SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Note 1. ORGANIZATION

Organization

Through its wholly owned subsidiary HCMC Intellectual Property Holdings, LLC, the Company operates manages and intends to expand on its intellectual property portfolio. 

Through its wholly owned subsidiary, Healthy Choice Wellness, LLC, the Amazon.com marketplace throughCompany operates:

Through its wholly owned subsidiary, Healthy U Wholesale, Inc. TheInc, the Company also operates HCMC Intellectual Property Holdings, LLC, a wholly owned subsidiary formed to hold, marketsells vitamins and expandsupplements, as well as health, beauty, and personal care products on its current intellectual property assets. Thewebsite www.TheVitaminStore.com.

Additionally, the Company markets its patented the Q-Cup™ technology under the vape segment; this patented technology is based on a small, quartz cup called the Q-Cup™, which a customer partially fills with either cannabis or CBD concentrate (approximately 50mg) purchased from a third party. The Q-Cup™ is then inserted into the Q-Cup™ Tank or Globe, whichthat heats the cup from the outside without coming in direct contact with the solid concentrate. This Q-Cup™ technology provides significantly more efficiency and an “on the go” solution for consumers who prefer to vape concentrates either medicinally or recreationally. The Company acquired substantially all of the assets of Mother Earth’s Storehouse on February 9, 2022, which operates a two store organic and health food and vitamin chain in New York’s Hudson Valley, a business that has been operating for over 40 years. The Company expanded its operation into the Health & Wellness segment in November 2021. HCMC acquired substantially all of the assets of EIR Hydration, an IV therapy center located in Roslyn Heights, NY. The Company also has licensing agreements for Healthy Choice Wellness Centers at the Casbah Spa and Salon in Fort Lauderdale, FL and Boston Direct Health in Boston, MA. The activities in the Wellness centers are currently reported under the Grocery segment due to its de minimis nature. From December 2021 through April 2022, the Company either closed its vape stores or sold substantially all of the assets of such stores. This will allow the Company to focus on developing wholesale business and sales through online platform.

The global outbreakCompany has commenced steps to spin off ("Spin-Off") its grocery segment and wellness business into a new publicly traded company (hereinafter referred to as “NewCo”). NewCo will continue the path of COVID-19 was declared a pandemicgrowth in the wellness verticals started by HCMC and explore other growth opportunities that comport with HCMC’s healthier lifestyle mission. Following the World Health OrganizationSpin-Off, HCMC will retain its entire patent suite, the Q-Cup® brand, and a national emergency bycontinue to develop its patent suite through R&D as well as continuing its path of enforcing its patent rights against infringers and attempting to monetize said patents through licensing deals.

At the U.S. government in March 2020 and has negatively impacted the U.S. and global economies, disrupted global supply chains and, mandated closures and stay-at-home orders and created significant disruptionstime of the global financial markets. The Company adjusted certain aspectsSpin-Off, HCMC will distribute all the outstanding shares of Common Stock held by it on a pro rata basis to holders of HCMC’s common stock. Shares of HCMC’s common stock outstanding as of the operationsrecord date for the Spin-Off (the “Record Date”), will entitle the holder thereof to protect their employeesreceive a certain number of shares of Common Stock in NewCo. The distribution will be made in book-entry form by a distribution agent. Fractional shares of Common Stock will not be distributed in the Spin-Off and customers while still meeting customers’ needs.While we have experienced many challenges, including but not limited to, product shortages, staffing difficulties, and evolving customer shopping behaviors, our focus remains on both offering our customers a high quality service experience and supporting our essential front-line team members. Though we have successfully managed these challenges to date, our operations and financial condition could stillany fractional amounts will be negatively affected by the COVID-19 pandemic and future developments, which are highly uncertain and cannot be predicted.rounded down. Please see more disclosure in Note 12 Stockholder Equity.

Note 2. LIQUIDITY

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern and realization of assets and satisfaction of liabilities in the normal course of business and do not include any adjustments that might result from the outcome of any uncertainties related to our going concern assessment. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values.

