ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED OPERATIONS
The following discussion and analysis should
be read in conjunction with our unaudited interim condensed consolidated financial statements and related notes appearing elsewhere
in this report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements
that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking
statements. The terms “we,” “us,” “our,” and the “Company” refer to Healthier Choices
Management Corp. and its wholly-owned subsidiaries, Healthy Choice Markets, Inc., Healthy Choice Markets 2, LLC (“Paradise
Health and Nutrition”), The Vitamin Store, LLC, Healthy U Wholesale, Inc., The Vape Store, Inc. (“Vape Store”),
Vaporin, Inc. (“Vaporin”), Smoke Anywhere U.S.A., Inc. (“Smoke”), Emagine the Vape Store, LLC (“Emagine”),
IVGI Acquisition, Inc., Vapormax Franchising LLC, Vaporin LLC, and Vaporin Florida, Inc. . All intercompany accounts and transactions
have been eliminated in consolidation.
Company Overview
Healthier Choices Management Corp. (the
“Company”) is a holding company focused on providing consumers with healthier daily choices with respect to nutrition
and other lifestyle alternatives. The Company currently operates ten 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. The Company also operates Ada’s Natural Market, a natural
and organic grocery store, through its wholly owned subsidiary Healthy Choice Markets, Inc. and Paradise Health and Nutrition,
stores that offer fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods,
dairy products, frozen foods, health & beauty products and natural household items through its wholly owned subsidiary Healthy
Choice Markets 2, LLC.
Going Concern and Liquidity
The unaudited condensed consolidated financial
statements included elsewhere in this Form 10-Q have been prepared in conformity with GAAP, which contemplate continuation of the
Company as a going concern and realization of assets and satisfaction of liabilities in the normal course of business and do not
include any adjustments that might result from the outcome of any uncertainties related to our going concern assessment. The carrying
amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement
values. The unaudited consolidated financial statements do not include any adjustments that might result from the outcome of these
uncertainties.
The Company incurred a loss from operations
of approximately $2.0 million for the six months ended June 30, 2019. As of June 30, 2019, cash and cash equivalents totaled approximately
$5.0 million. While we anticipate that our current cash, cash equivalents, and cash to be generated from operations will be sufficient
to meet our projected operating plans for the foreseeable future through a year and a day from the issuance of these unaudited
consolidated financial statements, should we require additional funds (either through equity or debt financings, collaborative
agreements or from other sources) we have no commitments to obtain such additional financing, and we may not be able to obtain
any such additional financing on terms favorable to us, or at all. If adequate financing is not available, the Company will further
delay, postpone or terminate product and service expansion and curtail certain selling, general and administrative operations.
The inability to raise additional financing may have a material adverse effect on the future performance of the Company.
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 ten retail vape stores, which are located in Florida, Georgia and Tennessee. The Company has ceased plans to increase the number
of retail vape stores due to adverse industry trends and increasing federal and state regulations that, if implemented, may negatively
impact future retail revenues.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED OPERATIONS – (Continued)
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, 2019 and 2018 that is used in the following
discussions of our results of operations:
|
|
Three Months Ended
June 30,
|
|
|
2019 to 2018
|
|
|
|
2019
|
|
|
2018
|
|
|
Change $
|
|
SALES
|
|
|
|
|
|
|
|
|
|
Vapor sales, net
|
|
$
|
1,085,259
|
|
|
$
|
1,140,640
|
|
|
$
|
(55,381
|
)
|
Grocery sales, net
|
|
|
2,731,754
|
|
|
|
2,137,281
|
|
|
|
594,473
|
|
TOTAL SALES, NET
|
|
|
3,817,013
|
|
|
|
3,277,921
|
|
|
|
539,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales vapor
|
|
|
442,931
|
|
|
|
565,054
|
|
|
|
(122,123
|
)
|
Cost of sales grocery
|
|
|
1,711,791
|
|
|
|
1,281,687
|
|
|
|
430,104
|
|
GROSS PROFIT
|
|
|
1,662,291
|
|
|
|
1,431,180
|
|
|
|
231,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
45,230
|
|
|
|
43,701
|
|
|
|
1,529
|
|
Selling, general and administrative
|
|
|
2,489,262
|
|
|
|
1,975,482
|
|
|
|
513,780
|
|
Total operating expenses
|
|
|
2,534,492
|
|
|
|
2,019,183
|
|
|
|
515,309
|
|
LOSS FROM OPERATIONS
|
|
|
(872,201
|
)
|
|
|
(588,003
|
)
|
|
|
(284,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on investment
|
|
|
(19,286
|
)
|
|
|
-
|
|
|
|
(19,286
|
)
|
Other income (expense)
|
|
|
-
|
|
|
|
107,500
|
|
|
|
(107,500
|
)
|
Interest income (expense)
|
|
|
(12,827
|
)
|
|
|
21,373
|
|
|
|
(34,200
|
)
|
Total other income (expense), net
|
|
|
(32,113
|
)
|
|
|
128,873
|
|
|
|
(160,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(904,314
|
)
|
|
$
|
(459,130
|
)
|
|
$
|
(445,184
|
)
|
Net Vapor sales decreased $55,000 to $1,085,000
for the three months ended June 30, 2019 as compared to $1,141,000 for the same period in 2018. The decrease in sales is primarily
due to the decreased number of stores – ten stores open during the three months ended June 30, 2019 as compared to twelve
retail stores and one wholesale location for the same period in 2018.
