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, 2017

 

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	☐   (Do not check if a smaller reporting company)	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

 

As of October 22, 2017, there were 29,348,867,108 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	1
Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016	1
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)	2
Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months ended September 30, 2017 (Unaudited)	3
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2017 and 2016 (Unaudited)	4
Notes to Consolidated Financial Statements (Unaudited)	5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	19
ITEM 4. Controls and Procedures	19
PART II OTHER INFORMATION	20
ITEM 1. Legal Proceedings	20
ITEM 1A. Risk Factors	20
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
ITEM 3. Defaults Upon Senior Securities	20
ITEM 4. Mine Safety Disclosures	20
ITEM 5. Other Information	20
ITEM 6. Exhibits	20
Signatures	21
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

HEALTHIER CHOICES MANAGEMENT CORP.

CONSOLIDATED BALANCE SHEETS

 

		September 30, 2017				December 31, 2016
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	8,231,314				$13,366,272
Due from merchant credit card processors, net of reserves			28,410				30,272
Accounts receivable, net of allowance of $10,734 and $33,367, respectively			74,937				25,798
Inventories			937,383				748,551
Prepaid expenses and vendor deposits			91,460				93,229
Current assets from discontinued operations			-				52,903
TOTAL CURRENT ASSETS			9,363,504				14,317,025
Property and equipment, net of accumulated depreciation of $345,211 and $293,398, respectively			611,096				638,926
Intangible assets, net			1,599,871				1,669,329
Goodwill			481,314				481,314
Other assets			119,285				128,157
TOTAL ASSETS		$	12,175,070			$	17,234,751
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	541,710			$	520,586
Accrued expenses			579,353				779,676
Current portion of capital lease			-				53,054
Current portion of loan payable			2,083				-
Derivative liabilities – non-consenting warrants			398,952				955,173
Derivative liabilities – consenting warrants			9,832,745				11,912,906
Current liabilities from discontinued operations			-				555,810
TOTAL CURRENT LIABILITIES			11,354,843				14,777,205
Loan payable, net of current portion			10,997				-
TOTAL LIABILITIES			11,365,840				14,777,205
COMMITMENTS AND CONTINGENCIES (SEE NOTE 10)
STOCKHOLDERS’ EQUITY
Common Stock, $.0001 par value per share, 750,000,000,000 shares authorized; 29,348,867,108 and 14,213,861,174 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively			2,934,887				1,421,386
Additional paid-in capital			7,921,897				3,782,818
Accumulated deficit			(10,047,554	)			(2,746,658	)
TOTAL STOCKHOLDERS’ EQUITY			809,230				2,457,546
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	12,175,070			$	17,234,751

 

See notes to unaudited consolidated financial statements

 

  

HEALTHIER CHOICES MANAGEMENT CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
SALES
Vapor sales, net		$	1,410,003			$	1,474,581			$	4,398,942			$	5,313,849
Grocery sales, net			1,447,040				1,575,037				5,349,800				2,085,293
TOTAL SALES, NET			2,857,043				3,049,618				9,748,742				7,399,142
Cost of sales vapor			709,445				655,856				1,877,686				2,441,715
Cost of sales grocery			893,838				939,606				3,118,563				1,251,872
GROSS PROFIT			1,253,760				1,454,156				4,752,493				3,705,555
OPERATING EXPENSES
Advertising			16,243				36,008				74,902				58,110
Selling, general and administrative			4,256,080				2,456,313				12,208,030				7,064,511
Impairment of goodwill and intangible assets			-				-				-				1,977,829
Retail store and kiosk closing costs			-				9,243				-				342,503
Total operating expenses			4,272,323				2,501,564				12,282,932				9,442,953
LOSS FROM OPERATIONS			(3,018,563	)			(1,047,408	)			(7,530,439	)			(5,737,398	)
OTHER INCOME (EXPENSE)
Gain (loss) on repurchase of Series A warrants			(20,160	)			3,437,221				(94,955	)			5,189,484
Change in fair value of derivative liabilities			-				(4,812,510	)			-				(18,489,507	)
Other income			9,665				-				20,126				-
Interest income			4,463				21,845				26,441				38,418
Interest expense			(419	)			(3,162	)			(3,552	)			(12,854	)
Total other expense, net			(6,451	)			(1,356,606	)			(51,940	)			(13,274,459	)
Net loss from continuing operations			(3,025,014	)			(2,404,014	)			(7,582,379	)			(19,011,857	)
Net income (loss) from discontinued operations			204,507				(8,915	)			281,483				(777,119	)
NET LOSS		$	(2,820,507	)		$	(2,412,929	)		$	(7,300,896	)		$	(19,788,976	)
NET LOSS PER SHARE-BASIC AND DILUTED
Continuing operations		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.01	)
Discontinued operations		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
NET LOSS PER SHARE -BASIC AND DILUTED		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.01	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC AND DILUTED			29,327,284,303				5,428,877,583				25,138,693,169				1,966,720,262

 

See notes to unaudited consolidated financial statements

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2017

(UNAUDITED)

 

		Common Stock								Additional Paid-In				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance – January 1, 2017			14,213,861,174			$	1,421,386			$	3,782,818			$	(2,746,658	)		$	2,457,546
Issuance of common stock in connection with cashless exercise of Series A warrants			15,125,005,934				1,512,501				(1,208,429	)			-				304,072
Issuance of stock options in connection with professional services			-				-				9,000				-				9,000
Stock options exercised			10,000,000				1,000				-				-				1,000
Stock-based compensation expense			-				-				5,338,508				-				5,338,508
Net loss			-				-				-				(7,300,896	)			(7,300,896	)
Balance – September 30, 2017			29,348,867,108			$	2,934,887			$	7,921,897			$	(10,047,554	)		$	809,230

 

See notes to unaudited consolidated financial statements

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Nine Months Ended September 30,
		2017				2016
OPERATING ACTIVITIES
Net loss		$	(7,300,896	)		$	(19,788,976	)
Adjustments to reconcile net loss to net cash used in operating activities:
(Income) loss from discontinued operations			(281,483	)			777,119
Change in allowances for bad debt			(22,633	)			52,684
Depreciation and amortization			261,456				223,772
Loss on disposal of property and equipment			-				103,312
Accretion of discounts on notes receivable from related party			-				(7,242	)
Accrued interest on notes receivable from related party			-				(8,773	)
(Gain) loss on repurchase of Series A warrants			94,955				(5,189,484	)
Write-down of obsolete and slow moving inventory			290,574				295,940
Stock-based compensation expense			5,338,508				61,794
Stock-based expense in connection with professional services			9,002				-
Impairment of goodwill and intangible assets			-				1,977,829
Change in fair value of derivative liabilities			-				18,489,507
Net cash used in discontinued operations			(221,424	)			(2,996,504	)
Changes in operating assets and liabilities:
Due from merchant credit card processors			1,862				(20,708	)
Accounts receivable			(26,506	)			(319,407	)
Inventories			(479,406	)			(438,509	)
Prepaid expenses and vendor deposits			1,769				410
Other assets			8,872				(2,573	)
Accounts payable			21,124				165,777
Accrued expenses			(200,323	)			(344,579	)
Customer deposits			-				17,997
NET CASH USED IN OPERATING ACTIVITIES			(2,504,549	)			(6,950,614	)
INVESTING ACTIVITIES
Acquisition of grocery store business			-				(2,910,612	)
Proceeds received from sale of tradename			-				100,000
Issuance of note receivable to related party in conjunction with sale of wholesale business			-				(500,000	)
Collection of loans receivable			-				139,765
Purchases of patent			(50,000	)			-
Purchases of property and equipment			(114,168	)			(29,763	)
NET CASH USED IN INVESTING ACTIVITIES			(164,168	)			(3,200,610	)
FINANCING ACTIVITIES
Proceeds from loan payable			13,977				-
Principal payments on loan payable			(897	)			-
Payments for repurchase of Series A warrants			(2,427,267	)			(3,278,827	)
Principal payments of capital lease obligations			(53,054	)			(50,050	)
Proceeds from exercise of stock options			1,000				-
NET CASH USED IN FINANCING ACTIVITIES			(2,466,241	)			(3,328,877	)
DECREASE IN CASH			(5,134,958	)			(13,480,101	)
CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD			13,366,272				27,214,991
CASH AND CASH EQUIVALENTS — END OF PERIOD		$	8,231,314			$	13,734,890
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest		$	3,552			$	12,854
NON-CASH INVESTING AND FINANCING ACTIVITIES
Recognition of discounts in connection with notes receivables to related party		$	-			$	(46,850	)
Issuance of common stock in connection with cashless exercise of Series A warrants		$	304,072			$	4,498,048
Cancellation of treasury stock		$	-			$	140,591
Preliminary Purchase Price Allocation in connection with the grocery store acquisition:
Amount allocated to goodwill		$	-			$	481,314
Property and equipment			-				500,225
Intangible assets - favorable lease			-				890,000
Intangible assets - customer relationships			-				60,000
Intangible assets - tradenames and technology			-				824,500
Inventory			-				253,524
Accrued expenses			-				(98,951	)
Cash used in the grocery store acquisition		$	-			$	2,910,612
Sale of Vape Wholesale Inventory and Business
Consideration received:
Note receivable from related party, net of discount		$	-			$	356,895
Note receivable from related party, net of discount			-				470,485
Treasury stock			-				140,591
Total consideration			-				967,971
Assets and liabilities transferred:
Inventory			-				(258,743	)
Accounts receivable, net			-				(244,735	)
Vendor deposits			-				(40,949	)
Accrued expenses			-				(35,273	)
Customer deposits			-				17,850
Loss on repurchase of treasury stock			-				61,850
Cash used in the sale of wholesale business		$	-			$	(500,000	)

 

See 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 operates thirteen vape retail stores in the Southeast region of the United States of America. The Company offers e-liquids vaporizers and related products through its vape retail stores. The Company sold its wholesale business on July 31, 2016. The sale of the wholesale business was not contemplated prior to July 1, 2016. The sale of the wholesale business qualifies as a discontinued operation and, accordingly, the Company has excluded results for the wholesale business operations from the Company’s continuing operations in the unaudited consolidated Statements of Operations for all periods presented.

 

On June 1, 2016, the Company acquired the business assets of Ada’s Whole Food Market LLC, a natural and organic grocery store, through its wholly owned subsidiary Healthy Choice Markets, Inc. The grocery store has been a leader in the natural grocery market in Fort Myers, Florida for the past 40 years, offering fresh, natural and organic products and specializing in facilitating a healthy, well balanced lifestyle. In addition to a comprehensive selection of vitamins and health & beauty products, the grocery store provides a fresh café and an organic juice bar.

 

In September 2017, Hurricane Irma struck Florida and caused major power outages to several of the Company’s operating facilities. Due to the loss of electricity, which lasted approximately one week, the Company suffered lost sales and inventory spoilage. The Company intends to submit insurance claims to recover the cost of lost sales and inventory spoilage, however, such claims have not, and may not, be accepted by our insurance carrier. 

 

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 incurred a loss from operations of approximately $7.5 million for the nine months ended September 30, 2017. As of September 30, 2017, cash and cash equivalents totaled approximately $8.2 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. 

 

Sourcing and Vendors

 

We source from multiple suppliers. These suppliers range from small independent businesses to multinational conglomerates. For the nine months ended September 30, 2017, we purchased approximately 75% of the goods we sell from our top 20 suppliers and approximately 40% of our total purchases were from one vendor.

 

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, Healthy Choice Markets, Inc., 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, and Vaporin Florida, 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, 2017. 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, 2016 included in the Company’s Annual Report on Form 10-K for such year as filed with the SEC on March 27, 2017. 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Reclassifications

 

Certain prior period amounts in the unaudited consolidated financial statements related to stock splits and the sale of discontinued operations have been reclassified to conform to the current period’s presentation. No changes to the Company’s net loss were made as a result of such reclassifications.

 

Segment Reporting

 

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the operating decision makers, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s decision-making group is the senior executive management team. The Company and the decision-making group views the Company’s operations and manage its business as two operating segments. All long-lived assets of the Company reside in the U.S.

 

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. For the nine months ended September 30, 2017 and 2016 shipping and handling costs of approximately $80,000 and $173,000, respectively, were included in cost of sales.

 

Concentration of Risk

 

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 Federal Deposit Insurance Corporation (“FDIC”) insurance limit. The Company has not experienced any losses on its cash and cash equivalents. 

 

At September 30, 2017, accounts receivable balances included a concentration from three customers with receivable balances ranging from approximately $15,000 to $17,000, all of which are greater than 10% of the total net accounts receivable balance. At December 31, 2016, accounts receivable balances included a concentration from three customers with receivable balances ranging from approximately $9,000 to $24,000, all of which are greater than 10% of the total net accounts receivable balance.

 

For the nine months ended September 30, 2017 and 2016, the Company did not have any customers with sales in excess of 10% of total sales.

 

 

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 inventory to its 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.

 

Identifiable Intangible Assets and Goodwill

 

Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain identifiable intangible assets are amortized over 3 and 15 years. Similar to tangible personal property and equipment, the Company periodically evaluates identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indefinite-lived intangible assets, such as goodwill are not amortized. The Company assesses the carrying amounts of goodwill for recoverability on at least an annual basis or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, and the useful life over which cash flows will occur. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for the Company.

 

During the third quarter of 2017, we changed the date of our annual impairment test from December 31st to September 30th. We believe the change in accounting principle related to changing our annual impairment testing date did not delay, accelerate, or avoid an impairment charge. We have determined that this change in accounting principle is preferable under the circumstances and does not result in adjustments to our financial statements when applied retrospectively. Our 2017 annual impairment test resulted in no impairment being recorded for the nine months ended September 30, 2017.

 

Adopted Accounting Pronouncements

 

In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. It is effective for annual reporting periods beginning after December 15, 2016. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 did not have a significant impact on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”). ASU 2016-09 requires an entity to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The adoption of ASU 2016-09 did not have a significant impact on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business” (“ASU 2017-01”). The amendments in ASU 2017-01 are to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The adoption of ASU 2017-01 did not have a significant impact on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 along with amending other parts of the goodwill impairment test. Under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, and interim periods therein with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. At adoption, this update will require a prospective approach. The adoption of ASU 2017-04 did not have a significant impact on the Company’s consolidated financial statements.

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which was subsequently modified in August 2015 by ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date”. As a result, the ASU No. 2014-09 is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. The core principle of ASU No. 2014-09 is that companies should recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects what the company expects to receive. It requires additional disclosures to describe the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. In 2016, the FASB issued additional ASUs that clarify the implementation guidance on principal versus agent considerations (ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scope improvements and practical expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections (ASU 2016-20). The Company will adopt the standard on January 1, 2018, but is still considering whether to use the retrospective or modified retrospective transition method. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.

 

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. 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 August 2016, the FASB issued ASU 2016-15 (Topic 230), “Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments”. The new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. The Company will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated cash flows and related disclosures.

 

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.

 

Note 3. DISCONTINUED OPERATIONS

 

Effective July 31, 2016, the Company sold its wholesale inventory and the related business operations (collectively, “Wholesale Business Assets”). The sale of the wholesale business qualifies as discontinued operations, and accordingly, the Company has excluded results for the wholesale business operations from the Company’s continuing operations in the unaudited consolidated Statements of Operations for all periods presented. The following table shows the results of the Company’s wholesale operations included in the loss from discontinued operations.  Sales shown in the following table are the elimination of sales returns reserves for which customers did not return products.

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Wholesale vapor sales, net		$	204,507			$	281,398			$	288,965			$	3,125,736
Cost of sales – vapor wholesale			-				203,482				-				2,832,564
Expenses – advertising selling, general and administrative			-				86,831				7,482				1,070,291
Total			-				290,313				7,482				3,902,855
Net income (1oss) from discontinued operations attributable to the wholesale business		$	204,507			$	(8,915	)		$	281,483			$	(777,119	)

 

The major classes of assets and liabilities of discontinued operations on the balance sheet are as follow:

 

		September 30, 2017				December 31, 2016
Assets
Accounts receivable		$	-			$	39,493
Due from merchant credit card processor, net			-				13,410
Total current assets from discontinued operations		$	-			$	52,903
Liabilities
Accrued expenses			-				555,810
Total current liabilities from discontinued operations		$	-			$	555,810

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

  

Note 4. ACQUISITION OF ADA’S WHOLE FOOD MARKET

 

On April 1, 2016, the Company’s wholly owned subsidiary Healthy Choice Markets Inc., entered into a Business Sale Agreement with Ada’s Whole Food Market LLC (the “Seller”) to purchase certain operating assets and assumed certain payables and a store lease obligation that constituted the business of Ada’s Natural Market grocery store (the “Grocery Acquisition”). The Grocery Acquisition was consummated on June 1, 2016 and the Company operates the grocery store under the same name, location, and management. At the closing of these transactions, the Company also entered into an employment agreement with the store manager.

 

Note 5. SEGMENT INFORMATION

 

Prior to the second quarter of 2016, the Company had a single reportable business segment, as it was a distributor and retailer of vapor products including vaporizers, e-liquids and electronic cigarettes. On June 1, 2016, the Company completed the Grocery Acquisition (see Note 4) and added a reportable segment. On July 31, 2016, the Company sold its wholesale inventory and related operations. The Company has excluded the results for the wholesale business, as discontinued operations, from the Company’s continuing operations for all periods presented. Management determines the reportable segments based on the internal reporting used by our Chief Operating Decision Makers 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:

 

		Three Months Ended
		Net Sales								Segment Gross Profit
		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
Vapor sales, net		$	1,410,003			$	1,474,581			$	700,558			$	818,725
Grocery sales, net			1,447,040				1,575,037				553,202				635,431
Total sales		$	2,857,043			$	3,049,618				1,253,760				1,454,156
Operating expenses											4,272,323				2,501,564
Operating loss											(3,018,563	)			(1,047,408	)
Other expense, net											(6,451	)			(1,356,606	)
Net loss from continuing operations											(3,025,014	)			(2,404,014	)
Net income (loss) from discontinued operations											204,507				(8,915	)
Net loss										$	(2,820,507	)		$	(2,412,929	)

 

For the three months ended September 30, 2017, depreciation and amortization was $17,011 and $68,125 for Vapor and Grocery, respectively. For the three months ended September 30, 2016, depreciation and amortization was $16,991 and $53,305 for Vapor and Grocery, respectively. 

 

		Nine Months Ended
		Net Sales								Segment Gross Profit
		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
Vapor sales, net		$	4,398,942			$	5,313,849			$	2,521,256			$	2,872,134
Grocery sales, net			5,349,800				2,085,293				2,231,237				833,421
Total sales		$	9,748,742			$	7,399,142				4,752,493				3,705,555
Operating expenses											12,282,932				9,442,953
Operating loss											(7,530,439	)			(5,737,398	)
Other expense, net											(51,940	)			(13,274,459	)
Net loss from continuing operations											(7,582,379	)			(19,011,857	)
Net income (loss) from discontinued operations											281,483				(777,119	)
Net loss										$	(7,300,896	)		$	(19,788,976	)

 

For the nine months ended September 30, 2017, depreciation and amortization was $50,270 and $197,985 for Vapor and Grocery, respectively. For the nine months ended September 30, 2016, depreciation and amortization was $58,239 and $70,757 for Vapor and Grocery, respectively. 

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 6. NOTES RECEIVABLE FROM RELATED PARTY

 

In connection with the sale of its wholesale business, the Company entered into two notes receivable with a related party. As consideration for the sale of wholesale inventory and business the Company received a secured, one-year promissory note in the principal amount of $370,000 (the “Acquisition Note”) bearing an interest rate of 4.5%, which payments thereunder are $10,000 monthly, with such payments commencing on October 28, 2016, with a balloon payment of the remainder of principal and interest due on July 29, 2017. As of September 30, 2017, the balloon payment had not been received.

 

The buyer and the Company entered into a secured, 36-month promissory note in the principal amount of $500,000 (the “Promissory Note”) bearing an interest rate of prime plus 2%, resetting annually on July 29^th, which payments thereunder are $14,000 per month, and commencing on January 26, 2017, with subsequent installments payable on the same day of each month thereafter, and in the 37^th month a balloon payment for all remaining accrued interest and principal due on July 29, 2019. The Company records all proceeds related to both notes as other income as proceeds are received. The notes were issued by an affiliate of the Company’s former Chief Executive Officer.

 

Note 7. INTANGIBLE ASSETS

 

Intangible assets, net are as follows: 

 

September 30, 2017		Useful Lives (Years)		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Favorable lease		15 years		$	890,000			$	(77,629	)		$	812,371
Trade names		10 years			820,000				(149,000	)			671,000
Customer relationships		5 years			60,000				(16,000	)			44,000
Technology		10 years			75,000				(5,000	)			70,000
Website		3 years			4,500				(2,000	)			2,500
Intangible assets, net				$	1,849,500			$	(249,629	)		$	1,599,871

 

December 31, 2016		Useful Lives (Years)		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Favorable lease		15 years		$	890,000			$	(33,859	)		$	856,141
Trade names		10 years			820,000				(87,500	)			732,500
Customer relationships		5 years			60,000				(7,000	)			53,000
Technology		10 years			25,000				(937	)			24,063
Website		3 years			4,500				(875	)			3,625
Intangible assets, net				$	1,799,500			$	(130,171	)		$	1,669,329

 

Intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense amounted to $119,458 and $51,155 for the nine months ended September 30, 2017 and 2016, respectively. Future annual estimated amortization expense is as follows: 

 

Years ending December 31,
2017 (remaining three months)		$	40,340
2018			161,361
2019			160,486
2020			159,861
2021			152,861
Thereafter			924,962
Total		$	1,599,871

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 8. STOCKHOLDERS’ EQUITY

 

Reverse Splits

 

On June 1, 2016, the Company’s Board of Directors effected a reverse stock split of the common stock at a ratio of 1-for-20,000. All share and per share amounts have been retroactively adjusted to reflect the reverse stock splits.

 

Compensatory Common Stock Summary

 

During the nine months ended September 30, 2017 and 2016, the Company recognized stock-based compensation expense related to compensatory Common Stock in the amount of $0 and $52,000, respectively. Stock-based compensation expense is included as part of selling, general and administrative expense in the accompanying consolidated statements of operations. As of September 30, 2017, there was no unamortized expense remaining related to stock awards because the remaining non-vested shares vested on April 1, 2016.

 

Series A Warrants

 

Through September 30, 2017, 1 Series A warrant has been exercised through the cashless exercise provision, resulting in the issuance of 15,125,005,934 shares of the Company’s common stock.

 

A summary of warrant activity for the nine months ended September 30, 2017 is presented below:

 

		Exercise Price				Warrant Common Stock Equivalent				Remaining Contractual Term
Outstanding at January 1, 2017		$	0.0001				634,754,364,551				3.60
Warrants repurchased		$	(0.000021	)			(114,796,220,280	)
Cashless exercises for common stock		$	(0.0001	)			(15,125,005,934	)
Black Scholes Value adjustment		$	(0.0001	)			(198,093,264	)
Outstanding at September 30, 2017		$	0.0001				504,635,045,073				2.85

 

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 January 1, 2017 and September 30, 2017 is presented below:

 

		September 30, 2017				January 1, 2017
Warrants outstanding			33				42
Black Scholes value			1,519,079				1,519,297
Closing bid stock price		$	0.0001			$	0.0001
Warrant common stock equivalent			504,635,045,073				634,754,364,551

 

Stock Options

 

During the three months ended September 30, 2017 and 2016, the Company recognized stock-based compensation of approximately $2,038,000 and $2,000, 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, 2017 and 2016, the Company recognized stock-based compensation of approximately $5,339,000 and $10,000, 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, 2017, the amount of unamortized stock-based compensation expense associated with unvested stock options granted to employees, directors and consultants was approximately $3.3 million, which will be amortized over a weighted average period of 0.6 years. At December 31, 2016, the amount of unamortized stock-based compensation expense associated with unvested stock options granted to employees, directors and consultants was approximately $0.5 million, which will be amortized over a weighted average period of 1.7 years. 

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 exercise of warrants (using the if-converted method). For the nine months ended September 30, 2017 and 2016, 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:

 

		September 30, 2017				September 30, 2016
Stock options			86,911,261,360				11,360
Warrants			504,635,045,073				655,691,759,993
Total			591,546,306,433				655,691,771,353

 

Note 9. 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;

 

●

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 September 30, 2017:

 

		Level 1				Level 2				Level 3				Total
LIABILITIES
Derivative liabilities – non-consenting warrants		$	-			$	398,952			$	-			$	398,952
Derivative liabilities – consenting warrants			-				9,832,745				-				9,832,745
Total derivative liabilities		$	-			$	10,231,697			$	-			$	10,231,697

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table summarizes the liabilities measured at fair value on a recurring basis as of December 31, 2016:

 

		Level 1				Level 2				Level 3				Total
LIABILITIES
Derivative liabilities – non-consenting warrants		$	-			$	955,173			$	-			$	955,173
Derivative liabilities – consenting warrants			-				11,912,906				-				11,912,906
Total derivative liabilities		$	-			$	12,868,079			$	-			$	12,868,079

 

The Company determined that its offer to purchase its Series A warrants for $0.000021 per warrant was the best indicator of the fair value of the derivative liabilities as of September 30, 2017 and December 31, 2016. 

 

Note 10. COMMITMENTS AND CONTINGENCIES

 

Employment and Consulting and Other Related Party Agreements

 

On April 8, 2016, Gregory Brauser informed the Board of his decision to resign from the Board and as President of the Company. Mr. Brauser’s resignation was not due to any disagreement with the Company on any matters relating to the Company’s operations, policies or practices. Through GAB Management Group, Inc., Mr. Brauser serves as a consultant to the Company pursuant to an Executive Services Consulting Agreement dated as of April 11, 2016 (the “Consulting Agreement”), the term of which is two years. Under the Consulting Agreement, GAB Management Group, Inc., will receive the following benefits in connection with consulting services that its principal, Mr. Brauser, provides to the Company: (1) an engagement fee of $50,000 payable at the time the Consulting Agreement is executed, and (2) thereafter monthly installments of $10,000 for 24 months.

 

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, 2017.

 

Purchase Commitments

 

At September 30, 2017 and December 31, 2016, the Company had vendor deposits of approximately $3,000 and $7,000, respectively, which are included as a component of prepaid expenses and vendor deposits in the consolidated balance sheets.

 

 

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

 

The following discussion and analysis should be read in conjunction with our unaudited interim 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 as a result of certain factors, including but not limited to those set forth under “Risk Factors” in our Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or the SEC, on March 27, 2017. The terms “we,” “us,” “our,” and the “Company” refer to Healthier Choices Management Corp. and its wholly-owned subsidiaries, Healthy Choice Markets, Inc., Vaporin, Inc., Vape Store, Smoke, 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 operates thirteen vape retail stores in the Southeast region of the United States of America. The Company offers e-liquids vaporizers and related products through its vape retail stores. The Company sold its wholesale business on July 31, 2016. The sale of the wholesale business was not contemplated prior to July 1, 2016. The sale of the wholesale business qualifies as a discontinued operation and accordingly the Company has excluded results for the wholesale business operations from the Company’s continuing operations in the unaudited consolidating Statements of Operations for all periods presented. 

 

On June 1, 2016, the Company acquired the business assets of Ada’s Whole Food Market LLC, a natural and organic grocery store, through its wholly owned subsidiary Healthy Choice Markets, Inc. The grocery store has been a leader in the natural grocery market in Fort Myers, Florida for the past 40 years, offering fresh, natural and organic products and specializing in facilitating a healthy, well balanced lifestyle. In addition to a comprehensive selection of vitamins and health & beauty products, the grocery store provides a fresh café and an organic juice bar. 

 

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.

 

We had a large number of warrants outstanding with features that made the warrants more debt-like than equity and could possibly result in cash outflows. Additionally, for the nine months ended September 30, 2017, we reported a net loss of $7,300,896 and had a working capital deficit of $1,991,339. These factors raised substantial doubt about our ability to continue as a going concern.

 

During 2016 and early 2017, we took steps to mitigate these factors by:

 

	●	increasing the number of authorized shares to 750,000,000,000 so that there would be sufficient shares available for issuance should all the warrant holders exercise; and
	●	entering into a Fifth Amended and Restated Series A Warrant Standstill Agreement (the “Fifth Amendment”) with warrant holders to effectively eliminate the possibility that warrant holders will exercise for anything other than shares.

 

The above steps substantially lowered our potential cash exposure. As a result, as of the date of the issuance of these financial statements, we believe our plans have alleviated substantial doubt about our ability to sustain operations for the foreseeable future through a year and a day from the issuance of these unaudited consolidated financial statements.

 

 

Factors Affecting Our Performance

 

We believe the following factors affect our performance:

 

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

 

Results of Operations

 

The following table sets forth our unaudited consolidated Statements of Operations for the three months ended September 30, 2017 and 2016 that is used in the following discussions of our results of operations:

 

		Three Months Ended September 30,								2016 to 2017
		2017				2016				Change
SALES
Vapor sales, net		$	1,410,003			$	1,474,581			$	(64,578	)
Grocery sales, net			1,447,040				1,575,037				(127,997	)
TOTAL SALES, NET			2,857,043				3,049,618				(192,575	)
Cost of sales vapor			709,445				655,856				53,589
Cost of sales grocery			893,838				939,606				(45,768	)
GROSS PROFIT			1,253,760				1,454,156				(200,396	)
OPERATING EXPENSES
Advertising			16,243				36,008				(19,765	)
Selling, general and administrative			4,256,080				2,456,313				1,799,767
Retail store and kiosk closing costs			-				9,243				(9,243	)
Total operating expenses			4,272,323				2,501,564				1,770,759
LOSS FROM OPERATIONS			(3,018,563	)			(1,047,408	)			(1,971,155	)
OTHER INCOME (EXPENSE)
Gain (loss) on repurchases of Series A warrants			(20,160	)			3,437,221				(3,457,381	)
Change in fair value of derivative liabilities			-				(4,812,510	)			4,812,510
Other income			9,665				-				9,665
Interest income			4,463				21,845				(17,382	)
Interest expense			(419	)			(3,162	)			2,743
Total other expense, net			(6,451	)			(1,356,606	)			1,350,155
Net loss from continuing operations			(3,025,014	)			(2,404,014	)			(621,000	)
Net income (loss) from discontinued operations			204,507				(8,915	)			213,422
NET LOSS		$	(2,820,507	)		$	(2,412,929	)		$	(407,578	)

 

Net vapor sales decreased $64,578 to $1,410,003 for the three months ended September 30, 2017 as compared to $1,474,581 for the same period in 2016. The decrease in sales is primarily due to the decreased number of thirteen stores open during the three months ended September 30, 2017 as compared to fourteen retail stores for the same period in 2016.

 

Net grocery sales decreased $127,997 to $1,447,040 for the three months ended September 30, 2017 as compared to $1,575,037 for the same period in 2016. The decrease in sales is primarily due to Ada’s Natural Market suffering an extended power outage caused by hurricane Irma, resulting in lost sales and inventory spoilage.

 

 

Vapor cost of goods sold for the three months ended September 30, 2017 and 2016 were $709,445 and $655,856, respectively, an increase of $53,589. The increase is primarily due to increases in product costs during the three months ended September 30, 2017 as compared to the same period in 2016. Gross profit from retail stores was $700,558 and $818,725 for the three months ended September 30, 2017 and 2016, respectively. 

 

Grocery cost of goods sold for the three months ended September 30, 2017 and 2016 were $893,838 and $939,606, respectively, a decrease of $45,768. The decrease is primarily due to Ada’s Natural Market suffering an extended power outage caused by hurricane Irma, resulting in lost sales and lower cost of goods sold, which was offset by spoiled inventory estimated at $80,000. Gross profit from grocery was $553,202 and $635,431 for the three months ended September 30, 2017 and 2016, respectively.

 

Selling, general and administrative expenses increased $1,799,767 to $4,256,080 for the three months ended September 30, 2017 compared to $2,456,313 for the same period in 2016. The increase is primarily attributable to increases in stock-based compensation of $2,035,595, payroll and benefits of $41,341 and depreciation and amortization of $17,323, offset by decreases in professional fees of $216,046, occupancy costs of $43,913, taxes, licenses and permits of $15,920 and bank service charges and merchant account fees of $12,897.

 

Net other expense of $6,451 for the three months ended September 30, 2017 includes interest income of $4,463, other income of $9,665, loss on repurchase of Series A warrants of $20,160, and interest expense of $419. Net other income of $1,356,606 for the three months ended September 30, 2016 includes a $4,812,510 change in the fair value of the derivative liabilities, $3,437,221 gain on repurchase of Series A warrants, $21,845 of interest income, and $3,162 of interest expense.

 

Net income from discontinued operations increased $213,422 to $204,507 for the three months ended September 30, 2017 as compared to net loss of $8,915 for the same period in 2016. See Note 3 – Discontinued Operations for further detail.

 

The following table sets forth our unaudited consolidated Statements of Operations for the nine months ended September 30, 2017 and 2016 that is used in the following discussions of our results of operations:

 

		Nine Months Ended September 30,								2016 to 2017
		2017				2016				Change
SALES
Vapor sales, net		$	4,398,942			$	5,313,849			$	(914,907	)
Grocery sales, net			5,349,800				2,085,293				3,264,507
TOTAL SALES, NET			9,748,742				7,399,142				2,349,600
Cost of sales vapor			1,877,686				2,441,715				(564,029	)
Cost of sales grocery			3,118,563				1,251,872				1,866,691
GROSS PROFIT			4,752,493				3,705,555				1,046,938
OPERATING EXPENSES
Advertising			74,902				58,110				16,792
Selling, general and administrative			12,208,030				7,064,511				5,143,519
Impairment of goodwill and intangible assets			-				1,977,829				(1,977,829	)
Retail store and kiosk closing costs			-				342,503				(342,503	)
Total operating expenses			12,282,932				9,442,953				2,839,979
LOSS FROM OPERATIONS			(7,530,439	)			(5,737,398	)			(1,793,041	)
OTHER INCOME (EXPENSE)
Gain (loss) on repurchases of Series A warrants			(94,955	)			5,189,484				(5,284,439	)
Change in fair value of derivative liabilities			-				(18,489,507	)			18,489,507
Other income			20,126				-				20,126
Interest income			26,441				38,418				(11,977	)
Interest expense			(3,552	)			(12,854	)			9,302
Total other expense, net			(51,940	)			(13,274,459	)			13,222,519
Net loss from continuing operations			(7,582,379	)			(19,011,857	)			11,429,478
Net income (loss) from discontinued operations			281,483				(777,119	)			1,058,602
NET LOSS		$	(7,300,896	)		$	(19,788,976	)		$	12,488,080

 

Net vapor sales decreased $914,907 to $4,398,942 for the nine months ended September 30, 2017 as compared to $5,313,849 for the same period in 2016. The decrease in sales is primarily due to the decreased number of thirteen stores open during the nine months ended September 30, 2017 as compared to fourteen to twenty retail stores for the same period in 2016.

 

Net grocery sales increased $3,264,507 to $5,349,800 for the nine months ended September 30, 2017 as compared to $2,085,293 for the same period in 2016. The increase in sales is due to Ada’s Natural Market being acquired in June 2016, and as such, 2016 has four months of activity compared to nine months activity in 2017.

 

 

Vapor cost of goods sold for the nine months ended September 30, 2017 and 2016 were $1,877,686 and $2,441,715, respectively, a decrease of $564,029. The decrease in cost of goods sold is primarily due to the decreased number of thirteen stores open during the nine months ended September 30, 2017 as compared to fourteen to twenty retail stores for the same period in 2016. Gross profit from retail stores was $2,521,256 and $2,872,134 for the nine months ended September 30, 2017 and 2016, respectively.

 

Grocery cost of goods sold for the nine months ended September 30, 2017 and 2016 were $3,118,563 and $1,251,872, respectively, an increase of $1,866,691. The increase is due to Ada’s Natural Market being acquired in June 2016, and as such, 2016 has four months of activity compared to nine months activity in 2017. Gross profit from grocery was $2,231,237 and $833,421 for the nine months ended September 30, 2017 and 2016, respectively.

 

Selling, general and administrative expenses increased $5,143,519 to $12,208,030 for the nine months ended September 30, 2017 compared to $7,064,511 for the same period in 2016. The increase is primarily attributable to increases in stock-based compensation of $5,276,714, payroll and benefits of $623,634, insurance of $43,319, depreciation and amortization of $37,684, and occupancy of $39,473, offset by decreases in professional fees of $911,779. Operating expenses also included charges for impairment of goodwill and intangible assets of $1,977,829 and retail store and kiosk closing costs of $342,503 for the nine months ended September 30, 2016 which did not occur for the same period in 2017.

 

Net other expense of $51,940 for the nine months ended September 30, 2017 includes a $94,955 loss on repurchase of Series A warrants, other income of $20,126, interest income of $26,441 and interest expense of $3,552. Net other expense of $13,274,459 for the nine months ended September 30, 2016 includes $5,189,484 gain on repurchase of Series A warrants, change in the fair value of the derivative liabilities of $18,489,507, interest income of $38,418, and interest expense of $12,854.

 

Income from discontinued operations increased $1,058,602, to $281,483 for the nine months ended September 30, 2017 as compared to net loss of $777,119 for the same period in 2016. See Note 3 – Discontinued Operations for further detail.

 

Liquidity and Capital Resources

 

		Nine Months Ended September 30,
		2017				2016
Net cash used in operating activities		$	(2,504,549	)		$	(6,950,614	)
Net cash used in investing activities			(164,168	)			(3,200,610	)
Net cash used in financing activities			(2,466,241	)			(3,328,877	)
		$	(5,134,958	)		$	(13,480,101	)

 

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 $7,300,896, a net cash usage of $672,608 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. Our net cash used in operating activities of $6,950,614 for the nine months ended September 30, 2016 resulted from our net loss of $19,788,976 and by net cash provided of $941,592 from changes in operating assets and liabilities and by non-cash adjustments of $13,779,954. Our net cash used in discontinued operations of $2,996,504 for the nine months ended September 30, 2016 resulted from our net loss from discontinued operations of $777,119, offset by a net cash usage of $2,219,385 from changes in assets and liabilities from discontinued operations. 

 

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 used in investing activities of $3,200,610 for the nine months ended September 30, 2016 is primarily due to purchases of property and equipment and the Grocery Acquisition.

 

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. The net cash used in financing activities of $3,328,877 for the nine months ended September 30, 2016 is due to repurchases of Series A warrants totaling $3,278,827 and payment of capital lease obligation of $50,050.

 

At September 30, 2017 and December 31, 2016, 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, 2017 and December 31, 2016.

 

		September 30, 2017				December 31, 2016
Cash		$	8,231,314			$	13,366,272
Total assets		$	12,175,070			$	17,234,751
Percentage of total assets			67.61	%			77.55	%

 

The Company reported a net loss of $7,300,896 for the nine months ended September 30, 2017. The Company also had negative working capital of $1,991,339. 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. As of October 22, 2017, the Company had approximately $7.9 million of cash. The decrease in cash from September 30, 2017 is primarily attributable to operating expenses.

 

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 2016 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.

 

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 is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive, financial and accounting officer, we conducted an evaluation of the effectiveness of our internal controls over financial reporting as of September 30, 2017. This evaluation was based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

In planning and performing its audit of our financial statements for the year ended December 31, 2016 in accordance with standards of the Public Company Accounting Oversight Board, our prior independent registered public accounting firm (“Prior Auditor”) noted a number of deficiencies in internal control over financial reporting that required audit adjustments that were made to such financial statements. Although our Prior Auditor concluded that not all of the deficiencies rose to the level of a material weakness, they advised us that the combination of such deficiencies constitutes a material weakness in the Company’s internal control over financial reporting related to the overall maintenance of the books and records in full accordance with U.S. GAAP.

 

Our Prior Auditor considered the overall deficiency to be related to overall maintenance of our books and records in full accordance with GAAP. This was as a result of insufficient segregation of duties, oversight of work performed and lack of compensating controls in our finance and accounting function due to limited 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 September 30, 2017 based on the criteria set forth in COSO.

 

Changes in Internal Control over Financial Reporting

 

Following this assessment and during the first and second quarters of fiscal year 2017, we have undertaken an action plan to strengthen internal controls and procedures:

 

●

We built out a new accounting team by filling our Chief Financial Officer, Controller and Accounting Manager positions with personnel possessing extensive experience working at large, publicly-traded companies with exposure to SEC reporting and numerous areas of technical accounting.

 

●

Our SEC reporting was brought in-house as the function was previously accomplished using outside consultants; providing for a more efficient reporting process than that experienced in 2016.

 

●

Our management has increased its focus on the Company’s month-end account reconciliation process to provide for more reliable and precise financial statements.

 

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, 2017.

 

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.

 

	HEALTHIER CHOICES MANAGEMENT CORP.
Date: October 23, 2017	By:	/s/ Jeffrey Holman
		Jeffrey Holman
		Chief Executive Officer
Date: October 23, 2017	By:	/s/ John Ollet
		John Ollet
		Chief Financial Officer

 

 

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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