NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1. ORGANIZATION, GOING CONCERN, AND BASIS OF PRESENTATION
Organization
Healthier
Choices Management Corp. (the “Company”) is a holding company focused on providing consumers with healthier daily
choices with respect to nutrition and other lifestyle alternatives. The Company operates thirteen vape retail stores in the Southeast
region of the United States of America. The Company offers e-liquids vaporizers and related products through its vape retail stores.
The Company sold its wholesale business on July 31, 2016. The sale of the wholesale business was not contemplated prior to July
1, 2016. The sale of the wholesale business qualifies as a discontinued operation and, accordingly, the Company has excluded results
for the wholesale business operations from the Company’s continuing operations in the unaudited consolidated Statements
of Operations for all periods presented.
On
June 1, 2016, the Company acquired the business assets of Ada’s Whole Food Market LLC, a natural and organic grocery store,
through its wholly owned subsidiary Healthy Choice Markets, Inc. The grocery store has been a leader in the natural grocery market
in Fort Myers, Florida for the past 40 years, offering fresh, natural and organic products and specializing in facilitating a
healthy, well balanced lifestyle. In addition to a comprehensive selection of vitamins and health & beauty products, the grocery
store provides a fresh café and an organic juice bar.
Going
Concern and Liquidity
The
accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern
and realization of assets and satisfaction of liabilities in the normal course of business and do not include any adjustments
that might result from the outcome of any uncertainties related to our going concern assessment. The carrying amounts of assets
and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values.
The Company incurred a loss from operations of approximately
$1,740,594 for the three months ended March 31, 2017. As of March 31, 2017, cash and cash equivalents totaled approximately $10,000,000.
While we anticipate that our current cash, cash equivalents, and cash to be generated from operations will be sufficient to meet
our projected operating plans through at least March 31, 2018, should we require additional funds, either through equity or debt
financings or collaborative agreements or from other sources; we have no commitments to obtain such additional financing, and
we may not be able to obtain any such additional financing on terms favorable to us, or at all. If adequate financing is not available,
the Company will further delay, postpone or terminate product and service expansion and curtail certain selling, general and administrative
operations. The inability to raise additional financing may have a material adverse effect on the future performance of the Company.
Sourcing
and Vendors
We
source from multiple suppliers. These suppliers range from small independent businesses to multinational conglomerates. For the
three months ended March 31, 2017, we purchased approximately 75% of the goods we sell from our top 20 suppliers and approximately
40% of our total purchases were from one vendor.
Basis
of Presentation and Principles of Consolidation
The
Company’s unaudited consolidated financial statements are prepared in accordance with GAAP. The unaudited consolidated financial
statements include the accounts of all subsidiaries in which the Company holds a controlling financial interest as of the financial
statement date.
The
unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The terms “we,”
“us,” “our,” and the “Company” refer to Healthier Choices Management Corp. and its wholly-owned
subsidiaries, Healthy Choice Markets, Inc., Vaporin, Inc., The Vape Store, Inc. (“Vape Store”), Smoke Anywhere U.S.A.,
Inc. (“Smoke”), Emagine the Vape Store, LLC (“Emagine”), IVGI Acquisition, Inc., Vapormax Franchising
LLC., Vaporin LLC., Vaporin Florida, Inc., and Healthy Choice Markets, Inc. All intercompany accounts and transactions have been
eliminated in consolidation.
HEALTHIER
CHOICES MANAGEMENT CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unaudited
Interim Financial Information
The
unaudited consolidated financial statements have been prepared by the Company and reflect all normal, recurring adjustments that,
in the opinion of management, are necessary for a fair presentation of the interim financial information. The results of operations
for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for
the year ending December 31, 2017. Certain information and footnotes normally included in financial statements prepared in accordance
with GAAP have been or omitted under the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange
Commission (“SEC”). These unaudited consolidated financial statements and notes included herein should be read in
conjunction with the audited consolidated financial statements and related notes thereto as of and for the year ended December
31, 2016 included in the Company’s Annual Report on Form 10-K for such year as filed with the SEC on March 27, 2017.
Note
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain
prior period amounts in the unaudited consolidated financial statements related to stock splits and the sale of discontinued operations
have been reclassified to conform to the current period’s presentation. No changes to the Company’s net loss were
made as a result of such reclassifications.
Segment
Reporting
Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation
by the operating decision makers, or decision-making group, in making decisions on how to allocate resources and assess performance.
