HEALTHIER CHOICES MANAGEMENT CORP.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-Q
For the quarterly period ended
September 30, 2022
Or
For the transition period from _____ to _____
Commission file number:
001-36469
(Exact name of Registrant as specified in its charter)
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code:
305
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600-5004
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Yes
☐
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒
Yes
☐
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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☐
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Accelerated filer
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☒
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol
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Name of each exchange on which registered
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As of November 10, 2022,
there were
339,741,632,384
shares of the registrant’s common stock, par value $0.0001 per share, outstanding.
TABLE OF CONTENTS
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PAGE
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25
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HEALTHIER CHOICES MANAGEMENT CORP.
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September 30, 2022 (Unaudited)
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December 31,
2021
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ASSETS
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CURRENT ASSETS
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Cash and cash equivalents
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$
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$
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Accounts receivable, net
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Notes receivable
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Inventories
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Prepaid expenses and vendor deposits
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Investment
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Restricted cash
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TOTAL CURRENT ASSETS
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Property and equipment, net of accumulated depreciation
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Intangible assets, net of accumulated amortization
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Goodwill
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Right of use asset – operating lease, net
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Other assets
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TOTAL ASSETS
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$
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$
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LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
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||||||||
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CURRENT LIABILITIES
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||||||||
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Accounts payable and accrued expenses
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$
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$
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Contract liabilities
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||||||
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Current portion of line of credit
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Current portion of loan payment
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Operating lease liability, current
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TOTAL CURRENT LIABILITIES
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Loan payable, net of current portion
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Operating lease liability, net of current
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TOTAL LIABILITIES
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COMMITMENTS AND CONTINGENCIES (SEE NOTE 13)
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CONVERTIBLE PREFERRED STOCK
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Series E convertible preferred stock, $
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STOCKHOLDERS’ EQUITY
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Series D convertible preferred stock, $
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Common Stock, $
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Additional paid-in capital
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Accumulated deficit
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(
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)
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(
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TOTAL STOCKHOLDERS’ EQUITY
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TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
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$
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$
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||||
See notes to unaudited condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended
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Nine Months Ended
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|||||||||||||||
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September 30,
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September 30,
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|||||||||||||||
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2022
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2021
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2022
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2021
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SALES
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Vapor sales, net
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$
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$
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$
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$
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Grocery sales, net
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||||||||||||
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TOTAL SALES, NET
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Cost of sales vapor
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Cost of sales grocery
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GROSS PROFIT
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OPERATING EXPENSES
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LOSS FROM OPERATIONS
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(
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)
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(
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(
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(
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OTHER INCOME (EXPENSE)
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Loss (gain) on investment
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(
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Other income, net
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Interest income (expense), net
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(
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Gain on debt extinguishment, net
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Total other income (expense), net
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NET LOSS
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$
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(
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$
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(
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$
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(
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$
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(
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NET LOSS PER SHARE-BASIC AND DILUTED
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$
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$
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$
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$
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC AND DILUTED
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See notes to unaudited condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 and 2021
(Unaudited)
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Series E Convertible Preferred Stock
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Convertible
Preferred Stock
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Common Stock
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Additional
Paid-In
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Accumulated
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Shares
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Amount
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Shares
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Amount
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Shares
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Amount
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Capital
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Deficit
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Total
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||||||||||||||||||||||||||||
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Balance –
July 1, 2022
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$
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$
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$
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$
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$
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(
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)
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$
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Issuance of Series E Convertible Preferred stock in connection with the Securities Purchase Agreement, net of offering costs
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-
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-
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-
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-
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(
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(
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|||||||||||||||||||||||||
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Net loss
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-
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-
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-
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-
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(
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(
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|||||||||||||||||||||||||
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Balance –
September 30, 2022
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$
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$
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$
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$
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$
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(
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$
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||||||||||||||||||||
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Series E Convertible Preferred Stock
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Convertible
Preferred Stock
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Common Stock
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Additional
Paid-In
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Accumulated
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Shares
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Amount
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Shares
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Amount
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Shares
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Amount
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Capital
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Deficit
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Total
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||||||||||||||||||||||||||||
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Balance –
July 1, 2021
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$
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$
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$
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$
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(
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$
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Series D Convertible Preferred Stock exercised
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-
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-
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(
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(
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|||||||||||||||||||||||||
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Issuance of common stock in connection with the Rights Offering, net of offering expenses
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-
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-
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Net loss
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-
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-
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-
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-
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(
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)
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(
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|||||||||||||||||||||||||
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Balance –
September 30, 2021
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$
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$
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$
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$
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(
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)
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$
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|||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements
HEALTHIER CHOICES MANAGEMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
|
Series E Convertible Preferred Stock
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Convertible
Preferred Stock
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Common Stock
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Additional
Paid-In
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Accumulated
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||||||||||||||||||||||||||||||||
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Shares
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Amount
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Shares
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Amount
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Shares
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Amount
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Capital
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Deficit
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Total
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||||||||||||||||||||||||||||
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Balance –
January 1, 2022
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$
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$
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$
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$
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$
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(
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)
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$
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||||||||||||||||||||
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Issuance of Series E Convertible Preferred stock in connection with the Securities Purchase Agreement, net of offering costs
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-
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-
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-
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-
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(
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(
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|||||||||||||||||||||||||
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Net loss
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-
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-
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-
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-
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(
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(
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)
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|||||||||||||||||||||||||
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Balance –
September 30, 2022
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$
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$
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$
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$
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$
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(
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)
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$
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||||||||||||||||||||
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Series E Convertible Preferred Stock
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Convertible
Preferred Stock
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Common Stock
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Additional
Paid-In
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Accumulated
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||||||||||||||||||||||||||||||||
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Shares
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Amount
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Shares
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Amount
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Shares
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Amount
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Capital
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Deficit
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Total
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||||||||||||||||||||||||||||
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Balance –
January 1, 2021
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$
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$
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$
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$
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$
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(
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)
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$
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||||||||||||||||||||
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Series C Preferred stock exercised
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-
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-
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(
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)
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(
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Stock options exercised
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-
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-
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Stock-based compensation expense
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-
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-
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-
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-
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Issuance of Series D Convertible Preferred stock in connection with the Securities Purchase Agreement
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-
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-
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Series D Convertible Preferred Stock exercised
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-
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-
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(
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(
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Issuance of common stock
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-
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-
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Issuance of common stock in connection with the Rights Offering, net of offering cost
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-
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-
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Issuance of awarded stock for officers and board member
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-
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-
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(
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)
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||||||||||||||||||||||||||
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Cancellation of awarded stock for officers and board member
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-
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-
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(
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)
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(
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|||||||||||||||||||||||||
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Net loss
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-
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-
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-
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-
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(
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)
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(
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)
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|||||||||||||||||||||||||
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Balance –
September 30, 2021
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$
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$
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$
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$
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$
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(
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)
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$
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||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended September 30,
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||||||||
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2022
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2021
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|||||||
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OPERATING ACTIVITIES
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Net loss
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$
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(
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)
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$
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(
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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Gain (loss) on investment
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(
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)
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|||||
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Amortization of right-of-use asset
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Write-down of obsolete and slow moving inventory
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Gain on debt settlement
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(
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)
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|||||
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Accrued interest on loan
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Stock-based compensation expense
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Changes in operating assets and liabilities:
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Accounts receivable
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(
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)
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(
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Inventories
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(
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(
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Prepaid expenses and vendor deposits
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(
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Other assets
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(
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Accounts payable and accrued expenses
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Contract liabilities
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(
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(
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Lease liability
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(
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)
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(
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)
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||||
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NET CASH USED IN OPERATING ACTIVITIES
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(
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)
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(
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)
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||||
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INVESTING ACTIVITIES
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Acquisition of Mother Earth's Storehouse
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(
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)
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|||||
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Collection of note receivable
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||||||
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Purchases of property and equipment
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(
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)
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(
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)
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||||
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Purchase of patent
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|
(
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)
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|||||
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NET CASH USED IN INVESTING ACTIVITIES
|
(
|
)
|
(
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)
|
||||
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FINANCING ACTIVITIES
|
||||||||
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Proceeds from line of credit
|
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|
||||||
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Principal payments on loan payable
|
(
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)
|
(
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)
|
||||
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Principal payment on the line of credit
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|
(
|
)
|
|||||
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Proceeds from Rights Offering
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|
|
||||||
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Proceeds from preferred stock, net of issuance costs
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|
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||||||
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Proceeds from exercise of stock options
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|
||||||
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NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
||||||
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NET INCREASE IN CASH, CASH EQUIVALENT AND RESTRICTED CASH
|
|
|
||||||
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH— BEGINNING OF PERIOD
|
|
|
||||||
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH — END OF PERIOD
|
$
|
|
$
|
|
||||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
|
Cash paid for interest
|
$
|
|
$
|
|
||||
|
Cash paid for income tax
|
$
|
|
$
|
|
||||
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
||||||||
|
Issuance of common stock
|
$
|
|
$
|
|
||||
|
Lease acquired
|
$
|
|
$
|
|
||||
See notes to unaudited condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. ORGANIZATION
Organization
Healthier Choices Management Corp. (the “Company”) is a holding company focused on providing
consumers with healthier daily choices with respect to nutrition and other lifestyle alternatives. The Company operates Ada’s Natural Market, a natural and organic grocery store, through its wholly owned subsidiary Healthy Choice Markets, Inc. Ada’s
Natural Market and Paradise Health and Nutrition offers fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, health & beauty products and natural household
items. The Company also sells vitamins and supplements on the Amazon.com marketplace through its wholly owned subsidiary Healthy U Wholesale, Inc. The Company also operates HCMC Intellectual Property Holdings, LLC, a wholly owned subsidiary formed to
hold, market and expand on its current intellectual property assets. The Company markets the Q-Cup™ technology under the vape segment; this patented technology is based on a small, quartz cup called the Q-Cup™, which a customer partially fills with
concentrate (approximately 50mg) purchased from a third party. The Q-Cup™ is then inserted into the Q-Cup™ Tank or Globe, which heats the cup from the outside without coming in direct contact with the solid concentrate. This Q-Cup™ technology
provides significantly more efficiency and an “on the go” solution for consumers who prefer to vape concentrates either medicinally or recreationally. The Company acquired substantially all of the assets of Mother Earth’s Storehouse on February 9,
2022, which operates a
two
store organic and health food
and vitamin chain in New York’s Hudson Valley, a business that has been operating for over
40
years. The Company expanded its operation into the Health & Wellness segment in November 2021. HCMC acquired substantially all of the assets of EIR Hydration, an IV therapy center located in Roslyn Heights,
NY.
The Company also has licensing agreements for Healthy Choice Wellness Centers at the Casbah Spa and Salon in Fort Lauderdale, FL and Boston Direct Health in Boston, MA. The activities in the Wellness centers are currently reported under
the Grocery segment due to its de minimis nature. From December 2021 through April 2022, the Company either closed its vape stores or sold substantially all of the assets of such stores.
This will allow the Company to focus on developing wholesale business and sales through online platform.
COVID-19 Management Update
The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020 and
has negatively impacted the U.S. and global economies, disrupted global supply chains and, mandated closures and stay-at-home orders and created significant disruptions of the global financial markets. The Company adjusted certain aspects of the
operations to protect their employees and customers while still meeting customers’ needs.
While we have experienced many challenges, including but not limited to, product shortages,
staffing difficulties, and evolving customer shopping behaviors, our focus remains on both offering our customers a high quality service experience and supporting our essential front-line team members. Though we have successfully managed these
challenges to date, our operations and financial condition could still be negatively affected by the COVID-19 pandemic and future developments, which are highly uncertain and cannot be predicted.
Note 2. LIQUIDITY
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in
the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern and realization of assets and satisfaction of liabilities in the normal course of business and do not include any adjustments that might result from
the outcome of any uncertainties related to our going concern assessment. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values.
The Company currently and historically has reported net losses and cash outflows from
operations. The Company anticipates that its current cash, cash equivalent and cash generated from operations will be sufficient to meet the projected operating expenses for the foreseeable future through at least the next twelve months from the
issuance of these unaudited condensed consolidated financial statements. Management believes with $
30.0
million cash on hand at the balance sheet date,
the Company’s cash will be sufficient to cover its operation for the 12 months from the date of the filing.
Note 3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and
Regulation S-X and do not include all the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The Company has made estimates and judgments affecting the amounts reported in the
Company’s unaudited condensed consolidated financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from the Company’s estimates. The condensed consolidated financial information is
unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022. The condensed consolidated balance sheet as
of December 31, 2021 was derived from the Company’s audited 2021 financial statements contained in the above referenced Form 10-K. Results of the nine months ended September 30, 2022, are not necessarily indicative of the results to be expected for
the full year ending December 31, 2022.
Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2021 Annual Report.
Note 4. CONCENTRATIONS
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid instruments with an original maturity of three months or less, when purchased, to be cash and cash equivalents. The majority of the
Company’s cash and cash equivalents are concentrated in
one
large financial institution, which is in excess of Federal Deposit Insurance
Corporation (FDIC) coverage.
A summary of the financial institutions that had a cash and cash equivalents in excess of FDIC limits of $
250,000
on September 30, 2022 and December 31, 2021 is presented below:
|
September 30, 2022
|
December 31, 2021
|
|||||||
|
Total cash, cash equivalents and restricted ca
sh
in excess of FDIC limits of $
|
$
|
|
$
|
|
||||
The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests, as deposits are held in
excess of federally insured limits. The Company’s cash equivalent at September 30, 2022 and December 31, 2021, respectively, was a money market account. The Company has not experienced any losses in such account.
The following table provides a reconciliation of cash, cash equivalents and restricted
cash to amounts shown in unaudited c
ondensed consolidated statements of cash flow
:
|
September 30, 2022
|
September 30, 2021
|
|||||||
|
Cash and Cash Equivalent
|
$
|
|
$
|
|
||||
|
Restricted cash
|
|
|
||||||
|
Total cash, cash equivalents and restricted cash
|
$
|
|
$
|
|
||||
Restricted Cash
The Company's restricted cash consisted of cash balances which were restricted as to withdrawal or usage under the August 18, 2022 security purchase agreement for the
purpose of funding any amounts due under the Series E Certificate of Designation upon the redemption of the Series E Preferred Stock.
Note 5. SEGMENT INFORMATION AND DISAGGREGATION OF REVENUES
In accordance with FASB ASC 280, "Disclosures about Segment of an enterprise and related information", the Company determined it has two reportable
segments: grocery and vapor. There are no inter-segment revenues.
The Company's general and administrative costs are not segment specific. As a result, all operating expenses are not managed on segment basis.
The tables below present information about reportable segments for the three months and nine months ended September 30, 2022, and
2021:
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
|
2022
|
2021
|
2022
|
2021
|
|||||||||||||
|
Vapor
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Grocery
|
|
|
|
|
||||||||||||
|
Total revenue
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Retail Vapor
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Retail Grocery
|
|
|
|
|
||||||||||||
|
Food service/restaurant
|
|
|
|
|
||||||||||||
|
Online/eCommerce
|
|
|
|
|
||||||||||||
|
Wholesale Grocery
|
|
|
|
|
||||||||||||
|
Wholesale Vapor
|
|
|
|
|
||||||||||||
|
Total revenue
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
(Loss) income from operations-Vapor
|
(
|
)
|
|
(
|
)
|
|
||||||||||
|
(Loss) income from operations-Grocery
|
(
|
)
|
|
|
|
|||||||||||
|
Corporate items
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Total loss
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
Note 6. NOTES RECEIVABLE AND OTHER INCOME
On September 6, 2018, the Company entered into a secured,
36
-month promissory note
(the “Note”)
with VPR Brands L.P. for $
582,260
. The Note bears an interest rate of
7.00
%
, which payments thereunder are $
4,141
weekly.
The Company records all proceeds related to the interest of the Note as interest income as proceeds are received.
On August 31, 2022, the Company amended and restated the Secured Promissory Note (the
"Amended Note") with VPR Brands L.P. to extend the
maturity date for one year. T
he
outstanding balance for the Amended Note is $
211,355
. The
Amended Note bears an interest rate of
7.00
%
, which
payments thereunder are $
1,500
weekly, with such payments
commencing as of September 3, 2022. The Amended Note has a balloon payment of $
145,931
for all remaining accrued interest and principal balance due in the final week of the
1
-year extension of the Amended Note.
A summary of the Amended Note as of September 30, 2022 and December 31, 2021 is presented
below:
|
Description
|
September 30, 2022
|
December 31, 2021
|
||||||
|
Promissory Note
|
$
|
|
$
|
|
||||
Note 7. ACQUISITION OF MOTHER EARTH’S STOREHOUSE, INC.
On February 9, 2022, the Company through its wholly owned subsidiary, Healthy Choice Markets 3, LLC, entered into an Asset Purchase Agreement with Mother
Earth’s Storehouse Inc. (“HCM3”) and its shareholders. Pursuant to the Purchase Agreement, HCM3 acquired certain assets and assumed certain liabilities related to Mother Earth’s grocery stores in Kingston and Saugerties, New York. The Company intends
to continue to operate the grocery stores under their existing name. The cash purchase price under the Asset Purchase Agreement was $
4,472,500
,
with an additional $
677,500
paid for inventory at closing. In addition, the Company assumed a lease obligation for the Kingston, NY store and
entered into an employment agreement with the store manager.
The purchase method of accounting in accordance with ASC 805,
Business Combinations
,
was applied for the Mother Earth's Storehouse acquisition. This requires the total cost of an acquisition to be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the
date of acquisition with the excess cost accounted for as goodwill. Goodwill arising from the acquisition is attributable to expected operational synergies from combining the operations of the acquired business with those of the Company
.
The purchase price allocation is final as of September 30, 2022. The following table summarizes the
purchase price allocation based on fair values of the net assets acquired at the acquisition date:
|
Purchase Consideration
|
||||
|
Cash Consideration paid
|
$
|
|
||
|
Purchase price allocation
|
||||
|
Inventory
|
|
|||
|
Property and equipment
|
|
|||
|
Intangible assets
|
|
|||
|
Right of use asset - operating lease
|
|
|||
|
Other liabilities
|
(
|
)
|
||
|
Operating lease liability
|
(
|
)
|
||
|
Goodwill
|
|
|||
|
Net assets acquired
|
$
|
|
||
|
Finite-lived intangible assets
|
||||
|
Trade Names/Trademarks
|
$
|
|
||
|
Customer Relationships
|
|
|||
|
Non-Compete Agreement
|
|
|||
|
Total intangible assets
|
$
|
|
||
Revenue and Earnings
R
evenue and net income for three months ended September 30, 2022
were $
3.2
million and $
0.01
million,
respectively. Revenue and net income were $
8.5
million and $
0.4
million, respectively, from the date of acquisition through September 30, 2022. Acquisition-related expenses are expensed as incurred. They were recorded in selling, general and
administrative expenses and were $
0
and $
78
,000,
for the three and nine months ended September 30, 2022, respectively. They primarily related to legal and other professional fees.
Unaudited Supplemental Pro Forma Information
The following unaudited pro forma summary presents consolidated
information of the Company, including Mother Earth's Storehouse, as if the business combination had occurred on January 1, 2021, the earliest period presented herein:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2022
|
2021
|
2022
|
2021
|
|||||||||||||
|
Sales
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Net (loss)
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
The pro forma financial information includes adjustments that are directly attributable to
the business combinations and are factually supportable. The pro forma adjustments include incremental amortization of intangible and remove non-recurring transaction costs directly associated with the acquisitions, such as legal and other
professional service fees. Cost savings or operating synergies expected to result from the acquisitions are not included in the pro forma results. For the three and nine months ended September 30, 2022, the pro forma financial information excludes $
0
and $
78
,000, respectively, of non-recurring acquisition-related expenses. These pro forma results are illustrative only and not
indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations.
Note 8. PROPERTY & EQUIPMENT
Property and equipment consist of the following:
|
September 30, 2022
|
December 31, 2021
|
|||||||
|
Displays
|
$
|
|
$
|
|
||||
|
Building
|
|
|
||||||
|
Furniture and fixtures
|
|
|
||||||
|
Leasehold improvements
|
|
|
||||||
|
Computer hardware & equipment
|
|
|
||||||
|
Other
|
|
|
||||||
|
|
|
|||||||
|
Less: accumulated depreciation and amortization
|
(
|
)
|
(
|
)
|
||||
|
Total property and equipment
|
$
|
|
$
|
|
||||
The Company incurred approximately $
64,986
and $
22,630
of depreciation expense for the
three months ended
September 30, 2022
and
2021
, and $
178,575
and $
89,155
of depreciation expense for the
nine months ended
September 30, 2022
and
2021
, respectively.
The Company closed all vape stores in Q2 2022, and disposed all vape stores' furniture and
fixtures, computer and equipment, and leasehold improvements. Total gross carrying amount of $
287,431
and total accumulated depreciation of $
287,247
were reduced from the consolidated balance sheets.
Note 9. INTANGIBLE ASSETS
Intangible assets, net are as follows:
|
September 30, 2022
|
Useful Lives (Years)
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||||
|
Trade names / Trademarks
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Customer relationships
|
|
|
(
|
)
|
|
||||||||
|
Patents
|
|
|
(
|
)
|
|
||||||||
|
Non-compete
|
|
|
(
|
)
|
|
||||||||
|
Website
|
|
|
(
|
)
|
|
||||||||
|
Intangible assets, net
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||
|
December 31, 2021
|
Useful Lives (Years)
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||||
|
Trade names / Trademarks
|
|
$
|
|
(
|
)
|
$
|
|
||||||
|
Customer relationships
|
|
|
(
|
)
|
|
||||||||
|
Patents
|
|
|
(
|
)
|
|
||||||||
|
Non-compete
|
|
|
(
|
)
|
|
||||||||
|
Website
|
|
|
(
|
)
|
|
||||||||
|
Intangible assets, net
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||
Intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense was approximately $
165,101
and $
95,335
for the three months ended September 30, 2022 and 2021, and $
473,587
and $
290,381
for the nine months ended September 30, 2022 and 2021, respectively.
Future annual estimated amortization expense is as follows:
|
Years ending December 31,
|
||||
|
2022 (remaining three months)
|
$
|
|
||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
Thereafter
|
|
|||
|
Total
|
$
|
|
||
Note 10. CONTRACT LIABILITIES
The Company’s contract liabilities consist of gift cards and loyalty rewards, for which the Company has a performance obligation to deliver products when
customers redeem balances or terms expire through breakage. Our breakage policy is
twenty four months
for gift cards,
twelve months
for Grocery loyalty rewards, and
six months
for Vapor loyalty rewards. As such, all contract liabilities are expected to be recognized within a
twenty four month
period. Revenue is
recognized when gift card and loyalty points are redeemed.
A summary of the net changes in contract liabilities activity at September 30, 2022 and December 31, 2021 is presented below:
|
September 30, 2022
|
December 31, 2021
|
|||||||
|
Beginning balance as January 1,
|
$
|
|
$
|
|
||||
|
Issued
|
|
|
||||||
|
Redeemed
|
(
|
)
|
(
|
)
|
||||
|
Breakage recognized
|
(
|
)
|
(
|
)
|
||||
|
Ending balance
|
$
|
|
$
|
|
||||
Note 11. DEBT
The following table provides a breakdown of the Company's debt as of September 30, 2022 and December 31, 2021 is presented below:
|
_
|
September 30, 2022
|
December 31, 2021
|
||||||
|
Line of Credit
|
$
|
|
$
|
|
||||
|
Other debt
|
|
|
||||||
|
Total debt
|
$
|
|
|
|||||
Note 12. STOCKHOLDERS’ EQUITY
Rights Offering
On June 18, 2021, the Company issued
27,046,800,310
shares of common stock in connection with the Rights Offering at a subscription price of $
0.0010
per share, generating gross proceeds of $
27.0
million. The Company incurred
direct financing related costs of $
2.7
million in connection with the offering resulting in net proceeds to the Company of $
24.3
million.
Exchange Agreement
On March 29, 2021, the Company entered into exchange agreements with the holders of indebtedness pursuant to the $
2.7
million Loan and Security Agreement (the "Credit Agreement"). Pursuant to the Credit Agreement with the holders of the Company’s indebtedness (the “Notes”) in an aggregate amount of $
1.3
million exchanged the Notes for
1,172,964,218
shares at a conversion price of $
0.0011
(the "Exchange"). The Notes were issued pursuant to the Credit Agreement dated as of August 18, 2020, among The Vape Store, Inc., the Company, Healthy Choice Markets, Inc., Sabby Healthcare Master Fund, Ltd., and Sabby Volatility Warrant
Master Fund, Ltd. In connection with the Exchange, the Credit Agreement and all related loan documents was terminated and the Holder’s on the assets of the Company and its subsidiaries was cancelled. The Company recognized a loss on debt
extinguishment of $
0.1
million.
Restricted Stock
On
January 14, 2021
, the Compensation
Committee of the Board of Directors of the Company approved an issuance of restricted stock to the Officers and a Director of the Company, in consideration for agreeing to a new vesting schedule for the existing awarded restricted stock. Each
individual was granted a
10
%
increase from the original award agreement
for a total of
2.3
billion shares of restricted common stock, which will
vest quarterly and equal amounts until
December 31, 2022
, provided that the grantee remains an employee of the Company through the vesting date.
On March 30, 2021 and June 29, 2021, the Company and the Officers and a Director of the Company agreed to forfeit a total of
6.18
billion of restricted shares of common stock that were due to vest on March 31, 2021 and June 30, 2021. The expense related to such was fully recognized in the fiscal year ended December
31, 2021, as such no additional compensation expense related with restricted stock has been reflected during the current fiscal year.
Series E Convertible Preferred Stock
On August 18, 2022, the Company entered into a Securities Purchase Agreement pursuant to which the Company sold and issued
14,722
shares of its Series E Convertible Preferred Stock to institutional investors for $
1,000
per share or an aggregate subscription of $
13.25
million. The number of shares
issued to each participant is based on subscription amount multiplied by conversion rate of
1.1111
. The Company also incurred offering costs of
approximately $
410,000
, which covers legal and consulting fee.
The Company is planning to spin off its grocery segment and wellness business
into a new publicly traded company (hereinafter referred to as “NewCo”). NewCo will continue the path of growth in the health verticals started by HCMC and explore other growth
opportunities that comport with HCMC’s healthier lifestyle mission. HCMC will retain its entire patent suite, the Q-Cup® brand, and continue to develop its patent suite through R&D as well as continuing its path of enforcing its patent rights
against infringers and attempting to monetize said patents through licensing deals.
At the time of the Spin-Off, HCMC will distribute all the outstanding shares of
Common Stock held by it on a pro rata basis to holders of HCMC’s common stock (the “Spinoff”).
Pursuant to the Securities Purchase Agreement, purchasers will also be required to purchase Series A Convertible Preferred Stock (“NewCo Series A Stock”)
of a newly created public company (“NewCo”) resulting from spin off of HCMC’s grocery and wellness businesses in the same subscription amounts that the Purchasers paid for the HCMC Preferred Stock (the “Spinoff”).
The HCMC Preferred Stock shall have voting rights on as converted basis at the Company’s
next stockholders’ meeting. However, as long as any shares of HCMC Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the HCMC Preferred Stock, (a)
alter or change adversely the powers, preferences or rights given to the HCMC Preferred Stock or alter or amend the Certificate of Designation, (b) increase the number of authorized shares of HCMC Preferred Stock, or (c) enter into any agreement with
respect to any of the foregoing.
Each share of Preferred Stock shall be convertible, at any time and from time to time at the option of the Holder thereof, into that number of shares of Common Stock (subject to the beneficial ownership
limitations). The conversion price for the HCMC Preferred Stock shall equal $
0.0001
.
Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary that is not a Fundamental Transaction (as defined in the
Certificate of Designation), the holders of HCMC Preferred Stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to $
1,000
per share of HCMC Preferred Stock.
Unless earlier converted or extended as set forth below, a holder may require the redemption of all or a portion of the stated value of the HCMC Preferred Stock either (1)
six months
after closing or (2) the time at which the balance is due and payable upon an event of default.
Stock Options
During the three months ended September 30, 2022 and 2021,
no
stock options of the Company were exercised into common stock. During the nine months ended September 30, 2022,
no
stock options of the Company were exercised
into common stock; in comparison to the
nine months ended
September 30, 2021
, where
2,275,000,000
stock
options of the Company were exercised into common stock.
During the three months ended
September 30, 2022
and
2021
, the Company recognized stock-based compensation of
$
0
and
$
0
, respectively. . During the nine months ended
September 30, 2022
and
2021
, the Company recognized stock-based compensation of $
0
and
$
34,375
, respectively.
Stock based compensation is included as part of selling, general and administrative expense in the accompanying
unaudited condensed
consolidated statements of
operations.
Income (Loss) Per Share
The following table summarizes the Company’s securities, in common share equivalents, which have been excluded
from the calculation of dilutive loss per share as their effect would be anti-dilutive:
|
As of September 30,
|
||||||||
|
2022
|
2021
|
|||||||
|
Preferred stock
|
|
|
||||||
|
Stock options
|
|
|
||||||
|
Total
|
|
|
||||||
Note 13. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On November 30, 2020, the Company filed a patent infringement lawsuit against Philip Morris USA, Inc. and Philip Morris Products S.A. in the U.S. District
Court for the Northern District of Georgia. The lawsuit alleges infringement on HCMC-owned patent(s) by the Philip Morris product known and marketed as “IQOS®”. Philip Morris claims that it is currently approaching
14
million users of its IQOS® product and has reportedly invested over $
3
billion in their smokeless tobacco products. On December 3, 2021, the District Court for the Northern District of Georgia effectively dismissed HCMC’s patent infringement action against Philip
Morris USA, Inc. and Philip Morris Products S.A. On December 14, 2021, the Company filed a notice of appeal of the District Court for the Northern District of Georgia’s dismissal of the Company’s patent infringement action against Philip Morris USA,
Inc. and Philip Morris Products S.A. The appeal brief was filed on February 28, 2022.
On December 3, 2021, the District Court for the Northern District of Georgia effectively dismissed HCMC’s patent infringement action against Philip Morris
USA, Inc. and Philip Morris Products S.A. In connection with such dismissal, the defendants sought to recover attorney’s fees from the Plaintiff. On February 22, 2022, the District Court for the Northern District of Georgia granted the defendant’s an
award of approximately $
575,000
in attorneys’ fees to be paid by the Company. The Company has fully provisioned this amount as of December 31,
2021. HCMC appealed this ruling on June 22, 2022.
From time to time the Company is involved in legal proceedings arising in the ordinary course of our
business. We believe that there is
no
other litigation pending that is likely to have, individually or in the aggregate, a material adverse effect on our financial condition or
results of operations as of
September 30, 2022
. With respect to legal
costs, we record such costs as incurred.
Employment Agreement
On February 26, 2021, the Company entered into an amended and restated employment agreement (the “
Employment Agreement Amendment
”) with the Company’s President and Chief Operating Officer, Christopher Santi. Pursuant to the Employment Agreement Amendment, Mr. Santi will continue to be employed as the Company’s President and Chief
Operating Officer through January 30, 2024. Mr. Santi will receive a base salary of $
0.4
million for 2021 and his salary will increase
10
% in each subsequent year.
On February 02, 2022, the Company entered into a Second Amended and Restated Employment Agreement (the “
Employment Agreement Amendment
”) with the Company’s Chief Financial Officer, John Ollet. Pursuant to the Employment Agreement Amendment, Mr. Ollet will continue to be employed as the Company’s Chief Financial Officer
through February 14, 2025. Mr. Ollet will receive a base salary of $
0.3
million for 2022 and his salary will increase
10
% in each subsequent calendar year.
Note
14.
SUBSEQUENT EVENTS
On October
14,
2022,
the Company through its wholly owned subsidiary, Healthy Choice Markets IV, LLC, entered into an Asset Purchase Agreement (the “Purchase
Agreement”) with Dean’s Natural Food Market of Shrewsbury, Inc., a New Jersey corporation, Green’s Natural Foods, Inc., a Delaware corporation, Dean’s Natural Food Market of Chester, LLC, a New Jersey limited liability company, Dean’s Natural Food
Market of Basking Ridge, LLC, a New Jersey limited liability company, and Dean’s Natural Food Market, Inc., a New Jersey corporation (collectively, the “Sellers”), and shareholders of the Sellers. Pursuant to the Purchase Agreement, the Company
acquired certain assets and assumed certain liabilities of an organic and natural health food and vitamin chain with
eight
store locations in New York and northern and central New Jersey (the “Stores”).
The purchase price under the Purchase Agreement is approximately
$
8
,000,000,
of which $
3
,000,000 is in the form of a promissory note. In addition, the seller is entitled to a contingent
earn-out based on certain revenue threshold within the one year period of the closing. The purchase price is subject to final inventory adjustment. The Company will assume all lease obligations for the Stores. The transaction closed on October
14,
2022. The Company has engaged a professional valuation firm to perform the valuation on the assets acquired and liabilities assumed. Purchase price allocation has not
been finalized at the time of filing.
On October 25, 2022, the Company announced that the Board has authorized aggregate common stock repurchases of up to $
5
million. HCMC may purchase shares on a discretionary basis from time to time through open market purchases, privately negotiated transactions or other means, including through Rule 10b5-1
trading plans. The timing and amount of the repurchase transactions will be subject to the discretion of HCMC based upon market conditions and other opportunities that HCMC may have for the use or investment of its cash balances. The repurchase program
has no expiration date, does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. The number of shares to be purchased and the timing of purchases will be based on the
Company's trading windows and available liquidity, general business and market conditions, and other factors, including legal requirements, debt covenant restrictions and alternative investment opportunities. The Company has not repurchased any shares
The lease for HCMC headquarter expired on September 30, 2022. The Company is actively negotiating the lease renewal terms with the new owner of the premise. At the time of
the filing, no agreement has been reached yet. The payment of the lease is on month to month.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED
CONSOLIDATED OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and related
notes appearing elsewhere in this report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially
from those anticipated in these forward-looking statements. The terms “we,” “us,” “our,” and the “Company” refer to Healthier Choices Management Corp. and its wholly-owned subsidiaries,
Healthy
Choice Markets, Inc., Healthy Choice Markets 2, LLC (“Paradise Health and Nutrition”), Healthy Choice Markets 3, LLC (“Mother Earth’s Storehouse”), Healthy Choices Markets 3 Real Estate LLC, Healthy Choice Markets IV, LLC (“Green's Natural Foods”),
HCMC Intellectual Property Holdings, LLC, Healthy Choice Wellness, LLC, The Vitamin Store, LLC, Healthy U Wholesale, Inc., and The Vape Store, Inc. (“Vape Store”)
. All intercompany accounts and transactions have been eliminated in
consolidation.
Company Overview
Healthier Choices Management Corp.
is a holding company focused on providing
consumers with healthier daily choices with respect to nutrition and other lifestyle alternatives.
Through its wholly owned subsidiary HCMC Intellectual Property Holdings, LLC, the Company manages and intends to expand on its intellectual property portfolio.
Through its wholly owned subsidiaries, Healthy Choice Markets, Inc., Healthy Choice Markets 2, LLC, and Healthy Choice Markets 3, LLC, respectively, the Company operates:
|
•
|
Ada’s Natural Market, a natural and organic grocery store offering fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood,
deli, baked goods, dairy products, frozen foods, health & beauty products and natural household items.
|
|
•
|
Paradise Health & Nutrition’s three stores that likewise offer fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood,
deli, baked goods, dairy products, frozen foods, health & beauty products and natural household items.
|
|
•
|
Mother Earth’s Storehouse, a two store organic and health food and vitamin chain in New York’s Hudson Valley, which has been in existence for over 40 years.
|
Through its wholly owned subsidiaries, Healthy Choice Markets IV, LLC, the Company acquired Green's Natural Foods on October 14, 2022, a chain of premier natural foods
stores in New York and New Jersey area,
offering a selection of 100% organic produce and all-natural, non-GMO groceries & bulk foods; a wide selection of local
products; an organic juice and smoothie bar; a fresh foods department, which offers fresh and healthy “grab & go” foods; a full selection of vitamins & supplements; as well as health and beauty products.
.
Through its wholly owned subsidiary, Healthy Choice Wellness, LLC, the Company has licensing agreements for Healthy Choice Wellness Centers at the Casbah Spa and Salon in
Fort Lauderdale, FL, and Boston Direct Health in Boston, MA. These centers offer multiple IV drip “cocktails” for clients to choose from that are designed to help boost immunity, fight fatigue and stress, reduce inflammation, enhance weight loss, and
efficiently deliver antioxidants and anti-aging mixes. Additionally, there are cocktails for health, beauty, and re-hydration. (
www.HealthyChoiceWellness.com
)
Through its wholly owned subsidiary, Healthy U Wholesale Inc., the Company sells vitamins and supplements, as well as health, beauty and personal care products on its
website
www.TheVitaminStore.com
.
Additionally, the Company markets its patented Q-Unit™ and Q-Cup® technology. Information on these products and the technology is available on the Company’s website at
www.theQcup.com
.
Liquidity
The unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q have been prepared in conformity with GAAP, which
contemplate continuation of the Company as a going concern and realization of assets and satisfaction of liabilities in the normal course of business and do not include any adjustments that might result from the outcome of any uncertainties related to
our going concern assessment. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The unaudited consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
The Company incurred a loss from operations of approximately $
4.8
million for the
nine months ended
September 30, 2022
. As of
September 30, 2022
, cash and cash equivalents totaled approximately $
30.0
million. The Company expects to continue incurring losses for the foreseeable future but w
e anticipate that our current cash and cash equivalents and additional cash to be generated from operations will be sufficient to cover our projected operating expenses for the foreseeable
future.
Management does not believe there are any substantial doubts about the Company’s ability to continue as a going concern within a year and a day from the issuance of these unaudited consolidated financial statements.
Factors Affecting Our Performance
We believe the following factors affect our performance:
Retail
: We believe the operating performance of our retail stores will affect our revenue and financial performance. The Company has four natural and organic groceries and dietary supplement stores located in Florida, as
well as two located in New York. As of April 2022, the Company assigned the lease of its remaining retail vape store due to adverse industry trends and increasing federal and state regulations that, if implemented, may negatively impact future retail
revenues. All of the Company's other vape stores had been either closed or had its assets sold from December 2021 to April 2022.
This will allow the Company to focus on developing wholesale business and sales through online platform.
Increased Competition
: Food retail is a large and competitive industry. Our competition varies and includes national, regional, and local conventional supermarkets, national superstores, alternative food retailers, natural foods
stores, smaller specialty stores, and farmers’ markets. In addition, we compete with restaurants and other dining options in the food-at-home and food-away-from-home markets. The opening and closing of competitive stores, as well as restaurants and
other dining options, in regions where we operate will affect our results. In addition, changing consumer preferences with respect to food choices and to dining out or at home can impact us. We also expect increased product supply and downward
pressure on prices to continue and impact our operating results in the future.
Our Response to the COVID-19 Pandemic:
We are proud to provide our guests with high quality, fresh foods and restaurant quality meals, delivered with impeccable service in an exceptionally clean and well-stocked store. With the
ongoing COVID-19 pandemic, we continue to carefully monitor and adjust our safety protocols while following public health guideline and local ordinances. We have maintained many of the protocols established at the beginning of the pandemic to keep
our team members and guests safe. The COVID-19 pandemic has presented many risks and challenges that we must manage. While we have experienced many challenges, including but not limited to, product shortages, staffing difficulties, and evolving
customer shopping behaviors, our focus remains on both offering our customers a high quality service experience and supporting our essential front-line team members. Though we have successfully managed these challenges to date, our operations and
financial condition could still be negatively affected by the COVID-19 pandemic and future developments, which are highly uncertain and cannot be predicted.
Results of Operations
The following table sets forth our unaudited condensed consolidated Statements of Operations for the three months ended September 30, 2022 and 2021 that is used in the following discussions of our results of operations:
|
Three Months Ended September 30,
|
2022 to 2021
|
|||||||||||
|
2022
|
2021
|
Change $
|
||||||||||
|
SALES
|
||||||||||||
|
Vapor sales, net
|
$
|
1,187
|
$
|
466,181
|
$
|
(464,994
|
)
|
|||||
|
Grocery sales, net
|
5,775,543
|
2,803,327
|
2,972,216
|
|||||||||
|
TOTAL SALES, NET
|
5,776,730
|
3,269,508
|
2,507,222
|
|||||||||
|
Cost of sales vapor
|
364
|
186,522
|
(186,158
|
)
|
||||||||
|
Cost of sales grocery
|
3,909,190
|
1,706,597
|
2,202,593
|
|||||||||
|
GROSS PROFIT
|
1,867,176
|
1,376,389
|
490,787
|
|||||||||
|
OPERATING EXPENSES
|
||||||||||||
|
Selling, general and administrative
|
3,985,377
|
2,427,256
|
1,558,121
|
|||||||||
|
LOSS FROM OPERATIONS
|
(2,118,201
|
)
|
(1,050,867
|
)
|
(1,067,334
|
)
|
||||||
|
OTHER INCOME (EXPENSE)
|
||||||||||||
|
Loss on investment
|
(11,314
|
)
|
(557
|
)
|
(10,757
|
)
|
||||||
|
Other income
|
4,327
|
-
|
4,327
|
|||||||||
|
Interest income
|
50,202
|
1,543
|
48,659
|
|||||||||
|
Total other income (expense), net
|
43,215
|
986
|
42,229
|
|||||||||
|
NET LOSS
|
$
|
(2,074,986
|
)
|
$
|
(1,049,881
|
)
|
$
|
(1,025,105
|
)
|
|||
Net vapor sales
decreased
approximately
$
0.5
million to $
1.2
thousand for the
three months ended
September 30, 2022
as compared to $
0.5
million for the same period in
2021
. The
decrease
in sales is primarily due to
the impact of store closings during the second quarter of 2022.
Net grocery sales
increased
$
3.0
million to $
5.8
million for the
three months ended
September 30, 2022
as compared to $
2.8
million for the same period in
2021
. The increase in sales is primarily due to an increase in the number
of stores
as a result of
the acquisition of Mother Earth's Storehouse in February 2022.
Vapor cost of goods sold for the three months ended September 30, 2022 and 2021 were $- thousand and $0.2 million, respectively, a
decrease of $0.2 million. The decrease is primarily due to the closing the remaining retail vape stores during three months ended September 30, 2022 as compared to the same period in 2021. Gross profit was $0.8 thousand and $0.3 million for three months ended September 30, 2022 and 2021, respectively.
Closing retail vape stores will allow the Company focus on developing wholesale business and online platform.
Grocery cost of goods sold for the
three months ended
September 30, 2022
and
2021
were $
3.9
million and $
1.7
million, respectively, an
increase
of $
2.2
million. The
increase
is primarily due to an increase in the number of stores from the acquisition of Mother Earth's Storehouse
on February 14, 2022.
Gross profit was $
1.9
million and $
1.1
million for the
three months ended
September 30, 2022
and
2021
, respectively.
