graphic

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

Or

          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number: 001-36469

HEALTHIER CHOICES MANAGEMENT CORP.
(Exact name of Registrant as specified in its charter)

Delaware
 
84-1070932
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
3800 North 28Th Way
   
Hollywood, Florida
 
33020
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: 305-600-5004

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 Yes  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
 
HCMC
 
OTC Pink Marketplace

As of November 10, 2022, there were 339,741,632,384 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.




TABLE OF CONTENTS

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

HEALTHIER CHOICES MANAGEMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS


   
September 30, 2022 (Unaudited)
   
December 31,
2021
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
 
$
30,009,173
   
$
26,496,404
 
Accounts receivable, net
   
53,439
     
28,481
 
Notes receivable
   
205,262
     
247,915
 
Inventories
   
2,401,903
     
1,521,199
 
Prepaid expenses and vendor deposits
   
295,823
     
456,397
 
Investment
   
17,143
     
23,143
 
Restricted cash
   
1,325,000
     
-
 
TOTAL CURRENT ASSETS
   
34,307,743
     
28,773,539
 
                 
Property and equipment, net of accumulated depreciation
   
1,528,300
     
176,988
 
Intangible assets, net of accumulated amortization
   
2,083,007
     
947,593
 
Goodwill
   
2,657,000
     
916,000
 
Right of use asset – operating lease, net
   
4,785,871
     
3,543,930
 
Other assets
   
108,565
     
85,437
 
                 
TOTAL ASSETS
 
$
45,470,486
   
$
34,443,487
 
                 
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
 
$
3,203,384
   
$
1,642,848
 
Contract liabilities
   
57,283
     
23,178
 
Current portion of line of credit
   
453,232
     
418,036
 
Current portion of loan payment
   
1,479
     
2,604
 
Operating lease liability, current
   
534,493
     
437,328
 
TOTAL CURRENT LIABILITIES
   
4,249,871
     
2,523,994
 
                 
Loan payable, net of current portion
   
-
     
815
 
Operating lease liability, net of current
   
3,885,543
     
2,685,021
 
TOTAL LIABILITIES
   
8,135,414
     
5,209,830
 
                 
COMMITMENTS AND CONTINGENCIES (SEE NOTE 13)
   
     
 
                 
CONVERTIBLE PREFERRED STOCK
               
Series E convertible preferred stock, $1,000 par value per share, 14,722 and 0 shares authorized, issued and outstanding as of September 30, 2022 and December 31, 2021, respectively; aggregate liquidation preference of $14.7 million
   
14,722,075
     
-
 
STOCKHOLDERS’ EQUITY
               
Series D convertible preferred stock, $1,000 par value per share, 5,000 shares authorized; 800 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively; aggregate liquidation preference of $0.8 million
   
800,000
     
800,000
 
Common Stock, $0.0001 par value per share, 750,000,000,000 shares authorized; 339,741,632,384 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
   
33,974,163
     
33,974,163
 
Additional paid-in capital
   
28,973,580
     
30,855,824
 
Accumulated deficit
   
(41,134,746
)
   
(36,396,330
)
TOTAL STOCKHOLDERS’ EQUITY
   
22,612,997
     
29,233,657
 
                 
TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
 
$
45,470,486
   
$
34,443,487
 

See notes to unaudited condensed consolidated financial statements
1


HEALTHIER CHOICES MANAGEMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2022
   
2021
   
2022
   
2021
 
SALES
                       
Vapor sales, net
 
$
1,187
   
$
466,181
   
$
256,747
   
$
1,671,098
 
Grocery sales, net
   
5,775,543
     
2,803,327
     
16,700,596
     
8,450,055
 
TOTAL SALES, NET
   
5,776,730
     
3,269,508
     
16,957,343
     
10,121,153
 
                                 
Cost of sales vapor
   
364
     
186,522
     
112,610
     
657,171
 
Cost of sales grocery
   
3,909,190
     
1,706,597
     
10,674,170
     
5,133,228
 
GROSS PROFIT
   
1,867,176
     
1,376,389
     
6,170,563
     
4,330,754
 
                                 
OPERATING EXPENSES
   
3,985,377
     
2,427,256
     
11,012,070
     
6,599,224
 
                                 
LOSS FROM OPERATIONS
   
(2,118,201
)
   
(1,050,867
)
   
(4,841,507
)
   
(2,268,470
)
                                 
OTHER INCOME (EXPENSE)
                               
Loss (gain) on investment
   
(11,314
)
   
(557
)
   
(6,000
)
   
10,954
 
Other income, net
   
4,327
     
-
     
27,376
     
-
 
Interest income (expense), net
   
50,202
     
1,543
     
81,715
     
(76,888
)
Gain on debt extinguishment, net
   
-
     
-
     
-
     
767,930
 
Total other income (expense), net
   
43,215
     
986
     
103,091
     
701,996
 
                                 
NET LOSS
 
$
(2,074,986
)
 
$
(1,049,881
)
 
$
(4,738,416
)
 
$
(1,566,474
)
                                 
NET LOSS PER SHARE-BASIC AND DILUTED
 
$
0.00
   
$
0.00
   
$
0.00
   
$
0.00
 
                                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC AND DILUTED
   
339,741,632,384
     
336,603,045,428
     
339,741,632,384
     
297,439,560,396
 
                                 
                                 
See notes to unaudited condensed consolidated financial statements
2


HEALTHIER CHOICES MANAGEMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 and 2021
(Unaudited)
   
Series E Convertible Preferred Stock
   
Convertible
Preferred Stock
   
Common Stock
   
Additional
Paid-In
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
Balance – July 1, 2022
   
-
   
$
-
     
800
   
$
800,000
     
339,741,632,384
   
$
33,974,163
   
$
30,855,824
   
$
(39,059,760
)
 
