HEALTHIER CHOICES MANAGEMENT CORP. 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 toHealthier 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 3Real 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. , andThe Vape Store, Inc. ("Vape Store "). All intercompany accounts and transactions have been eliminated in consolidation.
Company Overview
Through its wholly owned subsidiary
Through its wholly owned subsidiaries,
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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.
•
bulk foods, vitamins and supplements, packaged groceries, meat and seafood,
deli, baked goods, dairy products, frozen foods, health & beauty products and
natural household items.
•
chain in
years.
Through its wholly owned subsidiaries,Healthy Choice Markets IV, LLC , the Company acquiredGreen's Natural Foods onOctober 14, 2022 , a chain of premier natural foods stores inNew York andNew 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 forHealthy Choice Wellness Centers at theCasbah Spa and Salon inFort Lauderdale, FL , andBoston Direct Health inBoston, 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
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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 endedSeptember 30, 2022 . As ofSeptember 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 inFlorida , as well as two located inNew York . As ofApril 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 fromDecember 2021 toApril 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 ofMother Earth's Storehouse inFebruary 2022 . Vapor cost of goods sold for the three months endedSeptember 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 endedSeptember 30, 2022 as compared to the same period in 2021. Gross profit was$0.8 thousand and$0.3 million for three months endedSeptember 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 endedSeptember 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 ofMother Earth's Storehouse onFebruary 14, 2022 . Gross profit was$1.9 million and$1.1 million for the three months endedSeptember 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 ourFlorida 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 endedSeptember 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 endedSeptember 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
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The following table sets forth our unaudited consolidated Statements of
Operations for the nine months ended
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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2022 as compared to$8.5 million for the same period in 2021. The increase in sales is primarily due to acquisition ofMother Earth's Storehouse inFebruary 2022 . Vapor cost of goods sold for the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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 ofMother Earth's Storehouse inFebruary 2022 . Gross profit was$6.0 million and$3.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Total operating expenses increased$4.4 million to$11.0 million for the nine months endedSeptember 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 toMother 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 endedSeptember 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 endedSeptember 30, 2021 includes a gain on debt settlement of$768,000 , a gain on investment of$11,000 , and interest expense of$77,000 . 19
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Liquidity and Capital Resources
Nine Months Ended September 30,
2022 2021
Net cash provided by (used in)
Operating activities$ (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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2022 resulted from the acquisition ofMother 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 endedSeptember 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 endedSeptember 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 endedSeptember 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
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 theFDIC 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 ofSeptember 30, 2022 andDecember 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 endedSeptember 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.
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--------------------------------------------------------------------------------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 inthe United States , orU.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.
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