The Company currently and historically has reported net losses and cash outflows from operations. As of March 31, 2023, the Company had cash of approximately $19.8 million and working capital of $18.3 million. In the past, the Company financed its operations primarily through issuances of common stock and convertible preferred stock. The Company anticipates that itsbelieves current cash cash equivalent and cash generated from operations will beon hand is sufficient to meet the projected operating expensesits obligations and capital requirements for the foreseeable future through at least the next twelve months from the issuance of these unaudited condensed consolidated financial statements. Management believes with $30.0 million cash on hand at the balance sheet date, the Company’s cash will be sufficient to cover its operation for the 12 months from the date of the filing.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X and do not include all the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The Company has made estimates and judgments affecting the amounts reported in the Company’s unaudited condensed consolidated financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from the Company’s estimates. The condensed consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021,2022, filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022.30, 2023. The condensed consolidated balance sheet as of December 31, 20212022 was derived from the Company’s audited 20212022 financial statements contained in the above referenced Form 10-K. Results of the ninethree months ended September 30, 2022,March 31, 2023, are not necessarily indicative of the results to be expected for the full year ending December 31, 2022.2023.

Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 20212022 Annual Report.

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid instruments with an original maturity of three months or less, when purchased, to be cash and cash equivalents. The majority of the Company’s cash and cash equivalents areis concentrated in one large financial institution, which is in excess of Federal Deposit Insurance Corporation (FDIC) coverage. The Company did not have any cash equivalent as of March 31, 2023, and  December 31, 2022.

A summary of the financial institutionsinstitution that had a cash and cash equivalents in excess of FDIC limits of $250,000 on September 30, 2022March 31, 2023 and December 31, 20212022 is presented below:

The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests, as deposits are held in excess of federally insured limits. The Company’s cash equivalent at September 30, 2022 and December 31, 2021, respectively, was a money market account. The Company has not experienced any losses in such account.

The following table provides a reconciliation of cash cash equivalents and restricted cash to amounts shown in unaudited condensed consolidated statements of cash flow: 

Restricted Cash

 

The Company's restricted cash consisted of cash balances which were restricted as to withdrawal or usage under the August 18, 2022 securitysecurities purchase agreement for the purpose of funding any amounts due under the Series E Certificate of Designation upon the redemption of the Series E Preferred Stock.The balance also included cash held  in the collateral account to cover the cash draw from the line of credit.

Note 5. SEGMENT INFORMATION AND DISAGGREGATION OF REVENUES

In accordance with FASB ASC 280, "Disclosures about Segment of an enterprise and related information", the Company determined it has two reportable segments: grocery and vapor. There are no inter-segment revenues.

The Company's general and administrative costs are not segment specific. As a result, all operating expenses are not managed on segment basis.

The tables below present information about reportableCompany reports the following segments forin accordance with management guidance: Vapor and Grocery. When the three monthsCompany prepares its internal management reporting to evaluate business performance, we disaggregate revenue into the following categories that depict how the nature, amount, timing and nine months ended September 30, 2022,uncertainty of revenue and 2021:cash flows are affected by economic factors.

Note 6. NOTES RECEIVABLE AND OTHER INCOME

On September 6, 2018, the Company entered into a secured, 36-month promissory note (the “Note”) with VPR Brands L.P. for $582,260. The Note bears an interest rate of 7.00%, which payments thereunder are $4,141 weekly. The Company records all proceeds related to the interest of the Note as interest income as proceeds are received.

On August 31, 2022, the Company amended and restated the Secured Promissory Note (the "Amended Note") with VPR Brands L.P. to extend the maturity date for one year. The outstanding balance for the Amended Note is $211,355. The Amended Note bears an interest rate of 7.00%, which payments thereunder are $1,500 weekly, with such payments commencing as of September 3, 2022. The Amended Note has a balloon payment of $145,931 for all remaining accrued interest and principal balance due in the final week of the 1-year extension of the Amended Note.

Note 7. ACQUISITION OF MOTHER EARTH’S STOREHOUSE, INC.

On February 9,October 14, 2022, the Company through its wholly owned subsidiary, Healthy Choice Markets 3,IV, LLC, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Mother Earth’s StorehouseDean’s Natural Food Market of Shrewsbury, Inc. (“HCM3”), a New Jersey corporation, Green’s Natural Foods, Inc., a Delaware corporation, Dean’s Natural Food Market of Chester, LLC, a New Jersey limited liability company, Dean’s Natural Food Market of Basking Ridge, LLC, a New Jersey limited liability company, and its shareholders.Dean’s Natural Food Market, Inc., a New Jersey corporation (collectively, the “Sellers”), and shareholders of the Sellers. Pursuant to the Purchase Agreement, HCM3the Company acquired certain assets and assumed certain liabilities related to Mother Earth’s grocery storesof an organic and natural health food and vitamin chain with eight store locations in KingstonNew York and Saugerties,northern and central New York. The Company intends to continue to operate the grocery stores under their existing name. Jersey (the “Stores”).

