ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED
CONSOLDIATED OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and related
notes appearing elsewhere in this report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements. The terms “we,” “us,” “our,” and the “Company” refer to Healthier Choices Management Corp. and its wholly-owned subsidiaries, Healthy Choice Markets, Inc., Healthy Choice Markets
2, LLC (“Paradise Health and Nutrition”), 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. (collectively, the “Company”, “we”,
“us” and “our”) is a holding company focused on providing consumers with healthier daily choices with respect to nutrition and other lifestyle alternatives. The Company
currently operates nine retail vape stores in the Southeast region of the United States, through which it offers e-liquids, vaporizers and related products. The Company markets its Q-Cup™ technology under the vape segment. 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. In October 2019, the Company announced the launch of the Q-Unit, a U.S. patented device
made specifically for vaping concentrates. The Q-Unit, which boasts a mechanism that prevents the concentrates from coming in direct contact with the heating element, allows consumers to vape uncut pure extract from a pure quartz cup. The Company also operates Ada’s Natural Market, a natural and organic grocery store, through its wholly owned subsidiary Healthy Choice Markets, Inc. and Paradise Health and
Nutrition, stores that 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 through its wholly
owned subsidiary Healthy Choice Markets 2, LLC.
Going Concern and 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 $2.8 million for the nine months ended September 30, 2020. As of September 30, 2020, cash and cash equivalents totaled approximately $0.6 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 not be sufficient to cover our projected operating expenses for the foreseeable
future. Management believes these conditions raises substantial doubt about the Company's ability to continue as a going concern within a year and a day from the issuance of these consolidated financial statements. Should we require additional funds (either through equity or debt financing, 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. The inability to raise additional financing may have a material adverse
effect on the future performance of the Company.
Factors Affecting Our Performance
We believe the following factors affect our performance:
Vapor Retail: We believe the
operating performance of our vapor retail stores will affect our revenue and financial performance. The Company has a total of nine retail vape stores, which are located in Florida, Georgia and Tennessee.
Inventory Management: Our vapor
segment revenue trends are affected by an evolving product acceptance and consumer demand. We are creating and offering new products to our retail vapor customers. Evolving product development and technology impacts our licensing and intellectual
properties spending. We expect the transition to vaporizer and advanced technology and enhanced performance products to continue and will impact our overall operating results in the future.
Increased Competition: The
launch by national competitors in both of our business reporting segments have made it more difficult to compete on prices and to secure business. We expect increased product supply and downward pressure on prices to continue and impact our operating
results in the future. We also expect the continued expansion of national grocery chains, which leads to greater competition, to 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 September 30, 2020 and 2019 that is used in the following discussions of our results of operations:
Net Vapor sales decreased $0.3 million to $0.6 million
for the three months ended September
30, 2020 as compared to $0.9 million for the same period in 2019. The decrease in sales is primarily due to a major decreased in foot traffic
or temporary closure of some stores a result of the Coronavirus (COVID-19) pandemic during the three months ended September 30, 2020 as compared to the same period in 2019.
Net Grocery sales increased $0.2 million to $2.8 million for the three months ended September 30, 2020 as compared to $2.5 million
for the same period in 2019. The increase in sales
is primarily due to COVID-19 pandemic and the company new strategy to offer its customer the option to delivery or curb side pickup their orders.
Vapor cost of goods sold for the three months
ended September 30, 2020 and 2019 were $0.3 million and $0.4 million, respectively, a decreased of $0.1 million. The decrease is primarily due to decreases in product costs during three months ended September 30, 2020
as compared to the same period in 2019. Gross profit was $0.3 million and $0.5 million for three months ended September 30, 2020 and 2019, respectively.
Grocery cost of goods sold for the three months
ended September 30, 2020 and 2019 were $1.7 million and $1.6 million respectively, an increased of $99,000. The increase is primarily due to increases in sales and cost of goods sold from the
COVID-19 pandemic. Gross profit was $1.0 million and $0.9 million for the three months ended September 30, 2020 and 2019, respectively.
Total operating expenses increased $43,000 to $2.6 million for the
three months ended September 30,
2020 compared to $2.5 million for the same period in 2019. The increase is primarily attributable to an impairment of intangible assets of $0.4 million, offset by ,decreases in payroll and employee related cost of $0.1 million, stock compensation of $0.1 million, insurance of $43,000, meals, meals, travel and entertainment of $30,000, and occupancy of $9,000.
Net other expense of $87,000 for the three months ended September
30, 2020 includes interest expense of $85,000, and loss on investment of $3,000. Net other expense of $21,000 for the three months ended September 30, 2019 includes a loss on
investment of $13,000, partially offset by interest
income of $8,000.
The following table sets forth our unaudited consolidated Statements of Operations for the nine months ended September 30, 2020 and 2019 that is used in the following discussions of our results of operations:
Net Vapor sales decreased $1.3 million to $1.9 million
for the nine months ended September
30, 2020 as compared to $3.2 million for the same period in 2019. The decrease in sales is primarily due to a major decreased in foot traffic
or temporary closure of some stores a result of the Coronavirus (COVID-19) pandemic and a decrease in the number of stores open during the nine
months ended September 30, 2020 as compared to the same period in 2019.
Net Grocery sales increased $0.4 million to $8.8 million for the nine months ended September 30, 2020 as compared to $8.4 million
for the same period in 2019. The increase in sales is primarily due to COVID-19 pandemic and the
company new strategy to offer its customer the option to delivery or curb side pickup their orders.
Vapor cost of goods sold for the nine months ended September 30, 2020 and 2019
were $0.8 million and $1.3
million, respectively, a decrease of $0.6 million. The decrease is primarily due to a decreased in sales and product cost. Gross profit was $1.1 million and $1.9 million
for the nine months ended September
30, 2020 and 2019, respectively.
Grocery cost of goods sold for the nine months
ended September 30, 2020 and 2019 were $5.5 million and $5.3 million, respectively, an increase of $0.2 million. The increase is primarily due to increases in sales and cost of goods sold from the COVID-19 pandemic. Gross profit was $3.3 million and $3.1 million for the nine months ended September 30, 2019 and 2019, respectively.
Total operating expenses decreased $0.9 million to $7.1 million
for the nine months ended September
30, 2020 compared to $8.1 million for the same period in 2019. The decrease is primarily attributable to decreases in payroll and employee related cost
of $0.6 million, stock-based compensation of $0.3 million, professional fees of $0.1 million, taxes, licenses & permits of $0.1 million, insurance of $0.1 million, and occupancy
of $42,000, offset by an impairment of intangible assets of $0.4 million.
Net other expense of $0.1 million for the nine months ended September
30, 2020 was primarily due to an interest expense of $0.1 million, and a loss on investment of $14,000. Net other expense of $0.1 million for the nine months ended September 30, 2019
includes a loss on investment of 58,000, and interest expense of $20,000.
Liquidity and Capital Resources
Our net cash used in operating activities of $1.7 million for the nine months ended September 30, 2020 resulted from a net loss of $2.8 million, and a net cash usage of $0.2 million from changes in operating assets and liabilities, offset by a non-cash adjustment of $0.9 million. Our net cash used in operating activities of $2.9 million for the nine months ended September 30, 2019 resulted from a net loss of $3.2 million and a net cash usage of $1.0 million from changes in operating assets
and liabilities, offset by a non-cash adjustment of $1.3 million.
The net cash used in investing activities of $0.1 million for the nine months ended September 30, 2020 resulted from the issuance and collection of a note receivable, and purchases of a patent
and property and equipment. The net cash provided by investing activities of $99,000 for the nine months ended September 30, 2019 resulted from payments received on the VPR Brands L.P. Note.
The net cash provided by financing activities of $3.2 million for the nine months ended September 30, 2020 is due to proceeds received from the Term Loan of $2.5 million and loan of payments of $(0.2) million on the loan payable. The net cash provided by financing activities of $0.1 million for the nine months ended September 30, 2019 is due to payments
on the loan payable.
At September 30, 2020 and December 31, 2019, 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. The majority of our cash and cash
equivalents are concentrated in three financial institutions 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, 2020 and December 31, 2019.
The Company reported a net loss of $2.8
million for the nine months ended September
30, 2020. The Company also had negative working capital of $4.2 million. The Company expects to continue incurring losses for the
foreseeable future and may need to raise additional capital to satisfy warrant obligations, and 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 2019 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 warrant exercises and stock sales, having the authorized capital to issue stock to exercising Series A Warrant holders, 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.