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
Through its wholly owned subsidiary HCMC Intellectual Property Holdings, LLC, the Company currently operates nine retail vape stores inmanages and intends to expand on its intellectual property portfolio.
Through its wholly owned subsidiaries, Healthy Choice Markets, Inc., Healthy Choice Markets 2, LLC, and Healthy Choice Markets 3, LLC, respectively, the 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, throughoperates:
• | Ada’s Natural Market, a natural and organic grocery store offering fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, health & beauty products and natural household items (www.Adasmarket.com) |
• | Paradise Health & Nutrition’s three stores that likewise offer fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, health & beauty products and natural household items, (www.ParadiseHealthDirect.com) |
• | The Company acquired Mother Earth’s Storehouse on February 2022, which operates a two store organic and health food and vitamin chain in New York’s Hudson Valley, which has been in existence for over 40 years. (www.MotherEarthStorehouse.com) |
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. TheWellness, LLC, the Company also sells vitamins and supplements on the Amazon.com marketplace throughoperates:
• | Healthy Choice Wellness Center (Roslyn Heights, NY) a Company owned IV therapy center offering multiple IV drip “cocktails” for clients to choose from. These cocktails are designed to help boost immunity, fight fatigue and stress, reduce inflammation, enhance weight loss, and efficiently deliver anti-oxidants and anti-aging mixes. Additionally, there are cocktails for health, beauty and re-hydration. (www.Eirhydration.com, though rebranded website coming soon) |
• | The Company entered into a licensing agreement in February 2022 for a Healthy Choice Wellness Center at the Casbah Spa & Salon in Fort Lauderdale, FL, offering essentially the same services as the Roslyn Heights, NY location. This center will be opening in the second quarter of 2022. |
Through its wholly owned subsidiary, Healthy U Wholesale, Inc. Thethe Company also operates HCMC Intellectual Property Holdings, LLC, a new wholly owned subsidiary formed to hold, marketsells vitamins and expandsupplements, as well as health, beauty and personal care products on its current intellectual property assets. Thewebsite www.TheVitaminStore.com.
Additionally, the Company markets its patented Q-Unit™ and Q-Cup® technology. Information on these products and the Q-Cup™ technology under the vape segment; this patented technology is basedavailable 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.Company’s website at www.theQcup.com.
NATURAL AND ORGANIC GROCERIES andAND DIETARY SUPPLEMENTS BUSINESS
Local. Organic. Fresh. Three words that define Healthy Choice Markets! With Ada's Natural Market, a full-service grocery store and Healthy Choice Markets 2 are specialty retailerGreenleaf Grill, Ada’s flagship fast casual in-store restaurant, serving Fort Myers, FL, along with three (3) Paradise Health & Nutrition locations in the greater Melbourne, FL area, and our two (2) newly acquired as of naturalFebruary 2022, Mother Earth’s Storehouse locations in Hudson Valley, NY, all serving their respective local communities. Our stores provide all-natural and organic groceriesproducts in a friendly and dietary supplements. Wehelpful atmosphere, with aisles of traditional grocery complete with frozen, healthy home, vitamins & supplements, health & beauty, fresh produce, hormone and antibiotic free meats and bulk foods. Ada's Natural Market and Mother Earth’s Storehouse also offer chef-prepared ready-to-go foods, a 100% organic juice & smoothie bar (available also at two of our Paradise locations), and a free-trade coffee bar with fresh-baked-daily baked goods.
Collectively, 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:
| ● | selling only naturalall-natural and organic groceries; |
| ● | offering affordable prices and a shopper-friendly retail environment; and |
| ● | providing dine-in options at our NaturalGreenleaf Grill, Organic Juice Bar, and Green Leaf Café.our free-trade coffee bar. |
Our History and Founding Principles
We are committed to maintaining the following founding principles, which have helped foster our growth:
| ● | 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. |
| ● | Community. The Ada’s, Paradise, and Paradisenow Mother Earth’s Storehouse brands have each been serving Floridatheir respective communities for 4040+ years. |
| ● | 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, goodcompetitive 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:
| ● | greater consumer focus on high-quality nutritional products; |
| ● | an increased awareness of the importance of good nutrition to long-term wellness; |
| ● | aging communities that are seeking healthy lifestyle alternatives; |
| ● | 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; |
| ● | growing consumer concerns over the use of harmful chemical additives in body care and household cleaning supplies; |
| ● | well-established natural and organic brands, which generate additional industry awareness and credibility with consumers; and |
| ● | 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:
| ● | 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
| ● | 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:
| ● | 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. |
| ● | 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. |
| ● | 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. |
| ● | 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. |
| ● | 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. |
| ● | 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. |
| ● | 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. |
| ● | 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. |
| ● | Beverages. We offer a wide variety of non-alcoholic and alcoholic beverages containing natural and organic ingredients. |
| ● | 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. |
| ● | BodyHealth, Beauty, and Personal 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:
| ● | heavily advertised dealsdiscounts supported by manufacturer participation; |
| ● | in-store specials generally lasting for 30 days and not advertised outside the store; |
| ● | managers’ specials, such as clearance, overstock, short-dated or promotional incentives; and |
| ● | 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, 2020,2021, we purchased approximately 70%69% of the goods we sell from our top 20 suppliers. For the fiscal year ended December 31, 2020,2021, approximately 27%25% 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 Sprout's Farmers Market, 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, theThe 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 AdasAda's Natural Market was forced to temporarily closereduce hours for most of 2020.2020 and 2021.
To address the impact of the virus, we have instituted strict cleaning protocols at all locations, provided PPPPPE equipment for all employees and offered online ordering and curbside pick-up for all customers preferring to not enter the store.