The cash purchase price under the Asset Purchase Agreement was $4,472,500,$5,142,000, with an additional $677,500 paid for inventory at closing. $3,000,000 seller financing in the form of promissory note. In addition, the Company assumedseller is entitled to a lease obligation forcontingent earn-out based on a certain revenue threshold within the Kingston, NY store and entered into an employment agreement withone-year period of the store manager.closing.

The purchase methodCompany recorded $1,108,000 of accounting in accordance with ASC 805, Business Combinations, was appliedcontingent consideration based on the estimated financial performance for the Mother Earth's Storehouse acquisition.  This requiresone year following closing.  The contingent consideration was discounted at an interest rate of 3.8%, which represents the total cost of an acquisitionCompany's weighted average discount rate.  Contingent consideration related to be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition with the excess cost accounted for as goodwill. Goodwill arising from the acquisition is attributable to expected operational synergies from combining the operations of the acquired businessrecorded at fair value (level 3) with those of the Company.changes in fair value recorded in other expense (income), net.

The purchase price allocation is final asfollowing table summarizes the change in fair value of September 30, 2022. contingent consideration from acquisition date to March 31, 2023:

The following table summarizes the purchase price allocation based on fair values of the net assets acquired at the acquisition date:

Revenue and Earnings

RevenueThe following table represents the combined pro forma revenue and net incomeloss for the three months ended September 30, 2022 were $3.2 million and $0.01 million, respectively. RevenueMarch 31, 2022:

The combined proforma revenue and net income were $8.5 million and $0.4 million, respectively, from the date of acquisition through September 30, 2022. Acquisition-related expenses are expensed as incurred. They were recorded in selling, general and administrative expenses and were $0 and $78,000,loss for the three and nine monthsmonth period ended September 30,March 31, 2022 respectively. They primarily related to legal and other professional fees.

Note 8. PROPERTY, &PLANT, AND EQUIPMENT

The Company incurred approximately $64,986142,560 and $22,63049,936 of depreciation expense for the three months ended September 30, 2022March 31, 2023 and 2021, and $178,575 and $89,155 of depreciation expense for the nine months endedSeptember 30, 2022 and 2021, respectively.

Intangible assets, net are as follows:

Intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense was approximately  $165,101$230,902 and $95,335$143,386 for the three months ended September 30,March 31, 2023 and 2022, and 2021, and $473,587 and $290,381 for the nine months ended September 30, 2022 and 2021, respectively. Future annual estimated amortization expense is as follows:

Note 10. CONTRACT LIABILITIES

The following table provides a breakdown of the Company's debt as of September 30, 2022March 31, 2023 and December 31, 20212022 is presented below:

Series E Convertible Preferred Stock

On August 18, 2022, the Company entered into a Securities Purchase Agreement ("Series E Preferred Stock") pursuant to which the Company sold and issued 14,722 shares of its Series E Redeemable Convertible Preferred Stock to institutional investors for $1,000 per share or an aggregate subscription of $13.25 million. The number of shares issued to each participant is based on subscription amount multiplied by conversion rate of 1.1111. The Company also incurred offering costs of approximately $410,000, which covers legal and consulting fee.

Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary that is not a Fundamental Transaction (as defined in the Certificate of Designation), the holders of HCMC Series E Preferred Stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to $1,000 per share of HCMCSeries E Preferred Stock.

Unless earlier converted or extended as set forth below, a holder may require the redemption of all or a portion of the stated value of the HCMC Series E Preferred Stock either (1) six months after closing or (2) the time at which the balance is due and payable upon an event of default.

Stock Options

During the three months ended September 30, 2022March 31, 2023 and 2021, no stock options of the Company were exercised into common stock. During the nine months ended September 30, 2022, no stock options of the Company were exercised into common stock; in comparison to thenine months endedSeptember 30, 2021, where 2,275,000,000stock options of the Company were exercised into common stock.

