10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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, 2003

or

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

For the transition period from                      to                     

Commission File Number 1-15445

DRUGMAX, INC.,

(Formerly DrugMax.com, Inc.)

(Exact name of registrant as specified in its charter)

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

25400 US Highway 19 North, Suite 137, Clearwater, FL 33763

(Address of principal executive offices)

(727) 533-0431

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act.)  ¨  Yes  x  No.

As of November 11, 2003 there were 7,178,976 shares of common stock, par value $0.001 per share, outstanding.

DRUGMAX, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2003

TABLE OF CONTENTS

	Page #
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets September 30, 2003 (unaudited) and March 31, 2003	3
Condensed Consolidated Statements of Operations Three and Six Months Ended September 30, 2003 and September 30, 2002 (unaudited)	4
Condensed Consolidated Statements of Cash Flows Six Months Ended September 30, 2003 and September 30, 2002 (unaudited)	5
Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Financial Condition, Liquidity and Capital Resources	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	18
Item 4. Controls and Procedures	19
PART II OTHER INFORMATION
Item 1. Legal Proceedings	19
Item 4. Submission of Matters to a Vote of Security Holders	20
Item 6. Exhibits and Reports on Form 8-K	20
Signature Page	23
Exhibit 21.0 DrugMax, Inc. Subsidiaries
Exhibit 3.1 Restated Articles of Incorporation of Drugmax, Inc., filed September 5, 2001
Exhibit 31.1 Certification of Principal Executive Officer Pursuant to Section 302
Exhibit 31.2 Certification of Principal Financial Officer Pursuant to Section 302
Exhibit 32.1 Certification Pursuant to Section 906
Exhibit 32.2 Certification Pursuant to Section 906

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PART I – FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DRUGMAX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2003			March 31, 2003
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	56,493		$	161,489
Restricted cash		—			2,000,000
Accounts receivable, net of allowance for doubtful accounts of $1,231,628 and $1,253,826		13,613,673			11,339,842
Inventory		18,535,168			19,458,940
Due from affiliates		—			10,470
Deferred income tax asset		668,294			668,294
Prepaid expenses and other current assets		1,179,174			1,079,740
Total current assets		34,052,802			34,718,775
Property and equipment, net		1,081,434			767,550
Goodwill		13,105,000			13,105,000
Patents and trademarks		126,684			—
Notes receivable		519,648			625,329
Stockholders notes receivable		100,000			100,000
Net deferred income tax asset-long-term		749,336			749,336
Deferred financing costs, net		472,453			78,912
Other assets		137,977			95,660
Deposits		95,643			33,561
Total assets	$	50,440,977		$	50,274,123
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,862,624		$	14,619,341
Accrued expenses and other current liabilities		320,413			415,065
Credit line payable		18,421,741			15,943,619
Current portion of long-term liabilities		223,156			470,176
Due to affiliates		—			4,377
Total current liabilities		31,827,934			31,452,578
Long-term debt and capital leases		220,612			35,847
Other long-term liabilities		15,801			501,561
Total liabilities		32,064,347			31,989,986
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; 7,178,976 shares issued and outstanding		7,177			7,120
Additional paid-in capital		41,058,727			40,967,355
Accumulated deficit		(22,689,274	)		(22,690,338	)
Total stockholders’ equity		18,376,630			18,284,137
Total liabilities and stockholders’ equity	$	50,440,977		$	50,274,123

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, 2003			For the Three Months Ended September 30, 2002			For the Six Months Ended September 30, 2003			For the Six Months Ended September 30, 2002
Revenues	$	60,188,732		$	73,736,121		$	120,848,276		$	136,839,940
Cost of goods sold		58,053,185			71,456,335			116,725,513			132,579,328
Gross profit		2,135,547			2,279,786			4,122,763			4,260,612
Selling, general and administrative expenses		1,821,498			1,817,584			3,563,052			4,375,865
Amortization expense		—			9,000			—			18,000
Depreciation expense		53,964			73,615			106,466			147,529
Goodwill impairment loss		—			12,468,212			—			12,468,212
Total operating expenses		1,875,462			14,368,411			3,669,518			17,009,606
Operating income (loss)		260,085			(12,088,625	)		453,245			(12,748,994	)
Other income (expense)
Interest income		9,954			21,831			18,535			48,082
Other income		21,889			16,335			457,033			25,691
Interest expense		(255,137	)		(299,231	)		(927,749	)		(588,787	)
Total other income (expense)		(223,294	)		(261,065	)		(452,181	)		(515,014	)
Income (loss) before income tax benefit		36,791			(12,349,690	)		1,064			(13,264,008	)
Income tax benefit		—			51,159			—			393,788
Net income (loss)	$	36,791		$	(12,298,531	)	$	1,064		$	(12,870,220	)
Net income (loss) per common share-basic	$	0.01		$	(1.73	)	$	0.00		$	(1.81	)
Net income (loss) per common share-diluted	$	0.01		$	(1.73	)	$	0.00		$	(1.81	)
Weighted average shares outstanding-basic		7,176,315			7,119,172			7,153,208			7,119,172
Weighted average shares outstanding-diluted		7,283,130			7,119,172			7,223,164			7,119,172

See accompanying notes to condensed consolidated financial statements.

