EDGAR 10-K Filing

Company CIK: 844856
Filing Year: 2021
Filename: 844856_10-K_2021_0000844856-21-000019.json

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ITEM 1. BUSINESS
Item 1. Business.
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 nine retail vape stores in the Southeast region of the United States, through which it offers e-liquids, vaporizers and related products. 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. 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 new 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 either cannabis or CBD concentrate (approximately 50mg) purchased from a third party. The Q-Cup™ is then inserted into the Q-Cup™ Tank or Globe that 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.
NATURAL AND ORGANIC GROCERIES and DIETARY SUPPLEMENTS BUSINESS
Healthy Choice and Healthy Choice Markets 2 are specialty retailer of natural and organic groceries and dietary supplements. We focus on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We strive to generate long-term relationships with our customers based on quality and service by:
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selling only natural and organic groceries;
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offering affordable prices and a shopper-friendly retail environment; and
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providing dine-in options at our Natural Organic Juice Bar and Green Leaf Café.
Our History and Founding Principles
We are committed to maintaining the following founding principles, which have helped foster our growth:
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Quality. Every product on our shelves must go through a rigorous screening and approval process. Our mission includes providing the highest quality groceries and supplements, Natural Grocers branded products, European and United States Department of Agriculture (USDA) certified organic and fresh produce at the best prices in the industry.
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Community. The Ada’s and Paradise brands have been serving Florida communities for 40 years.
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Employees. Our employees make our companies great. We work hard to ensure that our employees are able to live a healthy, balanced lifestyle. We support them with free nutrition education programs, good pay and excellent benefits.
Our Market
We operate within the natural products retail industry, which is a subset of the United States grocery industry and the dietary supplement business. This industry includes conventional supermarkets, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, mail order and online retailers and multi-level marketers. Industry-wide sales of natural and organic foods and dietary supplements have experienced meaningful growth over the past several years, and we believe that growth will continue for the foreseeable future.
We believe the growth in sales of natural and organic foods and dietary supplements continues to be driven by numerous factors, including:
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greater consumer focus on high-quality nutritional products;
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an increased awareness of the importance of good nutrition to long-term wellness;
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aging communities that are seeking healthy lifestyle alternatives;
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heightened consumer awareness about the importance of food quality and a desire to avoid pesticide residues, growth hormones, artificial ingredients and genetically engineered ingredients in foods;
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growing consumer concerns over the use of harmful chemical additives in body care and household cleaning supplies;
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well-established natural and organic brands, which generate additional industry awareness and credibility with consumers; and
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the growth in the number of consumers with special dietary requirements as a result of allergies, chemical sensitivities, auto-immune disorders and other conditions.
Our Competitive Strengths
We are well-positioned to capitalize on favorable natural and organic grocery and dietary supplement industry dynamics as a result of the following competitive strengths:
Strict focus on high-quality natural and organic grocery products. We offer high-quality products and brands, including an extensive selection of widely-recognized natural and organic food, dietary supplements, body care products, pet care products and books. We offer our customers approximately 10,000 Stock Keeping Units (SKUs) of natural and organic products. We believe our broad product offering enables our customers to shop our stores for substantially all of their grocery and dietary supplement purchases. In our grocery departments, we primarily sell USDA certified organic produce and do not approve for sale grocery products that are known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils. In addition, we only sell pasture-raised, humanely-raised dairy products. Consistent with this strategy, our product selection does not include items that do not meet our strict quality guidelines. Our store managers enhance our robust product offering by customizing their stores’ selections to address the preferences of local customers.
Engaging customer service experience based on education and empowerment. We strive to offer consistently exceptional customer service in a shopper-friendly environment, which we believe creates a differentiated shopping experience, enhances customer loyalty and generates repeat visits from our clientele. A key aspect of our customer service model is to provide free nutrition education to our customers. We believe this focus provides an engaging retail experience while also empowering our customers to make informed decisions about their health. We offer our science-based nutrition education through our trained employees, our newsletter and sales flyer, community out-reach programs, one-on-one nutrition health coaching, nutrition classes and cooking demonstrations.
Our Growth Strategies
We expect to pursue several strategies to continue our profitable growth, including:
Expand our store base. We intend to expand our store base through the acquisition of new stores.
Increase sales from existing customers. In order to increase our average ticket and the number of customer transactions, we plan to continue offering an engaging customer experience by providing science-based nutrition education and a differentiated merchandising strategy that delivers affordable, high-quality natural and organic grocery products and dietary supplements. We also plan to continue to utilize targeted marketing efforts to reach our existing customers, which we anticipate will drive customer transactions and convert occasional, single-category customers into core, multi-category customers.
Grow our customer base. We plan to implement several measures aimed at building our brand awareness and growing our customer base, including: (i) redesigning our website (www.adasmarket.com) to enhance functionality, create a more engaging user experience and increase its reach and effectiveness; (ii) introducing customer appreciation programs at all our stores; and (iii) developing new collateral marketing materials. We believe offering nutrition education has historically been one of our most effective marketing strategies for reaching new customers and increasing the demand for natural and organic groceries and dietary supplements in our markets.
Improve operating margins. We expect to continue to improve our operating margins as we benefit from investments we have made or are making in fixed overhead and information technology. As we add additional stores, we expect to achieve greater economies of scale through sourcing and distribution. To achieve additional operating margin expansion, we intend to further optimize performance, maintain appropriate store labor levels and effectively manage product selection and pricing.
Our Products
Product Selection Guidelines. We have a set of strict quality guidelines covering all products we sell. For example:
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we do not approve for sale food known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils or phthalates or parabens, regardless of the proportion of its natural or organic ingredients;
● we sell USDA certified organic produce; and
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we sell meats naturally raised without hormones, antibiotics or treatments and that were not fed animal by-products.
Our product review team analyzes all new products and approves them for sale based on ingredients, price and uniqueness within the current product set. We actively research new products in the marketplace through our product vendors, private label manufacturers, scientific findings, customer requests and general trends in popular media. Our stores are able to fully merchandise all departments by providing an extensive assortment of natural and organic products. We do not believe we need to sell conventional products to fill our selection, increase our margins or attract more customers.
What We Sell. We operate both a full-service natural and organic grocery stores and dietary supplement stores within our retail locations. The following is a breakdown of our product mix:
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Grocery. We offer a broad selection of natural and organic grocery products with an emphasis on minimally processed and single ingredient products that are not known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils. Additionally, we carry a wide variety of products associated with special diets such as gluten free, vegetarian and non-dairy.
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Produce. We sell USDA-certified organic produce and source from local, organic producers whenever feasible. Our selection varies based on seasonal availability, and we offer a variety of organic produce offerings that are not typically found at conventional food retailers.
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Bulk Food and Private Label Products. We sell a wide selection of private label repackaged bulk and other products, including nuts, water, pasta, canned seafood, dried fruits, grains, granolas, honey, eggs, herbs, spices and teas.
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Dry, Frozen and Canned Groceries. We offer a wide variety of natural and organic dry, frozen and canned groceries, including cereals, soups, baby foods, frozen entrees and snack items. We offer a broad selection of natural chocolate bars, and energy, protein and food bars.
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Meats and Seafood. We offer naturally-raised or organic meat products. The meat products we offer come from animals that have never been treated with antibiotics or hormones or fed animal by-products. Additionally, we only buy from companies we believe employ humane animal-raising practices. Our seafood items are generally frozen at the time of processing and sold from our freezer section, thereby ensuring freshness and reducing food spoilage and safety issues.
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Dairy Products and Dairy Substitutes. We offer a broad selection of natural and organic dairy products such as milk, eggs, cheeses, yogurts and beverages, as well as non-dairy substitutes made from almonds, coconuts, rice and soy.
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Prepared Foods. Our stores have a convenient selection of refrigerated prepared fresh food items, including salads, sandwiches, salsa, humus and wraps. The size of this offering varies by location.
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Bread and Baked Goods. We receive regular deliveries of a wide selection of bakery products for our bakery section, which includes an extensive selection of gluten-free items.
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Beverages. We offer a wide variety of non-alcoholic and alcoholic beverages containing natural and organic ingredients.
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Dietary Supplements. We offer a wide selection of vitamins, supplements and natural remedies. Our staff is well educated and trained on multiple aspects of natural medicine.
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Body Care. We offer a full range of cosmetics, skin care, hair care, fragrance and personal care products containing natural and organic ingredients. Our body care offerings range from bargain-priced basics to high-end formulations.
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Household and General Merchandise. Our offerings include sustainable, hypo-allergenic and fragrance-free household products, including cleaning supplies, paper products, dish and laundry soap and other common household products, including diapers.
Quality Assurance. We endeavor to ensure the quality of the products we sell. We work with reputable suppliers we believe are compliant with established regulatory and industry guidelines. Our purchasing department requires a complete supplier and product profile as part of the approval process. Our dietary supplement suppliers must follow Food and Drug Administration (FDA) current good manufacturing practices supported by quality assurance testing for both the base ingredients and the finished product. We expect our suppliers to comply with industry best practices for food safety.
Many of our suppliers are inspected and certified under the USDA National Organic Program, voluntary industry associations, and other third-party auditing programs with regards to additional ingredients, manufacturing and handling standards. We operate all our stores in compliance with the National Organic Program standards, which restricts the use of certain substances for cleaning and pest control and requires rigorous recordkeeping, among other requirements.
Our Pricing Strategy
We believe our pricing strategy allows our customers to shop our stores on a regular basis for their groceries and dietary supplements.
The key elements of our pricing strategy include:
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heavily advertised deals supported by manufacturer participation;
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in-store specials generally lasting for 30 days and not advertised outside the store;
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managers’ specials, such as clearance, overstock, short-dated or promotional incentives; and
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specials on seasonally harvested produce.
As we expand our store base, we believe there are opportunities for increased leverage in fixed costs, such as administrative expenses, as well as increased economies of scale in sourcing products. We strive to keep our product, operating and general and administrative costs low, which allows us to continue to offer attractive pricing for our customers.
Store Management and Staffing. Our store staffing includes a manager and assistant manager, with department managers in each of the dietary supplement, grocery, dairy and frozen, produce, body care and receiving departments, as well as several non-management employees. Our regional manager is responsible for monthly store profit and loss, including labor, merchandising and inventory costs.
To ensure a high level of service, all employees receive training and guidance on customer service skills, product attributes and nutrition education. Employees are carefully trained and evaluated based on a requirement that they present nutrition information in an appropriate and legally compliant educational context while interacting with customers. Additionally, store employees are cross-trained in various functions, including cashier duties, stocking and receiving product.
Inventory. We use a robust merchandise management and perpetual inventory system that values goods at average cost. We manage shelf stock based on weeks-on-hand relative to sales, resupply time and minimum economic order quantity.
Sourcing and Vendors. We source from approximately 460 suppliers, and offer over 4,000 brands. These suppliers range from small independent businesses to multi-national conglomerates. As of December 31, 2020, we purchased approximately 70% of the goods we sell from our top 20 suppliers. For the fiscal year ended December 31, 2020, approximately 27% of our total purchases were from one vendor. We maintain good relations with all our suppliers and believe we have adequate alternative supply methods, including self-distribution.
We have longstanding relationships with our suppliers, and we require disclosure from them regarding quality, freshness, potency and safety data information. Our bulk food private label products are packaged by us in pre-packed sealed bags to help prevent contamination while in transit and in our stores. Unlike most of our competitors, most of our private label nuts, trail mix and flours are refrigerated in our warehouse and stores to maintain freshness.
Our Employees
Commitment to our employees is one of our five founding principles. Employees are eligible for health, long-term disability, vision and dental insurance coverage, as well as Company paid short-term disability and life insurance benefits, after they meet eligibility requirements. Additionally, our employees are offered a 401(k) retirement savings plan with discretionary contribution matching opportunities. This further offers our employees the opportunity to become more familiar with our products, which we believe improves the customer service our employees are able to provide. We believe these and other factors result in higher retention rates and encourage our employees to appreciate our culture, which helps them better promote our brand.
Our Customers
The growth in the natural and organic grocery and dietary supplement industries and growing consumer interest in health and nutrition have led to an increase in our core customer base. We believe the demands for affordable, nutritious food and dietary supplements are shared attributes of our core customers, regardless of their socio-economic status. Additionally, we believe our core customers prefer a retail store environment that offers carefully selected natural and organic products and dietary supplements. Our customers tend to be interested in health and nutrition, and expect our store employees to be highly knowledgeable about these topics and related products.
Competition
The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Our competition varies by market and includes conventional supermarkets such as Publix and Winn-Dixie, mass or discount retailers such as Wal-Mart and Target, natural and gourmet markets such as Whole Foods and The Fresh Market, specialty food retailers such as Trader Joe’s, independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, mail order and online retailers and multi-level marketers. These businesses compete with us for customers on the basis of price, selection, quality, customer service, shopping experience or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutritional education, differentiate us in the industry and provide a competitive advantage.
The Grocery business and COVID-19
Starting March 2020, the COVID-19 pandemic had little impact on the grocery segment of the business, other than the Green Leaf Grill. Demand for groceries, vitamins and supplements, and household products remained strong. However, due to many local businesses temporarily closing and local dinning restrictions, the Green Leaf Grill located at Adas Natural Market was forced to temporarily close for most of 2020.
To address the impact of the virus, we have instituted strict cleaning protocols at all locations, provided PPP equipment for all employees and offered online ordering and curbside pick-up for all customers preferring to not enter the store.
VAPORIZER AND E-LIQUID BUSINESS
Retail Stores
While evaluating retail store operations in 2020, management decided to decrease the inventory levels on hand for all of its vape stores in March 2020, due to a major decreased in foot traffic or temporary closure of some stores a result of the Coronavirus (COVID-19) pandemic. Management decided not close any stores in 2020.