HEALTHY CHOICE WELLNESS CENTERS
Healthier choices extend past just healthy eating. HCMC, through its Healthy Choice Wellness Centers, offers premium and optimized whole person-centered care and services, tailored to promote and maximize one's general health and well-being. Healthy Choice Wellness Centers’ services are designed to address one or more common concerns, including but not limited to immunity, anxiety, mental fortitude, sports recovery, and more. Through these services, which include IV Nutrient Drip Infusions and Intramuscular (IM) Injection Treatments, Healthy Choice Wellness Centers seek to provide healthy alternatives that treat the mind and body to its core, thus offering optimized healthier living.
Defining Healthy Choice Wellness
o | indicative of, conducive to, or promoting good health |
o | an act of selecting or making a decision when faced with two or more possibilities |
o | the state of being in good health, especially as an actively pursued goal |
Our Mission
To assist in one's achievement of personal well-being, which is an optimal and dynamic state that allows people to achieve their full potential through both the individual pursuit of wellness and the commitment and support of the communities to which they belong.
To assist in maximizing overall individual wellness, which is an active process that helps individuals reach their optimal well-being by integrating all the dimensions of wellness into their lives; physical, social, emotional, spiritual, environmental, intellectual, occupational, and financial.
To provide the highest standards of professionalism, emphasizing on quality of care, ethical behavior, ensuring client confidentiality, and the treatment of all individuals with respect and dignity.
To provide clients an immaculate wellness facility designed for the optimal benefit of the clients to receive their desired treatments in a clean and sterile environment that fosters a tranquil space to maximize one's overall wellness and well-being.
To continue the powerful pursuit of knowledge and education by all of our professionals and practitioners, to better provide consult to our clients for them to best maximize their overall wellness and well-being.
Our Vision
Life comes with a lot of choices - some easier to make than others. Healthier Living should be the easiest of those choices, and so Healthy Choice Wellness Centers offers Health & Wellness services that assist in making those choices a lot easier. Healthy Choice Wellness Centers seek to continue the commitment of its parent company, Healthier Choices Management Corp., in providing consumers with healthier alternatives to everyday lifestyle choices.
Healthy Choice Wellness Centers offer premium and optimized whole person-centered care and services, tailored to promote and maximize one's general health and well-being. All of our services are designed to address one or more common concerns, including but not limited to immunity, anxiety, mental fortitude, sports recovery, and more. Through these services, Healthy Choice Wellness Centers seek to provide healthy alternatives that treat the mind and body to its core, thus offering optimized healthier living.
Our Values
Healthy Choice Wellness Centers are committed to building a culture of well-being. Our goal is to optimize wellness, both for today and all of our tomorrows.
Healthy Choice Wellness Centers view the communities we serve as being comprised of whole and dynamic individuals. We are sensitive to the communal stresses of life that impact our health, wellness, and overall well-being. We promote and encourage personal responsibility and accountability in one's pursuit of achieving and maintaining their health and wellness. Our Healthy Choice Wellness team not only participates in the facilitation of services in the process of achieving one's wellness, but also are present to provide information, care, and knowledge to maintain course and maximize one's well-being according to their individual health goals, wants, and needs.
Healthy Choice Wellness Center also realizes that the whole is only as strong as its parts when it comes to those communities we serve. Thus, we put forth effort to strengthen the environments in which we live and work as they directly impact our well-being. This effort to support wellness for the individuals (the parts) must include working to create a healthy community at large (the whole) that supports the well-being of its members at large.
Our Growth Strategy
We seek to operate and expand our Healthy Choice Wellness centers by approaching growth via three (3) different pathways:
1) | Corporately owned and operated wellness centers |
2) | Wellness Centers implementing the services of Healthy Choice Wellness Centers by way of licensing agreements |
3) | Expansion by way of franchised locations |
Our Products & Services
Healthy Choice Wellness Centers specialize primarily in IV Nutrient Drip Infusion and Intramuscular (IM) Injection treatments, however we seek to expand these offerings (both in the number of IV and IM options offered, but also by adding additional whole-person centered services for optimizing overall general health).
IV Nutrient Drip Infusion Treatments: Healthy Choice Wellness Center’s IV Nutrient Drip Infusions are used to deliver vitamins and minerals directly into the bloodstream, offering superior absorption over oral supplements. We offer server pre-formulated customized solutions to address a variety of issues including:
Immune System Strengthening
Optimal Athletic Performance & Recovery
Hangover & Headache Relief
Currently, we offer eleven IV Nutrient Treatment Options: Quench, Get-Up-And-Go, Recovery & Performance, Immunity, Alleviate, Inner Beauty, Myers’ Cocktail, Nad+ (Premium Drip), Reboot, Glutathion, and Brainstorm.
Intramuscular (IM) Injection Treatments: Healthy Choice Wellness Center’s Intramuscular (IM) Injection treatments deliver vitamins and minerals directly into the bloodstream, offering superior absorption over oral supplements. We offer server pre-formulated customized solutions to address a variety of issues including:
Currently we offer four Injection Treatment Options: Vitamin B-12, Vitamin D-3, Glutathione, and our Skinny Shot.
Our Employees
Each Healthy Choice Wellness Center is led by licensed and accredited medical professionals and practitioners who share a like-minded philosophy with that of the Wellness Centers, as does all our support staff – we do not just practice healthy choices, we live it! We encourage and support all of our professionals and practitioners to continue the powerful pursuit of knowledge and education, to better provide consult to our clients for them to best maximize their overall wellness and well-being.
