Company Quick10K Filing
Quick10K
Healthier Choices Management
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2018-12-31 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-12-18 M&A, Exhibits
8-K 2018-11-19 Enter Agreement, Exhibits
8-K 2018-08-17 Regulation FD, Exhibits
8-K 2018-08-16 Enter Agreement, Shareholder Rights, Amend Bylaw, Other Events, Exhibits
8-K 2018-08-13 Enter Agreement, Officers, Exhibits
GBNK Guaranty Bancorp 879
INDU Industrea Acquisition 577
UEEC United Health Products 263
ENBP ENB Financial 111
PUBC Purebase 14
BDCO Blue Dolphin Energy 6
PAYD Paid 5
DD DuPont 0
VPLM Voip-Pal.com 0
FSIC FS Investment 0
HCMC 2019-06-30
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Note 1. Organization, Going Concern, and Basis of Presentation
Note 2. Summary of Significant Accounting Policies
Note 3. Concentrations
Note 4. Disaggregation of Revenues
Note 5. Intangible Assets
Note 6. Contract Assets and Contract Liabilities
Note 7. Stockholders' Equity
Note 8. Fair Value Measurements
Note 9. Commitments and Contingencies
Note 10. Lease
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Condensed Consoldiated Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 f10q0619ex31-1_healthier.htm
EX-31.2 f10q0619ex31-2_healthier.htm
EX-32.1 f10q0619ex32-1_healthier.htm
EX-32.2 f10q0619ex32-2_healthier.htm

Healthier Choices Management Earnings 2019-06-30

HCMC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 f10q0619_healthierchoices.htm QUARTERLY REPORT

 

  

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 June 30, 2019

 

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   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
3800 North 28Th Way    
Hollywood, FL   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 ☐ 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 ☐ 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

  

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 August 13, 2019, there were 66,645,257,694 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

    

 

 

 

 

  

TABLE OF CONTENTS

 

  PAGE
   
PART I FINANCIAL INFORMATION 1
   
ITEM 1. Financial Statements (Unaudited) 1
   
Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 1
   
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 2
   
Condensed Consolidated Shareholders’ Equity Statement for the Three and Six Months ended June 30, 2019 and 2018 3
   
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2019 and 2018 5
   
Notes to Condensed Consolidated Financial Statements 6
   
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
   
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 20
   
ITEM 4. Controls and Procedures 20
   
PART II OTHER INFORMATION 22
   
ITEM 1. Legal Proceedings 22
   
ITEM 1A. Risk Factors 22
   
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
   
ITEM 3. Defaults Upon Senior Securities 22
   
ITEM 4. Mine Safety Disclosures 22
   
ITEM 5. Other Information 22
   
ITEM 6. Exhibits 22
   
Signatures 23
   
Exhibit 31.1 24 
   
Exhibit 31.2 24 
   
Exhibit 32.1 24 
   
Exhibit 32.2 24 

 

i

 

 

PART I - FINANCIAL INFORMATION 

 

Item 1. Financial Statements (Unaudited)

 

HEALTHIER CHOICES MANAGEMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   June 30,
2019
   December 31,
2018
 
ASSETS        
CURRENT ASSETS        
Cash and cash equivalents  $5,042,612   $7,061,253 
Accounts receivable, net   36,056    51,951 
Inventories   2,018,570    1,864,619 
Prepaid expenses and vendor deposits   369,724    402,578 
Investment   45,858    90,857 
Contract assets   18,000    32,400 
TOTAL CURRENT ASSETS   7,530,820    9,503,658 
           
Property and equipment, net of accumulated depreciation   385,931    497,039 
Intangible assets, net of accumulated amortization   2,135,772    3,062,204 
Goodwill   1,437,314    1,437,314 
Note receivable   440,853    528,007 
Right of use asset – operating lease, net   4,660,940    - 
Other assets   144,122    144,441 
           
TOTAL ASSETS  $16,735,752   $15,172,663 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $988,804   $1,301,418 
Contract liabilities   167,381    442,630 
Operating lease liability, current   495,075    - 
Loan payable, current   282,284    282,224 
Credit line   2,000,000    1,868,460 
Derivative liabilities – warrants   1,722,028    1,722,928 
TOTAL CURRENT LIABILITIES   5,655,572    5,617,660 
           
Loan payable, net of current portion   1,010,411    1,128,234 
Operating lease liability, net of current   3,565,703    - 
TOTAL LIABILITIES   10,231,686    6,745,894 
           
COMMITMENTS AND CONTINGENCIES (SEE NOTE 9)          
           
STOCKHOLDERS’ EQUITY          
Series B convertible preferred stock, $1,000 par value per share, 30,000 shares authorized; 20,150 shares issued and outstanding as of June 30, 2019 and December 31, 2018; aggregate liquidation preference of $20.2 million   20,150,116    20,150,116 
Common Stock, $0.0001 par value per share, 750,000,000,000 shares authorized; 66,645,257,694 and 66,623,514,522 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively   6,664,526    6,662,351 
Additional paid-in capital   7,543,370    7,348,390 
Accumulated deficit   (27,853,946)   (25,734,088)
TOTAL STOCKHOLDERS’ EQUITY   6,504,066    8,426,769 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $16,735,752   $15,172,663 

 

See notes to unaudited condensed consolidated financial statements

 

1

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

   

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
SALES                
Vapor sales, net  $1,085,259   $1,140,640   $2,309,300   $2,449,534 
Grocery sales, net   2,731,754    2,137,281    5,887,819    4,435,792 
TOTAL SALES, NET   3,817,013    3,277,921    8,197,119    6,885,326 
                     