Vaporizers
“Vaporizers” are battery-powered products that enable users to inhale nicotine vapor. Regardless of their construction, they are comprised of three functional components:
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a mouthpiece, which is a small plastic cartridge that contains a liquid nicotine solution;
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the heating element that vaporizes the liquid nicotine so that it can be inhaled; and
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the electronic devices which include: a lithium-ion battery, an airflow sensor, a microchip controller and an LED, which illuminates to indicate use.
When a user draws air through the vaporizer, the air flow is detected by a sensor, which activates a heating element that vaporizes the solution stored in the mouthpiece/cartridge, the solution is then vaporized and it is this vapor that is inhaled by the user. The cartridge contains either a nicotine solution or a nicotine free solution, either of which may be flavored.
Vaporizers feature a tank or chamber, a heating element and a battery. The vaporizer user fills the tank with e-liquid or the chamber with dry herb or leaf. The vaporizer battery can be recharged and the tank and chamber can be refilled.
Our Brands
We sell a wide variety of our e-liquid under the Vape Store brand. Our in-house engineering and graphic design teams work to provide aesthetically pleasing, technologically advanced and affordable vaporizer and e-liquid flavor options. We are in the process of preparing to commercialize additional brands which we intend to market to new customers and demographics.
Our Improvements and Product Development on Intellectual Property
We have developed, trademarked and are preparing to commercialize additional products. We include product development expenses as part of our operating expenses. In October 2018, we announced the granting of three US patents related to our Q-Cup™ technology. This Q-Cup™ technology provides microdosing potentially more efficiency depending on the vaping method and an “on the go” solution for consumers who prefer to vape concentrates either medicinally or recreationally. In addition, we have a suite of patent applications pending in the United States. There is no assurance that we will be awarded patents for of any of these pending patent applications.
The Market for Vaporizers
We market our vaporizers as an alternative to traditional tobacco cigarettes and cigars. We offer our products in multiple nicotine strengths and flavors.
Advertising
Currently, we advertise our products primarily through point of sale materials and displays at retail locations. We also attempt to build brand awareness through social media marketing activities, price promotions, in-store and on premise promotions, public relations and radio advertising. Some of our competitors promote their brands through print media and television commercials, and through celebrity endorsements, and have substantial resources to devote to such efforts. We believe that our and our competitors’ efforts have helped increase our sales, our product acceptance and general industry awareness.
Distribution and Sales
The Company sells directly to consumers through the company owned retail vape stores. Our management believes that consumers are shifting towards vape stores for an enhanced experience. This enhanced experienced is derived from the greater variety of products at the stores, the knowledgeable staff and the social atmosphere. The Company anticipates a portion of future revenue will continue to come from its retail stores.
Business Strategy
We believe and are seeing in our current stores that there is a large consumer demand centered on vaporizer products and the “atmosphere” created by the vape stores. We believe that our reputation and our experience in the vaporizer industry, from a development, customer service and production perspective, give us an advantage in attracting customers.
Moreover, we believe that our history with our suppliers, including the volume of products we source, gives us an advantage over other market participants as it relates to favorable pricing, priority as to inventory supply and delivery and first access to new products, including first access to next generation products and technology.
Our goal is to achieve a position of sustainable leadership in the vaporizer industry. Our strategy consists of the following key elements:
● develop new product offerings with new technology and performance advancements;
● continue our product focus on vape related products;
● invest in and leverage our existing brand through marketing and advertising;
● expanding into new potential markets;
● align our product offerings and cost with market demand; and
● consider diversifying our line of business.
Competition
Competition in the vaporizer and e-liquid industry is intense. We compete with other sellers of vaporizes, most notably Altria Group, Inc., JT International, Imperial Tobacco, and Reynolds American, Inc., which are big tobacco companies that have vaporizer and electronic cigarette business segments. The nature of our competitors is varied as the market is highly fragmented and the barriers to entry into the business are low. Our direct competitors sell products that are substantially similar to ours excluding any products which we hold patents. As a general matter, we have access to market and sell the similar vaporizers as our competitors and we sell our products at substantially similar prices as our competitors; accordingly, the key competitive factors for our success is the quality of service we offer our customers, the scope and effectiveness of our marketing efforts, including media advertising campaigns and, increasingly, the ability to identify and develop new sources of customers.
As discussed above, we compete against “big tobacco”, U.S. cigarette manufacturers of both conventional tobacco cigarettes and electronic cigarettes like Altria Group, Inc., JT International, Imperial Tobacco, and Reynolds American, Inc. We compete against “big tobacco” who offers not only conventional tobacco cigarettes and electronic cigarettes and vaporizers, but also smokeless tobacco products such as “snus” (a form of moist ground smokeless tobacco that is usually sold in sachet form that resembles small tea bags), chewing tobacco and snuff. “Big tobacco” has nearly limitless resources, global distribution networks in place and a customer base that is fiercely loyal to their brands. Furthermore, we believe that “big tobacco” is devoting more attention and resources to developing, acquiring technology patents, and offering electronic cigarettes, vaporizers and e-liquids as these markets grow. Because of their well-established sales and distribution channels, marketing expertise and significant resources, “big tobacco” is better positioned than small competitors like us to capture a larger share of the electronic cigarette market. We also compete against numerous other smaller manufacturers or importers of cigarettes. There can be no assurance that we will be able to compete successfully against any of our competitors, some of whom have far greater resources, capital, experience, market penetration, sales and distribution channels than us. If our major competitors were, for example, to significantly increase the level of price discounts offered to consumers, we could respond by offering price discounts, which could have a materially adverse effect on our business, results of operations and financial condition.
Manufacturing
We have no manufacturing capabilities and do not intend to develop any manufacturing capabilities. Third party manufacturers make our products to meet our design specifications. We depend on third party manufacturers for our vaporizer e-liquid and accessories. Our customers associate certain characteristics of our products including the weight, feel, draw, unique flavor, packaging and other attributes of our products to the brands we market, distribute and sell. Any interruption in supply and or consistency of our products may harm our relationships and reputation with customers, and have a material adverse effect on our business, results of operations and financial condition. In order to minimize the risk of supply interruption, we currently utilize several third-party manufacturers to manufacture our products to our specifications.
We currently utilize several manufacturers both domestically and internationally. We contract with our manufacturers on a purchase order basis. We do not have any output or requirements contracts with any of our manufacturers. Our manufacturers provide us with finished products, which we hold in inventory for distribution, sale and use.
Source and Availability of Product
We believe that an adequate supply of product will be available to us as needed and from multiple sources and suppliers.
Patent Litigation
Third party patent lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights have and could force us to do one or more of the following:
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stop selling products or using technology that contains the allegedly infringing intellectual property;
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incur significant legal expenses;
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pay substantial damages to the party whose intellectual property rights we may be found to be infringing;
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redesign those products that contain the allegedly infringing intellectual property; or
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attempt to obtain a license to the relevant intellectual property from third parties, which may not be available to us on reasonable terms or at all.
Future third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could have a material adverse effect on our business, results of operations and financial condition.
We are required to obtain licenses to patents or proprietary rights of others and may be required to obtain more in the future and as the product continues to evolve. We cannot assure you that any future licenses required under any such patents or proprietary rights would be made available on terms acceptable to us or at all. If we do not obtain such licenses, we could encounter delays in product market introductions while we attempt to design around such patents, or could find that the development, manufacture, or sale of products requiring such licenses could be foreclosed. Litigation may be necessary to defend against claims of infringement asserted against us by others, or assert claims of infringement to enforce patents issued to us or exclusively licensed to us, to protect trade secrets or know-how possessed by us, or to determine the scope and validity of the proprietary rights of others. In addition, we may become involved in oppositions in foreign jurisdictions, reexamination declared by the United States Patent and Trademark Office, or interference proceedings declared by the United States Patent and Trademark Office to determine the priority of inventions with respect to our patent applications or those of our licensors. Litigation, opposition, reexamination or interference proceedings could result in substantial costs to and diversion of effort by us, and may have a material adverse impact on us. In addition, we cannot assure you that our efforts to maintain or defend our patents will be successful.
Patent Enforcement
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 “Complaint”). 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.
Regulations
Since a 2010 U.S. Court of Appeals decision, the Food and Drug Administration (“FDA”) is permitted to regulate electronic cigarettes as “tobacco products” under the Family Smoking Prevention and the Tobacco Control Act. Under this decision, the FDA is not permitted to regulate electronic cigarettes as “drugs” or “devices” or a “combination product” under the Federal Food, Drug and Cosmetic Act unless they are marketed for therapeutic purposes. This is contrary to anti-smoking devices like nicotine patches, which undergo more extensive FDA regulation. Because the Company does not market its electronic cigarettes for therapeutic purposes, the Company’s electronic cigarettes are subject to being classified as “tobacco products” under the Tobacco Control Act. The Tobacco Control Act grants the FDA broad authority over the manufacture, sale, marketing and packaging of tobacco products, although the FDA is prohibited from issuing regulations banning all cigarettes or all smokeless tobacco products, or requiring the reduction of nicotine yields of a tobacco product to zero.
On September 9, 2020 the FDA began enforcing rules that extended its regulatory authority to electronic cigarettes and certain other tobacco products under the Tobacco Control Act. The rules required that electronic cigarette and e-liquid manufacturers (i) register with the FDA and report electronic cigarette products and ingredient listings; (ii) market new electronic cigarette products only after FDA review; (iii) only make direct and implied claims of reduced risk if the FDA confirms that scientific evidence supports the claim and that marketing the electronic cigarette product will benefit public health as a whole; (iv) not distribute free samples; (v) implement minimum age and identification restrictions to prevent sales to individuals under age 21; (vi) include a health warning; and (vii) not sell electronic cigarettes in vending machines, unless in a facility that never admits youth. It is not known how long finalizing and implementing this regulatory process to may take. Accordingly, the Company has responded by beginning to take the necessary steps to ensure compliance.
In this regard, total compliance and related costs are not possible to predict and depend substantially on the future requirements imposed by the FDA under the Tobacco Control Act. Costs, however, could be substantial and could have a material adverse effect on the Company’s business, results of operations and financial condition. In addition, failure to comply with the Tobacco Control Act and with FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect on the Company’s business, financial condition and results of operations and ability to market and sell the Company’s products. At present, it is difficult to predict whether the Tobacco Control Act will impact the Company to a greater degree than competitors in the industry, thus affecting the Company’s competitive position.
State and local governments currently legislate and regulate tobacco products, including what is considered a tobacco product, how tobacco taxes are calculated and collected, to whom and by whom tobacco products can be sold and where tobacco products may or may not be smoked. State and local regulation of the e-cigarette market and the usage of e-cigarettes is beginning to accelerate.
As local regulations expand, vaporizers and electronic cigarettes may lose their appeal as an alternative to cigarettes, which may have the effect of reducing the demand for the Company’s products and as a result have a material adverse effect on the Company’s business, results of operations and financial condition.
At present, neither the Prevent All Cigarette Trafficking Act (which prohibits the use of the U.S. Postal Service to mail most tobacco products, which would require individuals and businesses that make interstate sales of cigarettes or smokeless tobacco to comply with state tax laws) nor the Federal Cigarette Labeling and Advertising Act (which governs how cigarettes can be advertised and marketed) apply to electronic cigarettes. The application of either or both of these federal laws to vaporizers and electronic cigarettes would have a material adverse effect on the Company’s business, results of operations and financial condition.
On July 1, 2015, the FDA published a document entitled “Advanced notice of proposed rulemaking” or the Advance. Through the Advance, the FDA solicited public comments on whether it should issue rules with respect to nicotine exposure warning and child-resistant packaging for e-liquids containing nicotine. Following public comment, the FDA may issue proposed rules in furtherance of the purposes outlined in the Advance and ultimately pass the rules as proposed or in modified form. We cannot predict whether rules will be passed or if they will have a material adverse effect on our future results of operations and financial conditions.
The Company expects that the tobacco industry will experience significant regulatory developments over the next few years, driven principally by the World Health Organization’s FCTC. The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. Regulatory initiatives that have been proposed, introduced or enacted include:
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the levying of substantial and increasing tax and duty charges;
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restrictions or bans on advertising, marketing and sponsorship;
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the display of larger health warnings, graphic health warnings and other labelling requirements;
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restrictions on packaging design, including the use of colors and generic packaging;
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restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;
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requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents’ levels;
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requirements regarding testing, disclosure and use of tobacco product ingredients;
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increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;
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elimination of duty free allowances for travelers; and
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encouraging litigation against tobacco companies.
If Vaporizers, electronic cigarettes, or e-liquids, are subject to one or more significant regulatory initiates enacted under the FCTC, the Company’s business, results of operations and financial condition could be materially and adversely affected.
Seasonality
Our business is active throughout the calendar year and does not experience significant fluctuation caused by seasonal changes in consumer purchasing.
The Vape Business and COVID-19
Starting March 2020, the COVID-19 pandemic had moderate to significant impact on the vape business depending on the location of the retail store. Several stores, located in smaller towns, saw a greater negative impact than stores located in larger retail environments. As stores reopened and retail consumers re-emerged, operations at all locations have stabilized.
To address the impact of the virus, we have instituted strict cleaning protocols at all locations, provided PPP equipment for all employees and offered curbside pick-up for all customers preferring to not enter the store.
Insurance and Risk Management
We use a combination of insurance and self-insurance to cover workers’ compensation, general liability, product liability, director and officers’ liability, employment practices liability, associate healthcare benefits and other casualty and property risks. Changes in legal trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers and changes in discount rates could all affect ultimate settlements of claims. We evaluate our insurance requirements and providers on an ongoing basis.
Information Technology Systems
We have made significant investments in overhead and information technology infrastructure, including purchasing, receiving, inventory, point of sale, warehousing, distribution, accounting, reporting and financial systems.
Segment Information
We have two reporting segments, natural and organic retail stores (“Grocery”) and vapor products (“Vapor”), through which we conduct all of our business.