Our Customers
The client base for our wellness centers is not bound by age groups or genders. Our clients consist of a broad range of individuals all seeking a common universal goal of seeking to improve their overall wellness. These individuals tend to be those who consciously live a healthy lifestyle, and are seeking treatments to maximize and optimize their overall well-being. This includes athletes seeking treatments to help recover quicker from injury and/or rehydrate, middle aged men and women seeking treatments to maximize their cognitive fortitude, those wanting to help alleviate indigestion or stomach pains, and a slew of other individual reasons all ending with the drive for healthier living.
ONLINE SALES
HCMC is your online source for the leading products in the all-natural vitamin and supplement, and health, beauty, and personal care categories of Healthier Living.
Backed by 30+ years of combined experience in the health and nutrition industry, we provide our customers with only the best products on the market — Try our exclusive offering of Ada’s Naturals brand products or any of the top products from the most recognized national natural health brands in the industry.
o | Product categories include, but are not limited to: Vitamins, Minerals & Herbals, Immunity, Multivitamins, Sports Nutrition, Protein Powders, Collagen, Stress & Anxiety, Sleep & Relax, Brain Health, Pain & Inflammation, Probiotics, Energy & Stamina, Joint & Bone Support, Digestion, Fish Oils, Just for Men, Kids/Children/Teens, and more. |
o | Product varieties include, but are not limited to: Apple Cider Vinegar, BCAA, Biotin, Calcium, Chlorophyll, CLA, Collagen Peptides, Creatine, Elderberry, Omega-3’s, Garlin, Glucosamine, Iron, Magnesium, Melatonin, Potassium, Prenatals, Probiotics, Protein Powders (Plant and Whey), Ashwaghanda Turmeric, Ginseng, Vitamin B,C,D,E,K+, Zinc, and more. |
o | Product brands include, but are not limited to: Ada’s Naturals, Enzymedica, Garden of Life, Natural Vitality, New Chapter, Renew Life, Solgar, and more. |
| ● | HEALTH, BEAUTY, AND PERSONAL CARE: |
o | Product categories include, but are not limited to: Oral Care, Hair Care, Body Wash, Skin & Face, Deodorant, Suncare, Soaps, Shaving, Feminine Hygiene, Lip Balms, Ear Candles, Lotions, Hand Sanitizers, Essential Oils, and more. |
o | Product varieties include, but are not limited to: Body Wash, Deodorant, Ear Candles, Shampoos, Conditioners, Toothpaste, Mouthwashes, Shaving, Bar Soaps, Liquid Soaps, Suncare, and more. |
o | Product brands include, but are not limited to: Ada’s Naturals, Alba Botanica, Aura Cacia, Derma-E, Desert Essence, Dr. Bronners, Every Man Jack, Heritage Store, Himalaya Botanique, Life-Flo, Lily of the Desert, Natracare, Naturally Fresh, Oral Essentials, South of France, Tea Tree Therapy, Thai Deodorant Stone, Thayers, and more. |
VAPORIZER AND E-LIQUID BUSINESS
Retail Stores
While evaluating retail store operations in 2020,2021, management decided to decrease the inventory levels on hand for all of its vape stores, in March 2020, due to a major decreaseddecrease in foot traffic or temporary closure of some stores a result of the Coronavirus (COVID-19)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:
| ● | a mouthpiece, which is a small plastic cartridge that contains a liquid nicotine solution; |
| ● | the heating element that vaporizes the liquid nicotine so that it can be inhaled; and |
| ● | 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 companyCompany 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 aan even smaller portion of future revenue will continue to come from its retail stores.stores as underperforming stores are being closed.
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
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:
| ● | stop selling products or using technology that contains the allegedly infringing intellectual property; |
| ● | incur significant legal expenses; |
| ● | pay substantial damages to the party whose intellectual property rights we may be found to be infringing; |
| ● | redesign those products that contain the allegedly infringing intellectual property; or |
| ● | 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 (“District Court”) for the Northern District of Georgia (the “Complaint”). The lawsuit allegesalleged infringement on HCMC-owned patent(s) by the Philip Morris product known and marketed as “IQOS™.” Philip Morris claims that it is currently approaching 14 million users of its IQOS® product and has reportedly invested over $3 billion in their smokeless tobacco products. On December 3, 2021, the District Court effectively dismissed HCMC’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. On December 14, 2021, the Company filed an appeal of the District Court’s dismissal of the Company’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. HCMC believes the District Court committed legal error by dismissing its complaint for patent infringement and also by denying the Company’s motion to amend its pleading.
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:
| ● | the levying of substantial and increasing tax and duty charges; |
| ● | restrictions or bans on advertising, marketing and sponsorship; |
| ● | the display of larger health warnings, graphic health warnings and other labelling requirements; |
| ● | restrictions on packaging design, including the use of colors and generic packaging; |
| ● | restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines; |
| ● | requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents’ levels; |
| ● | requirements regarding testing, disclosure and use of tobacco product ingredients; |
| ● | increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors; |
| ● | elimination of duty free allowances for travelers; and |
| ● | 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, theThe 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.
9The Company has included the results of the Healthy Choice Wellness Centers under the grocery segment due to its sales being de minimis.
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, 2020,2021, cash and cash equivalents totaled approximately $0.9$26.5 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 dayat least twelve months 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.
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.
Revolving Line of Credit
On April 13, 2018,November 3, 2021, the Company agreed toentered into an agreement for a new revolving credit line of $2.0credit of $2.0 million and a money marketblocked/restricted deposit 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%1.0% over what is earned on the collateral amount. The collateral amount established inaccount. Based on the arrangementagreement with the bank, is $2.0 million. As of December 31, 2020,each draw request from the Company had $2.0 million incredit line will be 100% cash secured with moneys held from the blocked account, which is recorded as restricted cash included in non-current assets.account.
