UNITED STATES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 001-36469
HEALTHIER CHOICES MANAGEMENT CORP.
(Exact name of Registrant as specified in its charter)
| Delaware | 84-1070932 | |
(State or other jurisdiction of | ||
incorporation or organization) | (I.R.S. Employer Identification No.) |
3800 North 28Th Way Hollywood, Florida | 33020 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: 305-600-5004
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.
☒Yes Yes ☐ No
☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒Yes Yes ☐ No
☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ ☒No No
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| Common Stock, par value $0.0001 per share | HCMC | OTC Pink Marketplace |
As of November 10, 2022,2023, there were 339,741,632,384 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.
TABLE OF CONTENTS
| PAGE | |
| PART I FINANCIAL INFORMATION | 1 |
| 1 | |
| 1 | |
| 2 | |
| 3 | |
| 5 | |
| 6 | |
| 22 | |
| 22 | |
| ITEM 6. Exhibits | 25 |
| Signatures | 27 |
| Exhibit 31.1 | |
| Exhibit 31.2 | |
| Exhibit 32.1 | |
| Exhibit 32.2 |
HEALTHIER CHOICES MANAGEMENT CORP.
| September 30, 2022 (Unaudited) | December 31, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 30,009,173 | $ | 26,496,404 | ||||
| Accounts receivable, net | 53,439 | 28,481 | ||||||
| Notes receivable | 205,262 | 247,915 | ||||||
| Inventories | 2,401,903 | 1,521,199 | ||||||
| Prepaid expenses and vendor deposits | 295,823 | 456,397 | ||||||
| Investment | 17,143 | 23,143 | ||||||
| Restricted cash | 1,325,000 | - | ||||||
| TOTAL CURRENT ASSETS | 34,307,743 | 28,773,539 | ||||||
| Property and equipment, net of accumulated depreciation | 1,528,300 | 176,988 | ||||||
| Intangible assets, net of accumulated amortization | 2,083,007 | 947,593 | ||||||
| Goodwill | 2,657,000 | 916,000 | ||||||
| Right of use asset – operating lease, net | 4,785,871 | 3,543,930 | ||||||
| Other assets | 108,565 | 85,437 | ||||||
| TOTAL ASSETS | $ | 45,470,486 | $ | 34,443,487 | ||||
| LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 3,203,384 | $ | 1,642,848 | ||||
| Contract liabilities | 57,283 | 23,178 | ||||||
| Current portion of line of credit | 453,232 | 418,036 | ||||||
| Current portion of loan payment | 1,479 | 2,604 | ||||||
| Operating lease liability, current | 534,493 | 437,328 | ||||||
| TOTAL CURRENT LIABILITIES | 4,249,871 | 2,523,994 | ||||||
| Loan payable, net of current portion | - | 815 | ||||||
| Operating lease liability, net of current | 3,885,543 | 2,685,021 | ||||||
| TOTAL LIABILITIES | 8,135,414 | 5,209,830 | ||||||
| COMMITMENTS AND CONTINGENCIES (SEE NOTE 13) | ||||||||
| CONVERTIBLE PREFERRED STOCK | ||||||||
Series E convertible preferred stock, $1,000 par value per share, 14,722 and 0 shares authorized, issued and outstanding as of September 30, 2022 and December 31, 2021, respectively; aggregate liquidation preference of $14.7 million | 14,722,075 | - | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
Series D convertible preferred stock, $1,000 par value per share, 5,000 shares authorized; 800 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively; aggregate liquidation preference of $0.8 million | 800,000 | 800,000 | ||||||
Common Stock, $0.0001 par value per share, 750,000,000,000 shares authorized; 339,741,632,384 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | 33,974,163 | 33,974,163 | ||||||
| Additional paid-in capital | 28,973,580 | 30,855,824 | ||||||
| Accumulated deficit | (41,134,746 | ) | (36,396,330 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 22,612,997 | 29,233,657 | ||||||
| TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | $ | 45,470,486 | $ | 34,443,487 | ||||
| (Unaudited) | ||||||||
| September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 7,137,833 | $ | 22,911,892 | ||||
| Accounts receivable, net | 130,907 | 55,815 | ||||||
| Notes receivable | - | 189,225 | ||||||
| Inventories | 3,553,942 | 3,817,192 | ||||||
| Prepaid expenses and vendor deposits | 1,746,452 | 322,182 | ||||||
| Investment | 1,714 | 9,771 | ||||||
| Other current assets | 398,910 | 1,224,171 | ||||||
| Restricted cash | 628,232 | 1,778,232 | ||||||
| TOTAL CURRENT ASSETS | 13,597,990 | 30,308,480 | ||||||
| Property, plant, and equipment, net of accumulated depreciation | 2,865,409 | 3,112,908 | ||||||
| Intangible assets, net of accumulated amortization | 4,313,743 | 5,005,511 | ||||||
| Goodwill | 5,747,000 | 5,747,000 | ||||||
| Right of use asset – operating lease, net | 10,063,353 | 10,604,935 | ||||||
| Other assets | 510,856 | 476,196 | ||||||
| TOTAL ASSETS | $ | 37,098,351 | $ | 55,255,030 | ||||
| LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 5,804,051 | $ | 5,715,234 | ||||
| Contingent consideration | - | 774,900 | ||||||
| Contract liabilities | 144,861 | 198,606 | ||||||
| Line of credit | 453,232 | 453,232 | ||||||
| Current portion of loan payment | 560,322 | 536,542 | ||||||
| Operating lease liability, current | 2,323,981 | 2,228,852 | ||||||
| TOTAL CURRENT LIABILITIES | 9,286,447 | 9,907,366 | ||||||
| Loan payable, net of current portion | 1,954,691 | 2,378,061 | ||||||
| Operating lease liability, net of current | 7,499,587 | 8,041,504 | ||||||
| TOTAL LIABILITIES | 18,740,725 | 20,326,931 | ||||||
| COMMITMENTS AND CONTINGENCIES (SEE NOTE 13) | - | - | ||||||
| CONVERTIBLE PREFERRED STOCK | ||||||||
| Series E redeemable convertible preferred stock, $ par value per share, shares authorized, shares and shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively; aggregate liquidation preference of $1.9 million and $14.7 million as of September 30, 2023 and December 31, 2022, respectively | 1,944,425 | 14,722,075 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Series D convertible preferred stock, $ par value per share, shares authorized; and shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | - | 800,000 | ||||||
Common Stock, $par value per share, shares authorized; and shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | 47,526,663 | 33,974,163 | ||||||
| Additional paid-in capital | 20,051,524 | 29,045,802 | ||||||
| Accumulated deficit | (51,164,986 | ) | (43,613,941 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 16,413,201 | 20,206,024 | ||||||
| TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | $ | 37,098,351 | $ | 55,255,030 | ||||
See notes to unaudited condensed consolidated financial statements
| 1 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| SALES | ||||||||||||||||
| Vapor sales, net | $ | 1,187 | $ | 466,181 | $ | 256,747 | $ | 1,671,098 | ||||||||
| Grocery sales, net | 5,775,543 | 2,803,327 | 16,700,596 | 8,450,055 | ||||||||||||
| TOTAL SALES, NET | 5,776,730 | 3,269,508 | 16,957,343 | 10,121,153 | ||||||||||||
| Cost of sales vapor | 364 | 186,522 | 112,610 | 657,171 | ||||||||||||
| Cost of sales grocery | 3,909,190 | 1,706,597 | 10,674,170 | 5,133,228 | ||||||||||||
| GROSS PROFIT | 1,867,176 | 1,376,389 | 6,170,563 | 4,330,754 | ||||||||||||
| OPERATING EXPENSES | 3,985,377 | 2,427,256 | 11,012,070 | 6,599,224 | ||||||||||||
| LOSS FROM OPERATIONS | (2,118,201 | ) | (1,050,867 | ) | (4,841,507 | ) | (2,268,470 | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Loss (gain) on investment | (11,314 | ) | (557 | ) | (6,000 | ) | 10,954 | |||||||||
| Other income, net | 4,327 | - | 27,376 | - | ||||||||||||
| Interest income (expense), net | 50,202 | 1,543 | 81,715 | (76,888 | ) | |||||||||||
| Gain on debt extinguishment, net | - | - | - | 767,930 | ||||||||||||
| Total other income (expense), net | 43,215 | 986 | 103,091 | 701,996 | ||||||||||||
| NET LOSS | $ | (2,074,986 | ) | $ | (1,049,881 | ) | $ | (4,738,416 | ) | $ | (1,566,474 | ) | ||||
| NET LOSS PER SHARE-BASIC AND DILUTED | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC AND DILUTED | 339,741,632,384 | 336,603,045,428 | 339,741,632,384 | 297,439,560,396 | ||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| SALES | ||||||||||||||||
| Vapor sales, net | $ | - | $ | 1,187 | $ | 38 | $ | 256,747 | ||||||||
| Grocery sales, net | 12,704,600 | 5,775,543 | 39,839,203 | 16,700,596 | ||||||||||||
| TOTAL SALES, NET | 12,704,600 | 5,776,730 | 39,839,241 | 16,957,343 | ||||||||||||
| Cost of sales vapor | - | 364 | 653 | 112,610 | ||||||||||||
| Cost of sales grocery | 8,061,966 | 3,909,190 | 25,199,879 | 10,674,170 | ||||||||||||
| GROSS PROFIT | 4,642,634 | 1,867,176 | 14,638,709 | 6,170,563 | ||||||||||||
| OPERATING EXPENSES | 8,033,795 | 3,985,377 | 23,192,575 | 11,012,070 | ||||||||||||
| LOSS FROM OPERATIONS | (3,391,161 | ) | (2,118,201 | ) | (8,553,866 | ) | (4,841,507 | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Gain (loss) on investment | 343 | (11,314 | ) | (8,057 | ) | (6,000 | ) | |||||||||
| Change in contingent consideration | 372,000 | - | 774,900 | - | ||||||||||||
| Other (expense) income, net | (8,397 | ) | 4,327 | 853 | 27,376 | |||||||||||
| Interest income, net | 36,226 | 50,202 | 235,125 | 81,715 | ||||||||||||
| Total other income (expense), net | 400,172 | 43,215 | 1,002,821 | 103,091 | ||||||||||||
| NET LOSS | $ | (2,990,989 | ) | $ | (2,074,986 | ) | $ | (7,551,045 | ) | $ | (4,738,416 | ) | ||||
| Induced conversions of preferred stock | - | - | (152,500 | ) | - | |||||||||||
| Net loss attributable to common stockholders | $ | (2,990,989 | ) | $ | (2,074,986 | ) | $ | (7,703,545 | ) | $ | (4,738,416 | ) | ||||
| NET LOSS PER SHARE-BASIC AND DILUTED | $ | $ | $ | $ | ||||||||||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC AND DILUTED | ||||||||||||||||
See notes to unaudited condensed consolidated financial statements
| 2 |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022 and 2021
(Unaudited)
| Series E Convertible Preferred Stock | Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
Balance – July 1, 2022 | - | $ | - | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 30,855,824 | $ | (39,059,760 | ) | $ | 26,570,227 | ||||||||||||||||||||
| Issuance of Series E Convertible Preferred stock in connection with the Securities Purchase Agreement, net of offering costs | 14,722 | 14,722,075 | - | - | - | - | (1,882,244 | ) | - | (1,882,244 | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (2,074,986 | ) | (2,074,986 | ) | |||||||||||||||||||||||||
Balance – September 30, 2022 | 14,722 | $ | 14,722,075 | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 28,973,580 | $ | (41,134,746 | ) | $ | 22,612,997 | ||||||||||||||||||||
| Series E Convertible Preferred Stock | Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
Balance – July 1, 2021 | - | - | 5,000 | $ | 5,000,000 | 333,179,132,384 | $ | 33,317,913 | $ | 26,546,415 | $ | (32,875,464 | ) | $ | 31,988,864 | |||||||||||||||||||||
| Series D Convertible Preferred Stock exercised | - | - | (4,200 | ) | (4,200,000 | ) | 6,562,500,000 | 656,250 | 3,543,750 | - | - | |||||||||||||||||||||||||
| Issuance of common stock in connection with the Rights Offering, net of offering expenses | - | - | - | - | - | - | 765,659 | - | 765,659 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (1,049,881 | ) | (1,049,881 | ) | |||||||||||||||||||||||||
Balance – September 30, 2021 | - | - | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 30,855,824 | $ | (33,925,345 | ) | $ | 31,704,642 | |||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
Series E Redeemable Convertible Preferred Stock | Series D Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
| Balance – July 1, 2023 | 1,944 | $ | 1,944,425 | 800 | $ | 800,000 | 463,266,632,384 | $ | 46,326,663 | $ | 19,324,774 | $ | (48,173,997 | ) | $ | 18,277,440 | ||||||||||||||||||||
| Series D Convertible Preferred Stock exercised | - | - | (800 | ) | (800,000 | ) | 8,000,000,000 | 800,000 | - | - | - | |||||||||||||||||||||||||
| Issuance of award stock | - | - | - | - | 4,000,000,000 | 400,000 | (400,000 | ) | - | - | ||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | 1,126,750 | - | 1,126,750 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (2,990,989 | ) | (2,990,989 | ) | |||||||||||||||||||||||||
| Balance – September 30, 2023 | 1,944 | $ | 1,944,425 | - | - | 475,266,632,384 | $ | 47,526,663 | $ | 20,051,524 | $ | (51,164,986 | ) | $ | 16,413,201 | |||||||||||||||||||||
Series E Redeemable Convertible Preferred Stock | Series D Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
| Balance – July 1, 2022 | - | $ | - | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 30,855,824 | $ | (39,059,760 | ) | $ | 26,570,227 | ||||||||||||||||||||
| Issuance of Series E Convertible Preferred stock in connection with the Securities Purchase Agreement, net of offering costs | 14,722 | 14,722,075 | - | - | - | - | (1,882,244 | ) | - | (1,882,244 | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (2,074,986 | ) | (2,074,986 | ) | |||||||||||||||||||||||||
| Balance – September 30, 2022 | 14,722 | $ | 14,722,075 | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 28,973,580 | $ | (41,134,746 | ) | $ | 22,612,997 | ||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements
| 3 |
HEALTHIER CHOICES MANAGEMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 20222023 AND 2021
(UNAUDITED)
| Series E Convertible Preferred Stock | Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
Balance – January 1, 2022 | - | $ | - | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 30,855,824 | $ | (36,396,330 | ) | $ | 29,233,657 | ||||||||||||||||||||
| Issuance of Series E Convertible Preferred stock in connection with the Securities Purchase Agreement, net of offering costs | 14,722 | 14,722,075 | - | - | - | - | (1,882,244 | ) | - | (1,882,244 | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (4,738,416 | ) | (4,738,416 | ) | |||||||||||||||||||||||||
Balance – September 30, 2022 | 14,722 | $ | 14,722,075 | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 28,973,580 | $ | (41,134,746 | ) | $ | 22,612,997 | ||||||||||||||||||||
| Series E Convertible Preferred Stock | Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
Balance – January 1, 2021 | - | $ | - | 16,277 | $ | 16,277,116 | 143,840,848,017 | $ | 14,384,084 | $ | 3,955,039 | $ | (32,358,871 | ) | $ | 2,257,368 | ||||||||||||||||||||
| Series C Preferred stock exercised | - | - | (16,277 | ) | (16,277,116 | ) | 162,771,153,001 | 16,277,116 | - | - | - | |||||||||||||||||||||||||
| Stock options exercised | - | - | - | - | 2,275,000,000 | 227,500 | - | - | 227,500 | |||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | 34,375 | - | 34,375 | |||||||||||||||||||||||||||
| Issuance of Series D Convertible Preferred stock in connection with the Securities Purchase Agreement | - | - | 5,000 | 5,000,000 | - | - | - | - | 5,000,000 | |||||||||||||||||||||||||||
| Series D Convertible Preferred Stock exercised | - | - | (4,200 | ) | (4,200,000 | ) | 6,562,500,000 | 656,250 | 3,543,750 | - | - | |||||||||||||||||||||||||
| Issuance of common stock | - | - | - | - | 1,182,831,056 | 118,283 | 1,289,273 | - | 1,407,556 | |||||||||||||||||||||||||||
| Issuance of common stock in connection with the Rights Offering, net of offering cost | - | - | - | - | 27,046,800,310 | 2,704,680 | 21,639,637 | - | 24,344,317 | |||||||||||||||||||||||||||
| Issuance of awarded stock for officers and board member | - | - | - | - | 2,250,000,000 | 225,000 | (225,000 | ) | - | - | ||||||||||||||||||||||||||
| Cancellation of awarded stock for officers and board member | - | - | - | - | (6,187,500,000 | ) | (618,750 | ) | 618,750 | - | - | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (1,566,474 | ) | (1,566,474 | ) | |||||||||||||||||||||||||
Balance – September 30, 2021 | - | $ | - | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 30,855,824 | $ | (33,925,345 | ) | $ | 31,704,642 | ||||||||||||||||||||
Series E Redeemable Convertible Preferred Stock | Series D Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
| Balance – January 1, 2023 | 14,722 | $ | 14,722,075 | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 29,045,802 | $ | (43,613,941 | ) | $ | 20,206,024 | ||||||||||||||||||||
| Series E convertible preferred stock redeemed | (11,193 | ) | (11,192,650 | ) | - | - | - | - | 22,222 | - | 22,222 | |||||||||||||||||||||||||
| Conversion of series E convertible preferred stock | (1,585 | ) | (1,585,000 | ) | - | - | 15,850,000,000 | 1,585,000 | - | - | 1,585,000 | |||||||||||||||||||||||||
| Series D Convertible Preferred Stock exercised | - | - | (800 | ) | (800,000 | ) | 8,000,000,000 | 800,000 | - | - | - | |||||||||||||||||||||||||
| Issuance of awarded stock | - | - | - | - | 111,675,000,000 | 11,167,500 | (11,167,500 | ) | - | - | ||||||||||||||||||||||||||
| Induced conversions of preferred stock | - | - | - | - | - | - | (152,500 | ) | - | (152,500 | ) | |||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | 2,303,500 | - | 2,303,500 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (7,551,045 | ) | (7,551,045 | ) | |||||||||||||||||||||||||
| Balance – September 30, 2023 | 1,944 | $ | 1,944,425 | - | $ | - | 475,266,632,384 | $ | 47,526,663 | $ | 20,051,524 | $ | (51,164,986 | ) | $ | 16,413,201 | ||||||||||||||||||||
Series E Redeemable Convertible Preferred Stock | Series D Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
| Balance – January 1, 2022 | - | $ | - | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 30,855,824 | $ | (36,396,330 | ) | $ | 29,233,657 | ||||||||||||||||||||
| Balance | - | $ | - | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 30,855,824 | $ | (36,396,330 | ) | $ | 29,233,657 | ||||||||||||||||||||
| Issuance of Series E Convertible Preferred stock in connection with the Securities Purchase Agreement, net of offering costs | 14,722 | 14,722,075 | - | - | - | - | (1,882,244 | ) | - | (1,882,244 | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (4,738,416 | ) | (4,738,416 | ) | |||||||||||||||||||||||||
| Balance – September 30, 2022 | 14,722 | $ | 14,722,075 | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 28,973,580 | $ | (41,134,746 | ) | $ | 22,612,997 | ||||||||||||||||||||
| Balance | 14,722 | $ | 14,722,075 | 800 | $ | 800,000 | 339,741,632,384 | $ | 33,974,163 | $ | 28,973,580 | $ | (41,134,746 | ) | $ | 22,612,997 | ||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements
| 4 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (4,738,416 | ) | $ | (1,566,474 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 652,162 | 379,536 | ||||||
| Gain (loss) on investment | 6,000 | (10,954 | ) | |||||
| Amortization of right-of-use asset | 555,726 | 400,334 | ||||||
| Write-down of obsolete and slow moving inventory | 533,343 | 265,635 | ||||||
| Gain on debt settlement | - | (767,930 | ) | |||||
| Accrued interest on loan | - | 60,809 | ||||||
| Stock-based compensation expense | - | 34,375 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (24,958 | ) | (34,465 | ) | ||||
| Inventories | (609,468 | ) | (460,232 | ) | ||||
| Prepaid expenses and vendor deposits | 160,574 | (11,779 | ) | |||||
| Other assets | (23,128 | ) | 4,162 | |||||
| Accounts payable and accrued expenses | 1,560,536 | 11,405 | ||||||
| Contract liabilities | (248,522 | ) | (145 | ) | ||||
| Lease liability | (499,980 | ) | (348,424 | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | (2,676,131 | ) | (2,044,147 | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Acquisition of Mother Earth's Storehouse | (5,150,000 | ) | - | |||||
| Collection of note receivable | 42,653 | 40,831 | ||||||
| Purchases of property and equipment | (251,840 | ) | (53,437 | ) | ||||
| Purchase of patent | - | (12,500 | ) | |||||
| NET CASH USED IN INVESTING ACTIVITIES | (5,359,187 | ) | (25,106 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Proceeds from line of credit | 35,196 | - | ||||||
| Principal payments on loan payable | (1,940 | ) | (255,592 | ) | ||||
| Principal payment on the line of credit | - | (2,000,000 | ) | |||||
| Proceeds from Rights Offering | - | 24,344,317 | ||||||
| Proceeds from preferred stock, net of issuance costs | 12,839,831 | 5,000,000 | ||||||
| Proceeds from exercise of stock options | - | 227,500 | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 12,873,087 | 27,316,225 | ||||||
| NET INCREASE IN CASH, CASH EQUIVALENT AND RESTRICTED CASH | 4,837,769 | 25,246,972 | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH— BEGINNING OF PERIOD | 26,496,404 | 2,925,475 | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH — END OF PERIOD | $ | 31,334,173 | $ | 28,172,447 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | 4,383 | $ | 36,792 | ||||