Going Concern and Liquidity
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate the continuation of the Company as a going concern for the next twelve months from the issuance of this Form 10-K 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 consolidated 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. As of December 31, 2020, cash and cash equivalents totaled approximately $0.9 million. Subsequent to the year ended December 31, 2020, the Company entered into a $5.0 million Securities Purchase Agreement (See Note 17. Subsequent Events for further discussion). The Company anticipates that its current cash, cash equivalent and cash generated from operations and $5.0 million received from the Securities Purchase Agreement described above will be sufficient to meet the projected operating expenses for the foreseeable future through a year and a day from the issuance of these consolidated financial statements. Should we require additional funds (either through equity or debt financing, collaborative agreements or from other sources) we have no commitments to obtain such additional financing, and we may not be able to obtain any such additional financing on terms favorable to us, or at all.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
Not applicable to smaller reporting companies.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None

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ITEM 2. PROPERTIES
Item 2. Properties.
The Company operates its business from numerous facilities in Florida, Georgia and Tennessee. These leased facilities include our headquarters location, warehouse and retail stores.
Grocery Segment. As of December 31, 2020, our Grocery segment had 4 retail stores in Florida which aggregate approximately 28,000 square feet, all of which are leased by our grocery segment.
Vapor Segment. As of December 31, 2020, our Vapor segment operated 7 retail stores in Florida, 1 retail store in Georgia and 1 retail store in Tennessee, aggregating approximately 11,000 square feet.
Our headquarters and warehouse is located in Hollywood, Florida which aggregates approximately 10,000 square feet.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
No response is required under Item 103 of Regulation S-K.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is currently listed on the OTC Pink marketplace under the symbol “HCMC”.
As of March 5, 2021, there were approximately 1,600 stockholders of record for our common stock. A substantially greater number of stockholders may be “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.
As of March 5, 2021, the last reported sale price of our common stock on the OTC Pink Marketplace was $0.0015 per share.
We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on any of our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends in the foreseeable future. Future determination as to the declaration and payment of dividends, if any, will be at the discretion of our Board and will depend on then existing conditions, including our operating results, financial conditions, contractual restrictions, capital requirements, business prospects and other factors our Board may deem relevant.
On July 27, 2020, the remaining Company Series A Warrants expired and the balance of outstanding warrants not exercised was 335,661 warrants.
Exchange Agreement to convert Series B Convertible Preferred Stock to Series C Convertible Preferred Stock
On November 17, 2020, the Company finalized the closing of the stock exchange with certain holders of its Series B Convertible Preferred Stock (the “Series B Stock”) to exchange all the Series B Stock for 20,150 shares of Series C Convertible Preferred Stock (the “Series C Stock”). Each share of Series C Stock has a stated value equal to $1,000 and is convertible into Common Stock on a fixed basis at a conversion price of $0.0001 per share. As of March 5, 2021, the Series C Stock have been 100% been converted and cancelled into 201.5 billion shares of Company common stock.
Issuance of Series D Convertible Preferred Stock
On February 7, 2021, the Company entered into a Securities Purchase Agreement, pursuant to which the Company sold and issued 5,000 shares of its Series D Convertible Preferred Stock (the “Preferred Stock”) to a single institutional, accredited investor for $1,000 per share or an aggregate subscription of $5,000,000. Subject to a customary “9.99% Beneficial Ownership Limitation blocker,” the Preferred Stock is currently convertible into 2,083,333,333.33 shares of the Company’s Common Stock at a conversion price of $0.0024 per share, with such conversion price subject to adjustment as set forth below and described in the Certificate of Designation.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data.
Not required for smaller reporting companies.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included elsewhere in this report. “Management’s Discussion and Analysis of Financial Condition” and “Results of Operations” contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.
Cautionary Note Regarding Forward Looking Statements
This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, liquidity, business strategy, plans and objectives of management for future operations, are forward-looking statements.
Forward-looking statements contained in this report include:
● Our liquidity;
● Increase demand for vaporizers and related products;
● Opportunities for our business; and
● Growth of our business.
The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “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, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements are contained in the Risk Factors contained herein. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors below.
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 a total of nine retail vape stores and four natural and organic groceries and dietary supplement 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.
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 Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 that is used in the following discussions of our results of operations:
For the Year Ended December 31,
2020 to 2019
Change $
SALES:
Vapor sales, net
$
2,458,945
$
4,134,701
$
(1,675,756)
Grocery sales, net
11,461,800
10,979,305
482,495
Total Sales
13,920,745
15,114,006
(1,193,261)
Cost of sales vapor
1,033,805
1,690,734
(656,929)
Cost of sales grocery
7,109,719
6,939,028
170,691
GROSS PROFIT
5,777,221
6,484,244
(707,023)
EXPENSES:
Impairment of goodwill and intangible assets
380,646
481,314
(100,668)
Selling, general and administrative
8,844,947
10,417,214
(1,572,267)
Total operating expenses
9,225,593
10,898,528
(1,672,935)
Operating loss
(3,448,372)
(4,414,284)
965,912
OTHER INCOME (EXPENSES):
Gain on revaluation of warrants
-
1,719,816
(1,719,816)
Other income, net
(100)
(2,524)
2,424
Interest expense, net
(272,651)
(35,527)
(237,124)
Gain (loss) on investment
(1,269)
(66,857)
65,588
Total other income (expense), net
(274,020)
1,614,908
(1,888,928)
NET INCOME (LOSS)
$
(3,722,392)
$
(2,799,376)
$
(923,016)
Net vapor sales decreased $1.7 million to $2.5 million for the twelve months ended December 31, 2020 as compared to $4.1 million for the same period in 2019. The decrease in sales was primarily due to a major decreased in foot traffic or temporary closure of some stores a result of the Coronavirus (COVID-19) pandemic and a decrease in the number of stores open compared to prior year. Net grocery sales increased $0.5 million to $11.5 million for the twelve months ended December 31, 2020 as compared to $11.0 million for the same period in 2019. The increase in sales was primarily due to COVID-19 pandemic and the Company new strategy to offer its customer the option to delivery or curb side pickup their orders.
Vapor cost of goods sold for the twelve months ended December 31, 2020 and 2019 were $1.0 million and $1.7 million, respectively , a decrease of $0.7 million. The decrease in cost of goods sold was primarily due to a decreased in sales and product cost. Grocery store cost of goods sold for the twelve months ended December 31, 2020 and 2019 were $7.1 million and $6.9 million, respectively, an increase of $0.2 million. The increase was primarily due to increases in sales and cost of goods sold from the COVID-19 pandemic.
Total operating expenses decreased $1.7 million to $9.2 million for the twelve months ended December 31, 2020. The decrease was primarily attributable to a decrease in payroll and employee related cost of $0.7 million, stock-based compensation of $0.3 million, insurance of $0.1 million, professional fees of $0.1 million, taxes, licenses & permits of $0.1 million, meals, travel & entertainment of $0.1 million and goodwill and intangible assets impairment of $0.1 million.
The Company determined that the carrying value of intangible assets in connection with the acquisition of The Vitamin Store, LLC exceeded their potential cash flow from disposition. The Company concluded that intangible assets was impaired and recorded an impairment charges of $0.4 million for the twelve months ended December 31, 2020. In 2019, the Company concluded that the goodwill from Healthy Choice Markets, LLC was impaired 2019 and recorded an impairment charge of $0.5 million.
Net other expenses of $0.3 million for the twelve months ended December 31, 2020 includes interest expense of $0.3 million and loss on investment of $1,300.
Liquidity and Capital Resources
For the year ended December 31,
Net cash provided by (used in):
Operating activities
$
(2,288,914)
$
(3,535,241)
Investing activities
(75,202)
126,754
Financing activities
1,764,176
(127,351)
$
(599,940)
$
(3,535,838)
Our net cash used in operating activities of $2.3 million for the twelve months ended December 31, 2020 resulted from our net loss of $3.7 million, offset by a net cash usage of $0.2 million from changes in operating assets and liabilities and a non-cash adjustments of $1.6 million. Our net cash used in continuing operating activities of $3.5 million for the twelve months ended December 31, 2019 resulted from our net loss from continuing operations of $2.8 million, offset by a net cash usage of $0.9 million from changes in operating assets and liabilities and a non-cash adjustments of $0.1 million. We did not utilize any cash on discontinued operations for the twelve months ended December 31, 2020 and 2019.
The net cash used in investing activities of $0.1 million for the twelve months ended December 31, 2020 resulted from the issuance and collection of a note receivable, and purchases of a patent and property and equipment. The net cash provided by investing activities of $0.1 million for the twelve months ended December 31, 2019 resulted from payments received on the VPR Brands L.P. Note.
The net cash provided by financing activities of $1.8 million for the twelve months ended December 31, 2020 is due to proceeds received from the Paycheck Protection Program of $0.9 million and Term Loan of $2.5 million, partially offset by payments of $1.7 million on the loan payable. The net cash used in financing activities of $0.1 million for the twelve months ended December 31, 2019 is due to payments on the loan payable of $0.3 million, partially offset by proceeds from our line of credit of $0.1 million.
At December 31, 2020 and December 31, 2019, we did not have any material financial guarantees or other contractual commitments with trade 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 large financial institutions and are generally in excess of the Federal Deposit Insurance Corporation (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 December 31, 2020 and December 31, 2019.
December 31, 2020
December 31, 2019
Cash
$
925,475
$
1,525,415
Total assets
$
11,874,993
$
14,006,669
Percentage of total assets
7.8%
10.9%
The Company reported net loss of approximately $3.7 million for the year ended December 31, 2020. The Company also had negative working capital of $2.6 million. The Company expects to continue incurring losses for the foreseeable future and may need to raise additional capital to satisfy business obligations, and to continue as a going concern.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements other than operating leases for retail locations, equipment, and vehicles.
Seasonality
We do not consider our business to be seasonal.
Non-GAAP Financial Measures
The following discussion and analysis contains a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles (GAAP). Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternative to, net income, operating income, and cash flow from operating activities, liquidity or any other financial measures. Non-GAAP financial measures may not be indicative of the historical operating results of the Company nor are they intended to be predictive of potential future financial results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP.
Management believes stockholders benefit from referring to the Adjusted EBITDA in planning, forecasting, and analyzing future periods. Management uses this non-GAAP financial measure in evaluating its financial and operational decision making and as a means of evaluating period to period comparison.
We define Adjusted EBITDA as net loss from operations adjusted for non-cash charges for depreciation and amortization and stock compensation. Management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and analysts to evaluate and assess our core operating results from period to period after removing the impact of significant non-cash charges that effect comparability between reporting periods. Our management recognizes that Adjusted EBITDA has inherent limitations because of the excluded items.
We have included a reconciliation of our non-GAAP financial measure to loss from operations as calculated in accordance with GAAP. We believe that providing the non-GAAP financial measure, together with the reconciliation to GAAP, helps investors make comparisons between the Company and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to specific definitions being used and to the reconciliation between such measures and the corresponding GAAP measures provided by each company under applicable rules of the Securities and Exchange Commission.
Reconciliation of Adjusted EBITDA to net loss allocable to common stockholders:
Operating loss
$
(3,448,372)
$
(4,414,284)
Impairment of goodwill and intangible assets
380,646
481,314
Depreciation and amortization
550,098
594,940
Stock-based compensation expense
78,029
374,241
Adjusted EBITDA
$
(2,439,599)
$
(2,963,789)

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to smaller reporting companies.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
See pages through.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
We are required to report under Section 404(a) of Sarbanes-Oxley regarding the effectiveness of our internal control over financial reporting.
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 during the year ended December 31, 2020 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.
Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our management, including our Principal Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2020.
In planning and performing its audit of our financial statements for the year ended December 31, 2020 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
●
Weakness around our purchase orders and inventory write-off 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 December 31, 2020 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Remediation Efforts
Following this assessment and during the twelve months ended December 31, 2020, we have undertaken an action plan to strengthen internal controls and procedures:
●
Management continues to devote significant efforts toward improvement of effectiveness of control over financial reporting. This includes analyzing non-routine transactions before booking journal entries; Implemented a monthly variance fluctuation analysis across all segments. Variance analysis are communicated to operations and executives to make sure the results are accurate.
●
Our management continues to remain their 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.
●
Vendor payments and cash disbursement are reviewed on weekly basis by management and accounting team to ensure timely payment. Cash balance are communicated to management on weekly basis to improve cash management.
Our management continues to review ways in which we can make improvements in internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The following table sets forth information regarding our executive officers and directors as of December 31, 2020:
Name
Age
Position
Executive Officers:
Jeffrey Holman
Chief Executive Officer, Chairman and Director
John A. Ollet
Chief Financial Officer
Christopher Santi
President and Chief Operating Officer
Non-Employee Directors:
Clifford J. Friedman
Director
Dr. Anthony Panariello
Director
Executive Officers
Jeffrey Holman has been our Chairman of the Board and Chief Executive Officer since April 2014. From February 2013 until March 4, 2015, Mr. Holman serviced as our President. Mr. Holman has been a member of our Board since May 2013 and has served as a member of the Board of Directors of our subsidiary Smoke Anywhere, USA since its inception on March 24, 2008. Since 1998, Mr. Holman has been the President of Jeffrey E. Holman & Associates, P.A., a South Florida based law firm. He has also been a Partner in the law firm of Holman, Cohen & Valencia since 2000. Mr. Holman was selected as a director for his business and legal experience. In addition, as one of the founders of Smoke Anywhere, Mr. Holman possesses an in-depth understanding of the challenges, risks and characteristics unique to our industry.
Christopher Santi has been our Chief Operating Officer since December 12, 2012 and has also served as the President since April 11, 2016. Previously, Mr. Santi served as Director of Operations of the Company beginning in October 2011. Mr. Santi served as the National Sales Manager of Collages.net from November 2007 to October 2011.
John A. Ollet has been our Chief Financial Officer since December 12, 2016. Mr. Ollet previously served as Executive Vice President-Finance for Systemax, Inc. (NYSE:SYX) from 2006 to 2016. His prior chief financial officer experience also includes serving as Vice President and Chief Financial Officer of Arrow Cargo Holdings, Inc., an airline logistics company, and VP Finance /CFO - The Americas - Cargo Division, KLM Royal Dutch Airlines, an airline company. He also previously served as Vice President Finance/Administration at Sterling-Starr Maritime Group, Inc. and served on the audit staff of Arthur Andersen & Co. Mr. Ollet received a bachelor’s degree in Finance/Economics and a master’s degree in business administration from Florida International University. Mr. Ollet is a Certified Public Accountant.
