Healthier Choices Management Corp. - Quarter Report: 2018 September (Form 10-Q)

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, 2018

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) 

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.

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

As of October 30, 2018, there were 65,506,264,170 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION 

Item 1. Financial Statements

HEALTHIER CHOICES MANAGEMENT CORP.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

See accompanying notes to unaudited consolidated financial statements

HEALTHIER CHOICES MANAGEMENT CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED) 

See accompanying notes to unaudited consolidated financial statements

HEALTHIER CHOICES MANAGEMENT CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2018

(UNAUDITED)

See accompanying notes to unaudited consolidated financial statements

Note: Amounts may not be additive due to rounding

HEALTHIER CHOICES MANAGEMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See accompanying notes to unaudited consolidated financial statements

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO 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 twelve 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. Ada’s Natural Market offers 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. 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 is partially filled with either cannabis or CBD concentrate (approximately 50mg). 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.

Going Concern and Liquidity

The accompanying unaudited 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, 2018, cash and cash equivalents totaled approximately $8.3 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. During the second quarter of 2018, the Company entered into a $2.0 million line of credit agreement with a financial institution that is subject to annual renewal with a variable interest rate that it is based on a rate of 1% over what is earned on the collateral amount. The collateral amount established in the arrangement with the financial institution is $2.0 million. In the third quarter of 2018, the Company used $0.5 million from the $2.0 million the line of credit at a variable interest rate, to issue a note receivable to VPR Brands LLC. The ability to raise additional financing may have a positive effect on the future performance of the Company.

Basis of Presentation and Principles of Consolidation

The Company’s unaudited consolidated financial statements are prepared in accordance with GAAP. The unaudited 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 unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The terms “we,” “us,” “our,” and the “Company” refer to Healthier Choices Management Corp. and its wholly-owned subsidiaries, Vaporin, Inc., The Vape Store, Inc. (“Vape Store”), Smoke Anywhere U.S.A., Inc. (“Smoke”), Emagine the Vape Store, LLC (“Emagine”), IVGI Acquisition, Inc., Vapormax Franchising LLC, Vaporin LLC, Vaporin Florida, Inc., Healthy U Wholesale, Inc. and Healthy Choice Markets, Inc. All intercompany accounts and transactions have been eliminated in consolidation.

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) 

Unaudited Interim Financial Information

The unaudited 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, 2018. 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 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, 2017 included in the Company’s Annual Report on Form 10-K for such year as filed with the SEC on March 15, 2018.  

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates in the Preparation of the Financial Statements

The preparation of unaudited 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 unaudited 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 assets and liabilities acquired in business combinations. Certain of management’s estimates could be affected by external conditions, including those unique to the Company’s industry, and general economic conditions. It is possible that these external factors could have an effect on the Company’s estimates that could cause actual results to differ from those estimates. The Company re-evaluates all accounting estimates at least quarterly based on these conditions and records adjustments when necessary.

Shipping and Handling

Shipping charges billed to customers are included in net sales and the related shipping and handling costs are included in cost of sales.

The following table provides a summary of the shipping and handling costs:

 Concentration of Risk

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.

A summary of the financial institutions that had a cash and cash equivalents in excess of FDIC limits of $250,000 at September 30, 2018 and December 31, 2017 is presented below:

The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests, as deposits are held in excess of federally insured limits. The Company has not experienced any losses in such accounts.

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Inventories

Inventories are stated at average cost. If the cost of the inventories exceeds their net realizable value, provisions are recorded to write down excess inventories to their net realizable value. The Company’s inventories consist primarily of merchandise available for resale, such as fresh produce, perishable grocery items and non-perishable consumable goods.

Revenue Recognition

Revenues from product sales and services rendered, net of promotional discounts, manufacturer coupons and rebates, return allowances, and sales and consumption taxes, are recorded when products are delivered, title passes to customers and collection is likely to occur. Title passes to customers at the point of sale for retail and upon delivery of products for wholesale. Return allowances, which reduce revenue, are estimated using historical experience.