Gross margin as a percentage of sales decreased approximately 10% as compared
to the same period in prior year as a result of lost sales in in our Florida stores, and write off of damaged inventory as a result of Hurricane Ian.
Total operating expenses increased $1.6 million to $4.0 million for the three months ended September 30, 2022
compared to $2.4 million for the same period in 2021.
The increase is primarily attributable to increases in professional fees of $0.6 million, payroll and employee related cost of $0.7 million, depreciation and
amortization expense of $0.2 million and occupancy costs of $0.1 million.
Total net other income increased $42,000 to $43,000 for the three months ended September 30, 2022 compared to $1,000 for the same period in 2021. The increase in net other
income is mainly attributable to increase in interest income
as a result of an increase in interest rates
.
The following table sets forth our unaudited consolidated Statements of Operations for the nine months ended September 30, 2022 and 2021 that is used in the following discussions of our results of operations:
|
Nine Months Ended September 30,
|
2022 to 2021
|
|||||||||||
|
2022
|
2021
|
Change $
|
||||||||||
|
SALES
|
||||||||||||
|
Vapor sales, net
|
$
|
256,747
|
$
|
1,671,098
|
$
|
(1,414,351
|
)
|
|||||
|
Grocery sales, net
|
16,700,596
|
8,450,055
|
8,250,541
|
|||||||||
|
TOTAL SALES, NET
|
16,957,343
|
10,121,153
|
6,836,190
|
|||||||||
|
Cost of sales vapor
|
112,610
|
657,171
|
(544,561
|
)
|
||||||||
|
Cost of sales grocery
|
10,674,170
|
5,133,228
|
5,540,942
|
|||||||||
|
GROSS PROFIT
|
6,170,563
|
4,330,754
|
1,839,809
|
|||||||||
|
OPERATING EXPENSES
|
||||||||||||
|
Selling, general and administrative
|
11,012,070
|
6,599,224
|
4,412,846
|
|||||||||
|
LOSS FROM OPERATIONS
|
(4,841,507
|
)
|
(2,268,470
|
)
|
(2,573,037
|
)
|
||||||
|
OTHER INCOME (EXPENSE)
|
||||||||||||
|
Gain (loss) on investment
|
(6,000
|
)
|
10,954
|
(16,954
|
)
|
|||||||
|
Other income
|
27,376
|
-
|
27,376
|
|||||||||
|
Interest income (expense), net
|
81,715
|
(76,888
|
)
|
158,603
|
||||||||
|
Gain on extinguishment of debt, net
|
-
|
767,930
|
(767,930
|
)
|
||||||||
|
Total other income (expense), net
|
103,091
|
701,996
|
(598,905
|
)
|
||||||||
|
NET LOSS
|
$
|
(4,738,416
|
)
|
$
|
(1,566,474
|
)
|
$
|
(3,171,942
|
)
|
|||
Net Vapor sales decreased $1.4 million to $0.3 million for the nine months ended September 30, 2022 as
compared to $1.7 million for the same period in 2021.
The decrease in sales is primarily due to closing the remaining retail vape stores during the nine months ended September 30, 2022 as compared to the same period
in 2021.
Net Grocery sales
increased
$
8.3
million to $
16.7
million for the
nine months ended
September 30, 2022
as compared to $
8.5
million for the same period in
2021
. The
increase
in sales is primarily due to acquisition of Mother Earth's Storehouse in February 2022
.
Vapor cost of goods sold for the nine months ended September 30, 2022 and 2021 were $0.1 million and $0.7 million, respectively, a
decrease of $0.5 million. The decrease is primarily due to closing retail stores. Gross profit was $0.1 million and $1.0 million for the nine months ended September 30, 2022 and 2021, respectively. Closing retail vape stores will allow the Company focus on developing wholesale business and online platform.
Grocery cost of goods sold for the nine months ended September 30, 2022 and 2021 were $10.7 million and $5.1 million, respectively,
an increase of $5.5 million. The
increase is primarily due to the acquisition of Mother Earth's Storehouse in February 2022. Gross profit was $6.0 million and $3.3 million for the nine months ended September 30, 2022 and 2021, respectively.
Total operating expenses increased $4.4 million to $11.0 million for the nine months ended September 30, 2022 compared
to $6.6 million for the same period in 2021.
Out of the $4.4 million operating expense increase, $2.5 million increase is due to Mother Earth’s Storehouse acquisition. The increase is
primarily attributable to increases in the professional fees of $1.5 million, office and store expenses of $0.2 million, payroll and employee related cost of $1.9
million, depreciation and amortization expenses of $273,000, meals, travel and entertainment of $45,000, insurance of $34,000, and occupancy of $248,000, offset by a decrease in stock compensation of $34,000.
Net other income of $
0.1
million for the
nine months ended
September 30, 2022
includes a loss on investment of $
6,000
, other income of $
27,000
, and an interest income of $
82,000
. Net other income of $
0.7
million for the
nine months ended
September 30, 2021
includes a gain on debt settlement of $768,000,
a gain on investment of $11,000, and interest expense of $77,000.
Liquidity and Capital Resources
|
Nine Months Ended September 30,
|
||||||||
|
2022
|
2021
|
|||||||
|
Net cash provided by (used in)
|
||||||||
|
Operating activities
|
$
|
(2,676,131
|
)
|
$
|
(2,044,147
|
)
|
||
|
Investing activities
|
(5,359,187
|
)
|
(25,106
|
)
|
||||
|
Financing activities
|
12,873,087
|
27,316,225
|
||||||
|
$
|
4,837,769
|
$
|
25,246,972
|
|||||
Our net cash used in operating activities of
approximately
$
2.7
million for the
nine months ended
September 30, 2022
resulted from a net loss of $
4.7
million, offset by a
non-cash adjustment of $1.7
million and a net cash provided of $
0.3
million from changes in operating assets and liabilities. Our net cash
used in operating activities of $
2.0
million for the
nine months ended
September 30, 2021
resulted from
a net loss of $
1.6
million and a net cash usage of $0.8 million from changes in
operating assets and liabilities, offset by a non-cash adjustment of $0.4 million.
The net cash used in investing activities of $
5.4
million for the
nine months ended
September 30, 2022
r
esulted from th
e acquisition of Mother Earth's Storehouse,
collection on a note receivable, and purchases of property and equipment
. The net cash used in investing
activities of $
25,000
for the
nine months ended
September 30, 2021
resulted from
the collection of a note receivable, and purchases of
property and equipment
.
The net cash provided by financing activities of $
12,873,000
for the
nine months ended
September 30, 2022
is due to proceeds received from the Series E Preferred Stock sales and from proceeds received
from line of credit. The net cash provided by financing activities of $
27.3
million for the
nine months ended
September 30, 2021
is due to proceeds
received from the
stock rights offering of $24.3 million and a Securities Purchase Agreement of $5.0 million, partially offset by a principal payment of $
2.0
million on the line of credit and loan payment of $0.3 million.
At September 30, 2022 and December 31, 2021, we did not have any material financial guarantees or other contractual commitments with vendors that are reasonably likely to have an
adverse effect on liquidity.