Non-Employee Directors
Anthony Panariello, M.D. has been a director since April 15, 2016. Dr. Panariello is a Board Certified in Pulmonology and Internal Medicine in Florida and has been in private practice since 1996, serving as an attending physician at a number of hospitals. Dr. Panariello is a member of the College of Physicians and the American College of Chest Physicians. Additionally, Dr. Panariello currently serves as a Lieutenant Commander in the Medical Corps of the United States Navy Reserve. Dr. Panariello received his Bachelor of Science from the State University of New York at Stony Brook and his medical degree from the Autonomous University of Guadalajara.
Clifford J. Friedman has been a director since April 15, 2016. Mr. Friedman is a certified public accountant in Coral Springs, Florida and manages his own public accounting, tax and consulting practice since 2001. From 1992 to 2000, Mr. Friedman was Vice President - Finance and Administration of the Box Worldwide, Inc., a Viacom company. He received an M.B.A. from Nova Southeastern University and his B.B.A. from Pace University.
Corporate Governance
Board Responsibilities
The Board oversees, counsels, and directs management in the long-term interest of the Company and its stockholders. The Board’s responsibilities include establishing broad corporate policies and reviewing the overall performance of the Company. The Board is not, however, involved in the operating details on a day-to-day basis.
Board Committees and Charters
The Board and its Committees meet throughout the year and act by written consent from time-to-time as appropriate. The Board delegates various responsibilities and authority to different Board Committees. Committees regularly report on their activities and actions to the Board.
The Board currently has and appoints the members of: The Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. Each of these committees have a written charter which can be found on our corporate website at www.healthiercmc.com/committee-charters/.
The following table identifies the independent and non-independent current Board and committee members:
Name
Independent
Audit
Compensation
Nominating And Corporate Governance
Jeffrey Holman
Dr. Anthony Panariello
X
X
X
X
Clifford J. Friedman
X
X
X
X
Director Independence
Our Board has determined that Clifford J. Friedman and Dr. Anthony Panariello are independent in accordance with standards under the OTC Pink Marketplace. Our Board determined that as a result of being executive officer, Messrs. Jeffrey Holman is not independent under the OTC Pink Marketplace Bulletin Boards. Our Board has also determined that Clifford J. Friedman and Dr. Anthony Panariello are independent under the OTC Pink Marketplace independence standards for Audit and Compensation Committee members.
Committees of the Board
Audit Committee
The Audit Committee, which currently consists of Clifford J. Friedman (chair) and Dr. Anthony Panariello, reviews the Company’s financial reporting process on behalf of the Board and administers our engagement of the independent registered public accounting firm. The Audit Committee approves all audit and non-audit services, and reviews the independence of our independent registered public accounting firm.
Audit Committee Financial Expert
Our Board has determined that Clifford J. Friedman is qualified as an Audit Committee Financial Expert, as that term is defined by the rules of the SEC and in compliance with the Sarbanes-Oxley Act of 2002.
Compensation Committee
The function of the Compensation Committee is to determine the compensation of our executive officers. The Compensation Committee has the power to set performance targets for determining periodic bonuses payable to executive officers and may review and make recommendations with respect to stockholder proposals related to compensation matters. Additionally, the Compensation Committee is responsible for administering the Company’s equity compensation plans including the Plan.
The members of the Compensation Committee are all independent directors within the meaning of applicable Nasdaq Listing Rules and all of the members are “non-employee directors” within the meaning of Rule 16b-3 under the Exchange Act.
Nominating and Corporate Governance Committee
The responsibilities of the Nominating and Corporate Governance Committee include the identification of individuals qualified to become Board members, the selection of nominees to stand for election as directors, the oversight of the selection and composition of committees of the Board, establish procedures for the nomination process including procedures and the oversight of the evaluations of the Board and management. The Nominating and Corporate Governance Committee has not established a policy with regard to the consideration of any candidates recommended by stockholders since no stockholders have made any recommendations. If we receive any stockholder recommended nominations, the Nominating Committee will carefully review the recommendation(s) and consider such recommendation(s) in good faith.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee has ever been an officer or employee of the Company. None of our executive officers serve, or have served during the last fiscal year, as a member of our compensation committee or other Board committee performing equivalent functions of any entity that has one or more executive officers serving on our Board or on our compensation committee.
Board Assessment of Risk
The Board is actively involved in the oversight of risks that could affect the Company. This oversight is conducted primarily through the Audit Committee, but the full Board has retained responsibility for general oversight of risks. The Audit Committee considers and reviews with our independent public accounting firm and management the adequacy of our internal controls, including the processes for identifying significant risks and exposures, and elicits recommendations for the improvements of such procedures where desirable. In addition to the Audit Committee’s role, the full Board is involved in oversight and administration of risk and risk management practices. Members of our senior management have day-to-day responsibility for risk management and establishing risk management practices, and members of management are expected to report matters relating specifically to the Audit Committee directly thereto, and to report all other matters directly to the Board as a whole. Members of our senior management have an open line of communication to the Board and have the discretion to raise issues from time-to-time in any manner they deem appropriate, and management’s reporting on issues relating to risk management typically occurs through direct communication with directors or committee members as matters requiring attention arise. Members of our senior management regularly attend portions of the Board’s meetings, and often discuss the risks related to our business.
Presently, the largest risks affecting the Company are the Company’s ability to manage and satisfy the Series A Warrant obligations and evaluation of potential adverse impact of the FDA’s final regulations on vaporizers and e-liquids on the retail business operations. The Board actively interfaces with management on seeking solutions.
Code of Ethics
The Company has a code of ethics, “Business Conduct: “Code of Conduct and Policy,” that applies to all of the Company’s employees, including its principal executive officer, principal financial officer and principal accounting officer, and the Board. A copy of this code is available on the Company’s website at http://www.healthiercmc.com/code-of-conduct. The Company intends to disclose any changes in or waivers from its code of ethics by posting such information on its website or by filing a Current Report on Form 8-K.
Stockholder Communications
Although we do not have a formal policy regarding communications with our Board, stockholders may communicate with the Board by writing to us at Healthier Choices Management Corp., 3800 N 28th Way, Hollywood, FL 33020, Attention: Corporate Secretary, or by facsimile (954) 272-7773. Stockholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and the other equity securities. Officers, directors and greater than ten percent stockholders are required by SEC rules to furnish us with copies of all Section 16(a) reports they file.
Based solely on a review of the reports furnished to us, or written representations from reporting persons that all reportable transactions were reported and that no Form 5s were required, we believe that during 2020 our officers, directors and greater than 10% owners timely filed all reports they were required to file under Section 16(a).

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. Executive Compensation
The following information is related to the compensation paid, distributed or accrued by us for fiscal 2020 to all Chief Executive Officers (principal executive officers) serving during the last fiscal year and the other most highly compensated executive officers serving at the end of the last fiscal year whose compensation exceeded $100,000. We refer to these individuals as our “named executive officers.”
Summary Compensation Table
Name and Principal Position
Year
Salary ($)
Bonus ($)
Option Awards/ (Forfeited) (1)$
Restricted Stock Awards(1) $
All Other Compensation ($)
Total
Jeffrey Holman
494,430
-
-
-
-
494,430
Chief Executive Officer
467,341
157,500
-
-
-
624,841
Christopher Santi
331,058
-
-
-
-
331,058
President and Chief Operating Officer
272,384
75,000
-
-
348,097
John Ollet
74,561
-
-
-
-
74,561
Chief Financial Officer
201,707
60,000
-
-
262,423
(1) Amounts reflect the aggregate grant date fair value, without regard to forfeitures, computed in accordance with ASC 718. These amounts represent options and restricted stock of the Company’s common stock and do not reflect the actual amounts that may be realized by the Named Executive Officers. Our assumptions with respect to the calculation of the stock options and restricted stock value are set forth in Note 2 to the consolidated financial statements contained herein.
Named Executive Officer Employment Agreements
On August 13, 2018, the Company amended and restated its existing employment agreement with Jeffrey Holman, the Company’s Chief Executive Officer (the “Holman Employment Agreement”). The Holman Employment Agreement is for an additional three year term and provides for an annual base salary of $450,000 and a target bonus for 2020 only in an amount ranging from 20% to 200% of his base salaries subject to the Company meeting certain earnings before interest, taxes depreciation and amortization performance milestones. Mr. Holman is entitled to receive severance payments, including two years of his then base salary and other benefits in the event of a change of control, termination by the Company without cause, termination for good reason by the executive or non-renewal by the Company. Mr. Holman was also granted 11 billion shares of restricted common stock pursuant to the Holman Employment Agreement Amendment on the condition that 11 billion of his options to purchase Company common stock are forfeited. This restricted stock will vest one year following the date of issuance provided that the grantee remains an employee of the Company through each applicable vesting date. On August 12, 2019, the Company agreed to extend the expiration date of the vesting period for the restricted stock by six months to February 13, 2020. On August 12, 2020, the Company agreed to extend for a second time the expiration date of the vesting period for the restricted stock by six months to February 13, 2021. The above description of the terms of the Holman Employment Agreement is not complete and is qualified by reference to the complete document.
Effective as of August 13, 2018, Healthier Choices Management Corp. (the “Company”) entered into an amendment to the existing employment agreement (the “Santi Amended Employment Agreement”) with the Company’s President and Chief Operating Officer, Christopher Santi. Pursuant to the Santi Amended Employment Agreement, Mr. Santi will continue to be employed as the Company’s President and Chief Operating Officer for an additional one year extension period through January 29, 2021. Mr. Santi will receive a base salary of $330,000 for this additional year. The severance pay period for termination without cause was increased to up to 18 months based on time of service. Mr. Santi was also granted 8 billion shares of restricted common stock pursuant to the Santi Amended Employment Agreement on the condition that 8 billion of his options to purchase Company common stock are forfeited. This restricted stock will vest one year following the date of issuance provided that the grantee remains an employee of the Company through each applicable vesting date. On August 12, 2019, the Company agreed to extend the expiration date of the vesting period for the restricted stock by six months to February 13, 2020. On August 12, 2020, the Company agreed to extend for a second time the expiration date of the vesting period for the restricted stock by six months to February 13, 2021. The above description of the terms of the Santi Amended Employment Agreement is not complete and is qualified by reference to the complete document.
Effective as of August 13, 2018, the Company entered into an amendment to the existing employment agreement (the “Ollet Amended Employment Agreement”) with the Company’s Chief Financial Officer, John Ollet. Pursuant to the Ollet Amended Employment Agreement, Mr. Ollet will continue to be employed as the Company’s Chief Financial Officer for an additional one year extension period through December 12, 2020. Mr. Ollet will receive a base salary of $250,000 for this additional year. Mr. Ollet was also granted 3 billion shares of restricted common stock pursuant to the Ollet Amended Employment Agreement. This restricted stock will vest one year following the date of issuance provided that the grantee remains an employee of the Company through each applicable vesting date. On August 12, 2019, the Company agreed to extend the expiration date of the vesting period for the restricted stock by six months to February 13, 2020. On August 12, 2020, the Company agreed to extend for a second time the expiration date of the vesting period for the restricted stock by six months to February 13, 2021. The above description of the terms of the Ollet Amended Employment Agreement not complete and is qualified by reference to the complete document.
Termination Provisions
The table below describes the severance payments that our Named Executive Officers are entitled to in connection with a termination of their employment upon death, disability, dismissal without cause, Change of Control or for Good Reason. All of the termination provisions are intended to comply with Section 409A of the Internal Revenue Code of 1986 and the Regulations thereunder.
Holman
Santi/Ollet
Death or Total Disability
Any amounts due at time of termination plus full vesting of equity awards
Any amounts due at time of termination
Dismissal Without Cause or Termination by Executive for Good Reason or upon a Change of Control (1)
Two years of Base Salary, full vesting of equity awards, benefit continuation for eighteen months plus pro-rated bonus if, any, that would have been earned for the fiscal year in which the termination occurs
Fifteen months of Base Salary plus one additional month for every additional four months of service, up to eighteen months’ maximum
Termination upon a Change of Control (2)
Two years of Base Salary, full vesting of equity awards, benefit continuation for eighteen months plus pro-rated bonus if, any, that would have been earned for the fiscal year in which the termination occurs
Eighteen months of Base Salary
(1) Good reason is generally (with certain exceptions) defined, in the case of Holman, as (i) a material diminution in their authority, duties or responsibilities, (y) the Company failing to maintain an office in the stated area or (ii) any other action or inaction that constitutes a material breach by the Company of the Employment Agreement. Messrs. Ollet and Santi’s employment agreement do not include the concept of good reason.
(2) Change of Control is generally defined (i) in the case of Holman, as any Change of Control Event as defined in Treasury Regulation Section 1.409A-3(i)(5); and (ii) in the case of Santi, as (w) a sale of substantially all of the Company, (x) any “person” (as such term is defined under the Exchange Act) becomes the beneficial owners of over 50% of the Company’s voting power, (y) a change in the majority of the composition of the Board or (z) a transaction that results in over 50% of the Company’s voting power ceasing to hold a majority of the voting power post-transaction.
Risk Assessment Regarding Compensation Policies and Practices as they Relate to Risk Management
Our compensation program for employees does not create incentives for excessive risk taking by our employees or involve risks that are reasonably likely to have a material adverse effect on us. Our compensation has the following risk-limiting characteristics:
●
Our base pay programs consist of competitive salary rates that represent a reasonable portion of total compensation and provide a reliable level of income on a regular basis, which decreases incentive on the part of our executives to take unnecessary or imprudent risks; and
●
Cash bonus awards are not tied to formulas that could focus executives on specific short-term outcomes.