The Company’s decision-making group is the senior executive management team. The Company and the decision-making group views
the Company’s operations and manage its business as two operating segments. All long-lived assets of the Company reside
in the U.S.
Use
of Estimates in the Preparation of the Financial Statements
The
preparation of unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the unaudited consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods.
Actual results could differ from those estimates. These estimates and assumptions include allowances, reserves and write-downs
of receivables and inventory, valuing equity securities and hybrid instruments, share-based payment arrangements, deferred taxes
and related valuation allowances, and the valuation of assets and liabilities acquired in business combinations. Certain of management’s
estimates could be affected by external conditions, including those unique to the Company’s industry, and general economic
conditions. It is possible that these external factors could have an effect on the Company’s estimates that could cause
actual results to differ from those estimates. The Company re-evaluates all of its accounting estimates at least quarterly based
on these conditions and records adjustments when necessary.
Shipping
and Handling
Shipping
charges billed to customers are included in net sales and the related shipping and handling costs are included in cost of sales.
For the three months ended March 31, 2017 and 2016 shipping and handling costs of $31,944 and $83,542, respectively, were included
in cost of sales.
Concentration
of Risk
At
March 31, 2017, accounts receivable balances included a concentration from four customers with receivable balances ranging from
approximately $11,000 to $25,000, all of which are greater than 10% of the total net accounts receivable balance. At December
31, 2016, accounts receivable balances included a concentration from four customers with receivable balances ranging from approximately
$11,000 to $26,000, all of which are greater than 10% of the total net accounts receivable balance.
For
the three months ended March 31, 2017 and 2016, the Company had no customers with sales in excess of 10%.
HEALTHIER
CHOICES MANAGEMENT CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Inventories
Inventories are stated at average
cost. If the cost of the inventories exceeds their net realizable value, provisions are recorded to write down excess inventory
to its net realizable value. The Company’s inventories consist primarily of merchandise available for resale, such as fresh
produce, perishable grocery items and non-perishable consumable goods.
Adopted
Accounting Pronouncements
In
July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2015-11, “Simplifying
the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires an entity to measure inventory at the lower
of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured
using last-in, first-out (“LIFO”) or the retail inventory method. It is effective for annual reporting periods beginning
after December 15, 2016. The amendments should be applied prospectively with earlier application permitted as of the beginning
of an interim or annual reporting period. The implementation of this update did not have a material effect on the Company’s
consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”).
ASU 2016-09 requires an entity to simplify several aspects of the accounting for share-based payment transactions, including the
income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash
flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The adoption
of ASU 2016-09 did not have a significant impact on the Company’s consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”
(“ASU 2017-01”). The amendments in ASU 2017-01 are to clarify the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and
consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within
those periods, with early adoption permitted. The adoption of ASU 2017-01 did not have a significant impact on the Company’s
consolidated financial statements.
Recently
Issued Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which was subsequently modified in
August 2015 by ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date. As a result,
the ASU No. 2014-09 is effective retrospectively for fiscal years and interim periods within those years beginning after December
15, 2017. The core principle of ASU No. 2014-09 is that companies should recognize revenue when the transfer of promised goods
or services to customers occurs in an amount that reflects what the company expects to receive. It requires additional disclosures
to describe the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. In 2016, the FASB
issued additional ASUs that clarify the implementation guidance on principal versus agent considerations (ASU 2016-08), on identifying
performance obligations and licensing (ASU 2016-10), and on narrow-scope improvements and practical expedients (ASU 2016-12) as
well as on the revenue recognition criteria and other technical corrections (ASU 2016-20). The Company will adopt the standard
on January 1, 2018, using the full retrospective transition method, which may result in a cumulative-effect adjustment for deferred
revenue to the opening balance sheet for 2016 and the restatement of the financial statements for all prior periods presented.
The Company continues to evaluate the impact of adoption of this standard on its consolidated financial statements and disclosures.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 establishes
a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet
for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after
December 15, 2018, and annual and interim periods thereafter, with early adoption permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is currently
evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15 (Topic 230), “Statement of Cash Flows Classification of Certain Cash Receipts and
Cash Payments”. The new standard will make eight targeted changes to how cash receipts and cash payments are presented and
classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. The
Company will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be
required to apply the amendments prospectively as of the earliest date practicable. The Company is currently evaluating the effect
that adopting this new accounting guidance will have on its consolidated cash flows and related disclosures.