The Company recognizes revenue in accordance with the following five-step model:

Accounting Standards Update (“ASU”) No. 2014-9, Revenue from Contracts with Customers (“ASU 2014-9”), is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition guidance. The Company adopted the standard on January 1, 2018 using the retrospective transition method, which requires reporting entities to apply the standard as of the earliest period presented in their financial statements. The adoption of the new standard resulted in an immaterial impact to the consolidated statements of operations for reclassifying $12,951 to net loss and an immaterial impact to the consolidated balance sheets for reclassifying $61,312 of contract liabilities from accrued expenses as of December 31, 2017. Contract liabilities consist of gift card and loyalty point program liabilities. See “Accounts Receivable, Contract Assets, and Deferred Revenue” significant accounting policy.

Adoption of ASU 2014-09 impacted the previously reported results for the three and nine months ended September 30, 2017 as follows:

Adoption of ASU 2014-09 impacted the previously reported balance sheet as of December 31, 2017 as follows:

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Accounts Receivable, Contract Assets, and Contract Liabilities

Accounts receivable are claims to consideration which are unconditional; meaning no performance obligations remain for the Company and only the passage of time is necessary before collection. Contract assets are distinguished from accounts receivable as performance obligations remain before claims to consideration become unconditional. By nature of the Company’s operations, contract assets are typically not recognized. Contract liabilities are recorded when customers transfer consideration in advance of delivery of products or services, which the Company records for gift cards and loyalty reward programs. When one party to an arrangement performs before the other(s), the Company records an account receivable, contract asset or contract liability.

The majority of arrangements with customers contain one performance obligation: to provide a distinct set of products or services. Most performance obligations are satisfied simultaneously as the Company exchanges products or services for customer payment. Exceptions include gift cards and loyalty rewards, for which the Company has a performance obligation to deliver products or services at a future date. As gift cards are purchased and loyalty points earned, contract liabilities are recorded until the performance obligations are satisfied through delivery of products or services or breakage based on gift card and loyalty reward program term limits. The Company’s breakage policy is twenty-four months for gift cards, twelve months for Grocery loyalty rewards, and six months for Vapor loyalty rewards. Loyalty rewards are earned at five percent on qualifying purchases and the reward functions as an allocation of transaction price from the period earned by the customer to the period the performance obligation is satisfied by the Company. As such, all contract liabilities are expected to be recognized within a twenty-four month period.

Recently Issued 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 on 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. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.

In July 2017, the FASB issued a two-part ASU No. 2017-11, I “Accounting for Certain Financial Instruments With Down Round Features” and II “Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception”. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) 

Note 3. 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.

Note 4. PREPAID EXPENSES AND VENDOR DEPOSITS

(1) Vendor deposits related to the sales contract with MJNE for the Q-Cups.

Note 5. INVESTMENT

During the third quarter of 2018, the Company invested $150,000 in 85,714 common stock shares at MJ Holdings, Inc.(“MJNE”), a publicly traded company. The investment was made based on the assumption of an increase in MJNE stock due to the sales agreement with the Company. The stock will be held indefinitely with the intention of producing a capital gain upon the sale at a future date.   The Company recorded the investment in MJNE at fair value with changes in the fair value reported through the income statement as the stock is traded on the OTC market. As of the September 30, 2018, the Company remeasured the fair value of the MJNE stock and recognized a gain on investment of $11,999. 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 6. NOTES RECEIVABLE AND OTHER INCOME

The Company entered into a secured, 36-month promissory note with VPR Brands L.P. for $582,260 on September 6, 2018. The note is composed of a principal amount of $500,000 (the “Promissory Note”) and an outstanding balance from prior secured notes of $82,260 (the “Note”). The Note bears an interest rate of 7%, which payments thereunder are $4,141 weekly, with such payments commencing as of September 14, 2018. The Company records all proceeds related to the interest of the Note as interest income as proceeds are received.

A summary of the Note as of September 30, 2018 is presented below:

For the three months ended September 30, 2018, the Company had a benefit of $82,260 related to the reversal of the outstanding valuation allowance reserve from prior notes receivable, recorded to other income in the Consolidated Statement of Operations.

For the nine months ended September 30, 2018, the company had a reversal of the valuation allowance reverse and notes receivable collections of $469,760 recorded to other income in the Consolidated Statement of Operations.