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)2020 and 2021). 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 ratioOn December 21, 2021, the Company paid in full the outstanding balance 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$410,000 from the Term Note are guaranteed by the Company and its wholly owned subsidiary, Healthy U Wholesale, Inc.Loan.
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 |
2021 | | $ | 280,000 |
2022 | | | 280,000 |
2023 | | | 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,May 3, 2021, the Company received a written noticeletter from the Lender agreeingCustomers Bank to allowinform the Company to usethat the remaining balancePPP Loan was paid and fully forgiven by the Small Business Administration (SBA). The forgiveness of $1.2 million from the Loan for operational purposes. The loan maturity date$885,227 was extended to February 18, 2021 and it bears interest at a rate of 5% per annum, payable monthly commencingreported in gain on debt settlements on the first dayconsolidated statements of the first month following the acceptance date of the extension.
operations.
Note 12. COMMITMENTS AND CONTINGENCIES
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 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 Term shall be automatically renewed for successive one-year terms unless notice of non-renewal is given by either party at least 30 days before the end of the Term. The above description of the terms of the Holman Employment Agreement is not complete and is qualified by reference to the complete document.
On February 26, 2021, the Company entered into an amended and restated employment agreement (the “Employment Agreement Amendment”) with the Company’s President and Chief Operating Officer, Christopher Santi. Pursuant to the Employment Agreement Amendment, Mr. Santi will continue to be employed as the Company’s President and Chief Operating Officer through January 30, 2024. Mr. Santi will receive a base salary of $0.4 million for 2021 and his salary will increase 10% in each subsequent year. The Term shall be automatically renewed for successive one-year terms unless notice of non-renewal is given by either party at least 30 days before the end of the Term. The above description of the terms of the Santi Employment Agreement is not complete and is qualified by reference to the complete document.
Legal Proceedings
TwoNaN 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$3 billion in their smokeless tobacco products.On December 3, 2021, the District Court for the Northern District of Georgia effectively dismissed HCMC’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. On December 14, 2021, the Company filed an appeal of the District Court for the Northern District of Georgia’s dismissal of the Company’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. HCMC believes the Georgia Court committed legal error by dismissing its complaint for patent infringement and also by denying the Company’s motion to amend its pleading.
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. 2021. With respect to legal costs, we record such costs as incurred.
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, 20202021 and 2019,2020, the Company recorded expenses of $15,000$12,000 and $40,000$15,000 as part of its cost of goods.
Note 13. STOCKHOLDERS’ EQUITY
Equity Compensation Plans
The Company’s 2015 Equity Incentive Plan, as amended (the(the “2015 Plan”), awards grants to employees. The plan can award up to 100 billion shares of common stock and currently 11.1 10.3 billion shares are available for grant as of December 31, 2020.2021.
The Company’s 2009 Equity Incentive Plan (the(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 no0 shares of common stock available for grant as of December 31, 2020.2021.
On June 18, 2021, the Company issued 27,046,800,310 shares of common stock in connection with the Rights Offering at a subscription price of $0.0010 per share, generating gross proceeds of $27.0 million. The Company incurred direct financing costs of $2.7 million in connection with the offering resulting in net proceeds to the Company of $24.3 million.
Exchange Agreement
On March 29, 2021, the Company entered into exchange agreements with the holders of the $2.7 million Loan and Security Agreement (the "Credit Agreement"). The agreement with the holders of the Company’s indebtedness (the “Notes”) in an aggregate amount of $1.3 million to exchange the Notes for 1,172,964,218 shares at a conversion price of $0.0011. The Notes were issued pursuant to the Credit Agreement dated as of August 18, 2020, among The Vape Store, Inc., the Company, Healthy Choice Markets, Inc., Sabby Healthcare Master Fund, Ltd., and Sabby Volatility Warrant Master Fund, Ltd. In connection with the Exchange, the Credit Agreement and all related loan documents was terminated and the Holder’s on the assets of the Company and its subsidiaries was cancelled. The Company recognized a loss on debt extinguishment of $0.1 million for the year ended December 31, 2021.
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.
During the years ended December 31, 2021 and 2020, the Company issued 162.8 billion shares and 38.7 billion shares of Company common stock in connection with the exercise of Series C stock.
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 accredited investors for $1,000 per share or an aggregate subscription of $5.0 million. As of December 31, 2021, the Company has issued 6.6 billion shares of Company common stock in connection with the exercise of 4,200 shares of the Series D Convertible Preferred Stock at a conversion price of $0.00064 per share. The conversion price for the exercise of the preferred stock was reset to the 80% of the lowest daily volume-weighted average price ("VWAP") during the 5 Trading Days immediately preceding the effective date of August 11, 2021.
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 forDuring the yearsyear ended December 31, 2020, and 2019 is presented below:the Company issued 3,466,153 shares of the Company Common Stock in connection with the exercise of the Series A Warrant.
| 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 | | - | | $ | - | | | - |
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.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.
On January 14, 2021, the Compensation Committee of the Company approved an issuance of restricted stock to the Officers and a Director of the Company, in consideration for agreeing to a new vesting schedule for the existing awarded restricted stock. Each individual was granted a 10% increase from the original award agreement for a total of 2.3 billion shares of restricted common stock, which will vest quarterly in equal amounts until December 31, 2022, provided that the grantee remains an employee of the Company through the vesting date.
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.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.