HEALTHIER
CHOICES MANAGEMENT CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In
November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” This guidance
was issued to address the diversity that exists in the classification and presentation of changes in restricted cash on the statement
of cash flows. The amendments will require that the statement of cash flows explain the change during the period in total cash,
cash equivalents and restricted cash. The amendments are effective for the financial statements issued for fiscal years after
December 15, 2017, and interim periods within those fiscal years. The amendments will be applied using a retrospective transition
method to each period presented. The Company is currently evaluating the effect that adopting this new accounting guidance will
have on its consolidated cash flows and related disclosures.
In
January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 along with amending other parts of the goodwill impairment
test. Under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of
the reporting unit with its carrying amount, and should recognize an impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting
unit. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, and interim periods therein with early adoption
permitted for interim or annual goodwill impairment tests performed after January 1, 2017. At adoption, this update will require
a prospective approach. The Company is currently evaluating the impact of adopting this guidance.
Note
3. DISCONTINUED OPERATIONS
Effective
July 31, 2016, the Company sold its wholesale inventory and the related business operations (collectively, “Wholesale Business
Assets”). The sale of the wholesale business qualifies as discontinued operations and accordingly the Company has excluded
results for the wholesale business operations from the Company’s continuing operations in the unaudited consolidated Statements
of Operations for all periods presented. The following table shows the results of the Company’s wholesale operations included
in the loss from discontinued operations.
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Wholesale vapor sales, net
|
|
$
|
-
|
|
|
$
|
1,613,569
|
|
|
|
|
|
|
|
|
|
|
Cost of sales – vapor wholesale
|
|
|
-
|
|
|
|
1,311,919
|
|
Expenses – advertising selling, general and administrative
|
|
|
(7,482
|
)
|
|
|
685,162
|
|
Total
|
|
|
(7,482
|
)
|
|
|
1,997,081
|
|
Loss from discontinued operations attributable to the wholesale business
|
|
$
|
(7,482
|
)
|
|
$
|
(383,512
|
)
|
The
major classes of assets and liabilities of discontinued operations on the balance sheet are as follow:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Assets
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
-
|
|
|
$
|
39,493
|
|
Due from merchant credit card processor, net
|
|
|
-
|
|
|
|
13,410
|
|
Total current assets of discontinued operations
|
|
$
|
-
|
|
|
$
|
52,903
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
457,858
|
|
|
|
555,810
|
|
Total current liabilities of discontinued operations
|
|
$
|
457,858
|
|
|
$
|
555,810
|
|
Note
4. ACQUISITION OF ADA’S WHOLE FOOD MARKET
On
June 1, 2016, the Company’s wholly owned subsidiary Healthy Choice Markets Inc., entered into a Business Sale Agreement
with Ada’s Whole Food Market LLC (the “Seller”) to purchase certain operating assets and assumed certain payables
and a store lease obligation that constituted the business of Ada’s Natural Market grocery store (the “Grocery Acquisition”).
The Company operates the grocery store under the same name, location, and management. The Company also entered into an employment
agreement with the store manager.
HEALTHIER
CHOICES MANAGEMENT CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following presents the unaudited pro forma combined results of operations of the Company with Ada’s Whole Food Market as
if the Grocery Acquisition occurred on January 1, 2016. The unaudited pro forma results of operations are presented for informational
purposes only and are based on estimated financial operations. The unaudited pro forma results of operations are not intended
to present actual results that would have been attained had the Grocery Acquisition been completed as of January 1, 2016 or to
project potential operating results as of any future date or for any future periods.
|
|
Three Months Ended March 31, 2016
|
|
Vapor sales, net
|
|
$
|
2,122,660
|
|
Grocery sales, net
|
|
|
1,983,667
|
|
Net loss from continuing operations
|
|
|
(15,995,740
|
)
|
Net loss from discontinued operations
|
|
|
(383,512
|
)
|
Net loss
|
|
|
(16,379,252
|
)
|
Net loss per share
|
|
|
|
|
Continuing operations
|
|
|
(35,572.92
|
)
|
Discontinued operations
|
|
|
(852.89
|
)
|
Net loss
|
|
|
(36,425.81
|
)
|
Weighted average number of common shares outstanding
|
|
|
450
|
|
Note
5. SEGMENT INFORMATION
Prior
to the second quarter of 2016, the Company had a single reportable business segment, as it was a distributor and retailer of vapor
products including vaporizers, e-liquids and electronic cigarettes. On June 1, 2016, the Company completed the Grocery Acquisition
(See Note 4) and added a reportable segment. On July 31, 2016, the Company sold its wholesale inventory and related operations.
The Company has excluded the results for the wholesale business, as discontinued operations, from the Company’s continuing
operations for all periods presented. Management determines the reportable segments based on the internal reporting used by our
Chief Operating Decision Makers to evaluate performance and to assess where to allocate resources. The Company evaluates segment
performance based on the segment gross profit before corporate expenses.
Summarized
below are the total net sales and segment operating loss for each reporting segment:
|
|
Three Months Ended
|
|
|
|
Net Sales
|
|
|
Segment Gross Profit
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Vapor sales, net
|
|
$
|
1,481,364
|
|
|
$
|
2,122,660
|
|
|
$
|
937,873
|
|
|
$
|
1,184,617
|
|
Grocery sales, net
|
|
|
2,104,626
|
|
|
|
-
|
|
|
|
887,753
|
|
|
|
-
|
|
Total Sales
|
|
$
|
3,585,990
|
|
|
$
|
2,122,660
|
|
|
|
1,825,626
|
|
|
|
1,184,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
3,566,220
|
|
|
|
2,210,467
|
|
Operating loss
|
|
|
|
|
|
|
|
|
|
|
(1,740,594
|
)
|
|
|
(1,025,850
|
)
|
Corporate other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
(17,790
|
)
|
|
|
(14,777,538
|
)
|
Net loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
(1,758,384
|
)
|
|
|
(15,803,388
|
)
|
Net loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(7,482
|
)
|
|
|
(383,512
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
$
|
(1,765,866
|
)
|
|
$
|
(16,186,900
|
)
|
For
the three months ended March 31, 2017, depreciation and amortization was $16,735 and $63,182 for Vapor and Grocery, respectively.
HEALTHIER
CHOICES MANAGEMENT CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
6. NOTES RECEIVABLE FROM RELATED PARTY
In
connection with the sale of its wholesale business, the Company entered into two notes receivable with a related party. As consideration
for the sale of wholesale inventory and business the Company received a secured, one-year promissory note in the principal amount
of $370,000 (the “Acquisition Note”) bearing an interest rate of 4.5%, which payments thereunder are $10,000 monthly,
with such payments commencing on October 28, 2016, with a balloon payment of the remainder of principal and interest due on July
29, 2017.
The
buyer and the Company entered into a secured, 36-month promissory note in the principal amount of $500,000 (the “Promissory
Note”) bearing an interest rate of prime plus 2%, resetting annually on July 29
th
, which payments thereunder
are $14,000 per month, with such payments deferred and commencing on January 26, 2017, with subsequent installments payable on
the same day of each month thereafter and in the 37
th
month, and a balloon payment for all remaining accrued interest
and principal due on July 29, 2019. The Company records all proceeds related to both notes as other income as proceeds are received.
Note
7. INTANGIBLE ASSETS
Intangible
assets, net is as follows:
March 31, 2017
|
|
Useful Lives
(Years)
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Favorable Leases
|
|
15.25 years
|
|
$
|
890,000
|
|
|
$
|
(48,449
|
)
|
|
$
|
841,551
|
|
Trade Names
|
|
10 years
|
|
|
820,000
|
|
|
|
(108,000
|
)
|
|
|
712,000
|
|
Customer Relationships
|
|
5 years
|
|
|
60,000
|
|
|
|
(10,000
|
)
|
|
|
50,000
|
|
Technology
|
|
20 years
|
|
|
50,000
|
|
|
|
(1,458
|
)
|
|
|
48,542
|
|
Website
|
|
3 years
|
|
|
4,500
|
|
|
|
(1,250
|
)
|
|
|
3,250
|
|
Intangible assets, net
|
|
|
|
$
|
1,824,500
|
|
|
$
|
(169,157
|
)
|
|
$
|
1,655,343
|
|
December 31, 2016
|
|
Useful Lives
(Years)
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Favorable Leases
|
|
15.25 years
|
|
$
|
890,000
|
|
|
$
|
(33,859
|
)
|
|
$
|
856,141
|
|
Trade Names
|
|
10 years
|
|
|
820,000
|
|
|
|
(87,750
|
)
|
|
|
732,500
|
|
Customer Relationships
|
|
5 years
|
|
|
60,000
|
|
|
|
(7,000
|
)
|
|
|
53,000
|
|
Technology
|
|
20 years
|
|
|
25,000
|
|
|
|
(937
|
)
|
|
|
24,063
|
|
Website
|
|
3 years
|
|
|
4,500
|
|
|
|
(875
|
)
|
|
|
3,625
|
|
Intangible assets, net
|
|
|
|
$
|
1,799,500
|
|
|
$
|
(130,171
|
)
|
|
$
|
1,669,329
|
|
Intangible
assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense amounted to $38,986 and
$25,328 for the three months ended March 31, 2017 and 2016, respectively. Future annual estimated amortization expense is as follows:
Years ending December
31,
|
|
|
|
2017 (remaining nine months)
|
|
$
|
117,270
|
|
2018
|
|
|
156,361
|
|
2019
|
|
|
155,486
|
|
2020
|
|
|
154,861
|
|
2021
|
|
|
147,861
|
|
Thereafter
|
|
|
923,504
|
|
Total
|
|
$
|
1,655,343
|
|
HEALTHIER
CHOICES MANAGEMENT CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
8. STOCKHOLDERS’ EQUITY
Reverse
Splits
On
June 1, 2016, the Company’s Board of Directors effected a reverse stock split of the Common Stock at a ratio of 1-for-20,000.
All share and per share amounts have been retroactively adjusted to reflect the reverse stock splits.
Compensatory
Common Stock Summary
During the three months ended March 31, 2017
and 2016, the Company recognized stock-based compensation expense related to compensatory Common Stock in the amount of $0 and
$52,000, respectively. Stock-based compensation expense is included as part of selling, general and administrative expense in the
accompanying consolidated statements of operations. As of March 31, 2017, there was no unamortized expense remaining related to
stock awards because the remaining non-vested shares vested on April 1, 2016.
Warrants
Through March 31, 2017, Series A Warrants to
purchase 1 share of common stock have been exercised through the cashless exercise provision in the Series A Warrants, resulting
in the issuance of 12,598,645,012 shares of the Company’s common stock.
A summary of warrant activity for the three months ended March 31,
2017 is presented below:
|
|
Exercise Price
|
|
|
Warrant
Common Stock
Equivalent
|
|
|
Remaining Contractual Term
|
|
Outstanding at January 1, 2017
|
|
$
|
0.0001
|
|
|
|
634,754,364,551
|
|
|
|
3.60
|
|
Warrants repurchased
|
|
|
(0.000021
|
)
|
|
|
(113,580,956,776
|
)
|
|
|
|
|
Cashless exercises for common stock
|
|
|
(0.0001
|
)
|
|
|
(12,598,645,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
$
|
0.0001
|
|
|
|
508,574,762,763
|
|
|
|
3.35
|
|
Stock Options
During the three months ended March 31, 2017
and 2016, the Company recognized stock-based compensation of $1,197,195 and $58,786 respectively, in connection with the amortization
of stock options, net of recovery of stock-based charges for forfeited stock options. Stock-based compensation expense is included
as part of selling, general and administrative expense in the accompanying consolidated statements of operations. At March 31,
2017, the amount of unamortized stock-based compensation expense associated with unvested stock options granted to employees,
directors and consultants was approximately $7.1 million, which will be amortized over a weighted average period of 1.04 years.
HEALTHIER
CHOICES MANAGEMENT CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Loss
per Share
Basic
loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during
the period. Diluted loss per share is computed using the weighted average number of shares of common stock outstanding and, if
dilutive, potential shares of common stock outstanding during the period. Potential common shares consist of incremental shares
of common stock issuable upon (a) the exercise of stock options (using the treasury stock method); (b) the vesting of restricted
stock units; (c) the conversion of Series A Preferred Stock; and (d) the exercise of warrants (using the if-converted method).
For the three months ended March 31, 2017 and 2016, diluted loss per share excludes the potential shares of common stock, as their
effect is antidilutive. The following table summarizes the Company’s securities, in common share equivalents, that have
been excluded from the calculation of dilutive loss per share as their effect would be anti-dilutive:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
82,851,011,360
|
|
|
|
-
|
|
Series A preferred stock
|
|
|
-
|
|
|
|
3
|
|
Warrants
|
|
|
508,574,762,763
|
|
|
|
801,268,122,018
|
|
Total
|
|
|
591,425,774,123
|
|
|
|
801,268,122,021
|
|
Note
9. FAIR VALUE MEASUREMENTS
The
fair value framework under FASB’s guidance requires the categorization of assets and liabilities into three levels based
upon the assumptions used to measure the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas
Level 3, if applicable, would generally require significant management judgment. The three levels for categorizing assets and
liabilities under the fair value measurement requirements are as follows:
|
●
|
Level
1: Fair value measurement of the asset or liability using observable inputs such as quoted
prices in active markets for identical assets or liabilities;
|
|
●
|
Level
2: Fair value measurement of the asset or liability using inputs other than quoted prices
that are observable for the applicable asset or liability, either directly or indirectly,
such as quoted prices for similar (as opposed to identical) assets or liabilities in
active markets and quoted prices for identical or similar assets or liabilities in markets
that are not active; and
|
|
●
|
Level
3: Fair value measurement of the asset or liability using unobservable inputs that reflect
the Company’s own assumptions regarding the applicable asset or liability.
|
Nonfinancial
assets such as goodwill, other intangible assets, and long-lived assets held and used are measured at fair value when there is
an indicator of impairment and recorded at fair value only when impairment is recognized or for a business combination.
The
following table summarizes the liabilities measured at fair value on a recurring basis as of March 31, 2017:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities – non consenting warrants
|
|
$
|
-
|
|
|
$
|
955,173
|
|
|
$
|
-
|
|
|
$
|
955,173
|
|
Derivative liabilities – consenting warrants
|
|
|
-
|
|
|
|
9,354,926
|
|
|
|
-
|
|
|
|
9,354,926
|
|
Total derivative liabilities
|
|
$
|
-
|
|
|
$
|
10,310,099
|
|
|
$
|
-
|
|
|
$
|
10,310,099
|
|
HEALTHIER
CHOICES MANAGEMENT CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table summarizes the liabilities measured at fair value on a recurring basis as of December 31, 2016:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities – non consenting warrants
|
|
$
|
-
|
|
|
$
|
955,173
|
|
|
$
|
-
|
|
|
$
|
955,173
|
|
Derivative liabilities – consenting warrants
|
|
|
-
|
|
|
|
11,912,906
|
|
|
|
-
|
|
|
|
11,912,906
|
|
Total derivative liabilities
|
|
$
|
-
|
|
|
$
|
12,868,079
|
|
|
$
|
-
|
|
|
$
|
12,868,079
|
|
The Company determined that its offer to purchase
its Series A warrants for $0.000021 per warrant was the best indicator of the fair value of the derivative liability as of March
31, 2017 and December 31, 2016.
Note
10. COMMITMENTS AND CONTINGENCIES
Employment
and Consulting and Other Related Party Agreements
On April 8, 2016,
Gregory Brauser informed the Board of his decision to resign from the Board and as President of the Company. Mr. Brauser’s resignation
was not due to any disagreement with the Company on any matters relating to the Company’s operations, policies or practices.
Through GAB Management Group, Inc., Mr. Brauser will serve as a consultant to the Company pursuant to an Executive
Services Consulting Agreement dated as of April 11, 2016 (the “Consulting Agreement”), the term of
which is two years. Under the Consulting Agreement, GAB Management Group, Inc., will receive the following benefits in connection
with consulting services that its principal, Mr. Brauser, will provide to the Company beginning on April 11, 2016: (1)
an engagement fee of $50,000 payable at the time the Consulting Agreement is executed, and (2) thereafter monthly installments of
$10,000 for 24 months.
Legal Proceedings
From time to time the Company may be involved in various
claims and legal actions arising in the ordinary course of our business.
Purchase Commitments
At March 31, 2017 and December 31, 2016, the Company had vendor deposits of approximately $51,000 and
$7,000, respectively, which are included as a component of prepaid expenses and vendor deposits in the consolidated balance
sheets.
NOTE
11. SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date but before the consolidated financial statements are
issued. Based upon the evaluation, other than the action listed below, the Company did not identify any recognized or non-recognized
subsequent events that would have required adjustment or disclosure in the accompanying unaudited consolidated financial statements.
On
April 4, 2017, Vulcan Vape, LLC (“Vulcan”) and America Vape Supply, LLC (“AVS”) filed an amended complaint
against the Company and Vape Store. The lawsuit was filed in U.S. District Court for the Southern District of Florida Palm Beach
Division. The assets of AVS and Vulcan were sold to Vape Store on November 5, 2015 and Vulcan and AVS claimed in the lawsuit they
were due additional holdback payments from the asset acquisition. The Company intends to rigorously defend these allegations.