periods ended December 31, 2000. These expenses include various administrative, sales, marketing and other direct operating expenses of $1,556,270 and $4,025,814 for the three- and nine-month periods ended December 31, 2001, respectively, compared to $1,303,234 and $4,096,515 for the three- and nine-month periods ended December 31, 2000, respectively, net of $661,763 and $1,975,647 associated with goodwill amortization in the three- and nine-month periods ended December 31, 2000. The percentage of operating expenses remained constant at 2.4% of gross revenues, for the three months ended December 31, 2001 and 2000, respectively, and decreased from 3.3% to 2.0% for the nine months ended December 31, 2001 and 2000, respectively. The operating expenses for the three- and nine-months ended December 31, 2001, include $332,853 in expenses of Discount, or .5% of gross revenues, in operating expenses from the date of acquisition of Penner through December 31, 2001. The improvement in the operating expense ratio for the nine months ended December 31, 2001, reflects increased warehouse efficiencies, economies of scale associated with the Company's growth, and cost control efforts, such as elimination of duplicate services resulting from mergers, and reduction in web site monitoring and setup costs. Interest expense. Interest expense was approximately $217,900 and $754,500 for the three- and nine-month periods ended December 31, 2001, respectively, compared to approximately $343,400 and $815,000, respectively, for the three- and nine-month periods ended December 31, 2000. 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. The net income per share for the three- and nine-month periods ended December 31, 2001 was $.05 and $.28 per share, respectively, for both the basic and diluted shares, compared to a net loss per share of $(.09) and $(.43), respectively, for both the basic and diluted shares for the three- and nine-month periods ended December 31, 2000. At March 31, 2001, the Company had a deferred income tax asset valuation of $1,458,500. During the nine-month period ended December 31, 2001, the Company reduced the entire valuation allowance, and booked $1,110,280 deferred income tax asset, net of income tax expense of $348,220 for the nine-month period ended December 31, 2001, which provided the Company with net income of $.21 for the basic and $.20 per diluted share. The Company's adoption of SFAS No. 142 increased the net income per share by approximately $.06 and $.18 for both the basic and diluted net income per share for the three- and nine-month periods ended December 31, 2001, and would have had the effect of decreasing the basic and diluted net loss by $.10 and $.30 respectively, for both the basic and diluted purposes for the three- and nine-month periods ended December 31, 2000. Income Taxes. The Company had an estimated gross deferred income tax asset and valuation allowance of approximately $1.3 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 14 has 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 $1.3 million deferred income tax asset, offset by estimated income tax expense, for a net deferred income tax benefit of for the nine-month period ended December 31, 2001. 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 nine months ended December 31, 2001 and 2000. 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 operations produced positive cash flow (defined by the Company as net income plus non-cash expenses) for the quarter ended December 31, 2001. The Company's continued financial improvement is attributable to the growth of the Company's core business, control over corporate expenditures and management's ability to maintain acceptable gross margins. The Company has working capital and cash and cash equivalents of $4.0 million and $.2 million, respectively, and restricted cash of $2 million at December 31, 2001. Net cash used in operating activities was $6,554,640 for the nine months ended December 31, 2001. The usage of cash is primarily attributable to increases in accounts receivable, inventory, deposits and accrued expenses and decreases in accounts payable, prepaid expenses, and due from affiliates. Net cash used in investing activities was $549,752 for the nine months ended December 31, 2001. Cash was invested in property and equipment in the amount of $69,871, less cash received for the sale of miscellaneous property and equipment no longer used by the Company, in intangible assets consisting of fees associated with the amended line of credit agreement, and the cash paid for the Penner acquisition. Net cash provided by financing activities was $6,927,538 for the nine months ended December 31, 2001, representing a net increase in the Company's revolving line of credit of $7,467,049, and a decrease in the restricted cash account with Standard, offset by the repayment of principal on the notes payable, and a decrease in due to affiliates. On October 29, 2001, the Company executed a loan modification agreement modifying its original line of credit with Standard Federal Bank National Association ("Standard"), formerly Michigan National Bank, as successor in interest to Mellon Bank, N.A., increasing the line to $23 million. The credit facility imposes financial covenants on the Company's net worth, net income (loss) and working capital ratios on a quarterly basis. The Company was not in compliance with the net worth, working capital, and quarterly net income ratios as of December 31, 2001. Standard has provided a letter to waive the net worth, working capital and quarterly net income (loss) covenants for the quarter ended December 31, 2001. Management anticipates meeting the financial covenants of the credit facility for the quarter ended March 31, 2002, based upon its current projections for the quarter then ended. 15 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. On or about January 22, 2002, K. Sterling Miller ("Miller") and Jimmy L. Fagala ("Fagala" together with Miller the "Plaintiffs") filed a complaint naming the Company as a defendant in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida. In the complaint, the Plaintiffs seek damages from the Company alleging, among other things, that the Company inappropriately failed to release a total of approximately 39,000 shares of the Company's stock to the Plaintiffs in connection with the Company's acquisition of Desktop Corporation. The Plaintiffs also allege that the Company breached its employment agreements with Miller and Fagala. The Company intends to vigorously defend these allegations. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. In July 2001, the Company released from escrow 500,000 shares of common stock due to Dynamic Health Products, Inc., a Florida corporation, earned through the contingent consideration clauses of the Becan Distributors, Inc. acquisition. In October 2001, the Company issued 125,418 shares of restricted common stock to McKesson Corporation as part of the purchase price of Penner & Welsch, Inc. In October 2001, simultaneous with the acquisition of Penner, the Company issued 25,000 shares of common stock to Gregory M. Johns ("Johns") in conjunction with Johns' execution of a Restrictive Covenants Agreement and Agreement Not to Compete dated October 19, 2001. The foregoing transactions did not involve any underwriter, underwriting discounts or commissions or any public offering, and the Company believes that the transactions were exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof. The recipients in the transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in the transactions. The recipients had adequate access to information about the Company. Item 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 16 Item 4. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The following exhibits are filed with this report: 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 between the Registrant and Eric Egnet dated March 31, 1999. (1) 2.3 Agreement and Plan of Reorganization dated September 8, 1999 by and between Nutriceuticals.com Corporation and Dynamic Health Products, Inc. (2) 2.4 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) 2.5 Stock Purchase Agreement between DrugMax.com, Inc. and W.A. Butler Company dated as of March 20, 2000. (3) 2.6 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) 2.7 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) 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) 10.3 Employment Agreement by and between Valley Drug Company and Ronald J. Patrick dated April 19, 2000 (8) 10.4 Employment Agreement by and between Valley Drug Company and Ralph A. Blundo dated April 19, 2000. (8) 10.5 Employment Agreement by and between DrugMax, Inc. and Jugal K. Taneja, dated October 1, 2001. (12) 17 10.6 Consulting Agreement by and between DrugMax.com, Inc. and Stephen M. Watters dated August 10, 2000. (9) 10.7 Loan and Security Agreement among DrugMax.com, Inc. and Valley Drug Company and Mellon Bank, N.A., dated October 24, 2000. (9) 10.8 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) 10.9 Employment Agreement by and between DrugMax, Inc. and Gregory M. Johns dated October 19, 2001. * 10.10 Restrictive Covenants Agreement and Agreement Not to Compete by and between DrugMax, Inc. and Gregory M. Johns dated October 19, 2001. * 21.0 Subsidiaries of DrugMax.com, Inc. (9) 99.1 DrugMax.com, Inc.1999 Incentive and Non-Statutory Stock Option Plan. (8) ___________________________ * Filed herewith. (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. 18 (b) Reports on Form 8-K. During the three months ended December 31, 2001, the Company filed the following five (5) reports on Form 8-K. Form 8-K, dated October 24, 2001, with respect to the Company's press release to announce the asset purchase of Penner & Welsch, Inc. Form 8-K, dated October 29, 2001, with respect to the Company's press release to announce the loan modification agreement with Standard Federal Bank National Association. Form 8-K, dated November 7, 2001, with respect to the Company's press release to announce an agreement with Morepen Laboratories Ltd. Form 8-K, dated November 9, 2001, with respect to the Company's asset purchase of Penner & Welsch, Inc. Form 8-K, dated November 13, 2001, with respect to the Company's press release to announce second quarter financial results. Subsequent to December 31, 2001, the Company filed the following one (1) report on Form 8-K/A Form 8-K/A, dated January 7, 2002, with respect to financial data for the Company's asset purchase of Penner & Welsch, Inc. 19 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: February 14, 2002 By: /s/ Jugal K. Taneja -------------------------- -------------------------------- Jugal K. Taneja Chief Executive Officer Date: February 14, 2002 By: /s/ Ronald J. Patrick -------------------------- -------------------------------- Ronald J. Patrick Chief Financial Officer, Vice President of Finance, Secretary and Treasurer Date: February 14, 2002 By: /s/ William L. LaGamba -------------------------- -------------------------------- William L. LaGamba President and Chief Operations Officer 20