Cost of sales vapor   442,931    565,054    952,347    1,141,715 
Cost of sales grocery   1,711,791    1,281,687    3,679,587    2,667,965 
GROSS PROFIT   1,662,291    1,431,180    3,565,185    3,075,646 
                     
OPERATING EXPENSES   2,534,492    2,019,183    5,524,947    5,154,673 
                     
LOSS FROM OPERATIONS   (872,201)   (588,003)   (1,959,762)   (2,079,027)
                     
OTHER (EXPENSE) INCOME                    
Loss on investment   (19,286)   -    (44,999)   - 
Other income (expense), net   -    107,500    (692)   317,500 
Interest income (expense), net   (12,827)   21,373    (11,390)   32,761 
Total other (expense) income, net   (32,113)   128,873    (57,081)   350,261 
                     
NET LOSS  $(904,314)  $(459,130)  $(2,016,843)  $(1,728,766)
                     
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   66,642,629,630    29,348,867,108    

66,635,948,138

    29,348,867,108 

  

See notes to unaudited condensed consolidated financial statements

    

2

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

CONDENSED CONSOLIDATED STOCKHOLDERS’ EQUITY STATEMENT

FOR THE THREE MONTHS ENDED JUNE 30, 2019

(UNAUDITED)

 

   Convertible
Preferred Stock
   Common Stock   Additional
Paid-In
   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
Balance – March 31, 2019   20,150   $20,150,116    66,634,387,066   $6,663,438   $7,460,832   $(26,949,632)  $7,324,754 
Issuance of common stock in connection with cashless exercise of Series A warrants   -    -    10,870,628    1,088    (637)   -    451 
Stock-based compensation expense   -    -    -    -    83,175    -    83,175 
Net loss                            (904,314)   (904,314)
Balance – June 30, 2019   20,150   $20,150,116    66,645,257,694   $6,664,526   $7,543,370   $(27,853,946)  $6,504,066 

    

HEALTHIER CHOICES MANAGEMENT CORP.

CONDENSED CONSOLIDATED STOCKHOLDERS’ EQUITY STATEMENT

FOR THE THREE MONTHS ENDED JUNE 30, 2018

(UNAUDITED)

  

   Convertible
Preferred Stock
   Common Stock   Additional
Paid-In
   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
Balance – March 31, 2018   -   $-    29,348,867,108   $2,934,887   $11,152,128   $(13,840,462)  $246,553 
Issuance of common stock in connection with cashless exercise of Series A warrants   -    -    -    -    -    -    - 
Stock-based compensation expense   -    -    -    -    86,616    -    86,616 
Net loss                            (459,130)   (459,130)
Balance – June 30, 2018   -   $-    29,348,867,108   $2,934,887   $11,238,744   $(14,299,592)  $(125,961)

   

See notes to unaudited condensed consolidated financial statements

     

3

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

CONDENSED CONSOLIDATED STOCKHOLDERS’ EQUITY STATEMENT

FOR THE SIX MONTHS ENDED JUNE 30, 2019

(UNAUDITED)

 

   Convertible
Preferred Stock
   Common Stock   Additional
Paid-In
   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
Balance – December 31, 2018   20,150   $20,150,116    66,623,514,522   $6,662,351   $7,348,390   $(25,734,088)  $8,426,769 
Issuance of common stock in connection with cashless exercise of Series A warrants   -    -    21,743,172    2,175    (1,274)   -    901 
Stock-based compensation expense   -    -    -    -    196,254    -    196,254 
Cumulative Effect on adoption of ASC 842   -    -    -    -    -    (103,015)   (103,015)
Net loss                            (2,016,843)   (2,016,843)

Balance – June 30, 2019

   20,150   $20,150,116    66,645,257,694   $6,664,526   $7,543,370   $(27,853,946)  $6,504,066 

   

HEALTHIER CHOICES MANAGEMENT CORP.

CONDENSED CONSOLIDATED STOCKHOLDERS’ EQUITY STATEMENT

FOR THE SIX MONTHS ENDED JUNE 30, 2018

(UNAUDITED)

 

   Convertible
Preferred Stock
   Common Stock   Additional
Paid-In
   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
Balance – December 31, 2017      -   $    -    29,348,867,108   $2,934,887   $10,080,238   $(12,570,827)  $444,298 
Stock-based compensation expense   -    -    -    -    1,158,506    -    1,158,506 
Net loss   -    -    -    -    -    (1,728,765)   (1,728,765)
Balance – June 30, 2018   -   $-    29,348,867,108   $2,934,887   $11,238,744   $(14,299,592)  $(125,961)

  

See notes to unaudited condensed consolidated financial statements

 

4

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Six Months Ended
June 30,
 
   2019   2018 
OPERATING ACTIVITIES        
Net loss  $(2,016,843)  $(1,728,766)
Adjustments to reconcile net loss to net cash used in operating activities:          
Bad debt expense   (3,002)   12,695 
Depreciation and amortization   302,277    177,472 
Loss on disposal of assets   25,427    - 
Loss on investment   44,999    - 
Amortization of right-of-use asset   327,287    - 
Stock-based compensation expense   196,254    1,158,506 
           
Changes in operating assets and liabilities:          
Due from merchant credit card processors   -    15,615 
Accounts receivable   18,898    12,662 
Inventories   (153,951)   (23,886)
Prepaid expenses and vendor deposits   30,659    (27,428)
Contract assets   14,400    - 
Other assets   320    41,513 
Accounts payable   9,526    140,367 
Accrued expenses   (322,140)   (152,274)
Contract liabilities   (275,249)   (30,699)
Lease liability   (288,850)   - 
NET CASH USED IN OPERATING ACTIVITIES   (2,089,988)   (404,223)
           
INVESTING ACTIVITIES          
Collection of note receivable   87,154    - 
Purchases of patent   (25,000)   (25,000)
Purchases of property and equipment   (4,584)   (32,720)
NET CASH PROVIDED BY INVESTING ACTIVITIES   57,570    (57,720)
           
FINANCING ACTIVITIES          
Proceeds from line of credit   131,540    - 
Principal payments on loan payable   (117,763)   (1,041)
NET CASH PROVIDED BY FINANCING ACTIVITIES   13,777    (1,041)
           
DECREASE IN CASH   (2,018,641)   (462,984)
CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD   7,061,253    7,883,191 
CASH AND CASH EQUIVALENTS — END OF PERIOD  $5,042,612   $7,420,207 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for interest  $69,220   $360 

 

See notes to unaudited condensed consolidated financial statements 

     

5

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

  

Note 1. ORGANIZATION, GOING CONCERN, AND BASIS OF PRESENTATION

 

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 Company currently operates ten retail vape stores in the Southeast region of the United States, through which it offers e-liquids, vaporizers and related products. The Company also operates Ada’s Natural Market, a natural and organic grocery store, through its wholly owned subsidiary Healthy Choice Markets, Inc and Paradise Health and Nutrition, stores that 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 through its wholly owned subsidiary Healthy Choice Markets 2, LLC. The Company also sells vitamins and supplements on the Amazon.com marketplace through its wholly owned subsidiary Healthy U Wholesale, Inc. The Company markets 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 50 mg) purchased from a third party. The Q-Cup™ is then inserted into the Q-Cup™ Tank or Globe, that 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.

 

Liquidity

 

The accompanying 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 incurred a loss from operations of approximately $2.0 million for the six months ended June 30, 2019. As of June 30, 2019, cash and cash equivalents totaled approximately $5.0 million. While we anticipate that our current cash, cash equivalents, and cash to be generated from operations will be sufficient to meet our projected operating plans for the foreseeable future through at least a year and a day from the issuance of these unaudited condensed consolidated financial statements, should we require additional funds (either through equity or debt financings, collaborative agreements or from other sources) we have no commitments to obtain such additional financing, and we may not be able to obtain any such additional financing on terms favorable to us, or at all.

  

Basis of Presentation and Principles of Consolidation

 

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The unaudited condensed consolidated financial statements include the accounts of all subsidiaries in which the Company holds a controlling financial interest as of the financial statement date. 

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Healthy Choice Markets, Inc., Healthy Choice Markets 2, LLC (“Paradise Health and Nutrition”), The Vitamin Store, LLC, Healthy U Wholesale, Inc., The Vape Store, Inc. (“Vape Store”), Vaporin, Inc. (“Vaporin”), Smoke Anywhere U.S.A., Inc. (“Smoke”), Emagine the Vape Store, LLC (“Emagine”), IVGI Acquisition, Inc., Vapormax Franchising LLC, Vaporin LLC, and Vaporin Florida, Inc. All intercompany accounts and transactions have been eliminated in consolidation.

 

6

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

  

Unaudited Interim Financial Information

 

The unaudited condensed consolidated financial statements have been prepared by the Company and reflect all normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the interim financial information. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending December 31, 2019. Certain information and footnotes normally included in financial statements prepared in accordance with GAAP have been omitted under the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the audited consolidated financial statements and related notes thereto as of and for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K for such year as filed with the SEC on March 27, 2019. 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates in the Preparation of the Financial Statements

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include allowances, reserves and write-downs of receivables and inventory, valuing equity securities and hybrid instruments, share-based payment arrangements, deferred taxes and related valuation allowances, and the valuation of the assets and liabilities acquired in business combinations. Certain of management’s estimates could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and records adjustments when necessary.

 

Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and annual and interim periods thereafter, with early adoption permitted. The Company adopted ASU No. 2016-02 on January 1, 2019 using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented.

 

Adoption of this standard resulted in the recognition of operating lease right-of-use assets of $4,988,000 and corresponding lease liabilities of $4,350,000 on the consolidated balance sheet as of January 1, 2019. An adjustment to Ada’s favorable lease of $739,000 and prepaid rent of $2,000, resulted in a cumulative effect adjustment of $103,000. The standard did not materially impact operating results or liquidity. Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included in Note 10, Leases.

  

Note 3. CONCENTRATIONS

 

Cash

 

Our cash balances are kept liquid to support our growing acquisition and infrastructure needs for operational expansion. The majority of the Company’s cash and cash equivalents are concentrated in one large financial institution, which is in excess of Federal Deposit Insurance Corporation (FDIC) coverage.

 

7

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

  

A summary of the financial institutions that had a cash and cash equivalents in excess of FDIC limits of $250,000 at June 30, 2019 and December 31, 2018 is presented below:

 

   June 30,
2019
   December 31,
2018
 
Total Cash in excess of FDIC limits of $250,000   3,981,000    6,039,000 

 

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 has not experienced any losses in such accounts.

  

Vendor

 

We source from multiple suppliers. These suppliers range from small independent businesses to multinational conglomerates. For the six months ended June 30, 2019, we purchased approximately 68% of the goods we sell from our top 20 suppliers.