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DRUGMAX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Six Months Ended September 30, 2003			For the Six Months Ended September 30, 2002
Cash flows from operating activities:
Net income (loss)	$	1,064		$	(12,870,220	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Amortization of financing costs charged to interest expense		143,060			73,376
Depreciation and amortization		106,466			165,529
Goodwill impairment loss and intangible assets charge		—			12,468,212
Bad debt expense		—			908,559
Forgiveness of liability		(501,561	)		—
Loss on disposal of assets		—			1,121
Increase in net deferred income tax asset		—			(393,788	)
Changes in operating assets and liabilities:
Accounts receivable, net		(2,279,377	)		(3,255,047	)
Inventory		1,148,415			2,737,106
Due from affiliates		10,470			627
Prepaid expense and other current assets		(107,914	)		(670,401	)
Other assets		5,750			135
Notes receivable		105,681			88,032
Deposits		(52,752	)		2,436
Accounts payable		(2,354,146	)		1,632,750
Accrued expenses and other current liabilities		(109,783	)		(52,976	)
Net cash (used in) provided by operating activities		(3,884,627	)		835,451
Cash flows from investing activities:
Purchases of property and equipment		(80,350	)		(30,530	)
Proceeds from sale of property and equipment		—			2,756
Cash paid for legal fees for acquisition of Avery		(34,071	)		—
Net cash used in investing activities		(114,421	)		(27,774	)
Cash flows from financing activities:
Net change in restricted cash		2,000,000			—
Net change in cash due to reclassification of account		1,933			—
Net change under revolving line of credit agreement		2,478,122			(442,805	)
Increase in deferred financing costs		(445,172	)		(40,000	)
Payments of long-term debt and capital leases		(136,454	)		(338,203	)
(Payments to) proceeds from affiliates		(4,377	)		—
Net cash provided by (used for) financing activities		3,894,052			(821,008	)
DECREASE IN CASH AND CASH EQUIVALENTS		(104,996	)		(13,331	)
Cash and cash equivalents at beginning of period		161,489			167,373
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	56,493		$	154,042
					(continued	)

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SUPPLEMENTAL DISCLOSURES OF CASH FLOWS ACTIVITIES
Cash paid for interest	$	195,076		$	154,042
Cash paid for income taxes	$	—		$	—
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of accounts receivable to notes receivable				$	201,197
Asset acquired through long-term financing				$	31,602
In April 2003, pursuant to the agreement with W.A. Butler & Company, the Company recorded the reversal of a long-term debt to W.A. Butler & Co.	$	501,561
In May 2003, the Company purchased substantially all the assets of Avery Pharmaceuticals, Inc. No cash was paid for the acquisition. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired	$	789,202
Acquisition note executed		(90,000	)
Forgiveness of debt owed to the Company		(52,571	)
Liabilities assumed	$	646,631
In June 2003, the Company issued 57,143 shares of common stock of the Company to Jugal K. Taneja for his guaranty executed in favor of Congress.	$	91,429
					(concluded	)

See accompanying notes to condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

For the Three and Six Months Ended September 30, 2003 and 2002.

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., a Louisiana corporation (“Discount”), Valley Drug Company (“Valley”) and its wholly-owned subsidiary Valley Drug Company South (“Valley South”), Desktop Media Group, Inc. (“Desktop”) and its wholly-owned subsidiary VetMall, Inc. (“VetMall”), and Discount Rx, Inc., a Nevada corporation (“Discount Nevada”), doing business as Avery Pharmaceuticals (“Avery”), (collectively referred to as the “Company”). All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements included in the Company’s Form 10-K for the fiscal year ended March 31, 2003.

The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.

NOTE B - RECENT ACCOUNTING PROUNCEMENTS

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS No. 145”). SFAS No. 145 will rescind SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax benefit. As a result of SFAS No. 145, the criteria in APB No. 30 will be used to classify those gains and losses. The provisions of SFAS No. 145 related to of the rescission of FASB No. 13 shall be applied in fiscal years beginning after May 15. 2002. Early application of the provisions of SFAS No. 145 related to the rescission of FSAB No. 13 is encouraged. The components of SFAS No. 145 adopted in fiscal 2003, resulted in the Company recording forgiveness of debt to other income in the six months ended September 30, 2003.

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 adopted the provisions of SFAS No. 146 for any restructuring activities initiated after December 31, 2002. As of September 30, 2003, the Company had not undertaken any such restructuring activities.

In November 2002, the FASB issued Interpretation No. 45, Guarantors’ Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such

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as standby letters of credit. It also requires that at all times a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of FIN 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. The Company will apply the provisions of FIN 45 to any guarantees issued after December 31, 2002. As of September 30, 2003, the Company did not have any guarantees outstanding.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (“SFAS 148”) which addresses financial accounting and reporting for recording expenses for the fair value of stock options. SFAS 148 provides alternative methods of transition for a voluntary change to fair value-based method of accounting for stock-based employee compensation. Additionally, SFAS No. 148 requires more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002, with early application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has elected to continue to apply the intrinsic value-based method of accounting as allowed by APB No. 25. See “Stock Based Compensation” below.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51 for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003. Initially, FIN 46 was to apply in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. At its October 2003 meeting, the FASB agreed to defer the effective date of FIN 46 for variable interests held by public companies in all entities that were acquired prior to February 1, 2003. The deferral will require that public companies adopt the provisions of FIN 46 at the end of periods ending after December 15, 2003. The interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The Company intends to adopt FIN 46 as of its third fiscal quarter ending December 31, 2003. The Company is currently assessing the impact of the adoption of FIN 46.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS No. 150”). SFAS No. 150 establishes standards for how an issuer classifies and measurers in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with SFAS No. 150, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except, mandatorily redeemable non-controlling (minority) interests which, on October 29, 2003, the FASB decided to defer indefinitely. As of September 30, 2003, the adoption of SFAS No. 150 has had no impact on the Company.

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Stock Based Compensation

In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), which was effective for fiscal years beginning after December 15, 1995. Under SFAS No. 123, the Company may elect to recognize stock-based compensation expense based on the fair value of the awards or to account for stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB Opinion No. 25”), and disclose in the consolidated financial statements the effects of SFAS No. 123 as if the recognition provisions were adopted. The Company has adopted the recognition provisions of APB Opinion No. 25. The following table illustrates the effect on net (loss) income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the three and six months ended September 30, 2003 and 2002:

	For the Three Months Ended September 30, 2003			For the Three Months Ended September 30, 2002			For the Six Months Ended September 30, 2003			For the Six Months Ended September 30, 2002
Net income (loss) reported	$	36,791		$	(12,298,531	)	$	1,064		$	(12,870,220	)
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		557,175			272,272			557,175			27,272
Pro forma net loss	$	(530,384	)	$	(12,570,803	)	$	(556,111	)	$	(12,897,492	)
Income (loss) per common share as reported:
Basic	$	0.01		$	(1.73	)	$	0.00		$	(1.81	)
Diluted	$	0.01		$	(1.73	)	$	0.00		$	(1.81	)
Loss per common share - pro forma:
Basic	$	(0.07	)	$	(1.77	)	$	(0.08	)	$	(1.81	)
Diluted	$	(0.07	)	$	(1.77	)	$	(0.08	)	$	(1.81	)

The Company did not grant any options in the three months ended September 30, 2003. For purposes of the above disclosure, the determination of the fair value of stock options granted in the three months ended September 30, 2002 was based on the following: (i) a risk free interest rate of 3.94% (ii) expected option lives of 5 – 10 years; and (iii) expected volatility in the market price of the Company’s common stock of 67%.

