UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

þ  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2017

 

or

 

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from: _____________ to _____________

 

HEALTHIER CHOICES MANAGEMENT CORP.

(Exact name of registrant as specified in its charter)

 

Delaware		001-36469		84-1070932
(State or Other Jurisdiction of Incorporation or Organization)		(Commission File Number)		(I.R.S. Employer Identification No.)

 

Address of Principal Executive Office: 3800 North 28^th Way Hollywood, FL 33020

 

Registrant’s telephone number, including area code: (305) 600-5004

 

Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.0001

 

Securities registered pursuant to Section 12(g) of the Act:

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes  þ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ☐ Yes  þ No

 

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. þ 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). þ Yes  ☐ No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 þ
			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 Act). Yes ☐  þ No

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $2,922,951.24 million based on the June 30, 2017 closing price of $0.0001 per share.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 29,348,867,108 shares outstanding as of March 13, 2018.

 

 

INDEX

 

	Page
PART I
Item 1. Business.	3
Item 1A. Risk Factors.	13
Item 1B. Unresolved Staff Comments.	13
Item 2. Properties.	13
Item 3. Legal Proceedings.	13
Item 4. Mine Safety Disclosures.	13
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	14
Item 6. Selected Financial Data.	16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.	19
Item 8. Financial Statements and Supplementary Data.	20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	20
Item 9A. Controls and Procedures.	20
Item 9B. Other Information.	21
PART III
Item 10. Directors, Executive Officers and Corporate Governance	21
Item 11. Executive Compensation.	24
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.	26
Item 13. Certain Relationships and Related Transactions, and Director Independence.	27
Item 14. Principal Accounting Fees and Services.	27
PART IV
Item 15.  Exhibits, Financial Statement Schedules.	28
SIGNATURES	29
Exhibit Index	30

 

 

PART I

 

Item 1. Business.

 

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 thirteen 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.

 

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 submitted insurance claims to recover a portion of the cost of lost sales and inventory spoilage of approximately $41,000. As of December 31, 2017, the insurance claims have been accepted by our insurance carrier and are included in other assets as payment has not been received.

 

VAPORIZER AND E-LIQUID BUSINESS

 

Retail Stores

 

While evaluating retail store operations in 2016, management decided to close three of its Atlanta area vape stores on February 15, 2016, and December 31, 2016. Additionally, six of its Florida vape stores were closed between May 31, 2016 and December 31, 2016.

 

Vaporizers

 

“Vaporizers” are battery-powered products that enable users to inhale nicotine vapor without smoke, tar, ash, or carbon monoxide. Regardless of their construction, they are comprised of three functional components:

 

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a mouthpiece, which is a small plastic cartridge that contains a liquid nicotine solution;

 

●

the heating element that vaporizes the liquid nicotine so that it can be inhaled; and

 

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the electronic devices which include: a lithium-ion battery, an airflow sensor, a microchip controller and an LED, which illuminates to indicate use.

 

When a user draws air through the vaporizer, the air flow is detected by a sensor, which activates a heating element that vaporizes the solution stored in the mouthpiece/cartridge, the solution is then vaporized and it is this vapor that is inhaled by the user. The cartridge contains either a nicotine solution or a nicotine free solution, either of which may be flavored.

 

Vaporizers feature a tank or chamber, a heating element and a battery. The vaporizer user fills the tank with e-liquid or the chamber with dry herb or leaf. The vaporizer battery can be recharged and the tank and chamber can be refilled.

 

Our Brands

 

We sell a wide variety of our e-liquid under the Vape Store brand. Our in-house engineering and graphic design teams work to provide aesthetically pleasing, technologically advanced and affordable vaporizer and e-liquid flavor options. We are in the process of preparing to commercialize additional brands which we intend to market to new customers and demographics.

 

Our Improvements and Product Development on Intellectual Property

 

We have developed, trademarked and are preparing to commercialize additional products. We include product development expenses as part of our operating expenses. While we currently own no patents which are material to our business, we were recently issued a utility patent covering a vaporizer or electronic cigarette device. This patented improvement is intended to prevent the release and ingestion of metal particles from the heating element from entering the lungs of the user of the vaporizer or electronic cigarette. Additionally, we have a suite of patent applications pending in the United States. There is no assurance that we will be awarded patents for of any of these pending patent applications.

 

 

Vaporizer Biometric Fingerprint Lock Sensor Patent

 

We have a patent pending for a biometric fingerprint lock sensor that can be used in vaporizers. The biometric fingerprint lock sensor will allow the owner of the vaporizer to keep the device locked and turned off unless the authorized user unlocks the device via fingerprint scan, protecting the device from use by another individual. This technology may be used to protect against minors being able to turn on the device and will also deem the devices unusable in the event the device is lost or stolen. There is no assurance that we will be awarded a patent for this technology.

 

Flavor Profiles

 

We are developing new flavor profiles that are distinct to our brands. We believe that as the vaporizer industry matures, users of vaporizers and e-liquids will continue to develop preferences for the product based not only on their quality, ability to successfully deliver nicotine, battery capacity, and vapor volume they generate, but on taste and flavor, like smokers do with their preferred brand of conventional tobacco cigarettes.

 

Our Kits and Accessories

 

Our vaporizers are available in kits that contain everything a user needs to begin enjoying their “vaping” experience. In addition to kits, we sell replacement parts including batteries, coils, refill cartridges or cartomizers that contain the liquid solution, atomizers, tanks and e-liquids. Our refill cartridges and e-liquids are available in various assorted flavors and nicotine levels (including 0.0% nicotine). In addition to our vaporizer products, we sell an assortment of accessories, including various types of chargers (including USB chargers), carrying cases and lanyards.

 

The Market for Vaporizers

 

We market our vaporizers as an alternative to traditional tobacco cigarettes and cigars. We offer our products in multiple nicotine strengths and flavors. Because vaporizers and electronic cigarettes offer a “smoking” experience without the burning of tobacco leaf, vaporizers and electronic cigarettes offer users the ability to satisfy their nicotine cravings without smoke, tar, ash or carbon monoxide. In many cases vaporizers may be used where tobacco-burning cigarettes may not. Vaporizers may be used in some instances where for regulatory or safety reasons tobacco burning cigarettes may not be used. However, certain states, cities, businesses, providers of transportation and public venues in the U.S. have banned the use of vaporizers, where traditional cigarettes may not be smoked, while others are considering banning the use of vaporizers. We cannot provide any assurances that the use of vaporizers will be permitted in places where traditional tobacco burning cigarette use is banned. See “Risk Factors” for further discussion.

 

Advertising

 

Currently, we advertise our products primarily through point of sale materials and displays at retail locations. We also attempt to build brand awareness through social media marketing activities, price promotions, in-store and on-premise promotions, public relations and radio advertising. We intend to continue to strategically manage our advertising activities in 2018 to gain editorial coverage for our brands. Some of our competitors promote their brands through print media and television commercials, and through celebrity endorsements, and have substantial resources to devote to such efforts. We believe that our and our competitors’ efforts have helped increase our sales, our product acceptance and general industry awareness.

 

Distribution and Sales

 

The Company sells directly to consumers through thirteen company owned retail vape stores. Our management believes that consumers are shifting towards vape stores for an enhanced experience. This enhanced experienced is derived from the greater variety of products at the stores, the knowledgeable staff and the social atmosphere. The Company anticipates a significant portion of future revenue will continue to come from its retail stores.

 

Business Strategy

 

We believe and are seeing in our current stores that there is a large consumer demand centered on the vaporizer products and the “atmosphere” created by the vape stores. We believe that our reputation and our experience in the vaporizer industry, from a development, customer service and production perspective, give us an advantage in attracting customers.

 

 

Moreover, we believe that our history with our suppliers, including the volume of products we source, gives us an advantage over other market participants as it relates to favorable pricing, priority as to inventory supply and delivery and first access to new products, including first access to next generation products and technology.

 

Our goal is to achieve a position of sustainable leadership in the vaporizer industry. Our strategy consists of the following key elements:

 

●

develop new product offerings with new technology and performance advancements;

 

●

continue our product focus on vaporizers and e-liquids;

 

●

invest in and leverage our existing brand through marketing and advertising;

 

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expanding into new potential markets;

 

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align our product offerings and cost with market demand; and

 

●

consider diversifying our line of business

 

Competition

 

Competition in the vaporizer and e-liquid industry is intense. We compete with other sellers of vaporizes, most notably Altria Group, Inc., JT International, Imperial Tobacco, and Reynolds American, Inc., which are big tobacco companies that have vaporizer and electronic cigarette business segments. The nature of our competitors is varied as the market is highly fragmented and the barriers to entry into the business are low. Our direct competitors sell products that are substantially similar to ours. As a general matter, we have access to market and sell the similar vaporizers as our competitors and we sell our products at substantially similar prices as our competitors; accordingly, the key competitive factors for our success is the quality of service we offer our customers, the scope and effectiveness of our marketing efforts, including media advertising campaigns and, increasingly, the ability to identify and develop new sources of customers.

 

As discussed above, we compete against “big tobacco”, U.S. cigarette manufacturers of both conventional tobacco cigarettes and electronic cigarettes like Altria Group, Inc., JT International, Imperial Tobacco, and Reynolds American, Inc. We compete against “big tobacco” who offers not only conventional tobacco cigarettes and electronic cigarettes and vaporizers, but also smokeless tobacco products such as “snus” (a form of moist ground smokeless tobacco that is usually sold in sachet form that resembles small tea bags), chewing tobacco and snuff. “Big tobacco” has nearly limitless resources, global distribution networks in place and a customer base that is fiercely loyal to their brands. Furthermore, we believe that “big tobacco” is devoting more attention and resources to developing, acquiring technology patents, and offering electronic cigarettes, vaporizers and e-liquids as these markets grow. Because of their well-established sales and distribution channels, marketing expertise and significant resources, “big tobacco” is better positioned than small competitors like us to capture a larger share of the electronic cigarette market. We also compete against numerous other smaller manufacturers or importers of cigarettes. There can be no assurance that we will be able to compete successfully against any of our competitors, some of whom have far greater resources, capital, experience, market penetration, sales and distribution channels than us. If our major competitors were, for example, to significantly increase the level of price discounts offered to consumers, we could respond by offering price discounts, which could have a materially adverse effect on our business, results of operations and financial condition.

 

Manufacturing

 

We have no manufacturing capabilities and do not intend to develop any manufacturing capabilities. Third party manufacturers make our products to meet our design specifications. We depend on third party manufacturers for our vaporizer e-liquid and accessories. Our customers associate certain characteristics of our products including the weight, feel, draw, unique flavor, packaging and other attributes of our products to the brands we market, distribute and sell. Any interruption in supply and or consistency of our products may harm our relationships and reputation with customers, and have a material adverse effect on our business, results of operations and financial condition. In order to minimize the risk of supply interruption, we currently utilize several third-party manufacturers to manufacture our products to our specifications.

 

We currently utilize several manufacturers both domestically and internationally. We contract with our manufacturers on a purchase order basis. We do not have any output or requirements contracts with any of our manufacturers. Our manufacturers provide us with finished products, which we hold in inventory for distribution, sale and use. Certain Chinese factories and the products they export have recently been the source of safety concerns and recalls, which is generally attributed to lax regulatory, quality control and safety standards. Should Chinese factories continue to draw public criticism for exporting unsafe products, whether those products relate to our products or not, we may be adversely affected by the stigma associated with Chinese production, which could have a material adverse effect on our business, results of operations and financial position.

 

Although we believe that several alternative sources for our products are available, any failure to obtain the components, chemical constituents and manufacturing services necessary for the production of our products would have a material adverse effect on our business, results of operations and financial condition.

 

 

Source and Availability of Raw Materials

 

We believe that an adequate supply of product and raw materials will be available to us as needed and from multiple sources and suppliers.

 

Patent Litigation

 

Third party patent lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights have and could force us to do one or more of the following:

 

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stop selling products or using technology that contains the allegedly infringing intellectual property;

 

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incur significant legal expenses;

 

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pay substantial damages to the party whose intellectual property rights we may be found to be infringing;

 

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redesign those products that contain the allegedly infringing intellectual property; or

 

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attempt to obtain a license to the relevant intellectual property from third parties, which may not be available to us on reasonable terms or at all.

 

Future third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could have a material adverse effect on our business, results of operations and financial condition. 

 

We are required to obtain licenses to patents or proprietary rights of others and may be required to obtain more in the future and as the product continues to evolve. We cannot assure you that any future licenses required under any such patents or proprietary rights would be made available on terms acceptable to us or at all. If we do not obtain such licenses, we could encounter delays in product market introductions while we attempt to design around such patents, or could find that the development, manufacture, or sale of products requiring such licenses could be foreclosed. Litigation may be necessary to defend against claims of infringement asserted against us by others, or assert claims of infringement to enforce patents issued to us or exclusively licensed to us, to protect trade secrets or know-how possessed by us, or to determine the scope and validity of the proprietary rights of others. In addition, we may become involved in oppositions in foreign jurisdictions, reexaminations declared by the United States Patent and Trademark Office, or interference proceedings declared by the United States Patent and Trademark Office to determine the priority of inventions with respect to our patent applications or those of our licensors. Litigation, opposition, reexamination or interference proceedings could result in substantial costs to and diversion of effort by us, and may have a material adverse impact on us. In addition, we cannot assure you that our efforts to maintain or defend our patents will be successful.

 

Regulations

 

Since a 2010 U.S. Court of Appeals decision, the Food and Drug Administration (“FDA”) is permitted to regulate electronic cigarettes as “tobacco products” under the Family Smoking Prevention and the Tobacco Control Act. Under this decision, the FDA is not permitted to regulate electronic cigarettes as “drugs” or “devices” or a “combination product” under the Federal Food, Drug and Cosmetic Act unless they are marketed for therapeutic purposes. This is contrary to anti-smoking devices like nicotine patches, which undergo more extensive FDA regulation. Because the Company does not market its electronic cigarettes for therapeutic purposes, the Company’s electronic cigarettes are subject to being classified as “tobacco products” under the Tobacco Control Act. The Tobacco Control Act grants the FDA broad authority over the manufacture, sale, marketing and packaging of tobacco products, although the FDA is prohibited from issuing regulations banning all cigarettes or all smokeless tobacco products, or requiring the reduction of nicotine yields of a tobacco product to zero.

 

On April 24, 2014, the FDA released proposed rules that would extend its regulatory authority to electronic cigarettes and certain other tobacco products under the Tobacco Control Act. The proposed rules would require that electronic cigarette manufacturers (i) register with the FDA and report electronic cigarette product and ingredient listings; (ii) market new electronic cigarette products only after FDA review; (iii) only make direct and implied claims of reduced risk if the FDA confirms that scientific evidence supports the claim and that marketing the electronic cigarette product will benefit public health as a whole; (iv) not distribute free samples; (v) implement minimum age and identification restrictions to prevent sales to individuals under age 18; (vi) include a health warning; and (vii) not sell electronic cigarettes in vending machines, unless in a facility that never admits youth. It is not known how long finalizing and implementing this regulatory process to may take. Accordingly, the Company cannot predict the content of any final rules from the proposed rules or the impact they may have.

 

 

In this regard, total compliance and related costs are not possible to predict and depend substantially on the future requirements imposed by the FDA under the Tobacco Control Act. Costs, however, could be substantial and could have a material adverse effect on the Company’s business, results of operations and financial condition. In addition, failure to comply with the Tobacco Control Act and with FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect on the Company’s business, financial condition and results of operations and ability to market and sell the Company’s products. At present, it is difficult to predict whether the Tobacco Control Act will impact the Company to a greater degree than competitors in the industry, thus affecting the Company’s competitive position.

 

State and local governments currently legislate and regulate tobacco products, including what is considered a tobacco product, how tobacco taxes are calculated and collected, to whom and by whom tobacco products can be sold and where tobacco products may or may not be smoked. State and local regulation of the e-cigarette market and the usage of e-cigarettes is beginning to accelerate.

 

As local regulations expand, vaporizers and electronic cigarettes may lose their appeal as an alternative to cigarettes, which may have the effect of reducing the demand for the Company’s products and as a result have a material adverse effect on the Company’s business, results of operations and financial condition.

 

At present, neither the Prevent All Cigarette Trafficking Act (which prohibits the use of the U.S. Postal Service to mail most tobacco products, which would require individuals and businesses that make interstate sales of cigarettes or smokeless tobacco to comply with state tax laws) nor the Federal Cigarette Labeling and Advertising Act (which governs how cigarettes can be advertised and marketed) apply to electronic cigarettes. The application of either or both of these federal laws to vaporizers and electronic cigarettes would have a material adverse effect on the Company’s business, results of operations and financial condition.

