Healthier Choices Management Corp.: Form 10-Q for the period ended Sep 30, 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, 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 (http://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 (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 $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 we 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:

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:

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

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 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 $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.

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.

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.