| Cash paid for income tax | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Issuance of common stock | $ | - | $ | 1,290,260 | ||||
| Lease acquired | $ | 1,797,667 | $ | - | ||||
| 2023 | 2022 | |||||||
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (7,551,045 | ) | $ | (4,738,416 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,115,396 | 652,162 | ||||||
Loss on notes receivable settlement | 10,931 | - | ||||||
| Loss on investment | 8,057 | 6,000 | ||||||
| Amortization of right-of-use asset | 1,689,198 | 555,726 | ||||||
| Write-down of obsolete and slow-moving inventory | 1,581,043 | 533,343 | ||||||
| Stock-based compensation expense | 2,303,500 | - | ||||||
| Change in contingent consideration | (774,900 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (75,092 | ) | (24,958 | ) | ||||
| Inventories | (1,317,793 | ) | (609,468 | ) | ||||
| Prepaid expenses and vendor deposits | (1,626,358 | ) | 160,574 | |||||
| Other current assets | 825,261 | - | ||||||
| Other assets | (34,660 | ) | (23,128 | ) | ||||
| Accounts payable and accrued expenses | 555,280 | 1,560,536 | ||||||
| Contract liabilities | (53,745 | ) | (248,522 | ) | ||||
| Lease liability | (1,594,404 | ) | (499,980 | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | (4,939,331 | ) | (2,676,131 | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Acquisition of Mother Earth’s Storehouse | - | (5,150,000 | ) | |||||
| Collection of note receivable | 178,294 | 42,653 | ||||||
| Purchases of property and equipment | (176,129 | ) | (251,840 | ) | ||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 2,165 | (5,359,187 | ) | |||||
| FINANCING ACTIVITIES | ||||||||
| Proceeds from line of credit | - | 35,196 | ||||||
| Principal payments on loan payable | (399,590 | ) | (1,940 | ) | ||||
| Payment of induced conversions of preferred stock | (152,500 | ) | - | |||||
| Proceeds from preferred stock, net of issuance costs | - | 12,839,831 | ||||||
| Payments for deferred offering costs | (264,375 | ) | - | |||||
| Payment for series E preferred stock redemption | (11,170,428 | ) | - | |||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (11,986,893 | ) | 12,873,087 | |||||
| NET (DECREASE) INCREASE IN CASH AND RESTRICTED CASH | (16,924,059 | ) | 4,837,769 | |||||
| CASH AND RESTRICTED CASH— BEGINNING OF PERIOD | 24,690,124 | 26,496,404 | ||||||
| CASH AND RESTRICTED CASH — END OF PERIOD | $ | 7,766,065 | $ | 31,334,173 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | 127,533 | $ | 4,383 | ||||
| Cash paid for income tax | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Issuance of common stock in connection with series E preferred stock conversion | $ | 1,585,000 | $ | - | ||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | 1,147,616 | $ | 1,797,667 | ||||
| 1% stated value reduction on preferred stock redemption | $ | 22,222 | $ | - | ||||
| Non-cash deferred offering cost | $ | 466,463 | $ | - | ||||
See notes to unaudited condensed consolidated financial statements
| 5 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. ORGANIZATION
Organization
Healthier Choices Management Corp. (the “Company”) is a holding company focused on providing consumers with healthier daily choices with respect to nutrition and other lifestyle alternatives. The
Through its wholly owned subsidiary HCMC Intellectual Property Holdings, LLC, the Company operates Ada’s Natural Market, a naturalmanages and organic grocery store, throughintends to expand on its intellectual property portfolio.
Through its wholly owned subsidiaries, the Company operates:
| ● | Ada’s Natural Market, a natural and organic grocery store offering fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, health & beauty products and natural household items. |
| ● | Paradise Health & Nutrition’s three stores that likewise offer fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, health & beauty products and natural household items. |
| ● | Mother Earth’s Storehouse, a two-store organic and health food and vitamin chain in New York’s Hudson Valley, a business that has been in existence for over 40 years. |
| ● | Greens Natural Foods’ eight stores in New York and New Jersey, offering a selection of 100% organic produce and all-natural, non-GMO groceries & bulk foods; a wide selection of local products; an organic juice and smoothie bar; a fresh foods department, which offers fresh and healthy “grab & go” foods; a full selection of vitamins & supplements; as well as health and beauty products |
| ● | Ellwood Thompson’s, an organic and natural health food and vitamin store located in Richmond, Virginia. Ellwood Thompson’s was acquired on October 1, 2023 for a purchase price of approximately $1,500,000. |
Through its wholly owned subsidiary, Healthy Choice Markets, Inc. Ada’s Natural MarketWellness, LLC, the Company (1) operates Healthy Choice Wellness Center in Kingston, NY and Paradise Health(2) has a licensing agreement for a Healthy Choice Wellness Center located at the Casbah Spa and Nutrition offers fresh produce, bulk foods, vitaminsSalon in Fort Lauderdale, FL.
These centers offer multiple vitamin drip mixes and supplements, packaged groceries, meatintramuscular shots for clients to choose from that are designed to help boost immunity, fight fatigue and seafood, deli, baked goods, dairy products, frozen foods,stress, reduce inflammation, enhance weight loss, and efficiently deliver antioxidants and anti-aging mixes. Additionally, there are IV vitamin mixes and shots for health, & beauty, products and natural household items. The Company also sells vitamins and supplements on the Amazon.com marketplace throughre-hydration.
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.
Spin-Off
The Company acquired substantially all of the assets of Mother Earth’s Storehouse on February 9, 2022, which operateshas commenced steps to spin off (“Spin-Off”) its grocery segment and wellness business into 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 fornew publicly traded company, Healthy Choice Wellness Centers atCorp. (hereinafter referred to as “NewCo”). NewCo will continue the Casbah Spa and Salon in Fort Lauderdale, FL and Boston Direct Health in Boston, MA. The activitiespath of growth in the Wellness centers are currently reported underwellness verticals started by HCMC and explore other growth opportunities that comport with HCMC’s healthier lifestyle mission. Following the Grocery segment dueSpin-Off, HCMC will retain its entire patent suite, the Q-Cup® brand, and continue to develop its de minimis nature. From December 2021patent suite through April 2022,R&D as well as continuing its path of enforcing its patent rights against infringers and attempting to monetize said patents through licensing deals.
| 6 |
At the Company either closed its vape stores or sold substantially alltime of the assetsSpin-Off, HCMC will distribute all the outstanding shares of such stores. This will allow the CompanyCommon Stock held by it on a pro rata basis to focus on developing wholesale business and sales through online platform.
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 still be negatively affected by the COVID-19 pandemic and future developments, which are highly uncertain and cannot be predicted.
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 September 30, 2023, the Company had cash of approximately $7.1 million and working capital of $4.3 million. 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 issuancedate of these unaudited condensed consolidated financial statements. Management believes with $30.0 million cash on hand atfiling. In the balance sheet date, past, the Company’s cashCompany financed its operations primarily through issuances of common stock and convertible preferred stock. However, we have no commitments to obtain such additional financing, and there can be no assurance that the Company will be sufficientable to coverraise the necessary funds to fund its operation for the 12 months from the date of the filing.
Note 3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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 statementpresentation 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 nine months ended September 30, 2022,2023, are not necessarily indicative of the results to be expected for the full year ending December 31, 2022.
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.
| 7 |
Note 4. CONCENTRATIONS
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.
A summary of the financial institutionsinstitution that had a cash and cash equivalents in excess of FDIC limits of $250,000 on$250,000 as of September 30, 20222023 and December 31, 20212022 is presented below:
| September 30, 2022 | December 31, 2021 | |||||||
Total cash, cash equivalents and restricted cash in excess of FDIC limits of $250,000 | $ | 30,749,550 | $ | 26,023,593 | ||||
SCHEDULE OF CASH AND CASH EQUIVALENTS IN EXCESS OF FDIC LIMIT
| September 30, 2023 | December 31, 2022 | |||||||
| Total cash in excess of FDIC limits of $250,000 | $ | 6,169,123 | $ | 21,682,144 | ||||
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 condensedcondensed consolidated statements of cash flowflow:
:
| September 30, 2022 | September 30, 2021 | |||||||
| Cash and Cash Equivalent | $ | 30,009,173 | $ | 28,172,447 | ||||
| Restricted cash | 1,325,000 | - | ||||||
| Total cash, cash equivalents and restricted cash | $ | 31,334,173 | $ | 28,172,447 | ||||
| September 30, 2023 | September 30, 2022 | |||||||
| Cash | $ | 7,137,833 | $ | 30,009,173 | ||||
| Restricted cash | 628,232 | 1,325,000 | ||||||
| Total cash and restricted cash | $ | 7,766,065 | $ | 31,334,173 | ||||
Restricted Cash
The Company'sCompany’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.
Note 5. SEGMENT INFORMATION AND DISAGGREGATION OF REVENUES
In accordance with FASB ASC 280, "Disclosures“Disclosures about Segment of an enterprise and related information"information”, the Company determined it has two reportable segments: grocery and vapor. There are no inter-segment revenues.
The Company'sCompany’s general and administrative costs are not segment specific. As a result, all operating expenses are not managed on segment basis.
| 8 |
The tables below present information about reportable segments for the three months and nine months ended September 30, 2022,2023, and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Vapor | $ | 1,187 | $ | 466,181 | $ | 256,747 | $ | 1,671,098 | ||||||||
| Grocery | 5,775,543 | 2,803,327 | 16,700,596 | 8,450,055 | ||||||||||||
| Total revenue | $ | 5,776,730 | $ | 3,269,508 | $ | 16,957,343 | $ | 10,121,153 | ||||||||
| Retail Vapor | $ | 1,187 | $ | 466,153 | $ | 256,747 | $ | 1,671,029 | ||||||||
| Retail Grocery | 5,187,540 | 2,475,887 | 14,944,074 | 7,438,115 | ||||||||||||
| Food service/restaurant | 584,382 | 305,626 | 1,743,228 | 908,476 | ||||||||||||
| Online/eCommerce | 3,621 | 15,199 | 13,294 | 85,174 | ||||||||||||
| Wholesale Grocery | - | 6,615 | - | 18,290 | ||||||||||||
| Wholesale Vapor | - | 28 | - | 69 | ||||||||||||
| Total revenue | $ | 5,776,730 | $ | 3,269,508 | $ | 16,957,343 | $ | 10,121,153 | ||||||||
| (Loss) income from operations-Vapor | (4,998 | ) | 66,306 | (39,460 | ) | 300,573 | ||||||||||
| (Loss) income from operations-Grocery | (289,653 | ) | 52,923 | 20,397 | 172,564 | |||||||||||
| Corporate items | (1,823,550 | ) | (1,170,096 | ) | (4,822,444 | ) | (2,741,607 | ) | ||||||||
| Total loss | $ | (2,118,201 | ) | $ | (1,050,867 | ) | $ | (4,841,507 | ) | $ | (2,268,470 | ) | ||||
SCHEDULE OF INFORMATION ABOUT REPORTABLE SEGMENTS
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Vapor | $ | - | $ | 1,187 | $ | 38 | $ | 256,747 | ||||||||
| Grocery | 12,704,600 | 5,775,543 | 39,839,203 | 16,700,596 | ||||||||||||
| Total revenue | $ | 12,704,600 | $ | 5,776,730 | $ | 39,839,241 | $ | 16,957,343 | ||||||||
| Retail Vapor | $ | - | $ | 1,187 | $ | 38 | $ | 256,747 | ||||||||
| Retail Grocery | 11,307,056 | 5,187,540 | 35,374,653 | 14,944,074 | ||||||||||||
| Food service/restaurant | 1,396,194 | 584,382 | 4,459,142 | 1,743,228 | ||||||||||||
| Online/eCommerce | 1,350 | 3,621 | 5,408 | 13,294 | ||||||||||||
| Total revenue | $ | 12,704,600 | $ | 5,776,730 | $ | 39,839,241 | $ | 16,957,343 | ||||||||
| Loss from operations-Vapor | (7,014 | ) | (4,998 | ) | (24,411 | ) | (39,460 | ) | ||||||||
| (Loss) income from operations-Grocery | (688,948 | ) | (289,653 | ) | (1,151,710 | ) | 20,397 | |||||||||
| Corporate items | (2,695,199 | ) | (1,823,550 | ) | (7,377,745 | ) | (4,822,444 | ) | ||||||||
| Total loss from operations | $ | (3,391,161 | ) | $ | (2,118,201 | ) | $ | (8,553,866 | ) | $ | (4,841,507 | ) | ||||
Note 6. NOTES RECEIVABLE AND OTHER INCOME
On September 6, 2018, the Company entered into a secured 3636-month promissory note (the(the “Note”) with VPR Brands L.P. for $582,260582,260. The Note bears an interest rate of 7.007.00%%, which payments thereunder are $4,1414,141 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"“Amended Note”) with VPR Brands L.P. to extend the maturity date for one year. TheThe outstanding balance for the Amended Note is $211,355211,355. The Amended Note bears an interest rate of 7.007.00%%, which payments thereunder are $1,5001,500 weekly, with such payments commencing as of September 3, 2022. The Amended Note has a balloon payment of $145,931145,931 for all remaining accrued interest and principal balance due in the final week of the 11-year extension of the Amended Note.
In August 2023, VPR Brands L.P. settled with the Company for the remaining notes receivable balance of $145,931 by making a balloon payment of $135,000 cash. The Company recognized a loss of $10,931 from this settlement which is included in other (expense) income net in the accompanying unaudited condensed consolidated statements of operations.
A summary of the Amended Note as of September 30, 20222023 and December 31, 20212022 is presented below:
SUMMARY OF AMENDED NOTES
| Description | September 30, 2023 | December 31, 2022 | ||||||
| Promissory Note | $ | - | $ | 189,225 | ||||
| 9 |
| Description | September 30, 2022 | December 31, 2021 | ||||||
| Promissory Note | $ | 205,262 | $ | 247,915 | ||||
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 a promissory note. In addition, the seller is entitled to a contingent earn-out based on a certain revenue threshold within the one-year period of the closing.
The Company assumed a lease obligationrecorded $1,108,000 of contingent consideration based on the estimated financial performance for the Kingston, NY store and entered intoone year following closing. The contingent consideration was discounted at an employment agreement withinterest rate of 3.8%, which represents the store manager.
The following table summarizes the change in fair value of contingent consideration from acquisition date to expected operational synergies from combining the operations of the acquired business with those of the Company.
SCHEDULE OF CHANGE IN FAIR VALUE OF CONTINGENT CONSIDERATION
| Fair Market Value - Level 3 | ||||
| Balance as of October 14, 2022 | $ | 1,108,000 | ||
| Remeasurement | (333,100 | ) | ||
| Balance as of December 31, 2022 | 774,900 | |||
| Remeasurement | (774,900 | ) | ||
| Balance as of September 30, 2023 | $ | - | ||
The following table summarizes the change in fair value of contingent consideration for the three months ended September 30, 2023:
| Fair Market Value - Level 3 | ||||
| Balance as of June 30, 2023 | $ | 372,000 | ||
| Beginning balance | $ | 372,000 | ||
| Remeasurement | (372,000 | ) | ||
| Balance as of September 30, 2023 | $ | - | ||
| Ending balance | $ | - | ||
The following table summarizes the purchase price allocation based on fair values of the net assets acquired at the acquisition date:
SUMMARY OF PURCHASE PRICE ALLOCATION BASED ON FAIR VALUES OF THE NET ASSETS ACQUIRED
| October 14, 2022 | ||||
| Purchase Consideration | ||||
| Cash consideration paid | $ | 5,142,000 | ||
| Promissory note | 3,000,000 | |||
| Contingent consideration issued to Green’s Natural seller | 1,108,000 | |||
| Total Purchase Consideration | $ | 9,250,000 | ||
| Purchase price allocation | ||||
| Inventory | $ | 1,642,000 | ||
| Property and equipment | 1,478,000 | |||
| Intangible assets | 3,251,000 | |||
| Right of use asset - Operating lease | 6,427,000 | |||
| Other liabilities | (211,000 | ) | ||
| Operating lease liability | (6,427,000 | ) | ||
| Goodwill | 3,090,000 | |||
| Net assets acquired | $ | 9,250,000 | ||
| Finite-lived intangible assets | ||||
| Trade Names (8 years) | $ | 1,133,000 | ||
| Customer Relationships (6 years) | 1,103,000 | |||
| Non-Compete Agreement (5 years) | 1,015,000 | |||
| Total intangible assets | $ | 3,251,000 | ||
| 10 |
| Purchase Consideration | ||||
| Cash Consideration paid | $ | 5,150,000 | ||
| Purchase price allocation | ||||
| Inventory | 805,000 | |||
| Property and equipment | 1,278,000 | |||
| Intangible assets | 1,609,000 | |||
| Right of use asset - operating lease | 1,797,667 | |||
| Other liabilities | (283,000 | ) | ||
| Operating lease liability | (1,797,667 | ) | ||
| Goodwill | 1,741,000 | |||
| Net assets acquired | $ | 5,150,000 | ||
| Finite-lived intangible assets | ||||
| Trade Names/Trademarks | $ | 513,000 | ||
| Customer Relationships | 683,000 | |||
| Non-Compete Agreement | 413,000 | |||
| Total intangible assets | $ | 1,609,000 | ||
The acquisition is structured as asset purchase in a business combination, and goodwill is tax-deductible, and amortizable over 15 years for tax purpose.
Revenue and Earnings
Revenue
The following table represents the combined pro forma revenue and net income for three months ended September 30, 2022 were $3.2 million and $0.01 million, respectively. 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 months ended September 30, 2022, respectively. They primarily related to legal2022:
SCHEDULE OF SUPPLEMENTAL PRO FORMA INFORMATION
For Three Months Ended September 30, 2022 | For Nine Months Ended September 30, 2022 | |||||||
| Sales | $ | 13,208,469 | $ | 40,240,844 | ||||
| Net loss | $ | (2,534,383 | ) | $ | (5,888,835 | ) | ||
The combined proforma revenue and other professional fees.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Sales | $ | 5,776,730 | $ | 6,842,549 | $ | 18,380,486 | $ | 20,840,277 | ||||||||
| Net (loss) | (2,074,985 | ) | (665,288 | ) | (4,581,680 | ) | (412,696 | ) | ||||||||
and $78
,000, respectively, of non-recurring acquisition-related expenses. These pro forma results are illustrative only and not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations.
Property, plant, and equipment consist of the following:
| September 30, 2022 | December 31, 2021 | |||||||
Displays | $ | 305,558 | $ | 305,558 | ||||
| Building | 575,000 | - | ||||||
| Furniture and fixtures | 311,521 | 246,496 | ||||||
Leasehold improvements | 727,469 | 136,504 | ||||||
| Computer hardware & equipment | 133,654 | 151,924 | ||||||
Other | 345,708 | 315,788 | ||||||
| 2,398,910 | 1,156,270 | |||||||
Less: accumulated depreciation and amortization | (870,610 | ) | (979,282 | ) | ||||
| Total property and equipment | $ | 1,528,300 | $ | 176,988 | ||||
SCHEDULE OF PROPERTY, PLANT, AND EQUIPMENT
| September 30, 2023 | December 31, 2022 | |||||||
| Displays | $ | 312,146 | $ | 312,146 | ||||
| Building | 575,000 | 575,000 | ||||||
| Furniture and fixtures | 592,260 | 560,256 | ||||||
| Leasehold improvements | 1,925,385 | 1,910,719 | ||||||
| Computer hardware & equipment | 187,967 | 160,210 | ||||||
| Other | 688,773 | 587,602 | ||||||
| Property and equipment, gross | 4,281,531 | 4,105,933 | ||||||
| Less: accumulated depreciation and amortization | (1,416,122 | ) | (993,025 | ) | ||||
| Total property, plant, and equipment, net | $ | 2,865,409 | $ | 3,112,908 | ||||
The Company incurred approximately $137,32264,986 and $64,98422,630 of depreciation expense for the three months endedSeptember 30, 20222023 and 2021,2022, and $423,628178,575 and $178,57589,155 of depreciation expense for the nine months endedSeptember 30, 20222023 and 2021,2022, respectively.
and total accumulated depreciation of $287,247 were reduced from the consolidated balance sheets.