 

Purchase from one vendor in excess of 20% of total purchase is summarized in below table:

 

   June 30,
2019
   December 31,
2018
 
Purchase in excess of 20% of total purchase        
Vendor A   21%   30%

  

Note 4. DISAGGREGATION OF REVENUES

 

The Company reports the following segments in accordance with management guidance: Vapor and Grocery. When the Company prepares its internal management reporting to evaluate business performance, we disaggregate revenue into the following categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. 

  

   Three Months Ended   Six Months Ended 
   June 30,
2019
   June 30,
2018
   June 30,
2019
   June 30,
2018
 
Vapor  $1,085,259   $1,140,640   $2,309,300   $2,449,534 
Grocery   2,731,754    2,137,281    5,887,819    4,435,792 
Total revenue  $3,817,013   $3,277,921   $8,197,199   $6,885,326 
                     
Retail Vapor  $1,085,181   $1,139,621   $2,308,904   $2,442,476 
Retail Grocery   2,349,138    1,526,587    5,010,081    3,173,222 
Food service/restaurant   310,124    398,835    657,775    796,399 
Online/eCommerce   66,031    206,904    204,855    457,864 
Wholesale Grocery   6,462    4,955    15,107    8,307 
Wholesale Vapor   77    1,019    397    7,058 
Total revenue  $3,817,013   $3,277,921   $8,197,119   $6,885,326 

 

8

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

   

Note 5. INTANGIBLE ASSETS

 

Intangible assets, net are as follows: 

 

June 30, 2019  Useful Lives
(Years)
  Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
 
Trade names  8-10 years   993,000    (303,265)   689,735 
Customer relationships  4-10 years   1,228,000    (167,136)   1,060,864 
Patents  10 years   270,250    (35,514)   234,736 
Non-compete  4 years   174,000    (23,563)   150,437 
Website  3 years   4,500    (4,500)   - 
Intangible assets, net     $2,669,750   $(533,978)  $2,135,772 

 

 December 31, 2018  Useful Life 

Gross

Carrying Amount

  

Accumulated

Amortization

  

Net Carrying

Amount

 
Favorable lease  15 years  $890,000   $(150,580)  $739,420 
Trade names  8-10 years   993,000    (252,329)   740,671 
Customer relationships  4-10 years   1,228,000    (41,010)   1,186,990 
Patents  10 years   245,250    (22,940)   222,310 
Non-compete  4 years   174,000    (1,812)   172,188 
Website  3 years   4,500    (3,875)   625 
Intangible assets, net     $3,534,750   $(472,546)  $3,062,204 

 

 Intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense amounted to approximately $212,000 and $81,000 for the six months ended June 30, 2019 and 2018, respectively. Due to adoption of ASU No. 2016-02 on January 1, 2019, the Company’s favorable lease intangible asset associated with its Ada’s Natural Market location, with a net balance of $739,000 as of December 31, 2018, was reclassified to right-of-use asset in the Ada’s lease amortization schedule to correct the January 1, 2019 opening balance sheet. Future annual estimated amortization expense is as follows:

 

Years ending December 31,    
2019 (remaining six months)  $212,325 
2020   424,650 
2021   417,650 
2022   402,265 
2023   163,400 
Thereafter   515,482 
Total  $2,135,772 

 

9

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 6. CONTRACT ASSETS AND CONTRACT LIABILITIES

 

The Company’s contract assets consist of sales commissions to third parties that support and facilitate the completion of complex transactions, for which the Company has a performance obligation to pay due to the fact that the sales agreement was fully executed.

 

The Company’s deferred revenue consists of gift cards and loyalty rewards, for which the Company has a performance obligation to deliver products when customers redeem balances or terms expire through breakage. Our breakage policy is twenty-four months for gift cards, twelve months for Grocery loyalty rewards, and six months for Vapor loyalty rewards. As such, all contract liabilities are expected to be recognized within a twenty-four month period. Revenue is recognized when gift card and loyalty points are redeemed.

 

A summary of the net changes in contract liabilities activity for the six months ended June 30, 2019 and 2018 is presented below:

 

   June 30,
2019
   June 30,
2018
 
Beginning balance as January1,  $442,630   $61,312 
Issued   64,452    80,126 
Redeemed   (67,781)   (111,173)
Breakage recognized   (1,222)   347 
Fulfillment of contract   (270,698)   - 
Ending balance as of June 30,  $167,381   $30,612 

 

Note 7. STOCKHOLDERS’ EQUITY

   

Series A Warrants

 

A summary of warrant activity for the six months ended June 30, 2019 is presented below:

 

  

Exercise Price

  

Warrant Common Stock Equivalent

   Remaining Contractual Term 
Outstanding at January 1, 2019  $0.0001    41,642,670,772    1.50 
Warrants settlement  $-    -      
Cashless exercises for common stock  $(0.0001)   (21,743,172)     
Black Scholes Value adjustment  $(0.0001)   (115,104,728)     
Outstanding at June 30, 2019  $0.0001    41,505,822,872    1.00 

 

Pursuant to the Series A Warrant agreement, the Black Scholes value is calculated by a third-party and utilized in calculating the warrant common stock equivalents at the point of cashless exercise. As such, the value is computed at the end of each reporting period to determine the amount of warrant common stock equivalents outstanding using the formula below:

 

(Series A Warrants exercised * Black Scholes Value) / Closing common stock bid price as of two trading days prior.