The Company has no other equity based compensation plans for its employees.

NOTE C - ACQUISITIONS

VetMall, Inc.

In April 2003, W.A. Butler & Company (“Butler”), a 30% shareholder of VetMall, executed an agreement with the Company and VetMall. The terms of the agreement provide for the transfer of Butler’s 30% ownership of VetMall stock and the forgiveness of $.5 million of long-term liabilities, which is included in other income in the condensed consolidated financial statements of the Company. The agreement also releases Butler from any present and future operational expenses of VetMall. The transfer of Butler’s 30% interest in VetMall did not have an impact on the revenues or operating expenses of the Company for the three and six months ended September 30, 2003.

Avery Pharmaceuticals, Inc.

On May 14, 2003, Discount Nevada, a wholly owned subsidiary of the Company, purchased substantially all of the assets, and assumed certain liabilities, of Avery Pharmaceuticals, Inc., Avery Wholesale Pharmaceuticals, Inc., also known as Texas Vet Supply (jointly “Avery”), and Infinity Custom Plastics, Inc. (“Infinity”), wholesale distributors of pharmaceuticals and respiratory products based in Texas, pursuant to an Asset Purchase Agreement dated May 14, 2003 (the “Avery Agreement”).

Pursuant to the Avery Agreement, the Company acquired accounts receivable, inventory, equipment, furniture, the trade name and a patent pending for the process of the manufacture of vials for the respiratory

9

therapy industry, totaling approximately $789,000. The liabilities assumed, which were comprised principally of trade payables, amounted to approximately $646,000, in addition to the forgiveness of debt owed to the Company of approximately $53,000. In addition, the Company executed a promissory note in the amount of $318,000 to the predecessor company’s 50% shareholder, as additional consideration. The note includes a right of set off for accounts payable in excess of an agreed upon amount assumed at closing. The original note may not be reduced below $90,000 after set off. Management believes the adjusted note amount will be $90,000 after the set off for accounts payables honored by the Company since the acquisition; therefore, the Company has recorded the note in the amount of $90,000. Additionally, the Avery Agreement contains a provision whereby based on Avery’s earnings, the note may be increased to the original amount of $318,000 which would be treated as an addition to the purchase price. Terms of the note provide for principal payments due monthly beginning July 5, 2003 through the due date of January 5, 2006. Interest on the note is due quarterly beginning September 5, 2003 at the rate of 6% per annum. Also, the Company executed a Consulting and Non-Competition Agreement (“Consulting Agreement”) with John VerVynck (“VerVynck”) an officer and shareholder of Avery and Infinity. The Consulting Agreement provides for the payment to VerVynck of $39,360, payable bi-monthly, over the six-month term of the Consulting Agreement. The Consulting Agreement prohibits VerVynck from competing for one year following his termination and the six-month term of the consulting agreement. The Company will operate the acquired business through its wholly owned subsidiary Discount Nevada under the fictitious name of Avery Pharmaceuticals.

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

Accounts receivable - trade	$	47,025
Accounts receivable - other		39,920
Inventory		224,643
Property and equipment		340,000
Other assets		10,930
Patent		126,684
Assumption of liabilities		(646,631	)
Net value of purchased assets		142,571
Forgiveness of trade payables due to the Company		(52,571	)
Acquisition note payable		(90,000	)
Cash paid for acquisition	$	—

The unaudited pro forma effect of the acquisition of Avery on the Company’s revenue, net losses and net income (loss) per share for the three and six months ended September 30, 2003 and 2002 had the acquisition occurred on April 1, 2002, are as follows:

	For the Three Months Ended September 30, 2003		For the Three Months Ended September 30, 2002			For the Six Months Ended September 30, 2003			For the Six Months Ended September 30, 2002
Revenues	$	60,188,732	$	75,826,374		$	121,952,939		$	141,039,898
Net Income (loss) before tax benefit		36,791		(12,365,766	)		(16,372	)		(13,311,636	)
Tax benefit		—		51,159			—			393,788
Net Income (loss)		36,791		(12,314,607	)		(16,372	)		(12,917,848	)
Income (loss) per common share - basic		0.01		(1.73	)		(0.00	)		(1.81	)
Income (loss) per common share - diluted		0.01		(1.73	)		(0.00	)		(1.81	)

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NOTE D - GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying value of goodwill did not change for the six months ended September 30, 2003. 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 subsidiary within that segment.

The change in the carrying value of other intangible assets for the six months ended September 30, 2003 is as follows:

	September 30, 2003				March 31, 2003
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortizable intangible asset:
Patent	$	126,684	$	—	$	—	$	—

The Company did not record amortization expense for the three and six months ended September 30, 2003 on the patent recorded as a result of the Avery acquisition in May 2003, pending the final approval of the patent by the United States Patent and Trademark Office, and the implementation of the patented asset by the Company. Amortization expense recorded for an intangible asset in the form of a non-compete agreement existing at September 30, 2002 was $9,000 and $18,000 for the three and six months ended September 30, 2002. At September 30, 2003, the Company is in the process of completing its impairment test and expects that no impairment exists.

NOTE E - INCOME TAXES

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

NOTE F - DEBT

On April 15, 2003, the Company obtained from Congress Financial Corporation (“Congress”) a $40 million revolving line of credit and a $400,000 term loan. The Congress credit facility along with the

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Mellon Bank N.A. (“Mellon”) restricted cash account of $2 million were used to satisfy the outstanding line of credit and term loan with Standard Federal Bank National Association (“Standard”), formerly Michigan National Bank as successor in interest to Mellon. The Congress revolving line of credit enables the Company to borrow a maximum of $40 million, with borrowings limited to 85% of eligible accounts receivable and 65% of eligible inventory. The revolving line of credit and the term note currently bear interest at the rate of 0.50% per annum in excess of the Prime Rate. The Congress credit facility is collateralized by all of the Company’s assets. The line of credit is for a term of 36 months, and the term note is payable over the same 36-month period. The Congress credit facility imposes certain restrictive covenants on Tangible Net Worth and EBITDA. All costs associated with the Congress credit facility will be amortized as interest expense over the term of the loan. The outstanding balance on the revolving line of credit and term loan were approximately $18,400,000 and $344,000, respectively, at September 30, 2003. At September 30, 2003, the interest rate on the revolving line of credit and term loan was 4.5%.

In April 2003, the Company recorded as interest expense the remaining unamortized financing costs of the Standard credit facility in the amount of $78,913. Additionally, the Company recorded as interest expense the early termination fee of approximately $351,000 and a fee for the waiver of the 90-day notice of termination of $30,000 paid to Standard.

On April 15, 2003, Jugal K. Taneja, the Chairman of the Board, CEO and a Director of the Company executed a Guarantee (the “Guarantee”) in favor of Congress. The Guarantee provides Congress with Mr. Taneja’s unconditional guaranty of all obligations, liabilities, and indebtedness of any kind of the Company to Congress, provided that the Guarantee shall not exceed $2 million in year one; is reduced to $1.5 million in year two; and is further reduced to $1 million in year three, subject to the Company achieving collateral availability objectives. In June 2003, the Company issued 57,143 shares of common stock of the Company to Mr. Taneja as compensation for his guarantee in favor of Congress, valued at $91,429, based on the fair market value of the stock on the date of the grant. The cost of the common stock has been recorded as a financing cost related the Congress credit facility and will be amortized as interest expense over the term of the loan.

NOTE G- SEGMENT INFORMATION

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

The Company has determined that is 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, 2003 and 2002. The critical accounting policies of the operating segment are those discussed in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company distributes product both within and outside the United States. Revenues from distribution within the United States represented approximately 99.6% and 99.4% of gross revenues for the three and six months ended September 30, 2003 and 2002, respectively, and approximately 99.5% of gross revenues for the three and six months ended September 30, 2002. Foreign revenues were generated from distribution to customers in Puerto Rico.

NOTE H- CONTINGENCIES

On October 2, 2003, QK Healthcare, Inc. filed a complaint against Valley in the United States District Court of the Eastern District of New York including several counts with regard to the sale of twenty bottles of Lipitor by Valley to QK Healthcare, Inc., including breach of contract, violations of the implied warranty of merchantability, and fraud. The complaint demands actual damages, punitive damages and legal fees and expenses. The Company intends to vigorously defend this action. The Company cannot reasonably estimate any future possible loss as a result of this matter and has made no provision in the accompanying condensed consolidated financial statements for the resolution of this matter.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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-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’s Directors or Officers about the Company and the industry in which it operates, and assumptions made by management, and include among other items, (a) the Company’s strategies regarding growth and business expansion, including future acquisitions; (b) the Company’s financing plans; (c) trends affecting the Company’s financial condition or results of operations; (d) the Company’s ability to continue to control costs and to meet its liquidity and other financing needs; (e) the declaration and payment of dividends; and (f) the Company’s ability to respond to changes in customer demands and regulations. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that the anticipated results will occur. When used in this report, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions are generally intended to identify forward-looking statements.

Important factors that could cause the actual results to differ materially from those in the forward-looking statements include, among other items, (i) changes in the regulatory and general economic environment related to the health care and pharmaceutical industries, including possible changes in reimbursement for healthcare products and in manufacturers’ pricing or distribution policies; (ii) conditions in the capital markets, including the interest rate environment and the availability of capital; (iii) changes in the competitive marketplace that could affect the 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-K for the year ended March 31, 2003, 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, nutritional supplements, and other related products. The Company is headquartered in Clearwater, Florida and maintains distribution centers in Pennsylvania, Ohio, Louisiana, and Texas. 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.

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Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains a discussion of the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates and judgments, including those related to customer incentives, product returns, bad debts, inventories, intangible assets, income taxes, and contingencies and litigation. The Company bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among others, affect the Company’s more significant judgments and estimates used in the preparation of its condensed consolidated financial statements. The Company’s significant accounting policies are more fully described in Note 2 to its consolidated financial statements contained in its Form 10-K for the year ended March 31, 2003.

Revenue Recognition

The Company recognizes revenue when goods are shipped and title or risk of loss resides with unaffiliated customers, and at which time the appropriate provisions are recorded for estimated contractual chargeback credits from the manufacturers based on the Company’s contract with the manufacturer. Rebates and allowances are recorded as a component of cost of sales in the period they are received from the vendor or manufacturer unless such rebates and allowances are reasonably estimable at the end of a reporting period. The Company records chargeback credits due from its vendors in the period when the sale is made to the customer which is eligible for contract pricing from the manufacturer.

The Company accepts return of product from its customers for product which is saleable, in unopened containers and carries a current date. Generally, product returns are received via the Company’s own delivery vehicles, thereby eliminating a direct shipping cost from being incurred by the customer or the Company. Depending on the length of time the customer has held the product; the Company may charge a handling and restocking fee. Overall, the percentage of the return of product to the Company is extremely low. The Company has no sales incentive or rebate programs with its customers.

Inventory Valuation

Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out basis of accounting. Inventories consist of brand and generic drugs, over-the-counter products, health and beauty aids, nutritional supplements, and other related products held for resale. The inventories of the Company’s four distribution centers are constantly monitored for out-of-date or damaged products, which if exist, are reclassed and physically relocated out of saleable inventory to a holding area, referred to as the “morgue” inventory, for return to and credit from the manufacturer. However, if market acceptance of the Company’s existing products or the successful introduction of new products should significantly decrease, inventory write-downs could be required. As of September 30, 2003 and 2002, no inventory valuation allowances were necessary.

Goodwill and Intangible Assets

The Company has completed several acquisitions which have generated significant amounts of goodwill and intangible assets and related amortization. The values assigned to goodwill and intangibles, as well as their related useful lives, are subject to judgment and estimation by the Company. In addition, upon adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), the Company ceased amortization of goodwill effective April 2001, and reviews goodwill annually for impairment. Goodwill and intangibles related to acquisitions are determined based on purchase price allocations. Valuation of intangible assets is generally based on the estimated cash flows related to those assets, while the initial value assigned to goodwill is the residual of

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the purchase price over the fair value of all identifiable assets acquired and liabilities assumed. Thereafter, the value of goodwill cannot be greater than the excess of the fair value of the Company’s reportable unit over the fair value of identifiable assets and liabilities, based on the annual impairment test. Useful lives are determined based on the expected future period of benefit of the asset, the assessment of which considers various characteristics of the asset, including historical cash flows.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment when events or circumstances indicate that a diminution in value may have occurred, based on a comparison of undiscounted future cash flows to the carrying amount of the long-lived asset. Periodically, the Company evaluates the recoverability of the net carrying value of its property and equipment, by comparing the carrying values to the estimated future undiscounted cash flows. A deficiency in these cash flows relative to the carrying amounts is an indication of the need for a write-down due to impairment. The impairment write-down would be the difference between the carrying amounts and the fair value of these assets. Losses on impairments are recognized by a charge to earnings. The Company recorded an impairment of assets charge as a result of its annual impairment testing at September 30, 2002. At September 30, 2003, the Company is in the process of completing its impairment test and expects that no impairment exists.

Results of Operations

For the Three and Six Months Ended September 30, 2003 and 2002.

Revenues. The Company generated revenues of $60.2 million and $120.8 million for the three and six months ended September 30, 2003, respectively, compared to revenues of $73.7 million and $136.8 million for the three and six months ended September 30, 2002, respectively

The net decrease in revenues were the result of several factors:

1. Management’s decision to revise the Valley South business plan during the three months ended June 30, 2002. Valley South was operating as a full-line distributor servicing independent pharmacies in the Louisiana area as their primary wholesaler. Revenues of approximately $2.5 million and $6.5 million were recorded from the sale of branded drugs sold to independent pharmacies, where Valley South was the primary wholesaler, during the three and six months ended September 30, 2002, respectively. The branded drug sales resulted in lower profit margins; and therefore, had minimal impact on gross margins for the periods presented. Valley South has operated as a generic drug distribution center carrying only the fastest moving branded drugs. The generic-to-brand product mix was approximately 39% for the three and six months ended September 30, 2003.

2. The Company has participated in over-the-counter product special purchase programs in prior years. During the three and six months ended September 30, 2002, over $4 million in sales were generated from the 2002 program as compared to no program sales for the three and six months ended September 30, 2003. For the three and six months ended September 30, 2003, the products were not available from the suppliers in the quantities previously supplied. However, subsequent to September 30, 2003, special purchase program sales of approximately $1.5 million have been generated.

3. Sales to warehouse customers declined by $10 million and $11.7 million during the three and six months ended September 30, 2003, respectively compared to the three and six months ended September 30, 2002. The impact on gross margin is minimal.

4. The Company has been focusing on its core business of servicing the independent pharmacies, hospitals and small chain stores. For the three and six months ended September 30, 2003, sales increased to these customers by $4.0 million and $7.8 million, respectively, as compared to the three and six months ended September 30,2002. The

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increased volume represents growth of approximately 21% for the three and six months ended September 30, 2003 as compared to the three and six months ended September 30, 2002.

	For Three Months Ended September 30, 2003		For Three Months Ended September 30, 2002		For Six Months Ended September 30, 2003		For Six Months Ended September 30, 2002
Revenues from:
Branded pharmaceuticals	$	55,717,826	$	65,575,073	$	111,629,062	$	123,253,403
Generic pharmaceuticals		3,606,566		3,913,729		7,278,659		7,616,244
Over-the-counter and general		864,340		4,247,319		1,940,555		5,970,293
Total Revenues	$	60,188,732	$	73,736,121	$	120,848,276	$	136,839,940

The Company has primarily grown its business through strategic acquisitions. The Company currently has four distribution centers, all of which were acquired as follows:

• In November 1999 the Company acquired Becan Distributors, Inc., and its subsidiary Discount;

• In April 2000, the Company acquired Valley;

• In October 2001, the Company acquired Penner; and

• In May 2003, the Company acquired Avery.

Gross Profit. The Company achieved gross profit of approximately $2.1 million and $4.1 million for the three and six months ended September 30, 2003, respectively, compared to approximately $2.3 million and $4.3 million for the three and six months ended September 30, 2002, respectively. The Company’s margin, as a percentage of revenue, was 3.5% and 3.4% for the three and six months ended September 30, 2003, respectively, and 3.1% for each the three and six month ended September 30, 2002. The increase in gross margin percentage for the three and six months ended September 30, 2003 was primarily due to more profitable generic sales as compared to the lower margin brand pharmaceutical sales. Emphasis on generic sales continues to be part of the Company’s focus to improve gross profit.

Operating Expenses and Other Income and Expenses. The Company incurred operating expenses of approximately $1.9 million and $3.7 million for the three and six months ended September 30, 2003, respectively, compared to approximately $14.4 million and $17.0 million for the three and six months ended September 30, 2002, respectively. The following schedule details the major components of operating expenses:

	For the Three Months Ended September 30, 2003		For the Three Months Ended September 30, 2002		For the Six Months Ended September 30, 2003		For the Six Months Ended September 30, 2002
Operating expenses:
Administrative, sales, marketing and other direct operating expenses	$	1,821,498	$	1,817,584	$	3,563,052	$	3,478,865
Amortization and depreciation expense		53,964		82,615		106,466		165,529
Bad debt expense		—		—		—		897,000
Goodwill impairment loss and intangible asset charge		—		12,468,212		—		12,468,212
Total operating expenses	$	1,875,462	$	14,368,411	$	3,669,518	$	17,009,606

Administrative, sales, marketing and other direct operating expenses were 3.1% and 2.9% of gross revenues for the three and six months ended September 30, 2003, respectively, and 2.6% and 3.3% of gross

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revenues for the three and six months ended September 30, 2002, respectively. The increase of 0.5% and 0.4% in the administrative, sales, marketing and other direct operating expenses for the three and six months ended September 30, 2003 over the three and six months ended September 30, 2002, respectively, were due primarily to the increased operating costs associated with the acquisition of Avery in May 2003 and decreased sales.

The Company incurred approximately $32,000 and $476,000 in other income for the three and six months ended September 30, 2003, respectively, compared to approximately $38,000 and $74,000 for the three and six months ended September 30, 2002, respectively. In April 2003, the Company recorded approximately $73,000 in costs associated with the termination of the Standard credit facility, which were charged as other expense, and recorded as other income the reversal of a long-term liability due to Butler of approximately $502,000 in connection with the agreement between the Company and Butler whereby Butler assigned its 30% ownership in VetMall to the Company. (See Acquisitions.)

Interest expense. Interest expense was approximately $255,137 and $927,749 for the three and six months ended September 30, 2003, respectively, and approximately $299,231 and $588,787 for the three and six months ended September 30, 2002, respectively. Included in interest expense is the amortization of loan financing costs, which were $46,458 and $143,060 for the three and six months ended September 30, 2003, respectively, and the early termination fee of $350,934 and the 90-day notice waiver fee of $30,000 charged by Standard for the early termination of that credit facility in April 2003. Included in interest expense for the amortization of loan financing costs for the three and six months ended September 30, 2002 are $40,483 and $73,376, respectively. The Company does not expect the new credit facility with Congress to have a material impact on interest expense for fiscal 2004.

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 income per share for the three and six months ended September 30, 2003 was $.01 and $.00 per basic and diluted shares, compared to a net loss of $1.73 and $1.81 per basic and diluted shares, for the three and six months ended September 30, 2002. The Company had issued and outstanding 1,539,319 and 1,576,178 options to purchase shares of the Company’s common stock, in addition to warrants to purchase 150,000 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, 2003. These anti-dilutive shares could potentially dilute the basic EPS in the future. Shares of common stock used in the calculation of basic and dilutive net income per share for the six months ended September 30, 2003 were 7,153,208 and 7,223,164, respectively.

Income Taxes. SFAS No. 109 requires a valuation allowance to reduce the deferred income tax assets reported, if based on the weight of the evidence, it is more likely than not that a portion or all of the deferred income tax assets will not be realized. As such, a valuation allowance of $1,458,500 was established at 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 $1,458,500 deferred income tax asset, offset by current year deferred income tax expense of $354,952, for a net deferred income tax benefit of $1,103,548 for the year ended March 31, 2002.

The Company determines a valuation allowance based on its analysis of amounts available in the statutory carry back period, consideration of future deductible amounts, and assessment of future profitability. As a result of the substantial operating losses incurred during fiscal year 2003, the Company established

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valuation allowances as a portion of the net deferred tax asset in the amount of $580,100 as of March 31, 2003, as it will take more than a few years to realize the deferred tax asset.

During the three and six months ended September 30, 2003, no tax effect was recorded due to the insignificant impact of the operating results. During the three and six months ended September 30, 2002, the Company recorded deferred income tax benefit of $51,159 and $342,629, respectively. As of September 30, 2003, 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 recorded 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, 2003 and 2002. 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 income increased by non-cash expenses produced positive cash flow for the six months ended September 30, 2003. The Company has working capital and cash and cash equivalents of approximately $2.2 million and $.06 million, respectively, at September 30, 2003.

The Company’s principal commitments at September 30, 2003 consist of the outstanding loan agreement with Congress and leases on its office and warehouse space. There were no material commitments for capital expenditures at that date.

Net cash used in operating activities was $3.9 million for the six months ended September 30, 2003. Cash was used primarily by increases in accounts receivables, prepaid and other current assets and deposits, decreases in accounts payables, and accrued expenses and other current liabilities; offset by decreases in inventory, due from affiliates, other assets and notes receivable.

Net cash used in investing activities was approximately $.11 million for the six months ended September 30, 2003, which represented cash invested in property and equipment and legal expenses incurred with the acquisition of Avery.

Net cash provided by financing activities was approximately $3.9 million for the six months ended September 30, 2003, primarily representing a decrease in the Company’s restricted cash account of $2 million, which was used along with the new Congress revolving line of credit to satisfy the Standard credit facility, an increase in the line of credit of approximately $2.5 million, offset by an increase in deferred financing costs associated with the Congress credit facility and payments of long-term debt, capital leases.

Management believes the Company has sufficient capital resources to fund the Company’s operations for at least the next twelve months. Management does not believe the acquisition of Avery will have a material impact on the liquidity of the Company.

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, 2003, the Company’s outstanding debt with Congress was approximately $18.4 million on the line of credit and $.3 million on the term loan. The interest rates charged on the line of credit and term loan are floating rates subject to periodic adjustment, with certain options for management to choose from. At September 30, 2003, the interest rate charged on the line of credit and term loan was 4.5%. The company manages its risk by choosing the most advantageous interest option offered by its lender. 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.

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Item 4. CONTROLS AND PROCEDURES.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to use its judgment in evaluating the cost to benefit relationship of possible controls and procedures.

At September 30, 2003, the Company performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. The evaluation was performed with the participation of senior management of key corporate functions, and under the supervision of the CEO and CFO. Based on the evaluation, the Company’s management, including the CEO and CFO, concluded that its disclosure controls and procedures were effective.

There have been no significant changes in the Company’s internal controls over financial reporting during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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. In September of 2002, Plaintiffs served the Company with written discovery requests. Since then, there has been no activity by Plaintiffs or HCT, and the Company is currently considering how to proceed in light of this inactivity. The Company intends to vigorously defend the actions filed against it and to pursue its counterclaim. The Company has made no provision in the accompanying condensed consolidated financial statements for resolution of this matter.

The Company previously executed an engagement letter with GunnAllen Financial (“GAF”) with an effective date of August 20, 2001, for consulting services over a three month period from the effective date, and renewable month to month thereafter until terminated by either party with a thirty day notice. The GAF agreement required that the Company pay to GAF, for consulting services performed, $5,000 per month plus expenses capped at $2,000 per month, and further required the Company to issue a warrant to

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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 fees previously paid to GAF. No warrants had been issued to GAF as of September 30, 2003, and GAF had not instituted any legal proceedings against the Company. The Company cannot reasonably estimate any future possible loss as a result of this matter. The Company has made no provision in the accompanying consolidated financial statements for resolution of this matter.

On May 1, 2002, the Company filed suit against an established customer of the Company’s Pittsburgh distribution center for collection of past due accounts receivable. The customer accounted for approximately $4.1 million, or 1.5%, of the gross revenue of the Company in the fiscal year ended March 31, 2002. The Company has an unconditional personal guaranty signed by the customer’s owner. On May 23, 2002, the customer filed a voluntary petition in bankruptcy in the U.S. Bankruptcy Court, under Chapter Eleven of the United States Bankruptcy Act, subsequent to which the customer failed to file the proper financial data with the court, causing the voluntary bankruptcy filing to be withdrawn. Management is continuing to pursue its claim for payment through the courts and working with the major creditors to process return of inventory. The Company currently has reserved an allowance account of $669,000, representing approximately 75% of the account balance.

On October 2, 2003, QK Healthcare, Inc. filed a complaint against Valley in the United States District Court of the Eastern District of New York including several counts with regard to the sale of twenty bottles of Lipitor by Valley to QK Healthcare, Inc., including breach of contract, violations of the implied warranty of merchantability, and fraud. The complaint demands actual damages, punitive damages and legal fees and expenses. The Company intends to vigorously defend this action. The Company cannot reasonably estimate any future possible loss as a result of this matter and has made no provision in the accompanying condensed consolidated financial statements for the 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, 2003 should have a material adverse impact on its financial position, results of operations, or cash flows.

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

None

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)

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2.5	Merger Purchase Agreement between DrugMax.com, Inc., DrugMax Acquisition Corporation, and Valley Drug Company, Ronald J. Patrick and Ralph A. Blundo dated as of April 19, 2000. (4)
2.6	Agreement for Purchase and Sale of Assets by and between Discount Rx, Inc., and Penner & Welsch, Inc., dated October 12, 2001. (11)
3.1	Restated Articles of Incorporation of DrugMax, Inc., filed September 5, 2001.*
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 DrugMax, Inc. and William L. LaGamba dated April 1, 2003. (16)
10.2	Employment Agreement by and between DrugMax, Inc. and Ronald J. Patrick dated April 1, 2003 (16)
10.3	Employment Agreement by and between DrugMax, Inc. and Jugal K. Taneja, dated April 1, 2003. (16)
10.4	DrugMax.com, Inc. 1999 Incentive and Non-Statutory Stock Option Plan. (8)
10.5	Amendment No. 1 to DrugMax, Inc. 1999 Incentive and Non-Statutory Stock Option Plan, dated June 5, 2002. (14)
10.6	Loan and Security Agreement by an between Congress Financial Corporation and DrugMax, Inc., Valley Drug Company, Valley Drug Company South and Discount Rx, Inc., dated April 15, 2003. (15)
10.7	DrugMax, Inc. 2003 Restricted Stock Plan dated August 27, 2003. (17)
21.0	Subsidiaries of DrugMax, Inc. *
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

21

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

* 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.

⁽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.

⁽¹⁵⁾ Incorporated by reference to the Company’s Form 10-K, filed July 15, 2003.

⁽¹⁶⁾ Incorporated by reference to the Company’s Form 10-K/A, filed July 29, 2003.

⁽¹⁷⁾ Incorporated by reference to the Company’s Definitive Proxy Statement filed September 8, 2003.

(b) Reports on Form 8-K.

During the three months ended September 30, 2003, the Company filed no reports on Form 8-K.

22

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 14, 2003	By:	/s/    JUGAL K. TANEJA
		Jugal K. Taneja Chief Executive Officer
Date: November 14, 2003	By:	/s/    RONALD J. PATRICK
		Ronald J. Patrick Chief Financial Officer, Vice President of Finance, Secretary and Treasurer
Date: November 14, 2003	By:	/s/    WILLIAM L. LAGAMBA
		William L. LaGamba President and Chief Operations Officer

23

EX-3.1

Exhibit 3.1

RESTATED

ARTICLES OF INCORPORATION

OF

DRUGMAX.COM, INC.

DrugMax.com, Inc. (the “Corporation”), a corporation organized and existing under the Nevada Revised Statutes (“NRS”), of the State of Nevada does hereby certify:

I.    The Corporation, pursuant to the provisions of NRS 78.403, hereby adopts these Restated Articles of Incorporation which accurately restate and integrate the Articles of Incorporation filed on October 18, 1993, and all amendments thereto that are in effect to date as permitted by NRS 78.385.

II.    Each amendment made by these Restated Articles of Incorporation (the “Restated Articles”) has been effected in conformity with the provisions of the NRS. The Restated Articles and each amendment thereto were duly approved and adopted by the unanimous written consent of the Corporation’s Board of Directors and by the written consent of stockholders holding at least a majority of the voting power on September 5, 2001, and the consents given for the amendments contained herein were sufficient for approval of such amendments.

III.    The original Articles of Incorporation and all amendments and supplements thereto are hereby superseded by the Restated Articles which are as follows:

ARTICLE ONE

The name of the corporation is DrugMax, Inc.

ARTICLE TWO

The purpose or purposes for which this corporation is organized are:

To engage, without qualification, in any lawful act or activity for which corporations may be organized under the laws of the State of Nevada.

ARTICLE THREE

SECTION 3.01. AUTHORIZED CAPITAL STOCK. The total number of shares of capital stock the corporation is authorized to issue is Twenty-Six Million (26,000,000) shares, each having a par value of $0.001, of which (i) Twenty-Four Million (24,000,000) shares shall be designated as “Common Stock and” (ii) Two Million (2,000,000) shares shall be designated as “Preferred Stock”.

SECTION 3.02. COMMON STOCK. Each share of Common Stock issued and outstanding shall be entitled to one vote on all matters. Dividends shall be declared and paid only out of funds legally available therefor. Shares of such Common Stock may be issued for such

consideration and for such corporate purposes as the Board of Directors may from time to time determine. Fully paid shares of Common Stock of this corporation shall not be liable to any further call or assessment.

SECTION 3.03. PREFERRED STOCK. The Board of Directors shall have the authority to authorize the issuance of the Preferred Stock from time to time in one or more classes or series, and to state in the resolution or resolutions from time to time adopted providing for the issuance thereof the following:

(a) Whether or not the class or series shall have voting rights, full or limited, or will be without voting rights;

(b) The number of shares to constitute the class or series and the designation thereof;

(c) The preferences and relative, participating, optional or other special rights, if any, and the qualifications, limitations, or restrictions thereof, if any, with respect to any class or series;

(d) Whether or not the shares of any class or series shall be redeemable and, if redeemable, the redemption price or prices, and the time or times at which, and the terms and conditions upon which, such shares shall be redeemable and the manner of redemption;

(e) Whether or not the shares of a class or series shall be subject to the operation of retirement or sinking funds to be applied to the purchase or redemption of such shares for retirement, and if such retirement or sinking funds shall be established, the annual amount thereof and the terms and provisions relative to the operation thereof;

(f) The dividend rate, whether dividends are payable in cash, stock of the corporation, or other property, the conditions upon which and the times when such dividends are payable, the preference to or the relation to the payment of dividends payable on any other class or classes or series of stock, whether or not such dividend shall be cumulative or noncumulative, and if cumulative, the date or dates from which such dividends shall accumulate;

(g) The preferences, if any, and the amounts thereof which the holders of any class or series thereof are entitled to receive upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the corporation;

(h) Whether or not the shares of any class or series is convertible into, or exchangeable for, the shares of any other class or classes or of any other series of the same or any other class or classes of stock of the corporation and the conversion price or prices or ratio or ratios or the rate or rates at which such

exchange may be made, with such adjustments, if any, as shall be stated and expressed or provided for in such resolution or resolutions; and

(i) Such other rights and provisions with respect to any class or series as may to the Board of Directors seem advisable.

The shares of each class or series of the Preferred Stock may vary from the shares of any other class or series thereof in any respect. The Board of Directors may increase the number of shares of the Preferred Stock designated for any existing class or series by a resolution adding to such class or series authorized and unissued shares of the Preferred Stock not designated for any other class or series. The Board of Directors may decrease the number of shares of the Preferred Stock designated for any existing class or series of the Preferred Stock and the shares so subtracted shall become authorized, unissued and undesignated shares of the Preferred Stock.

ARTICLE FOUR

The governing board of this corporation shall be known as directors, and the number of directors may from time to time be increased or decreased in such manner as shall be provided by the bylaws of this corporation, provided that the number of directors shall not be reduced to less than three (3) nor increased to more than nine (9). Directors of the corporation need not be residents of the State of Nevada and need not own shares of the corporation’s stock.

ARTICLE FIVE

The Capital stock of the corporation, after the amount of the subscription price has been paid in money, property, or services, as the directors shall determine, shall not be subject to assessment to pay the debts of the corporation, nor for any other purpose and no stock issued as fully paid up shall ever be assessable or assessed, and the Articles of Incorporation shall not be amended in this particular.

ARTICLE SIX

The corporation is to have perpetual existence.

ARTICLE SEVEN

In furtherance and not in limitation to the powers conferred by statute, the board of directors is expressly authorized:

Subject to the bylaws, if any, adopted by the stockholders, to make, alter or amend the bylaws of the corporation.

To fix the amount to be reserved as working capital over and above its capital stock paid in, to authorize and to cause to be executed mortgages and liens upon the real and personal property of this corporation.

3

By resolution passed by a majority of the whole board, to designate one or more committees, each committee to consist of one or more of the directors of the corporation, which, to the extent provided in the resolution or in the bylaws of the corporation, shall have and may exercise the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be stated in the bylaws of the corporation or as may be determined from time to time by resolution adopted by the board of directors.

When and as authorized by the affirmative vote of stockholders holding stock entitling them to exercise at least a majority of the voting power given at a stockholders meeting called for that purpose, or when authorized by the written consent of the holders of at least a majority of the voting stock issued and outstanding, the board of directors shall have power and authority at any meeting to sell, lease or exchange all of the property and assets of the corporation, including its good will and its corporate franchises, upon such terms and conditions as its board of directors deems expedient and for the best interests of the corporation.

ARTICLE EIGHT

Meetings of the stockholders may be held at such place within or without the State of Nevada, if the bylaws so provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Nevada at such place or places as may be designated from time to time by the board of directors or in the bylaws of the corporation.

ARTICLE NINE

This corporation reserves the right to amend, alter, change or repeal any provision contained in the Articles of Incorporation, in the manner now or hereafter prescribed by statute, or by the Articles of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reference.

ARTICLE TEN

No stockholder shall be entitled as a matter of right to subscribe for or receive additional shares of any class of stock of the corporation, whether now or hereafter authorized, or any bonds, debentures or other securities convertible into stock, but such additional shares of stock or other securities convertible into stock may be issued or disposed of by the board of directors to such persons and on such terms as in its discretion it shall deem advisable.

4

IN WITNESS WHEREOF, the undersigned President has executed these Restated Articles of Incorporation as of September 5, 2001.

DRUGMAX.COM, INC.

By:                                                                                                                                           

William L. LaGamba, President and Secretary

5

EX-21.0

EXHIBIT 21.0

DRUGMAX, INC.

Subsidiaries

Valley Drug Company (Ohio)

Valley Drug Company South (Louisiana)

Discount Rx, Inc. (Louisiana)

Desktop Media Group, Inc. (Florida)

VetMall, Inc. (Florida)

Discount Rx, Inc., (Nevada)

EX-31.1

EXHIBIT 31.1

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(s) and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant, and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s control over financial reporting.

Dated: November 14, 2003	By:	/s/    JUGAL K. TANEJA
		Jugal K. Taneja Chief Executive Officer

EX-31.2

EXHIBIT 31.2

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(s) and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant, and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s control over financial reporting.

Dated: November 14, 2003	By:	/s/    RONALD J. PATRICK
		Ronald J. Patrick Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DrugMax, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2003, as filed with the Securities and Exchange Commission on November 14, 2003 (the “Report”), I, Jugal K. Taneja, Chairman and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/    JUGAL K. TANEJA        

Jugal K. Taneja

Chief Executive Officer

November 14, 2003

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DrugMax, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2003, as filed with the Securities and Exchange Commission on November 14, 2003 (the “Report”), I, Ronald J. Patrick, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/    RONALD J. PATRICK        

Ronald J. Patrick

Chief Financial Officer,

Principal Financial and Accounting Officer

November 14, 2003