Note 7. INTANGIBLE ASSETS

Intangible assets, net are as follows: 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense amounted to $122,166 and $119,458 for the nine months ended September 30, 2018 and 2017, respectively. Future annual estimated amortization expense is as follows:

Note 8. CONTRACT ASSETS AND 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. During the three months ended September 30, 2018, the Company paid sales commissions of $180,000 related to the initial sale of the Q-Cup. As such, all contract assets are expected to be recognized as the order is being deliver to the customers.

The Company’s contract liabilities consist of customer deposits, 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.

A summary of the contract liabilities activity for the nine months ended September 30, 2018 and 2017 is presented below:

Note 9. ACCRUED EXPENSES

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 10. LINE OF CREDIT

The Company entered into a $2.0 million line of credit agreement with a financial institution that is subject to annual renewal with a variable interest rate that it is based on a rate of 1% over what is earned on the collateral amount. The collateral amount established in the arrangement with the financial institution is $2.0 million. On September 10, 2018, the Company withdrew $0.5 million from line of credit and the interest for the period was $126. As of September 30, 2018, the Company has not made any payments towards the principal amount borrowed from the credit line.   The maturity date for the line of credit is April 13, 2019.

Note 11. STOCKHOLDERS’ EQUITY

Modification of share-based payment awards to officers

On August 13, 2018, the Compensation Committee of the Board of Directors of the Company approved a modification of share-based payment awards to the Chief Executive Officer and Chief Operating Officer of the Company. As part of the share modification, the Chief Executive Officer and Chief Operating Officer were granted 11 billion and 8 billion shares of restricted common stock on the condition that same numbers of shares from their options to purchase Company common stock are forfeited. This restricted stock will vest one year following the date of issuance provided that the grantee remains an employee of the Company through each applicable vesting date. The share modification will not have an impact on the Consolidated Statements of Operations because both of the officers’ options plans have been fully amortized as of the first quarter of 2018.

Restricted Stock

On August 13, 2018, the Compensation Committee of the Board of Directors of the Company approved an issuance of awarded restricted stock to the Chief Financial Officer of the Company. The Chief Financial Officer was granted 3 billion shares of restricted common stock. This restricted stock will vest one year following the date of issuance provided that the grantee remains an employee of the Company through each applicable vesting date. The issuance of the restricted stock will have an impact on the Consolidated Statements of Operations because the awarded restricted common stock will be amortized on a straight-line basis over a period of twelve months. During the three months ended September 30, 2018, the Company recognized stock-based compensation expense of $50,000 from the awarded shares to the Chief Financial Officer.

Series B Convertible Preferred Stock

On August 16, 2018, the Company entered into agreements with certain holders of its Series A Warrants to exchange the Company’s Series B Convertible Preferred Stock for Series A Warrants. A total of 20,722 shares of Series B Stock were exchanged for 46,048,318 Series A Warrants (including those warrants issuable pursuant to a unit purchase option). Each share of Series B Stock “Series B Stock” has a stated value equal to $1,000 and is convertible into Common Stock on a fixed basis at a conversion price of $0.0001 per share.

Series A Warrants

A summary of warrant activity for the nine months ended September 30, 2018 is presented below:

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Pursuant to the Series A Warrant agreements, 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 number of warrant common stock equivalents outstanding are computed at the end of each reporting period 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 January 1, 2018 and September 30, 2018, is presented below:

Stock Options

During the three months ended September 30, 2018 and 2017, the Company recognized stock-based compensation of $0.1 million and $2.0 million, respectively, in connection with the amortization of stock options, net of recovery of stock-based charges for forfeited unvested stock options. During the nine months ended September 30, 2018 and 2017, the Company recognized stock-based compensation of $1.3 million and $5.3 million, respectively. Stock-based compensation expense is included as part of selling, general and administrative expense in the accompanying consolidated statements of operations.

At September 30, 2018, the amount of unamortized stock-based compensation expense associated with the unvested stock options granted to employees, directors and consultants was approximately $0.1 million, which will be amortized over a weighted average period of 0.21 years. At December 31, 2017, the amount of unamortized stock-based compensation expense associated with unvested stock options granted to employees, directors and consultants was approximately $1.3 million, which will be amortized over a weighted average period of 0.43 years.

