UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
For
the quarterly period ended
Or
For the transition period from _____ to _____
Commission
file number:
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
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.
☒
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).
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐
Yes
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| OTC Pink Marketplace |
As of May 8, 2024, there were shares of the registrant’s common stock, par value $0.0001 per share, outstanding.
TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTHIER CHOICES MANAGEMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2024 | December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalent | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and vendor deposits | ||||||||
| Assets held for sale | ||||||||
| Other current assets | ||||||||
| Restricted cash | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property, plant, and equipment, net of accumulated depreciation | ||||||||
| Intangible assets, net of accumulated amortization | ||||||||
| Right of use asset – operating lease, net | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Contract liabilities | ||||||||
| Line of credit | ||||||||
| Current portion of loan payment | ||||||||
| Operating lease liability, current | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Loan payable, net of current portion | ||||||||
| Operating lease liability, net of current | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES (SEE NOTE 13) | ||||||||
| CONVERTIBLE PREFERRED STOCK | ||||||||
| Series E redeemable convertible preferred stock, $par value per share, shares authorized, shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively: aggregate liquidation preference of $ | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common Stock, $ par value per share, shares authorized; shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements
| 3 |
HEALTHIER CHOICES MANAGEMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| SALES | ||||||||
| Vapor sales, net | $ | $ | ||||||
| Grocery sales, net | ||||||||
| TOTAL SALES, NET | ||||||||
| Cost of sales vapor | ||||||||
| Cost of sales grocery | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES | ||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Loss on investment | ( | ) | ( | ) | ||||
| Other income (expense), net | ( | ) | ||||||
| Interest (expense) income, net | ( | ) | ||||||
| Total other income (expense), net | ( | ) | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Induced conversions of Preferred Stock | ( | ) | ||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
| NET LOSS PER SHARE-BASIC AND DILUTED | $ | $ | ||||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC AND DILUTED | ||||||||
See notes to unaudited condensed consolidated financial statements
| 4 |
HEALTHIER CHOICES MANAGEMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2024 and 2023
(Unaudited)
Series E Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance – January 1, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||
| Balance – March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Series E Convertible Preferred Stock | Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
| Balance – January 1, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Series E convertible preferred stock redeemed | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Conversion of series E convertible preferred stock | ( | ) | ( | ) | - | |||||||||||||||||||||||||||||||
| Induced conversions of preferred stock | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | ||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance – March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements
| 5 |
HEALTHIER CHOICES MANAGEMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Loss on investment | ||||||||
| Amortization of right-of-use asset | ||||||||
| Write-down of obsolete and slow-moving inventory | ||||||||
| Stock-based compensation expense | ||||||||
| Change in contingent consideration | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and vendor deposits | ( | ) | ||||||
| Other current assets | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Contract liabilities | ( | ) | ||||||
| Lease liability | ( | ) | ( | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Collection of note receivable | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Payments for deferred offering costs | ( | ) | ||||||
| Proceeds from security purchase agreement | ||||||||
| Principal payments on loan payable | ( | ) | ( | ) | ||||
| Payment of induced conversions of preferred stock | ( | ) | ||||||
| Payment for series E preferred stock redemption | ( | ) | ||||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | ( | ) | ||||||
| NET DECREASE IN CASH, CASH EQUIVALENT AND RESTRICTED CASH | ( | ) | ( | ) | ||||
| CASH, CASH EQUIVALENT AND RESTRICTED CASH— BEGINNING OF PERIOD | ||||||||
| CASH, CASH EQUIVALENT 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 | ||||||||
| Non-cash deferred offering cost | $ | $ | ||||||
| Issuance of common stock in connection with series E preferred stock conversion | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
| Accrued payment of induced conversions of preferred stock | $ | $ | ||||||
See
notes to unaudited condensed consolidated financial statements
| 6 |
HEALTHIER CHOICES MANAGEMENT CORP.
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.
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 subsidiary Healthy Choice Wellness Corp. (“HCWC”), 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 |
| ● | Mother
Earth’s Storehouse, a |
| ● | Greens
Natural Foods’ |
| ● | Ellwood Thompson’s, an organic and natural health food and vitamin store located in Richmond, Virginia. |
Through its wholly owned subsidiary, Healthy Choice Wellness, LLC, the Company operates a Healthy Choice Wellness Center in Kingston, NY and has a licensing agreement for a Healthy Choice Wellness Center located at the Casbah Spa and Salon in Fort Lauderdale, FL.
These centers offer multiple vitamin drip mixes and intramuscular shots 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 IV vitamin mixes and shots for health, beauty, and re-hydration.
Through its wholly owned subsidiary, Healthy Choice Wellness II, LLC, the Company entered into a joint venture with an established healthcare provider, and the joint venture is in the process of creating a structure whereby it will engage in telemedicine evaluations of patients for semaglutide therapy. The operation will encompass, generally: medical evaluations of patients; treatment of patients with semaglutide; coordination with providers and patients. There was no activity for the quarter ended March 31, 2024.
Through its wholly owned subsidiary, Healthy U Wholesale, 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 the Q-Cup™ technology under the vape segment; this patented technology is based on a small, quartz cup called the Q-Cup™, which a customer partially fills with either cannabis or CBD concentrate (approximately 50mg) purchased from a third party. The Q-Cup™ is then inserted into the Q-Cup™ Tank or Globe, that heats the cup from the outside without coming in direct contact with the solid concentrate. This Q-Cup™ technology provides significantly more efficiency and an “on the go” solution for consumers who prefer to vape concentrates either medicinally or recreationally.
| 7 |
Spin-Off
The Company intends 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 would distribute all the outstanding shares of Common Stock held by it on a pro rata basis to holders of HCMC’s common stock. Each share of HCMC’s common stock outstanding as of the record date for the Spin-Off (the “Record Date”), will entitle the holder thereof to receive shares of Common Stock in NewCo. The distribution will be made in book-entry form by a distribution agent. Fractional shares of Common Stock will not be distributed in the Spin-Off and any fractional amounts will be rounded down. Please see more disclosure in Note 12 Stockholder Equity.
Note 2. GOING CONCERN AND MANAGEMENT’S PLANS
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. As of March 31, 2024, the Company had cash
and cash equivalent of approximately $
The Company contracted a third-party consultant, whose expertise is streamlining operations, to identify areas of improvement and cost savings. The Company will enact the consultant’s recommendation in anticipation of realizing savings and achieving profitability. The Company plans on evaluating non-performing stores and continuing to expand via acquisition which will help achieve profitability. Also, the Company is formulating plans to raise capital from outside investors, as it has done in the past, to fund operating losses and also provide capital for further business acquisitions. The result of the capital raise is to improve the Company’s operating and financial performance. The success of these plans is dependent upon various factors, foremost being the ability to reduce outside consulting expenses and the ability to secure additional capital from outside investors. There can be no assurance that such plans will be successful.
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 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, 2023, filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2024. The condensed consolidated balance sheet as of December 31, 2023 was derived from the Company’s audited 2023 financial statements contained in the above referenced Form 10-K. Results of the three months ended March 31, 2024, are not necessarily indicative of the results to be expected for the full year ending December 31, 2024.
| 8 |
Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2023 Annual Report.
Note 4. CONCENTRATIONS
Cash, Cash Equivalent 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
equivalent. The majority of the Company’s cash and cash equivalent are concentrated in one large financial institution, which
is in excess of Federal Deposit Insurance Corporation (FDIC) coverage. The balance of cash equivalent was approximately $
A
summary of the financial institution that had cash and cash equivalent in excess of FDIC limits of $
| March 31, 2024 | December 31, 2023 | |||||||
| Total cash and cash equivalent 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 has not experienced any losses in such accounts.
The following table provides a reconciliation of cash, cash equivalent and restricted cash to amounts shown in unaudited condensed consolidated statements of cash flow:
| March 31, 2024 | March 31, 2023 | |||||||
| Cash and cash equivalent | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash 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 securities 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. The balance also included cash held in the collateral account to cover the cash draw from the line of credit.
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.
| 9 |
The Company reports the following segments in accordance with management guidance: Vapor and Grocery. When the Company prepares its internal management reporting to evaluate business performance, we disaggregate revenue into the following categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Vapor | $ | $ | ||||||
| Grocery | ||||||||
| Total revenue | $ | $ | ||||||
| Wholesale/Online Vapor | $ | $ | ||||||
| Retail Grocery | ||||||||
| Food service/restaurant | ||||||||
| Online/eCommerce | ||||||||
| Total revenue | $ | $ | ||||||
| Loss from operations - Vapor | ( | ) | ( | ) | ||||
| Income (loss) from operations - Grocery | ( | ) | ||||||
| Corporate items | ( | ) | ( | ) | ||||
| Total loss from operations | $ | ( | ) | $ | ( | ) | ||
Note 6. ACQUISITION
Ellwood Thompson’s
On October 1, 2023, the Company through its wholly owned subsidiary, Healthy Choice Markets V, LLC, entered into an Asset Purchase Agreement with (i) ET Holding, Inc., d/b/a Ellwood Thompson’s Local Market, a Virginia corporation, (ii) Ellwood Thompson’s Natural Market, L.C., a Virginia limited liability company, and (iii) Richard T. Hood, an individual resident of the Commonwealth of Virginia. Pursuant to the Purchase Agreement, the Company acquired certain assets and assumed certain liabilities related to Ellwood Thompson’s grocery stores in Richmond, Virginia. The Company intends to continue to operate the grocery stores under their existing name.
The
cash purchase price under the Asset Purchase Agreement was $
The following table summarizes the purchase price allocation based on fair values of the net assets acquired at the acquisition date:
| October 1, 2023 | ||||
| Purchase Consideration | ||||
| Cash consideration paid | $ | |||
| Promissory note | ||||
| Total Purchase Consideration | $ | |||
| Purchase price allocation | ||||
| Inventory | $ | |||
| Intangible assets | ||||
| Right of use asset - Operating lease | ||||
| Other liabilities | ( | ) | ||
| Operating lease liability | ( | ) | ||
| Goodwill | ||||
| Net assets acquired | $ | |||
| Finite-lived intangible assets | ||||
| Trade Names (8 years) | $ | |||
| Total intangible assets | $ | |||
The
acquisition is structured as asset purchase in a business combination, and goodwill is tax-deductible, and amortizable over
| 10 |
Revenue and Earnings
The following unaudited pro forma summary presents consolidated information of the Company, including Ellwood Thompson’s, as if the business combinations had occurred on January 1, 2023, the earliest period presented herein:
For Three Months Ended March 31, 2023 | ||||
| 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. The proforma data gives effects to actual operating results prior to the acquisition. These proforma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisitions occurred as of the beginning of each period presented or that may be obtained in future periods.
Note 7. ASSETS HELD FOR SALE
On
February 7, 2024, the Company closed the operation of the Saugerties store. The decision was based on management’s plan to maximize
the profitability of the grocery segment. The Company transferred all operating assets and liabilities to other neighboring stores. The
building, which is owned by the Company, has a net carrying value of approximately $
Note 8. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following:
| March 31, 2024 | December 31, 2023 | |||||||
| Displays | $ | $ | ||||||
| Building | ||||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Computer hardware & equipment | ||||||||
| Other | ||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Total property, plant, and equipment | $ | $ | ||||||
The
Company incurred approximately $
| 11 |
Note 9. INTANGIBLE ASSETS
Intangible assets, net are as follows:
| March 31, 2024 | Useful Lives (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Trade names | $ | $ | ( | ) | $ | |||||||||
| Customer relationships | ( | ) | ||||||||||||
| Patents | ( | ) | ||||||||||||
| Non-compete | ( | ) | ||||||||||||
| Intangible assets, net | $ | $ | ( | ) | $ | |||||||||
| December 31, 2023 | Useful Lives (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Trade names | $ | $ | ( | ) | $ | |||||||||
| Customer relationships | ( | ) | ||||||||||||
| Patents | ( | ) | ||||||||||||
| Non-compete | ( | ) | ||||||||||||
| Intangible assets, net | $ | $ | ( | ) | $ | |||||||||
Intangible
assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense was approximately $
| Years ending December 31, | ||||
| 2024 (remaining nine months) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
Note 10. CONTRACT LIABILITIES
A summary of the net changes in contract liabilities activity at March 31, 2024 and December 31, 2023 is presented below:
| March 31, 2024 | December 31, 2023 | |||||||
| Beginning balance as January 1, | $ | $ | ||||||
| Issued | ||||||||
| Redeemed | ( | ) | ( | ) | ||||
| Breakage recognized | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
Note 11. DEBT
A breakdown of the Company’s debt as of March 31, 2024 and December 31, 2023 is presented below:
| March 31, 2024 | December 31, 2023 | |||||||
| Promissory notes | $ | $ | ||||||
| Debt discount | ( | ) | ||||||
| Line of credit | ||||||||
| Total debt, net of debt discount | $ | $ | ||||||
| Current portion of long-term debt | ( | ) | ( | ) | ||||
| Long-term debt | $ | $ | ||||||
| 12 |
Promissory Notes
In
connection with the Green’s Natural Foods acquisition, on October 14, 2022, the Company issued a secured promissory note (the “Greens
Note”) in the principal amount of $
In
connection with the Ellwood Thompson’s acquisition, on October 1, 2023, the Company issued a secured promissory note (the “Ellwood
Note”) in the principal amount of $
On
January 18, 2024, HCWC entered into a Securities Purchase Agreement (the “Bridge Financing”) with institutional
investors whereby (a) HCWC issued a total of approximately $
The Company may, at its option, at any time or from time to time prepay the outstanding principal amount or any accrued but unpaid interest, in each case in whole or in part, without penalty or premium, provided that any such prepayment of any outstanding amount of principal shall be accompanied by the payment of all accrued but unpaid interest on the amount of principal being prepaid, plus any costs and fees incurred.
The following table summarizes the 5-year repayment schedule:
| For the years ending December 31, | ||||
| 2024 (remaining nine months) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total | $ | |||
| 13 |
Note 12. STOCKHOLDERS’ EQUITY
Series E Convertible Preferred Stock
On
August 18, 2022, the Company entered into a Securities Purchase Agreement (“Series E Preferred Stock”) pursuant to which
the Company sold and issued shares of its Series E Redeemable Convertible Preferred Stock to institutional investors for $
per share or an aggregate subscription of $million. The number of shares issued to each participant is based on subscription amount
multiplied by conversion rate of
The
HCMC Series E 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 Series E 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 Series E Preferred Stock, (a) alter or change adversely the powers,
preferences or rights given to the HCMC Series E Preferred Stock or alter or amend the Certificate of Designation, (b) increase the number
of authorized shares of HCMC Series E Preferred Stock, or (c) enter into any agreement with respect to any of the foregoing. Each share
of Series E 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 initial conversion price for the HCMC Series E Preferred
Stock shall equal $
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 Series E Preferred Stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to $ per share of Series E 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 Series E 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.
On
March 1, 2023, the Company entered into a First Amendment to HCMC Series E Preferred Stock with each purchaser (“Purchaser”)
identified as those who participated in the HCMC Series E Preferred Stock, dated as of August 18, 2022. The parties amended the HCMC
Preferred Stock related to the conversion payment whereby upon conversion of the Series E Preferred Stock prior to the record date for
the Spin-Off, the Company will pay the Purchaser ten percent (
On
May 15, 2023, the Company and the Purchaser entered into the Second Amendment to the Securities Purchase Agreement, pursuant to which
the Company agreed to extend the time period for the Conversion Payment eligibility to December 1, 2023. The Company filed an amendment
to the Certificate of Designation to make the redemption price of the Preferred Stock (the “Redemption Price”) equal the
Stated Value regardless of the date on which it is redeemed.
On
October 30, 2023, the Company entered into a Third Amendment to the Securities Purchase Agreement with its Series E Redeemable Convertible
Preferred Stock purchasers. The parties agreed to:
| 14 |
On February 20, 2024, the Company entered into a Fourth Amendment to the Securities Purchase Agreement with its Series E Redeemable Convertible Preferred Stock purchasers, pursuant to which the Company and such parties agreed to amend the date on which the obligation to acquire the Series A Preferred Stock ceases to June 1, 2024.
Through March 31, 2024, shares of Series E preferred stock have been cumulatively converted into shares of common stock as a result of
the Series E preferred stock conversion, and shares of Series E preferred stock have been cumulatively redeemed, and approximately $
Pursuant to the Securities Purchase Agreement, purchasers of the Series E Convertible Preferred Stock will also be required to purchase Series A Convertible Preferred Stock of NewCo resulting from spin off of HCMC’s grocery and wellness businesses in the same subscription amounts that the Purchasers paid for the HCMC Series E Preferred Stock.
Spin-Off
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. Each share of HCMC’s common stock outstanding as the record date for the Spin-Off (the “Record Date”), will entitle the holder thereof to receive shares of Common Stock in NewCo. The distribution will be made in book-entry form by a distribution agent. Fractional shares of Common Stock will not be distributed in the Spin-Off and any fractional amounts will be rounded down.
Pursuant to the Securities Purchase Agreement, purchasers of the Series E Convertible Preferred Stock will also be required to purchase Series A Convertible Preferred Stock (“NewCo Series A Stock”) of a newly created 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.
On October 27, 2023, the Company filed a new registration statement on Form S-1 (the “Spin-off S-1”) in connection with the spin-off of all of the existing HCWC common stock by Healthier Choices Management Corp. with the Securities and Exchange Commission (the “Commission”).
On October 30, 2023, the Company filed Amendment No. 1 to its registration statement on Form S-1 (the “IPO S-1”) with the Commission.
On December 20, 2023, the Company filed Amendment No. 1 to its Spin-off S-1 with the Commission.
On December 21, 2023, the Company filed Amendment No. 2 to its IPO S-1 with the Commission.
On February 13, 2024, the Company filed Amendment No. 2 to its Spin-off S-1 with the Commission with respect to the Spin-Off.
On February 13, 2024, the Company filed Amendment No. 3 to its IPO S-1 with the Commission with respect to the IPO.
Stock Options
During the three months ended March 31, 2024 and 2023, the Company recognized stock-based compensation of approximately $ and $, respectively in connection with amortization of restricted stock and stock options. Stock based compensation is included as part of selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations.
| 15 |
Income (Loss) Per Share
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| Preferred stock | ||||||||
| Stock options | ||||||||
| Restricted stock | ||||||||
| Total | ||||||||
Note 13. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
There
were two lawsuits in connection with alleged claimed battery defects for an electronic cigarette device. One has been dismissed by
the court wherein the plaintiff settled with the Company’s insurance carrier with no economic impact to the Company. In the
second lawsuit, as of December 31, 2023, the Company had reached an arrangement with the plaintiff to resolve the matter, limiting
potential exposure to $
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
On
December 31, 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 $
On
April 12, 2023, the U.S. Court of Appeals for the Federal Circuit ruled in favor of HCMC on
In
the first appeal, HCMC appealed the ruling of the District Court dismissing HCMC’s patent infringement action and denying HCMC’s
motion to amend its pleading. In the second appeal, HCMC appealed the District Court’s award of attorneys’ fees to Philip
Morris. In its decisions, the Federal Circuit ruled for HCMC by reversing both of those decisions and remanded the case back to the District
Court for further proceedings. As a result of the ruling, the Company reversed the $
| 16 |
On September 26, 2023, HCMC filed a patent infringement lawsuit against R.J. Reynolds Vapor Company (“RJR”) in the U.S. District Court for the Middle District of North Carolina in connection with HCMC’s assertions that RJR’s Vuse electronic cigarette infringes one of HCMC’s patents.
On July 7, 2023, the Company entered into a patent licensing agreement for one of its patents in the vape segment. The Company as the licensor, grants to licensee during the term a non-exclusive right and license under the Licensed Patents to make, use, offer to sell, sell, and import licensed products in the territory of the United States of America. The licensee will pay to the licensor a royalty based on net sales of all licensed products in the territory during the term of the agreement. Either party can cancel the agreement with 60-days written notice. The Company is still in the process of building this operation, and no product sales or no royalties earned as of the date of this filing.
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 March 31, 2024. With respect to legal costs, we record such costs as incurred.
Note 14. SUBSEQUENT EVENTS
On April 8, 2024, the parties to the SPA entered into a Fifth Amendment to the August 18, 2022 Securities Purchase Agreement, pursuant to which the Company and such parties agreed to amend the Completion Date to August 1, 2024.
On April 11, 2024, the Company filed Amendment No. 1 on Form 8-K/A to the Form 8-K filed on January 23, 2024, which terminated the existing obligation for institutional investors to purchase HCWC’s Class A common stock in the IPO and replaced the Bridge Shares with Bridge Warrants. The Bridge Warrants will entitle the holders thereof to purchase shares of HCWC’s Class A common stock (the “Bridge Warrant Shares”) at a nominal exercise price of $ per share at any time on or after HCWC’s registration statement on Form S-1 for the initial registration of the Class A common stock (the “IPO”) is declared effective by the United State Securities and Exchange Commission.
On April 12, 2024, the Company granted and issued shares of restricted stocks to an employee. The award commences vesting of % on February 1, 2024 and remainder will vest % increments on the last day of each calendar quarter thereafter through September 30, 2025.
| 17 |
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 Wellness Corp., 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”), Healthy Choice Markets V, LLC (“Ellwood Thompson’s), HCMC Intellectual Property Holdings, LLC, Healthy Choice Wellness, LLC, Healthy Choice Wellness II, 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 Wellness Corp., Healthy Choice Markets, Inc., Healthy Choice Markets 2, LLC, and Healthy Choice Markets 3, LLC, Healthy Choice Markets IV, LLC and Healthy Choice Markets V, 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 (www.Adasmarket.com) | |
| ● | 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, (www.ParadiseHealthDirect.com) | |
| ● | 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 (www.MotherEarthStorehouse.com). | |
| ● | Greens Natural Foods’ eight stores in New York and New Jersey, 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 (www.Greensnaturalfoods.com). | |
| ● | Ellwood Thompson’s, an organic and natural health food and vitamin store located in Richmond, Virginia. (www.ellwoodthompsons.com). |
Through its wholly owned subsidiary, Healthy Choice Wellness, LLC, the Company operates a Healthy Choice Wellness Center in Kingston, NY and has a licensing agreement for a Healthy Choice Wellness Center located at the Casbah Spa and Salon in Fort Lauderdale, FL.
Through its wholly owned subsidiary, Healthy Choice Wellness II, LLC, the Company entered into a joint venture with an established healthcare provider, and the joint venture is in the process of creating a structure whereby it will engage in telemedicine evaluations of patients for semaglutide therapy. The operation will encompass, generally: medical evaluations of patients; treatment of patients with semaglutide; coordination with providers and patients.
