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”), HCMC Intellectual Property Holdings, LLC, The Vitamin Store, LLC, Healthy U Wholesale, Inc., The Vape Store, Inc. (“Vape Store”), Vaporin, Inc., Smoke Anywhere U.S.A., Inc., Emagine the Vape Store, LLC, 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.
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 $$0.2 million for the six months ended June 30, 2021. As of June 30, 2021, cash and cash equivalents totaled approximately $29.3 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.
Rights Offering
On April 20, 2021, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission (the “SEC”) for a Rights Offering to its stockholders. The purpose of this Rights Offering is to raise equity capital in a cost-effective and potentially non-dilutive manner that provides all of our existing shareholders the opportunity to participate, purchase, and own up to approximately an additional 25% of the Company’s common stock. The net proceeds are to be used for general working capital purposes, including the protection of our intellectual property rights through litigation and other methods, funding future research and development for both our intellectual property suite and product offerings, and funding growth initiatives and expansion for our health food, vitamin and supplements, and vape segments, both online and in brick and mortar stores.
On June 18, 2021, the Company issued 27,046,800,310 shares of common stock in connection with the Rights Offering at a subscription price of $0.0010 per share, generating gross proceeds of $27.0 million. The Company incurred direct financing costs of $3.5 million in connection with the offering resulting in net proceeds to the Company of $23.6 million.
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 seven 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 June 30, 2021 and 2020 that is used in the following discussions of our results of operations:
Net Vapor sales increased $$0.1 million to $$0.6 million for the three months ended June 30, 2021 as compared to $$0.5 million for the same period in 2020. The increase in sales is primarily due to a consistent increased in foot traffic for the stores during the three months ended June 30, 2021 as compared to the same period in 2020.
Net Grocery sales increased $$7,000 to $$2.8 million for the three months ended June 30, 2021 as compared to $$2.8 million for the same period in 2020. The increase in sales is primarily due to a small increase in the customer count compared to the same period in 2020.
Vapor cost of goods sold for the three months ended June 30, 2021 and 2020 were $$0.2 million and $$0.2 million, respectively, an increase of $$25,000. The increase is primarily due to increases in sales and product costs during three months ended June 30, 2021 as compared to the same period in 2020. Gross profit was $$0.4 million and $$0.3 million for three months ended June 30, 2021 and 2020, respectively.
Grocery cost of goods sold for the three months ended June 30, 2021 and 2020 were $$1.7 million and $$1.7 million respectively, an decreased of $$38,000. The decrease is primarily due to a decrease in cost of goods sold during the three months ended June 30, 2021 as compared to the same period in 2020. Gross profit was $$1.1 million and $$1.1 million for the three months ended June 30, 2021 and 2020, respectively.
Total operating expenses decreased $$19,000 to $$2.1 million for the three months ended June 30, 2021 compared to $$2.2 million for the same period in 2020. The decrease is primarily attributable to decreases in payroll and employee related cost of $$20,000, insurance of $$19,000, depreciation and amortization of $$14,000 and occupancy of $$6,000, partially offset by an increase stock compensation of $$40,000.
Net other expense of $$865,000 for the three months ended June 30, 2021 includes a gain on extinguishment of debt of $$885,000, partially offset by a loss on investment of $$15,000 and interest expense of $$6,000. Net other expense of $$24,000 for the three months ended June 30, 2020 includes an interest expense of $$23,000 and a loss on investment of $$1,000.
The following table sets forth our unaudited consolidated Statements of Operations for the six months ended June 30, 2021 and 2020 that is used in the following discussions of our results of operations:
Net Vapor sales decreased $$0.1 million to $$1.2 million for the six months ended June 30, 2021 as compared to $$1.3 million for the same period in 2020. The decrease in sales is primarily due to a decreased in foot traffic for some stores a result of the Coronavirus (COVID-19) pandemic and a decrease in the number of stores open during the six months ended June 30, 2021 as compared to the same period in 2020.
Net Grocery sales decreased $$0.4 million to $$5.6 million for the six months ended June 30, 2021 as compared to $$6.1 million for the same period in 2020. The decrease in sales is primarily due to a consistent decreased in foot traffic for some stores a result of the Coronavirus (COVID-19) pandemic.
Vapor cost of goods sold for the six months ended June 30, 2021 and 2020 were $$0.5 million and $$0.5 million, respectively, a decrease of $$0.1 million. The decrease is primarily due to a decreased in sales and product cost. Gross profit was $$0.7 million and $$0.8 million for the six months ended June 30, 2021 and 2020, respectively.
Grocery cost of goods sold for the six months ended June 30, 2021 and 2020 were $$3.4 million and $$3.7 million, respectively, a decrease of $$0.3 million. The decrease is primarily due to decreases in sales and cost of goods sold from the COVID-19 pandemic. Gross profit was $$2.2 million and $$2.3 million for the six months ended June 30, 2020 and 2020, respectively.
Total operating expenses decreased $$0.4 million to $$4.2 million for the six months ended June 30, 2021 compared to $$4.5 million for the same period in 2020. The decrease is primarily attributable to decreases in office and store expenses of $$0.2, payroll and employee related cost of $$0.1 million, stock-based compensation of $$40,000, occupancy of $$34,000, insurance of $$34,000, and taxes, licenses & permits of $$11,000, offset by an increase in professional fees of $$0.1 million.
Net other expense of $$0.7 million for the six months ended June 30, 2021 includes a gain on extinguishment of debt of $$0.8 million and a gain on investment of $$12,000, partially offset by an interest expense of $$0.1 million. Net other expense of $$0.1 million for the six months ended June 30, 2020 includes a loss on investment of $$11,000, and interest expense of $$39,000.
Liquidity and Capital Resources
Our net cash used in operating activities of $$1.4 million for the six months ended June 30, 2021 resulted from a net loss of $0.5 million, and a net cash usage of $$0.8 million from changes in operating assets and liabilities, offset by a non-cash adjustment of $$0.2 million. Our net cash used in operating activities of $$1.0 million for the six months ended June 30, 2020 resulted from a net loss of $1.5 million and a net cash usage of $$0.1 million from changes in operating assets and liabilities, offset by a non-cash adjustment of $$0.6 million.
The net cash used in investing activities of $$14,000 for the six months ended June 30, 2021 resulted from the collection of a note receivable, and purchases of property and equipment. The net cash used in investing activities of $$0.1 million for the six months ended June 30, 2020 resulted from the collection of a note receivable, and purchases patents and property and equipment.
The net cash provided by financing activities of $$27.9 million for the six months ended June 30, 2021 is due to proceeds received from the Rights Offering of $24.8 million and a Securities Purchase Agreement of $5.0 million, partially offset by a principal payment of $2 million on the line of credit. The net cash used in financing activities of $$0.7 million for the six months ended June 30, 2020 is due to payments on the loan payable.
At June 30, 2021 and December 31, 2020, we did not have any material financial guarantees or other contractual commitments with vendors that are reasonably likely to have an adverse effect on liquidity.
Our cash balances are kept liquid to support our growing acquisition and infrastructure needs for operational expansion. The majority of our cash and cash equivalents are concentrated in one financial institution and are generally in excess of the FDIC insurance limit. The Company has not experienced any losses on its cash and cash equivalents. The following table presents the Company’s cash position as of June 30, 2021 and December 31, 2020.
The Company reported a net loss of $$0.5 million for the six months ended June 30, 2021. The Company also had positive working capital of $$28.8 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 2020 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.