 

On July 1, 2015, the FDA published a document entitled “Advanced notice of proposed rulemaking” or the Advance. Through the Advance, the FDA solicited public comments on whether it should issue rules with respect to nicotine exposure warning and child-resistant packaging for e-liquids containing nicotine. Following public comment, the FDA may issue proposed rules in furtherance of the purposes outlined in the Advance and ultimately pass the rules as proposed or in modified form. We cannot predict whether rules will be passed or if they will have a material adverse effect on our future results of operations and financial conditions.

 

The Company expects that the tobacco industry will experience significant regulatory developments over the next few years, driven principally by the World Health Organization’s FCTC. The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. Regulatory initiatives that have been proposed, introduced or enacted include:

 

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the levying of substantial and increasing tax and duty charges;

 

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restrictions or bans on advertising, marketing and sponsorship;

 

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the display of larger health warnings, graphic health warnings and other labelling requirements;

 

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restrictions on packaging design, including the use of colors and generic packaging;

 

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restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;

 

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requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents’ levels;

 

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requirements regarding testing, disclosure and use of tobacco product ingredients;

 

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increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;

 

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elimination of duty free allowances for travelers; and

 

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encouraging litigation against tobacco companies.

 

If Vaporizers, electronic cigarettes, or e-liquids, are subject to one or more significant regulatory initiates enacted under the FCTC, the Company’s business, results of operations and financial condition could be materially and adversely affected.

 

  

Healthy Choice Markets

 

Healthy Choice is a specialty retailer of natural and organic groceries and dietary supplements. We focus on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We strive to generate long-term relationships with our customers based on quality and service by:

 

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selling only natural and organic groceries;

 

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offering affordable prices and a shopper-friendly retail environment; and

 

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dine-in options at our Natural Organic Juice Bar and Green Leaf Café.

 

Our History and Founding Principles

 

We are committed to maintaining the following founding principles, which have helped foster our growth:

 

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Quality. Every product on our shelves must go through a rigorous screening and approval process. Our mission includes providing the highest quality groceries and supplements, Natural Grocers branded products, European and United States Department of Agriculture (USDA) certified organic and fresh produce at the best prices in the industry.

 

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Community. Ada’s Market has been serving the Ft. Myers community for 40 years.

 

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Employees. Our employees make our company great. We work hard to ensure that our employees are able to live a healthy, balanced lifestyle. We support them with free nutrition education programs, good pay and excellent benefits.

 

Our Market

 

We operate within the natural products retail industry, which is a subset of the United States grocery industry and the dietary supplement business. This industry includes conventional supermarkets, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, mail order and online retailers and multi-level marketers. Industry-wide sales of natural and organic foods and dietary supplements have experienced meaningful growth over the past several years, and we believe that growth will continue for the foreseeable future.

 

We believe the growth in sales of natural and organic foods and dietary supplements continues to be driven by numerous factors, including:

 

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greater consumer focus on high-quality nutritional products;

 

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an increased awareness of the importance of good nutrition to long-term wellness;

 

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an aging Ft. Myer’s community that is seeking healthy lifestyle alternatives;

 

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heightened consumer awareness about the importance of food quality and a desire to avoid pesticide residues, growth hormones, artificial ingredients and genetically engineered ingredients in foods;

 

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growing consumer concerns over the use of harmful chemical additives in body care and household cleaning supplies;

 

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well-established natural and organic brands, which generate additional industry awareness and credibility with consumers; and

 

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the growth in the number of consumers with special dietary requirements as a result of allergies, chemical sensitivities, auto-immune disorders and other conditions.

 

Our Competitive Strengths

 

We are well-positioned to capitalize on favorable natural and organic grocery and dietary supplement industry dynamics as a result of the following competitive strengths:

 

Strict focus on high-quality natural and organic grocery products. We offer high-quality products and brands, including an extensive selection of widely-recognized natural and organic food, dietary supplements, body care products, pet care products and books. We offer our customers approximately 10,000 Stock Keeping Units (SKUs) of natural and organic products. We believe our broad product offering enables our customers to shop our stores for substantially all of their grocery and dietary supplement purchases. In our grocery departments, we primarily sell USDA certified organic produce and do not approve for sale grocery products that are known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils. In addition, we only sell pasture-raised, humanely-raised dairy products. Consistent with this strategy, our product selection does not include items that do not meet our strict quality guidelines. Our store managers enhance our robust product offering by customizing their stores’ selections to address the preferences of local customers.

 

 

Engaging customer service experience based on education and empowerment. We strive to offer consistently exceptional customer service in a shopper-friendly environment, which we believe creates a differentiated shopping experience, enhances customer loyalty and generates repeat visits from our clientele. A key aspect of our customer service model is to provide free nutrition education to our customers. We believe this focus provides an engaging retail experience while also empowering our customers to make informed decisions about their health. We offer our science-based nutrition education through our trained employees, our newsletter and sales flyer, community out-reach programs, one-on-one nutrition health coaching, nutrition classes and cooking demonstrations.

 

Our Growth Strategies

 

We expect to pursue several strategies to continue our profitable growth, including:

 

Expand our store base. We intend to expand our store base through the acquisition of new stores.

 

Increase sales from existing customers. In order to increase our average ticket and the number of customer transactions, we plan to continue offering an engaging customer experience by providing science-based nutrition education and a differentiated merchandising strategy that delivers affordable, high-quality natural and organic grocery products and dietary supplements. We also plan to continue to utilize targeted marketing efforts to reach our existing customers, which we anticipate will drive customer transactions and convert occasional, single-category customers into core, multi-category customers.

 

Grow our customer base. We plan to implement several measures aimed at building our brand awareness and growing our customer base, including: (i) redesigning our website (www.adasmarket.com) to enhance functionality, create a more engaging user experience and increase its reach and effectiveness; (ii) introducing customer appreciation programs at all our stores; and (iii) developing new collateral marketing materials. We believe offering nutrition education has historically been one of our most effective marketing strategies for reaching new customers and increasing the demand for natural and organic groceries and dietary supplements in our markets.

 

Improve operating margins. We expect to continue to improve our operating margins as we benefit from investments we have made or are making in fixed overhead and information technology. As we add additional stores, we expect to achieve greater economies of scale through sourcing and distribution. To achieve additional operating margin expansion, we intend to further optimize performance, maintain appropriate store labor levels and effectively manage product selection and pricing.

 

Ada’s Natural Market

 

Ada’s offers a comprehensive selection of natural and organic groceries and dietary supplements in a smaller-store format that aims to provide a convenient, easily shopped and relaxed environment for our customers. Our store design emphasizes a clutter-free, organized feel, a quiet ambience accented with warm lighting. We believe our core customers consider us a destination stop for their nutritional education and information, natural and organic products and dietary supplements.

 

Our Store Format. Ada’s has 16,000 selling square feet. Approximately 1,000 of our stores’ selling square footage is dedicated to dietary supplements. Ada’s sells approximately 10,000 SKUs of natural and organic products per store.

 

Our Products

 

Product Selection Guidelines. We have a set of strict quality guidelines covering all products we sell. For example:

 

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we do not approve for sale food known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils or phthalates or parabens, regardless of the proportion of its natural or organic ingredients;

 

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we sell USDA certified organic produce;

 

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we sell meats naturally raised without hormones, antibiotics or treatments and that were not fed animal by-products; and

 

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we do not sell any tobacco or tobacco-related products.

 

 

Our product review team analyzes all new products and approves them for sale based on ingredients, price and uniqueness within the current product set. We actively research new products in the marketplace through our product vendors, private label manufacturers, scientific findings, customer requests and general trends in popular media. Our stores are able to fully merchandise all departments by providing an extensive assortment of natural and organic products. We do not believe we need to sell conventional products to fill our selection, increase our margins or attract more customers.

 

What We Sell. We operate both a full-service natural and organic grocery store and a dietary supplement store within a single retail location. The following is a breakdown of our product mix:

 

The products in our stores include:

 

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Grocery. We offer a broad selection of natural and organic grocery products with an emphasis on minimally processed and single ingredient products that are not known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils. Additionally, we carry a wide variety of products associated with special diets such as gluten free, vegetarian and non-dairy. Our grocery products include:

 

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Produce. We sell USDA-certified organic produce and source from local, organic producers whenever feasible. Our selection varies based on seasonal availability, and we offer a variety of organic produce offerings that are not typically found at conventional food retailers.

 

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Bulk Food and Private Label Products. We sell a wide selection of private label repackaged bulk and other products, including nuts, water, pasta, canned seafood, dried fruits, grains, granolas, honey, eggs, herbs, spices and teas.

 

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Dry, Frozen and Canned Groceries. We offer a wide variety of natural and organic dry, frozen and canned groceries, including cereals, soups, baby foods, frozen entrees and snack items. We offer a broad selection of natural chocolate bars, and energy, protein and food bars.

 

●

Meats and Seafood. We offer naturally-raised or organic meat products. The meat products we offer come from animals that have never been treated with antibiotics or hormones or fed animal by-products. Additionally, we only buy from companies we believe employ humane animal-raising practices. Our seafood items are generally frozen at the time of processing and sold from our freezer section, thereby ensuring freshness and reducing food spoilage and safety issues.

 

●

Dairy Products and Dairy Substitutes. We offer a broad selection of natural and organic dairy products such as milk, eggs, cheeses, yogurts and beverages, as well as non-dairy substitutes made from almonds, coconuts, rice and soy.

 

●

Prepared Foods. Our stores have a convenient selection of refrigerated prepared fresh food items, including salads, sandwiches, salsa, humus and wraps. The size of this offering varies by location.

 

●

Bread and Baked Goods. We receive regular deliveries of a wide selection of bakery products for our bakery section, which includes an extensive selection of gluten-free items.

 

●

Beverages. We offer a wide variety of non-alcoholic and alcoholic beverages containing natural and organic ingredients.

 

●

Dietary Supplements. We offer a wide selection of vitamins, supplements and natural remedies. Our staff is well educated and trained on multiple aspects of natural medicine.

 

●

Body Care. We offer a full range of cosmetics, skin care, hair care, fragrance and personal care products containing natural and organic ingredients. Our body care offerings range from bargain-priced basics to high-end formulations.

 

●

Household and General Merchandise. Our offerings include sustainable, hypo-allergenic and fragrance-free household products, including cleaning supplies, paper products, dish and laundry soap and other common household products, including diapers.

 

Quality Assurance. We endeavor to ensure the quality of the products we sell. We work with reputable suppliers we believe are compliant with established regulatory and industry guidelines. Our purchasing department requires a complete supplier and product profile as part of the approval process. Our dietary supplement suppliers must follow Food and Drug Administration (FDA) current good manufacturing practices supported by quality assurance testing for both the base ingredients and the finished product. We expect our suppliers to comply with industry best practices for food safety.

 

 

Many of our suppliers are inspected and certified under the USDA National Organic Program, voluntary industry associations, and other third-party auditing programs with regard to additional ingredients, manufacturing and handling standards. We operate all our stores in compliance with the National Organic Program standards, which restricts the use of certain substances for cleaning and pest control and requires rigorous recordkeeping, among other requirements.

 

Our Pricing Strategy

 

We believe our pricing strategy allows our customers to shop our stores on a regular basis for their groceries and dietary supplements.

 

The key elements of our pricing strategy include:

 

●

heavily advertised deals supported by manufacturer participation;

 

●

in-store specials generally lasting for 30 days and not advertised outside the store;

 

●

managers’ specials, such as clearance, overstock, short-dated or promotional incentives; and

 

●

specials on seasonally harvested produce.

 

As we expand our store base, we believe there are opportunities for increased leverage in fixed costs, such as administrative expenses, as well as increased economies of scale in sourcing products. We strive to keep our product, operating and general and administrative costs low, which allows us to continue to offer attractive pricing for our customers.

 

Our Store Operations

 

Store Hours. Our stores are open from 8:00 a.m. to 8:30 p.m., Monday through Saturday, and from 9:00 a.m. to 8:00 p.m. on Sunday.

 

Store Management and Staffing. Our store staffing includes a manager and assistant manager, with department managers in each of the dietary supplement, grocery, dairy and frozen, produce, body care and receiving departments, as well as several non-management employees. The store manager is responsible for monthly store profit and loss, including labor, merchandising and inventory costs.

 

To ensure a high level of service, all employees receive training and guidance on customer service skills, product attributes and nutrition education. Employees are carefully trained and evaluated based on a requirement that they present nutrition information in an appropriate and legally compliant educational context while interacting with customers. Additionally, store employees are cross-trained in various functions, including cashier duties, stocking and receiving product.

 

Inventory. We use a robust merchandise management and perpetual inventory system that values goods at average cost. We manage shelf stock based on weeks-on-hand relative to sales, resupply time and minimum economic order quantity.

 

Sourcing and Vendors. We source from approximately 250 suppliers, and offer over 4,000 brands. These suppliers range from small independent businesses to multi-national conglomerates. As of December 31, 2017, we purchased approximately 75% of the goods we sell from our top 20 suppliers. For the fiscal year ended December 31, 2017, approximately 40% of our total purchases were from one vendor. We maintain good relations with all our suppliers and believe we have adequate alternative supply methods, including self-distribution.

 

We have longstanding relationships with our suppliers, and we require disclosure from them regarding quality, freshness, potency and safety data information. Our bulk food private label products are packaged by us in pre-packed sealed bags to help prevent contamination while in transit and in our stores. Unlike most of our competitors, most of our private label nuts, trail mix and flours are refrigerated in our warehouse and stores to maintain freshness.

 

Our Employees

 

Commitment to our employees is one of our five founding principles. Employees are eligible for health, long-term disability, vision and dental insurance coverage, as well as Company paid short-term disability and life insurance benefits, after they meet eligibility requirements. Additionally, our employees are offered a 401(k) retirement savings plan with discretionary contribution matching opportunities. This further offers our employees the opportunity to become more familiar with our products, which we believe improves the customer service our employees are able to provide. We believe these and other factors result in higher retention rates and encourage our employees to appreciate our culture, which helps them better promote our brand.

 

 

Our Customers

 

The growth in the natural and organic grocery and dietary supplement industries and growing consumer interest in health and nutrition have led to an increase in our core customer base. We believe the demands for affordable, nutritious food and dietary supplements are shared attributes of our core customers, regardless of their socio-economic status. Additionally, we believe our core customers prefer a retail store environment that offers carefully selected natural and organic products and dietary supplements. Our customers tend to be interested in health and nutrition, and expect our store employees to be highly knowledgeable about these topics and related products.

 

Competition

 

The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Our competition varies by market and includes conventional supermarkets such as Publix and Winn-Dixie, mass or discount retailers such as Wal-Mart and Target, natural and gourmet markets such as Whole Foods and The Fresh Market, specialty food retailers such as Trader Joe’s, independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, mail order and online retailers and multi-level marketers. These businesses compete with us for customers on the basis of price, selection, quality, customer service, shopping experience or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutritional education, differentiate us in the industry and provide a competitive advantage.

 

Seasonality

 

Our business is active throughout the calendar year and does not experience significant fluctuation caused by seasonal changes in consumer purchasing.

 

Insurance and Risk Management

 

We use a combination of insurance and self-insurance to cover workers’ compensation, general liability, product liability, director and officers’ liability, employment practices liability, associate healthcare benefits and other casualty and property risks. Changes in legal trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers and changes in discount rates could all affect ultimate settlements of claims. We evaluate our insurance requirements and providers on an ongoing basis.

 

Information Technology Systems

 

We have made significant investments in overhead and information technology infrastructure, including purchasing, receiving, inventory, point of sale, warehousing, distribution, accounting, reporting and financial systems.

 

Segment Information

 

We have two reporting segments, natural and organic retail stores (“Grocery”) and vapor products (“Vapor”), through which we conduct all of our business.  

 

Going Concern and Liquidity

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate the 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 consolidated financial statements do not necessarily purport to represent realizable or settlement values.

 

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 year ended December 31, 2017, we reported a net loss of approximately $9.9 million and had a working capital deficit of approximately $2.3 million. 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:

 

1)

increasing the number of authorized shares to 750,000,000,000 shares so that there would be sufficient shares available for issuance should all the warrant holders exercise;

 

2)

entering into a Fifth Amended and Restated Series A Warrant Standstill Agreement (the “Fifth Amendment”) with warrant holders effectively eliminating the possibility that warrant holders will exercise for anything other than shares, and

 

 

The steps above substantially lowered our outstanding liabilities and resulted in the Company having positive equity. As a result, as of the date of the issuance of these financial statements, we believe our plans have alleviated substantial doubt about the Company’s ability to sustain operations for the foreseeable future through a year and a day from the issuance of these consolidated financial statements.

 

Item 1A. Risk Factors.

 

Not applicable to smaller reporting companies. Please see the Company’s risk factors contained under Item 7.

 

Item 1B. Unresolved Staff Comments.

 

None

 

Item 2. Properties.

 

The Company currently has lease agreements for 13 retail vape store locations and an administrative office. Under these leases, the initial lease terms range from one to five years. The Company also has a lease agreement for its grocery sales operations. Refer to Note 9 for the overall lease liability commitment.

 

Item 3. Legal Proceedings.

  

No response is required under Item 103 of Regulation S-K. For a description of any other legal proceedings, see Note 9 of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.

 

Item 4. Mine Safety Disclosures.

 

None.

 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our common stock is currently listed on the OTC Pink marketplace under the symbol “HCMC”. On January 25, 2016, the Units separated into Series A Convertible Preferred Stock and Series A Warrants and public trading of the Units ceased.

 

Change from NASDAQ to OTCQB to OTC Pink Sheets Stock Listing

 

On January 22, 2016, the Company received a letter from the Listing Qualifications Staff (the “Staff”) of The NASDAQ Stock Market LLC (“Nasdaq”) indicating that the Staff had determined to delist the Company’s securities based upon its concerns that the Company’s continued listing on Nasdaq, particularly pursuant to a grace period within which to regain compliance with the $1.00 bid price requirement set forth in Nasdaq Listing Rule 5450, is no longer in the public interest as that concept is described in Nasdaq Listing Rule 5110. Specifically, the Staff indicated that, given the potential for dilution of the Company’s stockholders that may be caused by the cashless exercise provision of the Company’s Series A warrants, the Staff believes that the grace period provided to the Company to regain compliance with the $1.00 bid price requirement is no longer warranted. Previously on September 14, 2015, the Staff had notified the Company that, based upon its non-compliance with the minimum $1.00 bid price requirement for the prior 30 consecutive business days, the Company – in accordance with the Nasdaq Listing Rules – had been provided a grace period, through March 14, 2016, to regain compliance with the minimum bid price requirement. On the afternoon of February 11, 2016, the Company was notified by Nasdaq that trading of the Company’s common stock would be halted.

 

On February 16, 2016, the Company notified the Staff of Nasdaq that it was withdrawing its request to the Nasdaq Listing Qualifications Panel (the “Panel”) for an appeal of the delisting determination made by the Staff on January 22, 2016. As a result, the Company’s shares of common stock were suspended from The Nasdaq Capital Market at the opening of business on Wednesday, February 17, 2016. Nasdaq filed a Form 25 Notification of Delisting with the Securities and Exchange Commission relating to the delisting of the Company’s common stock. The official delisting of the Company’s common stock became effective ten days thereafter. Upon the delisting from Nasdaq, the Company no longer met the “Equity Conditions” required to issue the Company’s common stock to fulfill a cashless exercise pursuant to Section 1(d) of its Series A Warrants. The Company began trading on the OTCQB Market at the opening of the markets on March 16, 2016 under its temporary symbol, VPCOD and thereby met the “Equity Conditions” required to issue the Company’s common stock to fulfill a cashless exercise pursuant to Section 1(d) of its Series A Warrants.

 

On October 31, 2016, the Company received notice from OTC Markets Group that the Company’s common stock would be moved from the OTCQB to the OTC Pink Sheets on November 1, 2016, as a result of the Company’s failure to cure its bid price deficiency. On November 1, 2016, the date of the delisting from OTCQB, the Company no longer meets the “Equity Conditions” required to allow the Company to elect to issue common stock to fulfill a cashless exercise pursuant to Section 1(d) of its Series A Warrants. Holders of the Series A Warrants may still undertake a cashless exercise of their warrants and agree to permit the Company to issue common stock to fulfill such exercise.

 

 

On February 1, 2016, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to (i) effect a reverse stock split of the Common Stock at a ratio between 1-for-10 and 1-for-70, such ratio to be determined by the Board, (ii) reduce the par value of the Common Stock from $0.001 to $0.0001 and (iii) increase the number of authorized shares of the Common Stock from 500,000,000 shares to 5,000,000,000 shares. Each share entitles the holder to one vote. On March 8, 2016, the Board effected a reverse stock split of the Common Stock at a ratio of 1-for-70. On March 21, 2016, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Common Stock at a ratio between 1-for-10,000 and 1-for-20,000, such ratio to be determined by the Board. On June 1, 2016, the Board effected a reverse stock split of the Common Stock at a ratio of 1-for-20,000.

 

The following table contains, for the periods indicated, the intraday high and low sale prices per share of our common stock and Units.¹

 

		Common Stock1
		High				Low
		$				$
Fiscal 2016			1.00				0.0005
First Quarter			0.25				0.0071
Second Quarter			1.00				0.0001
Third Quarter			0.0002				0.0001
Fourth Quarter			0.0001				0.0005
Fiscal 2017			0.0001				0.0001
First Quarter			0.0001				0.0001
Second Quarter			0.0002				0.0001
Third Quarter			0.0001				0.0001
Fourth Quarter			0.0001				0.0001

 

¹ The Company effected a 1-for-70 reverse stock split on March 9, 2016 and a 1-for-20,000 reverse stock split on May 27, 2016. Common stock per share information gives effect to the aforementioned reverse splits of the Company’s common stock.

 

As of March 13, 2018, there were approximately 29,348,867,108 stockholders of record for our common stock. A substantially greater number of stockholders may be “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.

 

As of March 13, 2018 the last reported sale price of our common stock on OTC Pink Marketplace was $0.0001 per share. 

 

We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on any of our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends in the foreseeable future. Future determination as to the declaration and payment of dividends, if any, will be at the discretion of our Board and will depend on then existing conditions, including our operating results, financial conditions, contractual restrictions, capital requirements, business prospects and other factors our Board may deem relevant.

 

Tender Offer for the Repurchase of Outstanding Series A Warrants

 

On December 7, 2016, the Company commenced a tender offer to repurchase its outstanding Series A Warrants, which offer expired on January 17, 2017 with a total of 10,073,884 Series A Warrants being tendered at a cost of $2,216,255 to the Company.

 

Other Repurchases of Outstanding Series A Warrants

 

Other repurchases of Series A Warrants during 2017 are set forth in the table below.

 

Period		Total Number of Series A Warrants Purchased				Average Price Paid per Series A Warrant
April 1, 2016 – June 30, 2016			3,706,793.000				0.39
July 1, 2016 – September 30, 2016			1,817,501.000				0.25
January 1, 2017 – September 30, 2017			10,601,412				0.23

 

 

Item 6. Selected Financial Data.

 

Not required for smaller reporting companies.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included elsewhere in this report. “Management’s Discussion and Analysis of Financial Condition” and “Results of Operations” contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

 

Cautionary Note Regarding Forward Looking Statements

 

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, liquidity, business strategy, plans and objectives of management for future operations, are forward-looking statements.

 

Forward-looking statements contained in this report include:

 

●

Our liquidity;

 

●

Increase demand for vaporizers and related products;

 

●

Opportunities for our business; and

 

●

Growth of our business.

 

The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “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, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements are contained in the Risk Factors contained herein. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors below.

  

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 vape 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 maintain the quality of service we offer our customers and effective marketing efforts.

 

 

Results of Operations

 

The following table sets forth our Consolidated Statements of Operations for the years ended December 31, 2017 and 2016 that is used in the following discussions of our results of operations:

 

		For the Year Ended December 31,								2017 to 2016
		2017				2016				Change $
SALES:
Vapor sales, net		$	5,867,202			$	6,722,052			$	(854,850	)
Grocery sales, net			7,093,893				3,843,111				3,250,782
Total Sales			12,961,095				10,565,163				2,395,932
Cost of sales vapor			2,567,400				2,979,609				(412,209	)
Cost of sales grocery			4,114,914				2,352,201				1,762,713
GROSS PROFIT			6,278,781				5,233,353				1,045,428
EXPENSES:
Advertising			110,694				92,124				18,570
Selling, general and administrative			16,444,944				9,700,479				6,744,465
Impairment of goodwill and intangible assets			-				3,955,362				(3,955,362	)
Retail store and kiosk closing costs			-				347,656				(347,656	)
Total operating expenses			16,555,638				14,095,621				2,460,017
Operating loss			(10,276,857	)			(8,862,268	)			(1,414,589	)
OTHER INCOME (EXPENSES):
Amortization of debt discounts			-				21,599				(21,599	)
Gain (loss) on warrant repurchases			(94,955	)			5,189,484				(5,284,439	)
Non-cash change in fair value of derivative liabilities			-				15,255,143				(15,255,143	)
Other income			200,129				640,000				(439,871	)
Interest income			33,774				45,723				(11,949	)
Other expense			(1,780	)			-				(1,780	)
Interest expense			(3,722	)			(15,386	)			11,664
Total other income			133,446				21,136,563				(21,003,117	)
Net income (loss) from continuing operations			(10,143,411	)			12,274,295				(22,417,706	)
Net income (loss) from discontinued operations			281,483				(1,589,803	)			1,871,286
NET INCOME (LOSS)		$	(9,861,928	)		$	10,684,492			$	(20,546,420	)

 

Net vapor sales decreased $854,850 to $5,867,202 for the twelve months ended December 31, 2017 as compared to $6,722,052 for the same period in 2016. The decrease in sales is primarily due to the decreased number of stores open during 2017 of thirteen, compared to twenty retail stores in 2016. 

 

Net grocery sales increased $3,250,782 to $7,093,893 for the twelve months ended December 31, 2017 as compared to $3,843,111 for the same period in 2016. The increase was primarily due to Ada’s Natural Market being acquired in June 1, 2016, which represents twelve months of sales in 2017 compared to seven months of sales in 2016.

 

Vapor cost of goods sold for the twelve months ended December 31, 2017 and 2016 were $2,567,400 and $2,979,609, respectively a decrease of $412,209. The decrease in cost of goods sold is primarily due to the decreased number of stores open during 2017 of thirteen, compared to twenty retail stores 2016. Gross profit from vapor decreased by $442,641 to $3,299,802 for the twelve months ended December 31, 2017 as compared to $3,742,443 for the twelve months ended December 31, 2016.

 

Grocery store cost of goods sold for the twelve months ended December 31, 2017 and 2016 were $4,114,914 and $2,352,201, respectively an increase of $1,762,713. The increase was primarily due to Ada’s Natural Market being acquired in June 1, 2016, which represents twelve months of cost of goods sold in 2017 compared to seven months of cost of goods sold in 2016. Gross profit from grocery increased by $1,488,069 to $2,978,979 for the twelve months ended December 31, 2017 as compared to $1,490,910 for the twelve months ended December 31, 2016.

 

Total operating expenses increased $2,460,017 to $16,555,638 for the twelve months ended December 31, 2017 compared to $14,095,621 for the same period in 2016. The increase is primarily attributable to an increase in the following expenses in 2017 compared to 2016 of $7,421,419 of stock compensation, $353,845 of payroll and benefits, and $48,393 of insurance offset by a decrease of the following expenses in 2017 compared to 2016 of $3,955,362 of impairment of goodwill and intangible assets, $1,054,912 of professional fees, $347,656 of retail store and kiosk closing costs.

 

 

The Company concluded that goodwill was impaired and recorded an impairment charges of $3,955,362 for the twelve months ended December 31, 2016. The Company determined that the carrying value of intangible assets in connection with the Vaporin merger exceeded their potential cash flow from disposition. The Company did not have an impairment charge for 2017.

 

Net other income of $133,446 for the twelve months ended December 31, 2017 includes $94,955 loss on repurchase of Series A warrants, $200,129 of other income, $1,780 of other expense, $33,774 of interest income and $3,722 of interest expense. Net other income of $21,136,563 for the twelve months ended December 31, 2016 includes a $21,599 amortization of debt discounts from notes receivable related to the sale of the wholesale business, $5,189,484 gain on repurchase of Series A warrants, $15,255,143 non-cash change in fair value of Series A warrants, $640,000 other income, $45,723 interest income, and $15,386 of interest expense.

  

The Series A warrants contain a cashless exercise feature that provides for the issuance of a number of shares of our common stock that increases as the trading market price of our common stock decreases. Series A warrants are exercised pursuant to a cashless exercise based on the closing bid price of our common stock as of the two trading days prior to the time of such exercise and the Black Scholes Value. The potential for such highly dilutive exercise of the Series A Warrants may depress the price of our common stock regardless of the Company’s business performance, and could encourage short selling by market participants, especially if the trading price of our common stock begins to decrease. In any such event, investors may be adversely affected.

 

Liquidity and Capital Resources

 

		For the year ended December 31,
		2017				2016
Net cash used in operating activities		$	(2,823,445	)		$	(7,315,987	)
Net cash used in investing activities			(192,885	)			(3,187,516	)
Net cash used in financing activities			(2,466,751	)			(3,345,216	)
		$	(5,483,081	)		$	(13,848,719

  

Our net cash used in continuing operating activities of $2,602,021 for the twelve months ended December 31, 2017 resulted from our net loss from continuing operations of $10,143,411, a net cash usage of $789,218 from changes in operating assets and liabilities offset by non-cash adjustments of $8,330,608. Our net cash used in discontinued operations of $221,424 for the twelve months ended December 31, 2017 resulted from our net income from discontinued operations of $281,483 offset by non-cash adjustments of $502,907. Our net cash used in continuing operating activities of $3,576,816 for the twelve months ended December 31, 2016 resulted from our net income from continuing operations of $12,274,295, a net cash usage of $846,858 from changes in operating assets and liabilities offset by non-cash adjustments of $15,004,253. Our net cash used in discontinued operations of $3,739,171 for the twelve months ended December 31, 2016 resulted from our net loss from discontinued operations of $1,589,803 a net cash usage of $2,466,269 from changes in assets and liabilities from discontinued operations offset by noncash adjustments of $316,901.

 

The net cash used in investing activities of $192,885 for the twelve months ended December 31, 2017 resulted from patent purchases of $50,000 and property and equipment of $142,885.

 

The net cash used in investing activities of $3,187,516 for the twelve months ended December 31, 2016 resulted from the acquisition of grocery store business assets for $2,910,612, purchases of $25,299 of property and equipment, purchases of tradename of $25,000, issuance of note receivable to related party in conjunction with sale of wholesale business of $500,000 offset by proceeds received from sale of tradename of $100,000 and collection of note receivable of $173,395.

 

The net cash used in financing activities of $2,466,751 for the twelve months ended December 31, 2017 is due to repurchases of Series A warrants totaling $2,427,267, principal payments on capital lease obligations of $53,054, and principal payments on loan payable of $1,407 offset by proceeds from loan payable of $13,977 and proceeds from exercise of stock options of $1,000. The net cash used in financing activities of $3,345,216 for the twelve months ended December 31, 2016 is due to repurchases of Series A warrants totaling $3,278,827 and payment of $66,389 of capital lease obligation.

 

At December 31, 2017 and December 31, 2016, we do not have any material financial guarantees or other contractual commitments with these 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 one large financial institution, which is in excess of Federal Deposit Insurance Corporation (FDIC) coverage. The following table presents the Company's cash position as of December 31, 2017 and December 31, 2016.

 

		December 31, 2017				December 31, 2016
Cash		$	7,883,191			$	13,366,272
Total assets		$	11,701,405			$	17,234,751
Percentage of total assets			67.4	%			77.6	%

  

The Company reported net loss allocable to common stockholders of approximately $9.9 million for the year ended December 31, 2017. The Company had a deficit in working capital of approximately $2.3 million as of December 31, 2017, As of March 13, 2018, the Company had approximately $7.6 million of cash. The decrease in cash from December 31, 2016 is primarily attributable to repurchases of Series A warrants and operating expenses.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements other than operating leases for retail locations, equipment, and vehicles.

 

Seasonality

 

We do not consider our business to be seasonal.

 

Non-GAAP – Financial Measure

 

The following discussion and analysis contains a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles (GAAP). Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternative to, net income, operating income, and cash flow from operating activities, liquidity or any other financial measures. Non-GAAP financial measures may not be indicative of the historical operating results of the Company nor are they intended to be predictive of potential future financial results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP.

 

Management believes stockholders benefit from referring to the Adjusted EBITDA in planning, forecasting, and analyzing future periods. Management uses this non-GAAP financial measure in evaluating its financial and operational decision making and as a means of evaluating period to period comparison.

 

We define Adjusted EBITDA as net loss from operations adjusted for non-cash charges for depreciation and amortization and stock compensation. Management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and analysts to evaluate and assess our core operating results from period to period after removing the impact of significant non-cash charges that effect comparability between reporting periods. Our management recognizes that Adjusted EBITDA has inherent limitations because of the excluded items.

 

We have included a reconciliation of our non-GAAP financial measure to loss from operations as calculated in accordance with GAAP. We believe that providing the non-GAAP financial measure, together with the reconciliation to GAAP, helps investors make comparisons between the Company and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to specific definitions being used and to the reconciliation between such measures and the corresponding GAAP measures provided by each company under applicable rules of the Securities and Exchange Commission.