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), and (b) the exercise of warrants (using the if-converted method). For the three and nine months ended September 30, 2018 and 2017, diluted loss per share excludes the potential shares of common stock, 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:

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 12. 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:

Nonfinancial assets such as goodwill, other intangible assets, and long-lived assets held and used are measured at fair value when there is an indicator of impairment and recorded at fair value when impairment is recognized or for a business combination.

The following table summarizes the liabilities measured at fair value on a recurring basis as of September 30, 2018:

The following table summarizes the liabilities measured at fair value on a recurring basis as of December 31, 2017:

Note 13. COMMITMENTS AND CONTINGENCIES

Fontem License Agreement

The Company has a non-exclusive license to certain products with Fontem Ventures B.V. “Fontem”. The Company will make quarterly license and royalty payments in perpetuity to Fontem based on the sale of qualifying products as defined in the license agreement at a royalty rate of 5.25%.

A summary of the royalty expenses as of September 30, 2018 and 2017 is presented below:

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

Employment Agreements

Jeffrey Holman

On August 13, 2018, the Company amended and restated its existing employment agreement with Jeffrey Holman, the Company’s Chief Executive Officer. The employment agreement is for an additional three year term and provides for an annual base salary of $450,000 and a target bonus for 2018 only in an amount ranging from 20% to 200% of his base salaries subject to the Company meeting certain earnings before interest, taxes depreciation and amortization performance milestones. Mr. Holman is entitled to receive severance payments, including two years of his then base salary and other benefits in the event of a change of control, termination by the Company without cause, termination for good reason by the executive or non-renewal by the Company. Mr. Holman was also granted 11 billion shares of restricted common stock on the condition that 11 billion of his options to purchase Company common stock are forfeited. This restricted stock will vest one year following the date of issuance provided that the grantee remains an employee of the Company through each applicable vesting date.   

John Ollet  

Effective as of August 13, 2018, the Company entered into an amendment to the existing employment agreement with the Company’s Chief Financial Officer, John Ollet. Mr. Ollet will continue to be employed as the Company’s Chief Financial Officer for an additional one year extension period through December 12, 2020. Mr. Ollet will receive a base salary of $250,000 for this additional year. Mr. Ollet was also granted 3 billion shares of restricted common stock. This restricted stock will vest one year following the date of issuance provided that the grantee remains an employee of the Company through each applicable vesting date.

Christopher Santi

Effective as of August 13, 2018, the Company entered into an amendment to the existing employment agreement with the Company’s President and Chief Operating Officer, Christopher Santi. Mr. Santi will continue to be employed as the Company’s President and Chief Operating Officer for an additional one year extension period through January 29, 2021. Mr. Santi will receive a base salary of $330,000 for this additional year. The severance pay period for termination without cause was increased to up to 18 months based on time of service. Mr. Santi was also granted 8 billion shares of restricted common stock on the condition that 8 billion of his options to purchase Company common stock are forfeited. This restricted stock will vest one year following the date of issuance provided that the grantee remains an employee of the Company through each applicable vesting date.

Exclusive Distribution Agreement

On August 17, 2018, the Company entered into an Exclusive Distribution Agreement with MJ Holdings, Inc. (“MJNE”). The Agreement grants MJNE the right to exclusively sell and distribute the Company’s cannabis and CBD patented and patent pending quartz ‘Q-Cup’ technology (the “Q-cups”) in the Nevada territory. Pursuant to the terms of the Agreement, MJNE agreed to purchased $2,000,000   in Q-Cups from the Company and MJNE has delivered the full purchase price in advance. The initial term of the Agreement is for one year with additional successive one-year renewals, subject to certain standard termination provisions. The Company has the option to terminate the Agreement on 30 days’ written notice if MJNE fails to purchase a sufficient minimum quantity of Q-cups from the Company. For each renewal term, MJNE’s minimum purchase obligation for the Q-cups is currently $6 million in required increments of at least $500,000 per month, subject to mutually agreed upon adjustments based upon the first year sales.

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 14. SEGMENT INFORMATION

Management determines the reportable segments based on the internal reporting used by our executives to evaluate performance and to assess where to allocate resources. The Company evaluates segment performance based on the segment gross profit before corporate expenses.

Summarized below are the total net sales and segment operating loss for each reporting segment:

For the three months ended September 30, 2018, depreciation and amortization was $19,317 and $69,685 for Vapor and Grocery, respectively. For the three months ended September 30, 2017, depreciation and amortization was $17,011 and $68,125 for Vapor and Grocery, respectively.

For the nine months ended September 30, 2018, depreciation and amortization was $52,872 and $208,471 for Vapor and Grocery, respectively. For the nine months ended September 30, 2017, depreciation and amortization was $50,270 and $197,985 for Vapor and Grocery, respectively.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Going Concern and Liquidity

The unaudited 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 $0.8 million and $2.9 million, respectively for the three months and nine months ended September 30, 2018. As of September 30, 2018, cash and cash equivalents totaled approximately $8.3 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 audited 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:

Retail Vapor: We believe the operating performance of our retail stores will affect our revenue and financial performance. The Company has a total of twelve retail vapor stores, which are located in Florida, Georgia, Tennessee and Alabama. 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.

Inventory Management: Our revenue trends are affected by an evolving product acceptance and consumer demand. We are creating and offering new products to our retail 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 operating results in the future.

Increased Competition: The launch by national competitors of branded vaporizer and e-cigarette products have made it more difficult to compete on prices and to secure business. We expect increased vaporizer product supply and downward pressure on prices to continue and impact our operating results in the future. We market and sell the similar vaporizers and e-liquids as our competitors and we sell our products at substantially similar prices as our competitors; accordingly, the key competitive factors for our success is to maintain the quality of service we offer our customers and effective marketing efforts.

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

Operating Results by Segment

The following table sets forth our unaudited consolidated Statements of Operations for the three months ended September 30, 2018 and 2017, that is used in the following discussions of our results of operations:

Net Vapor sales decreased $347,129 to $1,106,596 for the three months ended September 30, 2018 as compared to $1,453,725 for the same period in 2017. The decrease in sales is primarily due to the decreased number of stores – twelve; and one wholesale location open during the three months ended September 30, 2018 as compared to thirteen retail stores and two wholesale locations for the same period in 2017.

Net Grocery sales increased $495,396 to $1,923,878 for the three months ended September 30, 2018 as compared to $1,428,482 for the same period in 2017. The increase in sales versus prior year is primarily due to the online Amazon sales of $135,483 from Healthy U Wholesale and a decrease in sales for the same period in 2017 due to fact that Ada’s Natural Market suffered an extended power outage caused by hurricane Irma.

Vapor cost of goods sold for the three months ended September 30, 2018 and 2017 were $460,648 and $709,445, respectively, a decrease of $248,797. The decrease is primarily due to decreases in product costs and better buying during the three months ended September 30, 2018 as compared to the same period in 2017. Gross profit was $645,947 and $744,280 for the three months ended September 30, 2018 and 2017, respectively. 

Grocery cost of goods sold for the three months ended September 30, 2018 and 2017 were $1,183,033 and $893,838, respectively, an increase of $289,195. The increase is primarily due to increases in sales and cost of goods sold from Healthy U Wholesale. Gross profit as $740,846 and $534,644 for the three months ended September 30, 2018 and 2017, respectively.

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

Selling, general and administrative expenses decreased $2,132,609 to $2,123,471 for the three months ended September 30, 2018 compared to $4,256,080 for the same period in 2017. The decrease is primarily attributable to decreases in stock-based compensation of $1,897,620, payroll and employee related cost of $151,501, office expenses of $37,695, taxes, licenses and permits of $18,493, and insurance of $15,986.

Net other expense of $10,502,057 for the three months ended September 30, 2018 includes a change in fair value of Series A Warrants of $10,696,774, offset by other income of $164,259, and interest income of $31,847. Net other expense of $6,541 for the three months ended September 30, 2017 includes a change in fair value of Series A Warrants of $20,160, offset by other income of $9,665, and interest income of $4,463.

The company did not incur activity from discontinued operations for the three months ended September 30, 2018 as compared to net income of $204,507 for the same period in 2017.

The following table sets forth our unaudited consolidated Statements of Operations for the nine months ended September 30, 2018 and 2017 that is used in the following discussions of our results of operations:

Net Vapor sales decreased $884,527 to $3,556,130 for the nine months ended September 30, 2018 as compared to $4,440,657 for the same period in 2017. The decrease in sales is primarily due to twelve stores and one wholesale location open during the nine months ended September 30, 2018 as compared to thirteen retail stores and two wholesale locations for the same period in 2017.