On January 14, 2021, the Compensation Committee of the Company approved an issuance of restricted stock to the Officers and a Director of the Company, in consideration for agreeing to a new vesting schedule for the existing awarded restricted stock. Each individual was granted a 10% increase from the original award agreement for a total of 2.3 billion shares of restricted common stock, which will vest quarterly in equal amounts until December 31, 2022, provided that the grantee remains an employee of the Company through the vesting date.
On March 30, 2021, the Company and the Officers and a Director of the Company agreed to forfeit a total of 3.09 billion of restricted shares of common stock that were due to vest on March 31, 2021.
On June 29, 2021, the Company and the Officers and a Director of the Company agreed to forfeit a total of 3.09 billion of restricted shares of common stock that were due to vest on June 30, 2021.
Stock Options
During the yearyears ended December 31, 2021 and 2020, the Company did not0t grant any options for the purchase of shares of its common stocks.
A summary of option activity during the years ended December 31, 20202021 and 20192020 is as follows:
| Number of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Term (Yrs.) | | Aggregate Intrinsic Value | | 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 | | | 8 | | $ | - | |
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 | | | 7 | | $ | - | |
Outstanding, January 1, 2020 | | | | 69,862,230,680 | | | $ | 0.00 | | | | 7 | | | $ | 0 | |
Options granted | | - | | | 0.00 | | | | | | - | | | 0 | | | | 0.00 | | | | | | | | - | |
Options forfeited or expired | | - | | | 0.00 | | | | | | - | | | 0 | | | | 0.00 | | | | | | | | 0 | |
Outstanding, December 31, 2020 | | 69,862,230,680 | | $ | 0.00 | | | 6 | | | - | | | 69,862,230,680 | | | $ | 0.00 | | | | 6 | | | $ | - | |
Exercisable at December 31, 2020 | | 69,862,230,680 | | $ | 0.00 | | | 6 | | $ | - | |
Options granted | | | | 0 | | | | 0.00 | | | | | | | | - | |
Options exercised | | | | (2,275,000,000 | ) | | | 0.00 | | | | | | | | - | |
Options forfeited or expired | | | | 0 | | | | 0.00 | | | | | | | | - | |
Outstanding, December 31, 2021 | | | | 67,587,230,680 | | | $ | 0.00 | | | | 5 | | | | 0 | |
Exercisable at December 31, 2021 | | | | 67,587,230,680 | | | $ | 0.00 | | | | 5 | | | $ | 0 | |
During the years ended December 31, 20202021 and 2019,2020, the Company recognized stock-based compensation expense of approximately $0.1 million$34,375 and $0.4 million,$78,029, 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, | | December 31, | |
| 2020 | | 2019 | | 2021 | | | 2020 | |
| | | | | | | | | | |
Preferred stock | | 162,771,153,000 | | 201,501,142,000 | | | 1,250,000,000 | | | | 162,771,153,000 | |
Stock options | | 69,862,230,680 | | 68,362,230,680 | | | 67,587,230,680 | | | | 69,862,230,680 | |
Warrants | | - | | | 41,437,627,105 | |
Total | | 232,633,383,680 | | | 311,300,999,785 | | | 68,837,230,680 | | | | 232,633,383,680 | |
Weighted average shares used in calculating basic and diluted net income (loss) per share are as follows:
| Year Ended December 31, |
| 2020 | | 2019 |
| | | | | |
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 |
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, 2020.2021.
Maturity of Lease Liabilities by Fiscal Year | | | | |
2021 | $ | 631,978 | |
2022 | | 564,478 | | $ | 572,335 | |
2023 | | 450,877 | | | 450,877 | |
2024 | | 342,005 | | | 342,005 | |
2025 | | 337,685 | | | 337,685 | |
2026 | | | | 267,759 | |
Thereafter | | 2,209,009 | | | 1,941,250 | |
Total undiscounted operating lease payments | $ | 4,536,032 | | $ | 3,911,911 | |
Less: Imputed interest | | (946,825) | | | (789,562 | ) |
Present value of operating lease liabilities | $ | 3,589,207 | | $ | 3,122,349 | |
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 |
The following summarizes the Company's operating leases:
Balance Sheet Classification | | December 31, 2021 | | | December 31, 2020 | |
Right of use asset | | $ | 3,543,930 | | | $ | 4,078,621 | |
| | | | | | | | |
Operating lease liability, current | | $ | 437,328 | | | $ | 474,686 | |
Operating lease liability, net of current | | | 2,685,021 | | | | 3,114,521 | |
Total operating lease liabilities | | $ | 3,122,349 | | | $ | 3,589,207 | |
The amortization of the right-of-use asset of $534,691 was included in operating cash flows.
Other Information | | | |
Weighted-average remaining lease term for operating leases | | 10 years | |
Weighted-average discount rate for operating leases | | | 4.774.74 | % |
Rent expense for the years ended December 31, 20202021 and 20192020 was approximately $0.9 million and $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, 2020:2021:
| December 31, 2020 | | December 31, 2021 | |
Operating lease cost | $ | 480,314 | | $ | 389,538 | |
Variable lease cost | | 353,887 | | | 372,608 | |
Short-term lease cost | | 116,709 | | | 139,291 | |
Total Rent Expense | $ | 950,910 | |
Total rent expense | | | $ | 901,437 | |
Cash Flows
Cash paid for amounts included inThe aggregate cash payments under the present value of operating lease liabilitiesleasing arrangement was $511,000approximately $467,000 for the 2020year ended December 31, 2021 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 |
The Company did not have a provision for income taxes (current or deferred tax expense) for tax years ended December 31, 20202021 and 2019.2020. 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, | |
| Year Ended December 31, | | 2021 | | | 2020 | |
| 2020 | | 2019 | | | | | | |
U.S. federal statutory rate | $ | (781,704) | | $ | (587,869) | | $ | (847,867 | ) | | $ | (781,704 | ) |
State and local taxes, net of federal benefit | | (132,291) | | | (100,094) | | | (111,900 | ) | | | (132,291 | ) |
Change in valuation allowance | | 1,201,450 | | | 249,935 | | | 734,615 | | | | 1,201,450 | |
True-up & deferred adjustment | | 23,614 | | | 258,165 | | | 11,441 | | | | 23,614 | |
Stock based compensation | | 19,159 | | | 17,901 | | | 8,171 | | | | 19,159 | |
Forgiveness of PPP loan | | | | (210,432 | ) | | | 0 | |
Other permanent items | | 935 | | | 6,664 | | | 0 | | | | 935 | |
Change in tax rate | | 2,429 | | | 97,731 | | | 89,360 | | | | 2,429 | |
Expired warrants | | (422,655) | | | - | | | 0 | | | | (422,655 | ) |
Other | | 89,063 | | | 57,567 | | | 326,612 | | | | 89,063 | |
| $ | - | | $ | - | | $ | 0 | | | $ | 0 | |
As of December 31, 20202021 and 2019,2020, the Company’s deferred tax assets and liabilities consisted of the effects of temporary differences attributable to the following:
| Year Ended December 31, | | Year Ended December 31, | |
| 2020 | | 2019 | | 2021 | | | 2020 | |
Deferred tax assets: | | | | | | | | | | | |
NOL & AMT credit carryforward | $ | 13,366,483 | | $ | 12,654,534 | |
Net operating losses | | | $ | 14,136,491 | | | $ | 13,366,483 | |
Inventory reserves and allowances | | 31,249 | | | 30,965 | | | 30,156 | | | | 31,249 | |
Accrued Expenses and Deferred Income | | 45,358 | | | 48,050 | | | 136,686 | | | | 45,358 | |
Charitable contribution | | 5,303 | | | 5,284 | | | 5,134 | | | | 5,303 | |
Stock based compensation | | 1,966,058 | | | 1,967,795 | | | 1,903,413 | | | | 1,966,058 | |
Net book value of fixed assets | | 6,574 | | | 3,978 | | | 1,961 | | | | 6,574 | |
Net book value of intangible assets | | 731,365 | | | 666,538 | | | 671,954 | | | | 731,365 | |
ASC 842 - Lease Accounting | | 32,681 | | | 29,132 | | | 33,891 | | | | 32,681 | |
Total deferred tax assets | | 16,185,071 | | | 15,406,276 | | | 16,919,686 | | | | 16,185,071 | |
Deferred tax liabilities: | | | | | | |
Extinguishment of Warrants | | - | | | (422,655) | |
Total deferred tax liabilities | | - | | | (422,655) | |
| | | | | | | | | | | | | |
Net deferred tax assets | | 16,185,071 | | | 14,983,621 | | | 16,919,686 | | | | 16,185,071 | |
Valuation allowance | | (16,185,071) | | | (14,983,621) | | | (16,919,686 | ) | | | (16,185,071 | ) |
Net deferred tax assets | $ | - | | $ | - | | $ | 0 | | | $ | 0 | |
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, 20202021 and 20192020 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 million734,615 and $0.2 million1,201,450 for the tax years ended 20202021 and 2019,2020, 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, 20202021 the Company had U.S. federal and state net operating loss carryforwards (“NOLS”) of $56.461.0 million and $42.446.6 million, respectively. Federal NOLs of $46.3 million expire beginning in 20302032 through 2037 and $10.114.7 million do not expire.expire and are subject to 80% of taxable income under Internal Revenue Code Section 172. State NOLs of $35.4 million expire beginning in 20302032 through 2037 and $7.011.2 million do not expire.expire and maybe subject to income limitations under each State statute. 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 periodpandemic, which, the new legislation is enacted. The CARES Act made various tax law changes including among other things, (i) increasingoutlines the limitation under Section 163(j)provisions of the Internal Revenue Code of 1986, as amendedPaycheck Protection Program (the “IRC”“PPP”) for 2019 and 2020 to permit additional expensing of interest (ii) enacting a technical correction so. The Company determined that qualified improvement property can be immediately expensed under IRC Section 168(k), (iii) making modifications toit met the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020criteria to be carried backeligible to obtain a loan under the five preceding taxable yearsPPP because, among other reasons, in orderlight of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to generate a refund of previously paid income taxes and (iv) enhancing the recoverability of alternative minimum tax credits. Givensupport the Company’s full valuation allowance positionongoing operations and retain all its employees. Under the Company did not have taxable income in the five preceding years,terms of the CARES Act, did not have an impactPPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the program. Such forgiveness will be determined, subject to limitations, based on the financial statements.use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. The Company submitted its application for 100% loan forgiveness and in May 2021 the loan was 100% forgiven by the SBA. As a result, the Company recorded a gain on the forgiveness of the loan in the amount of $885,226.
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.