During the three months ended September 30, 2022March 31, 2023 and 20212022, the Company recognized stock-based compensation of approximately $050,000 and $0, respectively. . During the nine months endedrespectively September 30, 2022in connection with amortization of restricted stock and 2021stock options, the Company recognized stock-based compensation of $0 and $34,375, respectively.. Stock based compensation is included as part of selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations.

Income (Loss) Per Share

The following table summarizes the Company’s securities, in common share equivalents, which have been excluded from the calculation of dilutive loss per share as their effect would be anti-dilutive:

Note 13. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Two lawsuits were filed against the Company and its subsidiaries in connection with alleged claimed battery defects for an electronic cigarette device. Plaintiffs claim these batteries were sold by a store of the Company’s subsidiary and have sued for an undetermined amount of damages (other than a total of $0.4 million of medical costs). The initial complaints were filed between January 2019 and April 2019. We responded to the complaints in 2019 and we exchanged additional support information with the plaintiff for one of the lawsuits in 2021. Given the lack of information presented by the plaintiffs to date, the Company is unable to predict the outcome of these matters and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to these legal proceedings.

On November 30, 2020, the Company filed a patent infringement lawsuit against Philip Morris USA, Inc. and Philip Morris Products S.A. in the U.S. District Court for the Northern District of Georgia.  The lawsuit alleges infringement on HCMC-owned patent(s) by the Philip Morris product known and marketed as “IQOS®”.  Philip Morris claims that it is currently approaching 14 million users of its IQOS® product and has reportedly invested over $3 billion in their smokeless tobacco products. On December 3, 2021, the District Court for the Northern District of Georgia effectively dismissed HCMC’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A.  On December 14, 2021, the Company filed a notice of appeal of the District Court for the Northern District of Georgia’s dismissal of the Company’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. The appeal brief was filed on February 28, 2022.

On December 3, 2021, the District Court for the Northern District of Georgia effectively dismissed HCMC’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. In connection with such dismissal, the defendants sought to recover attorney’s fees from the Plaintiff. On February 22, 2022, the District Court for the Northern District of Georgia granted the defendant’s an award of approximately $575,000$575,000 in attorneys’ fees to be paid by the Company. The Company has fully provisioned this amount as of December 31, 2021. 2022. HCMC appealed this ruling on June 22, 2022. Refer to Note 14 Subsequent Event.

From time to time the Company is involved in legal proceedings arising in the ordinary course of our business. We believe that there is no other litigation pending that is likely to have, individually or in the aggregate, a material adverse effect on our financial condition or results of operations as of September 30, 2022March 31, 2023. With respect to legal costs, we record such costs as incurred.

Note 14. SUBSEQUENT EVENTS

As of the date of filing, 9,150,000,000 shares of common stock were subsequently issued since March 31, 2023 as a professional valuation firm to perform the valuation on the assets acquired and liabilities assumed. Purchase price allocation has not been finalized at the timeresult of filing.HCMC Series E Preferred Stock conversions.

On October 25, 2022, the Company announced thatApril 23, 2023, the Board has authorized aggregate common stock repurchases of up to $5 million.Directors of HCMC may purchase shares on a discretionary basis from time to time through open market purchases, privately negotiated transactions or other means, including through Rule 10b5-1 trading plans. The timing and amount ofapproved the repurchase transactions will be subjectSecond Amendment to the discretion of HCMC based upon market conditions and other opportunities that HCMC may have for2015 Equity Incentive Plan which increased the use or investment of its cash balances. The repurchase program has no expiration date, does not require the purchase of any minimum number of shares of HCMC common stock authorized for issuance under the Amended Plan to 225,000,000,000 shares. The board of directors also approved the issuance of an additional 107,675,000,000 shares of restricted common stock to the employees and may be suspended, modified or discontinuedexecutive officers of HCMC. The grants of restricted common stock will commence vesting at any time without prior notice. The number12.5% of shares to be purchasedthe award on February 1, 2024 and the timing of purchases will be basedvest in 2.5% increments on the Company's trading windows and available liquidity, general business and market conditions, and other factors, including legal requirements, debt covenant restrictions and alternative investment opportunities. The Company has not repurchased any shareslast day of each calendar quarter thereafter through September 30, 2025.

We believe the following factors affect our performance: