Healthier Choices Management Corp.: Form 10-Q for the period ended Mar 31, 2022

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, HCMC Intellectual Property Holdings, LLC, Healthy Choice Wellness, LLC, The Vitamin Store, LLC, Healthy U Wholesale, Inc., The Vape Store, Inc. (“Vape Store”), Vaporin, Inc. (“Vaporin”), Smoke Anywhere U.S.A., Inc. (“Smoke”), Emagine the Vape Store, LLC (“Emagine”), IVGI Acquisition, Inc., Vapormax Franchising LLC, Vaporin LLC, and Vaporin Florida, Inc. All intercompany accounts and transactions have been eliminated in consolidation.

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 subsidiary, Healthy Choice Wellness, LLC, the Company operates:

• Healthy Choice Wellness Center (Roslyn Heights, NY) a corporately owned IV therapy center offering multiple IV drip “cocktails” for clients to choose from. These cocktails 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.
• The Company also has a licensing agreement for a Healthy Choice Wellness Center at the Casbah Spa and Salon in Fort Lauderdale, FL, offering essentially the same services as the Roslyn Heights, NY location.

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 (http://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 (http://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 $1.4 million for the three months ended March 31, 2022. As of March 31, 2022, cash and cash equivalents totaled approximately $20.6 million. The Company expects to continue incurring losses for the foreseeable future and we anticipate that our current cash and cash equivalents to be generated from operations will be sufficient to cover our projected operating expenses for the foreseeable future. Management do 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 (1) a total of four retail vape stores and (2) four natural and organic groceries and dietary supplement stores located in Florida, as well as two located in New York. The Company has reduced the number of retail vape stores due to adverse industry trends and increasing federal and state regulations that, if implemented, may negatively impact future retail revenues.

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 March 31, 2022 and 2021 that is used in the following discussions of our results of operations:

Net vapor sales decreased approximately $0.4 million to $0.2 million for the three months ended March 31, 2022 as compared to $0.6 million for the same period in 2021. The decrease in sales is primarily due to a decrease in the number of stores open during the three months ended March 31, 2022 as compared to the same period in 2021.

Net grocery sales increased $1.9 million to $4.8 million for the three months ended March 31, 2022 as compared to $2.9 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 March 31, 2022 and 2021 were $0.1 million and $0.2 million, respectively, a decrease of $0.1 million. The decrease is primarily due to decreases in sales and product costs during three months ended March 31, 2022 as compared to the same period in 2021. Gross profit was $0.1 million and $0.4 million for three months ended March 31, 2022 and 2021, respectively.

Grocery cost of goods sold for the three months ended March 31, 2022 and 2021 were $3.0 million and $1.7 million, respectively, an increase of $1.2 million. The increase is primarily due to an increase in the number of stores from the acquisition of Mother Earth's Storehouse during the three months ended March 31, 2022 as compared to the same period in 2021. Gross profit was $1.8 million and $1.1 million for the three months ended March 31, 2022 and 2021, respectively.

Total operating expenses increased $1.3 million to $3.3 million for the three months ended March 31, 2022 compared to $2.0 million for the same period in 2021. The increase is primarily attributable to an increase in professional fees of $0.4 million, payroll and employee related cost of $0.5 million, office and store expense of $0.2 million, occupancy costs of $0.1 million and depreciation and amortization of $0.1 million.

Net other income of $37,000 for the three months ended March 31, 2022 includes other income of $17,000, interest income of $17,000 and a gain on investment of $4,000. Net other expense of $164,000 for the three months ended March 31, 2021 includes a loss on debt settlements of $117,000, interest expense of $73,000, offset by a gain on investment of $26,000.

Liquidity and Capital Resources

Our net cash used in operating activities of approximately $0.7 million for the three months ended March 31, 2022 resulted from a net loss of $1.3 million, offset by a non-cash adjustment of $0.4 million and a net cash provided of $0.2 million from changes in operating assets and liabilities. Our net cash used in operating activities of $0.7 million for the three months ended March 31, 2021 resulted from a net loss of $0.7 million and a net cash usage of $0.3 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 $5.3 million for the three months ended March 31, 2022 resulted from the 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 $18,000 for the three months ended March 31, 2021 resulted from the collection of a note receivable, and purchases of patents and property and equipment.

The net cash provided by financing activities of $35,000 for the three months ended March 31, 2022 is due to proceeds received from the line of credit. The net cash provided by financing activities of $3.1 million for the three months ended March 31, 2021 is due to proceeds received from the Securities Purchase Agreement of $5.0 million, partially offset by a principal payment of $2.0 million on the line of credit.

At March 31, 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 March 31, 2022 and December 31, 2021.

The Company reported a net loss of $1.3 million for the three months ended March 31, 2022. The Company also had positive working capital of $20.2 million. The Company expects to continue incurring losses for the foreseeable future and we do not believe there are any substantial doubts about the Company’s ability to continue as a going concern.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our 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.

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, 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 March 31, 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”).

Changes in Internal Control over Financial Reporting

Following this assessment and during the three months ended March 31, 2022, we have undertaken an action plan to

strengthen internal controls and procedures:

• Management continues to devote significant efforts toward improvement of effectiveness of control over financial reporting. This includes analyzing non-routine transactions before booking journal entries; Implemented a monthly variance fluctuation analysis across all segments. Variance analyses are communicated to operations and executives to make sure the results are accurate.
• Our management has increased 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.
• The Company is evaluating the addition of a new position, Inventory Analyst, to handle all matters related to the implementation of a cycle-count procedure as well as coordinating all physical inventory counts with third parties.
• Vendor payments and cash disbursement are reviewed on weekly basis by management and accounting team to ensure timely payment. Cash balances are communicated to management on weekly basis to improve cash management.

Our management continues to review ways in which we can make improvements in internal control over financial reporting reporting and will further delineate milestones as they are achieved.