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 | | Year Ended | |
| Net Sales | | Segment Gross Profit | | Net Sales | | | Segment Gross Profit | |
| December 31, 2020 | | December 31, 2019 | | December 31, 2020 | | December 31, 2019 | | December 31, 2021 | | | December 31, 2020 | | | December 31, 2021 | | | December 31, 2020 | |
Vapor | $ | 2,458,945 | | $ | 4,134,701 | | $ | 1,425,140 | | $ | 2,443,967 | | $ | 2,084,813 | | | $ | 2,458,945 | | | $ | 1,245,214 | | | $ | 1,425,140 | |
Grocery | | 11,461,800 | | | 10,979,305 | | | 4,352,081 | | | 4,040,277 | | | 11,235,041 | | | | 11,461,800 | | | | 4,047,340 | | | | 4,352,081 | |
Total | $ | 13,920,745 | | $ | 15,114,006 | | | 5,777,221 | | | 6,484,244 | | $ | 13,319,854 | | | $ | 13,920,745 | | | | 5,292,554 | | | | 5,777,221 | |
Corporate expenses | | | | | | | | 9,225,593 | | | 10,898,528 | | | | | | | | | | | 10,033,048 | | | | 9,225,593 | |
Operating loss | | | | | | | | (3,448,372) | | | (4,414,284) | | | | | | | | | | | (4,740,494 | ) | | | (3,448,372 | ) |
Corporate other income (expense), net | | | | | | | | (274,020) | | | 1,614,908 | | | | | | | | | | | 703,035 | | | | (274,020 | ) |
Net loss | | | | | | | | (3,722,392) | | | (2,799,376) | | | | | | | | | | | (4,037,459 | ) | | | (3,722,392 | ) |
For the year ended December 31, 2021 depreciation and amortization was approximately $1,000 and $0.5 million for Vapor and Grocery, respectively.
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
Acquisition of Mother Earth's Storehouse
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,February 8, 2022, provided that the grantee remains an employee of the Company through its wholly owned subsidiary, Healthy Choice Markets 3, LLC, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Mother Earth’s Storehouse Inc. (“HCM3”) and its shareholders. Pursuant to the vesting date.Purchase Agreement, HCM3 acquired certain assets and assume certain liabilities related to Mother Earth’s grocery stores in Kingston and Saugerties, New York. The Company intends to continue to operate the grocery stores under their existing name. The cash purchase price under the Purchase Agreement is approximately $3.9 million, with an additional $677,500 paid for inventory at closing. In addition, the Company assumed a lease obligation for the Kingston, NY store and entered into an employment agreement with the store manager.
On January 14, 2021,In connection with the Compensation CommitteeHCM3 acquisition of the Boardassets of DirectorsMother Earth's, a wholly owned subsidiary of HCMC acquired for approximately $575,000 the Company approved an issuance of restricted stock to Anthony Panierello a Director ofhistoric building that houses 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.Saugerties, NY store.
John Ollet Employment Agreement
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, 2021,02, 2022, the Company entered into an amendeda Second Amended and restated employment agreementRestated Employment Agreement (the “Employment Agreement Amendment”) with the Company’s President and Chief OperatingFinancial Officer, Christopher Santi.John Ollet. Pursuant to the Employment Agreement Amendment, Mr. SantiOllet will continue to be employed as the Company’s President and Chief OperatingFinancial Officer through January 30, 2024.February 14, 2025. Mr. SantiOllet will receive a base salary of $363,000$300,000 for 20212022 and his salary will increase 10%
in each subsequent calendar year.
Since January 1, 2021 to March 5,Patent infringement litigation
On December 31, 2021, the District Court for the Northern District of Georgia effectively dismissed HCMC’s patent infringement action against Philip Morris USA, Inc. and Philip Morris Products S.A. In connection with such dismissal, the defendants sought to recover attorney’s fees from the Plaintiff. On February 22, 2022, the District Court for the Northern District of Georgia granted the defendant’s an award of approximately $575,000 in attorneys’ fees to be paid by the Company. The Company Series C Stock have been 100% been converted and cancelled into 162.8 billion common shares. In addition, 625 million stock optionshas fully provisioned this amount as 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.December 31, 2021.
Exhibit | | | | Incorporated by Reference | | Filed or Furnished |
No. | | Exhibit Description | | Form | | Date | | Number | | Herewith |
| | | | | | | | | | |
1.1 | | | | S-1 | | 7/10/15 | | 1.1 | | |
2.1(a) | | | | 8-K | | 5/23/16 | | 2.1 | | |