Outstanding Awards at Fiscal Year End
Listed below is information with respect to unexercised options that have not vested, and equity incentive plan awards for each named executive officer outstanding as of December 31, 2020:
Outstanding Equity Awards at 2020 Fiscal Year-End
Number of Shares Issued
Under Stock Options
Number of Shares Issued Under Restricted Stock
Stock Options and Restricted Stock Exercise Price ($) Per Share of Stock
Expiration Date
Number of Shares That Have Not Vested (#)
Market Value of Shares That Name
Have Not Vested ($)
Jeffrey Holman
-
11,000,000,000
0.0001
8/13/2028
11,000,000,000
1,100,000
Jeffrey Holman
39,000,000,000
-
0.0001
2/1/2027
-
-
Christopher Santi
-
8,000,000,000
0.0001
8/13/2028
8,000,000,000
800,000
Christopher Santi
17,000,000,000
-
0.0001
2/1/2027
-
-
John Ollet
-
3,000,000,000
0.0001
8/13/2028
3,000,000,000
300,000
John Ollet
1,000,000,000
-
0.0001
12/9/2026
-
-
John Ollet
4,000,000,000
-
0.0001
8/30/2027
-
-
Director Compensation
Non-employee directors are paid a monthly fee of $1,000 per month and $1,000 for each meeting attended. Because we do not pay any compensation to employee directors, Mr. Holman is omitted from the following table. Non-employee members of our Board of Directors were compensated for as follows:
Fiscal 2020 Director Compensation
Name
Fees Earned or Paid in Cash ($)
Dr. Anthony Panariello
$
20,000
Clifford J. Friedman
$
20,000
Equity Compensation Plan Information
The 2015 Equity Incentive Plan (the “Plan”) was approved by the Company’s stockholders at the June 26, 2015 stockholders meeting. On November 21, 2016, the Company’s Board of Directors increased the number of shares of common stock available for issuance pursuant to the Plan to 100,000,000,000. The Plan is a broad-based plan in which all employees, consultants, officers, and directors of the Company are eligible to participate. The purpose of the Plan is to further the growth and development of the Company by providing, through ownership of stock of the Company and other equity-based awards, an incentive to its officers and other key employees and consultants who are in a position to contribute materially to the prosperity of the Company, to increase such persons’ interests in the Company’s welfare, by encouraging them to continue their services to the Company, and by enabling the Company to attract individuals of outstanding ability to become employees, consultants, officers and directors of the Company.
The following chart reflects the number of awards granted under equity compensation plans approved and not approved by stockholders and the weighted average exercise price for such plans as of December 31, 2020.
Name of Plan
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)
Weighted average exercise price of outstanding options, warrants and rights (b)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders
2015 Equity Incentive Plan
90,194,750,004
0.0001
90,194,750,004
Total
90,194,750,004
-
90,194,750,004

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.
The following table sets forth the number of shares of our common stock beneficially owned as of December 31, 2020, by (i) those persons known by us to be owners of more than 5% of our common stock, (ii) each director, (iii) our Named Executive Officers and (iv) all of our executive officers and directors of as a group. Unless otherwise specified in the notes to this table, the address for each person is: c/o Healthier Choices Management Corp., 3800 North 28th Way, Hollywood, Florida 33020.
Title of Class
Beneficial Owner
Amount and Nature of Beneficial Owner (1)
Percent of Class (1)
Directors and Executive Officers:
Common Stock
Jeffrey E. Holman (2)
40,512,500,000
13.09%
Common Stock
Christopher Santi (3)
18,100,000,000
5.85%
Common Stock
John Ollet (4)
5,412,500,000
1.75%
Common Stock
Dr. Anthony Panariello (5)
1,068,750,000
0.35%
Common Stock
Clifford J. Friedman (6)
1,500,000,000
0.48%
All directors and officers as a group (5 persons) (7)
66,593,750,000
21.52%
5% Stockholders:
None
-
0%
Total:
66,593,750,000
21.52%
(1) Beneficial Ownership. Applicable percentages are based on 309,496,867,856 shares of common stock outstanding as of March 5, 2021. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants, convertible notes and preferred stock currently exercisable or convertible or exercisable or convertible within 60 days are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. The table includes shares of common stock, options, warrants, and preferred stock exercisable or convertible into common stock and vested or vesting within 60 days. Unless otherwise indicated in the footnotes to this table, we believe that each of the stockholders named in the table has sole voting and investment power with respect to the shares of common stock indicated as beneficially owned by them. The table does not include: (i) restricted stock units that do not have the right to vote until they vest and the shares are delivered or (ii) unvested options that do not vest within 60 days of the date listed above in this footnote.
(2) Holman. Chairman and Chief Executive Officer. Includes 39,000,000,000 vested options and 12,100,000,000 shares of unvested restricted Common Stock. This restricted stock vests 12.5% on the last day of each calendar quarter commencing March 31, 2021.
(3) Santi. President and Chief Operation Officer. Includes 17,000,000,000 vested options and 8,800,000,000 shares of unvested restricted Common Stock. This restricted stock vests 12.5% on the last day of each calendar quarter commencing March 31, 2021.
(4) Ollet. Chief Financial Officer. Includes 5,000,000,000 vested options. He also holds 3,000,000,000 shares of unvested restricted Common Stock. This restricted stock vests 12.5% on the last day of each calendar quarter commencing March 31, 2021.
(5) Panariello. A director. Includes 1,000,000,000 vested options. He also holds 550,000,000 shares of unvested restricted Common Stock. This restricted stock vests 12.5% on the last day of each calendar quarter commencing March 31, 2021.
(6) Friedman. A director. Includes 990,000,000 vested options and 510,000,000 shares of Common Stock.
(7) Directors and Executive Officers. Includes executive officers who are not Named Executive Officers under the SEC’s rules and regulations.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
For the year ended December 31, 2020, the Company did not have any related party transactions.
Policies and Procedures for Related Party Transactions
We have adopted a policy that our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of any class of our common stock and any members of the immediate family of any of the foregoing persons are not permitted to enter into a related person transaction with us without the prior consent of our audit committee. Our audit committee will review and oversee all transactions with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of any class of our common stock or any member of the immediate family of any of the foregoing persons and such person would have a direct or indirect interest. In approving or rejecting any such transactions, our audit committee is to consider the material facts of the transaction, including, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
Our Audit Committee pre-approves audit and permissible non-audit services performed by its independent registered public accounting firm, as well as the fees charged for such services. All of the services related to audit fees and audit-related fees charged were pre-approved by the Audit Committee. The following table shows the fees for the years ended December 31, 2020 and 2019.
2020 ($)
2019 ($)
Audit Fees (1)
$
188,000
$
208,000
Total
$
188,000
$
208,000
(1) Audit fees - these fees relate to the audit of our annual financial statements and the review of our interim quarterly financial statements and our registration statements.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules.
(a)
Documents filed as part of the report.
(1) Financial Statements. See Index to Consolidated Financial Statements, which appears on page hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item.
(2)
Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the consolidated financial statements or notes included in this report.
(3)
Exhibits. The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
FINANCIAL STATEMENT INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Healthier Choices Management Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Healthier Choices Management Corp. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical Audit Matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 2017.
New York, NY
March 5, 2021
F - 2
HEALTHIER CHOICES MANAGEMENT CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 2020
December 31, 2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
925,475
$
1,525,415
Accounts receivable
23,675
65,401
Inventories
1,749,246
1,757,012
Prepaid expenses and vendor deposits
286,065
269,833
Investment
22,731
24,000
TOTAL CURRENT ASSETS
3,007,192
3,641,661
Restricted Cash
2,000,000
2,000,000
Property and equipment, net of accumulated depreciation
230,719
332,290
Intangible assets, net of accumulated amortization
1,248,352
1,923,447
Goodwill
916,000
956,000
Note receivable
304,511
343,387
Right of use asset - operating lease, net
4,078,621
4,663,019
Other assets
89,598
146,865
TOTAL ASSETS
$
11,874,993
$
14,006,669
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses
$
1,085,663
$
825,860
Contract liabilities
21,262
26,823
Operating lease liability, current
474,686
555,959
Current portion of line of credit
2,000,000
2,000,000
Current portion of loan payment
2,072,484
282,344
TOTAL CURRENT LIABILITIES
5,654,095
3,690,986
Loan payable, net of current portion
849,009
869,223
Operating lease liability, net of current
3,114,521
3,544,729
TOTAL LIABILITIES
9,617,625
8,104,938
COMMITMENTS AND CONTINGENCIES (SEE NOTE 12)
STOCKHOLDERS’ EQUITY
Series B convertible preferred stock, $1,000 par value per share, 30,000 shares authorized; - and 20,150 shares issued and outstanding as of December 31, 2020 and 2019
-
20,150,116
Series C convertible preferred stock, $1,000 par value per share, 30,000 shares authorized; 20,150 shares issued and 16,277 shares outstanding as of December 31, 2020; aggregate liquidation preference of $16.3 million
16,277,116
-
Common Stock, $0.0001 par value per share, 750,000,000,000 shares authorized; 143,840,848,017 and 67,698,494,244 shares issued and outstanding as of December 31, 2020 and 2019, respectively
14,384,084
6,769,849
Additional paid-in capital
3,955,039
7,618,245
Accumulated deficit
(32,358,871)
(28,636,479)
TOTAL STOCKHOLDERS’ EQUITY
2,257,368
5,901,731
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
11,874,993
$
14,006,669
See notes to consolidated financial statements
F - 3
HEALTHIER CHOICES MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
SALES:
Vapor sales, net
$
2,458,945
$
4,134,701
Grocery sales, net
11,461,800
10,979,305
TOTAL SALES, NET
13,920,745
15,114,006
Cost of sales vapor
1,033,805
1,690,734
Cost of sales grocery
7,109,719
6,939,028
GROSS PROFIT
5,777,221
6,484,244
OPERATING EXPENSES:
Impairment of goodwill and intangible assets
380,646
481,314
Selling, general and administrative
8,844,947
10,417,214
Total operating expenses
9,225,593
10,898,528
LOSS FROM OPERATIONS
(3,448,372)
(4,414,284)
OTHER INCOME (EXPENSE):
Gain on revaluation of warrants
-
1,719,816
Other expense, net
(100)
(2,524)
Interest expense, net
(272,651)
(35,527)
Loss on investment
(1,269)
(66,857)
Total other (expense) income, net
(274,020)
1,614,908
NET LOSS
$
(3,722,392)
$
(2,799,376)
NET LOSS PER SHARE BASIC AND DILUTED
$
0.00
$
0.00
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC AND DILUTED
90,351,540,618
66,977,667,455
See notes to consolidated financial statements
F - 4
HEALTHIER CHOICES MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2019
Convertible Preferred Stock
Common Stock
Additional Paid-In
Accumulated
Shares
Amount
Shares
Amount
Capital
Deficit
Total
Balance - December 31, 2018
20,150
$
20,150,116
66,623,514,522
$
6,662,351
$
7,348,390
$
(25,734,088)
$
8,426,769
Issuance of common stock in connection with cashless exercise of Series A warrants
-
-
74,979,722
7,498
(4,386)
-
3,112
Issuance of awarded common stock for professional services
-
-
1,000,000,000
100,000
(100,000)
-
-
Cumulative effect on adoption of ASC842
-
-
-
-
-
(103,015)
(103,015)
Stock-based compensation expense
-
-
-
-
374,241
-
374,241
Net loss
-
-
-
-
-
(2,799,376)
(2,799,376)
Balance - December 31, 2019
20,150
20,150,116
67,698,494,244
$
6,769,849
$
7,618,245
$
(28,636,479)
$
5,901,731
Issuance of common stock in connection with cashless exercise of Series A warrants
-
-
37,412,353,772
3,741,235
(3,741,235)
-
-
Cancellation of Series B Convertible Preferred Stock
(20,150)
(20,150,116)
-
-
-
-
(20,150,116)
Issuance of Series C Convertible Preferred Stock
20,150
20,150,116
-
-
-
-
20,150,116
Conversion of Preferred Stock
(3,873)
(3,873,000)
-
3,873,000
-
-
-
Stock-based compensation expense
-
-
-
-
78,029
-
78,029
Net loss
-
-
-
-
-
(3,722,392)
(3,722,392)
Balance - December 31, 2020
16,277
$
16,277,116
105,110,848,016
$
14,384,084
$
3,955,039
$
(32,358,871)
$
2,257,368
See notes to consolidated financial statements
F - 5
HEALTHIER CHOICES MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
OPERATING ACTIVITIES:
Net loss
$
(3,722,392)
$
(2,799,376)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in provision for doubtful accounts
-
(3,002)
Depreciation and amortization
550,098
594,940
Loss on disposal of assets
-
27,013
Amortization of right-of-use asset
584,398
325,208
Loss on investment
1,269
66,857
Stock-based compensation expense
78,029
374,241
Impairment of goodwill and intangible assets
380,646
481,314
Change in fair value of derivative liabilities
-
(1,719,816)
Changes in operating assets and liabilities:
Accounts receivable
41,726
27,202
Inventories
7,766
107,607
Prepaid expenses and vendor deposits
(16,233)
92,900
Contract assets
-
32,400
Other assets
57,269
(2,424)
Accounts payable and accrued liabilities
265,552
(475,558)
Contract liabilities
(5,561)
(415,807)
Lease liability
(511,481)
(248,940)
NET CASH USED IN OPERATING ACTIVITIES
(2,288,914)
(3,535,241)
INVESTING ACTIVITIES:
Collection of note receivable
38,876
184,620
Purchases of patent
(89,415)
(25,000)
Purchases of property and equipment
(24,663)
(32,866)
NET CASH PROVIDED BY INVESTING ACTIVITIES
(75,202)
126,754
FINANCING ACTIVITIES:
Proceeds from line of credit
-
131,540
Principal payments on loan payable
(1,652,339)
(258,891)
Proceeds from paycheck protection program
876,515
-
Proceeds from loan and security agreement
2,540,000
-
NET CASH USED IN FINANCING ACTIVITIES
1,764,176
(127,351)
DECREASE IN CASH
(599,940)
(3,535,838)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - BEGINNING OF YEAR
3,525,415
7,061,253
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - END OF YEAR
$
2,925,475
$
3,525,415
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest
$
314,925
$
143,901
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with cashless exercise of Series A warrants
$
-
$
3,000
See notes to consolidated financial statements
F - 6
HEALTHIER CHOICES MANAGEMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. ORGANIZATION, BASIS OF PRESENTATION, AND RECENT DEVELOPMENTS
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 currently operates nine retail vape stores in the Southeast region of the United States, through which it offers e-liquids, vaporizers and related products. The Company also 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 new 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 either cannabis or CBD concentrate (approximately 50mg) purchased from a third party. The Q-Cup™ is then inserted into the Q-Cup™ Tank or Globe, that 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.
COVID-19 Management Update
In March 2020, the outbreak of COVID-19 (coronavirus) caused by a novel strain of the coronavirus has recently been recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in the markets in which the Company operates. The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses, “shelter in place” and other governmental regulations, reduced consumer spending due to both job losses and other effects attributable to the COVID-19, and there are many unknowns. The Company has adjusted certain aspects of the operations to protect their employees and customers while still meeting customers’ needs. While to date the Company has not been required to close any of its stores, the Company is currently operating under regular hours and we are expecting COVID-19 to have a long-term beneficial impact to the future financial results of the grocery segment. The Company continues to monitor the impact of the COVID-19 outbreak closely. The extent to which the COVID-19 outbreak will impact our operations is manageable, and there is no imminent risk on business continuity and future operation.
Sourcing and Vendors.
We source from multiple suppliers. These suppliers range from small independent businesses to multinational conglomerates. For the fiscal years ended December 31, 2020 and 2019, approximately 27% and 24% of our total purchases were from one vendor.
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial statements are prepared in accordance with GAAP. The consolidated financial statements include the accounts of all subsidiaries in which the Company holds a controlling financial interest as of the financial statement date.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Healthy Choice Markets, Inc., Healthy Choice Markets 2, LLC (“Paradise Health and Nutrition”), HCMC Intellectual Property Holdings, LLC, The Vitamin Store, LLC, Healthy U Wholesale, Inc., The Vape Store, Inc. (“Vape Store”), Vaporin, Inc. (“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.
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Note 2. GOING CONCERN AND LIQUIDITY
The accompanying 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 incurred a loss from operations of approximately $3.4 million for the year ended December 31, 2020. As of December 31, 2020, cash and cash equivalents totaled approximately $0.9 million equivalents. Subsequent to the year ended December 31, 2020, the Company entered into a $5.0 million Securities Purchase Agreement (See Note 17. Subsequent Events for further discussion). Management anticipates that its current cash, cash equivalent and cash generated from operations and cash received from the Securities Purchase Agreement will be sufficient to meet the projected operating expenses for the foreseeable future through a year and a day from the issuance of these consolidated financial statements.
Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain amounts in the consolidated financial statements and related notes have been reclassified to conform to the current year presentation. Such reclassifications do not impact the Company's previously reported financial position or net income (loss).
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the operating decision makers, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s decision-making group are the senior executive management team. The Company and the decision-making group view the Company’s operations and manage its business as two operating segments. All long-lived assets of the Company reside in the U.S.
Use of Estimates in the Preparation of the Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include allowances, reserves and write-downs of inventory, valuing equity securities and hybrid instruments, share-based payment arrangements, deferred taxes and related valuation allowances, and the valuation of the assets and liabilities acquired in business combinations. Certain of management’s estimates could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and records adjustments when necessary.
Revenue Recognition
Revenues from product sales and services rendered, net of promotional discounts, manufacturer coupons and rebates, return allowances, and sales and consumption taxes, are recorded when products are delivered, title passes to customers and collection is likely to occur. Title passes to customers at the point of sale for retail and upon delivery of products for wholesale. Return allowances, which reduce revenue, are estimated using historical experience.
The Company recognizes revenue in accordance with the following five-step model:
●
identify arrangements with customers;
●
identify performance obligations;
●
determine transaction price;
●
allocate transaction price to the separate performance obligations in the arrangement, if more than one exists; and
●
recognize revenue as performance obligations are satisfied.
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Shipping and Handling
Shipping charges billed to customers are included in net sales and the related shipping and handling costs are included in cost of sales. For the years ended December 31, 2020 and 2019, shipping and handling costs of approximately $48,000 and $82,000, were included in cost of sales, respectively.
Cash and Cash Equivalents
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. At December 31, 2020, cash in excess of FDIC limits of $250,000 per financial institution were approximately $0.6 million. 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 December 31, 2020 was a money market account. The Company has not experienced any losses in such accounts.
Accounts Receivable, Contract Assets and Contract Liabilities
Accounts receivable are claims to consideration which are unconditional; meaning no performance obligations remain for the Company and only the passage of time is necessary before collection. Contract assets are distinguished from accounts receivable as performance obligations remain before claims to consideration become unconditional. By nature of the Company’s operations, contract assets are typically not recognized. Contract liabilities are recorded when customers transfer consideration in advance of delivery of products or services, which the Company records for gift cards and loyalty reward programs. When one party to an arrangement performs before the other(s), the Company records an account receivable, contract asset or contract liability.
The majority of arrangements with customers contain one performance obligation: to provide a distinct set of products or services. Most performance obligations are satisfied simultaneously as the Company exchanges products or services for customer payment. Exceptions include gift cards and loyalty rewards, for which the Company has a performance obligation to deliver products or services at a future date. As gift cards are purchased and loyalty points earned, contract liabilities are recorded until the performance obligations are satisfied through delivery of products or services or breakage based on gift card and loyalty reward program term limits.
The Company’s breakage policy is twenty-four months for gift cards, twelve months for Grocery loyalty rewards, and six months for Vapor loyalty rewards. Loyalty rewards are earned at five percent on qualifying purchases and the reward functions as an allocation of transaction price from the period earned by the customer to the period the performance obligation is satisfied by the Company. As such, all contract liabilities are expected to be recognized within a twenty-four month period.
Concentration of accounts receivable consist of the following:
December 31, 2020
December 31, 2019
Customer A
-
14%
Customer B
-
46%
Customer C
34%
12%
Due from Merchant Credit Card Processor
Due from merchant credit card processor represents monies held by the Company’s credit card processors. The funds are being held by the merchant credit card processors pending satisfaction of their hold requirements and expiration of charge backs/refunds from customers.
Inventories
Inventories are stated at average cost. If the cost of the inventories exceeds their net realizable value, adjustments are recorded to write down excess inventory to their net realizable value. The Company’s inventories consist primarily of merchandise available for resale, such as vaporizers, electronic cigarettes, e-liquids, fresh produce, perishable grocery items and non-perishable consumable goods.
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Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the expected useful life of the respective asset, after the asset is placed in service. Revenue earning property and equipment includes signage, furniture and fixtures, computer hardware, appliance, cooler, displays with useful lives range from two to seven years. Leasehold improvements are amortized over life of lease.
Identifiable Intangible Assets and Goodwill
Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain identifiable intangible assets are amortized over 3 and 15 years. Similar to tangible personal property and equipment, the Company periodically evaluates identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indefinite-lived intangible assets, such as goodwill are not amortized.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In connection with this review, the Company also reevaluates the depreciable lives for these assets. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset’s carrying value.
The Company assesses the carrying amounts of goodwill for recoverability on at least an annual basis or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, and the useful life over which cash flows will occur. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for the Company. Our annual impairment test is conducted on September 30 of each year or more often if deemed necessary. As part of management's qualitative analysis at December 31, 2020 to determine whether any triggering events have occurred since the annual test date of September 30, 2020, which would indicate an impairment. Management determined no triggering events had occurred through December 31, 2020.
Advertising
The Company expenses advertising costs as incurred. For the years ended December 31, 2020 and 2019, the company incurred advertising expenses of $0.1 million and $0.2 million, respectively.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under this method, income tax expense is recognized as the amount of: (i) taxes payable or refundable for the current year and (ii) future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of available evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Stock-Based Compensation
The Company accounts for stock-based compensation for employees and directors under ASC Topic No. 718, “Compensation-Stock Compensation” (“ASC 718”). These standards define a fair value based method of accounting for stock-based compensation. In accordance with ASC 718, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using an appropriate valuation model, whereby compensation cost is the fair value of the award as determined by the valuation model at the grant date. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. The Company recognize forfeitures as they are incur. Stock-based compensation for non-employees is measured at the grant date, is re-measured at subsequent vesting dates and reporting dates, and is amortized over the service period.
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Fair Value Measurements
The fair value framework under FASB’s guidance requires the categorization of assets and liabilities into three levels based upon the assumptions used to measure the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, would generally require significant management judgment. The three levels for categorizing assets and liabilities under the fair value measurement requirements are as follows:
●
Level 1: Fair value measurement of the asset or liability using observable inputs such as quoted prices in active markets for identical assets or liabilities;
●
Level 2: Fair value measurement of the asset or liability using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
●
Level 3: Fair value measurement of the asset or liability using unobservable inputs that reflect the Company’s own assumptions regarding the applicable asset or liability.
Nonfinancial assets such as goodwill, other intangible assets, and long-lived assets held and used are measured at fair value when there is an indicator of impairment and recorded at fair value when impairment is recognized or for a business combination.
Sequencing Policy
Under ASC 815-40-35, the Company has adopted a sequencing policy, whereby, in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares.
Recently Issued Accounting Pronouncements
The Company adopted Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). The amendment requires that the statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 in the second quarter of 2020 using the retrospective transition method to each period presented. The adoption primarily resulted in the inclusion of the restricted cash balances within the overall cash balances and a reconciliation of cash, cash equivalents and restricted cash reported on the condensed consolidated balance sheet. The adoption of this standard did not have a material impact on the condensed consolidated financial statements and is not expected to have a material impact for the foreseeable future.
Note 4. DISAGGREGATION OF REVENUES
The Company reports the following segments in accordance with management guidance: Vapor and Grocery. When the Company prepares its internal management reporting to evaluate business performance, we disaggregate revenue into the following categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
December 31, 2020
December 31, 2019
Vapor sales, net
$
2,458,945
$
4,134,701
Grocery sales, net
11,461,800
10,979,305
Total revenue
$
13,920,745
$
15,114,006
Retail Vapor
$
2,458,945
$
4,134,243
Retail Grocery
10,047,437
9,326,165
Food service/restaurant
1,088,162
1,252,167
Online/e-Commerce
307,487
362,731
Wholesale Grocery
18,714
38,242
Wholesale Vapor
-
Total revenue
$
13,920,745
$
15,114,006
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Note 5. INVESTMENT
In 2018, the Company invested $150,000 in 85,714 common stock shares at MJ Holdings, Inc. (“MJNE”), a publicly traded company. The investment was made based on the assumption of an increase in MJNE stock due to the sales agreement with the Company. The Company recorded the investment in MJNE at fair value with changes in the fair value reported through the income statement as the stock is traded on the OTC market. Investment is classed with Level 1 of the valuation hierarchy. Fair value for the investment is based on quoted prices in active markets.
Description
Fair Value Measurements Using Quoted Prices in Active Market (Level 1)
Mark to Market
Final
Investment
$
24,000
$
(1,269)
$
22,731
Note 6. INVENTORIES
Inventories are stated at average cost. If the cost of the inventories exceeds their market value, adjustments are recorded to write down excess inventory to its net realizable value. Throughout the year, the Company did not have independent third party counts of its inventory due to the Coronavirus (COVID-19) pandemic and recorded the write down of inventories amounting to $0.3 million and $0.5 million, approximately, in 2020 and 2019 respectively, as a result of the findings. The Company’s inventories consist primarily of merchandise available for resale.
December 31, 2020
December 31, 2019
Vapor Business
$
304,614
$
352,230
Grocery Business
1,444,632
1,404,782
Total
$
1,749,246
$
1,757,012
Note 7. NOTES RECEIVABLE AND OTHER INCOME
On September 6, 2018, the Company entered into a secured, 36-month promissory note with VPR Brands L.P. for $582,260. The Note bears an interest rate of 7%, 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.
A summary of the Note as of December 31, 2020 is presented below:
Description
Due Date
Interest Rate
Loan Amount
Payments Received
Remaining Balance
Promissory Note
9/6/2021
7%
$
582,260
$
277,749
$
304,511
For the years ended December 31, 2020 and 2019, the Company had notes receivable collections of approximately $49,000 and $108,374, respectively. These collections are recorded to other income in the Consolidated Statement of Operations.
Note 8. PROPERTY & EQUIPMENT
Property and equipment consists of the following
Year Ended December 31,
Displays
$
305,558
$
305,558
Furniture and fixtures
246,496
246,496
Leasehold improvements
128,004
128,004
Computer hardware & equipment
143,082
143,863
Other
276,711
251,268
1,099,851
1,075,189
Less: accumulated depreciation and amortization
(869,132)
(742,899)
Total property and equipment
$
230,719
$
332,290
The Company incurred approximately $0.1 million and $0.2 million of depreciation expense for the years ended December 31, 2020 and 2019, respectively.
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Note 9. GOODWILL AND INTANGIBLE ASSETS
The Company evaluated the carrying value of its goodwill by estimating the fair value of its consolidated business operations through the use of discounted cash flow models, which required management to make significant judgments as to the estimated future cash flows. The ceased retail grocery store expansion coupled with the reduction in revenue resulting from increased competition adversely impacted the Company’s projected cash flows and profits. Accordingly, the Company’s goodwill was evaluated for impairment. Our 2020 annual impairment test resulted in an impairment being recorded. As part of management's qualitative analysis at December 31, 2020 to determine whether any triggering events have occurred since the annual test date of September 30, 2020, which would indicate an impairment. Management determined not triggering events had occurred through December 31, 2020.
The changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019 are as follows:
December 31, 2020
December 31, 2019
Beginning balance
$
956,000
$
1,437,314
Impairment of goodwill-retail business
(40,000)
(481,314)
Ending balance
$
916,000
$
956,000
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value amount of asset may not be fully recoverable, or at least annually. The company recognizes an impairment loss when the sum of the expected undiscounted future cash flows is less than the carrying amount of the assets. The amount of impairment is measured as the difference between the asset's estimated fair value and its book value.
The Company determined during the annual test for impairment that the estimated undiscounted cash flows related to the sales of the Vitamin Store were less than carrying value of the intangible assets. Based on its analysis, the Company concluded that the intangible assets was impaired and recorded an impairment charges of $0.3 million as of December 31, 2020.
Intangible assets, net are as follows:
December 31, 2020
Useful Lives (Years)
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Customer relationships
4-5 years
$
883,000
$
(475,073)
$
407,927
Trade names
8-10 years
923,000
(441,786)
481,214
Patents
10 years
359,665
(85,641)
274,024
Non-compete
4 years
174,000
(88,813)
85,187
Intangible assets, net
$
2,339,665
$
(1,091,313)
$
1,248,352
December 31, 2019
Useful Lives (Years)
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Customer relationships
4-10 years
$
1,228,000
$
(293,260)
$
934,740
Trade names
8-10 years
993,000
(354,203)
638,797
Patents
10 years
270,250
(49,027)
221,223
Non-compete
4 years
174,000
(45,313)
128,687
Intangible assets, net
$
2,665,250
$
(741,803)
$
1,923,447
Amortization expense was approximately $0.4 million for the period ended December 31, 2020 and 2019.
The weighted-average remaining amortization period of the Company’s amortizable intangible assets is approximately 7 years as of December 31, 2020. The estimated future amortization of the intangible assets is as follows:
For the years ending December 31,
$
385,091
369,706
130,841
130,841
125,341
Thereafter
106,532
Total
$
1,248,352
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Note 10. CONTRACT LIABILITIES
The Company’s contract liabilities consist of customer deposits, 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. The Company’s 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.
A summary of the contract liabilities activity for the years ended December 31, 2020 and 2019 is presented below:
Year ended December 31,
Beginning balance as of January1,
$
26,823
$
442,630
Issued
53,929
48,876
Redeemed
(58,263)
(54,724)
Breakage recognized
(1,227)
(1,696)
Fulfillment of contracts (1)
-
(408,263)
Ending balance as of December 31,
$
21,262
$
26,823
(1) See Note 12. “Commitments and Contingencies” for additional information.
Note 11. LINE OF CREDIT AND DEBT
The following table provides a breakdown of the Company's debt as of December 31, 2020 is presented below:
Amount
Line of Credit
$
2,000,000
Term Loan Credit Agreement
800,924
Paycheck Protection Program
882,264
Loan and Security Agreement ("PPE Loan")
1,232,414
Other debt
5,891
Total Line of Credit and Debt
$
4,921,493
Line of Credit
On April 13, 2018, the Company agreed to a new revolving credit line of $2.0 million and a money market account of $2.0 million (“blocked account”) with Professional Bank in Coral Gables, Florida. On September 30, 2020, the Company reached agreement with Professional Bank to renew the credit line for one more year, and the next annual review will occur on or before July 15, 2021. The new agreement included a variable interest rate that it is based on a rate of 1.5% over what is earned on the collateral amount. The collateral amount established in the arrangement with the bank is $2.0 million. As of December 31, 2020, the Company had $2.0 million in the blocked account, which is recorded as restricted cash included in non-current assets.
Term Loan Credit Agreement
On December 31, 2018, the Company entered into a Term Loan Credit Agreement (the “Credit Agreement”) with Professional Bank, a Florida banking corporation (the “Bank”), pursuant to which the Company issued a Term Note (the “Term Note”) in the principal amount of $1,400,000 in favor of the Bank. The Term Note bears interest at a rate equal to 1.5 percentage points in excess of that rate shown in the Wall Street Journal as the prime rate, adjusted annually (which was 5.50% as of December 31, 2020). The proceeds of the Term Note were used for acquisitions and for general working capital requirements.
The Credit Agreement contains a customary financial covenant for a minimum debt service coverage ratio of 1.25 to 1.0. The Credit Agreement matures on December 31, 2023. In addition, the Credit Agreement provides for monthly principal payments of $22,333 commencing in January 2019 plus applicable interest, and mandatory prepayments with a portion of excess cash flow.
The obligations under the Credit Agreement and the Term Note are guaranteed by the Company and its wholly owned subsidiary, Healthy U Wholesale, Inc.
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Principal repayments to be made during the next four years, at which time the long-term debt will be fully repaid, as follow:
Year
Principal Payment
$
280,000
280,000
240,924
Expected payments for the upcoming years
$
800,924
Plus: Payments made through 2020
599,076
Total Payments
$
1,400,000
Paycheck Protection Program
On May 15, 2020, the Company was granted a loan (the “Loan”) from Customers Bank, in the aggregate amount of $876,515, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020.
The Loan, which was in the form of a Note dated May 6, 2020 issued by the Company, matures on May 6, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on November 6, 2020. Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred after May 6, 2020. The Company intends to use the entire Loan amount for these qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. On December 9, 2020, the Company submitted the forgiveness application for the PPP Loan to the Small Business Bureau.
Loan and Security Agreement
On August 18, 2020, the Company agreed to a loan and security agreement (the “Loan”) in the aggregate of $2.7 million with Sabby Healthcare Master Fund, LTD and Sabby Volatility Warrant Master Fund, LTD (“collectively, the Lender”). Under the terms of the agreement, the loan has a non-refundable discount of 5% to the face amount of the loan and it matures on November 16, 2020. The debt obligations from the loan are secured by the assets of the Company. The proceeds received from the Loan were record as restricted cash included in non-current assets. The proceeds will be used solely for the purchase of personal protective equipment (“PPE”) and any related expenses from the transactions. The Lender is entitled to 20% of all Net profits received from the sales of the PPE goods through the maturity date.
On December 29, 2020, the Company received a written notice from the Lender agreeing to allow the Company to use the remaining balance of $1.2 million from the Loan for operational purposes. The loan maturity date was extended to February 18, 2021 and it bears interest at a rate of 5% per annum, payable monthly commencing on the first day of the first month following the acceptance date of the extension.
Note 12. 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 on April 2019 and May 2019, respectively. 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.
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 December 31, 2020. With respect to legal costs, we record such costs as incurred.
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Fontem License Agreement
The Company has a non-exclusive license to certain products with Fontem Ventures B.V. (“Fontem”). The Company will make quarterly license and royalty payments in perpetuity to Fontem, based on the sale of qualifying products as defined in the license agreement at a royalty rate of 5.25%. For the years ended December 31, 2020 and 2019, the Company recorded expenses of $15,000 and $40,000 as part of its cost of goods.
Note 13. STOCKHOLDERS’ EQUITY
Equity Compensation Plans
The Company’s 2015 Equity Incentive Plan, as amended (the “2015 Plan”), awards grants to employees. The plan can award up to 100 billion shares of common stock and currently 11.1 billion shares are available for grant as of December 31, 2020.
The Company’s 2009 Equity Incentive Plan (the “2009 Plan”) awards grants to employees, non-employee directors and consultants in connection with their retention and/or continued employment by the Company. The 2009 Plan had no shares of common stock available for grant as of December 31, 2020.
Preferred Stock
The Company’s amended and restated articles of incorporation authorizes the Company’s Board of Directors to issue up to 1,000,000 shares of “blank check” preferred stock, having a $0.001 par value, in one or more series without stockholder approval. Each such series of preferred stock may have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as determined by the Company’s Board of Directors. See below for details associated with the designation of the 1,000,000 shares of the Series A preferred stock.
Series B Convertible Preferred Stock
On August 16, 2018, the Company entered into agreements with certain holders of its Series A Warrants. The Company issued Series B Convertible Preferred Stock (the “Series B Stock") in exchange for certain Series A Warrants. A total of 20,722 shares of Series B Stock were exchanged for 46,048,318 of Series A Warrants (including those warrants issuable pursuant to a unit purchase option). Each share of Series B Stock has a stated value equal to $1,000 and is convertible into Common Stock on a fixed basis at a conversion price of $0.00 per share.
Series C Convertible Preferred Stock
On November 17, 2020, the Company finalized the closing of the stock exchange with certain holders of its Series B Stock to exchange all the Series B Stock for 20,150 shares of Series C Convertible Preferred Stock (the “Series C Stock”). Each share of Series C Stock has a stated value equal to $1,000 and is convertible into Common Stock on a fixed basis at a conversion price of $0.0001 per share.
Warrants
October 5, 2016, the Company’s amended and restated its Series A Warrant Standstill Agreements (the "Amended Standstill Agreements") to permit each holder (each, a "Holder") to effect a "cashless" exercise of the Series A Warrants only on dates when the closing bid price used to determine the "net number" of shares to be issued upon exercise is at or above $0.00. The shares issuable upon the exercise of the Series A Warrants are calculated (1) using a Black Scholes Value of 1,517,936 per share and a closing stock bid price at or above 0.00 and (2) the Company will deliver only common stock upon exercise of the Series A Warrants.
On July 27, 2020, the Company's Series A Warrants expired and the balance of outstanding warrants not exercised was 355,661 warrants.
A summary of warrant activity for the years ended December 31, 2020 and 2019 is presented below:
Number of Warrants
Weighted Average Exercise Price
Weighted Average Remaining Term (Yrs.)
Outstanding at January 1, 2019
3,828,729
$
1,522,692
1.6
Warrants exercised
(6,915)
1,518,029
Outstanding at December 31, 2019
3,821,814
$
1,517,936
0.6
Warrants exercised
(3,466,153)
1,511,100
Warrants expired
(355,661)
-
Outstanding at December 31, 2020
-
$
-
-
F - 16
Modification of share-based payment awards to officers
On August 13, 2018, the Compensation Committee of the Board of Directors of the Company approved a modification of share-based payment awards to the Chief Executive Officer and Chief Operating Officer of the Company. As part of the share modification, the Chief Executive Officer and Chief Operating Officer were granted 11 billion and 8 billion shares of restricted common stock on the condition that the same number of shares from their options to purchase the Company’s common stock are forfeited. However, the shares were issued to the officers and have been reflected in the statement of stockholders’ equity. Initially, this restricted stock was schedule to vest one year following the date of issuance provided that the grantee remains an employee of the Company through the vesting date; the vesting schedule was extended and additional six months on August 12, 2019. The share modification did not have an impact on the Consolidated Statements of Operations because both of the officers’ options plans were fully amortized as of the first quarter of 2018.
On August 12, 2019, the Company agreed to extend the expiration date of the vesting period for the restricted stock by six months to February 13, 2020.
On August 12, 2020, the Company agreed to extend for a second time the expiration date of the vesting period for the restricted stock by six months to February 13, 2021.
Restricted Stock
On August 13, 2018, the Compensation Committee of the Board of Directors of the Company approved an issuance of restricted stock to the Chief Financial Officer (the "Officer") of the Company. The Officer was granted 3 billion shares of restricted common stock, which will vest one year following the date of issuance, provided that the grantee remains an employee of the Company through the vesting date; the vesting schedule was extended and additional six months on August 12, 2019. During the year ended December 31, 2019, the Company recognized stock-based compensation expense of $175,000 from the awarded shares to the Officer.
On August 12, 2019, the Company agreed to extend the expiration date of the vesting period for the restricted stock by six months to February 13, 2020.
On August 12, 2020, the Company agreed to extend for a second time the expiration date of the vesting period for the restricted stock by six months to February 13, 2021.
Stock Options
During the year ended December 31, 2020, the Company did not grant any options for the purchase of shares of its common stocks.
A summary of option activity during the years ended December 31, 2020 and 2019 is as follows:
Number of Options
Weighted Average Exercise Price
Weighted Average Remaining Term (Yrs.)
Aggregate
Intrinsic Value
Outstanding, January 1, 2019
68,312,230,680
$
0.00
$
-
Options granted
2,300,000,000
0.00
-
Options forfeited or expired
(750,000,000)
0.00
-
Outstanding, December 31, 2019
69,862,230,680
$
0.00
$
-
Options granted
-
0.00
-
Options forfeited or expired
-
0.00
-
Outstanding, December 31, 2020
69,862,230,680
$
0.00
-
Exercisable at December 31, 2020
69,862,230,680
$
0.00
$
-
During the years ended December 31, 2020 and 2019, the Company recognized stock-based compensation expense of approximately $0.1 million and $0.4 million, respectively, in connection with the amortization of stock options, net of recovery of stock-based charges for forfeited stock options. Stock-based compensation expense is included as part of selling, general and administrative expense in the accompanying consolidated statements of operations.
At December 31, 2020, the amount of unamortized stock-based compensation expense on unvested stock options granted to employees, directors and consultants was approximately $$4,000, which will be amortized over a weighted average period of 0.5 years.
Income (Loss) per Share
Basic income (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon (a) the exercise of stock options (using the treasury stock method); (b) the conversion of Series A convertible preferred stock; (c) the exercise of warrants (using the if-converted method); (d) the vesting of restricted stock units; and (e) the conversion of convertible notes payable. Diluted income (loss) per share excludes the potential common shares, as their effect is antidilutive. The following table summarizes the Company’s securities that have been excluded from the calculation of basic and dilutive income (loss) per share as their effect would be anti-dilutive:
December 31,
Preferred stock
162,771,153,000
201,501,142,000
Stock options
69,862,230,680
68,362,230,680
Warrants
-
41,437,627,105
Total
232,633,383,680
311,300,999,785
Weighted average shares used in calculating basic and diluted net income (loss) per share are as follows:
Year Ended December 31,
Basic
90,351,540,618
66,977,667,455
Effect of exercise stock options
-
-
Effect of exercise warrants
-
-
Diluted
90,351,540,618
66,977,667,455
F - 17
Note 14. LEASE
The Company has various lease agreements with terms up to 20 years, including leases of retail stores, headquarter and equipment. All the leases are classified as operating leases.
The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of December 31, 2020.
Maturity of Lease Liabilities by Fiscal Year
$
631,978
564,478
450,877
342,005
337,685
Thereafter
2,209,009
Total undiscounted operating lease payments
$
4,536,032
Less: Imputed interest
(946,825)
Present value of operating lease liabilities
$
3,589,207
Balance Sheet Classification
Operating lease liability, current
$
474,686
Operating lease liability, net of current
3,114,521
Total operating lease liabilities
$
3,589,207
Other Information
Weighted-average remaining lease term for operating leases
10 years
Weighted-average discount rate for operating leases
4.77
%
Rent expense for the years ended December 31, 2020 and 2019 was approximately $1.0 million, respectively, is included in selling, general and administrative expenses in the accompanying consolidated statement of operations.
The following table represents the components of lease cost are as follows for twelve months ended December 31, 2020:
December 31, 2020
Operating lease cost
$
480,314
Variable lease cost
353,887
Short-term lease cost
116,709
Total Rent Expense
$
950,910
Cash Flows
Cash paid for amounts included in the present value of operating lease liabilities was $511,000 for the 2020 and was included in operating cash flows. The amortization of the right-of-use asset of $584,398 was included in operating cash flows.
Supplemental balance sheet information related to our operating leases is as follows:
Balance Sheet Classification
January 1, 2020
December 31, 2020
Right of use asset
Other assets
$
4,663,019
$
4,078,621
Lease liability, current
Current liabilities
$
555,959
$
474,686
Lease liability, net of current
Other liabilities
$
3,544,729
$
3,114,521
F - 18
Note 15. INCOME TAXES
The Company did not have a provision for income taxes (current or deferred tax expense) for tax years ended December 31, 2020 and 2019. The following is a reconciliation of the expected tax expense (benefit) at the U.S. statutory rate to the actual tax expense (benefit) reflected in the accompanying statement of operations:
Year Ended December 31,
U.S. federal statutory rate
$
(781,704)
$
(587,869)
State and local taxes, net of federal benefit
(132,291)
(100,094)
Change in valuation allowance
1,201,450
249,935
True-up & deferred adjustment
23,614
258,165
Stock based compensation
19,159
17,901
Other permanent items
6,664
Change in tax rate
2,429
97,731
Expired warrants
(422,655)
-
Other
89,063
57,567
$
-
$
-
As of December 31, 2020 and 2019, the Company’s deferred tax assets and liabilities consisted of the effects of temporary differences attributable to the following:
Year Ended December 31,
Deferred tax assets:
NOL & AMT credit carryforward
$
13,366,483
$
12,654,534
Inventory reserves and allowances
31,249
30,965
Accrued Expenses and Deferred Income
45,358
48,050
Charitable contribution
5,303
5,284
Stock based compensation
1,966,058
1,967,795
Net book value of fixed assets
6,574
3,978
Net book value of intangible assets
731,365
666,538
ASC 842 - Lease Accounting
32,681
29,132
Total deferred tax assets
16,185,071
15,406,276
Deferred tax liabilities:
Extinguishment of Warrants
-
(422,655)
Total deferred tax liabilities
-
(422,655)
Net deferred tax assets
16,185,071
14,983,621
Valuation allowance
(16,185,071)
(14,983,621)
Net deferred tax assets
$
-
$
-
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the positive and negative evidence available, management has determined that a valuation allowance is required at December 31, 2020 and 2019 to reduce the deferred tax assets to amounts that are more likely than not to be realized. The Company’s valuation increased by $1.2 million and $0.2 million for the tax years ended 2020 and 2019, respectively. Should the factors underlying management’s analysis change, future valuation adjustments to the Company’s net deferred tax assets may be necessary.
At December 31, 2020 the Company had U.S. federal and state net operating loss carryforwards (“NOLS”) of $56.4 million and $42.4 million, respectively. Federal NOLs of $46.3 million expire beginning in 2030 through 2037 and $10.1 million do not expire. State NOLs of $35.4 million expire beginning in 2030 through 2037 and $7.0 million do not expire. Utilization of our NOLS may be subject to an annual limitation under section 382 and similar state provisions of the Internal Revenue Code due to changes of ownership that may have occurred or that could occur in the future, as defined under the regulations.
On March 27, 2020, the CARES Act was enacted in response to COVID-19 pandemic. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The CARES Act made various tax law changes including among other things (i) increasing the limitation under Section 163(j) of the Internal Revenue Code of 1986, as amended (the “IRC”) for 2019 and 2020 to permit additional expensing of interest (ii) enacting a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k), (iii) making modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and (iv) enhancing the recoverability of alternative minimum tax credits. Given the Company’s full valuation allowance position and the Company did not have taxable income in the five preceding years, the CARES Act did not have an impact on the financial statements.
The Company files a federal income tax return and income tax returns in various state tax jurisdictions and the Company is generally no longer subject examinations by federal and state tax authorities for years before 2017.
F - 19
Note 16. SEGMENT INFORMATION
Management determines the reportable segments based on the internal reporting used by our executives to evaluate performance and to assess where to allocate resources. The Company evaluates segment performance based on the segment gross profit before corporate expenses.
Summarized below are the total net sales and segment operating profit for each reporting segment:
Year Ended
Net Sales
Segment Gross Profit
December 31, 2020
December 31, 2019
December 31, 2020
December 31, 2019
Vapor
$
2,458,945
$
4,134,701
$
1,425,140
$
2,443,967
Grocery
11,461,800
10,979,305
4,352,081
4,040,277
Total
$
13,920,745
$
15,114,006
5,777,221
6,484,244
Corporate expenses
9,225,593
10,898,528
Operating loss
(3,448,372)
(4,414,284)
Corporate other income (expense), net
(274,020)
1,614,908
Net loss
(3,722,392)
(2,799,376)
For the year ended December 31, 2020 depreciation and amortization was approximately $10,000 and $0.5 million for Vapor and Grocery, respectively.
For the year ended December 31, 2019 depreciation and amortization was approximately $41,000 and $0.5 million for Vapor and Grocery, respectively.
Note 17. SUBSEQUENT EVENTS
On January 14, 2021, the Compensation Committee of the Board of Directors of the Company approved an issuance of restricted stock to the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer of the Company, in consideration for agreeing to a new vesting schedule for the existing awarded restricted stock. Each Officer of the Company was granted a 10% increase from the original award agreement for a total of 2.2 billion shares of restricted common stock, which will vest on December 31, 2022, provided that the grantee remains an employee of the Company through the vesting date.
On January 14, 2021, the Compensation Committee of the Board of Directors of the Company approved an issuance of restricted stock to Anthony Panierello a Director of the Company, in consideration for agreeing to a new vesting schedule for the existing awarded restricted stock. The Director of the Company was granted a 10% increase from the original award agreement for a total of 50 million shares of restricted common stock, which will vest on December 31, 2022, provided that the grantee remains an employee of the Company through the vesting date.
On February 7, 2021, Healthier Choices Management Corp. (the “Company”) entered into a Securities Purchase Agreement, pursuant to which the Company sold and issued 5,000 shares of its Series D Convertible Preferred Stock (the “Preferred Stock”) to institutional investors for $1,000 per share or an aggregate subscription of $5,000,000. The Preferred Stock is currently convertible into 2,083,333,333 shares of the Company’s Common Stock at a conversion price of $0.0024 per share, with such conversion price subject to adjustment as described in the Certificate of Designation.
On February 25, 2021, the Company received a written notice from Sabby Healthcare Master Fund, LTD and Sabby Volatility Warrant Master Fund, LTD (“collectively, the Lender”) agreeing to the requested extension for the term loan and security agreement (the “Loan”) that matures on November 16, 2020. The loan extension matures on March 18, 2021 and it bears interest at a rate of 5% per annum, payable monthly commencing on the first day of the first month following the acceptance date of the extension.
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 $363,000 for 2021 and his salary will increase 10% in each subsequent year.
Since January 1, 2021 to March 5, 2021, the Company Series C Stock have been 100% been converted and cancelled into 162.8 billion common shares. In addition, 625 million stock options of the Company have been exercised into common stock and 2.25 billion shares of restricted stock has been issued pursuant to contractual agreements with the Company’s officers and directors.
F - 20
EXHIBIT INDEX
Exhibit
Incorporated by Reference
Filed or Furnished
No.
Exhibit Description
Form
Date
Number
Herewith
1.1
Form of Underwriting Agreement
S-1
7/10/15
1.1
2.1(a)
Business Sale Offer and Acceptance Agreement, dated April 11, 2016, by and between Vapor Corp. and Ada’s Whole Food Market LLC
8-K
5/23/16
2.1
2.1(b)
Asset Purchase Agreement, dated July 29, 2016, by and between Vapor Corp. and VPR Brands, L.P.
8-K
8/3/16
1.1
2.1(c)
Asset Purchase Agreement, dated November 19, 2018, by and among the Company and Paradise Health Foods, Inc.
8-K
11/21/18
2.1
2.1(d)
Membership Interest Purchase Agreement, dated December 14, 2018, by and among Healthy U Wholesale, Inc. and the Sellers named therein
8-K
12/26/18
2.2
3.1
Certificate of Incorporation
10-Q
11/16/15
3.1
3.1(a)
Certificate of Amendment to Certificate of Incorporation
8-K
3/03/17
3.1
3.1(b)
Certificate of Amendment to Certificate of Incorporation
S-1
7/10/15
3.2
3.1(c)
Certificate of Amendment to Certificate of Incorporation
S-4
12/11/15
3.2
3.1(d)
Certificate of Amendment to Certificate of Incorporation
8-K
2/2/16
3.1
3.1(e)
Certificate of Amendment to Certificate of Incorporation
8-K
3/9/16
3.1
3.1(f)
Certificate of Amendment to Certificate of Incorporation
8-K
6/1/16
3.1
3.1(g)
Certificate of Amendment to Certificate of Incorporation
8-K
8/5/16
3.1
3.1(h)
Certificate of Designation of Series A Preferred Stock
S-1
7/10/15
3.4
3.1(i)
Certificate of Correction to the Certificate of Designation of Series A Preferred Stock
8-A12B
7/27/15
3.5
3.1(j)
Certificate of Designation of Preferences, Rights And Limitations of Series B Convertible Preferred Stock
8-K
8/21/18
3.1
3.1(k)
Certificate of Designation of Preferences, Rights And Limitations of Series C Convertible Preferred Stock
8-K
9/25/20
3.1
3.1(l)
Certificate of Designation of Preferences, Rights And Limitations of Series D Convertible Preferred Stock
8-K
2/4/21
3.1
3.2
Bylaws
8-K
12/31/13
3.4
10.1
Form of Securities Purchase Agreement dated March 3, 2015
8-K
3/05/15
10.1
10.2
2015 Equity Incentive Plan
S-1
6/01/15
10.28
10.3
Form of Letter Agreement dated June 19, 2015
8-K
6/25/15
10.4
10.4
Form of Letter Agreement dated June 19, 2015
8-K
6/25/15
10.5
10.5
Form of Warrant dated June 22, 2015
8-K
6/25/15
10.6
10.6
Form of Registration Rights Agreement dated June 22, 2015
8-K
6/25/15
10.7
10.7
Term Loan Credit Agreement, dated December 31, 2018, by and among Healthy Choice Markets 2, LLC, The Vitamin Store, LLC and Professional Bank
8-K
1/7/19
10.1
10.8
Term Note, dated December 31, 2019, issued by Healthy Choice Markets 2, LLC, and The Vitamin Store, LLC, in favor of Professional Bank
8-K
1/7/19
10.2
Exhibit
Incorporated by Reference
Filed or Furnished
No.
Exhibit Description
Form
Date
Number
Herewith
10.9
Amendment to Vapor Corp. 2015 Equity Incentive Plan
S-8
2/8/17
4.2
10.10
Form of Restricted Stock Award Agreement
8-K
8/20/18
10.4
10.11
Second Amended and Restated Employment Agreement, entered into as of February 26, 2021 by and between the Company and Christopher Santi
8-K
3/5/21
10.1
X
10.12
Third Amended and Restated Restricted Stock Agreement dated as of February 12, 2021 by and between Healthier Choices Management Corp. and Jeffrey Holman
X
10.13
Third Amended and Restated Restricted Stock Agreement dated as of February 12, 2021 by and between Healthier Choices Management Corp. and Christopher Santi
X
10.14
Third Amended and Restated Restricted Stock Agreement dated as of February 12, 2021 by and between Healthier Choices Management Corp. and John Ollet
X
10.15
Third Amended and Restated Restricted Stock Agreement dated as of February 12, 2021 by and between Healthier Choices Management Corp. and Anthony Panariello
X
10.16
Amended and Restated Employment Agreement, dated as of March 13, 2018 by and between the Company and John Ollet
8-K
8/20/18
10.2
10.17
Amended and Restated Employment Agreement, dated as of March 13, 2018 by and between the Company and Jeffrey Holman
8-K
8/20/18
10.3
16.1
Letter from Morrison, Brown, Argiz & Farra, LLC, dated April 26, 2017
8-K
4/28/17
16.1
21.1
List of Subsidiaries
Filed
23.1
Consent of Marcum L.L.P
Filed
31.1
Certification of Principal Executive Officer (302)
Filed
31.2
Certification of Principal Financial Officer (302)
Filed
32.1
Certification of Principal Executive Officer and Principal Financial Officer (906)
Furnished**
101.INS
XBRL Instance Document
Filed
101.SCH
XBRL Taxonomy Extension Schema Document
Filed
101.CAL
XBRL Taxonomy Extension Calculation Link base Document
Filed
101.DEF
XBRL Taxonomy Extension Definition Link base Document
Filed
101.LAB
XBRL Taxonomy Extension Label Link base Document
Filed
101.PRE
XBRL Taxonomy Extension Presentation Link base Document
Filed
* Management contract or compensatory plan or arrangement.
** 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.
Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our stockholders who make a written request to our Corporate Secretary at 3800 North 28th Way, Hollywood, Florida 33020.