$
26,570,227
 
Issuance of Series E Convertible Preferred stock in connection with the Securities Purchase Agreement, net of offering costs
   
14,722
     
14,722,075
     
-
     
-
     
-
     
-
     
(1,882,244
)
   
-
     
(1,882,244
)
Net loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(2,074,986
)
   
(2,074,986
)
Balance – September 30, 2022
   
14,722
   
$
14,722,075
     
800
   
$
800,000
     
339,741,632,384
   
$
33,974,163
   
$
28,973,580
   
$
(41,134,746
)
 
$
22,612,997
 



   
Series E Convertible Preferred Stock
   
Convertible
Preferred Stock
   
Common Stock
   
Additional
Paid-In
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
Balance – July 1, 2021
   
-
     
-
     
5,000
   
$
5,000,000
     
333,179,132,384
   
$
33,317,913
   
$
26,546,415
   
$
(32,875,464
)
 
$
31,988,864
 
Series D Convertible Preferred Stock exercised
   
-
     
-
     
(4,200
)
   
(4,200,000
)
   
6,562,500,000
     
656,250
     
3,543,750
     
-
     
-
 
 Issuance of common stock in connection with the Rights Offering, net of offering expenses
   
-
     
-
     
-
     
-
     
-
     
-
     
765,659
     
-
     
765,659
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(1,049,881
)
   
(1,049,881
)
Balance – September 30, 2021
   
-
     
-
     
800
   
$
800,000
     
339,741,632,384
   
$
33,974,163
   
$
30,855,824
   
$
(33,925,345
)
 
$
31,704,642
 


See notes to unaudited condensed consolidated financial statements
3


HEALTHIER CHOICES MANAGEMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)

   
Series E Convertible Preferred Stock
   
Convertible
Preferred Stock
   
Common Stock
   
Additional
Paid-In
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
Balance – January 1, 2022
   
-
   
$
-
     
800
   
$
800,000
     
339,741,632,384
   
$
33,974,163
   
$
30,855,824
   
$
(36,396,330
)
 
$
29,233,657
 
Issuance of Series E Convertible Preferred stock in connection with the Securities Purchase Agreement, net of offering costs
   
14,722
     
14,722,075
     
-
     
-
     
-
     
-
     
(1,882,244
)
   
-
     
(1,882,244
)
Net loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(4,738,416
)
   
(4,738,416
)
Balance – September 30, 2022
   
14,722
   
$
14,722,075
     
800
   
$
800,000
     
339,741,632,384
   
$
33,974,163
   
$
28,973,580
   
$
(41,134,746
)
 
$
22,612,997
 




   
Series E Convertible Preferred Stock
   
Convertible
Preferred Stock
   
Common Stock
   
Additional
Paid-In
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
Balance – January 1, 2021
   
-
   
$
-
     
16,277
   
$
16,277,116
     
143,840,848,017
   
$
14,384,084
   
$
3,955,039
   
$
(32,358,871
)
 
$
2,257,368
 
Series C Preferred stock exercised
   
-
     
-
     
(16,277
)
   
(16,277,116
)
   
162,771,153,001
     
16,277,116
     
-
     
-
     
-
 
Stock options exercised
   
-
     
-
     
-
     
-
     
2,275,000,000
     
227,500
     
-
     
-
     
227,500
 
Stock-based compensation expense
   
-
     
-
     
-
     
-
     
-
     
-
     
34,375
     
-
     
34,375
 
Issuance of Series D Convertible Preferred stock in connection with the Securities Purchase Agreement
   
-
     
-
     
5,000
     
5,000,000
     
-
     
-
     
-
     
-
     
5,000,000
 
Series D Convertible Preferred Stock exercised
   
-
     
-
     
(4,200
)
   
(4,200,000
)
   
6,562,500,000
     
656,250
     
3,543,750
     
-
     
-
 
Issuance of common stock
   
-
     
-
     
-
     
-
     
1,182,831,056
     
118,283
     
1,289,273
     
-
     
1,407,556
 
Issuance of common stock in connection with the Rights Offering, net of offering cost
   
-
     
-
     
-
     
-
     
27,046,800,310
     
2,704,680
     
21,639,637
     
-
     
24,344,317
 
Issuance of awarded stock for officers and board member
   
-
     
-
     
-
     
-
     
2,250,000,000
     
225,000
     
(225,000
)
   
-
     
-
 
Cancellation of awarded stock for officers and board member
   
-
     
-
     
-
     
-
     
(6,187,500,000
)
   
(618,750
)
   
618,750
     
-
     
-
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(1,566,474
)
   
(1,566,474
)
Balance – September 30, 2021
   
-
   
$
-
     
800
   
$
800,000
     
339,741,632,384
   
$
33,974,163
   
$
30,855,824
   
$
(33,925,345
)
 
$
31,704,642
 

See notes to unaudited condensed consolidated financial statements
4


HEALTHIER CHOICES MANAGEMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine Months Ended September 30,
 
   
2022
   
2021
 
OPERATING ACTIVITIES
           
Net loss
 
$
(4,738,416
)
 
$
(1,566,474
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
652,162
     
379,536
 
Gain (loss) on investment
   
6,000
     
(10,954
)
Amortization of right-of-use asset
   
555,726
     
400,334
 
Write-down of obsolete and slow moving inventory
   
533,343
     
265,635
 
Gain on debt settlement
   
-
     
(767,930
)
Accrued interest on loan
   
-
     
60,809
 
Stock-based compensation expense
   
-
     
34,375
 
                 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(24,958
)
   
(34,465
)
Inventories
   
(609,468
)
   