 

A summary of the outstanding warrant common stock equivalents at June 30, 2019 and December 31, 2018 is presented below:

 

   June 30,
2019
   December 31,
2018
 
Warrants outstanding (A)   2.7334    2.7348 
Black Scholes value (B)   1,518,481    1,522,692 
Subtotal (C)=(A) x (B)   4,150,582    4,164,258 
Closing bid stock price (D)  $0.0001   $0.0001 
Warrant common stock equivalent (C)/(D)   41,506,000,000    41,643,000,000 

 

10

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

   

Stock Options

 

The Company recognized stock-based compensation in connection with the amortization of stock options, net of recovery of stock-based charges for forfeited unvested stock options. Stock-based compensation expense is included as part of operating expenses in the accompanying consolidated statements of operations.

 

A summary of compensation expense recognized is presented below:

 

   Three Months Ended   Six Months Ended 
   June 30,
2019
   June 30,
2018
   June 30,
2019
   June 30,
2018
 
Stock-based compensation  $83,175   $86,616   $196,254   $1,158,506 

  

At June 30, 2019, the amount of unamortized stock-based compensation expense associated with unvested stock options granted to employees, directors and consultants was approximately $40,000, which will be amortized over a weighted average period of 1 year.

  

Loss Per Share

 

Basic loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed using the weighted average number of shares of common stock outstanding and, if dilutive, potential shares of common stock outstanding during the period. Potential common shares consist of incremental shares of common stock issuable upon (a) the exercise of stock options (using the treasury stock method); (b) the conversion of Series A convertible preferred stock; (c) the exercise of warrants (using the if-converted method); (d) the vesting of restricted stock units; and (e) the conversion of convertible notes payable. Diluted income (loss) per share excludes the potential common shares, as their effect is antidilutive.

 

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

 

   June 30, 
   2019   2018 
         
Preferred stock   201,501,142,000    - 
Stock options   90,012,230,680    89,568,899,200 
Warrants   41,505,822,872    506,136,603,028 
Total   333,019,195,552    595,705,502,228 

  

Note 8. FAIR VALUE MEASUREMENTS

 

The fair value framework under FASB’s guidance requires the categorization of assets and liabilities into three levels based upon the assumptions used to measure the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, would generally require significant management judgment. The three levels for categorizing assets and liabilities under the fair value measurement requirements are as follows:

 

Level 1: Fair value measurement of the asset or liability using observable inputs such as quoted prices in active markets for identical assets or liabilities;

 

11

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

  

Level 2: Fair value measurement of the asset or liability using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and

 

Level 3: Fair value measurement of the asset or liability using unobservable inputs that reflect the Company’s own assumptions regarding the applicable asset or liability.

 

Nonfinancial assets such as goodwill, other intangible assets, and long-lived assets held and used are measured at fair value and tested for impairment annually, or when there is an indicator of impairment between annual tests.

 

The following table summarizes the liabilities measured at fair value on a recurring basis as of June 30, 2019:

 

   Level 1   Level 2   Level 3   Total 
LIABILITIES                
Derivative liabilities – warrants  $   -   $1,722,028   $    -   $1,722,028 
Total derivative liabilities – warrants  $-   $1,722,028   $-   $1,722,028 

 

The following table summarizes the liabilities measured at fair value on a recurring basis as of December 31, 2018:

 

   Level 1   Level 2   Level 3   Total 
LIABILITIES                
Derivative liabilities – warrants  $    -   $1,722,928   $    -   $1,722,928 
Total derivative liabilities – warrants  $-   $1,722,928   $-   $1,722,928 

 

Note 9. COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

From time to time the Company may be involved in various claims and legal actions arising in the ordinary course of our business. With respect to legal costs, we record such costs as incurred.

 

A subsidiary of the Company is a defendant in two lawsuits that stem from purported defect and negligence concerning electronic cigarette products it sold. The action was filed in state court in Broward County, Florida. Plaintiff is seeking damages for his physical injuries as well as his pain and suffering. Plaintiff claims that he was injured by a vape battery explosion that occurred in his pocket on or about September 2017 and that he purchased the battery from a store operated by the Company’s subsidiary.

 

The other lawsuit was filed in the 8th Judicial Circuit in and for Alachua Court, Florida. Plaintiff claimed that a battery explosion occurred in his pocket on or about May 1, 2018. Plaintiff sued the Company, alleging design and manufacturing defects in the subject battery, as well as breach of warranties and negligence, which caused or contributed to the Plaintiff’s injuries and damages.

 

While discovery is at its infancy, the Company intends to vigorously dispute these claims that have been asserted against it.

 

12

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

  

Note 10. LEASE

 

The Company has various lease agreements with terms up to 20 years, including leases of retail stores, headquarter and equipment. All the leases are classified as operating leases. The Company adopted Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”) effective January 1, 2019 using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. We elected not to reassess whether any expired or existing contracts are or contain leases, reassess the lease classification for any expired or existing leases, nor reassess initial direct costs for any existing leases.

 

The standard had an impact on the Company’s condensed consolidated balance sheets, but did not have a material impact on the Company’s condensed consolidated statements of operations or condensed consolidated statements of cash flows upon adoption. Upon adoption, the Company recognized right-of-use asset of $5.0 million and lease liability of $4.3 million for operating leases as of January 1, 2019.

 

The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of June 30, 2019.