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.
| 18 |
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 currently and historically has reported net losses and cash outflows from operations. As of March 31, 2024, the Company had cash and cash equivalent of approximately $3.9 million and negative working capital of $1.5 million. Management has made plans to reduce certain costs and raise needed capital, however there can be no assurance the Company can successfully implement these plans. The Company anticipates its current cash and cash generated from operations will not be sufficient to meet projected operating expenses for the foreseeable future through at least twelve months from the issuance of the consolidated financial statements.
The Company contracted a third-party consultant, whose expertise is streamlining operations, to identify areas of improvement and cost savings. The Company will enact the consultant’s recommendation in anticipation of realizing savings and achieving profitability. The Company plans on evaluating non-performing stores and continuing to expand via acquisition which will help achieve profitability. Also, the Company is formulating plans to raise capital from outside investors, as it has done in the past, to fund operating losses and also provide capital for further business acquisitions. The result of the capital raise is to improve the Company’s operating and financial performance. The success of these plans is dependent upon various factors, foremost being the ability to reduce outside consulting expenses and the ability to secure additional capital from outside investors. There can be no assurance that such plans will be successful.
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 ten located in New York and New Jersey. The Company has closed retail vape stores, as management has shifted its retail sales focus to the wholesale and online channel. The adverse industry trends and increasing federal and state regulations that, if implemented, may negatively impact future wholesale and online operations in the vapor segment.
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.
Results of Operations
The following table sets forth our unaudited condensed consolidated Statements of Operations for the three months ended March 31, 2024 and 2023 that is used in the following discussions of our results of operations:
| Three Months Ended March 31, | 2024 to 2023 | |||||||||||
| 2023 | 2023 | Change $ | ||||||||||
| SALES | ||||||||||||
| Vapor sales, net | $ | 119 | $ | 38 | $ | 81 | ||||||
| Grocery sales, net | 15,894,358 | 13,559,706 | 2,334,652 | |||||||||
| TOTAL SALES, NET | 15,894,477 | 13,559,744 | 2,334,733 | |||||||||
| Cost of sales vapor | 132 | 653 | (521 | ) | ||||||||
| Cost of sales grocery | 9,839,981 | 8,644,700 | 1,195,281 | |||||||||
| GROSS PROFIT | 6,054,364 | 4,914,391 | 1,139,973 | |||||||||
| OPERATING EXPENSES | ||||||||||||
| Selling, general and administrative | 8,859,017 | 6,897,438 | 1,961,579 | |||||||||
| LOSS FROM OPERATIONS | (2,804,653 | ) | (1,983,047 | ) | (821,606 | ) | ||||||
| OTHER INCOME (EXPENSE) | ||||||||||||
| (Loss) gain on investment | (857 | ) | (4,457 | ) | 3,600 | |||||||
| Other income (expense), net | 3,355 | (17,450 | ) | 20,805 | ||||||||
| Interest income | (58,992 | ) | 97,653 | (156,645 | ) | |||||||
| Total other income (expense), net | (56,494 | ) | 75,746 | (132,240 | ) | |||||||
| NET LOSS | $ | (2,861,147 | ) | $ | (1,907,301 | ) | $ | (953,846 | ) | |||
| 19 |
Net vapor sales remained approximately unchanged for the three months ended March 31, 2024 as compared to the same period in 2023. The Company closed all its brick-and-mortar retail vape stores, as management had shifted its retail sales focus to the wholesale and online channel. The sales for the three months ended March 31, 2024 and 2023 continued to be significantly impacted by technical issues associated with the processing of credit card payments on the Q-Cup.com website and the inability to bring new products to market via distribution.
Net grocery sales increased $2.3 million to $15.9 million for the three months ended March 31, 2024 as compared to $13.6 million for the same period in 2023. The increase in grocery sales was primarily due to the acquisition of Ellwood Thompson’s, offset by a slight decrease in same-store sales of $0.6 million; this was in large part attributable to the closing of the non-performing Saugerties store and the outsourced prepared food service in Ada’s Natural Food store which was an underperforming department.
Vapor cost of goods sold for the three months ended March 31, 2024 and 2023 remained unchanged. The Company closed all its brick-and-mortar retail vape stores, as management has shifted its retail sales focus to the wholesale and online channel. The cost of goods sold for the three months ended March 31, 2024 and 2023 continued to be significantly impacted by technical issues associated with the processing of credit card payments on the Q-Cup.com website and the inability to bring new products to market via distribution.
Grocery cost of goods sold for the three months ended March 31, 2024 and 2023 were $9.8 million and $8.6 million, respectively. The increase of $1.8 million is primarily due to the acquisition of Ellwood Thompson’s, offset by a decrease in same-store cost of goods sold of $0.6 million. Gross profit was $6.1 million and $4.9 million for the three months ended March 31, 2024 and 2023, respectively. Gross margin as a percentage of sales increased approximately 2.0% as compared to the same period in prior year because of the closing of the non-performing Saugerties store and the outsourced prepared food service in Ada’s Natural Food store which was an underperforming department.
Total operating expenses increased $2.0 million to $8.9 million for the three months ended March 31, 2024 compared to $6.9 million for the same period in 2023. The increase is primarily due to the acquisition of Ellwood Thompson’s on October 1, 2023 which accounted for $0.9 million of operating expenses as well as the increase in stock-based compensation expense of $1.1 million.
Total other (expenses) income, net of $56,000 for the three months ended March 31, 2024 consists of net interest expense of $59,000, offset by $3,000 other income. Total other (expenses) income, net of $76,000 for the three months ended March 31, 2023 consists of interest income of $98,000 and other expense of $22,000.
Liquidity and Capital Resources
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net cash (used in) provided by | ||||||||
| Operating activities | $ | (2,374,113 | ) | $ | (2,344,310 | ) | ||
| Investing activities | (121,405 | ) | (109,931 | ) | ||||
| Financing activities | 1,319,233 | (742,164 | ) | |||||
| $ | (1,176,285 | ) | $ | (3,196,405 | ) | |||
| 20 |
Our net cash used in operating activities of approximately $2.4 million for the three months ended March 31, 2024 resulted from a net loss of $2.9 million, offset by a non-cash adjustment of $3.0 million and a net cash usage of $2.5 million from changes in operating assets and liabilities. Our net cash used in operating activities of approximately $2.3 million for the three months ended March 31, 2023 resulted from a net loss of $1.9 million, offset by a non-cash adjustment of $1.7 million and a net cash usage of $2.1 million from changes in operating assets and liabilities.
The net cash used in investing activities of $0.1 million for the three months ended March 31, 2024 resulted from purchases of property and equipment. The net cash used in investing activities of $0.1 million for the three months ended March 31, 2023 resulted from collection on a note receivable and purchases of property and equipment.
The net cash provided by financing activities of $1.3 million for the three months ended March 31, 2024 consists of cash proceeds of $1.7 million from Security Purchase Agreement (“SPA”) signed on January 18, 2024, principal payment on loan payable of $0.2 million, and payment for deferred offering cost of $0.2 million. The net cash used in financing activities of $0.7 million for the three months ended March 31, 2023 is due to Series E Preferred Stock redemption and exercise and principal payment on loan payable.
At March 31, 2024 and December 31, 2023, 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 equivalent are concentrated in one financial institution and is generally in excess of the FDIC insurance limit. The Company has not experienced any losses on its cash. The following table presents the Company’s cash position as of March 31, 2024 and December 31, 2023.
| March 31, 2024 | December 31, 2023 | |||||||
| Cash and cash equivalent | $ | 3,904,801 | $ | 5,081,086 | ||||
| Total assets | $ | 29,131,526 | $ | 30,969,579 | ||||
| Percentage of total assets | 13.40 | % | 16.41 | % | ||||
The Company reported a net loss of $2.9 million for the three months ended March 31, 2024. The Company also had negative working capital of $1.5 million. The Company expects to continue incurring losses for the foreseeable future. Management has made plans to reduce certain costs and raise needed capital, however there can be no assurance the Company can successfully implement these plans. The Company anticipates its current cash and cash generated from operations will not be sufficient to meet projected operating expenses for the foreseeable future through at least twelve months from the issuance of the 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.
| 21 |
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 2023 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
We are required to report under Section 404(a) of Sarbanes-Oxley regarding the effectiveness of our internal control over financial reporting.