2.1(b) | | | | 8-K | | 8/3/16 | | 1.1 | | |
2.1(c) | | | | 8-K | | 11/21/18 | | 2.1 | | |
2.1(d) | | | | 8-K | | 12/26/18 | | 2.2 | | |
3.1 | | | | 10-Q | | 11/16/15 | | 3.1 | | |
3.1(a) | | | | 8-K | | 3/03/17 | | 3.1 | | |
3.1(b) | | | | S-1 | | 7/10/15 | | 3.2 | | |
3.1(c) | | | | S-4 | | 12/11/15 | | 3.2 | | |
3.1(d) | | | | 8-K | | 2/2/16 | | 3.1 | | |
3.1(e) | | | | 8-K | | 3/9/16 | | 3.1 | | |
3.1(f) | | | | 8-K | | 6/1/16 | | 3.1 | | |
3.1(g) | | | | 8-K | | 8/5/16 | | 3.1 | | |
3.1(h) | | | | S-1 | | 7/10/15 | | 3.4 | | |
3.1(i) | | | | 8-A12B | | 7/27/15 | | 3.5 | | |
3.1(j) | | | | 8-K | | 8/21/18 | | 3.1 | | |
3.1(k) | | | | 8-K | | 9/25/20 | | 3.1 | | |
3.1(l) | | | | 8-K | | 2/4/21 | | 3.1 | | |
3.2 | | | | 8-K | | 12/31/13 | | 3.4 | | |
10.1 | | | | 8-K | | 3/05/15 | | 10.1 | | |
10.2 | | | | S-1 | | 6/01/15 | | 10.28 | | |
10.3 | | | | 8-K | | 6/25/15 | | 10.4 | | |
10.4 | | | | 8-K | | 6/25/15 | | 10.5 | | |
10.5 | | | | 8-K | | 6/25/15 | | 10.6 | | |
10.6 | | | | 8-K | | 6/25/15 | | 10.7 | | |
10.7 | | | | 8-K | | 1/7/19 | | 10.1 | | |
10.8 | | | | 8-K | | 1/7/19 | | 10.2 | | |
Exhibit | | | | Incorporated by Reference | | Filed or Furnished |
No. | | Exhibit Description | | Form | | Date | | Number | | Herewith |
| | | | | | | | | | |
1.1 | | | | S-1 | | 7/10/15 | | 1.1 | | |
2.1(a) | | | | 8-K | | 5/23/16 | | 2.1 | | |
2.1(b) | | | | 8-K | | 8/3/16 | | 1.1 | | |
2.1(c) | | | | 8-K | | 11/21/18 | | 2.1 | | |
2.1(d) | | | | 8-K | | 12/26/18 | | 2.2 | | |
2.1(e) | | | | 8-K | | 2/8/22 | | 2.1 | | |
2.1(f) | | | | | | | | | | X |
3.1 | | | | 10-Q | | 11/16/15 | | 3.1 | | |
3.1(a) | | | | 8-K | | 3/03/17 | | 3.1 | | |
3.1(b) | | | | S-1 | | 7/10/15 | | 3.2 | | |
3.1(c) | | | | S-4 | | 12/11/15 | | 3.2 | | |
3.1(d) | | | | 8-K | | 2/2/16 | | 3.1 | | |
3.1(e) | | | | 8-K | | 3/9/16 | | 3.1 | | |
3.1(f) | | | | 8-K | | 6/1/16 | | 3.1 | | |
3.1(g) | | | | 8-K | | 8/5/16 | | 3.1 | | |
3.1(h) | | | | 8-K | | 2/4/21 | | 3.1 | | |
3.1(i) | | | | | | | | | | X |
3.2 | | | | 8-K | | 12/31/13 | | 3.4 | | |
10.1 | | | | 8-K | | 3/05/15 | | 10.1 | | |
10.2* | | | | S-1 | | 6/01/15 | | 10.28 | | |
10.3 | | | | 8-K | | 6/25/15 | | 10.4 | | |
10.4 | | | | 8-K | | 6/25/15 | | 10.5 | | |
10.9 | | | | | | | | | | X |
10.10 | | | | | | | | | | X |
Exhibit | | | | Incorporated by Reference | | Filed or Furnished |
No. | | Exhibit Description | | Form | | Date | | Number | | Herewith |
10.9 | | | | S-8 | | 2/8/17 | | 4.2 | | |
10.10 | | | | 8-K | | 8/20/18 | | 10.4 | | |
10.11 | | | | 8-K | | 3/5/21 | | 10.1 | | X |
10.12 | | | | | | | | | | X |
10.13 | | | | | | | | | | X |
10.14 | | | | | | | | | | X |
10.15 | | | | | | | | | | X |
10.16 | | | | 8-K | | 8/20/18 | | 10.2 | | |
10.17 | | | | 8-K | | 8/20/18 | | 10.3 | | |
16.1 | | | | 8-K | | 4/28/17 | | 16.1 | | |
21.1 | | | | | | | | | | Filed |
23.1 | | | | | | | | | | Filed |
31.1 | | | | | | | | | | Filed |
31.2 | | | | | | | | | | Filed |
32.1 | | | | | | | | | | 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 |
Exhibit | | | | Incorporated by Reference | | Filed or Furnished |
No. | | Exhibit Description | | Form | | Date | | Number | | Herewith |
10.11* | | | | S-8 | | 2/8/17 | | 4.2 | | |
10.12* | | | | 8-K | | 8/20/18 | | 10.4 | | |
10.13* | | | | 8-K | | 3/5/21 | | 10.1 | | X |
10.14* | | | | 10-K | | 3/8/21 | | 10.12 | | |
10.15* | | | | 10-K | | 3/8/21 | | 10.13 | | |
10.16* | | | | 10-K | | 3/8/21 | | 10.14 | | |
10.17* | | | | 10-K | | 3/8/21 | | 10.15 | | |
10.18* | | | | 8-K | | 2/2/22 | | 10.1 | | |
10.19* | | | | 8-K | | 8/20/18 | | 10.3 | | |
16.1 | | | | 8-K | | 4/28/17 | | 16.1 | | |
21.1 | | | | | | | | | | X |
23.1 | | | | | | | | | | Filed |
31.1 | | | | | | | | | | Filed |
31.2 | | | | | | | | | | Filed |
32.1 | | | | | | | | | | 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.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 5, 2021.31, 2022.
| Healthier Choices Management Corp. |
| | |
| By: | /s/ Jeffrey Holman |
| | Jeffrey Holman |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | | Title | | Date |
| | | | |
/s/ Jeffrey Holman | | Principal Executive Officer | | March 5, 202131, 2022 |
Jeffrey Holman | | and Director | | |
| | | | |
/s/ John A. Ollet | | Chief Financial Officer | | March 5, 202131, 2022 |
John A. Ollet | | (Principal Financial and Accounting Officer) | | |
| | | | |
/s/ Clifford J. Friedman | | Director | | March 5, 202131, 2022 |
Clifford J. Friedman | | | | |
| | | | |
/s/ Anthony Panariello | | Director | | March 5, 202131, 2022 |
Anthony Panariello | | | | |