Net Grocery sales increased $594,000 to
$2,732,000 for the three months ended June 30, 2019 as compared to $2,137,000 for the same period in 2018. The increase in sales
is primarily due to the acquisition of three Paradise Health and Nutrition stores.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED OPERATIONS – (Continued)
Vapor cost of goods sold for the three
months ended June 30, 2019 and 2018 were $443,000 and $565,000, respectively, a decrease of $122,000. The decrease is primarily
due to decreases in product costs during the three months ended June 30, 2019 as compared to the same period in 2018. Gross profit
was $642,000 and $576,000 for the three months ended June 30, 2019 and 2018, respectively.
Grocery cost of goods sold for the three
months ended June 30, 2019 and 2018 were $1,712,000 and $1,282,000 respectively, an increase of $430,000. The increase is primarily
due to increases in sales and cost of goods sold from the acquisition of three Paradise Health and Nutrition stores. Gross profit
was $1,020,000 and $856,000 for the three months ended June 30, 2019 and 2018, respectively.
Selling, general and administrative expenses
increased $514,000 to $2,489,000 for the three months ended June 30, 2019 compared to $1,975,000 for the same period in 2018. The
increase is primarily attributable to increases in payroll and employee related cost of $163,000, occupancy costs of $113,000,
professional fee of $90,000, depreciation and amortization of $60,000, and insurance of $28,000.
Net other expense of $32,000 for the three
months ended June 30, 2019 includes loss on investment of $19,000, and interest expense of $39,000, offset by interest income of
$26,000. Net other income of $129,000 for the three months ended June 30, 2018 includes other income of $108,000, and interest
income of $22,000, offset by interest expense of $156.
The following table sets forth our unaudited
consolidated Statements of Operations for the six months ended June 30, 2019 and 2018 that is used in the following discussions
of our results of operations:
|
|
Six Months Ended
June 30,
|
|
|
2019 to 2018
|
|
|
|
2019
|
|
|
2018
|
|
|
Change $
|
|
SALES
|
|
|
|
|
|
|
|
|
|
Vapor sales, net
|
|
$
|
2,309,300
|
|
|
$
|
2,449,534
|
|
|
$
|
(140,234
|
)
|
Grocery sales, net
|
|
|
5,887,819
|
|
|
|
4,435,792
|
|
|
|
1,452,027
|
|
TOTAL SALES, NET
|
|
|
8,197,119
|
|
|
|
6,885,326
|
|
|
|
1,311,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales vapor
|
|
|
952,347
|
|
|
|
1,141,715
|
|
|
|
(189,368
|
)
|
Cost of sales grocery
|
|
|
3,679,587
|
|
|
|
2,667,965
|
|
|
|
1,011,622
|
|
GROSS PROFIT
|
|
|
3,565,185
|
|
|
|
3,075,646
|
|
|
|
489,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
89,604
|
|
|
|
81,464
|
|
|
|
8,140
|
|
Selling, general and administrative
|
|
|
5,435,343
|
|
|
|
5,073,209
|
|
|
|
362,134
|
|
Total operating expenses
|
|
|
5,524,947
|
|
|
|
5,154,673
|
|
|
|
370,274
|
|
LOSS FROM OPERATIONS
|
|
|
(1,959,762
|
)
|
|
|
(2,079,027
|
)
|
|
|
119,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on investment
|
|
|
(44,999
|
)
|
|
|
-
|
|
|
|
(44,999
|
)
|
Other income (expense)
|
|
|
(692
|
)
|
|
|
317,500
|
|
|
|
(318,192
|
)
|
Interest income (expense)
|
|
|
(11,390
|
)
|
|
|
32,761
|
|
|
|
(44,151
|
)
|
Total other income (expense), net
|
|
|
(57,081
|
)
|
|
|
350,261
|
|
|
|
(407,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(2,016,843
|
)
|
|
$
|
(1,728,766
|
)
|
|
$
|
(288,077
|
)
|
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED OPERATIONS – (Continued)
Net Vapor sales decreased $140,000 to $2,309,000
for the six months ended June 30, 2019 as compared to $2,450,000 for the same period in 2018. The decrease in sales is primarily
due to ten stores open during the six months ended June 30, 2019 as compared to twelve retail stores and one wholesale location
for the same period in 2018.
Net Grocery sales increased $1,452,000
to $5,888,000 for the six months ended June 30, 2019 as compared to $4,436,000 for the same period in 2018. The increase in sales
is primarily due to the acquisition of three Paradise Health and Nutrition stores.