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 March 31, 2023 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.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its internal control over financial reporting based on the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal control over financial reporting was ineffective as of March 31, 2024 and noted the material weaknesses 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. |
| 22 |
| ● | Weakness around 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. | |
| ● | Failure to follow accounts payable policies and procedures for vendor information updates. | |
| ● | The Company had ineffective design, implementation and, operation of controls over logical access, program change management, and vendor management controls. The Company controls on IT should have included the following: |
| ○ | Appropriate restrictions that would adequately prevent users from gaining inappropriate access to the financially relevant systems. | ||
| ○ | IT program and data changes affecting the Company’s financial IT applications and underlying accounting records, should be identified, tested, authorized and implemented appropriately to validate that data produced by its relevant IT system(s) were complete and accurate. | ||
| ○ | Obtaining and reviewing key third party service provider SOC reports. |
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 March 31, 2023 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. | |
| ● | Establishing policies and procedures in the IT area to mitigate data breach, unauthorized access and address segregation of duties, as well as review key third party service provider SOC reports. | |
| ● | Using business intelligence to combine business analytics, data tools and infrastructure to help the Company quickly identify the issues in POS system and facilitate internal control over financial reporting. Developing dashboards for operation to monitor the margin at store level, department level and sku level. | |
| ● | Establishing procedures and enforcing quarterly perishable physical inventory count for all retail stores and analyzing the financial impacts to improve efficiency in inventory control and purchase control. | |
| ● | Providing sufficient training to accounts payable associates and enforcing accounts payable policies and procedures. |
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 March 31, 2024, 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.
| 23 |
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There were two lawsuits in connection with alleged claimed battery defects for an electronic cigarette device. One has been dismissed by the court wherein the plaintiff settled with the Company’s insurance carrier with no economic impact to the Company. In the second lawsuit, as of December 31, 2023, the Company had reached an arrangement with the plaintiff to resolve the matter, limiting potential exposure to $1.5 million. While this arrangement is presently not formalized by a signed agreement, the Company has accrued a liability of $1.5 million at December 31, 2023, which was reflected in accounts payable and accrued expenses, to represent management’s estimate of the probable settlement amount based on the current status of discussions. The settlement remains subject to finalization, and until a definitive agreement is executed, no assurance can be given that the outcome will differ from this accrual. The case has been removed from the court’s trial calendar.
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. HCMC appealed this ruling on June 22, 2022.
On April 12, 2023, the U.S. Court of Appeals for the Federal Circuit ruled in favor of HCMC on two separate appeals it had filed in its patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. pending in the district court for the Northern District of Georgia.
In the first appeal, HCMC appealed the ruling of the District Court dismissing HCMC’s patent infringement action and denying HCMC’s motion to amend its pleading. In the second appeal, HCMC appealed the District Court’s award of attorneys’ fees to Philip Morris. In its decisions, the Federal Circuit ruled for HCMC by reversing both of those decisions and remanded the case back to the District Court for further proceedings.
On September 26, 2023, HCMC filed a patent infringement lawsuit against R.J. Reynolds Vapor Company (“RJR”) in the U.S. District Court for the Middle District of North Carolina in connection with HCMC’s assertions that RJR’s Vuse electronic cigarette infringes one of HCMC’s patents.
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 March 31, 2023. With respect to legal costs, we record such costs as incurred.
ITEM 1A. RISK FACTORS.
Not Applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In connection with the Bridge Financing, in addition to the Notes, HCWC issued Bridge Warrants will entitle the holders thereof to purchase 188,889 shares of HCWC’s Class A common stock (the “Bridge Warrant Shares”) at a nominal exercise price of $0.01 per share, at any time on or after HCWC’s registration statement on Form S-1 for the initial registration of the Class A common stock (the “IPO”) is declared effective by the United State Securities and Exchange Commission. HCWC has agreed to register all of the Bridge Warrant Shares in connection with the IPO. The issuance of the Notes and the Bridge Warrants are exempt from registration pursuant to the provisions Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D, as promulgated by the Commission, on the basis that the Issuer and HCWC had a pre-existing relationship with the investor and there was no public offering. The Bridge Warrants may not be offered or sold absent their registration for resale or the availability of an exemption therefrom. HCWC expects to use the proceeds from the sale of the Securities for general working capital purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS.
See the exhibits listed in the accompanying “Index to Exhibits.”
| 24 |
INDEX TO EXHIBITS
| Exhibit | Incorporated by Reference | Filed or Furnished | ||||||||
| No. | Exhibit Description | Form | Date | Number | Herewith | |||||
| 31.1 | Certification of Principal Executive Officer (302) | Filed | ||||||||
| 31.2 | Certification of Principal Financial Officer (302) | Filed | ||||||||
| 32.1 | Certification of Principal Executive Officer (906) | Furnished * | ||||||||
| 32.2 | Certification of Principal Financial Officer (906) | Furnished * | ||||||||
| 101.INS | Inline XBRL Instance Document | Filed | ||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed | ||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed | ||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed | ||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed | ||||||||
| 101.PRE | Inline 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.
| 25 |
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: May 9, 2024 | By: | /s/ Jeffrey Holman |
| Jeffrey Holman | ||
| Chief Executive Officer | ||
| Date: May 9, 2024 | By: | /s/ John Ollet |
| John Ollet | ||
| Chief Financial Officer | ||
| 26 |