 

		2017				2016
Reconciliation of Adjusted EBITDA to net loss allocable to common stockholders:
Operating loss		$	(10,276,857	)		$	(8,862,268	)
Depreciation and amortization			350,647				374,388
Stock-based compensation expense			7,496,849				75,430
Adjusted EBITDA		$	(2,429,361	)		$	(8,412,450	)

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable to smaller reporting companies.

 

 

Item 8. Financial Statements and Supplementary Data.

 

See pages F-1 through F-27.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

  

The Audit Committee of the Company completed a competitive process to determine what firm would serve as the Company’s independent registered public accounting firm for the year ended December 31, 2017. On April 20, 2017, the Audit Committee determined to dismiss Morrison, Brown, Argiz & Farra, LLC as the Company’s independent registered public accounting firm effective immediately.

 

During the years ended December 31, 2016 and 2017, there were no (a) disagreements with auditors on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to satisfaction, would have caused our auditors to make reference to the subject matter thereof in connection with its reports for such years; or (b) reportable events, as described under Item 304(a)(1)(v) of Regulation S-K.

 

Item 9A. Controls and Procedures.

 

We are required to report under Section 404(a) of Sarbanes-Oxley regarding the effectiveness of our internal control over financial reporting. If we determine that we have material weaknesses, it may be necessary to make restatements of our consolidated financial statements and investors will not be able to rely on the completeness and accuracy of the financial information contained in our filings with the SEC and this could potentially subject us to sanctions or investigations by the SEC or other regulatory authorities or stockholder litigation.

 

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 during the year ended December 31, 2017 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.

 

Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our management, including our Principal Executive Officer and Principal Financial Officer, did not conduct an evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2017.

 

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:

 

	●	Failure to have properly documented and designed disclosure controls and procedures and testing of the operating effectiveness of our internal control over financial reporting

	●	Weakness around our inventory count procedures

●

Segregation of duties due to lack of personnel

 

Our management concluded that considering internal control deficiencies that, in the aggregate, rise to the level of material weaknesses, we did not maintain effective internal control over financial reporting as of December 31, 2017 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

Remediation Efforts

 

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 continue to build out our 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. We also established relationships with financial reporting consultants to assist with technical accounting as deemed necessary.

●

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.

 

  

Item 9B. Other Information.

 

None.

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Directors and Executive Officers

 

The following table sets forth information regarding our executive officers and directors as of March 13, 2018:

 

Name		Age			Position
Executive Officers:
Jeffrey Holman		51			Chief Executive Officer, Chairman and Director
John A. Ollet		55			Chief Financial Officer
Christopher Santi		47			President and Chief Operating Officer
Non-Employee Directors:
Clifford J. Friedman		56			Director
Dr. Anthony Panariello		58			Director

 

Executive Officers

 

Jeffrey Holman has been our Chairman of the Board and Chief Executive Officer since April 2014. From February 2013 until March 4, 2015, Mr. Holman serviced as our President. Mr. Holman has been a member of our Board since May 2013 and has served as a member of the Board of Directors of our subsidiary Smoke Anywhere, USA since its inception on March 24, 2008. Since 1998, Mr. Holman has been the President of Jeffrey E. Holman & Associates, P.A., a South Florida based law firm. He has also been a Partner in the law firm of Holman, Cohen & Valencia since 2000. Mr. Holman was selected as a director for his business and legal experience. In addition, as one of the founders of Smoke Anywhere, Mr. Holman possesses an in-depth understanding of the challenges, risks and characteristics unique to our industry.

 

Christopher Santi has been our Chief Operating Officer since December 12, 2012 and has served as the President and Chief Operating Officer since April 11, 2016. Prior to that Mr. Santi served as Director of Operations of the Company beginning in October 2011. Mr. Santi served as the National Sales Manager of Collages.net from November 2007 to October 2011.

 

John A. Ollet has been our Chief Financial Officer since December 12, 2016. Mr. Ollet previously served as Executive Vice President-Finance for Systemax, Inc. (NYSE:SYX) from 2006 to 2016. His prior chief financial officer experience also includes serving as Vice President and Chief Financial Officer of Arrow Cargo Holdings, Inc., an airline logistics company, and VP Finance /CFO - The Americas - Cargo Division, KLM Royal Dutch Airlines, an airline company. He also previously served as Vice President Finance/Administration at Sterling-Starr Maritime Group, Inc. and served on the audit staff of Arthur Andersen & Co. Mr. Ollet received a bachelor’s degree in Finance/Economics and a master’s degree in business administration from Florida International University. Mr. Ollet is a Certified Public Accountant.

 

Non-Employee Directors

 

Anthony Panariello, M.D. has been a director since April 15, 2016. Dr. Panariello is Board Certifed in Pulmonology and Internal Medicine in Florida and has been in private practice since 1996, serving as an attending physician at a number of hospitals. Dr. Panariello is a member of the College of Physicians and the American College of Chest Physicians. Additionally, Dr. Panariello currently serves as a Lieutenant Commander in the Medical Corps of the United States Navy Reserve. Dr. Panariello received his Bachelor of Science from the State University of New York at Stony Brook and his medical degree from the Autonomous University of Guadalajara.

  

Clifford J. Friedman has been a director since April 15, 2016. Mr. Friedman is a certified public accountant in Coral Springs, Florida and managed his own public accounting, tax and consulting practice since 2001. From 1992 to 2000, Mr. Friedman was Vice President-Finance of Administration of the Box Worldwide, Inc., a Viacom company. He received an M.B.A. from Nova Southeastern University and his B.B.A. from Pace University.

 

 

Corporate Governance

 

Board Responsibilities

 

The Board oversees, counsels, and directs management in the long-term interest of the Company and its stockholders. The Board’s responsibilities include establishing broad corporate policies and reviewing the overall performance of the Company. The Board is not, however, involved in the operating details on a day-to-day basis.

 

Board Committees and Charters

 

The Board and its Committees meet throughout the year and act by written consent from time-to-time as appropriate. The Board delegates various responsibilities and authority to different Board Committees. Committees regularly report on their activities and actions to the Board.

 

The Board currently has and appoints the members of: The Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. Each of these committees have a written charter which can be found on our corporate website at www.healthiercmc.com/committee-charters/.

 

The following table identifies the independent and non-independent current Board and committee members: 

 

Name

Independent

Audit

Compensation

Nominating And Corporate Governance

Jeffrey Holman

Dr. Anthony Panariello

X

X

X

X

Clifford J. Friedman

X

X

X

X

 

Director Independence

 

Our Board has determined that Clifford J. Friedman and Dr. Anthony Panariello are independent in accordance with standards under the OTC Pink Marketplace. Our Board determined that as a result of being executive officer, Messrs. Jeffrey Holman is not independent under the OTC Pink Marketplace Bulletin Boards. Our Board has also determined that Clifford J. Friedman and Dr. Anthony Panariello are independent under the OTC Pink Marketplace independence standards for Audit and Compensation Committee members.

 

Committees of the Board

 

Audit Committee

 

The Audit Committee, which currently consists of Clifford J. Friedman (chair) and Dr. Anthony Panariello, reviews the Company’s financial reporting process on behalf of the Board and administers our engagement of the independent registered public accounting firm. The Audit Committee approves all audit and non-audit services, and reviews the independence of our independent registered public accounting firm.

 

Audit Committee Financial Expert

 

Our Board has determined that Clifford J. Friedman is qualified as an Audit Committee Financial Expert, as that term is defined by the rules of the SEC and in compliance with the Sarbanes-Oxley Act of 2002.

 

Compensation Committee

 

The function of the Compensation Committee is to determine the compensation of our executive officers. The Compensation Committee has the power to set performance targets for determining periodic bonuses payable to executive officers and may review and make recommendations with respect to stockholder proposals related to compensation matters. Additionally, the Compensation Committee is responsible for administering the Company’s equity compensation plans including the Plan.

 

The members of the Compensation Committee are all independent directors within the meaning of applicable Nasdaq Listing Rules and all of the members are “non-employee directors” within the meaning of Rule 16b-3 under the Exchange Act.

 

 

Nominating and Corporate Governance Committee

 

The responsibilities of the Nominating and Corporate Governance Committee include the identification of individuals qualified to become Board members, the selection of nominees to stand for election as directors, the oversight of the selection and composition of committees of the Board, establish procedures for the nomination process including procedures and the oversight of the evaluations of the Board and management. The Nominating and Corporate Governance Committee has not established a policy with regard to the consideration of any candidates recommended by stockholders since no stockholders have made any recommendations. If we receive any stockholder recommended nominations, the Nominating Committee will carefully review the recommendation(s) and consider such recommendation(s) in good faith.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of our compensation committee has ever been an officer or employee of the Company. None of our executive officers serve, or have served during the last fiscal year, as a member of our compensation committee or other Board committee performing equivalent functions of any entity that has one or more executive officers serving on our Board or on our compensation committee.

 

Board Assessment of Risk

 

The Board is actively involved in the oversight of risks that could affect the Company. This oversight is conducted primarily through the Audit Committee, but the full Board has retained responsibility for general oversight of risks. The Audit Committee considers and reviews with our independent public accounting firm and management the adequacy of our internal controls, including the processes for identifying significant risks and exposures, and elicits recommendations for the improvements of such procedures where desirable. In addition to the Audit Committee’s role, the full Board is involved in oversight and administration of risk and risk management practices. Members of our senior management have day-to-day responsibility for risk management and establishing risk management practices, and members of management are expected to report matters relating specifically to the Audit Committee directly thereto, and to report all other matters directly to the Board as a whole. Members of our senior management have an open line of communication to the Board and have the discretion to raise issues from time-to-time in any manner they deem appropriate, and management’s reporting on issues relating to risk management typically occurs through direct communication with directors or committee members as matters requiring attention arise. Members of our senior management regularly attend portions of the Board’s meetings, and often discuss the risks related to our business.

 

Presently, the largest risks affecting the Company are the Company’s ability to manage and satisfy the Series A Warrant obligations and evaluation of potential adverse impact of the FDA’s final regulations on vaporizers and e-liquids on the retail business operations. The Board actively interfaces with management on seeking solutions.

 

Code of Ethics

 

The Company has a code of ethics, “Business Conduct: “Code of Conduct and Policy,” that applies to all of the Company’s employees, including its principal executive officer, principal financial officer and principal accounting officer, and the Board. A copy of this code is available on the Company’s website at http://www.healthiercmc.com/code-of-conduct. The Company intends to disclose any changes in or waivers from its code of ethics by posting such information on its website or by filing a Current Report on Form 8-K.

 

Stockholder Communications

 

Although we do not have a formal policy regarding communications with our Board, stockholders may communicate with the Board by writing to us at Healthier Choices Management Corp., 3800 N 28th Way, Hollywood, FL 33020, Attention: Corporate Secretary, or by facsimile (954) 272-7773. Stockholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and the other equity securities. Officers, directors and greater than ten percent stockholders are required by SEC rules to furnish us with copies of all Section 16(a) reports they file.

 

Based solely on a review of the reports furnished to us, or written representations from reporting persons that all reportable transactions were reported and that no Form 5s were required, we believe that during 2016 our officers, directors and greater than 10% owners timely filed all reports they were required to file under Section 16(a).

 

 

ITEM 11. Executive Compensation

 

The following information is related to the compensation paid, distributed or accrued by us for fiscal 2017 and 2016 to all Chief Executive Officers (principal executive officers) serving during the last fiscal year and the two other most highly compensated executive officers serving at the end of the last fiscal year whose compensation exceeded $100,000. We refer to these individuals as our “named executive officers.”

 

Summary Compensation Table

 

Name and Principal Position		Year		Salary ($)				Bonus ($)				Option Awards (1)				All Other Compensation ($)				Total
Jeffrey Holman		2017			346,368				100,000				4,999,998				9,900				5,456,266
Chief Executive Officer		2016			312,346				100,000				-				-				412,346
Christopher Santi		2017			225,410				25,000				2,499,999				601				2,751,010
President & Chief Operating Officer		2016			209,117				50,000				-				-				259,117
John Ollet		2017			185,931				-				500,000				510				686,441
Chief Financial Officer		2016			8,307				-				-				-				8,307
Gina Hicks		2017			38,462				-				-				-				38,462
Former Chief Financial Officer		2016			197,117				-				-				45,113				242,250

 

(1)   Amounts reflect the aggregate grant date fair value, without regard to forfeitures, computed in accordance with ASC 718. These amounts represent options of the Company’s common stock and do not reflect the actual amounts that may be realized by the Named Executive Officers. Our assumptions with respect to the calculation of the stock options value are set forth in Note 2 to the consolidated financial statements contained herein.

 

Named Executive Officer Employment Agreements

 

On August 10, 2015, the Company entered into three-year Employment Agreements with Jeffrey Holman, the Company’s Chief Executive Officer, and Gregory Brauser, the Company’s President. Each of the Employment Agreements provide for an annual base salary of $300,000 and a target bonus in an amount ranging from 20% to 200% of their base salaries subject to the Company meeting certain adjusted earnings before interest, taxes depreciation and amortization (“Adjusted EBITDA”) performance milestones. Adjusted EBITDA is defined in the Employment Agreements as earnings (loss) from continuing operations before interest expense, income taxes, collateral valuation adjustment, bad debt expense, one-time expenses, depreciation and amortization and amortization of stock compensation or Adjusted EBITDA defined in any filing of the Company with the SEC subsequent to the date of the Employment Agreements. Messrs. Holman and Brauser are also entitled to receive severance payments, including two years of their 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.

 

Effective December 12, 2012, the Company entered into a three-year employment agreement with Christopher Santi, the Company’s President and Chief Operating Officer. The employment agreement paid a beginning base salary of $156,000 which increased to $170,000 beginning in December 2016. In accordance with this employment agreement, Mr. Santi received a 10-year option to purchase up to 57 shares of the Company’s common stock at an exercise price of $437.50, vesting monthly at the rate of approximately 2 shares per month. As of the date of this report, the options are fully vested. On January 30, 2017, the Company entered into a new employment agreement with Mr. Santi for a three-year term beginning January 30, 2017. Pursuant to the new employment agreement, Mr. Santi will receive a base salary of $225,000, increasing to $250,000 and $275,000, respectively, for the second and third years of the employment agreement. Mr. Santi is also eligible to earn an annual bonus at the discretion of the Company’s Board of Directors.

 

 

Termination Provisions

 

The table below describes the severance payments that our Named Executive Officers are entitled to in connection with a termination of their employment upon death, disability, dismissal without cause, Change of Control or for Good Reason. All of the termination provisions are intended to comply with Section 409A of the Internal Revenue Code of 1986 and the Regulations thereunder.

 

		Holman		Santi
Death or Total Disability		Any amounts due at time of termination plus full vesting of equity awards		Any amounts due at time of termination
Dismissal Without Cause or Termination by Executive for Good Reason or upon a Change of Control (1)		Two years of Base Salary, full vesting of equity awards, benefit continuation for eighteen months plus pro-rated bonus if, any, that would have been earned for the fiscal year in which the termination occurs		Fifteen months of Base Salary plus one additional month for every additional four months of service, up to eighteen months’ maximum
Termination upon a Change of Control (2)		Two years of Base Salary, full vesting of equity awards, benefit continuation for eighteen months plus pro-rated bonus if, any, that would have been earned for the fiscal year in which the termination occurs		Eighteen months of Base Salary

 

(1) Good reason is generally (with certain exceptions) defined, in the case of Holman, as (i) a material diminution in their authority, duties or responsibilities, (y) the Company failing to maintain an office in the stated area or (ii) any other action or inaction that constitutes a material breach by the Company of the Employment Agreement. Mr. Santi’s employment agreement does not include the concept of good reason.

 

(2) Change of Control is generally defined (i) in the case of Holman, as any Change of Control Event as defined in Treasury Regulation Section 1.409A-3(i)(5); and (ii) in the case of Santi, as (w) a sale of substantially all of the Company, (x) any “person” (as such term is defined under the Exchange Act) becomes the beneficial owners of over 50% of the Company’s voting power, (y) a change in the majority of the composition of the Board or (z) a transaction that results in over 50% of the Company’s voting power ceasing to hold a majority of the voting power post-transaction.

 

Risk Assessment Regarding Compensation Policies and Practices as they Relate to Risk Management

 

Our compensation program for employees does not create incentives for excessive risk taking by our employees or involve risks that are reasonably likely to have a material adverse effect on us. Our compensation has the following risk-limiting characteristics:

 

●

Our base pay programs consist of competitive salary rates that represent a reasonable portion of total compensation and provide a reliable level of income on a regular basis, which decreases incentive on the part of our executives to take unnecessary or imprudent risks; and

 

●

Cash bonus awards are not tied to formulas that could focus executives on specific short-term outcomes.

 

Outstanding Awards at Fiscal Year End

 

Listed below is information with respect to unexercised options that have not vested, and equity incentive plan awards for each named executive officer outstanding as of December 31, 2017:

 

Outstanding Equity Awards at 2017 Fiscal Year-End

 

Name		Number of Shares Issued Under Stock Options				Stock Options Exercise Price ($) Per Share of Stock				Stock Option Expiration Date				Number of Shares That Have Not Vested (#)				Market Value of Shares That Have Not Vested ($)
Jeffrey Holman			50,000,000,000				0.0001				2/1/2027				-				-
Christopher Santi			1				0.02				3/29/22				-				-
Christopher Santi			25,000,000,000				0.0001				2/1/2027				-				-
John Ollet			1,000,000,000				0.0001				12/9/2026				500,000,000				50,000
John Ollet			4,000,000,000				0.0001				8/30/2027				1,000,0000,000				100,000

 

Director Compensation

 

Non-employee directors are paid a monthly fee of $1,000 per month and $1,000 for each meeting attended. Because we do not pay any compensation to employee directors, Mr. Holman is omitted from the following table. Non-employee members of our Board of Directors were compensated for as follows:

 

 

Fiscal 2017 Director Compensation

 

Name		Fees Earned or Paid in Cash ($)
Dr. Anthony Panariello		$	36,000
Clifford J. Friedman		$	37,000

 

Equity Compensation Plan Information

 

The 2015 Equity Incentive Plan (the “Plan”) was approved by the Company’s stockholders at the June 26, 2015 stockholders meeting. On November 21, 2016, the Company’s Board of Directors increased the number of shares of common stock available for issuance pursuant to the Plan to 100,000,000,000. The Plan is a broad-based plan in which all employees, consultants, officers, and directors of the Company are eligible to participate. The purpose of the Plan is to further the growth and development of the Company by providing, through ownership of stock of the Company and other equity-based awards, an incentive to its officers and other key employees and consultants who are in a position to contribute materially to the prosperity of the Company, to increase such persons’ interests in the Company’s welfare, by encouraging them to continue their services to the Company, and by enabling the Company to attract individuals of outstanding ability to become employees, consultants, officers and directors of the Company.

 

The following chart reflects the number of awards granted under equity compensation plans approved and not approved by stockholders and the weighted average exercise price for such plans as of December 31, 2017.

 

Name of Plan		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)				Weighted average exercise price of outstanding options, warrants and rights (b)				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders
2009 Equity Incentive Plan			0.011			$	20,506,610				-
2015 Equity Incentive Plan			87,894,750,004				0.0001				12,105,249,996
Total			87,894,750,004				-				12,105,249,996

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.

 

The following table sets forth the number of shares of our common stock beneficially owned as of March 13, 2018, by (i) those persons known by us to be owners of more than 5% of our common stock, (ii) each director, (iii) our Named Executive Officers and (iv) all of our executive officers and directors of as a group. Unless otherwise specified in the notes to this table, the address for each person is: c/o Healthier Choices Management Corp., 3800 North 28th Way, Hollywood, Florida 33020.

 

Title of Class		Beneficial Owner		Amount and Nature of Beneficial Owner (1)				Percent of Class (1)
Directors and Executive Officers:
Common Stock		Jeffrey E. Holman (2)			4,711,732,180				19.99	%
Common Stock		Christopher Santi (3)			4,711,732,180				19.99	%
Common Stock		John Ollet (4)			4,500,000,000				15.33	%
Common Stock		Dr. Anthony Panariello (5)			1,000,000,000				2.62	%
Common Stock		Clifford J. Friedman (6)			1,000,000,000				2.62	%
		All directors and officers as a group (6 persons) (7)			15,233,464,360				55.13	%
5% Stockholders:
None					0				0	%
Total:					15,233,464,360				53.06	%

 

 

(1) Beneficial Ownership. Applicable percentages are based on 29,348,867,108 shares of common stock outstanding as of March 13, 2018. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants, convertible notes and preferred stock currently exercisable or convertible or exercisable or convertible within 60 days are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. The table includes shares of common stock, options, warrants, and preferred stock exercisable or convertible into common stock and vested or vesting within 60 days. Unless otherwise indicated in the footnotes to this table, we believe that each of the stockholders named in the table has sole voting and investment power with respect to the shares of common stock indicated as beneficially owned by them. The table does not include: (i) restricted stock units that do not have the right to vote until they vest and the shares are delivered or (ii) unvested options that do not vest within 60 days of the date listed above in this footnote.

 

(2) Holman. Chairman and Chief Executive Officer. The option agreement includes a provision that prevents Mr. Holman from exercising the option into common stock to the extent (but only to the extent) that such conversion would result in the holder, or any of its affiliates, beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder) more than 19.9% of the Company’s outstanding Common Stock (the “Exercise Blocker”). Without the Exercise Blocker, Mr. Holman would be deemed to beneficially own 50,000,000,000 shares of Common Stock pursuant to vested options.

 

(3) Santi. Santi and Chief Operation Officer. The option agreement of Mr. Santi includes the Exercise Blocker. Without the Exercise Blocker, Mr. Santi would be deemed to beneficially own 25,000,000,000 shares of Common Stock pursuant to vested options.

 

(4) Ollet. Chief Financial Officer. Includes 4,500,000,000 vested options.

 

(5) Panariello. A director. Includes 1,000,000,000 vested options.

 

(6) Friedman. A director. Includes 1,000,000,000 vested options.

 

(7) Directors and Executive Officers. Includes executive officers who are not Named Executive Officers under the SEC’s rules and regulations. 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

During 2016, the Company purchases, at rates comparable to market rates, e-liquids sold in its retail stores and wholesale operations, respectively from Liquid Science, Inc., a company in which Jeffrey Holman (the Company’s Chief Executive Officer), Gregory Brauser (the Company’s former President) and Michael Brauser each had a 15% beneficial ownership interest. During 2016, the Company made approximately 23% of its purchases of e-liquid from Liquid Science, which purchases equaled $356,000 in the aggregate. In 2016, the Company received approximately $94,000 in royalty income from Liquid Science related to the use of the Company trademark. In April 2016, Mr. Holman sold all of his interest in Liquid Science.

 

Policies and Procedures for Related Party Transactions

 

We have adopted a policy that our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of any class of our common stock and any members of the immediate family of any of the foregoing persons are not permitted to enter into a related person transaction with us without the prior consent of our audit committee. Our audit committee will review and oversee all transactions with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of any class of our common stock or any member of the immediate family of any of the foregoing persons and such person would have a direct or indirect interest. In approving or rejecting any such transactions, our audit committee is to consider the material facts of the transaction, including, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction.

 

Item 14. Principal Accounting Fees and Services.

 

Our Audit Committee pre-approves audit and permissible non-audit services performed by its independent registered public accounting firm, as well as the fees charged for such services. All of the services related to audit fees and audit-related fees charged were pre-approved by the Audit Committee. The following table shows the fees for the years ended December 31, 2017 and 2016.

 

		2017 ($)				2016 ($)
Audit Fees (1)		$	140,000			$	364,929
Audit Related Fees			-				15,126
All Other Fees			-				-
Total		$	140,000			$	380,055

 

(1) Audit fees — these fees relate to the audit of our annual financial statements and the review of our interim quarterly financial statements and our registration statements.

 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

(a)	Documents filed as part of the report.

 

(1)

Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof.  The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item.

 

(2)

Financial Statements Schedules.  All schedules are omitted because they are not applicable or because the required information is contained in the consolidated financial statements or notes included in this report.

 

(3)

Exhibits. The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report.

 

 

FINANCIAL STATEMENT INDEX

 

Report of Marcum LLP, Independent Registered Public Accounting Firm	F-2
Report of Morrison, Brown, Argiz & Farra, LLC	F-3
Financial Statements
Consolidated Balance Sheets as of December 31, 2017, and 2016	F-4
Consolidated Statements of Operations for the Years Ended December 31, 2017 and 2016	F-5
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2017 and 2016	F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and 2016	F-7
Notes to Consolidated Financial Statements	F-9

 

   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

Healthier Choices Management Corp.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Healthier Choices Management Corp. (the “Company”) as of December 31, 2017, and the related consolidated statements of operations, stockholders’ (deficit) equity and cash flows for the year ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.

 

Marcum LLP

 

/S/ Marcum LLP

 

We have served as the Company’s auditor since 2017.

 

New York, NY

March 14, 2018 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Audit Committee of the
Board of Directors and Stockholders
of Healthier Choices Management Corp. (f/k/a Vapor Corp.)

 

We have audited the accompanying consolidated balance sheet of Healthier Choice Management Corp. (formerly known as Vapor Corp.) (the “Company”) as of December 31, 2016, and the related consolidated statements of operations, changes in stockholders’ (deficit) equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Healthier Choice Management Corp. as of December 31, 2016, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The Company has adjusted its 2015 consolidated financial statements to retrospectively apply the change in accounting related to the one-for-twenty thousand reverse split described in Note 11 and the presentation of discontinued operations as described in Note 3 to the consolidated financial statements. Other auditors reported on the consolidated financial statements before the retrospective adjustment. We also audited the adjustments to the 2015 consolidated financial statements to retrospectively apply the change in accounting as described in Notes 11 and 3. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the Company's 2015 consolidated financial statements other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2015 consolidated financial statements as a whole.

 

Morrison, Brown, Argiz & Farra, LLC
Miami, FL
March 23, 2017

 

 

HEALTHIER CHOICES MANAGEMENT CORP.
CONSOLIDATED BALANCE SHEETS

  

		December 31, 2017				December 31, 2016
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	7,883,191			$	13,366,272
Due from merchant credit card processor			28,410				30,272
Accounts receivable, net of allowance			75,568				25,798
Inventories			861,650				748,551
Prepaid expenses and vendor deposits			63,808				93,229
Other current assets			41,183				-
Current assets from discontinued operations			-				52,903
TOTAL CURRENT ASSETS			8,953,810				14,317,025
Property and equipment, net of accumulated depreciation			589,506				638,926
Intangible assets, net of accumulated amortization			1,559,531				1,669,329
Goodwill			481,314				481,314
Other assets			117,244				128,157
TOTAL ASSETS		$	11,701,405			$	17,234,751
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	512,395			$	520,586
Accrued expenses			538,204				779,676
Current portion of capital lease			-				53,054
Current portion of loan payable			2,111				-
Derivative liabilities - warrants			10,231,697				12,868,079
Current liabilities from discontinued operations			-				555,810
TOTAL CURRENT LIABILITIES			11,284,407				14,777,205
Loan payable, net of current portion			10,459				-
TOTAL LIABILITIES			11,294,866				14,777,205
COMMITMENTS AND CONTINGENCIES (SEE NOTE 9)
STOCKHOLDERS’ EQUITY
Common stock, $.0001 par value, 750,000,000,000 shares authorized, 29,348,867,108 issued and outstanding as of December 31, 2017 and 14,213,861,174 issued and outstanding as of December 31, 2016			2,934,887				1,421,386
Additional paid-in capital			10,080,238				3,782,818
Accumulated deficit			(12,608,586	)			(2,746,658	)
TOTAL STOCKHOLDERS’ EQUITY			406,539				2,457,546
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	11,701,405			$	17,234,751

 

See notes to consolidated financial statements

 

 

HEALTHIER CHOICES MANAGEMENT CORP. 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Year Ended December 31,
		2017				2016
SALES:
Vapor sales, net		$	5,867,202			$	6,722,052
Grocery sales, net			7,093,893				3,843,111
Total Sales			12,961,095				10,565,163
Cost of sales vapor			2,567,400				2,979,609
Cost of sales grocery			4,114,914				2,352,201
GROSS PROFIT			6,278,781				5,233,353
EXPENSES:
Advertising			110,694				92,124
Selling, general and administrative			16,444,944				9,700,479
Impairment of goodwill and intangible assets			-				3,955,362
Retail store and kiosk closing costs			-				347,656
Total operating expenses			16,555,638				14,095,621
Operating loss			(10,276,857	)			(8,862,268	)
OTHER INCOME (EXPENSES):
Amortization of debt discounts			-				21,599
Gain (loss) on warrant repurchases			(94,955	)			5,189,484
Non-cash change in fair value of derivative liabilities			-				15,255,143
Other income			200,129				640,000
Interest income			33,774				45,723
Other expense			(1,780	)			-
Interest expense			(3,722	)			(15,386	)
Total other income			133,446				21,136,563
Net income (loss) from continuing operations			(10,143,411	)			12,274,295
Net income (loss) from discontinued operations			281,483				(1,589,803	)
NET INCOME (LOSS)		$	(9,861,928	)		$	10,684,492
NET INCOME (LOSS) PER SHARE-BASIC AND DILUTED:
Continuing operations			0.00				0.00
Discontinued operations			0.00				0.00
NET INCOME (LOSS) PER SHARE BASIC AND DILUTED		$	0.00			$	0.00
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-
BASIC			26,199,887,696				4,102,959,032
DILUTED			26,199,887,696				640,656,219,521

 

See notes to consolidated financial statements

 

  

HEALTHIER CHOICES MANAGEMENT CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2017

 

		Series A Convertible Preferred Stock								Treasury Stock								Common Stock								Additional Paid-In				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Total
Balance – December 31, 2015			1			$	-				-			$	-				6			$	-			$	846,943			$	(13,431,150	)		$	(12,584,207	)
Issuance of common stock in connection with cashless exercise of Series A warrants			-				-				-				-				15,619,771,345				1,561,977				2,936,071				-				4,498,048
Purchase of treasury stock made in conjunction with the sale of the wholesale business			-				-				(1,405,910,203	)			(140,591	)			-				-				(75,626	)			-				(216,217	)
Treasury stock cancellation			-				-				1,405,910,203				140,591				(1,405,910,203	)			(140,591	)			-				-				-
Issuance of common stock in connection with conversion of Series A convertible preferred stock			(1	)			-				-				-				26				-				-				-				-
Stock-based compensation expense			-				-				-				-				-				-				75,430				-				75,430
Net income			-				-				-				-				-				-				-				10,684,492				10,684,492
Balance – December 31, 2016			-			$	-				-			$	-				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			-								-				-				-				-				7,496,849				-				7,496,849
Net loss			-								-				-				-				-				-				(9,861,928	)			(9,861,928	)
Balance – December 31, 2017			-							$	-			$	-				29,348,867,108			$	2,934,887			$	10,080,238			$	(12,608,586	)		$	406,539

 

See notes to consolidated financial statements

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the year ended December 31,
		2017				2016
OPERATING ACTIVITIES:
Net income (loss)		$	(9,861,928	)		$	10,684,492
Adjustments to reconcile net income (loss) to net cash used in operating activities:
(Income) loss from discontinued operations			(281,483	)			1,589,803
Change in allowances for bad debt			(14,372	)			663,218
Depreciation and amortization			350,647				374,388
Loss on disposal of assets			1,456				103,312
(Gain) loss on repurchase of Series A warrants			94,955				(5,189,484	)
Accretion of discounts on note receivable from related party			-				(21,600	)
Accrued interest on notes receivable from related party			-				(11,634	)
Write-down of obsolete and slow-moving inventory			392,071				301,898
Stock-based compensation expense			7,496,849				75,430
Stock-based expense in connection with professional services			9,002				-
Impairment of goodwill and intangible assets			-				3,955,362
Non-cash change in fair value of derivative liabilities			-				(15,255,143	)
Net cash used in discontinued operations			(221,424	)			(3,739,171	)
Changes in operating assets and liabilities:
Due from merchant credit card processors			1,862				(20,797	)
Accounts receivable			(35,398	)			(197,908	)
Inventories			(505,170	)			(350,148	)
Prepaid expenses and vendor deposits			29,421				121,421
Other assets			(30,270	)			37,040
Accounts payable			(8,191	)			332,012
Accrued expenses			(241,472	)			(786,328	)
Customer deposits			-				17,850
NET CASH USED IN OPERATING ACTIVITIES			(2,823,445	)			(7,315,987	)
INVESTING ACTIVITIES:
Acquisition of grocery store business			-				(2,910,612	)
Proceeds from sale of tradename			-				100,000
Issuance of note receivable to related party in conjunction with sale of wholesale business			-				(500,000	)
Collection of note receivable			-				173,395
Purchases of tradename			-				(25,000	)
Purchase of patent			(50,000	)			-
Purchases of property and equipment			(142,885	)			(25,299	)
NET CASH USED IN INVESTING ACTIVITIES:			(192,885	)			(3,187,516	)
FINANCING ACTIVITIES:
Proceeds from loan payable			13,977				-
Principal payments on loan payable			(1,407	)			-
Proceeds from exercise of stock options			1,000				-
Payments for repurchase of Series A warrants			(2,427,267	)			(3,278,827	)
Principal payments of capital lease obligations			(53,054	)			(66,389	)
NET CASH USED IN FINANCING ACTIVITIES			(2,466,751	)			(3,345,216	)
DECREASE IN CASH			(5,483,081	)			(13,848,719	)
CASH AND CASH EQUIVALENTS — BEGINNING OF YEAR			13,366,272				27,214,991
CASH AND CASH EQUIVALENTS — END OF YEAR		$	7,883,191			$	13,366,272
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	4,000			$	15,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with cashless exercise of Series A warrants		$	304,000			$	4,498,000

 

 

		FOR THE YEAR ENDED DECEMBER 31, 2016
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 relations			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 Vapor 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 consolidated financial statements

 

 

HEALTHIER CHOICES MANAGEMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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 thirteen 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.

 

Going Concern and Liquidity

 

The accompanying 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 $10.3 million for the twelve months ended December 31, 2017. As of December 31, 2017, cash and cash equivalents totaled approximately $7.9 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.

 

Sourcing and Vendors.

 

We source from multiple suppliers. These suppliers range from small independent businesses to multinational conglomerates. For the fiscal years ended December 31, 2017 and 2016, approximately 40% of our total purchases were from one vendor.

 

Basis of Presentation and Principles of Consolidation

 

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

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Reclassifications

 

Certain prior period amounts in the 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 are the senior executive management team. The Company and the decision-making group view 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 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 consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include allowances, reserves and write-downs of receivables and inventory, valuing equity securities and hybrid instruments, share-based payment arrangements, deferred taxes and related valuation allowances, and the valuation of the net assets acquired in acquisitions. Certain of our estimates could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and records adjustments when necessary.

 

Revenue Recognition

 

The Company recognizes revenue from product sales or services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured.

 

Product sales revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped, title passes to customers and collection is reasonably assured. Retail sales revenues are recorded at the point of sale when both title and risk of loss is transferred to the customer. Return allowances, which reduce product revenue, are estimated using historical experience. Revenue from product sales and services rendered is recorded net of sales and consumption taxes.

  

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 years ended December 31, 2017 and 2016 shipping and handling costs of approximately $100,000 and $105,000, were included in cost of sales, respectively.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with an original maturity of three months or less, when purchased, to be cash and cash equivalents. The majority of the Company’s cash and cash equivalents are concentrated in one large financial institution, which is in excess of Federal Deposit Insurance Corporation (FDIC) coverage. At December 31, 2017 and 2016, cash in excess of FDIC limits of $250,000 per financial institution were approximately $7.1 and $12.9 million, respectively. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests, as deposits are held in excess of federally insured limits. The Company’s cash equivalent at December 31, 2017 and 2016 was a money market account. The Company has not experienced any losses in such accounts.

 

 

Accounts Receivable and Concentration of Risk

 

Accounts receivable, net is stated at the amount the Company expects to collect, or the net realizable value. The Company provides a provision for allowances that includes returns, allowances and doubtful accounts equal to the estimated uncollectible amounts. The Company estimates its provision for allowances based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the provision for allowances will change.

 

Concentration of accounts receivable consist of the following:

  

		December 31, 2017				December 31, 2016
Customers balances in excess of 10% of total accounts receivable
Customer A			27	%			-
Customer B			21	%			57	%
Customer C			19	%			11	%
Customer D			-				15	%

 

Due from Merchant Credit Card Processor

 

Due from merchant credit card processor represents monies held by the Company’s credit card processors. The funds are being held by the merchant credit card processors pending satisfaction of their hold requirements and expiration of charge backs/refunds from customers.

 

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. The Company’s inventory consists of fresh produce, perishable grocery items and non-perishable consumable goods that are immediately available for sale.

 

Property and Equipment

 

Property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the expected useful life of the respective asset, after the asset is placed in service. The Company generally uses the following depreciable lives for its major classifications of property and equipment:

 

Description		Useful Lives
Warehouse fixtures		2 years
Signage		5 years
Furniture and fixtures		5 years
Computer hardware		3 years
Appliance		3-5 years
Cooler		5 years
Machinery		5-7 years
Displays		5-7 years
Leasehold improvements		Life of lease

 

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.

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In connection with this review, the Company also reevaluates the depreciable lives for these assets. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset’s carrying value.

 

 

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. Management also performed a qualitative analysis at December 31, 2017 to determine whether any triggering events have occurred since the annual test date of September 30, 2017 which would indicate an impairment. Management determined no triggering events had occurred through December 31, 2017.

 

Advertising

 

The Company expenses advertising costs as incurred.

 

Income Taxes

 

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under this method, income tax expense is recognized as the amount of: (i) taxes payable or refundable for the current year and (ii) future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of available evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

Fair Value Measurements

 

The Company applies the provisions of ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”). The Company’s short term financial instruments include cash, due from merchant credit card processors, accounts receivable, accounts payable and accrued expenses, each of which approximate their fair values based upon their short-term nature. The Company’s other financial instruments include notes payable obligations and derivative liabilities. The carrying value of these instruments approximate fair value, as they bear terms and conditions comparable to market, for obligations with similar terms and maturities.

 

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

 

Level 1 – quoted prices in active markets for identical assets or liabilities;

 

Level 2 – quoted prices for similar assets and liabilities in active market or inputs that are observable; and

 

Level 3 – inputs that are unobservable.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation for employees and directors under ASC Topic No. 718, “Compensation-Stock Compensation” (“ASC 718”). These standards define a fair value based method of accounting for stock-based compensation. In accordance with ASC 718, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using an appropriate valuation model, whereby compensation cost is the fair value of the award as determined by the valuation model at the grant date. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Stock-based compensation for non-employees is measured at the grant date, is re-measured at subsequent vesting dates and reporting dates, and is amortized over the service period.

 

 

Derivative Instruments

 

The Company accounts for free-standing derivative instruments and hybrid instruments that contain embedded derivative features in accordance with ASC Topic No. 815, “Derivative Instruments and Hedging Activities,” (“ASC 815”) as well as related interpretations of this topic. In accordance with this topic, derivative instruments and hybrid instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument.

 

The Company estimates fair values of derivative instruments and hybrid instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For complex instruments, the Company utilizes custom Monte Carlo simulation models. For less complex instruments, such as free-standing warrants, the Company generally uses the Binomial Lattice model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk-free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as the Binomial Lattice model or the Black-Scholes-Merton valuation model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s net income (loss) going forward will reflect the volatility in these estimates and assumption changes. Under ASC 815, increases in the trading price of the Company’s common stock and increases in fair value during a given financial period result in the application of non-cash derivative losses. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial period result in the application of non-cash derivative gains.

 

Sequencing Policy 

 

Under ASC 815-40-35, the Company has adopted a sequencing policy, whereby, in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company's inability to demonstrate it has sufficient authorized shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares.

 

Discontinued Operations 

 

On July 31, 2016, the Company sold its wholesale inventory and related operations. 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 consolidating Statements of Operations for all periods presented.

 

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. 

 

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 using the retrospective transition method. The Company performed an evaluation of the impact of adopting the new standard and believes there will be no impact to the consolidated statements of operations and an immaterial impact to the consolidated balance sheets for reclassifying contract liabilities from accrued expenses. Contract liabilities will consist of gift card and loyalty point program liabilities. See – Note 8 ACCRUED EXPENSES. The Company does not expect the adoption of the new standard will have a material impact 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 does not expect that the adoption of this new standard will have a material impact 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.

 

 

Note 3. ACQUISITION AND DISPOSAL

  

Retail Stores and Kiosks

 

Retail Stores

 

During 2016, after evaluating retail store operations, management decided to close two of its Atlanta area vape retail stores on February 15, 2016, and September 30, 2016, respectively, and five of its Florida retail vapor stores were closed between May 31 and September 30, 2016. An additional Georgia retail location was closed during the fourth quarter of 2016.

 

Retail Kiosks

 

The Company opened eight mall retail kiosks for its vaping products in October and November 2014. The Company’s management decided to close the kiosks after evaluating the short-term performance of the locations and to focus expansion efforts on retail stores. During 2015 the Company closed all of its mall kiosks. In connection with the kiosk closings, for the year ended December 31, 2016, the Company incurred $347,656 of loss on disposal.

 

ADA’S Whole Food Market

 

On June 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 the certain operating assets and assumed certain payables and a store lease obligation related to that constituted the business of Ada’s Natural Market grocery store (the “Grocery Acquisition”). The Company operates the grocery store under the same name, location, and management. The Company also entered into an employment agreement with the store manager.

 

The Grocery Acquisition was accounted for under the acquisition method of accounting. Accordingly, the acquired assets and assumed liabilities were recorded at their estimated fair values, and operating results for Ada’s Whole Food Market are included in the consolidated financial statements from the effective date of acquisition of June 1, 2016. The allocation of the purchase price is summarized as follows:

 

Purchase Consideration
Cash paid:		$	2,910,612
Identifiable assets acquired and liabilities assumed at fair value
Property and equipment			500,225
Intangible assets - favorable lease			890,000
Intangible assets - tradenames and technology			820,000
Intangible assets - customer relationships			60,000
Intangible assets - website			4,500
Inventory			253,524
Accrued expenses			(98,951	)
Net indentifiable assets acquired		$	2,429,298
Total allocated to goodwill		$	481,314

 

Goodwill arising from the transaction mainly consists of the expected operational synergies upon acquisition of the combined entity and intangibles not qualifying for separate recognition. Goodwill is not expected to be deductible for income tax purposes in the tax jurisdiction of the acquired business. The favorable lease will be amortized on a straight-line basis over its expected useful life of 15 years, which represents the remaining lease term. The tradename will be amortized on a straight-line basis over its expected useful life of ten years. Customer relationships will be amortized on a straight-line basis over their expected useful lives of five years. The website will be amortized on a straight-line basis over its expected useful life of three years.

 

The following presents the unaudited pro-forma combined results of operations of the Company with Ada’s Whole Food Market as if the acquisition occurred on January 1, 2016.

   

		2016
Retail sales, net		$	6,722,052
Grocery sales, net		$	7,149,223
Net income (loss) from continuing operations		$	12,274,295
Net income (loss) from discontinued operations		$	(1,589,803	)
Net income (loss) allocable to common shareholders		$	10,684,492
Net loss per share:
Continuing operations		$	(0.01	)
Discontinued operations		$	(0.00	)
Net loss allocable to common shareholders		$	(0.01	)
Weighted average number of shares outstanding			2,506,158,054

 

 

The unaudited pro-forma results of operations are presented for information purposes only and are based on estimated financial operations. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2016 or to project potential operating results as of any future date or for any future periods.

 

Sale of Wholesale Business

 

On July 29, 2016, the Company entered into an Asset Purchase Agreement (the “Wholesale Business Purchase Agreement”) with VPR Brands, L.P. (the “Purchaser”) and the Purchaser’s Chief Executive Officer, Kevin Frija (the former Chief Executive Officer of the Company) pursuant to which the Company sold its wholesale inventory and the related business operations (collectively, “Wholesale Business Assets”), which previously operated at 3001 Griffin Road, Dania Beach, Florida 33312. The sale transaction was approved by the Company’s Board of Director’s on July 26, 2016 and completed on July 31, 2016. The consideration for the Wholesale Business Assets is (i) 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 on July 29, 2017; (ii) A secured, 36-month promissory note in the principal amount of $500,000 bearing an interest rate of prime plus 2%, resetting annually on July 29^th,which payments thereunder are $14,000 per month, with such payments deferred 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; (iii) the assumption by the Purchaser of certain liabilities related to the Company’s wholesale operations, including but not limited to the month-to-month lease for the premises. Pursuant to the Wholesale Business Purchase Agreement, the Company shall continue to own its accounts receivable from its wholesale operations as of July 29, 2016. The Company agreed to use its commercially reasonable efforts, consistent with standard industry practice, to collect such accounts receivable, and any and all amounts so collected (i) up to $150,000 (net of any refunds) in the aggregate shall be credited against payment of the Acquisition Note; and (ii) in excess of $150,000 (up to $95,800) will be transferred to the Purchaser’s Chief Executive Officer as additional consideration for the transfer to the Company by Mr. Frija of 1,405,910,203 shares of the Company’s common stock (the “Retired Shares”) that he had acquired on the open market. As of December 31, 2017, the balloon payments had not been received. The Company collected $285,000 during 2017 and $180,000 during 2016 on the notes. The 2016 collections include the $150,000 credit on collection of outstanding accounts receivable as of the date of sale of the wholesale business.

 

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 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.

 

		December 31, 2016
Wholesale vapor sales, net		$	3,135,158
Cost of sales – vapor wholesale			2,832,564
Expenses – selling general and administrative			1,262,547
Other Expense			629,850
Total			4,724,961
Loss from discontinued operations attributable to the wholesale business		$	(1,589,803	)

 

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

 

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

 

 

Note 4. INVENTORIES

 

Inventories are stated at average cost. If the cost of the inventories exceeds their market 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.

 

		December 31, 2017				December 31, 2016
Inventories:
Vapor Business		$	386,593			$	399,702
Grocery Business			475,057				348,849
Total		$	861,650			$	748,551

 

Note 5. OTHER INCOME

 

Other income for the twelve months ended December 31, 2017 primarily consists of collection of notes receivable related to sale of the Wholesale business. See Note 3 – ACQUISITION AND DISPOSAL – “Sale of Wholesale Business”. Management determined notes receivable were uncollectable based on payment history and recorded a valuation allowance to fully reserve notes receivable on December 31, 2016. As notes receivable were fully reserved for the twelve months ended December 31, 2017, collections of $285,000 were recorded to other income. Management believes the valuation allowance is appropriate at December 31, 2017.

 

Other income of $640,000 for the twelve months ended December 31, 2016 is a reversal of contingent earnings payable related to Vape Store acquisitions as earnings targets were not met.

 

Note 6. PROPERTY & EQUIPMENT and CAPITAL LEASE OBLIGATIONS

 

Property and equipment consists of the following:

 

		Year Ended December 31,
		2017				2016
Appliances		$	41,771			$	41,771
Computer hardware & equipment			114,930				160,184
Furniture and fixtures			239,855				242,005
Machinery			93,957				92,825
Displays			297,900				302,700
Vehicles			20,477				-
Leasehold improvements			102,195				20,647
Signage			72,192				72,192
			983,277				932,324
Less: accumulated depreciation and amortization			(393,771	)			(293,398	)
Total property and equipment		$	589,506			$	638,926

 

During the years ended December 31, 2017 and 2016, the Company incurred approximately $191,000 and $194,000, respectively, of depreciation expense.

 

Note 7. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill represents the premium paid over the fair value of the intangible and net tangible assets acquired in the Merger and other retail business acquisitions. The Company assesses the carrying value of its goodwill on at least an annual basis.

 

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. Management also performed a qualitative analysis at December 31, 2017 to determine whether any triggering events have occurred since the annual test date of September 30, 2017 which would indicate an impairment. Management determined no triggering events had occurred through December 31, 2017.

 

 

The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 are as follows:

 

		December 31, 2017				December 31, 2016
Beginning balance		$	481,314			$	3,177,017
Goodwill from acquired grocery business			-				481,314
Impairment of goodwill-retail business			-				(3,177,017	)
Ending balance		$	481,314			$	481,314

 

Intangible assets consist of the following:

 

		Useful Lives
Favorable lease			15
Trade names and technology			10
Customer relationships			5
Website			3

 

Upon completion of the annual impairment analysis as of December 31, 2016, the Company determined that certain intangible assets were impaired. Accordingly, the Company recorded an impairment charge of $778,345 during the year ended December 31, 2016. The Company determined that there was not an impairment to intangible assets during the year ended December 31, 2017, and as such, no impairment charge has been recorded for the year ended December 31, 2017.

 

The changes in the carrying amount of intangible assets for the years ended December 31, 2017 and 2016 are as follows:

 

		Favorable Lease			Trade Names and Technology				Customer Relationships				Website				Total
Beginning balance, January 1, 2016		$	-		$	929,000			$	-			$	-			$	929,000
Additions from acquired grocery business			890,000			845,000				60,000				4,500				1,799,500
Sale of tradename			-			(100,000	)			-				-				(100,000	)
Impairment			-			(778,345	)			-				-				(778,345	)
Amortization expense			(33,859	)		(139,092	)			(7,000	)			(875	)			(180,826	)
Ending balance, December 31, 2016		$	856,141		$	756,563			$	53,000			$	3,625			$	1,669,329
Purchase of patents			-			50,000				-				-				50,000
Amortization expense			(58,361	)		(87,937	)			(12,000	)			(1,500	)			(159,798	)
Ending balance, December 31, 2017		$	797,780		$	718,626			$	41,000			$	2,125			$	1,559,531

 

The weighted-average remaining amortization period of the Company’s amortizable intangible assets is approximately 30 years as of December 31, 2017. The estimated future amortization of the intangible assets is as follows:

 

For the years ending December 31,
2018		$	161,361
2019			160,486
2020			159,861
2021			152,861
2022			147,861
Thereafter			777,101
Total		$	1,559,531

 

 

Note 8. ACCRUED EXPENSES

 

Accrued expenses are comprised of the following:

 

		For the Year Ended December 31,
		2017				2016
Accrued Board of Directors		$	14,000			$	29,000
Accrued Loyalty and Gift Cards			99,070				85,274
Accrued severance			-				37,440
Accrued payroll and related employee expenses			72,522				229,768
Accrued Delaware Franchise Tax			36,000				121,617
Accrued Litigation and Settlements			18,150				70,872
Accrued legal and professional fees			111,783				131,833
Accrued sales returns for wholesale activities			168,693				-
Other accrued liabilities			17,986				73,872
Total		$	538,204			$	779,676

 

Note 9. COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

The Company leases its Florida office and warehouse facilities under a three-year lease. The lease provides for annual rental payments, including taxes, of approximately $100,000 per year. The Company also leases its Vape and Grocery stores.

 

Future minimum lease payments under non-cancelable operating leases that have initial or remaining terms in excess of one year at December 31, 2017 are due as follows:

 

2018		$	595,000
2019			428,000
2020			325,000
2021			131,000
Total		$	1,479,000

 

Rent expense for the year ended December 31, 2017 and 2016 was approximately $741,000 and $777,000, respectively, is included in selling, general and administrative expenses in the accompanying consolidated statement of operations. 

 

During the year ending 2016, the Company closed seven of its retail Vape Stores. The majority of the Vape stores closed were in the Orlando, Florida area and the others were in Georgia. The cost incurred with the closing of these stores amounted to $308,965.

 

Employment Agreements 

 

On December 12, 2016, the Company entered into a three-year employment agreement with John Ollet. Mr. Ollet’s initial base salary shall be $180,000, $190,000 and $200,000 in years one, two and three, respectively. Mr. Ollet shall be eligible to receive a one-time sign-on bonus of $5,500. Mr. Ollet shall also be entitled to bonuses and other incentives at the discretion of the Company, based in part on Mr. Ollet’s performance.

 

On August 10, 2015, the Company entered into three-year Employment Agreements with Jeffrey Holman, the Company’s Chief Executive Officer, and Gregory Brauser, the Company’s President. Each of the Employment Agreements provide for an annual base salary of $300,000 and a target bonus in an amount ranging from 20% to 200% of their base salaries subject to the Company meeting certain adjusted earnings before interest, taxes depreciation and amortization (“Adjusted EBITDA”) performance milestones. Adjusted EBITDA is defined in the Employment Agreements as earnings (loss) from continuing operations before interest expense, income taxes, collateral valuation adjustment, bad debt expense, one-time expenses, depreciation and amortization and amortization of stock compensation or Adjusted EBITDA defined in any filing of the Company with the SEC subsequent to the date of the Employment Agreements. Holman and Brauser are also entitled to receive severance payments, including 2 years of their 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.

 

Effective December 12, 2012, the Company entered into a three-year employment agreement with Christopher Santi, the Company’s President and Chief Operating Officer. The employment agreement paid a beginning base salary of $156,000 which increased to $170,000 beginning in December 2016. In accordance with this employment agreement, Mr. Santi received a 10-year option to purchase up to 57 shares of the Company’s common stock at an exercise price of $437.50, vesting monthly at the rate of approximately 2 shares per month. As of the date of this report, the options are fully vested. On January 30, 2017, the Company entered into a new employment agreement with Mr. Santi for a three-year term beginning January 30, 2017. Pursuant to the new employment agreement, Mr. Santi will receive a base salary of $225,000, increasing to $250,000 and $275,000, respectively, for the second and third years of the employment agreement. Mr. Santi is also eligible to earn an annual bonus at the discretion of the Company’s Board of Directors.

 

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.

 

Fontem License Agreement

 

Effective December 16, 2015, the Company entered into a confidential Settlement Agreement and a non-exclusive royalty-bearing confidential Global License Agreement (“License Agreement”) with Fontem Ventures B.V. (“Fontem”) resulting in the dismissal of all of the aforementioned patent infringement cases by Fontem against the Company. The estimated settlement fee of approximately $1.7 million was included in selling, general and administrative expenses and in accrued expense at December 31, 2015. On January 15, 2016, the Company made a payment of $1.7 million under the terms of the Settlement and License Agreements. In connection with the License Agreement, Fontem granted the Company a non-exclusive license to certain of its products. As consideration, the Company will make quarterly license and royalty payments to Fontem based on the sale of qualifying products as defined in the License Agreement. The term of the License Agreement will continue until all of the patents on the products subject to the agreement are no longer enforceable. As of December 31, 2017, the Company has made royalty payments in the amount of $1.9 million.

 

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%

 

For the years ended December 31, 2017 and 2016, the Company incurred royalty expenses of approximately $76,000 and $78,000.

 

Other Matters

 

On March 2, 2016, Hudson Bay Master Fund Ltd. (“HB”), filed an action against the Company in the Supreme Court of the State of New York, County of New York, captioned Hudson Bay Master Fund Ltd. versus Vapor Corp., Index No. 651094/2016. This action alleged that the Company failed to timely effect exercises of its Series A Warrants delivered by the plaintiff and sought damages of $339,810. On May 10, 2016, solely to avoid the costs, risks and uncertainties inherent in litigation, the Company entered into a settlement agreement with respect to all claims included in the action by HB (the “HB Settlement”). The HB Settlement provided, among other things, that the parties would enter into and file a stipulation of discontinuance that provides for the dismissal of the action against the Company (the “HB Stipulation”). This action by HB was dismissed with prejudice.

 

On June 2, 2016, four Series A Warrant holders, filed an action against the Company in the Supreme Court of the State of New York, County of New York, captioned Empery Asset Master, LTD, Empery Tax Efficient, LP, Empery Tax Efficient II, LP and Intracoastal Capital, LLC versus Vapor Corp., Index No. 652950/2016. This action alleged that the Company failed to timely effect exercises of its Series A Warrants delivered by the plaintiffs and sought aggregate damages of approximately $603,000. Between June 17, 2016 and June 22, 2016, solely to avoid the costs, risks and uncertainties inherent in litigation, the Company entered into settlement agreements with respect to all claims included in the Complaints (the “Settlements”). The Settlements provide, among other things, that the parties would enter into and file a stipulation of discontinuance that provides for the dismissal of the Complaint (the “Stipulation”), and the holders would surrender the balance of their Series A Warrant upon receipt of settlement payments. These actions were dismissed with prejudice.

 

Note 10. STOCKHOLDERS’ EQUITY

 

Amendments to Certificate of Incorporation

 

On February 1, 2016, the Company filed an amendment to its Certificate of Incorporation to increase its authorized Common Stock to 5,000,000,000, and change the par value to $0.0001. On March 4, 2016, the Company filed an amendment to its Certificate of Incorporation to effectuate a one-for-seventy reverse stock split to its Common Stock. On June 1, 2016, the Company filed an amendment to its Certificate of Incorporation to effectuate a one-for-twenty thousand reverse stock split to its Common Stock. On August 4, 2016, the Company filed an amendment to its Amended and Restated Certificate of Incorporation to increase the number of shares of the authorized common stock from 5,000,000,000 to 750,000,000,000. Each share entitles the holder to one vote.

 

All warrant, convertible preferred stock, option, common stock shares and per share information included in these consolidated financial statements gives retroactive effect to the aforementioned reverse splits of the Company’s common stock.

 

Equity Plans 

 

On July 7, 2015, the stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”), which is a broad-based plan and awards granted may be restricted stock, restricted stock units, options and stock appreciation rights. On November 21, 2016, the 2015 Plan was amended to increase the number of shares of common stock available for grants to 100,000,000,000. The 2015 Plan had 13,823,999,996 shares of common stock available for grant as of December 31, 2017.

 

The Company’s 2009 Equity Incentive Plan (the “2009 Plan”) was duly adopted by the stockholders on November 24, 2009. The 2009 Plan provides for the granting of incentive stock options to employees, the granting of non-qualified stock options to employees, non-employee directors and consultants, and the granting of restricted stock to employees, non-employee directors and consultants in connection with their retention and/or continued employment by the Company. Options issued under the 2009 Plan generally have a ten-year term and generally become exercisable over a four-year period. Shares subject to awards that expire unexercised or are forfeited or terminated will again become available for issuance under the 2009 Plan. No participant in the 2009 Plan can receive option grants and/or restricted shares for more than 20% of the total shares subject to the 2009 Plan. The 2009 Plan had no shares of common stock available for grant as of December 31, 2017.

 

 

Preferred Stock

 

The Company’s amended and restated articles of incorporation authorizes the Company’s Board of Directors to issue up to 1,000,000 shares of “blank check” preferred stock, having a $0.001 par value, in one or more series without stockholder approval. Each such series of preferred stock may have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as determined by the Company’s Board of Directors. See below for details associated with the designation of the 1,000,000 shares of the Series A preferred stock.

 

Series A Unit Public Offering 

 

On July 29, 2015, the Company closed a public offering of Units for gross proceeds of approximately $41.4 million and net proceeds of approximately $38.7 million. On January 25, 2016, the Units automatically separated into an aggregate of 0.672 shares of Series A. Preferred Stock, which were convertible in to an aggregate of 27 shares of common stock, and five-year Series A Warrants, exercisable into 54 shares of common stock. Except in the event of a “cashless exercise” as described below, each Series A Warrant is exercisable into one share of common stock at an exercise price of $1,736,000 per share and expires on July 23, 2020. See the Warrants section of this footnote for details related to warrant activity.

 

The Series A Preferred Stock (a) ranks equal to the common stock on an as converted basis with regard to the payment of dividends or upon liquidation; (b) automatically converts into common stock upon the consummation of a Fundamental Transaction, as defined; (c) has no voting rights, except related to the amendment of the terms of the Series A preferred stock; and (d) has conversion limits whereby the holder may not beneficially own in excess of 4.99% of the common stock. Through December 31, 2016, 0.630 shares of Series A Preferred Stock were converted and the Company issued 26 shares of common stock to settle these conversions, leaving 0.042 shares of Series A Preferred Stock outstanding.

 

The Series A warrants were originally determined to be derivative liabilities because there is a potential cash settlement provision which isn’t under the Company’s control (see Note 11). Utilizing a Monte Carlo valuation method, the issuance date value of the Series A warrant liabilities was calculated to be $79.4 million. Since the value of the Series A warrant liabilities exceeded the gross proceeds from the public offering, the Company recorded a $38.1 million deemed dividend on the preferred stock. Each Series A warrant may be exercised on a cashless basis for the Black Scholes value defined in the warrant agreement. The number of shares of common stock that the Company will issue in connection with the exercise of the Series A warrants is primarily based on the closing bid price of the common stock two days prior to the date of the exercise. If (a) all of the warrants were exercised simultaneously when the Company’s common stock traded below a certain price per share, or (b) the Company does not continue to meet certain Equity Conditions (as defined), the Company may not have sufficient authorized common stock and could be required to use cash to pay warrant holders.

 

In connection with the closing of this offering, the Company incurred $4,779,003 of issuance costs, including cash underwriting fees of $2,722,687, other cash costs of approximately $503,898, and the issuance date value of $1,552,418 (utilizing the Black-Scholes-Merton valuation model) of the underwriter’s five-year Series A unit purchase option, which gives the underwriter the option to purchase 0.034 shares of Series A Convertible Preferred Stock, which were convertible into 1 share of common stock, plus Series A Warrants. All of the issuance costs were allocated to the Series A warrant liabilities because no carrying value was attributed to the Series A preferred stock and, as a result, the issuance costs were expensed immediately.

 

In connection with the closing of this offering, on August 3, 2015, the Company paid Chardan Capital Markets, LLC (“Chardan”) $500,000 in satisfaction of an agreement between Chardan and the Company pursuant to which Chardan waived certain rights to participate in the public offering that were granted to Chardan under its previous agreements with the Company. The $500,000 cost was recorded in other expenses on the consolidated statement of operations for the year ended December 31, 2015.  

  

Warrants

 

During the year ended December 31, 2017, Series A Warrants to purchase 1 share of common stock have been exercised through the cashless exercise provision in the Series A Warrants, resulting in the issuance of 15,125,005,934 shares of the Company’s common stock. In addition, Series A Warrants to purchase 8 shares of common stock were repurchased, which would have resulted in the issuance of approximately 114,796,220,280 shares of the Company’s common stock if such Series A Warrants had not been repurchased as of the date of this report.

 

The shares issuable upon the exercise of the Series A Warrants are calculated (1) using a Black Scholes Value of $1,520,919 per share and a closing stock bid price of $0.0001 per share and (2) assuming the Company delivers only common stock upon exercise of the Series A Warrants and not cash payments as permitted under the terms of the Series A Warrants.

 

At the years ended December 31, 2017 and 2016, the warrants were valued at the tender offer price of $0.22 per warrant. Management believes the tender offer price is the best indicator of fair value as it is a level 2 valuation and no material events indicating the fair value has changed occurred through December 31, 2017.

 

Holders (the “Holders”) of approximately 90% of the Series A Warrants are subject to the Amended and Restated Standstill Agreements (the “Standstill Agreements). These Standstill Agreements permit the Holders to effect a “cashless” exercise of the Series A Warrants only on dates when the closing bid price used to determine the “net number” of shares to be issued upon exercise is at or above $0.0001 per share. Pursuant to the terms of the Standstill Agreements, the Holders agreed in certain circumstance to receive only common stock (and not cash) pursuant to such cashless exercise pursuant to Section 1(d) of their Series A Warrants. Those circumstances include if the Company is deemed not to meet the “Equity Conditions” of the Series A Warrants because of the failure of the Company common stock to be listed or quoted on an eligible national securities exchange.

A summary of warrant activity for the years ended December 31, 2017 and 2016 is presented below:

 

		Number of Warrants				Weighted Average Exercise Price				Weighted Average Remaining Term (Yrs.)
Outstanding at January 1, 2016			54			$	1,736,000				4.6
Warrants exercised			(5	)			1,736,000
Warrants repurchased			(7	)			1,736,000
Outstanding at December 31, 2016			42			$	1,736,000				3.6
Warrants exercised			(1	)			320,540
Warrants repurchased			(8	)			1,532,038
Outstanding at December 31, 2017			33			$	1,520,919				2.6
Exercisable at December 31, 2017			33			$	1,520,919				2.6

 

A summary of the approximate outstanding warrant common stock equivalents for the years ended December 31, 2017 and 2016 are as follows:

 

		December 31, 2017				December 31, 2016
Warrants outstanding			33				42
Black Scholes value *			1,520,919				1,519,297
Closing bid stock price		$	0.0001			$	0.0001
Warrant common stock equivalent **			505,246,000,000				634,754,000,000

 

* 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 * Black Scholes Value) / closing common stock bid price as of two trading days prior.

 

See Note 11 – Fair Value Measurements for additional details related to the Series A Warrants that were exchanged

 

Compensatory Common Stock Summary 

 

During the years ended December 31, 2017 and 2016, the Company recognized stock-based compensation expense related to compensatory Common Stock in the amount of $0 and $75,000, respectively. Stock-based compensation expense is included as part of selling, general and administrative expense in the accompanying consolidated statements of operations. All compensatory Common Stock was fully vested as of December 31, 2016 and no compensatory common stock was issued during the year ended December 31, 2017.

  

Stock Options

 

During December 2016, the Company granted options for the purchase of 5,001,000,004 shares of its common stock to employees, at an aggregate grant date value of $500,100 or $0.0001 per option share. During the year ended December 31, 2017, the Company granted options for the purchase of 82,893,750,000 shares of its common stock to employees, at an aggregate grant date value of $8,289,375 or $0.0001 per option shares. On February 1, 2017, pursuant to the 2015 Plan, the Company issued a total of 77,000,000,000 options to purchase common stock to certain officers and directors. Twenty-five percent of the options vested upon issuance and the remainder vest equally at the end of the following three calendar quarters.