Vapor cost of goods sold for the six months
ended June 30, 2019 and 2018 were $952,000 and $1,142,000, respectively, a decrease of $189,000. The decrease is primarily due
to the decreased number of stores. Gross profit was $1,357,000 and $1,308,000 for the six months ended June 30, 2019 and 2018,
respectively.
Grocery cost of goods sold for the six
months ended June 30, 2019 and 2018 were $3,680,000 and $2,668,000, respectively, an increase of $1,012,000. The increase is primarily
due to increases in sales and cost of goods sold from the acquisition of three Paradise Health and Nutrition stores. Gross profit
was $2,208,000 and $1,768,000 for the six months ended June 30, 2018 and 2018, respectively.
Selling, general and administrative expenses
increased $362,000 to $5,435,000 for the six months ended June 30, 2019 compared to $5,073,000 for the same period in 2018. The
increase is primarily attributable to increases in payroll and employee related cost of $644,000, occupancy costs of $198,000,
professional fee of $158,000, depreciation and amortization of $125,000, and taxes, licenses & permits of $86,000, offset by
decreases in stock-based compensation of $962,000.
Net other expense of $57,000 for the six
months ended June 30, 2019 includes loss on investment of $45,000, interest expense of $69,000 offset by interest income of $58,000,
other income of $25,000 offset by other expense of $25,000. Net other income of $350,000 for the six months ended June 30, 2018
includes other income of $318,000, and interest income of $33,000, offset by interest expense of $360.
The company did not incur activity from
discontinued operations for the six months ended June 30, 2019 or for the same period in 2018.
Liquidity and Capital Resources
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(2,089,989
|
)
|
|
$
|
(404,223
|
)
|
Net cash provided by investing activities
|
|
|
57,570
|
|
|
|
(57,720
|
)
|
Net cash provided by financing activities
|
|
|
13,777
|
|
|
|
(1,041
|
)
|
|
|
$
|
(2,018,642
|
)
|
|
$
|
(462,984
|
)
|
Our net cash used in operating activities
of $2.1 million for the six months ended June 30, 2019 resulted from our net loss of $2.0 million, a net cash usage of $269,000
from changes in operating assets and liabilities, offset by share-based compensation expense of $196,000. Our net cash used in
operating activities of $404,000 for the six months ended June 30, 2018 resulted from our net loss of $1.7 million, a net cash
provided by changes in operating assets and liabilities of $166,000, offset by share-based compensation expense of $1.2 million.
The net cash provided by investing activities
of $58,000 for the six months ended June 30, 2019 resulted from payments received on the VPR Brands L.P. Note. The net cash used
in investing activities of $57,000 for the six months ended June 30, 2018 resulted from the purchases of a patent and property
and equipment.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED OPERATIONS – (Continued)
The net cash provided by financing activities
of $14,000 for the six months ended June 30, 2019 resulted from $132,000 proceeds from the credit line with Professional Bank,
offset by $118,000 of loan principle payment. The net cash used in financing activities of $1,000 for the six months ended June
30, 2018 resulted from loan payments.
At June 30, 2019 and December 31, 2018,
we did not have any material financial guarantees or other contractual commitments with vendors that are reasonably likely to have
an adverse effect on liquidity.
Our cash balances are kept liquid to support
our growing acquisition and infrastructure needs for operational expansion. The majority of our cash and cash equivalents are concentrated
in three financial institutions and are generally in excess of the FDIC insurance limit. The Company has not experienced any losses
on its cash and cash equivalents. The following table presents the Company’s cash position as of June 30, 2019 and December 31,
2018.
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,042,612
|
|
|
$
|
7,061,253
|
|
Total assets
|
|
$
|
16,735,752
|
|
|
$
|
15,172,663
|
|
Percentage of total assets
|
|
|
30.13
|
%
|
|
|
46.54
|
%
|
The Company reported a net loss of $2.0
million for the six months ended June 30, 2019. The Company also had positive working capital of $1.9 million. The Company expects
to continue incurring losses for the foreseeable future and may need to raise additional capital to satisfy warrant obligations,
and to continue as a going concern.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis
of financial condition and results of operations is based on our 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 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 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 2018 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 consolidated financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDENSED CONSOLDIATED OPERATIONS – (Continued)
Seasonality
We do not consider our business to be seasonal.
Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements
including statements regarding retail expansion, the future demand for our products, the transition to vaporizer and other products,
competition, the adequacy of our cash resources and our authorized Common Stock, and our continued ability to raise capital.
The words “believe,” “may,”
“estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,”
“could,” “target,” “potential,” “is likely,” “will,” “expect”
and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking
statements largely on our current expectations and projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy and financial needs.
The results anticipated by any or all of
these forward-looking statements might not occur. Important factors that could cause actual results to differ from those in the
forward-looking statements include our future common stock price, the timing of future warrant exercises and stock sales, having
the authorized capital to issue stock to exercising Series A warrant holders, customer acceptance of our products, and proposed
federal and state regulation. We undertake no obligation to publicly update or revise any forward-looking statements, whether as
the result of new information, future events or otherwise.