(460,232
)
Prepaid expenses and vendor deposits
   
160,574
     
(11,779
)
Other assets
   
(23,128
)
   
4,162
 
Accounts payable and accrued expenses
   
1,560,536
     
11,405
 
Contract liabilities
   
(248,522
)
   
(145
)
Lease liability
   
(499,980
)
   
(348,424
)
NET CASH USED IN OPERATING ACTIVITIES
   
(2,676,131
)
   
(2,044,147
)
                 
INVESTING ACTIVITIES
               
Acquisition of Mother Earth's Storehouse
   
(5,150,000
)
   
-
 
Collection of note receivable
   
42,653
     
40,831
 
Purchases of property and equipment
   
(251,840
)
   
(53,437
)
Purchase of patent
   
-
     
(12,500
)
NET CASH USED IN INVESTING ACTIVITIES
   
(5,359,187
)
   
(25,106
)
                 
FINANCING ACTIVITIES
               
Proceeds from line of credit
   
35,196
     
-
 
Principal payments on loan payable
   
(1,940
)
   
(255,592
)
Principal payment on the line of credit
   
-
     
(2,000,000
)
Proceeds from Rights Offering
   
-
     
24,344,317
 
Proceeds from preferred stock, net of issuance costs
   
12,839,831
     
5,000,000
 
Proceeds from exercise of stock options
   
-
     
227,500
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
12,873,087
     
27,316,225
 
                 
NET INCREASE IN CASH, CASH EQUIVALENT AND RESTRICTED CASH
   
4,837,769
     
25,246,972
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH— BEGINNING OF PERIOD
   
26,496,404
     
2,925,475
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — END OF PERIOD
 
$
31,334,173
   
$
28,172,447
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid for interest
 
$
4,383
   
$
36,792
 
Cash paid for income tax
 
$
-
   
$
-
 
NON-CASH INVESTING AND FINANCING ACTIVITIES
               
Issuance of common stock
 
$
-
   
$
1,290,260
 
Lease acquired
 
$
1,797,667
   
$
-
 

See notes to unaudited condensed consolidated financial statements
5


HEALTHIER CHOICES MANAGEMENT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. ORGANIZATION

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 Ada’s Natural Market, a natural and organic grocery store, through its wholly owned subsidiary Healthy Choice Markets, Inc. Ada’s Natural Market and Paradise Health and Nutrition offers 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. The Company also sells vitamins and supplements on the Amazon.com marketplace through its wholly owned subsidiary Healthy U Wholesale, Inc. The Company also operates HCMC Intellectual Property Holdings, LLC, a wholly owned subsidiary formed to hold, market and expand on its current intellectual property assets. The Company markets the Q-Cup™ technology under the vape segment; this patented technology is based on a small, quartz cup called the Q-Cup™, which a customer partially fills with concentrate (approximately 50mg) purchased from a third party. The Q-Cup™ is then inserted into the Q-Cup™ Tank or Globe, which heats the cup from the outside without coming in direct contact with the solid concentrate. 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. The Company acquired substantially all of the assets of Mother Earth’s Storehouse on February 9, 2022, which operates a two store organic and health food and vitamin chain in New York’s Hudson Valley, a business that has been operating for over 40 years. The Company expanded its operation into the Health & Wellness segment in November 2021. HCMC acquired substantially all of the assets of EIR Hydration, an IV therapy center located in Roslyn Heights, NY. The Company also 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. The activities in the Wellness centers are currently reported under the Grocery segment due to its de minimis nature. From December 2021 through April 2022, the Company either closed its vape stores or sold substantially all of the assets of such stores. This will allow the Company to focus on developing wholesale business and sales through online platform.

COVID-19 Management Update

The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020 and has negatively impacted the U.S. and global economies, disrupted global supply chains and, mandated closures and stay-at-home orders and created significant disruptions of the global financial markets. The Company adjusted certain aspects of the operations to protect their employees and customers while still meeting customers’ needs. 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.

Note 2. LIQUIDITY

The accompanying unaudited condensed 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 currently and historically has reported net losses and cash outflows from operations. The Company anticipates that its current cash, cash equivalent 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. Management believes with $30.0 million cash on hand at the balance sheet date, the Company’s cash will be sufficient to cover its operation for the 12 months from the date of the filing.



6


Note 3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X and do not include all the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The Company has made estimates and judgments affecting the amounts reported in the Company’s unaudited condensed consolidated financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from the Company’s estimates. The condensed consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022. The condensed consolidated balance sheet as of December 31, 2021 was derived from the Company’s audited 2021 financial statements contained in the above referenced Form 10-K. Results of the nine months ended September 30, 2022, are not necessarily indicative of the results to be expected for the full year ending December 31, 2022.

Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2021 Annual Report.

Note 4. CONCENTRATIONS

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid instruments with an original maturity of three months or less, when purchased, to be cash and cash equivalents. The majority of the Company’s cash and cash equivalents are concentrated in one large financial institution, which is in excess of Federal Deposit Insurance Corporation (FDIC) coverage.

A summary of the financial institutions that had a cash and cash equivalents in excess of FDIC limits of $250,000 on September 30, 2022 and December 31, 2021 is presented below:

 
September 30, 2022
   
December 31, 2021
 
Total cash, cash equivalents and restricted cash in excess of FDIC limits of $250,000
 
$
30,749,550
   
$
26,023,593
 

The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests, as deposits are held in excess of federally insured limits. The Company’s cash equivalent at September 30, 2022 and December 31, 2021, respectively, was a money market account. The Company has not experienced any losses in such account.

 
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in unaudited condensed consolidated statements of cash flow
 
 

 
   
September 30, 2022
   
September 30, 2021
 
Cash and Cash Equivalent
 
$
30,009,173
   
$
28,172,447
 
Restricted cash
   
1,325,000
     
-
 
Total cash, cash equivalents and restricted cash
 
$
31,334,173
   
$
28,172,447
 

Restricted Cash
 
The Company's restricted cash consisted of cash balances which were restricted as to withdrawal or usage under the August 18, 2022 security purchase agreement for the purpose of funding any amounts due under the Series E Certificate of Designation upon the redemption of the Series E Preferred Stock.
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Note 5. SEGMENT INFORMATION AND DISAGGREGATION OF REVENUES

In accordance with FASB ASC 280, "Disclosures about Segment of an enterprise and related information", the Company determined it has two reportable segments: grocery and vapor. There are no inter-segment revenues.

The Company's general and administrative costs are not segment specific. As a result, all operating expenses are not managed on segment basis.

The tables below present information about reportable segments for the three months and nine months ended September 30, 2022, and 2021:

 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2022
   
2021
   
2022
   
2021
 
Vapor
 
$
1,187
   
$
466,181
   
$
256,747
   
$
1,671,098
 
Grocery
   
5,775,543
     
2,803,327
     
16,700,596
     
8,450,055
 
Total revenue
 
$
5,776,730
   
$
3,269,508
   
$
16,957,343
   
$
10,121,153
 
                                 
Retail Vapor
 
$
1,187
   
$
466,153
   
$
256,747
   
$
1,671,029
 
Retail Grocery
   
5,187,540
     
2,475,887
     
14,944,074
     
7,438,115
 
Food service/restaurant
   
584,382
     
305,626
     
1,743,228
     
908,476
 
Online/eCommerce
   
3,621
     
15,199
     
13,294
     
85,174
 
Wholesale Grocery
   
-
     
6,615
     
-
     
18,290
 
Wholesale Vapor
   
-
     
28
     
-
     
69
 
Total revenue
 
$
5,776,730
   
$
3,269,508
   
$
16,957,343
   
$
10,121,153
 
                                 
(Loss) income from operations-Vapor
   
(4,998
)
   
66,306
     
(39,460
)
   
300,573
 
(Loss) income from operations-Grocery
   
(289,653
)
   
52,923
     
20,397
     
172,564
 
Corporate items
   
(1,823,550
)
   
(1,170,096
)
   
(4,822,444
)
   
(2,741,607
)
Total loss
 
$
(2,118,201
)
 
$
(1,050,867
)
 
$
(4,841,507
)
 
$
(2,268,470
)
 
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Note 6. NOTES RECEIVABLE AND OTHER INCOME

On September 6, 2018, the Company entered into a secured, 36-month promissory note (the “Note”) with VPR Brands L.P. for $582,260. The Note bears an interest rate of 7.00%, which payments thereunder are $4,141 weekly. The Company records all proceeds related to the interest of the Note as interest income as proceeds are received.

On August 31, 2022, the Company amended and restated the Secured Promissory Note (the "Amended Note") with VPR Brands L.P. to extend the maturity date for one year. The outstanding balance for the Amended Note is $211,355. The Amended Note bears an interest rate of 7.00%, which payments thereunder are $1,500 weekly, with such payments commencing as of September 3, 2022. The Amended Note has a balloon payment of $145,931 for all remaining accrued interest and principal balance due in the final week of the 1-year extension of the Amended Note.

A summary of the Amended Note as of September 30, 2022 and December 31, 2021 is presented below:

Description
 
September 30, 2022
   
December 31, 2021
 
Promissory Note
 
$
205,262
   
$
247,915
 
 
Note 7. ACQUISITION OF MOTHER EARTH’S STOREHOUSE, INC.

On February 9, 2022, the Company through its wholly owned subsidiary, Healthy Choice Markets 3, LLC, entered into an Asset Purchase Agreement with Mother Earth’s Storehouse Inc. (“HCM3”) and its shareholders. Pursuant to the Purchase Agreement, HCM3 acquired certain assets and assumed certain liabilities related to Mother Earth’s grocery stores in Kingston and Saugerties, New York. The Company intends to continue to operate the grocery stores under their existing name. The cash purchase price under the Asset Purchase Agreement was $4,472,500, with an additional $677,500 paid for inventory at closing. In addition, the Company assumed a lease obligation for the Kingston, NY store and entered into an employment agreement with the store manager.

The purchase method of accounting in accordance with ASC 805, Business Combinations, was applied for the Mother Earth's Storehouse acquisition.  This requires the total cost of an acquisition to be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition with the excess cost accounted for as goodwill. Goodwill arising from the acquisition is attributable to expected operational synergies from combining the operations of the acquired business with those of the Company.

The purchase price allocation is final as of September 30, 2022. The following table summarizes the purchase price allocation based on fair values of the net assets acquired at the acquisition date:

Purchase Consideration
     
Cash Consideration paid
 
$
5,150,000
 
         
Purchase price allocation
       
   Inventory
   
805,000
 
   Property and equipment
   
1,278,000
 
   Intangible assets
   
1,609,000
 
   Right of use asset - operating lease
   
1,797,667
 
   Other liabilities
   
(283,000
)
   Operating lease liability
   
(1,797,667
)
   Goodwill
   
1,741,000
 
Net assets acquired
 
$
5,150,000
 
         
Finite-lived intangible assets
       
   Trade Names/Trademarks
 
$
513,000
 
   Customer Relationships
   
683,000
 
   Non-Compete Agreement
   
413,000
 
Total intangible assets
 
$
1,609,000
 

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Revenue and Earnings

Revenue and net income for three months ended September 30, 2022 were $3.2 million and $0.01 million, respectively. Revenue and net income were $8.5 million and $0.4 million, respectively, from the date of acquisition through September 30, 2022. Acquisition-related expenses are expensed as incurred. They were recorded in selling, general and administrative expenses and were $0 and $78,000, for the three and nine months ended September 30, 2022, respectively. They primarily related to legal and other professional fees.

Unaudited Supplemental Pro Forma Information

The following unaudited pro forma summary presents consolidated information of the Company, including Mother Earth's Storehouse, as if the business combination had occurred on January 1, 2021, the earliest period presented herein:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2022
   
2021
   
2022
   
2021
 
Sales
 
$
5,776,730
   
$
6,842,549
   
$
18,380,486
   
$
20,840,277
 
Net (loss)
   
(2,074,985
)
   
(665,288
)
   
(4,581,680
)
   
(412,696
)

The pro forma financial information includes adjustments that are directly attributable to the business combinations and are factually supportable. The pro forma adjustments include incremental amortization of intangible and remove non-recurring transaction costs directly associated with the acquisitions, such as legal and other professional service fees. Cost savings or operating synergies expected to result from the acquisitions are not included in the pro forma results. For the three and nine months ended September 30, 2022, the pro forma financial information excludes $0 and $78,000, respectively, of non-recurring acquisition-related expenses. These pro forma results are illustrative only and not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations.
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Note 8. PROPERTY & EQUIPMENT

Property and equipment consist of the following:
   
September 30, 2022
   
December 31, 2021
 
Displays
 
$
305,558
   
$
305,558
 
Building
   
575,000
     
-
 
Furniture and fixtures
   
311,521
     
246,496
 
Leasehold improvements
   
727,469
     
136,504
 
Computer hardware & equipment
   
133,654
     
151,924
 
Other
   
345,708
     
315,788
 
     
2,398,910
     
1,156,270
 
Less: accumulated depreciation and amortization
   
(870,610
)
   
(979,282
)
Total property and equipment
 
$
1,528,300
   
$
176,988
 

The Company incurred approximately $64,986 and $22,630 of depreciation expense for the three months ended September 30, 2022 and 2021, and $178,575 and $89,155 of depreciation expense for the nine months ended September 30, 2022 and 2021, respectively.

The Company closed all vape stores in Q2 2022, and disposed all vape stores' furniture and fixtures, computer and equipment, and leasehold improvements. Total gross carrying amount of $287,431 and total accumulated depreciation of $287,247 were reduced from the consolidated balance sheets.

Note 9. INTANGIBLE ASSETS

Intangible assets, net are as follows:

September 30, 2022
Useful Lives (Years)
 
Gross
Carrying Amount
   
Accumulated
Amortization
   
Net
Carrying Amount
 
Trade names / Trademarks
8-10 years
 
$
1,436,000
   
$
(650,568
)
 
$
785,432
 
Customer relationships
4-5 years
   
1,566,000
     
(916,024
)
   
649,976
 
Patents
10 years
   
372,165
     
(150,145
)
   
222,020
 
Non-compete
4-5 years
   
651,000
     
(233,338
)
   
417,662
 
Website
4 years
   
10,000
     
(2,083
)
   
7,917
 
Intangible assets, net
   
$
4,035,165
   
$
(1,952,158
)
 
$
2,083,007
 

December 31, 2021
Useful Lives (Years)
 
Gross
Carrying Amount
   
Accumulated
Amortization
   
Net
Carrying Amount
 
Trade names / Trademarks
8-10 years
 
$
923,000
     
(536,661
)
 
$
386,339
 
Customer relationships
4-5 years
   
883,000
     
(685,823
)
   
197,177
 
Patents
10 years
   
372,165
     
(122,233
)
   
249,932
 
Non-compete
4 years
   
238,000
     
(133,646
)
   
104,354
 
Website
4 years
   
10,000
     
(209
)
   
9,791
 
Intangible assets, net
   
$
2,426,165
   
$
(1,478,572
)
 
$
947,593
 

Intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense was approximately  $165,101 and $95,335 for the three months ended September 30, 2022 and 2021, and $473,587 and $290,381 for the nine months ended September 30, 2022 and 2021, respectively. Future annual estimated amortization expense is as follows:

Years ending December 31,
     
2022 (remaining three months)
 
$
154,715
 
2023
   
411,149
 
2024
   
411,149
 
2025
   
404,107
 
2026
   
309,214
 
Thereafter
   
392,673
 
Total
 
$
2,083,007
 

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Note 10. CONTRACT LIABILITIES

The Company’s contract liabilities consist of gift cards and loyalty rewards, for which the Company has a performance obligation to deliver products when customers redeem balances or terms expire through breakage. Our breakage policy is twenty four months for gift cards, twelve months for Grocery loyalty rewards, and six months for Vapor loyalty rewards. As such, all contract liabilities are expected to be recognized within a twenty four month period. Revenue is recognized when gift card and loyalty points are redeemed.

A summary of the net changes in contract liabilities activity at September 30, 2022 and December 31, 2021 is presented below:


 
September 30, 2022
   
December 31, 2021
 
Beginning balance as January 1,
 
$
23,178
   
$
21,262
 
Issued
   
423,321
     
39,469
 
Redeemed
   
(362,108
)
   
(37,463
)
Breakage recognized
   
(27,108
)
   
(90
)
Ending balance
 
$
57,283
   
$
23,178
 
 

Note 11. DEBT

The following table provides a breakdown of the Company's debt as of September 30, 2022 and December 31, 2021 is presented below:

_
 
September 30, 2022
   
December 31, 2021
 
Line of Credit
 
$
453,232
   
$
418,036
 
Other debt
   
1,479
     
3,419
 
Total debt
 
$
454,711
     
421,455
 
 

Note 12. STOCKHOLDERS’ EQUITY

Rights Offering

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 related costs of $2.7 million in connection with the offering resulting in net proceeds to the Company of $24.3 million.