 

Maturity of Lease Liabilities by Fiscal Year    
2019 (remaining)  $357,733 
2020   621,435 
2021   495,154 
2022   455,916 
2023   441,262 
Thereafter   2,888,699 
Total undiscounted operating lease payments  $5,260,199 
Less: Imputed interest   (1,199,421)
Present value of operating lease liabilities  $4,060,778 
      
Balance Sheet Classification     
Operating lease liability, current  $495,075 
Operating lease liability, net of current   3,565,703 
Total operating lease liabilities  $4,060,778 
Other Information     
Weighted-average remaining lease term for operating leases   11 years 
Weighted-average discount rate for operating leases   4.8%

 

Components of lease cost are as follows:

 

   June 30,
2019
 
Operating lease cost  $255,605 
Variable lease cost   164,719 
Short-term lease cost   71,682 
Total Rent Expense  $492,006 

 

13

 

 

HEALTHIER CHOICES MANAGEMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

Cash Flows

 

Cash paid for amounts included in the present value of operating lease liabilities was $289,000 during first two quarters 2019 and was included in operating cash flows. The amortization of the right-of-use asset of $327,000 was included in operating cash flows.

 

Supplemental balance sheet information related to our operating leases is as follows:

 

   Balance Sheet Classification 

January 1,
2019

   June 30,
2019
 
Right of use asset  Other assets  $4,988,227   $4,660,940 
Lease liability, current  Current liabilities  $553,316   $495,075 
Lease liability, net of current  Other liabilities  $3,796,312   $3,565,703 

  

  

14

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED 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”), The Vitamin Store, LLC, Healthy U Wholesale, Inc., The Vape Store, Inc. (“Vape Store”), Vaporin, Inc. (“Vaporin”), Smoke Anywhere U.S.A., Inc. (“Smoke”), Emagine the Vape Store, LLC (“Emagine”), IVGI Acquisition, Inc., Vapormax Franchising LLC, Vaporin LLC, and Vaporin Florida, Inc. . All intercompany accounts and transactions have been eliminated in consolidation.

 

Company Overview

 

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 Company currently operates ten retail vape stores in the Southeast region of the United States, through which it offers e-liquids, vaporizers and related products. The Company markets its Q-Cup™ technology under the vape segment. This Q-Cup™ technology provides significantly more efficiency and an “on the go” solution for consumers who prefer to vape concentrates either medicinally or recreationally. The Company also operates Ada’s Natural Market, a natural and organic grocery store, through its wholly owned subsidiary Healthy Choice Markets, Inc. and Paradise Health and Nutrition, stores that 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 through its wholly owned subsidiary Healthy Choice Markets 2, LLC.

 

Going Concern and Liquidity

 

The unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q have been prepared in conformity with 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 unaudited consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

The Company incurred a loss from operations of approximately $2.0 million for the six months ended June 30, 2019. As of June 30, 2019, cash and cash equivalents totaled approximately $5.0 million. While we anticipate that our current cash, cash equivalents, and cash to be generated from operations will be sufficient to meet our projected operating plans for the foreseeable future through a year and a day from the issuance of these unaudited consolidated financial statements, should we require additional funds (either through equity or debt financings, collaborative agreements or from other sources) we have no commitments to obtain such additional financing, and we may not be able to obtain any such additional financing on terms favorable to us, or at all. If adequate financing is not available, the Company will further delay, postpone or terminate product and service expansion and curtail certain selling, general and administrative operations. The inability to raise additional financing may have a material adverse effect on the future performance of the Company.

 

Factors Affecting Our Performance

 

We believe the following factors affect our performance:

 

Vapor Retail: We believe the operating performance of our vapor retail stores will affect our revenue and financial performance. The Company has a total of ten retail vape stores, which are located in Florida, Georgia and Tennessee. The Company has ceased plans to increase the number of retail vape stores due to adverse industry trends and increasing federal and state regulations that, if implemented, may negatively impact future retail revenues.

 

15

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED OPERATIONS – (Continued)

  

Inventory Management: Our vapor segment revenue trends are affected by an evolving product acceptance and consumer demand. We are creating and offering new products to our retail vapor customers. Evolving product development and technology impacts our licensing and intellectual properties spending. We expect the transition to vaporizer and advanced technology and enhanced performance products to continue and will impact our overall operating results in the future.

 

Increased Competition: The launch by national competitors in both of our business reporting segments have made it more difficult to compete on prices and to secure business. We expect increased product supply and downward pressure on prices to continue and impact our operating results in the future. We also expect the continued expansion of national grocery chains, which leads to greater competition, to impact our operating results in

the future.

 

Results of Operations

 

The following table sets forth our unaudited condensed consolidated Statements of Operations for the three months ended June 30, 2019 and 2018 that is used in the following discussions of our results of operations:

 

   Three Months Ended
June 30,
   2019 to 2018 
   2019   2018   Change $ 
SALES            
Vapor sales, net  $1,085,259   $1,140,640   $(55,381)
Grocery sales, net   2,731,754    2,137,281    594,473 
TOTAL SALES, NET   3,817,013    3,277,921    539,092 
                
Cost of sales vapor   442,931    565,054    (122,123)
Cost of sales grocery   1,711,791    1,281,687    430,104 
GROSS PROFIT   1,662,291    1,431,180    231,111 
                
OPERATING EXPENSES               
Advertising   45,230    43,701    1,529 
Selling, general and administrative   2,489,262    1,975,482    513,780 
Total operating expenses   2,534,492    2,019,183    515,309 
LOSS FROM OPERATIONS   (872,201)   (588,003)   (284,198)
                
OTHER INCOME (EXPENSE)               
Loss on investment   (19,286)   -    (19,286)
Other income (expense)   -    107,500    (107,500)
Interest income (expense)   (12,827)   21,373    (34,200)
Total other income (expense), net   (32,113)   128,873    (160,986)
                
NET LOSS  $(904,314)  $(459,130)  $(445,184)

 

Net Vapor sales decreased $55,000 to $1,085,000 for the three months ended June 30, 2019 as compared to $1,141,000 for the same period in 2018. The decrease in sales is primarily due to the decreased number of stores – ten stores open during the three months ended June 30, 2019 as compared to twelve retail stores and one wholesale location for the same period in 2018.