Net Grocery sales increased $1,039,307 to $6,359,671 for the nine months ended September 30, 2018 as compared to $5,320,364 for the same period in 2017. The increase in sales is primarily attributable to increase in the online Amazon sales of $593,347 from Healthy U Wholesale, and an increase of $495,440 from Ada’s Natural Market.

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

Vapor cost of goods sold for the nine months ended September 30, 2018 and 2017 were $1,602,363 and $1,877,686, respectively, a decrease of $275,323. The decrease in sales is primarily due to the decreased number of twelve stores and one wholesale location open during the nine months ended September 30, 2018 as compared to thirteen retail stores and two wholesale locations for the same period in 2017. Gross profit was $1,953,767 and $2,562,971 for the nine months ended September 30, 2018 and 2017, respectively.

Grocery cost of goods sold for the nine months ended September 30, 2018 and 2017 were $3,850,998 and $3,118,563, respectively, an increase of $732,435. The increase is primarily due to increases in sales and cost of goods sold from Healthy U Wholesale. Gross profit was $2,508,673 and $2,201,801 for the nine months ended September 30, 2018 and 2017, respectively.

Selling, general and administrative expenses decreased $5,011,350 to $7,196,680 for the nine months ended September 30, 2018 compared to $12,208,030 for the same period in 2017. The decrease is primarily attributable to decreases in stock-based compensation of $4,039,646, payroll and benefits of $355,755, professional fees of $339,803, and taxes, licenses and permits of $137,352.

Net other expenses of $10,151,796 for the nine months ended September 30, 2018 includes a change in fair value of Series A Warrants of $10,696,774, offset by other income of $481,759, and interest income of $64,968. Net other expense of $51,940 for the nine months ended September 30, 2017 includes a change in fair value of Series A Warrants of $94,955, and interest expense of $3,552, offset by interest income of $26,441, and other income of $20,126.

The company did not incur activity from discontinued operations for the nine months ended September 30, 2018 as compared to net income of $281,483 for the same period in 2017.

Liquidity and Capital Resources

Our net cash provided by operating activities of $393,916 for the nine months ended September 30, 2018 resulted from a non-cash adjustment of $12,417,927, and a net cash usage of $999,511 from changes in operating assets and liabilities, offset by a net loss of $13,023,521. Our net cash used in operating activities of $2,504,549 for the nine months ended September 30, 2017 resulted from our net loss of $7,288,617, a net cash usage of $684,887 from changes in operating assets and liabilities offset by non-cash adjustments of $5,468,955. Our net cash used in discontinued operations of $221,424 for the nine months ended September 30, 2017 resulted from our net income from discontinued operations of $281,483 and a net cash usage of $502,907 from changes in assets and liabilities from discontinued operations.

The net cash used in investing activities of $581,936 for the nine months ended September 30, 2018 resulted from the issuance and collection of a note receivable, and purchases of a patent and property and equipment. The net cash used in investing activities of $164,168 for the nine months ended September 30, 2017 resulted from the purchases of a patent and property and equipment.

The net cash provided by financing activities of $576,205 for the nine months ended September 30, 2018 is due to proceeds from loan payable of $500,000 and proceeds from exercise of stock options of $77,778, offset by payment of $1,573 of loan payments. The net cash used in financing activities of $2,466,241 for the nine months ended September 30, 2017 is due to repurchases of Series A warrants totaling $2,427,267, payment of $53,054 of capital lease obligation and payment of $897 in loan payments, offset by proceeds from a loan payable of $13,977 and exercise of stock options of $1,000.

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

At September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017.

The Company reported a net loss of $13.0 million for the nine months ended September 30, 2018. The Company also had positive working capital of $4.9 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 except to the Company’s critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the Company’s 2017 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.

Seasonality

We do not consider our business to be seasonal.

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

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 September 30, 2018 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, 2017 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:

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, 2018 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). 

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

Changes in Internal Control over Financial Reporting

Following this assessment and during the nine months ended September 30, 2018, we have undertaken an action plan to strengthen internal controls and procedures:

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

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 September 30, 2018.

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.”

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.

INDEX TO EXHIBITS 

* 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.