Exchange Agreement

On March 29, 2021, the Company entered into exchange agreements with the holders of indebtedness pursuant to the $2.7 million Loan and Security Agreement (the "Credit Agreement"). Pursuant to the Credit Agreement with the holders of the Company’s indebtedness (the “Notes”) in an aggregate amount of $1.3 million exchanged the Notes for 1,172,964,218 shares at a conversion price of $0.0011 (the "Exchange"). The Notes were issued pursuant to the Credit Agreement dated as of August 18, 2020, among The Vape Store, Inc., the Company, Healthy Choice Markets, Inc., Sabby Healthcare Master Fund, Ltd., and Sabby Volatility Warrant Master Fund, Ltd.  In connection with the Exchange, the Credit Agreement and all related loan documents was terminated and the Holder’s on the assets of the Company and its subsidiaries was cancelled.  The Company recognized a loss on debt extinguishment of $0.1 million.
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Restricted Stock

On January 14, 2021, the Compensation Committee of the Board of Directors of the Company approved an issuance of restricted stock to the Officers and a Director of the Company, in consideration for agreeing to a new vesting schedule for the existing awarded restricted stock. Each individual was granted a 10% increase from the original award agreement for a total of 2.3 billion shares of restricted common stock, which will vest quarterly and equal amounts until December 31, 2022, provided that the grantee remains an employee of the Company through the vesting date.

On March 30, 2021 and June 29, 2021, the Company and the Officers and a Director of the Company agreed to forfeit a total of 6.18 billion of restricted shares of common stock that were due to vest on March 31, 2021 and June 30, 2021. The expense related to such was fully recognized in the fiscal year ended December 31, 2021, as such no additional compensation expense related with restricted stock has been reflected during the current fiscal year.

Series E Convertible Preferred Stock

On August 18, 2022, the Company entered into a Securities Purchase Agreement pursuant to which the Company sold and issued 14,722 shares of its Series E Convertible Preferred Stock to institutional investors for $1,000 per share or an aggregate subscription of $13.25 million. The number of shares issued to each participant is based on subscription amount multiplied by conversion rate of 1.1111. The Company also incurred offering costs of approximately $410,000, which covers legal and consulting fee.

The Company is planning to spin off its grocery segment and wellness business into a new publicly traded company (hereinafter referred to as “NewCo”). NewCo will continue the path of growth in the health verticals started by HCMC and explore other growth opportunities that comport with HCMC’s healthier lifestyle mission. HCMC will retain its entire patent suite, the Q-Cup® brand, and continue to develop its patent suite through R&D as well as continuing its path of enforcing its patent rights against infringers and attempting to monetize said patents through licensing deals. At the time of the Spin-Off, HCMC will distribute all the outstanding shares of Common Stock held by it on a pro rata basis to holders of HCMC’s common stock (the “Spinoff”).

Pursuant to the Securities Purchase Agreement, purchasers will also be required to purchase Series A Convertible Preferred Stock (“NewCo Series A Stock”) of a newly created public company (“NewCo”) resulting from spin off of HCMC’s grocery and wellness businesses in the same subscription amounts that the Purchasers paid for the HCMC Preferred Stock (the “Spinoff”).
 
The HCMC Preferred Stock shall have voting rights on as converted basis at the Company’s next stockholders’ meeting.  However, as long as any shares of HCMC Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the HCMC Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the HCMC Preferred Stock or alter or amend the Certificate of Designation, (b) increase the number of authorized shares of HCMC Preferred Stock, or (c) enter into any agreement with respect to any of the foregoing. Each share of Preferred Stock shall be convertible, at any time and from time to time at the option of the Holder thereof, into that number of shares of Common Stock (subject to the beneficial ownership limitations). The conversion price for the HCMC Preferred Stock shall equal $0.0001.
 
Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary that is not a Fundamental Transaction (as defined in the Certificate of Designation), the holders of HCMC Preferred Stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to $1,000 per share of HCMC Preferred Stock.

Unless earlier converted or extended as set forth below, a holder may require the redemption of all or a portion of the stated value of the HCMC Preferred Stock either (1) six months after closing or (2) the time at which the balance is due and payable upon an event of default.

Stock Options

During the three months ended September 30, 2022 and 2021, no stock options of the Company were exercised into common stock. During the nine months ended September 30, 2022, no stock options of the Company were exercised into common stock; in comparison to the nine months ended September 30, 2021, where 2,275,000,000 stock options of the Company were exercised into common stock.

During the three months ended September 30, 2022 and 2021, the Company recognized stock-based compensation of $0 and $0, respectively. . During the nine months ended September 30, 2022 and 2021, the Company recognized stock-based compensation of $0 and $34,375, respectively. Stock based compensation is included as part of selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations.
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Income (Loss) Per Share

The following table summarizes the Company’s securities, in common share equivalents, which have been excluded from the calculation of dilutive loss per share as their effect would be anti-dilutive:

 
As of September 30,
 
   
2022
   
2021
 
Preferred stock
   
148,471,000,000
     
1,250,000,000
 
Stock options
   
68,587,000,000
     
68,587,000,000
 
Total
   
217,058,000,000
     
69,837,000,000
 
 
Note 13. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Two lawsuits were filed against the Company and its subsidiaries in connection with alleged claimed battery defects for an electronic cigarette device. Plaintiffs claim these batteries were sold by a store of the Company’s subsidiary and have sued for an undetermined amount of damages (other than a total of $0.4 million of medical costs). The initial complaints were filed between January 2019 and April 2019. We responded to the complaints in 2019 and we exchanged additional support information with the plaintiff for one of the lawsuits in 2021. Given the lack of information presented by the plaintiffs to date, the Company is unable to predict the outcome of these matters and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to these legal proceedings.

On November 30, 2020, the Company filed a patent infringement lawsuit against Philip Morris USA, Inc. and Philip Morris Products S.A. in the U.S. District Court for the Northern District of Georgia.  The lawsuit alleges infringement on HCMC-owned patent(s) by the Philip Morris product known and marketed as “IQOS®”.  Philip Morris claims that it is currently approaching 14 million users of its IQOS® product and has reportedly invested over $3 billion in their smokeless tobacco products. On December 3, 2021, the District Court for the Northern District of Georgia effectively dismissed HCMC’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A.  On December 14, 2021, the Company filed a notice of appeal of the District Court for the Northern District of Georgia’s dismissal of the Company’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. The appeal brief was filed on February 28, 2022.

On December 3, 2021, the District Court for the Northern District of Georgia effectively dismissed HCMC’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. In connection with such dismissal, the defendants sought to recover attorney’s fees from the Plaintiff. On February 22, 2022, the District Court for the Northern District of Georgia granted the defendant’s an award of approximately $575,000 in attorneys’ fees to be paid by the Company. The Company has fully provisioned this amount as of December 31, 2021. HCMC appealed this ruling on June 22, 2022.

From time to time the Company is involved in legal proceedings arising in the ordinary course of our business. We believe that there is no other litigation pending that is likely to have, individually or in the aggregate, a material adverse effect on our financial condition or results of operations as of September 30, 2022. With respect to legal costs, we record such costs as incurred.

Employment Agreement

On February 26, 2021, the Company entered into an amended and restated employment agreement (the “Employment Agreement Amendment”) with the Company’s President and Chief Operating Officer, Christopher Santi. Pursuant to the Employment Agreement Amendment, Mr. Santi will continue to be employed as the Company’s President and Chief Operating Officer through January 30, 2024.  Mr. Santi will receive a base salary of $0.4 million for 2021 and his salary will increase 10% in each subsequent year.

On February 02, 2022, the Company entered into a Second Amended and Restated Employment Agreement (the “Employment Agreement Amendment”) with the Company’s Chief Financial Officer, John Ollet.  Pursuant to the Employment Agreement Amendment, Mr. Ollet will continue to be employed as the Company’s Chief Financial Officer through February 14, 2025.  Mr. Ollet will receive a base salary of $0.3 million for 2022 and his salary will increase 10% in each subsequent calendar year.
14



Note 14. SUBSEQUENT EVENTS

On October 14, 2022, the Company through its wholly owned subsidiary, Healthy Choice Markets IV, LLC, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Dean’s Natural Food Market of Shrewsbury, Inc., a New Jersey corporation, Green’s Natural Foods, Inc., a Delaware corporation, Dean’s Natural Food Market of Chester, LLC, a New Jersey limited liability company, Dean’s Natural Food Market of Basking Ridge, LLC, a New Jersey limited liability company, and Dean’s Natural Food Market, Inc., a New Jersey corporation (collectively, the “Sellers”), and shareholders of the Sellers. Pursuant to the Purchase Agreement, the Company acquired certain assets and assumed certain liabilities of an organic and natural health food and vitamin chain with eight store locations in New York and northern and central New Jersey (the “Stores”).

The purchase price under the Purchase Agreement is approximately $8,000,000, of which $3,000,000 is in the form of a promissory note. In addition, the seller is entitled to a contingent earn-out based on certain revenue threshold within the one year period of the closing. The purchase price is subject to final inventory adjustment. The Company will assume all lease obligations for the Stores. The transaction closed on October 14, 2022. The Company has engaged a professional valuation firm to perform the valuation on the assets acquired and liabilities assumed. Purchase price allocation has not been finalized at the time of filing.

On October 25, 2022, the Company announced that the Board has authorized aggregate common stock repurchases of up to $5 million. HCMC may purchase shares on a discretionary basis from time to time through open market purchases, privately negotiated transactions or other means, including through Rule 10b5-1 trading plans. The timing and amount of the repurchase transactions will be subject to the discretion of HCMC based upon market conditions and other opportunities that HCMC may have for the use or investment of its cash balances. The repurchase program has no expiration date, does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. The number of shares to be purchased and the timing of purchases will be based on the Company's trading windows and available liquidity, general business and market conditions, and other factors, including legal requirements, debt covenant restrictions and alternative investment opportunities. The Company has not repurchased any shares

The lease for HCMC headquarter expired on September 30, 2022. The Company is actively negotiating the lease renewal terms with the new owner of the premise. At the time of the filing, no agreement has been reached yet. The payment of the lease is on month to month.
15

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLIDATED 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”), 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)

 
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.
 
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.
 
16


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.
17


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:

   
Three Months Ended September 30,
   
2022 to 2021
 
   
2022
   
2021
   
Change $
 
SALES
                 
Vapor sales, net
 
$
1,187
   
$
466,181
   
$
(464,994
)
Grocery sales, net
   
5,775,543
     
2,803,327
     
2,972,216
 
TOTAL SALES, NET
   
5,776,730
     
3,269,508
     
2,507,222
 
                         
Cost of sales vapor
   
364
     
186,522
     
(186,158
)
Cost of sales grocery
   
3,909,190
     
1,706,597
     
2,202,593
 
GROSS PROFIT
   
1,867,176
     
1,376,389
     
490,787
 
                         
OPERATING EXPENSES
                       
Selling, general and administrative
   
3,985,377
     
2,427,256
     
1,558,121
 
LOSS FROM OPERATIONS
   
(2,118,201
)
   
(1,050,867
)
   
(1,067,334
)
                         
OTHER INCOME (EXPENSE)
                       
Loss on investment
   
(11,314
)
   
(557
)
   
(10,757
)
Other income
   
4,327
     
-
     
4,327
 
Interest income
   
50,202
     
1,543
     
48,659
 
Total other income (expense), net
   
43,215
     
986
     
42,229
 
                         
NET LOSS
 
$
(2,074,986
)
 
$
(1,049,881
)
 
$
(1,025,105
)

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.

18

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:

   
Nine Months Ended September 30,
   
2022 to 2021
 
   
2022
   
2021
   
Change $
 
SALES
                 
Vapor sales, net
 
$
256,747
   
$
1,671,098
   
$
(1,414,351
)
Grocery sales, net
   
16,700,596
     
8,450,055
     
8,250,541
 
TOTAL SALES, NET
   
16,957,343
     
10,121,153
     
6,836,190
 
                         
Cost of sales vapor
   
112,610
     
657,171
     
(544,561
)
Cost of sales grocery
   
10,674,170
     
5,133,228
     
5,540,942
 
GROSS PROFIT
   
6,170,563
     
4,330,754
     
1,839,809
 
                         
OPERATING EXPENSES
                       
Selling, general and administrative
   
11,012,070
     
6,599,224
     
4,412,846
 
LOSS FROM OPERATIONS
   
(4,841,507
)
   
(2,268,470
)
   
(2,573,037
)
                         
OTHER INCOME (EXPENSE)
                       
Gain (loss) on investment
   
(6,000
)
   
10,954
     
(16,954
)
Other income
   
27,376
     
-
     
27,376
 
Interest income (expense), net
   
81,715
     
(76,888
)
   
158,603
 
Gain on extinguishment of debt, net
   
-
     
767,930
     
(767,930
)
Total other income (expense), net
   
103,091
     
701,996
     
(598,905
)
                         
NET LOSS
 
$
(4,738,416
)
 
$
(1,566,474
)
 
$
(3,171,942
)

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.

19

Liquidity and Capital Resources

   
Nine Months Ended September 30,
 
   
2022
   
2021
 
Net cash provided by (used in)
           
 Operating activities
 
$
(2,676,131
)
 
$
(2,044,147
)
 Investing activities
   
(5,359,187
)
   
(25,106
)
Financing activities
   
12,873,087
     
27,316,225
 
   
$
4,837,769
   
$
25,246,972
 

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.

   
September 30, 2022
   
December 31, 2021
 
Cash
 
$
30,009,173
   
$
26,496,404
 
Total assets
 
$
45,470,486
   
$
34,443,487
 
Percentage of total assets
   
66.00
%
   
76.93
%

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.

20


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.


21


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.


ITEM 4. CONTROLS AND PROCEDURES

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.




22

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Two lawsuits were filed against the Company and its subsidiaries in connection with alleged claimed battery defects for an electronic cigarette device. Plaintiffs claim these batteries were sold by a store of the Company’s subsidiary and have sued for an undetermined amount of damages (other than a total of $0.4 million of medical costs). The initial complaints were filed between January 2019 and April 2019. We responded to the complaints in 2019 and we exchanged additional support information with the plaintiff for one of the lawsuits in 2021. Given the lack of information presented by the plaintiffs to date, the Company is unable to predict the outcome of these matters and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to these legal proceedings.

On November 30, 2020, the Company filed a patent infringement lawsuit against Philip Morris USA, Inc. and Philip Morris Products S.A. in the U.S. District Court for the Northern District of Georgia.  The lawsuit alleges infringement on HCMC-owned patent(s) by the Philip Morris product known and marketed as “IQOS®”.  Philip Morris claims that it is currently approaching 14 million users of its IQOS® product and has reportedly invested over $3 billion in their smokeless tobacco products. On December 3, 2021, the District Court for the Northern District of Georgia effectively dismissed HCMC’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A.  On December 14, 2021, the Company filed a notice of appeal of the District Court for the Northern District of Georgia’s dismissal of the Company’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. The appeal brief was filed on February 28, 2022.

On December 3, 2021, the District Court for the Northern District of Georgia effectively dismissed HCMC’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. In connection with such dismissal, the defendants sought to recover attorney’s fees from the Plaintiff. On February 22, 2022, the District Court for the Northern District of Georgia granted the defendant’s an award of approximately $575,000 in attorneys’ fees to be paid by the Company. The Company has fully provisioned this amount as of December 31, 2021. HCMC appealed this ruling on June 22, 2022.

From time to time the Company is involved in legal proceedings arising in the ordinary course of our business. We believe that there is no other litigation pending that is likely to have, individually or in the aggregate, a material adverse effect on our financial condition or results of operations as of September 30, 2022. With respect to legal costs, we record such costs as incurred.

ITEM 1A. RISK FACTORS.

Not Applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5. OTHER INFORMATION.

Not Applicable.

ITEM 6. EXHIBITS.

See the exhibits listed in the accompanying “Index to Exhibits.”

23


INDEX TO EXHIBITS

Exhibit
     
Incorporated by Reference
 
Filed or Furnished
No.
 
Exhibit Description
 
Form
 
Date
 
Number
 
Herewith
31.1
               
Filed
31.2
               
Filed
32.1
               
Furnished *
32.2
               
Furnished *
101.INS
 
XBRL Instance Document
             
Filed
101.SCH
 
XBRL Taxonomy Extension Schema Document
             
Filed
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
             
Filed
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
             
Filed
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
             
Filed
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
             
Filed
104
 
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
             
Filed

*
This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
24



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
HEALTHIER CHOICES MANAGEMENT CORP.
     
Date: November 10, 2022
By:
/s/ Jeffrey Holman
   
Jeffrey Holman
   
Chief Executive Officer
     
Date: November 10, 2022
By:
/s/ John Ollet
   
John Ollet
   
Chief Financial Officer

25

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