 

Net Grocery sales increased $594,000 to $2,732,000 for the three months ended June 30, 2019 as compared to $2,137,000 for the same period in 2018. The increase in sales is primarily due to the acquisition of three Paradise Health and Nutrition stores.

 

16

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED OPERATIONS – (Continued)

  

Vapor cost of goods sold for the three months ended June 30, 2019 and 2018 were $443,000 and $565,000, respectively, a decrease of $122,000. The decrease is primarily due to decreases in product costs during the three months ended June 30, 2019 as compared to the same period in 2018. Gross profit was $642,000 and $576,000 for the three months ended June 30, 2019 and 2018, respectively. 

 

Grocery cost of goods sold for the three months ended June 30, 2019 and 2018 were $1,712,000 and $1,282,000 respectively, an increase of $430,000. The increase is primarily due to increases in sales and cost of goods sold from the acquisition of three Paradise Health and Nutrition stores. Gross profit was $1,020,000 and $856,000 for the three months ended June 30, 2019 and 2018, respectively.

 

Selling, general and administrative expenses increased $514,000 to $2,489,000 for the three months ended June 30, 2019 compared to $1,975,000 for the same period in 2018. The increase is primarily attributable to increases in payroll and employee related cost of $163,000, occupancy costs of $113,000, professional fee of $90,000, depreciation and amortization of $60,000, and insurance of $28,000.

 

Net other expense of $32,000 for the three months ended June 30, 2019 includes loss on investment of $19,000, and interest expense of $39,000, offset by interest income of $26,000. Net other income of $129,000 for the three months ended June 30, 2018 includes other income of $108,000, and interest income of $22,000, offset by interest expense of $156.

 

The following table sets forth our unaudited consolidated Statements of Operations for the six months ended June 30, 2019 and 2018 that is used in the following discussions of our results of operations:

 

   Six Months Ended
June 30,
   2019 to 2018 
   2019   2018   Change $ 
SALES            
Vapor sales, net  $2,309,300   $2,449,534   $(140,234)
Grocery sales, net   5,887,819    4,435,792    1,452,027 
TOTAL SALES, NET   8,197,119    6,885,326    1,311,793 
                
Cost of sales vapor   952,347    1,141,715    (189,368)
Cost of sales grocery   3,679,587    2,667,965    1,011,622 
GROSS PROFIT   3,565,185    3,075,646    489,539 
                
OPERATING EXPENSES               
Advertising   89,604    81,464    8,140 
Selling, general and administrative   5,435,343    5,073,209    362,134 
Total operating expenses   5,524,947    5,154,673    370,274 
LOSS FROM OPERATIONS   (1,959,762)   (2,079,027)   119,265 
                
OTHER INCOME (EXPENSE)               
Loss on investment   (44,999)   -    (44,999)
Other income (expense)   (692)   317,500    (318,192)
Interest income (expense)   (11,390)   32,761    (44,151)
Total other income (expense), net   (57,081)   350,261    (407,342)
                
NET LOSS  $(2,016,843)  $(1,728,766)  $(288,077)

 

17

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED OPERATIONS – (Continued)

  

Net Vapor sales decreased $140,000 to $2,309,000 for the six months ended June 30, 2019 as compared to $2,450,000 for the same period in 2018. The decrease in sales is primarily due to ten stores open during the six months ended June 30, 2019 as compared to twelve retail stores and one wholesale location for the same period in 2018.

 

Net Grocery sales increased $1,452,000 to $5,888,000 for the six months ended June 30, 2019 as compared to $4,436,000 for the same period in 2018. The increase in sales is primarily due to the acquisition of three Paradise Health and Nutrition stores.

 

Vapor cost of goods sold for the six months ended June 30, 2019 and 2018 were $952,000 and $1,142,000, respectively, a decrease of $189,000. The decrease is primarily due to the decreased number of stores. Gross profit was $1,357,000 and $1,308,000 for the six months ended June 30, 2019 and 2018, respectively.

 

Grocery cost of goods sold for the six months ended June 30, 2019 and 2018 were $3,680,000 and $2,668,000, respectively, an increase of $1,012,000. The increase is primarily due to increases in sales and cost of goods sold from the acquisition of three Paradise Health and Nutrition stores. Gross profit was $2,208,000 and $1,768,000 for the six months ended June 30, 2018 and 2018, respectively.

 

Selling, general and administrative expenses increased $362,000 to $5,435,000 for the six months ended June 30, 2019 compared to $5,073,000 for the same period in 2018. The increase is primarily attributable to increases in payroll and employee related cost of $644,000, occupancy costs of $198,000, professional fee of $158,000, depreciation and amortization of $125,000, and taxes, licenses & permits of $86,000, offset by decreases in stock-based compensation of $962,000.

 

Net other expense of $57,000 for the six months ended June 30, 2019 includes loss on investment of $45,000, interest expense of $69,000 offset by interest income of $58,000, other income of $25,000 offset by other expense of $25,000. Net other income of $350,000 for the six months ended June 30, 2018 includes other income of $318,000, and interest income of $33,000, offset by interest expense of $360.

 

The company did not incur activity from discontinued operations for the six months ended June 30, 2019 or for the same period in 2018.

 

Liquidity and Capital Resources

 

   Six Months Ended
June 30,
 
   2019   2018 
         
Net cash used in operating activities  $(2,089,989)  $(404,223)
Net cash provided by investing activities   57,570    (57,720)
Net cash provided by financing activities   13,777    (1,041)
   $(2,018,642)  $(462,984)

 

Our net cash used in operating activities of $2.1 million for the six months ended June 30, 2019 resulted from our net loss of $2.0 million, a net cash usage of $269,000 from changes in operating assets and liabilities, offset by share-based compensation expense of $196,000. Our net cash used in operating activities of $404,000 for the six months ended June 30, 2018 resulted from our net loss of $1.7 million, a net cash provided by changes in operating assets and liabilities of $166,000, offset by share-based compensation expense of $1.2 million.

 

The net cash provided by investing activities of $58,000 for the six months ended June 30, 2019 resulted from payments received on the VPR Brands L.P. Note. The net cash used in investing activities of $57,000 for the six months ended June 30, 2018 resulted from the purchases of a patent and property and equipment.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED OPERATIONS – (Continued)

  

The net cash provided by financing activities of $14,000 for the six months ended June 30, 2019 resulted from $132,000 proceeds from the credit line with Professional Bank, offset by $118,000 of loan principle payment. The net cash used in financing activities of $1,000 for the six months ended June 30, 2018 resulted from loan payments.

 

At June 30, 2019 and December 31, 2018, we did not have any material financial guarantees or other contractual commitments with vendors that are reasonably likely to have an adverse effect on liquidity.

 

Our cash balances are kept liquid to support our growing acquisition and infrastructure needs for operational expansion. The majority of our cash and cash equivalents are concentrated in three financial institutions and are generally in excess of the FDIC insurance limit. The Company has not experienced any losses on its cash and cash equivalents. The following table presents the Company’s cash position as of June 30, 2019 and December 31, 2018.

   June 30,
2019
   December 31,
2018
 
         
Cash  $5,042,612   $7,061,253 
Total assets  $16,735,752   $15,172,663 
Percentage of total assets   30.13%   46.54%

 

The Company reported a net loss of $2.0 million for the six months ended June 30, 2019. The Company also had positive working capital of $1.9 million. The Company expects to continue incurring losses for the foreseeable future and may need to raise additional capital to satisfy warrant obligations, and to continue as a going concern.

 

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 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 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 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.

 

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 2018 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 consolidated financial statements.

     

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED OPERATIONS – (Continued)

  

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 warrant exercises and stock sales, having the authorized capital to issue stock to exercising Series A warrant holders, 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 

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 June 30, 2019 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.

 

In planning and performing its audit of our financial statements for the year ended December 31, 2018 in accordance with standards of the Public Company Accounting Oversight Board, our independent registered public accounting firm noted material weaknesses in internal control over financial reporting. A list of our 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

 

Weakness around our inventory count procedures

 

Segregation of duties due to lack of personnel

 

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 June 30, 2019 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED OPERATIONS – (Continued)

  

Changes in Internal Control over Financial Reporting

 

Following this assessment and during the six months ended June 30, 2019, we have undertaken an action plan to

strengthen internal controls and procedures:

 

We continue to improve the process around inventory counts and throughout the current year, we performed a blind-count in 75% of our stores with the purpose of validating our inventory records and increasing the staff knowledge around the importance of the new inventory procedures implemented. In addition, we had an independent third-party count over 50% of our inventory value conducted on June 30, 2019.

 

Our management has increased 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.

 

Our management continues to review ways in which we can make improvements in internal control over financial reporting. 

 

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PART II - OTHER INFORMATION

  

ITEM 1. LEGAL PROCEEDINGS.

 

From time to time the Company may be involved in various claims and legal actions arising in the ordinary course of our business. We do not have any legal proceedings which have a material impact to the financial statements as of June 30, 2019.

 

A subsidiary of the Company is a defendant in two lawsuits that stem from purported defect and negligence concerning electronic cigarette products it sold. The action was filed in state court in Broward County, Florida. Plaintiff is seeking damages for his physical injuries as well as his pain and suffering. Plaintiff claims that he was injured by a vape battery explosion that occurred in his pocket on or about September 2017 and that he purchased the battery from a store operated by the Company’s subsidiary.

 

The other lawsuit was filed in the 8th Judicial Circuit in and for Alachua Court, Florida. Plaintiff claimed that a battery explosion occurred in his pocket on or about May 1, 2018. Plaintiff sued the Company, alleging design and manufacturing defects in the subject battery, as well as breach of warranties and negligence, which caused or contributed to the Plaintiff’s injuries and damages.

 

While discovery is at its infancy, the Company intends to vigorously dispute these claims that have been asserted against it.

 

ITEM 1A. RISK FACTORS.

 

Not Applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None. 

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION.

 

Not Applicable.

 

ITEM 6. EXHIBITS.

 

See the exhibits listed in the accompanying “Index to Exhibits.”

    

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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: August 13, 2019 By: /s/ Jeffrey Holman
    Jeffrey Holman
    Chief Executive Officer
     
Date: August 13, 2019 By: /s/ John Ollet
    John Ollet
    Chief Financial Officer

 

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INDEX TO EXHIBITS

 

Exhibit       Incorporated by Reference   Filed or
Furnished
No.   Exhibit Description   Form   Date   Number   Herewith
31.1   Certification of Principal Executive Officer (302)               Filed
31.2   Certification of Principal Financial Officer (302)               Filed
32.1   Certification of Principal Executive Officer (906)               Furnished *
32.2   Certification of Principal Financial Officer (906)               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

 

*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.

  

 

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