  

The fair value of employee stock options was estimated using the following Black-Scholes assumptions:

 

		For the Year Ended
		December 31,
		2017		2016
Expected term (years)		5 – 6 years		5 - 6 years
Risk free interest rate		1.83% – 2.22%		1.98% - 2.03%
Dividend yield		0%		0%
Volatility		0.0%		428.10%

 

 

A summary of option activity during the years ended December 31, 2017 and 2016 is as follows: 

 

						Weighted				Weighted
						Average				Average
		Number of				Exercise				Remaining
		Options				Price				Term (Yrs)
Outstanding, January 1, 2016			0.028			$	5,101,040				6
Options granted			5,001,000,004.000				0.0001
Options forfeited or expired			(0.017	)			11,625,400
Outstanding, December 31, 2016			5,001,000,004.011			$	0.0001				10
Options granted			82,893,750,000				0.0001
Options exercised			(10,000,000	)			0.0001
Options forfeited or expired			(729,741,524.011	)			0.0001
Outstanding, December 31, 2017			87,165,008,480.000			$	0.0001				9
Exercisable at December 31, 2017			83,221,258,480.000			$	0.0001				9

  

During the years ended December 31, 2017 and 2016, the Company recognized stock-based compensation expense of approximately $7.5 million and $13.7 thousand, respectively, in connection with the amortization of stock options, net of recovery of stock-based charges for forfeited stock options. Stock-based compensation expense is included as part of selling, general and administrative expense in the accompanying consolidated statements of operations. The weighted average grant date fair value of options granted during the year ended December 31, 2017 was $0.0001 per share.

 

At December 31, 2017, the amount of unamortized stock-based compensation expense on 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.

 

Income (Loss) per Share

 

Basic income (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon (a) the exercise of stock options (using the treasury stock method); (b) the conversion of Series A convertible preferred stock; (c) the exercise of warrants (using the if-converted method); (d) the vesting of restricted stock units; and (e) the conversion of convertible notes payable. Diluted income (loss) per share excludes the potential common shares, as their effect is antidilutive. The following table summarizes the Company’s securities that have been excluded from the calculation of basic and dilutive income (loss) per share as their effect would be anti-dilutive:

 

		December 31,
		2017				2016
Stock options			88,893,899,200				-
Warrants			505,246,312,541				-
Total			594,140,211,741				-

 

Shares used in calculating basic and diluted net income (loss) per share are as follows:

 

		Year Ended December 31,
		2017				2016
Basic			26,199,887,696				4,102,959,032
Effect of exercise stock options			-				5,000,999,976
Effect of exercise warrants			-				631,552,260,513
Diluted			26,199,887,696				640,656,219,521

  

On February 1, 2017, pursuant to the 2015 Plan, the Company issued a total of 77,000,000,000 options to purchase common stock to certain officers and directors. Twenty-five percent of the options vested upon issuance and the remainder vest equally at the end of the following three calendar quarters.

 

 

Note 11. FAIR VALUE MEASUREMENTS

  

The following table presents nonfinancial assets measured and recorded at fair value on a nonrecurring basis during the years ended December 31, 2017 and 2016:

 

		2017								2016
Description		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)				Loss				Fair Value Measurements Using Significant Unobservable Inputs (Level 3)				Loss
Goodwill		$	-			$	-			$	-			$	(3,177,017	)
Intangible assets			-				-				-				(778,345	)
Total		$	-			$	-			$	-			$	(3,955,362	)

 

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

 

		Level 1				Level 2				Level 3				Total
LIABILITIES:
Warrant liabilities		$	-			$	10,231,697			$	-			$	10,231,697
Total derivative liabilities		$	-			$	10,231,697			$	-			$	10,231,697

 

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:
Warrant liabilities		$	-			$	12,868,079			$	-			$	12,868,079
Total derivative liabilities		$	-			$	12,868,079			$	-			$	12,868,079

 

Level 3 Valuation Techniques

 

The Company’s derivative liabilities are carried at fair value and were classified as Level 3 in the fair value hierarchy due to the use of unobservable inputs.

 

The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at fair value on a recurring basis:

 

		For the Year Ended December 31, 2015
Balance at December 31, 2015		$	41,089,580
Cash paid to repurchase warrants			(3,278,827	)
Gain on repurchase of warrants			(5,189,484	)
Fair value of Series A Warrants repurchased			(8,468,311	)
Warrant exercises			(4,498,048	)
Change in fair value of derivative liabilities			(15,255,142	)
Reclassification of Series A warrant liability to Level 2			(12,868,079	)
Balance at December 31, 2016		$	-

 

During the year ended December 31, 2016, Series A warrants to purchase an aggregate of 4 and 7 shares of Common Stock which had been accounted for as a derivative liability were exercised and exchanged, respectively. The exercised warrants had an aggregate exercise date value of $4,498,048, which was reclassified to stockholders’ deficit. The exchanged warrants had an aggregate value at exchange date of $8,468,310 which was derecognized and the Company paid $3,278,827 of cash plus Series B warrants with a nominal value, with a resulting extinguishment gain of $5,189,484. The terms of the Series B warrant were agreed upon, but the warrants have not been issued. During the year ended December 31, 2016, certain holders of Series A Warrants executed Standstill Agreements, which were subsequently amended and restated whereby the holders agreed not to exercise Series A Warrants for a specified period of time and under certain circumstances.

 

 

As of December 31, 2016, the Company transferred the remaining derivative liability related to its Series A Warrants out of Level 3 and into Level 2 in the fair value hierarchy. Level 2 financial liabilities consist of derivative liabilities for which the determination of fair value is based on observable inputs for the liability. Specifically, the Company determined that its offer to purchase its Series A Warrants for $0.22 per warrant was the best indicator of the fair value of the derivative liability as of December 31, 2016. Accordingly, the Company transferred $12,868,079 from the Level 3 fair value hierarchy to the Level 2 fair value hierarchy as of December 31, 2016.

 

The Company uses a sensitivity analysis model to measure the impact of a 10% movement in the per share fair value per warrant. A hypothetical 10% change in the per share fair value of the warrant as of December 31, 2016 would result in $1,286,808 recorded other income (expenses).

 

Note 12. INCOME TAXES

 

The Company did not have a provision for income taxes (current or deferred tax expense) for tax years ended December 31, 2017 and 2016. The following is a reconciliation of the expected tax expense (benefit) at the U.S. statutory rate to the actual tax expense (benefit) reflected in the accompanying statement of operations:

 

		For the Years Ended December 31,
		2017				2016
U.S. federal statutory rate			(3,353,056	)			3,632,727
State and local taxes, net of federal benefit			(334,994	)			(227,984	)
Change in fair value of derivatives			-				(5,186,749	)
Settlement of warrants			-				(1,764,424	)
Goodwill impairment			-				1,080,186
Change in valuation allowance			(3,717,877	)			2,756,495
True-up & deferred adjustment			1,619				(220,327	)
Stock based compensation			258,394				15,826
Other permanent items			5,697				(214,142	)
Forfeitures & expiration of stock comp			45,915				118,691
Stock issuance costs & compensation wavers			-				78,640
Change in tax rate			7,036,850				(36,381	)
Other			57,452				(32,558	)
			-				-

 

As of December 31, 2017 and 2016, the Company’s deferred tax assets and liabilities consisted of the effects of temporary differences attributable to the following:

 

		Years Ended December 31,
		2017				2016
Current deferred tax assets:
NOL & AMT credit carryforward		$	11,106,460			$	15,853,308
Inventory reserves and allowances			209,345				504,104
Accrued expenses & deferred income			-				35,413
Charitable contribution			3,767				2,110
Stock based compensation			1,712,623				46,168
Net book value of intangible assets			639,731				931,417
Net book value of fixed assets			6,727				24,010
Total current deferred tax assets			13,678,653				17,396,530
Current deferred tax liabilities:
Net book value of intangible assets			-				-
Total current deferred tax liabilities			-				-
Net current deferred tax assets			13,678,653				17,396,530
Valuation allowance			(13,678,653	)			(17,396,530	)
Net deferred tax assets		$	-			$	-

  

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the positive and negative evidence available, management has determined that a valuation allowance of $13,678,653 and $17,396,530 are required at December 31, 2017 and 2016, respectively, to reduce the deferred tax assets to amounts that are more likely than not to be realized. Should the factors underlying management’s analysis change, future valuation adjustments to the Company’s net deferred tax assets may be necessary.

 

At December 31, 2017 the Company had U.S. federal and state net operating loss carryforwards (“NOLS”) of $46,362,439 and $35,081,878, respectively. These NOLs expire beginning in 2030. Utilization of our NOLS may be subject to an annual limitation under section 382 and similar state provisions of the Internal Revenue Code due to changes of ownership that may have occurred or that could occur in the future, as defined under the regulations.

 

As required by the provisions of ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of NOL or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.

 

If applicable, interest costs and penalties related to unrecognized tax benefits are required to be calculated and would be classified as interest and penalties in general and administrative expense in the statement of operations. As of December 31, 2017 and 2016, no liability for unrecognized tax benefit was required to be reported. No interest or penalties were recorded during the years ended December 31, 2017 and 2016. The Company does not expect any significant changes in its unrecognized tax benefits in the next year. The Company files U.S. federal and Alabama, Connecticut, Florida, Georgia, Massachusetts, New York, North Carolina, and Tennessee state income tax returns. As of December 31, 2017, the Company’s U.S. and state tax returns remain subject to examination by tax authorities beginning with the tax year ended December 31, 2014.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. The Company believes the impact of the inclusion of accumulated post-1986 foreign earnings on which U.S. income tax is currently deferred to a one-time transition tax on December 31, 2017 would not be material to the Company. The measurement of the transition tax liability requires extensive effort on the calculation of the foreign earnings and profit on a cumulative basis. The Company has made reasonable efforts to determine that there would be no material financial impact on this one-time transition tax as the Company believes its existing tax attributes can be used to offset the transition tax without limitation, but an election is available to not claim the net operating loss deduction against the mandatory foreign earnings inclusion at December 31, 2017.

 

Under ASC 740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies, to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. There is no further change to its assertion on maintaining a full valuation allowance against its U.S. deferred tax assets. Due to the change in the federal tax rate from 34% to 21%, which in turn changes the effective state tax rate from 3.69% to 4.41%, the Company’s gross deferred tax assets of approximately $20.7 million will be revalued to approximately $13.7 million with a corresponding offset to the valuation allowance. Any potential other taxes arising due to the Tax Act will result in reductions to its net operating loss carryforward and valuation allowance. Upon completion of our 2017 U.S. income tax return in 2018 we may identify additional remeasurement adjustments to our recorded deferred tax liabilities and the one-time transition tax. We will continue to assess our provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.

 

Note 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

See Note 3 – ACQUISITION AND DISPOSAL – “Sale of Wholesale Business” as this qualifies as a related party transaction.

 

During 2016, the Company purchased, e-liquids sold in its vape retail stores and wholesale operations, respectively from Liquid Science, Inc., a company in which Jeffrey Holman (the Company’s Chief Executive Officer) had a 15% beneficial ownership interest. During the twelve months ended December 31, 2016, the Company made approximately $356,000 or 23% of its purchases of e-liquid from Liquid Science for its continuing operations. Jeffrey Holman sold his ownership interest in Liquid Science, Inc. in April 2016. During 2016, the Company received royalty income from Liquid Science pursuant to the terms of a royalty agreement; approximately $52,000 received during the three months ended March 31, 2016 and $42,000 of royalty income received in July 2016. Pursuant to the royalty agreement between the Company and Liquid Science, as consideration for use of a Company trademark, Liquid science paid a 15% royalty on sales of licensed products sold directly to consumers. The royalty revenue was recorded when received. On July 21, 2016, Liquid Science entered into an asset purchase and license agreement with the Company, whereby the Company irrevocably sold, assigned, transferred, certain trademark, intellectual property, formulations, technology and granted rights to sell and distribute certain brand named products internationally. In conjunction with the sale, the royalty agreement between the Company and Liquid Science was terminated.

 

 

Note 14. 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 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 Net Sales and Segment Operating Profit for each reporting segment: 

  

		Year Ended
		Net Sales								Segment Gross Profit
		December 31, 2017				December 31, 2016				December 31, 2017				December 31, 2016
Vapor		$	5,867,202			$	6,722,052			$	3,299,802			$	3,742,443
Grocery			7,093,893				3,843,111				2,978,979				1,490,910
Total		$	12,961,095			$	10,565,163				6,278,781				5,233,353
Corporate expenses											16,555,638				14,095,621
Operating loss											(10,276,857	)			(8,862,268	)
Corporate other income (expense), net											133,446				21,136,563
Net income (loss) from continuing operations											(10,143,411	)			12,274,295
Net income (loss) from discontinued operations											281,483				(1,589,803	)
Net income (loss)										$	(9,861,928	)		$	10,684,492

 

For the year ended December 31, 2017 depreciation and amortization was $67,281 and $266,777 for Vapor and Grocery, respectively.

 

For the year ended December 31, 2016 depreciation and amortization was $174,376 and $200,012 for Vapor and Grocery, respectively.

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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, on March 14, 2018. 

 

	Healthier Choices Management Corp.
	By:	/s/ Jeffrey Holman
		Jeffrey Holman
		Chief Executive Officer (Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Jeffrey Holman		Principal Executive Officer		March 14, 2018
Jeffrey Holman		and Director
/s/ John A. Ollet		Chief Financial Officer		March 14, 2018
John A. Ollet		(Principal Financial and Accounting Officer)
/s/ Clifford J. Friedman		Director		March 14, 2018
Clifford J. Friedman
/s/ Anthony Panariello		Director		March 14, 2018
Anthony Panariello

 

EXHIBIT INDEX

 

Exhibit				Incorporated by Reference						Filed or Furnished
No.		Exhibit Description		Form		Date		Number		Herewith
1.1		Form of Underwriting Agreement		S-1		7/10/15		1.1
2.1(a)		Business Sale Offer and Acceptance Agreement, dated April 11, 2016, by and between Vapor Corp. and Ada’s Whole Food Market LLC		8-K		5/23/16		2.1
2.1(b)		Asset Purchase Agreement, dated July 29, 2016, by and between Vapor Corp. and VPR Brands, L.P.		8-K		8/3/16		1.1
3.1		Certificate of Incorporation		10-Q		11/16/15		3.1
3.1(a)		Certificate of Amendment to Certificate of Incorporation		8-K		3/03/17		3.1
3.1(b)		Certificate of Amendment to Certificate of Incorporation		S-1		7/10/15		3.2
3.1(c)		Certificate of Amendment to Certificate of Incorporation		S-4		12/11/15		3.2
3.1(d)		Certificate of Amendment to Certificate of Incorporation		8-K		2/2/16		3.1
3.1(e)		Certificate of Amendment to Certificate of Incorporation		8-K		3/9/16		3.1
3.1(f)		Certificate of Amendment to Certificate of Incorporation		8-K		6/1/16		3.1
3.1(g)		Certificate of Amendment to Certificate of Incorporation		8-K		8/5/16		3.1
3.1(h)		Certificate of Designation of Series A Preferred Stock		S-1		7/10/15		3.4
3.1(i)		Certificate of Correction to the Certificate of Designation of Series A Preferred Stock		8-A12B		7/27/15		3.5
3.2		Bylaws		8-K		12/31/13		3.4
4.1		Form of Series A Warrant		S-1		7/10/15		4.2
4.2		Form of Unit Purchase Agreement		S-1		7/10/15		4.3
10.4		Form of Securities Purchase Agreement dated March 3, 2015		8-K		3/05/15		10.1
10.5		2015 Equity Incentive Plan		S-1		6/01/15		10.28
10.9		Form of Letter Agreement dated June 19, 2015		8-K		6/25/15		10.4

 

 

10.10		Form of Letter Agreement dated June 19, 2015		8-K		6/25/15		10.5
10.11		Form of Warrant dated June 22, 2015		8-K		6/25/15		10.6
10.12		Form of Registration Rights Agreement dated June 22, 2015		8-K		6/25/15		10.7
10.14		Employment Agreement with Jeffrey Holman		10-Q		11/16/15		10.1
10.16		Employment Agreement with Christopher Santi		8-K		2/6/17		10.1
10.17		Form of Fifth Amended and Restated Series A Standstill Agreement		10-K		3/27/17		10.17
10.18		Executive Service Consulting Agreement, dated April 11, 2016, by and between Gregory Brauser and Vapor Corp.		8-K		4/11/16		10.1
10.19		Amendment to Vapor Corp. 2015 Equity Incentive Plan		S-8		2/8/17		4.2
16.1		Letter from Morrison, Brown, Argiz & Farra, LLC, dated April 26, 2017		8-K		4/28/17		16.1
21.1		List of Subsidiaries								Filed
23.1		Consent of Morrison, Brown, Argiz & Farra, LLC								Filed
23.2		Consent of Marcum L.L. P								Filed
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 and 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 Link base Document								Filed
101.DEF		XBRL Taxonomy Extension Definition Link base Document								Filed
101.LAB		XBRL Taxonomy Extension Label Link base Document								Filed
101.PRE		XBRL Taxonomy Extension Presentation Link base Document								Filed

 

* Management contract or compensatory plan or arrangement.

 

** 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.

 

Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our stockholders who make a written request to our Corporate Secretary at 3800 North 28th Way, Hollywood, Florida 33020.

 

 

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