| 11 |
Note 9. INTANGIBLE ASSETS
Intangible assets, net are as follows:
| September 30, 2022 | Useful Lives (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
| Trade names / Trademarks | 8-10 years | $ | 1,436,000 | $ | (650,568 | ) | $ | 785,432 | |||||
| Customer relationships | 4-5 years | 1,566,000 | (916,024 | ) | 649,976 | ||||||||
| Patents | 10 years | 372,165 | (150,145 | ) | 222,020 | ||||||||
| Non-compete | 4-5 years | 651,000 | (233,338 | ) | 417,662 | ||||||||
| Website | 4 years | 10,000 | (2,083 | ) | 7,917 | ||||||||
| Intangible assets, net | $ | 4,035,165 | $ | (1,952,158 | ) | $ | 2,083,007 | ||||||
| December 31, 2021 | Useful Lives (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
| Trade names / Trademarks | 8-10 years | $ | 923,000 | (536,661 | ) | $ | 386,339 | ||||||
| Customer relationships | 4-5 years | 883,000 | (685,823 | ) | 197,177 | ||||||||
| Patents | 10 years | 372,165 | (122,233 | ) | 249,932 | ||||||||
| Non-compete | 4 years | 238,000 | (133,646 | ) | 104,354 | ||||||||
| Website | 4 years | 10,000 | (209 | ) | 9,791 | ||||||||
| Intangible assets, net | $ | 2,426,165 | $ | (1,478,572 | ) | $ | 947,593 | ||||||
SCHEDULE OF INTANGIBLE ASSETS, NET
| September 30, 2023 | Useful Lives (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Trade names | 8-10 years | $ | 2,569,000 | $ | (951,193 | ) | $ | 1,617,807 | ||||||
| Customer relationships | 4-6 years | 2,669,000 | (1,256,556 | ) | 1,412,444 | |||||||||
| Patents | 10 years | 384,665 | (188,507 | ) | 196,158 | |||||||||
| Non-compete | 4-5 years | 1,602,000 | (514,666 | ) | 1,087,334 | |||||||||
| Intangible assets, net | $ | 7,224,665 | $ | (2,910,922 | ) | $ | 4,313,743 | |||||||
| December 31, 2022 | Useful Lives (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Trade names | 8-10 years | $ | 2,569,000 | (725,723 | ) | $ | 1,843,277 | |||||||
| Customer relationships | 4-6 years | 2,669,000 | (1,033,306 | ) | 1,635,694 | |||||||||
| Patents | 10 years | 384,665 | (159,658 | ) | 225,007 | |||||||||
| Non-compete | 4-5 years | 1,602,000 | (300,467 | ) | 1,301,533 | |||||||||
| Intangible assets, net | $ | 7,224,665 | $ | (2,219,154 | ) | $ | 5,005,511 | |||||||
Intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense was approximately $165,101$230,590 and $95,335$165,100 for the three months ended September 30, 2023 and 2022, and 2021,$691,768 and $473,587 and $290,381$473,587 for the nine months ended September 30, 20222023 and 2021,2022, respectively. Future annual estimated amortization expense is as follows:
| Years ending December 31, | ||||
| 2022 (remaining three months) | $ | 154,715 | ||
| 2023 | 411,149 | |||
| 2024 | 411,149 | |||
| 2025 | 404,107 | |||
| 2026 | 309,214 | |||
| Thereafter | 392,673 | |||
| Total | $ | 2,083,007 | ||
SCHEDULE OF FUTURE ANNUAL ESTIMATED AMORTIZATION EXPENSE
| $ | - | |||
| Years ending December 31, | ||||
| 2023 (remaining three months) | $ | 230,590 | ||
| 2024 | 922,358 | |||
| 2025 | 916,858 | |||
| 2026 | 838,877 | |||
| 2027 | 694,457 | |||
| Thereafter | 710,603 | |||
| Total | $ | 4,313,743 | ||
Note 10. CONTRACT LIABILITIES
A summary of the net changes in contract liabilities activity at September 30, 20222023 and December 31, 20212022 is presented below:
SUMMARY OF CONTRACT LIABILITIES ACTIVITY
| September 30, 2023 | December 31, 2022 | |||||||
| Beginning balance as January 1, | $ | 198,606 | $ | 23,178 | ||||
| Beginning balance | $ | 198,606 | $ | 23,178 | ||||
| Issued | 664,003 | 859,383 | ||||||
| Redeemed | (664,294 | ) | (628,012 | ) | ||||
| Breakage recognized | (53,454 | ) | (55,943 | ) | ||||
| Ending balance | $ | 144,861 | $ | 198,606 | ||||
| 12 |
| September 30, 2022 | December 31, 2021 | |||||||
| Beginning balance as January 1, | $ | 23,178 | $ | 21,262 | ||||
| Issued | 423,321 | 39,469 | ||||||
| Redeemed | (362,108 | ) | (37,463 | ) | ||||
| Breakage recognized | (27,108 | ) | (90 | ) | ||||
| Ending balance | $ | 57,283 | $ | 23,178 | ||||
Note 11. DEBT
The following table provides a breakdown of the Company'sCompany’s debt as of September 30, 20222023 and December 31, 20212022 is presented below:
| _ | September 30, 2022 | December 31, 2021 | ||||||
| Line of Credit | $ | 453,232 | $ | 418,036 | ||||
| Other debt | 1,479 | 3,419 | ||||||
| Total debt | $ | 454,711 | 421,455 | |||||
SCHEDULE OF BREAKDOWN OF DEBT
| September 30, 2023 | December 31, 2022 | |||||||
| Promissory note | $ | 2,515,013 | $ | 2,913,788 | ||||
| Other debt | - | 815 | ||||||
| Total debt | $ | 2,515,013 | $ | 2,914,603 | ||||
| Current portion of long-term debt | (560,322 | ) | (536,542 | ) | ||||
| Long-term debt | $ | 1,954,691 | $ | 2,378,061 | ||||
Note 12. STOCKHOLDERS’ EQUITY
On January 14, 2021
, the Compensation Committee of the Board of Directors of the Company approved an issuance of restricted stock to the Officers and a Director of the Company, in consideration for agreeing to a new vesting schedule for the existing awarded restricted stock. Each individual was granted a 10% increase from the original award agreement for a total of 2.3 billion shares of restricted common stock, which will vest quarterly and equal amounts until December 31, 2022, provided that the grantee remains an employee of the Company through the vesting date.
On August 18, 2022, the Company entered into a Securities Purchase Agreement (“Series E Preferred Stock”) pursuant to which the Company sold and issued shares of its Series E Redeemable Convertible Preferred Stock to institutional investors for $1,000$ per share or an aggregate subscription of $13.25$13.25 million. The number of shares issued to each participant is based on subscription amount multiplied by conversion rate of 1.1111.1.1111. The Company also incurred offering costs of approximately $410,000,$410,000, which covers legal and consulting fee.
The Company is planning to 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 growth in the health verticals started by HCMC and explore other growth opportunities that comport with HCMC’s healthier lifestyle mission. HCMC will retain its entire patent suite, the Q-Cup® brand, and continue 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 time of the Spin-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 (the “Spinoff”).
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.
On March 1, 2023, the Company entered into a First Amendment to HCMC Series E Preferred Stock with each purchaser (“Purchaser”) identified as those who participated in the HCMC Series E Preferred Stock, dated as of August 18, 2022. The parties amended the HCMC Preferred Stock related to the conversion payment whereby upon conversion of the Series E Preferred Stock prior to the record date for the Spin-Off, the Company will pay the Purchaser ten percent (10%) of the stated value of the Series E Preferred Stock converted. The record date was May 1, 2023.
On May 15, 2023, the Company and the Purchaser entered into the Second Amendment to the Securities Purchase Agreement, pursuant to which the Company agreed to extend the time period for the Conversion Payment eligibility to December 1, 2023. The Company filed an amendment to the Certificate of Designation to make the redemption price of the Preferred Stock (the “Redemption Price”) equal the Stated Value regardless of the date on which it is redeemed. Prior to this amendment, the Redemption Price was discounted by 1% for each month after the seven-month anniversary of the Issue Date that the Purchaser elected not to redeem.
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For the three months ended September 30, 2023, there were shares of common stock issued as a result of the Series E preferred stock conversion. Additionally, there were shares redeemed during the quarter ended September 30, 2023.
For the three months ended September 30, 2023, shares of common stock were issued as a result of the Series E preferred stock conversion. shares of Series E preferred stock were redeemed.
As of September 30, 2023, shares of Series E preferred stock was converted into shares of common stock as a result of the Series E preferred stock conversion. shares of Series E preferred stock was redeemed and approximately $11,170,000 was paid for redemption.
Pursuant to the Securities Purchase Agreement, purchasers of the Series E Convertible Preferred Stock will also be required to purchase Series A Convertible Preferred Stock of Healthy Choice Wellness Corp. (“HCWC”) in the same subscription amounts that the Purchasers paid for the HCMC Series E Preferred Stock. HCWC is the HCMC subsidiary that will be spun off to HCMC’s stockholders in connection with the spin off of HCMC’s grocery and wellness businesses.
Series D Convertible Preferred Stock
On February 7, 2021, the Company entered into a Securities Purchase Agreement, pursuant to which the Company sold and issued shares of its Series D Convertible Preferred Stock (the “Preferred Stock”) to accredited investors for $ per share or an aggregate subscription of $5.0 million. In the third quarter of 2023, the Company has issued billion shares of Company common stock in connection with the exercise of the remaining shares of the Series D Convertible Preferred Stock at a conversion price of $0.0001 per share. As of September 30, 2023, all series D preferred stocks have been converted. The Series D Stocks had no voting rights.
Stock Options and Restricted Stock
During the nine months ended September 30, 2023 and 2022, and 2021, stock options of the Company were exercised into common stock.
On April 23, 2023, the Board of Directors (the “Board”) of HCMC approved the Second Amendment to the 2015 Equity Incentive Plan (the “Amended Plan”). The Amended Plan increased the number of shares of HCMC common stock authorized for issuance under the Amended Plan to shares.
On April 23, 2023, HCMC’s board of directors has approved the issuance of approximately an additional shares of restricted common stock to the employees and executive officers of HCMC. Each grant of restricted common stock will commence vesting of % of the award on February 1, 2024 and will vest in % increments on the last day of each calendar quarter thereafter through September 30, 2025. All shares of restricted common stock related to the April 23, 2023 issuance remain unvested as of September 30, 2023.
During the three months ended September 30, 2023 and 2022, the Company recognized stock-based compensation of approximately $ and $, respectively in connection with amortization of restricted stock and stock options. 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.
Income (Loss) Per Share
SCHEDULE OF DILUTIVE LOSS PER SHARE
| 2023 | 2022 | |||||||
| As of September 30, | ||||||||
| 2023 | 2022 | |||||||
| Preferred stock | 19,444,000,000 | 148,471,000,000 | ||||||
| Stock options | 67,587,230,680 | 68,587,000,000 | ||||||
| Restricted stock | 1,500,000,000 | - | ||||||
| Total | 88,531,230,680 | 217,058,000,000 | ||||||
| 14 |
| As of September 30, | ||||||||
| 2022 | 2021 | |||||||
| Preferred stock | 148,471,000,000 | 1,250,000,000 | ||||||
| Stock options | 68,587,000,000 | 68,587,000,000 | ||||||
| Total | 217,058,000,000 | 69,837,000,000 | ||||||
The difference between our common stock outstanding as of September 30, 2023 of and the weighted average number of common stock outstanding in our basic and diluted net loss per share is the exclusion of shares of restricted common stock outstanding which are unvested as of September 30, 2023. There are no other reconciling items except for differences resulting from computing share issuances on a weighted average basis.
Note 13. COMMITMENTS AND CONTINGENCIES
On July 7, 2023, the Company entered into patent licensing agreement in the vape segment to grant the licensee the non-exclusive right and license to use, offer or sell the licensed products in the territory of the United States of America. The Company is still in the process of building this operation, and no product sales or no royalties earned as of the date of this filing.
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$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$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.
On April 12, 2023, the U.S. Court of Appeals for the Federal Circuit ruled in favor of HCMC on two separate appeals it had filed in its patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. pending in the district court for the Northern District of Georgia.
In the first appeal, HCMC appealed the ruling of the District Court dismissing HCMC’s patent infringement action and denying HCMC’s motion to amend its pleading. In the second appeal, HCMC appealed the District Court’s award of attorneys’ fees to Philip Morris. In its decisions, the Federal Circuit ruled for HCMC by reversing both of those decisions and remanded the case back to the District Court for further proceedings. As a result of the ruling, the Company reversed the $575,000 which was previously fully provisioned during the three months ended March 31, 2023.
There were two lawsuits in connection with alleged claimed battery defects for an electronic cigarette device. One has been dismissed by the court wherein the plaintiff settled with the Company’s insurance carrier with no economic impact to the Company. In the second lawsuit the Company is in the process of settlement and the case has been removed from the Courts trial calendar. Economic impact to the Company, if any, is not known or estimable at this time.
On September 26, 2023, HCMC filed a patent infringement lawsuit against R.J. Reynolds Vapor Company (“RJR”) in the U.S. District Court for the Middle District of North Carolina in connection with HCMC’s assertions that RJR’s Vuse electronic cigarette infringes one of HCMC’s patents.
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, 2022.2023. With respect to legal costs, we record such costs as incurred.
| 15 |
Employment Agreement Amendment”) with the Company’s President and Chief Operating Officer, Christopher Santi. Pursuant to the Employment Agreement Amendment, Mr. Santi will continue to be employed as the Company’s President and Chief Operating Officer through January 30, 2024. Mr. Santi will receive a base salary of $0.4 million for 2021 and his salary will increase 10% in each subsequent year.
Employment Agreement Amendment”) with the Company’s Chief Financial Officer, John Ollet. Pursuant to the Employment Agreement Amendment, Mr. Ollet will continue to be employed as the Company’s Chief Financial Officer through February 14, 2025. Mr. Ollet will receive a base salary of $0.3 million for 2022 and his salary will increase 10% in each subsequent calendar year.
On October 14,2022,September 28, 2023, the Company through its wholly owned subsidiary, Healthy Choice Markets IV,V, LLC, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Dean’sET Holding, Inc., d/b/a Ellwood Thompson’s Local Market, a Virginia corporation, Ellwood Thompson’s Natural Food Market, of Shrewsbury, Inc.L.C., 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 JerseyVirginia limited liability company, and Dean’s Natural Food Market, Inc., a New Jersey corporation (collectively, the “Sellers”), and shareholdersRichard T. Hood, an individual resident of the Sellers. Pursuant to the Purchase Agreement, theCommonwealth of Virginia. The Company acquired certain assets and assumed certain liabilities of an organic and natural health food and vitamin chain with eightstore locationslocated in New York and northern and central New JerseyRichmond, Virginia (the “Stores”“Store”).
The purchase price under the Purchase Agreement is approximately $1,500,000$8,000,000,, of which $750,0003,000,000 is in the form of a promissory note. In addition, the seller is entitled to a contingent earn-out based on certain revenue threshold within the one year period of the closing. The purchase price is subject to final inventory adjustment. The Company will assume all lease obligations for the Stores.Store. The transaction closedwas entered into on September 28, 2023 with effective date of October 14,2022.1, 2023. The Company has engaged a professional valuation firm to perform the valuation onof the assets acquired and liabilities assumed. PurchaseThe purchase price allocationaccounting has not been finalized at the time of filing.
On October 25, 2022,2, 2023, the Company announced thatsigned addendum with the Board has authorized aggregatecurrent landlord to renew the lease on its headquarter office for an additional twelve-month period starting from November 1, 2023.
On October 27, 2023, the Company filed a new registration statement on Form S-1 in connection with the spin-off of all of the existing HCWC common stock repurchases of upby Healthier Choices Management Corp. (the “Spin Off S-1”) with the Securities and Exchange Commission (the “Commission”).
On October 30, 2023, the Company filed Amendment No. 1 to $5 million. HCMC may purchase sharesits registration statement 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 ofForm S-1 (“IPO S-1”) with the repurchase transactions will be subjectCommission.
On October 30, 2023, the Company entered into third amendment to the discretion of HCMC based upon market conditions and other opportunities that HCMC may haveSecurities Purchase Agreement with its Series E Redeemable Convertible Preferred Stock purchasers. The parties agreed to: (1) set the initial conversion price for the use or investment of its cash balances. The repurchase program has no expiration date, does not requireSeries A Preferred Stock to be the 5-day volume weighted average price measured using the 5 trading days preceding the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. The number of shares to be purchased and the timing of purchases will be basedSeries A Preferred Stock, (2) 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 shares
| 16 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLIDATED OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements. The terms “we,” “us,” “our,” and the “Company” refer to Healthier Choices Management Corp. and its wholly-owned subsidiaries, Healthy Choice Markets, Inc., Healthy Choice Markets 2, LLC (“Paradise Health and Nutrition”), Healthy Choice Markets 3, LLC (“Mother Earth’s Storehouse”), Healthy Choices Markets 3 Real Estate LLC, Healthy Choice Markets IV, LLC (“Green'sGreen’s Natural Foods”), Healthy Choice Markets V, LLC (“Ellwood Thompson’s Local Market”), HCMC Intellectual Property Holdings, LLC, Healthy Choice Wellness, LLC, The Vitamin Store, LLC, Healthy U Wholesale, Inc., and The Vape Store, Inc. (“Vape Store”). All intercompany accounts and transactions have been eliminated in consolidation.
Company Overview
Healthier Choices Management Corp.is a holding company focused on providing consumers with healthier daily choices with respect to nutrition and other lifestyle alternatives.
Through its wholly owned subsidiary HCMC Intellectual Property Holdings, LLC, the Company manages and intends to expand on its intellectual property portfolio.
Through its wholly owned subsidiaries, Healthy Choice Markets, Inc., Healthy Choice Markets 2, LLC, and Healthy Choice Markets 3, LLC, respectively, the Company operates:
offering a selection of 100% organic produce and all-natural, non-GMO groceries & bulk foods; a wide selection of local products; an organic juice and smoothie bar; a fresh foods department, which offers fresh and healthy “grab & go” foods; a full selection of vitamins & supplements; as well as health and beauty products. .
| ● | Ada’s Natural Market, a natural and organic grocery store offering fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, health & beauty products and natural household items (www.Adasmarket.com). |
| ● | Paradise Health & Nutrition’s three stores that likewise offer fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, health & beauty products and natural household items (www.ParadiseHealthDirect.com). |
| ● | Mother Earth’s Storehouse, a two store organic and health food and vitamin chain in New York’s Hudson Valley, which has been in existence for over 40 years (www.MotherEarthStorehouse.com). |
| ● | Green’s Natural Foods’ eight stores in New York and New Jersey, offering a selection of 100% organic produce and all-natural, non-GMO groceries & bulk foods; a wide selection of local products; an organic juice and smoothie bar; a fresh foods department, which offers fresh and healthy “grab & go” foods; a full selection of vitamins & supplements; as well as health and beauty products (www.Greensnaturalfoods.com). |
| ● | Ellwood Thompson’s, an organic and natural health food and vitamin store located in Richmond, Virginia. (www.ellwoodthompsons.com). Ellwood Thompson’s was acquired on October 1, 2023 for a purchase price of approximately $1,500,000. |
Through its wholly owned subsidiary, Healthy Choice Wellness, LLC, the Company has licensing agreements for(1) operates Healthy Choice Wellness CentersCenter in Kingston, NY and (2) has a licensing agreement for a Healthy Choice Wellness Center located at the Casbah Spa and Salon in Fort Lauderdale, FL, and Boston Direct Health in Boston, MA. FL.
These centers offer multiple IV drip “cocktails” for clients to choose from that are designed to help boost immunity, fight fatigue and stress, reduce inflammation, enhance weight loss, and efficiently deliver antioxidants and anti-aging mixes. Additionally, there are cocktails for health, beauty, and re-hydration. (www.HealthyChoiceWellness.com).
)
Through its wholly owned subsidiary, Healthy U Wholesale Inc., the Company sells vitamins and supplements, as well as health, beauty and personal care products on its website www.TheVitaminStore.com.
www.TheVitaminStore.com.
Liquidity
www.theQcup.com
.
| 17 |
The Company incurred a loss from operations of approximately $4.8$8.6 million for the nine months endedSeptember 30, 2022.2023. As of September 30, 2022,2023, cash and cash equivalents totaled approximately $30.0$7.1 million. The Company expects to continue incurring losses for the foreseeable future but we anticipate that ourbelieves current cash on hand is sufficient to meet its obligations and cash equivalentscapital requirements for at least the next twelve months from the date of filing. In the past, the Company financed its operations primarily through issuances of common stock and convertible preferred stock. However, we have no commitments to obtain such additional cash tofinancing, and there can be generated from operationsno assurance that the Company will be sufficientable to cover our projected operating expenses forraise the foreseeable future. Management does not believe there are any substantial doubts about the Company’s abilitynecessary funds to continue as a going concern within a year and a day from the issuance of these unaudited consolidated financial statements.
Factors Affecting Our Performance
We believe the following factors affect our performance:
Retail: We believe the operating performance of our retail stores will affect our revenue and financial performance. The Company has four natural and organic groceries and dietary supplement stores located in Florida, as well as twoten located in New York. As of April 2022, theYork and New Jersey. The Company assigned the lease of its remaininghas closed retail vape store duestores, as management has shifted its retail sales focus to the wholesale and online channel. The adverse industry trends and increasing federal and state regulations that, if implemented, may negatively impact future retail revenues. All of the Company's other vape stores had been either closed or had its assets sold from December 2021 to April 2022. This will allow the Company to focus on developing wholesale business and sales through online platform.
Increased Competition: Food retail is a large and competitive industry. Our competition varies and includes national, regional, and local conventional supermarkets, national superstores, alternative food retailers, natural foods stores, smaller specialty stores, and farmers’ markets. In addition, we compete with restaurants and other dining options in the food-at-home and food-away-from-home markets. The opening and closing of competitive stores, as well as restaurants and other dining options, in regions where we operate will affect our results. In addition, changing consumer preferences with respect to food choices and to dining out or at home can impact us. We also expect increased product supply and downward pressure on prices to continue and impact our operating results in the future.
We are proud to provide our guests with high quality, fresh foods and restaurant quality meals, delivered with impeccable service in an exceptionally clean and well-stocked store. With the ongoing COVID-19 pandemic, we continue to carefully monitor and adjust our safety protocols while following public health guideline and local ordinances. We have maintained many of the protocols established at the beginning of the pandemic to keep our team members and guests safe. The COVID-19 pandemic has presented many risks and challenges that we must manage. 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 still be negatively affected by the COVID-19 pandemic and future developments, which are highly uncertain and cannot be predicted.
Results of Operations
The following table sets forth our unaudited condensed consolidated Statements of Operations for the three months ended September 30, 20222023 and 20212022 that is used in the following discussions of our results of operations:
Three Months Ended September 30, | 2023 to 2022 | |||||||||||
| 2023 | 2022 | Change $ | ||||||||||
| SALES | ||||||||||||
| Vapor sales, net | $ | - | $ | 1,187 | $ | (1,187 | ) | |||||
| Grocery sales, net | 12,704,600 | 5,775,543 | 6,929,057 | |||||||||
| TOTAL SALES, NET | 12,704,600 | 5,776,730 | 6,927,870 | |||||||||
| Cost of sales vapor | - | 364 | (364 | ) | ||||||||
| Cost of sales grocery | 8,061,966 | 3,909,190 | 4,152,776 | |||||||||
| GROSS PROFIT | 4,642,634 | 1,867,176 | 2,775,458 | |||||||||
| OPERATING EXPENSES | ||||||||||||
| Selling, general and administrative | 8,033,795 | 3,985,377 | 4,048,418 | |||||||||
| LOSS FROM OPERATIONS | (3,391,161 | ) | (2,118,201 | ) | (1,272,960 | ) | ||||||
| OTHER INCOME (EXPENSE) | ||||||||||||
| Gain (loss) on investment | 343 | (11,314 | ) | 11,657 | ||||||||
| Change in contingent consideration | 372,000 | - | 372,000 | |||||||||
| Other (expense) income, net | (8,397 | ) | 4,327 | (12,724 | ) | |||||||
| Interest income, net | 36,226 | 50,202 | (13,976 | ) | ||||||||
| Total other income (expense), net | 400,172 | 43,215 | 356,957 | |||||||||
| NET LOSS | $ | (2,990,989 | ) | $ | (2,074,986 | ) | $ | (916,003 | ) | |||
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| Three Months Ended September 30, | 2022 to 2021 | |||||||||||
| 2022 | 2021 | Change $ | ||||||||||
| SALES | ||||||||||||
| Vapor sales, net | $ | 1,187 | $ | 466,181 | $ | (464,994 | ) | |||||
| Grocery sales, net | 5,775,543 | 2,803,327 | 2,972,216 | |||||||||
| TOTAL SALES, NET | 5,776,730 | 3,269,508 | 2,507,222 | |||||||||
| Cost of sales vapor | 364 | 186,522 | (186,158 | ) | ||||||||
| Cost of sales grocery | 3,909,190 | 1,706,597 | 2,202,593 | |||||||||
| GROSS PROFIT | 1,867,176 | 1,376,389 | 490,787 | |||||||||
| OPERATING EXPENSES | ||||||||||||
| Selling, general and administrative | 3,985,377 | 2,427,256 | 1,558,121 | |||||||||
| LOSS FROM OPERATIONS | (2,118,201 | ) | (1,050,867 | ) | (1,067,334 | ) | ||||||
| OTHER INCOME (EXPENSE) | ||||||||||||
| Loss on investment | (11,314 | ) | (557 | ) | (10,757 | ) | ||||||
| Other income | 4,327 | - | 4,327 | |||||||||
| Interest income | 50,202 | 1,543 | 48,659 | |||||||||
| Total other income (expense), net | 43,215 | 986 | 42,229 | |||||||||
| NET LOSS | $ | (2,074,986 | ) | $ | (1,049,881 | ) | $ | (1,025,105 | ) | |||
Net
The decrease in net vapor sales decreasedapproximately $0.5 million to $1.2 thousand for the three months endedSeptember 30, 2022 as compared to $0.5 million for the same period in 2021. The decrease in sales is primarily due to the impact of store closings duringclosing all retail vape stores in the second quarter of 2022.
Net grocery sales increased $6.9 million to $12.7 million for the three months ended September 30, 2023 as compared to $5.8 million for the same period in 2022. The $6.9 million increase in grocery sales was primarily due to the acquisition of Green’s Natural Foods.
Vapor cost of sales for the three months ended September 30, 2023 and 2022 were $0 and 2021 were $-$0.4 thousand, and $0.2 million, respectively, a decrease of $0.2 million.$0.4 thousand. The decrease is primarily due to the closing the remaining retail vape stores, during three months ended September 30, 2022 as comparedmanagement has shifted its retail sales focus to the same period in 2021.wholesale and online channel. Gross (loss) profit was $0 and $0.8 thousand and $0.3 million for three months ended September 30, 2023 and 2022, and 2021, respectively. Closing retail vape stores will allow the Company focus on developing wholesale business and online platform.
Grocery cost of goods soldsales for the three months endedSeptember 30, 20222023 and 20212022 were $3.9$8.1 million and $1.7$3.9 million, respectively, an respectively. The increase of $2.2 million. The increase$4.2 million is primarily due to an increase in the number of stores from the acquisition of Mother Earth's Storehouse on February 14, 2022. Green’s Natural Foods stores. Gross profit was $1.9$4.6 million and $1.1$1.9 million for the three months endedSeptember 30, 20222023 and 2021,2022, respectively. Gross margin as a percentage of sales decreasedincreased approximately 10%4% as compared to the same period in prior year as a result of lost salesincreased product margin due to improved purchasing control in in our Florida stores, and write off of damaged inventory as a result of Hurricane Ian.
Total operating expenses increased $1.6approximately $4.0 million to $4.0$8.0 million for the three months ended September 30, 20222023 compared to $2.4$4.0 million for the same period in 2021.2022. The increase is primarily attributabledue to increasesthe acquisition of Green’s Natural Foods stores of approximately $3.2 million, and stock compensation expense of $1.1 million, offset by decreases in professional fees of $0.6 million, payroll and employee related cost of $0.7 million, depreciation and amortization expense of $0.2 million and occupancy costs of $0.1$0.4 million.
Total net other income (expense), net increased $42,000$357,000 to $43,000$4000,000 for the three months ended September 30, 20222023 compared to $1,000$43,000 for the same period in 2021.2022. The increase in net other income is mainly attributable to increase in interest income as a resultthe write off of an increase in interest ratesthe contingent liability related with Green’s Natural Foods seller’s earn-out..
The following table sets forth our unaudited condensed consolidated Statements of Operations for the nine months ended September 30, 20222023 and 20212022 that is used in the following discussions of our results of operations:
Nine Months Ended September 30, | 2023 to 2022 | |||||||||||
| 2023 | 2022 | Change $ | ||||||||||
| SALES | ||||||||||||
| Vapor sales, net | $ | 38 | $ | 256,747 | $ | (256,709 | ) | |||||
| Grocery sales, net | 39,839,203 | 16,700,596 | 23,138,607 | |||||||||
| TOTAL SALES, NET | 39,839,241 | 16,957,343 | 22,881,898 | |||||||||
| Cost of sales vapor | 653 | 112,610 | (111,957 | ) | ||||||||
| Cost of sales grocery | 25,199,879 | 10,674,170 | 14,525,709 | |||||||||
| GROSS PROFIT | 14,638,709 | 6,170,563 | 8,468,146 | |||||||||
| OPERATING EXPENSES | ||||||||||||
| Selling, general and administrative | 23,192,575 | 11,012,070 | 12,180,505 | |||||||||
| LOSS FROM OPERATIONS | (8,553,866 | ) | (4,841,507 | ) | (3,712,359 | ) | ||||||
| OTHER INCOME (EXPENSE) | ||||||||||||
| Loss on investment | (8,057 | ) | (6,000 | ) | (2,057 | ) | ||||||
| Change in contingent consideration | 774,900 | - | 774,900 | |||||||||
| Other income | 853 | 27,376 | (26,523 | ) | ||||||||
| Interest income, net | 235,125 | 81,715 | 153,410 | |||||||||
| Total other income (expense), net | 1,002,821 | 103,091 | 899,730 | |||||||||
| NET LOSS | $ | (7,551,045 | ) | $ | (4,738,416 | ) | $ | (2,812,629 | ) | |||
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| Nine Months Ended September 30, | 2022 to 2021 | |||||||||||
| 2022 | 2021 | Change $ | ||||||||||
| SALES | ||||||||||||
| Vapor sales, net | $ | 256,747 | $ | 1,671,098 | $ | (1,414,351 | ) | |||||
| Grocery sales, net | 16,700,596 | 8,450,055 | 8,250,541 | |||||||||
| TOTAL SALES, NET | 16,957,343 | 10,121,153 | 6,836,190 | |||||||||
| Cost of sales vapor | 112,610 | 657,171 | (544,561 | ) | ||||||||
| Cost of sales grocery | 10,674,170 | 5,133,228 | 5,540,942 | |||||||||
| GROSS PROFIT | 6,170,563 | 4,330,754 | 1,839,809 | |||||||||
| OPERATING EXPENSES | ||||||||||||
| Selling, general and administrative | 11,012,070 | 6,599,224 | 4,412,846 | |||||||||
| LOSS FROM OPERATIONS | (4,841,507 | ) | (2,268,470 | ) | (2,573,037 | ) | ||||||
| OTHER INCOME (EXPENSE) | ||||||||||||
| Gain (loss) on investment | (6,000 | ) | 10,954 | (16,954 | ) | |||||||
| Other income | 27,376 | - | 27,376 | |||||||||
| Interest income (expense), net | 81,715 | (76,888 | ) | 158,603 | ||||||||
| Gain on extinguishment of debt, net | - | 767,930 | (767,930 | ) | ||||||||
| Total other income (expense), net | 103,091 | 701,996 | (598,905 | ) | ||||||||
| NET LOSS | $ | (4,738,416 | ) | $ | (1,566,474 | ) | $ | (3,171,942 | ) | |||
Net Vaporvapor sales decreased $1.4$0.3 million to $0.3$0 million for the nine months ended September 30, 20222023 as compared to $1.7$0.3 million for the same period in 2021.2022. The decrease in sales is primarily due to closing the remaining retail vape stores during the nine months ended September 30, 2022, as comparedmanagement has shifted its retail sales focus to the same period in 2021.
Net Grocery sales increased $8.3 $23.1 million to $16.7$39.8 million for the nine months endedSeptember 30, 20222023 as compared to $8.5$16.7 million for the same period in 2021.2022. The increase in sales is primarily due to acquisition of Mother Earth's StorehouseGreen’s Natural Foods in February 2022October 2022..
Vapor cost of goods soldsales for the nine months ended September 30, 2023 and 2022 were $1.0 thousand and 2021 were $0.1 million and $0.7 million, respectively, a decrease of $0.5$0.1 million. The decrease is primarily due to closing retail stores.vape stores, as management has shifted its retail sales focus to the wholesale and online channel. Gross (loss) profit was $0.1 million$(1.0) thousand and $1.0$0.1 million for the nine months ended September 30, 2023 and 2022, and 2021, respectively. Closing retail vape stores will allow the Company focus on developing wholesale business and online platform.
Grocery cost of goods soldsales for the nine months ended September 30, 2023 and 2022 and 2021 were $10.7$25.2 million and $5.1$10.7 million, respectively, an increase of $5.5$14.5 million. The increase is primarily due to the acquisition of Mother Earth's StorehouseGreen’s Natural Foods in FebruaryOctober 2022. Gross profit was $14.6 million and $6.0 million for the nine months ended September 30, 2023 and $3.32022, respectively.
Total operating expenses increased $12.2 million to $23.2 million for the nine months ended September 30, 2023 compared to $11.0 million for the same period in 2022. The increase is primarily due to Green’s Natural Food acquisition of approximately $9.3 million, increases in stock based compensation of $2.3 million, payroll and employee related costs of $0.3, occupancy of $0.2 million, taxes, licenses and permits of $0.2 million.
Net other income of $1.0 million for the nine months ended September 30, 2023 includes a loss on investment of $8,000, change in contingent consideration of $775,000, other income of $1,000, and an interest income of $235,000. Net other income of $0.1 million for the nine months ended September 30, 2022 includes a loss on investment of $6,000, other income of $27,000, and 2021, respectively.
Liquidity and Capital Resources
Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash (used in) provided by | ||||||||
| Operating activities | $ | (4,939,331 | ) | $ | (2,676,131 | ) | ||
| Investing activities | 2,165 | (5,359,187 | ) | |||||
| Financing activities | (11,986,893 | ) | 12,873,087 | |||||
| $ | (16,924,059 | ) | $ | 4,837,769 | ||||
Our net cash used in operating expenses increased $4.4 million to $11.0activities of approximately $4.9 million for the nine months ended September 30, 2022 compared to $6.6 million for the same period in 2021. Out of the $4.4 million operating expense increase, $2.5 million increase is due to Mother Earth’s Storehouse acquisition. The increase is primarily attributable to increases in the professional fees of $1.5 million, office and store expenses of $0.2 million, payroll and employee related cost of $1.9 million, depreciation and amortization expenses of $273,000, meals, travel and entertainment of $45,000, insurance of $34,000, and occupancy of $248,000, offset by a decrease in stock compensation of $34,000.
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash provided by (used in) | ||||||||
| Operating activities | $ | (2,676,131 | ) | $ | (2,044,147 | ) | ||
| Investing activities | (5,359,187 | ) | (25,106 | ) | ||||
| Financing activities | 12,873,087 | 27,316,225 | ||||||
| $ | 4,837,769 | $ | 25,246,972 | |||||
| 20 |
The net cash used inprovided by investing activities of $5.4 million$2,000 for the nine months endedSeptember 30, 2022 resulted2023 resulted from the acquisition of Mother Earth's Storehouse, collection on a note receivable and purchases of property and equipment.equipment. The net cash used in investing activities of $25,000$5,359,000 for the nine months endedSeptember 30, 20212022 resulted from the acquisition of Mother Earth’s Storehouse, collection of a note receivable, and purchases of property and equipmentequipment.
.
The net cash used in financing activities of approximately $12.0 million for the nine months ended September 30, 2023 is due to Series E Preferred Stock redemption and exercise, payment for deferred offering cost related with spin off, and principle payment on loan payable. The net cash provided by financing activities of $12,873,000$12.9 million for the nine months endedSeptember 30, 2022 is due to proceeds received from the Series E Preferred Stock sales and from proceeds received from line of credit. The net cash provided by financing activities of $27.3 million for the nine months ended
September 30, 2021
is due to proceeds received from the stock rights offering of $24.3 million and a Securities Purchase Agreement of $5.0 million, partially offset by a principal payment of $2.0 million on the line of credit and loan payment of $0.3 million.
Our cash balances are kept liquid to support our growing acquisition and infrastructure needs for operational expansion. Most of our cash and cash equivalents areis concentrated in one financial institution and areis generally in excess of the FDIC insurance limit. The Company has not experienced any losses on its cash and cash equivalents.cash. The following table presents the Company’s cash position as of September 30, 20222023 and December 31, 2021.
| September 30, 2022 | December 31, 2021 | |||||||
| Cash | $ | 30,009,173 | $ | 26,496,404 | ||||
| Total assets | $ | 45,470,486 | $ | 34,443,487 | ||||
| Percentage of total assets | 66.00 | % | 76.93 | % | ||||
| September 30, 2023 | December 31, 2022 | |||||||
| Cash | $ | 7,137,833 | $ | 22,911,892 | ||||
| Total assets | $ | 37,287,765 | $ | 55,255,030 | ||||
| Percentage of total assets | 19.14 | % | 41.47 | % | ||||
The Company reported a net loss of $4.7$7.6 million for the nine months endedSeptember 30, 2022.2023. The Company also had positive working capital of $30.1$4.3 million. The Company expects to continue incurring losses for the foreseeable future, but we do not believe there are any substantial doubts about the Company’s ability to continue as a going concern. The Company'sCompany believes current cash 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 issuancedate of these unaudited condensed consolidated financial statements.filing. In the past, the Company financed its operations primarily through issuances of common stock and convertible preferred stock. However, we have no commitments to obtain such additional financing, and there can be no assurance that the Company will be able to raise the necessary funds to fund its operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements.
We base our estimates on our historical experience, knowledge of our business and industry, current and expected economic conditions, the attributes of our products, the regulatory environment, and in certain cases, the results of outside appraisals. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
| 21 |
While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.
There have been no material changes to the Company’s critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the 20212022 Annual Report, which we believe are the most critical to our business and the understanding of our results of operations and affect the more significant judgments and estimates that we use in the preparation of our condensed consolidated financial statements.
Seasonality
We do not consider our business to be seasonal.
Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements including statements regarding retail expansion, the future demand for our products, the transition to vaporizer and other products, competition, the adequacy of our cash resources and our authorized Common Stock, and our continued ability to raise capital.
The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.
The results anticipated by any or all of these forward-looking statements might not occur. Important factors that could cause actual results to differ from those in the forward-looking statements include our future common stock price, the timing of future Series DE preferred stock exercisesconversions and stock sales, customer acceptance of our products, and proposed federal and state regulation. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.
Not applicable to smaller reporting companies.
We are required to report under Section 404(a) of Sarbanes-Oxley regarding the effectiveness of our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
Our management, including our Principal Executive Officer and Principal Financial Officer, did not carry out an evaluation on internal controls as of September 30, 20222023 in regard to the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act. As an evaluation was not carried out, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report.
| 22 |
The Company’s management is responsible for establishing and performing its audit of our financial statements for the year ended December 31, 2021 in accordance with standards of the Public Company Accounting Oversight Board, our independent registered public accounting firm noted material weaknesses inmaintaining adequate internal control over financial reporting. A listUnder the supervision and with the participation of ourthe Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its internal control over financial reporting based on the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal control over financial reporting was ineffective as of September 30, 2023 and noted the material weaknesses are as follows:
| ● | Failure to have properly documented and designed disclosure controls and procedures and testing of the operating effectiveness of our internal control over financial reporting. |
| ● | Failure to perform periodic and year-end inventory observations in a timely manner and adequate controls to sufficiently perform required rollback procedures of inventory counts to the year-end. |
| ● | Weakness around our purchase orders and inventory procedures, |
| ● | Segregation of duties due to lack of personnel. | |
| ● | Information technology general controls (ITGCs) were not designed effectively to ensure that appropriate access security controls, change management and data center and network operations ITGCs were in place. |
Our management concluded that considering internal control deficiencies that, in the aggregate, rise to the level of material weaknesses, we did not maintain effective internal control over financial reporting as of September 30, 20222023 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Planned Remediation
Management continues to work to improve its controls related to our material weaknesses listed above. In order to achieve the timely implementation of the above,controls over the above-mentioned weaknesses, management has commenced the following actions and will continue to assess additional opportunities for remediation on an ongoing basisbasis:
:
| ● | Continuing to increase headcount across the Company, with a particular focus on hiring individuals with strong internal control backgrounds and inventory expertise. |
| ● | Increase third party physical inventory count and store level internal inventory count. | |
| ● | Increasing its focus on the Company’s purchase order process in order to better manage inventory thereby improving cash management and ultimately leading to more reliable and precise financial reporting. The Company implemented an open to buy program by comparing purchases with sales to better control overall inventory purchases. | |
| ● | Using business intelligence to combine business analytics, data tools and infrastructure to help the Company quickly identify the issues in POS system and facilitate internal control over financial reporting. Developing dashboards for operation to monitor the margin at store level, department level and sku level. | |
| ● | Establishing policies and procedures in the IT area to mitigate data breach, unauthorized access, and address segregation of duties. |
We are currently working to improve and simplify our internal processes and implement enhanced controls, as discussed above, to address the material weaknesses in our internal control over financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures. These material weaknesses will not be considered to be remediated until the applicable remediated controls are operating for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Controls over Financing Reporting
Except as detailed above, during the quarterthree months ended September 30, 2022,2023, there were no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II - OTHER INFORMATION
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 in attorneys’ fees to be paid by the Company. The Company has fully provisioned this amount as of December 31, 2021. HCMC appealed this ruling on June 22, 2022.
On April 12, 2023, the U.S. Court of Appeals for the Federal Circuit ruled in favor of HCMC on two separate appeals it had filed in its patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. pending in the district court for the Northern District of Georgia.
In the first appeal, HCMC appealed the ruling of the District Court dismissing HCMC’s patent infringement action and denying HCMC’s motion to amend its pleading. In the second appeal, HCMC appealed the District Court’s award of attorneys’ fees to Philip Morris. In its decisions, the Federal Circuit ruled for HCMC by reversing both of those decisions and remanded the case back to the District Court for further proceedings.
There were two lawsuits in connection with alleged claimed battery defects for an electronic cigarette device. One has been dismissed by the court wherein the plaintiff settled with the Company’s insurance carrier with no economic impact to the Company. In the second lawsuit the Company is in the process of settlement and the case has been removed from the Courts trial calendar. Economic impact to the Company, if any, is not known or estimable at this time.
On September 26, 2023, HCMC filed a patent infringement lawsuit against R.J. Reynolds Vapor Company (“RJR”) in the U.S. District Court for the Middle District of North Carolina in connection with HCMC’s assertions that RJR’s Vuse electronic cigarette infringes one of HCMC’s patents.
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, 2022. 2023. With respect to legal costs, we record such costs as incurred.
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Not Applicable.
None.
None.
Not Applicable.
Not Applicable.
See the exhibits listed in the accompanying “Index to Exhibits.”
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INDEX TO EXHIBITS
| Exhibit | Incorporated by Reference | Filed or Furnished | ||||||||||||
| No. | Exhibit Description | Form | Date | Number | Herewith | |||||||||
| 31.1 | Filed | |||||||||||||
| 31.2 | Filed | |||||||||||||
| 32.1 | Furnished * | |||||||||||||
| 32.2 | Furnished * | |||||||||||||
| 101.INS | XBRL Instance Document | Filed | ||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | Filed | ||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed | ||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed | ||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed | ||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed | ||||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | Filed | ||||||||||||
| * | This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HEALTHIER CHOICES MANAGEMENT CORP. | ||
| Date: November | By: | /s/ Jeffrey Holman |
| Jeffrey Holman | ||
| Chief Executive Officer | ||
| Date: November | By: | /s/ John Ollet |
| John Ollet | ||
| Chief Financial Officer | ||
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