Our cash balances are kept liquid to support our growing acquisition and infrastructure needs for operational expansion. Most of our cash and cash
equivalents are concentrated in one financial institution and are generally in excess of the FDIC insurance limit. The Company has not experienced any losses on its cash and cash equivalents. The following table presents the Company’s cash position as
of September 30, 2022 and December 31, 2021.
|
September 30, 2022
|
December 31, 2021
|
|||||||
|
Cash
|
$
|
30,009,173
|
$
|
26,496,404
|
||||
|
Total assets
|
$
|
45,470,486
|
$
|
34,443,487
|
||||
|
Percentage of total assets
|
66.00
|
%
|
76.93
|
%
|
||||
The Company reported a net loss of $
4.7
million for the
nine months ended
September 30, 2022
. The Company also had positive working capital of $
30.1
million.
The Company
expects to continue incurring losses for the foreseeable future but
we do not believe there are any substantial doubts about the Company’s ability to continue as a going concern. The Company's
current cash and cash generated from operations will be sufficient to meet the projected operating expenses for the foreseeable future through at least the next twelve months from the issuance of these unaudited
condensed consolidated financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to exercise considerable judgment with
respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the
date of the condensed consolidated financial statements.
We base our estimates on our historical experience, knowledge of our business and industry, current and expected economic conditions, the attributes of our
products, the regulatory environment, and in certain cases, the results of outside appraisals. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that
modifications are necessary. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot
guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.
There have been no material changes to the Company’s critical accounting policies and estimates as compared to the critical accounting policies and
estimates described in the 2021 Annual Report, which we believe are the most critical to our business and the understanding of our results of
operations and affect the more significant judgments and estimates that we use in the preparation of our condensed consolidated financial statements.
Seasonality
We do not consider our business to be seasonal.
Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements including statements regarding retail expansion, the future demand for our products, the transition to
vaporizer and other products, competition, the adequacy of our cash resources and our authorized Common Stock, and our continued ability to raise capital.
The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect”
and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we
believe may affect our financial condition, results of operations, business strategy and financial needs.
The results anticipated by any or all of these forward-looking statements might not occur. Important factors that could cause actual results to differ from
those in the forward-looking statements include our future common stock price, the timing of future Series D preferred stock exercises and stock sales, customer acceptance of our products, and proposed federal and state regulation. We undertake no
obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.
Not applicable to smaller reporting companies.
Evaluation of Disclosure Controls and Procedures
Our management, including our Principal Executive Officer and Principal Financial Officer, did not carry out an evaluation on internal controls as of September 30, 2022 in regard to the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, or the Exchange Act. As an evaluation was not carried out, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were ineffective as of the end of the
period covered by this report.
In planning and performing its audit of our financial statements for the year ended December 31, 2021 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.
|
| ● |
Failure to
perform periodic and year-end inventory observations in a timely manner and adequate controls
to sufficiently perform required rollback procedures of inventory counts to the year-end.
|
| ● |
Weakness around our purchase orders and inventory procedures
, inclusive of year-end physical inventory
observation procedures as well as physical 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 September 30, 2022 based on the criteria set forth in Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Planned Remediation
Management continues to work to improve its controls related to our material weaknesses listed above. In order to achieve the timely implementation of the above,
management has commenced the following actions and will continue to assess additional opportunities for remediation on an ongoing basis
:
| ● |
Continuing to increase headcount across the Company, with a particular focus on hiring individuals with strong internal control backgrounds and inventory expertise.
|
| ● |
Increasing its focus on the Company’s purchase order process in order to better manage inventory thereby improving cash management and ultimately leading to more
reliable and precise financial reporting.
|
We are currently working to improve and simplify our internal processes and implement enhanced controls, as discussed above, to address the material weaknesses in our
internal control over financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures. These material weaknesses will not be considered to be remediated until the applicable remediated controls are operating for a
sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Controls over Financing Reporting
Except as detailed above, during the quarter ended September 30, 2022, there were no significant changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II - OTHER INFORMATION
On November 30, 2020, the Company filed a patent infringement lawsuit against Philip Morris USA, Inc. and Philip Morris Products S.A. in the U.S. District
Court for the Northern District of Georgia. The lawsuit alleges infringement on HCMC-owned patent(s) by the Philip Morris product known and marketed as “IQOS®”. Philip Morris claims that it is currently approaching 14 million users of its IQOS®
product and has reportedly invested over $3 billion in their smokeless tobacco products. On December 3, 2021, the District Court for the Northern District of Georgia effectively dismissed HCMC’s patent infringement action against Philip Morris USA,
Inc. and Philip Morris Products S.A. On December 14, 2021, the Company filed a notice of appeal of the District Court for the Northern District of Georgia’s dismissal of the Company’s patent infringement action against Philip Morris USA, Inc. and
Philip Morris Products S.A. The appeal brief was filed on February 28, 2022.
On December 3, 2021, the District Court for the Northern District of Georgia effectively dismissed HCMC’s patent infringement action against Philip Morris
USA, Inc. and Philip Morris Products S.A. In connection with such dismissal, the defendants sought to recover attorney’s fees from the Plaintiff. On February 22, 2022, the District Court for the Northern District of Georgia granted the defendant’s an
award of approximately $575,000 in attorneys’ fees to be paid by the Company. The Company has fully provisioned this amount as of December 31, 2021. HCMC appealed this ruling on June 22, 2022.
From time to time the Company is involved in legal proceedings arising in the ordinary course of our
business. We believe that there is no other litigation pending that is likely to have, individually or in the aggregate, a material adverse effect on our financial condition or results of operations as of
September 30, 2022.
With respect to legal costs, we record such costs as incurred.
Not Applicable.
None.
None.
Not Applicable.
Not Applicable.
See the exhibits listed in the accompanying “Index to Exhibits.”
INDEX TO EXHIBITS
|
Exhibit
|
Incorporated by Reference
|
Filed or Furnished
|
||||||||
|
No.
|
Exhibit Description
|
Form
|
Date
|
Number
|
Herewith
|
|||||
|
31.1
|
Filed
|
|||||||||
|
31.2
|
Filed
|
|||||||||
|
32.1
|
Furnished *
|
|||||||||
|
32.2
|
Furnished *
|
|||||||||
|
101.INS
|
XBRL Instance Document
|
Filed
|
||||||||
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
Filed
|
||||||||
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
Filed
|
||||||||
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
Filed
|
||||||||
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
Filed
|
||||||||
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
Filed
|
||||||||
|
104
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
|
Filed
|
||||||||
| * |
This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
HEALTHIER CHOICES MANAGEMENT CORP.
|
||
|
Date: November 10, 2022
|
By:
|
/s/ Jeffrey Holman
|
|
Jeffrey Holman
|
||
|
Chief Executive Officer
|
||
|
Date: November 10, 2022
|
By:
|
/s/ John Ollet
|
|
John Ollet
|
||
|
Chief Financial Officer
|
||
TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial StatementsNote 1. OrganizationNote 2. LiquidityNote 3. Basis Of Presentation and Significant Accounting PoliciesNote 4. Concentrations Cash and Cash Equivalents and Restricted CashNote 4. ConcentrationsNote 5. Segment Information and Disaggregation Of RevenuesNote 6. Notes Receivable and Other IncomeNote 7. Acquisition Of Mother Earth S Storehouse, IncNote 8. Property & EquipmentNote 9. Intangible AssetsNote 10. Contract LiabilitiesNote 11. DebtNote 12. Stockholders EquityNote 13. Commitments and ContingenciesNote 14. Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of Condensed Consolidated OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits