UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2018
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _____________ to _____________
HEALTHIER CHOICES MANAGEMENT CORP.
(Exact name of registrant as specified in its charter)
| Delaware | 001-36469 | 84-1070932 | ||
| (State
or Other Jurisdiction of Incorporation or Organization) |
(Commission File Number) | (I.R.S.
Employer Identification No.) |
Address of Principal Executive Office: 3800 North 28th Way Hollywood, FL 33020
Registrant’s telephone number, including area code: (305) 600-5004
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.0001
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | Smaller reporting company | þ | |
| Emerging growth company | ☐ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes þ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $2.9 million based on the June 30, 2018 closing price of $0.0001 per share.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 66,634,387,066 shares outstanding as of March 27, 2019.
INDEX
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Healthier Choices Management Corp. (the “Company”) is a holding company focused on providing consumers with healthier daily choices with respect to nutrition and other lifestyle alternatives. The Company currently operates twelve retail vape stores in the Southeast region of the United States, through which it offers e-liquids, vaporizers and related products. The Company also operates Ada’s Natural Market, a natural and organic grocery store, through its wholly owned subsidiary Healthy Choice Markets, Inc. Ada’s Natural Market offers fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, health & beauty products and natural household items. The Company also sells vitamins and supplements on the Amazon.com marketplace through its wholly owned subsidiary Healthy U Wholesale, Inc. The Company markets its Q-Cup™ technology under the vape segment. This patented technology is based on a small, quartz cup called the Q-Cup™, which a customer partially fills with either cannabis or CBD concentrate (approximately 50mg) purchased from a third party. The Q-Cup™ is then inserted into the Q-Cup™ Tank or Globe that heats the cup from the outside without coming in direct contact with the solid concentrate. This Q-Cup™ technology provides significantly more efficiency and an “on the go” solution for consumers who prefer to vape concentrates either medicinally or recreationally.
In addition, effective as of December 14, 2018, we acquired substantially all of the assets of Paradise Health Foods, Inc. (“Paradise”), which owned and operated health and nutrition stores in Melbourne, Florida and Palm Bay, Florida. Contemporaneous with the Paradise closing, Healthy U Wholesale, Inc., entered into, and closed, a Membership Interest Purchase Agreement to acquire 100% of the equity interests in The Vitamin Store, LLC (“TVS”). TVS operates an online vitamin, supplement, and health-related products business at www.thevitaminstore.com.
VAPORIZER AND E-LIQUID BUSINESS
Retail Stores
While evaluating retail store operations in 2018, management decided to close two of its vape stores in December 31, 2018. One of the store closures was related to non-renewal of a lease and the other closing was related to underperformance of the store.
Vaporizers
“Vaporizers” are battery-powered products that enable users to inhale nicotine vapor without smoke, tar, ash, or carbon monoxide. 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.
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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 significantly more efficiency 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.
Vaporizer Biometric Fingerprint Lock Sensor Patent
We have a patent pending for a biometric fingerprint lock sensor that can be used in vaporizers. The biometric fingerprint lock sensor will allow the owner of the vaporizer to keep the device locked and turned off unless the authorized user unlocks the device via fingerprint scan, protecting the device from use by another individual. This technology may be used to protect against minors being able to turn on the device and will also deem the devices unusable in the event the device is lost or stolen. There is no assurance that we will be awarded a patent for this technology.
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. Because vaporizers and electronic cigarettes offer a “smoking” experience without the burning of tobacco leaf, vaporizers and electronic cigarettes offer users the ability to satisfy their nicotine cravings without smoke, tar, ash or carbon monoxide. In many cases vaporizers may be used where tobacco-burning cigarettes may not. Vaporizers may be used in some instances where for regulatory or safety reasons tobacco burning cigarettes may not be used. However, certain states, cities, businesses, providers of transportation and public venues in the U.S. have banned the use of vaporizers, where traditional cigarettes may not be smoked, while others are considering banning the use of vaporizers. We cannot provide any assurances that the use of vaporizers will be permitted in places where traditional tobacco burning cigarette use is banned.
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. We intend to continue to strategically manage our advertising activities in 2019 to gain editorial coverage for our brands. 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 ten company owned retail vape stores. Our management believes that consumers are shifting towards vape stores for an enhanced experience. This enhanced experienced is derived from the greater variety of products at the stores, the knowledgeable staff and the social atmosphere. The Company anticipates a significant portion of future revenue will continue to come from its retail stores.
Business Strategy
We believe and are seeing in our current stores that there is a large consumer demand centered on vaporizer products and the “atmosphere” created by the vape stores. We believe that our reputation and our experience in the vaporizer industry, from a development, customer service and production perspective, give us an advantage in attracting customers.
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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. 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.
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Source and Availability of Product
We believe that an adequate supply of product will be available to us as needed and from multiple sources and suppliers.
Patent Litigation
Third party patent lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights have and could force us to do one or more of the following:
| ● | 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, reexaminations 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.
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 April 24, 2014, the FDA released proposed rules that would extend its regulatory authority to electronic cigarettes and certain other tobacco products under the Tobacco Control Act. The proposed rules would require that electronic cigarette manufacturers (i) register with the FDA and report electronic cigarette product 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 18; (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 cannot predict the content of any final rules from the proposed rules or the impact they may have.
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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.
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NATURAL AND ORGANIC GROCERIES and DIETARY SUPPLEMENTS BUSINESS
Healthy Choice and Healthy Choice Markets 2 are specialty retailer of natural and organic groceries and dietary supplements. We focus on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We strive to generate long-term relationships with our customers based on quality and service by:
| ● | selling only natural and organic groceries; |
| ● | offering affordable prices and a shopper-friendly retail environment; and |
| ● | Providing dine-in options at our Natural Organic Juice Bar and Green Leaf Café. |
Our History and Founding Principles
We are committed to maintaining the following founding principles, which have helped foster our growth:
| ● | 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 and Paradise brands have been serving Florida communities for 40 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, good pay and excellent benefits. |
Our Market
We operate within the natural products retail industry, which is a subset of the United States grocery industry and the dietary supplement business. This industry includes conventional supermarkets, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, mail order and online retailers and multi-level marketers. Industry-wide sales of natural and organic foods and dietary supplements have experienced meaningful growth over the past several years, and we believe that growth will continue for the foreseeable future.
We believe the growth in sales of natural and organic foods and dietary supplements continues to be driven by numerous factors, including:
| ● | 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. |
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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; |
| ● | we sell meats naturally raised without hormones, antibiotics or treatments and that were not fed animal by-products; and |
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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. |
| ● | Body Care. We offer a full range of cosmetics, skin care, hair care, fragrance and personal care products containing natural and organic ingredients. Our body care offerings range from bargain-priced basics to high-end formulations. |
| ● | 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.
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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 deals 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, 2018, we purchased approximately 70% of the goods we sell from our top 20 suppliers. For the fiscal year ended December 31, 2018, approximately 30% 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.
9
Our Customers
The growth in the natural and organic grocery and dietary supplement industries and growing consumer interest in health and nutrition have led to an increase in our core customer base. We believe the demands for affordable, nutritious food and dietary supplements are shared attributes of our core customers, regardless of their socio-economic status. Additionally, we believe our core customers prefer a retail store environment that offers carefully selected natural and organic products and dietary supplements. Our customers tend to be interested in health and nutrition, and expect our store employees to be highly knowledgeable about these topics and related products.
Competition
The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Our competition varies by market and includes conventional supermarkets such as Publix and Winn-Dixie, mass or discount retailers such as Wal-Mart and Target, natural and gourmet markets such as Whole Foods and The Fresh Market, specialty food retailers such as Trader Joe’s, independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, mail order and online retailers and multi-level marketers. These businesses compete with us for customers on the basis of price, selection, quality, customer service, shopping experience or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutritional education, differentiate us in the industry and provide a competitive advantage.
Seasonality
Our business is active throughout the calendar year and does not experience significant fluctuation caused by seasonal changes in consumer purchasing.
Insurance and Risk Management
We use a combination of insurance and self-insurance to cover workers’ compensation, general liability, product liability, director and officers’ liability, employment practices liability, associate healthcare benefits and other casualty and property risks. Changes in legal trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers and changes in discount rates could all affect ultimate settlements of claims. We evaluate our insurance requirements and providers on an ongoing basis.
Information Technology Systems
We have made significant investments in overhead and information technology infrastructure, including purchasing, receiving, inventory, point of sale, warehousing, distribution, accounting, reporting and financial systems.
Segment Information
We have two reporting segments, natural and organic retail stores (“Grocery”) and vapor products (“Vapor”), through which we conduct all of our business.
Going Concern and Liquidity
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate the continuation of the Company as a going concern for the next twelve months from the issuance of this Form 10-K and realization of assets and satisfaction of liabilities in the normal course of business and do not include any adjustments that might result from the outcome of any uncertainties related to our going concern assessment. The carrying amounts of assets and liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable or settlement values.
The Company currently and historically has reported net losses and cash outflows from operations. As of December 31, 2018, cash and cash equivalents totaled approximately $7.1 million. While we anticipate that our current cash, cash equivalents, and cash to be generated from operations will be sufficient to meet our projected operating plans for the foreseeable future through a year and a day from the issuance of these consolidated financial statements, should we require additional funds (either through equity or debt financings, collaborative agreements or from other sources) we have no commitments to obtain such additional financing, and we may not be able to obtain any such additional financing on terms favorable to us, or at all. During the second quarter of 2018, the Company entered into a $2.0 million line of credit agreement with a financial institution that is subject to annual renewal with a variable interest rate that it is based on a rate of 1% over what is earned on the collateral amount. The collateral amount established in the arrangement with the financial institution is $2.0 million.
10
In the third quarter of 2018, the Company used $0.5 million from the $2.0 million the line of credit at a variable interest rate, to issue a note receivable to VPR Brands LLC. In addition, on December 31, 2018, we entered into a Term Loan Credit Agreement (the “Credit Agreement”) with Professional Bank (the “Bank”) pursuant to which the Company issued a Term Note (the “Term Note”) in the principal amount of $1.4 million in favor of the Bank. The Term Note bears interest at a rate equal to 1.5% in excess of that rate shown in the Wall Street Journal as the prime rate, adjusted annually. The proceeds of the Term Note are to be used for acquisitions and for general working capital requirements. The ability to raise additional financing may have a positive effect on the future performance of the Company.
Not applicable to smaller reporting companies.
Item 1B. Unresolved Staff Comments.
None
The Company operates its business from numerous facilities in Florida, Georgia and Tennessee. These leased facilities include our headquarters location, warehouse and retail stores.
| · | Grocery Segment. As of December 31, 2018, grocery segment has 4 retail stores in Florida which aggregate approximately 28,000 square feet, all of which are leased by grocery segment. |
| · | Vapor Segment. As of December 31, 2018, Vapor segment operates 8 retail stores in Florida, 1 retail store in Georgia and 1 retail store in Tennessee, aggregating approximately 18,000 square feet. |
| · | Our headquarter and warehouse is located in Hollywood, Florida. The leased property aggregates approximately 10,000 square feet. |
No response is required under Item 103 of Regulation S-K.
Item 4. Mine Safety Disclosures.
None.
11
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is currently listed on the OTC Pink marketplace under the symbol “HCMC”.
As of March 27, 2019, there were approximately 1,400 stockholders of record for our common stock. A substantially greater number of stockholders may be “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.
As of March 27, 2019, the last reported sale price of our common stock on OTC Pink Marketplace was $0.0001 per share.
We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on any of our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends in the foreseeable future. Future determination as to the declaration and payment of dividends, if any, will be at the discretion of our Board and will depend on then existing conditions, including our operating results, financial conditions, contractual restrictions, capital requirements, business prospects and other factors our Board may deem relevant.
Repurchases of Outstanding Series A Warrants
Company repurchases of Series A Warrants during 2017 are set forth in the table below. There were no such repurchases by the Company during 2018.
| Period | Total Number of Series A Warrants Purchased | Average Price Paid per Series A Warrant | ||||||
| January 1, 2017 – September 30, 2017 | 10,601,412 | 0.23 | ||||||
On August 16, 2018, Healthier Choices Management Corp. (the “Company”) entered into agreements (each a “Warrant Exchange Agreement”) with certain holders of its Series A Warrants to exchange the Company’s Series B Convertible Preferred Stock (the “Series B Stock”) for Series A Warrants. A total of 20,722 shares of Series B Stock were exchanged for 46,048,318 Series A Warrants (including those warrants issuable pursuant to a Unit Purchase Option). The Series A Warrants acquired by the Company represented approximately 92% of the outstanding Series A Warrants and would have been convertible into 460,483,180,000 shares of Company common stock (“Common Stock”) if exercised as the date of the Warrant Exchange Agreements. 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 $0.0001 per share.
As part of the transaction, the Company also acquired and cancelled a Unit Purchase Option that it had issued on July 23, 2015. The Unit Purchase Option was exercisable into 3,761,660 Series A Warrants.
Item 6. Selected Financial Data.
Not required for smaller reporting companies.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included elsewhere in this report. “Management’s Discussion and Analysis of Financial Condition” and “Results of Operations” contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.
Cautionary Note Regarding Forward Looking Statements
This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, liquidity, business strategy, plans and objectives of management for future operations, are forward-looking statements.
Forward-looking statements contained in this report include:
| ● | Our liquidity; |
| ● | Increase demand for vaporizers and related products; |
| ● | Opportunities for our business; and |
| ● | Growth of our business. |
The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “expect,” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.
The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements are contained in the Risk Factors contained herein. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors below.
Factors Affecting Our Performance
We believe the following factors affect our performance:
Retail: We believe the operating performance of our retail stores will affect our revenue and financial performance. The Company has a total of ten retail vape stores and four natural and organic groceries and dietary supplement stores which are located in Florida, Georgia and Tennessee. The Company has ceased plans to increase the number of retail vape stores due to adverse industry trends and increasing federal and state regulations that, if implemented, may negatively impact future retail revenues.
Increased Competition: The launch by national competitors in both of our business reporting segments have made it more difficult to compete on prices and to secure business. We expect increased product supply and downward pressure on prices to continue and impact our operating results in the future. We also expect the continued expansion of national grocery chains, which leads to greater competition, to impact our operating results in the future.
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Results of Operations
The following table sets forth our Consolidated Statements of Operations for the years ended December 31, 2018 and 2017 that is used in the following discussions of our results of operations:
| For the Year Ended December 31, | 2018 to 2017 | |||||||||||
| 2018 | 2017 | Change $ | ||||||||||
| SALES: | ||||||||||||
| Vapor sales, net | $ | 6,281,198 | $ | 5,910,697 | $ | 370,501 | ||||||
| Grocery sales, net | 8,365,842 | 7,037,447 | 1,328,395 | |||||||||
| Total Sales | 14,647,040 | 12,948,144 | 1,698,896 | |||||||||
| Cost of sales vapor | 2,651,110 | 2,567,400 | 83,710 | |||||||||
| Cost of sales grocery | 4,831,043 | 4,114,914 | 716,129 | |||||||||
| GROSS PROFIT | 7,164,887 | 6,265,830 | 899,057 | |||||||||
| EXPENSES: | ||||||||||||
| Advertising | 193,955 | 110,694 | 83,261 | |||||||||
| Selling, general and administrative | 9,952,858 | 16,444,944 | (6,492,086 | ) | ||||||||
| Total operating expenses | 10,146,813 | 16,555,638 | (6,408,825 | ) | ||||||||
| Operating loss | (2,981,926 | ) | (10,289,808 | ) | 7,307,882 | |||||||
| OTHER INCOME (EXPENSES): | ||||||||||||
| Loss on extinguishment of warrants in exchange for preferred stock/revaluation | (10,696,774 | ) | (94,955 | ) | (10,601,819 | ) | ||||||
| Other income | 475,430 | 200,129 | 275,301 | |||||||||
| Interest income | 108,067 | 33,774 | 74,293 | |||||||||
| Interest expense | (8,915 | ) | (5,502 | ) | 3,413 | |||||||
| Loss on investment | (59,143 | ) | - | (59,143 | ) | |||||||
| Total other income | (10,181,335 | ) | 133,446 | (10,314,781 | ) | |||||||
| Net loss from continuing operations | (13,163,261 | ) | (10,156,362 | ) | (3,006,899 | ) | ||||||
| Net income from discontinued operations | - | 281,483 | (281,483 | ) | ||||||||
| NET INCOME (LOSS) | $ | (13,163,261 | ) | $ | (9,874,879 | ) | $ | (3,288,382 | ) | |||
Net vapor sales increased $0.4 million to $6.3 million for the twelve months ended December 31, 2018 as compared to $5.9 million for the same period in 2017. The increase in sales is primarily due to proceeds realized from our patented Q-Cup™ technology. Net grocery sales increased $1.3 million to $8.4 million for the twelve months ended December 31, 2018 as compared to $7.0 million for the same period in 2017. The increase was primarily due to same store sales increase at Ada’s Natural Market.
Vapor cost of goods sold for the twelve months ended December 31, 2018 and 2017 were $2.7 million and $2.6 million, respectively an increase of $0.1 million. The increase in cost of goods sold is primarily due to the proceeds realized from our patented Q-Cup™ technology. Grocery store cost of goods sold for the twelve months ended December 31, 2018 and 2017 were $4.8 million and $4.1 million, respectively, an increase of $0.7 million. The increase was primarily due to the same store sales increase at Ada’s Natural Market.
Total operating expenses decreased $6.4 million to $10.1 million for the twelve months ended December 31, 2018. The decrease is primarily attributable to the decline in employee stock compensation which decreased by $5.8 million when compared to 2017.
Net other expenses of $10.2 million expenses for the twelve months ended December 31, 2018 includes $10.7 million of a non-cash charge of the Series A warrants related to the August 2018 Warrant Exchange Agreement. Also, $0.5 million of other income as a result of the re-payment of the VPR Brands note and, $0.1 million of a loss on investment in common stock of MJ Holdings, Inc stock.
14
Liquidity and Capital Resources
| For the year ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | (202,607 | ) | $ | (2,823,445 | ) | ||
| Investing activities | (3,964,457 | ) | (192,885 | ) | ||||
| Financing activities | 3,345,126 | (2,466,751 | ) | |||||
| $ | (821,938 | ) | $ | (5,483,081 | ) | |||
Our net cash used in operating activities of $0.2 million for the twelve months ended December 31, 2018 resulted from our net loss of $13.2 million, offset by a net cash usage of $0.1 million from changes in operating assets and liabilities and a non-cash adjustments of $13.1 million. Our net cash used in continuing operating activities of $2.8 million for the twelve months ended December 31, 2017 resulted from our net loss from continuing operations of $9.9 million, offset by a net cash usage of $0.8 million from changes in operating assets and liabilities and a non-cash adjustments of $8.1 million. We did not utilize any cash on discontinued operations for the twelve months ended December 31, 2018. Our net cash used in discontinued operations of $0.2 million for the twelve months ended December 31, 2017 resulted from our net income from discontinued operations of $0.3 million offset by non-cash adjustments of $0.5 million.
The net cash used in investing activities of $4.0 million for the twelve months ended December 31, 2018 resulted from the issuance and collection of a note receivable, the acquisition of new business and purchases of a patent and property and equipment. The net cash used in investing activities of $0.2 million for the twelve months ended December 31, 2017 resulted from patent purchases of $0.1 million and property and equipment of $0.1 million.
The net cash provided by financing activities of $3.3 million for the twelve months ended December 31, 2018 is due to proceeds from loan payable and line of credit of $3.3 million and proceeds from exercise of stock options of $0.1 million. The net cash used in financing activities of $2.5 million for the twelve months ended December 31, 2017 is due to repurchases of Series A warrants totaling $2.4 million and, principal payments on capital lease obligations of $0.1 million.
At December 31, 2018 and December 31, 2017, we did not have any material financial guarantees or other contractual commitments with trade vendors that are reasonably likely to have an adverse effect on liquidity.
Our cash balances are kept liquid to support our growing acquisition and infrastructure needs for operational expansion. The majority of our cash and cash equivalents are concentrated in one large financial institution, which is in excess of Federal Deposit Insurance Corporation (FDIC) coverage. The following table presents the Company’s cash position as of December 31, 2018 and December 31, 2017.
| December 31, 2018 | December 31, 2017 | |||||||
| Cash | $ | 7,061,253 | $ | 7,883,191 | ||||
| Total assets | $ | 15,172,664 | $ | 11,701,405 | ||||
| Percentage of total assets | 46.5 | % | 67.4 | % | ||||
The Company reported net loss of approximately $13.2 million for the year ended December 31, 2018. The Company also had positive working capital of $3.9 million. The Company expects to continue incurring losses for the foreseeable future and may need to raise additional capital to satisfy warrant obligations, and to continue as a going concern.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements other than operating leases for retail locations, equipment, and vehicles.
Seasonality
We do not consider our business to be seasonal.
15
Non-GAAP Financial Measures
The following discussion and analysis contains a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles (GAAP). Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternative to, net income, operating income, and cash flow from operating activities, liquidity or any other financial measures. Non-GAAP financial measures may not be indicative of the historical operating results of the Company nor are they intended to be predictive of potential future financial results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP.
Management believes stockholders benefit from referring to the Adjusted EBITDA in planning, forecasting, and analyzing future periods. Management uses this non-GAAP financial measure in evaluating its financial and operational decision making and as a means of evaluating period to period comparison.
We define Adjusted EBITDA as net loss from operations adjusted for non-cash charges for depreciation and amortization and stock compensation. Management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and analysts to evaluate and assess our core operating results from period to period after removing the impact of significant non-cash charges that effect comparability between reporting periods. Our management recognizes that Adjusted EBITDA has inherent limitations because of the excluded items.
We have included a reconciliation of our non-GAAP financial measure to loss from operations as calculated in accordance with GAAP. We believe that providing the non-GAAP financial measure, together with the reconciliation to GAAP, helps investors make comparisons between the Company and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to specific definitions being used and to the reconciliation between such measures and the corresponding GAAP measures provided by each company under applicable rules of the Securities and Exchange Commission.
| 2018 | 2017 | |||||||
| Reconciliation of Adjusted EBITDA to net loss allocable to common stockholders: | ||||||||
| Operating loss | $ | (2,981,926 | ) | $ | (10,289,808 | ) | ||
| Depreciation and amortization | 375,690 | 350,647 | ||||||
| Stock-based compensation expense | 1,712,412 | 7,496,849 | ||||||
| Adjusted EBITDA | $ | (893,824 | ) | $ | (2,442,312 | ) | ||
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to smaller reporting companies.
Item 8. Financial Statements and Supplementary Data.
See pages F-1 through F-23.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
We are required to report under Section 404(a) of Sarbanes-Oxley regarding the effectiveness of our internal control over financial reporting. If we determine that we have material weaknesses, it may be necessary to make restatements of our consolidated financial statements and investors will not be able to rely on the completeness and accuracy of the financial information contained in our filings with the SEC and this could potentially subject us to sanctions or investigations by the SEC or other regulatory authorities or stockholder litigation.
Evaluation of Disclosure Controls and Procedures. Our management, including our Principal Executive Officer and Principal Financial Officer, did not carry out an evaluation on internal controls during the year ended December 31, 2018 in regard to the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act. As an evaluation was not carried out, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report.
Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our management, including our Principal Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2018.
In planning and performing its audit of our financial statements for the year ended December 31, 2018 in accordance with standards of the Public Company Accounting Oversight Board, our independent registered public accounting firm noted material weaknesses in internal control over financial reporting. A list of our material weaknesses are as follows:
| ● | Failure to have properly documented and designed disclosure controls and procedures and testing of the operating effectiveness of our internal control over financial reporting |
| ● | Weakness around our inventory count procedures |
| ● | Segregation of duties due to lack of personnel |
Our management concluded that considering internal control deficiencies that, in the aggregate, rise to the level of material weaknesses, we did not maintain effective internal control over financial reporting as of December 31, 2018 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Remediation Efforts
Following this assessment and during the twelve months ended December 31, 2019, we have undertaken an action plan to strengthen internal controls and procedures:
| ● | We continue to improve the process around inventory counts. At year-end we contracted with an independent 3rd party to perform a physical inventory count at the vast majority of our retail locations. The purpose being the validation of our inventory records and increasing the staff knowledge around the importance of the new inventory procedures implemented. | |
| ● | Our management has increased its focus on the Company’s purchase order process in order to better manage inventory thereby improving cash management and ultimately leading to more reliable and precise financial reporting. |
Our management continues to review ways in which we can make improvements in internal control over financial reporting.
None.
17
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The following table sets forth information regarding our executive officers and directors as of December 31, 2018:
| Name | Age | Position | ||
| Executive Officers: | ||||
| Jeffrey Holman | 52 | Chief Executive Officer, Chairman and Director | ||
| John A. Ollet | 56 | Chief Financial Officer | ||
| Christopher Santi | 48 | President and Chief Operating Officer | ||
| Non-Employee Directors: | ||||
| Clifford J. Friedman | 57 | Director | ||
| Dr. Anthony Panariello | 59 | Director |
Executive Officers
Jeffrey Holman has been our Chairman of the Board and Chief Executive Officer since April 2014. From February 2013 until March 4, 2015, Mr. Holman serviced as our President. Mr. Holman has been a member of our Board since May 2013 and has served as a member of the Board of Directors of our subsidiary Smoke Anywhere, USA since its inception on March 24, 2008. Since 1998, Mr. Holman has been the President of Jeffrey E. Holman & Associates, P.A., a South Florida based law firm. He has also been a Partner in the law firm of Holman, Cohen & Valencia since 2000. Mr. Holman was selected as a director for his business and legal experience. In addition, as one of the founders of Smoke Anywhere, Mr. Holman possesses an in-depth understanding of the challenges, risks and characteristics unique to our industry.
Christopher Santi has been our Chief Operating Officer since December 12, 2012 and has served as the President and Chief Operating Officer since April 11, 2016. Prior to that Mr. Santi served as Director of Operations of the Company beginning in October 2011. Mr. Santi served as the National Sales Manager of Collages.net from November 2007 to October 2011.
John A. Ollet has been our Chief Financial Officer since December 12, 2016. Mr. Ollet previously served as Executive Vice President-Finance for Systemax, Inc. (NYSE:SYX) from 2006 to 2016. His prior chief financial officer experience also includes serving as Vice President and Chief Financial Officer of Arrow Cargo Holdings, Inc., an airline logistics company, and VP Finance /CFO - The Americas - Cargo Division, KLM Royal Dutch Airlines, an airline company. He also previously served as Vice President Finance/Administration at Sterling-Starr Maritime Group, Inc. and served on the audit staff of Arthur Andersen & Co. Mr. Ollet received a bachelor’s degree in Finance/Economics and a master’s degree in business administration from Florida International University. Mr. Ollet is a Certified Public Accountant.
Non-Employee Directors
Anthony Panariello, M.D. has been a director since April 15, 2016. Dr. Panariello is a Board Certified in Pulmonology and Internal Medicine in Florida and has been in private practice since 1996, serving as an attending physician at a number of hospitals. Dr. Panariello is a member of the College of Physicians and the American College of Chest Physicians. Additionally, Dr. Panariello currently serves as a Lieutenant Commander in the Medical Corps of the United States Navy Reserve. Dr. Panariello received his Bachelor of Science from the State University of New York at Stony Brook and his medical degree from the Autonomous University of Guadalajara.
Clifford J. Friedman has been a director since April 15, 2016. Mr. Friedman is a certified public accountant in Coral Springs, Florida and managed his own public accounting, tax and consulting practice since 2001. From 1992 to 2000, Mr. Friedman was Vice President-Finance of Administration of the Box Worldwide, Inc., a Viacom company. He received an M.B.A. from Nova Southeastern University and his B.B.A. from Pace University.
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Corporate Governance
Board Responsibilities
The Board oversees, counsels, and directs management in the long-term interest of the Company and its stockholders. The Board’s responsibilities include establishing broad corporate policies and reviewing the overall performance of the Company. The Board is not, however, involved in the operating details on a day-to-day basis.
Board Committees and Charters
The Board and its Committees meet throughout the year and act by written consent from time-to-time as appropriate. The Board delegates various responsibilities and authority to different Board Committees. Committees regularly report on their activities and actions to the Board.
The Board currently has and appoints the members of: The Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. Each of these committees have a written charter which can be found on our corporate website at www.healthiercmc.com/committee-charters/.
The following table identifies the independent and non-independent current Board and committee members:
| Name | Independent | Audit | Compensation | Nominating And Corporate Governance | ||||
| Jeffrey Holman | ||||||||
| Dr. Anthony Panariello | X | X | X | X | ||||
| Clifford J. Friedman | X | X | X | X |
Director Independence
Our Board has determined that Clifford J. Friedman and Dr. Anthony Panariello are independent in accordance with standards under the OTC Pink Marketplace. Our Board determined that as a result of being executive officer, Messrs. Jeffrey Holman is not independent under the OTC Pink Marketplace Bulletin Boards. Our Board has also determined that Clifford J. Friedman and Dr. Anthony Panariello are independent under the OTC Pink Marketplace independence standards for Audit and Compensation Committee members.
Committees of the Board
Audit Committee
The Audit Committee, which currently consists of Clifford J. Friedman (chair) and Dr. Anthony Panariello, reviews the Company’s financial reporting process on behalf of the Board and administers our engagement of the independent registered public accounting firm. The Audit Committee approves all audit and non-audit services, and reviews the independence of our independent registered public accounting firm.
Audit Committee Financial Expert
Our Board has determined that Clifford J. Friedman is qualified as an Audit Committee Financial Expert, as that term is defined by the rules of the SEC and in compliance with the Sarbanes-Oxley Act of 2002.
Compensation Committee
The function of the Compensation Committee is to determine the compensation of our executive officers. The Compensation Committee has the power to set performance targets for determining periodic bonuses payable to executive officers and may review and make recommendations with respect to stockholder proposals related to compensation matters. Additionally, the Compensation Committee is responsible for administering the Company’s equity compensation plans including the Plan.
The members of the Compensation Committee are all independent directors within the meaning of applicable Nasdaq Listing Rules and all of the members are “non-employee directors” within the meaning of Rule 16b-3 under the Exchange Act.
19
Nominating and Corporate Governance Committee
The responsibilities of the Nominating and Corporate Governance Committee include the identification of individuals qualified to become Board members, the selection of nominees to stand for election as directors, the oversight of the selection and composition of committees of the Board, establish procedures for the nomination process including procedures and the oversight of the evaluations of the Board and management. The Nominating and Corporate Governance Committee has not established a policy with regard to the consideration of any candidates recommended by stockholders since no stockholders have made any recommendations. If we receive any stockholder recommended nominations, the Nominating Committee will carefully review the recommendation(s) and consider such recommendation(s) in good faith.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee has ever been an officer or employee of the Company. None of our executive officers serve, or have served during the last fiscal year, as a member of our compensation committee or other Board committee performing equivalent functions of any entity that has one or more executive officers serving on our Board or on our compensation committee.
Board Assessment of Risk
The Board is actively involved in the oversight of risks that could affect the Company. This oversight is conducted primarily through the Audit Committee, but the full Board has retained responsibility for general oversight of risks. The Audit Committee considers and reviews with our independent public accounting firm and management the adequacy of our internal controls, including the processes for identifying significant risks and exposures, and elicits recommendations for the improvements of such procedures where desirable. In addition to the Audit Committee’s role, the full Board is involved in oversight and administration of risk and risk management practices. Members of our senior management have day-to-day responsibility for risk management and establishing risk management practices, and members of management are expected to report matters relating specifically to the Audit Committee directly thereto, and to report all other matters directly to the Board as a whole. Members of our senior management have an open line of communication to the Board and have the discretion to raise issues from time-to-time in any manner they deem appropriate, and management’s reporting on issues relating to risk management typically occurs through direct communication with directors or committee members as matters requiring attention arise. Members of our senior management regularly attend portions of the Board’s meetings, and often discuss the risks related to our business.
Presently, the largest risks affecting the Company are the Company’s ability to manage and satisfy the Series A Warrant obligations and evaluation of potential adverse impact of the FDA’s final regulations on vaporizers and e-liquids on the retail business operations. The Board actively interfaces with management on seeking solutions.
Code of Ethics
The Company has a code of ethics, “Business Conduct: “Code of Conduct and Policy,” that applies to all of the Company’s employees, including its principal executive officer, principal financial officer and principal accounting officer, and the Board. A copy of this code is available on the Company’s website at http://www.healthiercmc.com/code-of-conduct. The Company intends to disclose any changes in or waivers from its code of ethics by posting such information on its website or by filing a Current Report on Form 8-K.
Stockholder Communications
Although we do not have a formal policy regarding communications with our Board, stockholders may communicate with the Board by writing to us at Healthier Choices Management Corp., 3800 N 28th Way, Hollywood, FL 33020, Attention: Corporate Secretary, or by facsimile (954) 272-7773. Stockholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and the other equity securities. Officers, directors and greater than ten percent stockholders are required by SEC rules to furnish us with copies of all Section 16(a) reports they file.
Based solely on a review of the reports furnished to us, or written representations from reporting persons that all reportable transactions were reported and that no Form 5s were required, we believe that during 2018 our officers, directors and greater than 10% owners timely filed all reports they were required to file under Section 16(a).
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ITEM 11. Executive Compensation
The following information is related to the compensation paid, distributed or accrued by us for fiscal 2018 to all Chief Executive Officers (principal executive officers) serving during the last fiscal year and the two other most highly compensated executive officers serving at the end of the last fiscal year whose compensation exceeded $100,000. We refer to these individuals as our “named executive officers.”
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Option (1)$ | Restricted | All Other Compensation ($) | Total | |||||||||||||||||||
| Jeffrey Holman | 2018 | 385,537 | - | (1,100,000 | ) | 1,100,000 | 18,500 | 404,037 | ||||||||||||||||||
| Chief Executive Officer | 2017 | 346,368 | 100,000 | 4,999,998 | - | 9,900 | 5,456,266 | |||||||||||||||||||
| Christopher Santi | 2018 | 247,043 | - | (800,000 | ) | 800,000 | 650 | 247,693 | ||||||||||||||||||
| President & Chief Operating Officer | 2017 | 225,410 | 25,000 | 2,499,999 | - | 601 | 2,751,010 | |||||||||||||||||||
| John Ollet | 2018 | 189,669 | - | - | 300,000 | 716 | 490,385 | |||||||||||||||||||
| Chief Financial Officer | 2017 | 185,931 | - | 500,000 | - | 510 | 686,441 | |||||||||||||||||||
(1) Amounts reflect the aggregate grant date fair value, without regard to forfeitures, computed in accordance with ASC 718. These amounts represent options and restricted stock of the Company’s common stock and do not reflect the actual amounts that may be realized by the Named Executive Officers. Our assumptions with respect to the calculation of the stock options and restricted stock value are set forth in Note 2 to the consolidated financial statements contained herein.
Named Executive Officer Employment Agreements
On August 13, 2018, the Company amended and restated its existing employment agreement with Jeffrey Holman, the Company’s Chief Executive Officer (the “Holman Employment Agreement”). The Holman Employment Agreement is for an additional three year term and provides for an annual base salary of $450,000 and a target bonus for 2018 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. The above description of the terms of the Holman Employment Agreement is not complete and is qualified by reference to the complete document.
Effective as of August 13, 2018, Healthier Choices Management Corp. (the “Company”) entered into an amendment to the existing employment agreement (the “Santi Amended Employment Agreement”) with the Company’s President and Chief Operating Officer, Christopher Santi. Pursuant to the Santi Amended Employment Agreement, Mr. Santi will continue to be employed as the Company’s President and Chief Operating Officer for an additional one year extension period through January 29, 2021. Mr. Santi will receive a base salary of $330,000 for this additional year. The severance pay period for termination without cause was increased to up to 18 months based on time of service. Mr. Santi was also granted 8 billion shares of restricted common stock pursuant to the Santi Amended Employment Agreement on the condition that 8 billion of his options to purchase Company common stock are forfeited. This restricted stock will vest one year following the date of issuance provided that the grantee remains an employee of the Company through each applicable vesting date. The above description of the terms of the Santi Amended Employment Agreement is not complete and is qualified by reference to the complete document
Effective as of August 13, 2018, the Company entered into an amendment to the existing employment agreement (the “Ollet Amended Employment Agreement”) with the Company’s Chief Financial Officer, John Ollet. Pursuant to the Ollet Amended Employment Agreement, Mr. Ollet will continue to be employed as the Company’s Chief Financial Officer for an additional one year extension period through December 12, 2020. Mr. Ollet will receive a base salary of $250,000 for this additional year. Mr. Ollet was also granted 3 billion shares of restricted common stock pursuant to the Ollet Amended Employment Agreement. This restricted stock will vest one year following the date of issuance provided that the grantee remains an employee of the Company through each applicable vesting date. The above description of the terms of the Ollet Amended Employment Agreement not complete and is qualified by reference to the complete document.
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Under the Restricted Stock Award Agreements with Messrs. Holman, Ollet and Santi, each recipient will have all rights of a stockholder of the Company, except the right to receive any dividends thereon until vested. 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.
Termination Provisions
The table below describes the severance payments that our Named Executive Officers are entitled to in connection with a termination of their employment upon death, disability, dismissal without cause, Change of Control or for Good Reason. All of the termination provisions are intended to comply with Section 409A of the Internal Revenue Code of 1986 and the Regulations thereunder.
| Holman | Santi/Ollet | |||
| Death or Total Disability | Any amounts due at time of termination plus full vesting of equity awards | Any amounts due at time of termination | ||
| Dismissal Without Cause or Termination by Executive for Good Reason or upon a Change of Control (1) | Two years of Base Salary, full vesting of equity awards, benefit continuation for eighteen months plus pro-rated bonus if, any, that would have been earned for the fiscal year in which the termination occurs | Fifteen months of Base Salary plus one additional month for every additional four months of service, up to eighteen months’ maximum | ||
| Termination upon a Change of Control (2) | Two years of Base Salary, full vesting of equity awards, benefit continuation for eighteen months plus pro-rated bonus if, any, that would have been earned for the fiscal year in which the termination occurs | Eighteen months of Base Salary |
(1) Good reason is generally (with certain exceptions) defined, in the case of Holman, as (i) a material diminution in their authority, duties or responsibilities, (y) the Company failing to maintain an office in the stated area or (ii) any other action or inaction that constitutes a material breach by the Company of the Employment Agreement. Messrs. Ollet and Santi’s employment agreement do not include the concept of good reason.
(2) Change of Control is generally defined (i) in the case of Holman, as any Change of Control Event as defined in Treasury Regulation Section 1.409A-3(i)(5); and (ii) in the case of Santi, as (w) a sale of substantially all of the Company, (x) any “person” (as such term is defined under the Exchange Act) becomes the beneficial owners of over 50% of the Company’s voting power, (y) a change in the majority of the composition of the Board or (z) a transaction that results in over 50% of the Company’s voting power ceasing to hold a majority of the voting power post-transaction.
Risk Assessment Regarding Compensation Policies and Practices as they Relate to Risk Management
Our compensation program for employees does not create incentives for excessive risk taking by our employees or involve risks that are reasonably likely to have a material adverse effect on us. Our compensation has the following risk-limiting characteristics:
| ● | Our base pay programs consist of competitive salary rates that represent a reasonable portion of total compensation and provide a reliable level of income on a regular basis, which decreases incentive on the part of our executives to take unnecessary or imprudent risks; and |
| ● | Cash bonus awards are not tied to formulas that could focus executives on specific short-term outcomes. |
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Outstanding Awards at Fiscal Year End
Listed below is information with respect to unexercised options that have not vested, and equity incentive plan awards for each named executive officer outstanding as of December 31, 2018:
Outstanding Equity Awards at 2018 Fiscal Year-End
| Name | Number of Shares Issued Under Restricted Stock | Restricted Stock Exercise Share of Stock | Restricted Stock Expiration Date | Number of Shares That Have Not Vested (#) | Market Value of Not Vested ($) | |||||||||||||
| Jeffrey Holman | 11,000,000,000 | 0.0001 | 8/13/2028 | 11,000,000,000 | 1,100,000 | |||||||||||||
| Christopher Santi | 8,000,000,000 | 0.0001 | 8/13/2028 | 8,000,000,000 | 800,000 | |||||||||||||
| John Ollet | 3,000,000,000 | 0.0001 | 8/13/2028 | 3,000,000,000 | 300,000 | |||||||||||||
Director Compensation
Non-employee directors are paid a monthly fee of $1,000 per month and $1,000 for each meeting attended. Because we do not pay any compensation to employee directors, Mr. Holman is omitted from the following table. Non-employee members of our Board of Directors were compensated for as follows:
Fiscal 2018 Director Compensation
| Name | Fees Earned or Paid in Cash ($) | |||
| Dr. Anthony Panariello | $ | 26,000 | ||
| Clifford J. Friedman | $ | 26,000 | ||
Equity Compensation Plan Information
The 2015 Equity Incentive Plan (the “Plan”) was approved by the Company’s stockholders at the June 26, 2015 stockholders meeting. On November 21, 2016, the Company’s Board of Directors increased the number of shares of common stock available for issuance pursuant to the Plan to 100,000,000,000. The Plan is a broad-based plan in which all employees, consultants, officers, and directors of the Company are eligible to participate. The purpose of the Plan is to further the growth and development of the Company by providing, through ownership of stock of the Company and other equity-based awards, an incentive to its officers and other key employees and consultants who are in a position to contribute materially to the prosperity of the Company, to increase such persons’ interests in the Company’s welfare, by encouraging them to continue their services to the Company, and by enabling the Company to attract individuals of outstanding ability to become employees, consultants, officers and directors of the Company.
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The following chart reflects the number of awards granted under equity compensation plans approved and not approved by stockholders and the weighted average exercise price for such plans as of December 31, 2018.
| Name of Plan | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||
| Equity compensation plans approved by security holders | ||||||||||||
| 2009 Equity Incentive Plan | 0.011 | $ | 20,506,610 | - | ||||||||
| 2015 Equity Incentive Plan | 87,894,750,004 | 0.0001 | 11,130,249,996 | |||||||||
| Total | 87,894,750,004 | - | 11,130,249,996 | |||||||||
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.
The following table sets forth the number of shares of our common stock beneficially owned as of December 31, 2018, by (i) those persons known by us to be owners of more than 5% of our common stock, (ii) each director, (iii) our Named Executive Officers and (iv) all of our executive officers and directors of as a group. Unless otherwise specified in the notes to this table, the address for each person is: c/o Healthier Choices Management Corp., 3800 North 28th Way, Hollywood, Florida 33020.
| Title of Class | Beneficial Owner | Amount
and Nature of Beneficial Owner (1) | Percent of | |||||||
| Directors and Executive Officers: | ||||||||||
| Common Stock | Jeffrey E. Holman (2) | 13,320,213,974 | 19.99 | % | ||||||
| Common Stock | Christopher Santi (3) | 13,320,213,974 | 19.99 | % | ||||||
| Common Stock | John Ollet (4) | 5,000,000,000 | 6.98 | % | ||||||
| Common Stock | Dr. Anthony Panariello (5) | 1,000,000,000 | 1.50 | % | ||||||
| Common Stock | Clifford J. Friedman (6) | 1,000,000,000 | 1.50 | % | ||||||
| All directors and officers as a group (5 persons) (7) | 33,640,427,948 | 42.43 | % | |||||||
| 5% Stockholders: | ||||||||||
| None | - | 0 | % | |||||||
| Total: | 33,640,427,948 | 42.43 | % | |||||||
(1) Beneficial Ownership. Applicable percentages are based on 66,634,387,066 shares of common stock outstanding as of March 27, 2019. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants, convertible notes and preferred stock currently exercisable or convertible or exercisable or convertible within 60 days are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. The table includes shares of common stock, options, warrants, and preferred stock exercisable or convertible into common stock and vested or vesting within 60 days. Unless otherwise indicated in the footnotes to this table, we believe that each of the stockholders named in the table has sole voting and investment power with respect to the shares of common stock indicated as beneficially owned by them. The table does not include: (i) restricted stock units that do not have the right to vote until they vest and the shares are delivered or (ii) unvested options that do not vest within 60 days of the date listed above in this footnote.
(2) Holman. Chairman and Chief Executive Officer. Includes 39,000,000,000 vested options and 11,000,000,000 shares of unvested restricted Common Stock. The option agreement includes a provision that prevents Mr. Holman from exercising the option into common stock to the extent (but only to the extent) that such conversion would result in the holder, or any of its affiliates, beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder) more than 19.9% of the Company’s outstanding Common Stock (the “Exercise Blocker”). Without the Exercise Blocker, Mr. Holman would be deemed to beneficially own 50,000,000,000 shares of Common Stock pursuant to vested options.
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(3) Santi. Santi and Chief Operation Officer. Includes 17,000,000,000 vested options and 8,000,000,000 shares of unvested restricted Common Stock. The option agreement of Mr. Santi includes the Exercise Blocker. Without the Exercise Blocker, Mr. Santi would be deemed to beneficially own 25,000,000,000 shares of Common Stock pursuant to vested options.
(4) Ollet. Chief Financial Officer. Includes 5,000,000,000 vested options. He also holds 3,000,000,000 shares of unvested restricted Common Stock. The option agreement of Mr. Ollet includes the Exercise Blocker.
(5) Panariello. A director. Includes 1,000,000,000 vested options. He also holds 500,000,000 shares of unvested restricted Common Stock.
(6) Friedman. A director. Includes 1,000,000,000 vested options. He also holds 500,000,000 shares of unvested restricted Common Stock.
(7) Directors and Executive Officers. Includes executive officers who are not Named Executive Officers under the SEC’s rules and regulations.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Policies and Procedures for Related Party Transactions
We have adopted a policy that our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of any class of our common stock and any members of the immediate family of any of the foregoing persons are not permitted to enter into a related person transaction with us without the prior consent of our audit committee. Our audit committee will review and oversee all transactions with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of any class of our common stock or any member of the immediate family of any of the foregoing persons and such person would have a direct or indirect interest. In approving or rejecting any such transactions, our audit committee is to consider the material facts of the transaction, including, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction.
Item 14. Principal Accounting Fees and Services.
Our Audit Committee pre-approves audit and permissible non-audit services performed by its independent registered public accounting firm, as well as the fees charged for such services. All of the services related to audit fees and audit-related fees charged were pre-approved by the Audit Committee. The following table shows the fees for the years ended December 31, 2018 and 2017.
2018 ($) | 2017 ($) | |||||||
| Audit Fees (1) | $ | 208,000 | $ | 166,000 | ||||
| Total | $ | 208,000 | $ | 166,000 | ||||
(1) Audit fees — these fees relate to the audit of our annual financial statements and the review of our interim quarterly financial statements and our registration statements.
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Item 15. Exhibits, Financial Statement Schedules.
| (a) | Documents filed as part of the report. |
| (1) | Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item. |
| (2) | Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the consolidated financial statements or notes included in this report. |
| (3) | Exhibits. The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report. |
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FINANCIAL STATEMENT INDEX
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Healthier Choices Management Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Healthier Choices Management Corp. (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2017.
New York, NY
March 27, 2019
F-2
HEALTHIER
CHOICES MANAGEMENT CORP.
CONSOLIDATED BALANCE SHEETS
| December 31, 2018 | December 31, 2017 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 7,061,253 | $ | 7,883,191 | ||||
| Accounts receivable, net of allowance of $3,000 and $19,000, respectively | 51,951 | 75,568 | ||||||
| Inventories | 1,864,619 | 861,650 | ||||||
| Prepaid expenses and vendor deposits | 402,578 | 133,401 | ||||||
| Investment | 90,857 | - | ||||||
| Contract assets | 32,400 | - | ||||||
| TOTAL CURRENT ASSETS | 9,503,658 | 8,953,810 | ||||||
| Property and equipment, net of accumulated depreciation | 497,039 | 589,506 | ||||||
| Intangible assets, net of accumulated amortization | 3,062,204 | 1,559,531 | ||||||
| Goodwill | 1,437,314 | 481,314 | ||||||
| Note receivable | 528,007 | - | ||||||
| Other assets | 144,441 | 117,244 | ||||||
| TOTAL ASSETS | $ | 15,172,663 | $ | 11,701,405 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 1,301,418 | $ | 951,528 | ||||
| Contract liabilities | 442,630 | 61,312 | ||||||
| Current portion of line of credit | 1,868,460 | - | ||||||
| Current portion of loan payment | 282,224 | 2,111 | ||||||
| Derivative liabilities – warrants | 1,722,928 | 10,231,697 | ||||||
| TOTAL CURRENT LIABILITIES | 5,617,660 | 11,246,648 | ||||||
| Loan payable, net of current portion | 1,128,234 | 10,459 | ||||||
| TOTAL LIABILITIES | 6,745,894 | 11,257,107 | ||||||
| COMMITMENTS AND CONTINGENCIES (SEE NOTE 13) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Series B convertible preferred stock, $1,000 par value per share, 30,000 shares authorized; 20,150 shares issued and outstanding as of December 31, 2018; aggregate liquidation preference of $20.2 million | 20,150,116 | - | ||||||
| Common Stock, $0.0001 par value per share, 750,000,000,000 shares authorized; 66,623,514,522 and 29,348,867,108 shares issued and outstanding as of December 31, 2018 and 2017, respectively | 6,662,351 | 2,934,887 | ||||||
| Additional paid-in capital | 7,348,390 | 10,080,238 | ||||||
| Accumulated deficit | (25,734,088 | ) | (12,570,827 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 8,426,769 | 444,298 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 15,172,663 | $ | 11,701,405 | ||||
See notes to consolidated financial statements
F-3
HEALTHIER CHOICES MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| SALES: | ||||||||
| Vapor sales, net | $ | 6,281,198 | $ | 5,910,697 | ||||
| Grocery sales, net | 8,365,842 | 7,037,447 | ||||||
| TOTAL SALES, NET | 14,647,040 | 12,948,144 | ||||||
| Cost of sales vapor | 2,651,110 | 2,567,400 | ||||||
| Cost of sales grocery | 4,831,043 | 4,114,914 | ||||||
| GROSS PROFIT | 7,164,887 | 6,265,830 | ||||||
| OPERATING EXPENSES: | ||||||||
| Advertising | 193,955 | 110,694 | ||||||
| Selling, general and administrative | 9,952,858 | 16,444,944 | ||||||
| Total operating expenses | 10,146,813 | 16,555,638 | ||||||
| LOSS FROM OPERATIONS | (2,981,926 | ) | (10,289,808 | ) | ||||
| OTHER INCOME (EXPENSE): | ||||||||
| Loss on extinguishment of warrants in exchange for preferred stock/revaluation | (10,696,774 | ) | (94,955 | ) | ||||
| Other income | 475,430 | 200,129 | ||||||
| Interest income | 108,067 | 33,774 | ||||||
| Interest expense | (8,915 | ) | (5,502 | ) | ||||
| Loss on investment | (59,143 | ) | - | |||||
| Total other income (expense), net | (10,181,335 | ) | 133,446 | |||||
| Net loss from continuing operations | (13,163,261 | ) | (10,156,362 | ) | ||||
| Net loss from discontinued operations | - | 281,483 | ||||||
| NET LOSS | $ | (13,163,261 | ) | $ | (9,874,879 | ) | ||
| NET LOSS PER SHARE-BASIC AND DILUTED: | ||||||||
| Continuing operations | 0.00 | 0.00 | ||||||
| Discontinued operations | 0.00 | 0.00 | ||||||
| NET LOSS PER SHARE BASIC AND DILUTED | $ | 0.00 | $ | 0.00 | ||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING- | ||||||||
| BASIC AND DILUTED | 42,696,521,421 | 26,199,887,696 | ||||||
See notes to consolidated financial statements
F-4
HEALTHIER CHOICES MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2018
| Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance – December 31, 2016 | - | $ | - | 14,213,861,174 | $ | 1,421,386 | $ | 3,782,818 | $ | (2,695,948 | ) | $ | 2,508,256 | |||||||||||||||
| Issuance of common stock in connection with cashless exercise of Series A warrants | - | - | 15,125,005,934 | 1,512,501 | (1,208,429 | ) | - | 304,072 | ||||||||||||||||||||
| Issuance of stock options in connection with professional services | - | - | - | - | 9,000 | - | 9,000 | |||||||||||||||||||||
| Stock options exercised | - | - | 10,000,000 | 1,000 | - | - | 1,000 | |||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | 7,496,849 | - | 7,496,849 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (9,874,879 | ) | (9,874,879 | ) | |||||||||||||||||||
| Balance – December 31, 2017 | - | - | 29,348,867,108 | $ | 2,934,887 | $ | 10,080,238 | $ | (12,570,827 | ) | $ | 444,298 | ||||||||||||||||
| Issuance of common stock in connection with cashless exercise of Series A warrants | - | - | 4,270,589,636 | 427,058 | (251,513 | ) | - | 175,545 | ||||||||||||||||||||
| Stock options exercised | - | - | 787,777,778 | 78,778 | - | - | 78,778 | |||||||||||||||||||||
| Issuance of Series B Convertible Preferred Stock | 20,722 | 20,721,744 | - | - | (1,692,747 | ) | - | 19,028,997 | ||||||||||||||||||||
| Modification of share-based payment awards to officers | - | - | 19,000,000,000 | 1,900,000 | (1,900,000 | ) | - | - | ||||||||||||||||||||
| Issuance of awarded restricted stock to officer | - | - | 3,000,000,000 | 300,000 | (300,000 | ) | - | - | ||||||||||||||||||||
| Issuance of awarded common stock for professional services | - | - | 3,000,000,000 | 300,000 | (300,000 | ) | - | - | ||||||||||||||||||||
| Preferred stock converted | (572 | ) | (571,628 | ) | 5,716,280,000 | 571,628 | - | - | - | |||||||||||||||||||
| Investment in MJ Holdings, Inc. - Share exchange | - | - | 1,500,000,000 | 150,000 | - | - | 150,000 | |||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | 1,712,412 | - | 1,712,412 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (13,163,261 | ) | (13,363,261 | ) | |||||||||||||||||||
| Balance – December 31, 2018 | 20,150 | $ | 20,150,116 | 66,623,514,522 | $ | 6,662,351 | $ | 7,348,390 | $ | (25,934,088 | ) | $ | 8,226,769 | |||||||||||||||
See notes to consolidated financial statements
F-5
HEALTHIER CHOICES MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the year ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (13,163,261 | ) | $ | (9,874,879 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Loss from discontinued operations | - | (281,483 | ) | |||||
| Change in provision for doubtful accounts | (15,993 | ) | (14,372 | ) | ||||
| Depreciation and amortization | 375,690 | 350,647 | ||||||
| Loss on disposal of assets | 2,696 | 1,456 | ||||||
| Change in fair value of Series A warrants | 10,696,774 | 94,955 | ||||||
| Write-down of obsolete and slow-moving inventory | 281,116 | 392,071 | ||||||
| Stock-based compensation expense | 1,712,412 | 7,496,849 | ||||||
| Stock-based expense in connection with professional services | - | 9,002 | ||||||
| Net cash used in discontinued operations | - | (221,424 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 39,610 | (35,398 | ) | |||||
| Inventories | (534,085 | ) | (505,170 | ) | ||||
| Prepaid expenses and vendor deposits | (269,177 | ) | (9,900 | ) | ||||
| Contract assets | (32,400 | ) | - | |||||
| Other assets | (27,197 | ) | 10,913 | |||||
| Accounts payable | 349,890 | (263,459 | ) | |||||
| Contract liabilities | 381,318 | 26,747 | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | (202,607 | ) | (2,823,445 | ) | ||||
| INVESTING ACTIVITIES: | ||||||||
| Acquisition of Paradise and The Vitamin Store | (3,250,000 | ) | - | |||||
| Issuance of note receivable | (582,260 | ) | - | |||||
| Collection of note receivable | 54,253 | - | ||||||
| Loss on investment | 59,143 | - | ||||||
| Purchases of patent | (170,250 | ) | (50,000 | ) | ||||
| Purchases of property and equipment | (75,343 | ) | (142,885 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | (3,964,457 | ) | (192,885 | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
| Proceeds from line of credit | 1,868,460 | - | ||||||
| Proceeds from loan payable | 1,400,000 | 13,977 | ||||||
| Principal payments on loan payable | (2,112 | ) | (1,407 | ) | ||||
| Payments for repurchase of Series A warrants | - | (2,427,267 | ) | |||||
| Proceeds from exercise of stock options | 78,778 | 1,000 | ||||||
| Principal payments of capital lease obligations | - | (53,054 | ) | |||||
| NET CASH USED IN FINANCING ACTIVITIES | 3,345,126 | (2,466,751 | ) | |||||
| DECREASE IN CASH | (821,938 | ) | (5,483,081 | ) | ||||
| CASH AND CASH EQUIVALENTS — BEGINNING OF YEAR | 7,883,191 | 13,366,272 | ||||||
| CASH AND CASH EQUIVALENTS — END OF YEAR | $ | 7,061,253 | $ | 7,883,191 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | 7,000 | $ | 4,000 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of common stock in connection with cashless exercise of Series A warrants | $ | 176,000 | $ | 304,000 | ||||
| Issuance of Series B Convertible Preferred Stock in connection with the warrants settlement | $ | 19,028,997 | - | |||||
| Transfer of debt from prior note receivable | $ | 82,260 | - | |||||
See notes to consolidated financial statements
F-6
HEALTHIER
CHOICES MANAGEMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. ORGANIZATION, GOING CONCERN, BASIS OF PRESENTATION, AND RECENT DEVELOPMENTS
Organization
Healthier Choices Management Corp. (the “Company”) is a holding company focused on providing consumers with healthier daily choices with respect to nutrition and other lifestyle alternatives. The Company currently operates ten retail vape stores in the Southeast region of the United States, through which it offers e-liquids, vaporizers and related products. The Company also operates Ada’s Natural Market, a natural and organic grocery store, through its wholly owned subsidiary Healthy Choice Markets, Inc. Ada’s Natural Market and Paradise Health and Nutrition offers fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, health & beauty products and natural household items. The Company also sells vitamins and supplements on the Amazon.com marketplace through its wholly owned subsidiary Healthy U Wholesale, Inc. The Company markets the Q-Cup™ technology under the vape segment; this patented technology is based on a small, quartz cup called the Q-Cup™, which a customer partially fills with either cannabis or CBD concentrate (approximately 50mg) purchased from a third party. The Q-Cup™ is then inserted into the Q-Cup™ Tank or Globe, that heats the cup from the outside without coming in direct contact with the solid concentrate. This Q-Cup™ technology provides significantly more efficiency and an “on the go” solution for consumers who prefer to vape concentrates either medicinally or recreationally.
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 continuation of the Company as a going concern and realization of assets and satisfaction of liabilities in the normal course of business and do not include any adjustments that might result from the outcome of any uncertainties related to our going concern assessment. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values.
The Company currently and historically has reported net losses and cash outflows from operations. As of December 31, 2018, cash and cash equivalents totaled approximately $7.1 million. While we anticipate that our current cash, cash equivalents, and cash to be generated from operations will be sufficient to meet our projected operating plans for the foreseeable future through a year and a day from the issuance of these consolidated financial statements, should we require additional funds (either through equity or debt financings, collaborative agreements or from other sources), we have no commitments to obtain such additional financing and we may not be able to obtain any such additional financing on terms favorable to us, or at all.
During the second quarter of 2018, the Company entered into a $2.0 million line of credit agreement with a financial institution that is subject to annual renewal with a variable interest rate that it is based on a rate of 1% over what is earned on the collateral amount. The collateral amount established in the arrangement with the financial institution is $2.0 million. The Company has $0.1 million of availability as of December 31, 2018.
Sourcing and Vendors.
We source from multiple suppliers. These suppliers range from small independent businesses to multinational conglomerates. For the fiscal years ended December 31, 2018 and 2017, approximately 30% and 40% of our total purchases were from one vendor.
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial statements are prepared in accordance with GAAP. The consolidated financial statements include the accounts of all subsidiaries in which the Company holds a controlling financial interest as of the financial statement date.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Healthy Choice Markets, Inc., Healthy Choice Markets 2, LLC (“Paradise Health and Nutrition”), The Vitamin Store, LLC, Healthy U Wholesale, Inc., The Vape Store, Inc. (“Vape Store”), Vaporin, Inc. (“Vaporin”), Smoke Anywhere U.S.A., Inc. (“Smoke”), Emagine the Vape Store, LLC (“Emagine”), IVGI Acquisition, Inc., Vapormax Franchising LLC, Vaporin LLC, and Vaporin Florida, Inc. All intercompany accounts and transactions have been eliminated in consolidation.
F-7
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain prior period amounts in the consolidated financial statements related to stock splits and the sale of discontinued operations have been reclassified to conform to the current period’s presentation. No changes to the Company’s net loss were made as a result of such reclassifications.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the operating decision makers, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s decision-making group are the senior executive management team. The Company and the decision-making group view the Company’s operations and manage its business as two operating segments. All long-lived assets of the Company reside in the U.S.
Use of Estimates in the Preparation of the Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include allowances, reserves and write-downs of receivables and inventory, valuing equity securities and hybrid instruments, share-based payment arrangements, deferred taxes and related valuation allowances, and the valuation of the assets and liabilities acquired in business combinations. Certain of management’s estimates could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and records adjustments when necessary.
Revenue Recognition
Revenues from product sales and services rendered, net of promotional discounts, manufacturer coupons and rebates, return allowances, and sales and consumption taxes, are recorded when products are delivered, title passes to customers and collection is likely to occur. Title passes to customers at the point of sale for retail and upon delivery of products for wholesale. Return allowances, which reduce revenue, are estimated using historical experience.
The Company recognizes revenue in accordance with the following five-step model:
| ● | identify arrangements with customers; | |
| ● | identify performance obligations; | |
| ● | determine transaction price; | |
| ● | allocate transaction price to the separate performance obligations in the arrangement, if more than one exists; and | |
| ● | recognize revenue as performance obligations are satisfied. |
Accounting Standards Update (“ASU”) No. 2014-9, Revenue from Contracts with Customers (“ASU 2014-9”), is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition guidance. The Company adopted the standard on January 1, 2018 using the full retrospective method, which requires reporting entities to apply the standard as of the earliest period presented in their financial statements. The adoption of the new standard resulted in an immaterial impact to the consolidated statements of operations for reclassifying $13,000 to net loss and an immaterial impact to the consolidated balance sheets for reclassifying $61,000 of contract liabilities from accrued expenses as of December 31, 2017. Contract liabilities consist of gift card and loyalty point program liabilities. See “Accounts Receivable, Contract Assets, and Deferred Revenue” significant accounting policy.
Adoption of ASU 2014-09 impacted the previously reported results for the year ended December 31, 2017 as follows:
| As reported | ASU Impact | After adoption | ||||||||||
| Vapor sales, net | $ | 5,867,201 | $ | 43,496 | $ | 5,910,697 | ||||||
| Grocery sales, net | $ | 7,093,894 | $ | (56,447 | ) | $ | 7,037,447 | |||||
| Gross profit | $ | 6,278,781 | $ | (12,951 | ) | $ | 6,265,830 | |||||
| Net loss | $ | (9,861,928 | ) | $ | (12,951 | ) | $ | (9,874,879 | ) | |||
F-8
Adoption of ASU 2014-09 impacted the previously reported balance sheet as of December 31, 2017 as follows:
As reported December 31, | ASU 2014-09 Impact | After adoption December 31, 2017 | ||||||||||
| Accounts Payable and Accrued expenses | $ | 1,050,599 | $ | (99,071 | ) | $ | 951,528 | |||||
| Contract liabilities | $ | - | $ | 61,312 | $ | 61,312 | ||||||
| Total current liabilities | $ | 11,284,407 | $ | (37,759 | ) | $ | 11,246,648 | |||||
| Accumulated deficit | $ | (12,608,586 | ) | $ | 37,759 | $ | (12,570,827 | ) | ||||
| Total stockholders’ equity | $ | 406,539 | $ | 37,759 | $ | 444,298 | ||||||
Shipping and Handling
Shipping charges billed to customers are included in net sales and the related shipping and handling costs are included in cost of sales. For the years ended December 31, 2018 and 2017, shipping and handling costs of approximately $101,000 and $100,000, were included in cost of sales, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less, when purchased, to be cash and cash equivalents. The majority of the Company’s cash and cash equivalents are concentrated in one large financial institution, which is in excess of Federal Deposit Insurance Corporation (FDIC) coverage. At December 31, 2018, cash in excess of FDIC limits of $250,000 per financial institution were approximately $6.0 million. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests, as deposits are held in excess of federally insured limits. The Company’s cash equivalent at December 31, 2018 was a money market account. The Company has not experienced any losses in such accounts.
Accounts Receivable, Contract Assets and Contract Liabilities
Accounts receivable are claims to consideration which are unconditional; meaning no performance obligations remain for the Company and only the passage of time is necessary before collection. Contract assets are distinguished from accounts receivable as performance obligations remain before claims to consideration become unconditional. By nature of the Company’s operations, contract assets are typically not recognized. Contract liabilities are recorded when customers transfer consideration in advance of delivery of products or services, which the Company records for gift cards and loyalty reward programs. When one party to an arrangement performs before the other(s), the Company records an account receivable, contract asset or contract liability.
The majority of arrangements with customers contain one performance obligation: to provide a distinct set of products or services. Most performance obligations are satisfied simultaneously as the Company exchanges products or services for customer payment. Exceptions include gift cards and loyalty rewards, for which the Company has a performance obligation to deliver products or services at a future date. As gift cards are purchased and loyalty points earned, contract liabilities are recorded until the performance obligations are satisfied through delivery of products or services or breakage based on gift card and loyalty reward program term limits. The Company’s breakage policy is twenty-four months for gift cards, twelve months for Grocery loyalty rewards, and six months for Vapor loyalty rewards. Loyalty rewards are earned at five percent on qualifying purchases and the reward functions as an allocation of transaction price from the period earned by the customer to the period the performance obligation is satisfied by the Company. As such, all contract liabilities are expected to be recognized within a twenty-four month period.
Concentration of accounts receivable consist of the following:
| December 31, 2018 | December 31, 2017 | |||||||
| Customers balances in excess of 10% of total accounts receivable | ||||||||
| Customer A | - | 27 | % | |||||
| Customer B | - | 21 | % | |||||
| Customer C | - | 19 | % | |||||
| Customer D | 55 | % | - | |||||
F-9
Due from Merchant Credit Card Processor
Due from merchant credit card processor represents monies held by the Company’s credit card processors. The funds are being held by the merchant credit card processors pending satisfaction of their hold requirements and expiration of charge backs/refunds from customers.
Inventories
Inventories are stated at average cost. If the cost of the inventories exceeds their net realizable value, provisions are recorded to write down excess inventory to their net realizable value. The Company’s inventories consist primarily of merchandise available for resale, such as fresh produce, perishable grocery items and non-perishable consumable goods.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the expected useful life of the respective asset, after the asset is placed in service. Revenue earning property and equipment includes signage, furniture and fixtures, computer hardware, appliance, cooler, displays with useful lives range from two to seven years. Leasehold improvements are amortized over life of lease.
Identifiable Intangible Assets and Goodwill
Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain identifiable intangible assets are amortized over 3 and 15 years. Similar to tangible personal property and equipment, the Company periodically evaluates identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indefinite-lived intangible assets, such as goodwill are not amortized.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In connection with this review, the Company also reevaluates the depreciable lives for these assets. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset’s carrying value.
The Company assesses the carrying amounts of goodwill for recoverability on at least an annual basis or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, and the useful life over which cash flows will occur. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for the Company.
During the third quarter of 2017, we changed the date of our annual impairment test from December 31st to September 30th. We believe the change in accounting principle related to changing our annual impairment testing date did not delay, accelerate, or avoid an impairment charge. We have determined that this change in accounting principle is preferable under the circumstances and does not result in adjustments to our financial statements when applied retrospectively. Our 2018 annual impairment test resulted in no impairment being recorded. Management also performed a qualitative analysis at December 31, 2018 to determine whether any triggering events have occurred since the annual test date of September 30, 2018, which would indicate an impairment. Management determined no triggering events had occurred through December 31, 2018.
Advertising
The Company expenses advertising costs as incurred.
F-10
Income Taxes
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under this method, income tax expense is recognized as the amount of: (i) taxes payable or refundable for the current year and (ii) future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of available evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Stock-Based Compensation
The Company accounts for stock-based compensation for employees and directors under ASC Topic No. 718, “Compensation-Stock Compensation” (“ASC 718”). These standards define a fair value based method of accounting for stock-based compensation. In accordance with ASC 718, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using an appropriate valuation model, whereby compensation cost is the fair value of the award as determined by the valuation model at the grant date. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. 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.
Derivative Instruments
The Company accounts for free-standing derivative instruments and hybrid instruments that contain embedded derivative features in accordance with ASC Topic No. 815, “Derivative Instruments and Hedging Activities,” (“ASC 815”) as well as related interpretations of this topic. In accordance with this topic, derivative instruments and hybrid instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument.
The Company estimates fair values of derivative instruments and hybrid instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For complex instruments, the Company utilizes custom Monte Carlo simulation models. For less complex instruments, such as free-standing warrants, the Company generally uses the Binomial Lattice model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk-free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as the Binomial Lattice model or the Black-Scholes-Merton valuation model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s net income (loss) going forward will reflect the volatility in these estimates and assumption changes. Under ASC 815, increases in the trading price of the Company’s common stock and increases in fair value during a given financial period result in the application of non-cash derivative losses. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial period result in the application of non-cash derivative gains.
F-11
Fair Value Measurements
The fair value framework under FASB’s guidance requires the categorization of assets and liabilities into three levels based upon the assumptions used to measure the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, would generally require significant management judgment. The three levels for categorizing assets and liabilities under the fair value measurement requirements are as follows:
| ● | Level 1: Fair value measurement of the asset or liability using observable inputs such as quoted prices in active markets for identical assets or liabilities;
| |
|
● | Level 2: Fair value measurement of the asset or liability using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and |
| ● | Level 3: Fair value measurement of the asset or liability using unobservable inputs that reflect the Company’s own assumptions regarding the applicable asset or liability. |
Nonfinancial assets such as goodwill, other intangible assets, and long-lived assets held and used are measured at fair value when there is an indicator of impairment and recorded at fair value when impairment is recognized or for a business combination
Sequencing Policy
Under ASC 815-40-35, the Company has adopted a sequencing policy, whereby, in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares.
Adopted Accounting Pronouncements
As more fully described above, on January 1, 2018, the Company adopted ASU No. 2014-9 using the full retrospective method, which requires reporting entities to apply the standard as of the earliest period presented in their financial statements.
In August 2016, the FASB issued ASU 2016-15 (Topic 230), “Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments”. The new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. The adoption of this standard did not have a significant impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and annual and interim periods thereafter, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.
In July 2017, the FASB issued a two-part ASU No. 2017-11, I “Accounting for Certain Financial Instruments with Down Round Features” and II “Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception”. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.
F-12
Note 3. ACQUISITION AND DISPOSAL
Paradise Health and Nutrition and The Vitamin Store
During the fourth quarter of 2018, the Company’s wholly-owned subsidiary, Healthy Choice Markets 2, LLC (the “Paradise Buyer”), closed on its acquisition of substantially all of the assets of Paradise Health Foods, Inc. (“Paradise”), which owned and operated health and nutrition stores in Melbourne, Florida and Palm Bay, Florida (the “Paradise Acquisition”). In addition, the Paradise Buyer assumed certain leasehold obligations and entered into a short-term transition agreement with the sole stockholder of Paradise. The cash purchase price to acquire the assets and business of Paradise was approximately $2.28 million. Contemporaneous with the Paradise closing, Healthy U Wholesale, Inc. (the “TVS Buyer”), entered into, and closed, a Membership Interest Purchase Agreement to acquire 100% of the equity interests in The Vitamin Store, LLC (“TVS”) (the “TVS Acquisition” and, together with the Paradise Acquisition, the “Acquisitions”). TVS operates an online vitamin, supplement, and health-related products business at www.thevitaminstore.com. The cash purchase price to acquire TVS was approximately $973,000.
The Acquisitions were accounted for under the acquisition method of accounting. Accordingly, the acquired assets and assumed liabilities were recorded at their estimated fair values, and operating results for Paradise and TVS are included in the consolidated financial statements from the effective date of acquisition of December 14, 2018. The allocation of the purchase price is summarized as follows:
| Purchase Consideration | Paradise Health and Nutrition | The Vitamin Store, LLC | ||||||
| Cash paid: | $ | 2,277,000 | $ | 973,000 | ||||
| Identifiable assets acquired and liabilities assumed at fair value | ||||||||
| Property and equipment | 28,000 | - | ||||||
| Intangible assets – tradenames/trademarks | 103,000 | 70,000 | ||||||
| Intangible assets – Non-compete agreement | 174,000 | - | ||||||
| Intangible assets - customer relationships | 823,000 | 345,000 | ||||||
| Inventory | 671,000 | 79,000 | ||||||
| Net identifiable assets acquired | $ | 1,799,000 | $ | 494,000 | ||||
| Total allocated to goodwill | $ | 478,000 | $ | 479,000 | ||||
Goodwill arising from the transactions mainly consist of the expected operational synergies upon acquisition of the combined entity and intangibles not qualifying for separate recognition. Goodwill is not expected to be deductible for income tax purposes in the tax jurisdiction of the acquired business. The tradenames/trademarks will be amortized on a straight-line basis over their expected useful lives range from nine years to ten years. Customer relationships will be amortized on a straight-line basis over their expected useful lives range from five years to ten years. The non-compete agreement will be amortized on a straight-line basis over its expected useful life of four years.
The following presents the unaudited pro-forma combined results of operations of the Company with Paradise and TVS as if the acquisition occurred on January 1, 2017.
| 2018 | 2017 | |||||||
| Vapor sales, net | $ | 6,281,198 | $ | 5,910,697 | ||||
| Grocery sales, net | $ | 14,800,909 | $ | 13,616,530 | ||||
| Net loss from continuing operations | $ | (12,477,815 | ) | $ | (9,440,870 | ) | ||
| Net loss per share: | ||||||||
| Continuing operations | $ | - | $ | - | ||||
| Discontinued operations | $ | - | $ | - | ||||
| Net income (loss) per share basic and diluted | $ | - | $ | - | ||||
| Weighted average number of shares outstanding | 42,696,521,421 | 26,199,887,696 | ||||||
The unaudited pro-forma results of operations are presented for information purposes only and are based on estimated financial operations. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2018 or to project potential operating results as of any future date or for any future periods.
F-13
Note 4. DISAGGREGATION OF REVENUES
The Company reports the following segments in accordance with management guidance: Vapor and Grocery. When the Company prepares its internal management reporting to evaluate business performance, we disaggregate revenue into the following categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
| December 31, 2018 | December 31, 2017 | |||||||
| Vapor sales, net | $ | 6,281,198 | $ | 5,910,697 | ||||
| Grocery sales, net | 8,365,842 | 7,037,447 | ||||||
| Total revenue | $ | 14,647,040 | $ | 12,948,144 | ||||
| Retail Vapor | $ | 6,273,470 | $ | 5,590,835 | ||||
| Retail Grocery | 6,142,904 | 5,489,341 | ||||||
| Food service/restaurant | 1,526,934 | 1,487,925 | ||||||
| Online/e-Commerce | 666,927 | 59,066 | ||||||
| Wholesale Grocery | 29,077 | 1,115 | ||||||
| Wholesale Vapor | 7,728 | 319,862 | ||||||
| Total revenue | $ | 14,647,040 | $ | 12,948,144 | ||||
Note 5. INVESTMENT
During 2018, the Company invested $150,000 in 85,714 common stock shares at MJ Holdings, Inc. (“MJNE”), a publicly traded company. The investment was made based on the assumption of an increase in MJNE stock due to the sales agreement with the Company. The Company recorded the investment in MJNE at fair value with changes in the fair value reported through the income statement as the stock is traded on the OTC market. Investment is classed with Level 1 of the valuation hierarchy. Fair value for the investment is based on quoted prices in active markets.
| Description | Fair Value Measurements Using Quoted Prices in Active Market (Level 1) | Mark to Market | Final | |||||||||
| Investment | $ | 150,000 | $ | (59,143 | ) | $ | 90,857 | |||||
Note 6. INVENTORIES
Inventories are stated at average cost. If the cost of the inventories exceeds their market value, provisions are recorded to write down excess inventory to its net realizable value. Throughout the year, the Company had independent third party counts of its inventory and recorded the write down of inventories amounting to $0.3 million and $0.7 million, approximately, in 2018 and 2017 respectively, as a result of the findings. The Company’s inventories consist primarily of merchandise available for resale .
| December 31, 2018 | December 31, 2017 | |||||||
| Inventories: | ||||||||
| Vapor Business | $ | 425,062 | $ | 386,593 | ||||
| Grocery Business | 1,439,557 | 475,057 | ||||||
| Total | $ | 1,864,619 | $ | 861,650 | ||||
Note 7. NOTES RECEIVABLE AND OTHER INCOME
On September 6, 2018, the Company entered into a secured, 36-month promissory note with VPR Brands L.P. for $582,260. The note is composed of a principal amount of $500,000 (the “Promissory Note”) and an outstanding balance from prior secured notes of $82,260 (the “Note”). The Note bears an interest rate of 7%, which payments thereunder are $4,141 weekly, with such payments commencing as of September 14, 2018. The Company records all proceeds related to the interest of the Note as interest income as proceeds are received.
F-14
A summary of the Note as of December 31, 2018 is presented below:
| Description | Due Date | Interest Rate | Loan Amount | Payments Received | Remaining Balance | |||||||||||||
| Promissory Note | 9/6/2021 | 7.0 | % | $ | 582,260 | $ | 54,253 | $ | 528,007 | |||||||||
For the year ended December 31, 2018, the Company had a reversal of the valuation allowance reserve and notes receivable collections of approximately $0.5 million recorded to other income in the Consolidated Statement of Operations.
Note 8. PROPERTY & EQUIPMENT and CAPITAL LEASE OBLIGATIONS
Property and equipment consists of the following
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Displays | $ | 316,380 | $ | 370,092 | ||||
| Furniture and fixtures | 266,216 | 239,855 | ||||||
| Leasehold improvements | 128,004 | 102,195 | ||||||
| Computer hardware & equipment | 129,876 | 114,930 | ||||||
| Other | 235,772 | 156,205 | ||||||
| 1,076,248 | 983,277 | |||||||
| Less: accumulated depreciation and amortization | (579,209 | ) | (393,771 | ) | ||||
| Total property and equipment | $ | 497,039 | $ | 589,506 | ||||
The Company incurred approximately $0.2 million of depreciation expense for the years ended December 31, 2018 and 2017.
Note 9. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the premium paid over the fair value of the intangible and net tangible assets acquired in the Acquisitions and Merger and other retail business acquisitions. The Company assesses the carrying value of its goodwill on at least an annual basis.
The changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 are as follows:
| December 31, 2018 |
December 31, 2017 |
|||||||
| Beginning balance | $ | 481,314 | $ | 481,314 | ||||
| Goodwill from Acquisitions | 956,000 | - | ||||||
| Ending balance | $ | 1,437,314 | $ | 481,314 | ||||
Intangible assets, net are as follows:
| December 31, 2018 | Useful Lives (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Favorable lease | 15 years | $ | 890,000 | $ | (150,580 | ) | $ | 739,420 | ||||||
| Trade names | 8-10 years | 993,000 | (252,328 | ) | 740,672 | |||||||||
| Customer relationships | 4-10 years | 1,228,000 | (41,010 | ) | 1,186,990 | |||||||||
| Patents | 10 years | 245,250 | (22,939 | ) | 222,310 | |||||||||
| Non-compete | 4 years | 174,000 | (1,813 | ) | 172,188 | |||||||||
| Website | 3 years | 4,500 | (3,875 | ) | 625 | |||||||||
| Intangible assets, net | $ | 3,534,750 | $ | (472,545 | ) | $ | 3,062,204 | |||||||
F-15
| December 31, 2017 | Useful Lives (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Favorable lease | 15 years | $ | 890,000 | $ | (92,219 | ) | $ | 797,781 | ||||||
| Trade names | 10 years | 820,000 | (169,500 | ) | 650,500 | |||||||||
| Customer relationships | 5 years | 60,000 | (19,000 | ) | 41,000 | |||||||||
| Patents | 10 years | 75,000 | (6,875 | ) | 68,125 | |||||||||
| Website | 3 years | 4,500 | (2,375 | ) | 2,125 | |||||||||
| Intangible assets, net | $ | 1,849,500 | $ | (289,969 | ) | $ | 1,559,531 |
Amortization expense was approximately $0.2 million for the period ended December 31, 2018 and 2017.
The weighted-average remaining amortization period of the Company’s amortizable intangible assets is approximately 8 years as of December 31, 2018. The estimated future amortization of the intangible assets is as follows:
| For the years ending December 31, | ||||
| 2019 | $ | 481,136 | ||
| 2020 | 480,511 | |||
| 2021 | 473,511 | |||
| 2022 | 458,126 | |||
| 2023 | 217,823 | |||
| Thereafter | 951,097 | |||
| Total | $ | 3,062,204 | ||
Note 10. CONTRACT ASSETS AND LIABILITIES
The Company’s contract assets consist of sales commissions to third parties that support and facilitate the completion of complex transactions, for which the Company has a performance obligation to pay, due to the fact that the sales agreements were fully executed. During the year ended December 31, 2018, the Company paid sales commissions of $180,000 related to the initial sale of the Q-Cup (see Note 13). As such, all contract assets are expected to be recognized as the order is being delivered to the customers.
The Company’s contract liabilities consist of customer deposits, gift cards and loyalty rewards, for which the Company has a performance obligation to deliver products when customers redeem balances or terms expire through breakage. The Company’s breakage policy is twenty-four months for gift cards, twelve months for Grocery loyalty rewards, and six months for Vapor loyalty rewards. As such, all contract liabilities are expected to be recognized within a twenty-four month period.
A summary of the contract liabilities activity for the years ended December 31, 2018 and 2017 is presented below:
| Year ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Beginning balance as January1, | $ | 61,312 | $ | 34,564 | ||||
| Issued | 77,637 | 82,872 | ||||||
| Redeemed | (105,378 | ) | (59,385 | ) | ||||
| Breakage recognized | 796 | 3,260 | ||||||
| Customer deposits (1) | 408,263 | - | ||||||
| Ending balance as of December 31, | $ | 442,630 | $ | 61,312 | ||||
(1) See Note 13. “Commitments and Contingencies” for additional information.
F-16
Note 11. LINE OF CREDIT
During the second quarter of 2018, the Company entered into a $2.0 million line of credit agreement with a financial institution that is subject to annual renewal with a variable interest rate of 3% as of December 31, 2018. The collateral amount established in the arrangement with the financial institution is $2.0 million. As of December 31, 2018, the Company had $0.1 million of availability from line of credit. The maturity date for the line of credit is April 13, 2019.
Note 12. 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, 2018). The proceeds of the Term Note are to be used for acquisitions and for general working capital requirements.
The Credit Agreement contains a customary financial covenant for a minimum debt service coverage ratio of 1.25 to 1.0. The Credit Agreement matures on December 31, 2023. In addition, the Credit Agreement provides for monthly principle payments of $22,333 commencing in January 2019 plus applicable interest, and mandatory prepayments with a portion of excess cash flow.
The obligations under the Credit Agreement and the Term Note are guaranteed by the Company and its wholly owned subsidiary, Healthy U Wholesale, Inc.
Principal repayments to be made during the next five years, at which time the long-term debt will be fully repaid, as follow:
| Year | Principle Payment | |||
| 2019 | $ | 280,000 | ||
| 2020 | $ | 280,000 | ||
| 2021 | $ | 280,000 | ||
| 2022 | $ | 280,000 | ||
| 2023 | $ | 280,000 | ||
| $ | 1,400,000 | |||
Note 13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its Florida office and warehouse facilities under a three-year lease. The lease provides for annual rental payments, including taxes, of approximately $100,000 per year. The Company also leases its Vape and Grocery stores.
Future minimum lease payments under non-cancelable operating leases that have initial or remaining terms in excess of one year at December 31, 2018 are due as follows:
| 2019 | $ | 919,000 | ||
| 2020 | 754,000 | |||
| 2021 | 646,000 | |||
| 2022 | 569,000 | |||
| Total | $ | 2,888,000 |
Rent expense for the years ended December 31, 2018 and 2017 was approximately $732,000 and $741,000, respectively, is included in selling, general and administrative expenses in the accompanying consolidated statement of operations.
F-17
Exclusive Distribution Agreement
On August 17, 2018, the Company entered into an Exclusive Distribution Agreement with MJ Holdings, Inc. (“MJNE”). The Agreement grants MJNE the right to exclusively sell and distribute the Company’s patented and patent approved quartz ‘Q-Cup’ technology (the “Q-cups”) for the use with cannabis and CBD in the Nevada territory. Pursuant to the terms of the Agreement, MJNE agreed to purchase $2,000,000 in Q-Cups from the Company, of which MJNE delivered the full purchase price in advance. As of December 31, 2018, the Company had a balance of $0.3 million from the purchase price advance the initial term of the Agreement is for one year with additional successive one-year renewals, subject to certain standard termination provisions.
The Company has the option to terminate the Agreement on 30 days’ written notice if MJNE fails to purchase a sufficient minimum quantity of Q-cups from the Company. For each renewal term, MJNE’s minimum purchase obligation for the Q-cups is $6 million per year, subject to mutually agreed upon adjustments based upon the first year sales.
Legal Proceedings
From time to time the Company may be involved in various claims and legal actions arising in the ordinary course of our business. 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, 2018 and 2017, the Company recorded expenses of $59,000 and $21,000 as part of its cost of goods.
Note 14. STOCKHOLDERS’ EQUITY
Equity Plans
On July 7, 2015, the stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”), which is a broad-based plan and awards granted may be restricted stock, restricted stock units, options and stock appreciation rights. The Plan was subsequently amended to increase the number of shares of common stock available for grants to 100,000,000,000. The 2015 Plan had 11,130,249,996 shares of common stock available for grant as of December 31, 2018.
The Company’s 2009 Equity Incentive Plan (the “2009 Plan”) was adopted by the stockholders on November 24, 2009. The 2009 Plan provides for the granting of incentive stock options to employees, the granting of non-qualified stock options to employees, non-employee directors and consultants, and the granting of restricted stock to employees, non-employee directors and consultants in connection with their retention and/or continued employment by the Company. Options issued under the 2009 Plan generally have a ten-year term and generally become exercisable over a four-year period. Shares subject to awards that expire unexercised or are forfeited or terminated will again become available for issuance under the 2009 Plan. No participant in the 2009 Plan can receive option grants and/or restricted shares for more than 20% of the total shares subject to the 2009 Plan. The 2009 Plan had no shares of common stock available for grant as of December 31, 2018.
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 in exchange for certain Series A Warrants. A total of 20,722 shares of Series B Stock were exchanged for 46,048,318 (adjusted figures summarized in table below) of Series A Warrants (including those warrants issuable pursuant to a unit purchase option). Each share of Series B Stock “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 $0.0001 per share.
F-18
Warrants
The shares issuable upon the exercise of the Series A Warrants are calculated (1) using a Black Scholes Value of $1.5 million per share and a closing stock bid price of $0.0001 per share and (2) assuming the Company delivers only common stock upon exercise of the Series A Warrants and not cash payments as permitted under the terms of the Series A Warrants.
At the years ended December 31, 2018 and 2017, the warrants were valued at the tender offer price of $0.45 and $0.22, respectively, per warrant. Management believes the warrant exchange transaction price, which took place during the 3rd quarter of 2018, is the best indicator of fair value as it is a Level 2 valuation and no material events indicating the fair value has changed occurred through December 31, 2018. As a result, the Company recorded $971,000 of an unrealized loss as a result of the revaluation as of December 31, 2018
A summary of warrant activity for the years ended December 31, 2018 and 2017 is presented below:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Term (Yrs.) | ||||||||
| Outstanding at January 1, 2017 | 42 | $ | 1,736,000 | 3.6 | ||||||
| Warrants exercised | (1 | ) | 320,540 | |||||||
| Warrants repurchased | (8 | ) | 1,532,038 | |||||||
| Outstanding at December 31, 2017 | 33 | $ | 1,520,919 | 2.6 | ||||||
| Unit Purchase Agreement Issued UPOs | 3 | (630,042 | ) | |||||||
| Warrants exchanged pursuant to Series B Preferred Stock issuance | (33 | ) | 630,042 | |||||||
| Warrants exercised | (0 | ) | 1,523,947 | |||||||
| Outstanding at December 31, 2018 | 3 | $ | 1,522,692 | 1.6 | ||||||
| Exercisable at December 31, 2018 | 3 | $ | 1,520,692 | 1.6 | ||||||
A summary of the approximate outstanding warrant common stock equivalents for the years ended December 31, 2018 and 2017 are as follows:
| December 31, 2018 | December 31, 2017 | |||||||
| Warrants outstanding (A) | 2.7348 | 33.2198 | ||||||
| Black Scholes value (B) | $ | 1,522,692 | $ | 1,520,919 | ||||
| Subtotal (C)=(A) x (B) | 4,164,258 | 50,524,625 | ||||||
| Closing bid stock price (D) | $ | 0.0001 | $ | 0.0001 | ||||
| Warrant common stock equivalent (C)/(D) | 41,643,000,000 | 505,246,000,000 | ||||||
Pursuant to the Series A warrant agreement, the Black Scholes value is calculated by a third-party and utilized in calculating the warrant common stock equivalents at the point of cashless exercise. As such, the value is computed at the end of each reporting period to determine the amount of warrant common stock equivalents outstanding using the formula below:
(Series A warrants * Black Scholes Value) / closing common stock bid price as of two trading days prior.
See Note 15 – Fair Value Measurements for additional details related to the Series A Warrants that were exchanged
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 This restricted stock will vest one year following the date of issuance provided that the grantee remains an employee of the Company through the vesting date . 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.
F-19
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 of the Company. The Chief Financial 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. During the year ended December 31, 2018, the Company recognized stock-based compensation expense of $125,000 from the awarded shares to the Chief Financial Officer.
Stock Options
During the year ended December 31, 2018, the Company granted options for the purchase of 975,000,000 shares of its common stocks, at an aggregate grant date value of $97,500 or $0.0001 per option shares.
The fair value of employee stock options was estimated using the following Black-Scholes assumptions:
A summary of option activity during the years ended December 31, 2018 and 2017 is as follows:
| Weighted | Weighted Average | |||||||||
| Number of | Average | Remaining | ||||||||
| Options | Exercise Price | Term (Yrs) | ||||||||
| Outstanding, January 1, 2017 | 5,001,000,004 | $ | 0.0001 | 10 | ||||||
| Options granted | 82,893,750,000 | 0.0001 | ||||||||
| Options exercised | (10,000,000 | ) | 0.0001 | |||||||
| Options forfeited or expired | (729,741,524 | ) | 0.0001 | |||||||
| Outstanding, December 31, 2017 | 87,155,008,480 | $ | 0.0001 | 9 | ||||||
| Options granted | 975,000,000 | 0.0001 | ||||||||
| Options exercised | (787,777,800 | ) | 0.0001 | |||||||
| Options forfeited or expired | (19,030,000,000 | ) | 0.0001 | |||||||
| Outstanding, December 31, 2018 | 68,312,230,680 | $ | 0.0001 | 8 | ||||||
| Exercisable at December 31, 2018 | 68,312,230,680 | $ | 0.0001 | 8 | ||||||
During the years ended December 31, 2018 and 2017, the Company recognized stock-based compensation expense of approximately $1.7 million and $7.5 million, respectively, in connection with the amortization of stock options, net of recovery of stock-based charges for forfeited stock options. Stock-based compensation expense is included as part of selling, general and administrative expense in the accompanying consolidated statements of operations .
At December 31, 2018, the amount of unamortized stock-based compensation expense on unvested stock options granted to employees, directors and consultants was approximately $0.2 million, which will be amortized over a weighted average period of 1.9 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, | ||||||||
| 2018 | 2017 | |||||||
| Preferred stock | 201,501,142,000 | - | ||||||
| Stock options | 68,312,230,680 | 88,893,899,200 | ||||||
| Warrants | 41,642,670,772 | 505,246,312,541 | ||||||
| Total | 311,456,043,452 | 594,140,211,741 | ||||||
F-20
Weighted average shares used in calculating basic and diluted net income (loss) per share are as follows:
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Basic | 42,696,521,421 | 26,199,887,696 | ||||||
| Effect of exercise stock options | - | - | ||||||
| Effect of exercise warrants | - | - | ||||||
| Diluted | 42,696,521,421 | 26,199,887,696 | ||||||
Note 15. FAIR VALUE MEASUREMENTS OF DERIVATE LIABILITIES
The following table summarizes the liabilities measured at fair value on a recurring basis as of December 31, 2018:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| LIABILITIES | ||||||||||||||||
| Derivative liabilities – warrants | $ | - | $ | 1,722,928 | $ | - | $ | 1,722,928 | ||||||||
| Total derivative liabilities – warrants | $ | - | $ | 1,722,928 | $ | - | $ | 1,722,928 | ||||||||
The following table summarizes the liabilities measured at fair value on a recurring basis as of December 31, 2017:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| LIABILITIES | ||||||||||||||||
| Derivative liabilities – warrants | $ | - | $ | 10,231,697 | $ | - | $ | 10,231,697 | ||||||||
| Total derivative liabilities – warrants | $ | - | $ | 10,231,697 | $ | - | $ | 10,231,697 | ||||||||
F-21
Note 16. INCOME TAXES
The Company did not have a provision for income taxes (current or deferred tax expense) for tax years ended December 31, 2018 and 2017. 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, | ||||||||
| 2018 | 2017 | |||||||
| U.S. federal statutory rate | $ | (2,764,285 | ) | $ | (3,353,056 | ) | ||
| State and local taxes, net of federal benefit | (591,439 | ) | (334,994 | ) | ||||
| Settlement of warrants | 10,122,599 | - | ||||||
| Change in valuation allowance | (6,551,117 | ) | (3,717,877 | ) | ||||
| True-up & deferred adjustment | 5,155 | 1,619 | ||||||
| Stock based compensation | 88,903 | 258,394 | ||||||
| Other permanent items | 7,882 | 5,697 | ||||||
| Forfeitures & expiration of stock comp | - | 45,915 | ||||||
| Change in tax rate | - | 7,036,850 | ||||||
| Other | (244,630 | ) | 57,452 | |||||
| $ | - | $ | - | |||||
As of December 31, 2018 and 2017, the Company’s deferred tax assets and liabilities consisted of the effects of temporary differences attributable to the following:
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Current deferred tax assets: | ||||||||
| NOL & AMT credit carryforward | $ | 4,928,275 | $ | 11,106,460 | ||||
| Inventory reserves and allowances | 132,718 | 209,345 | ||||||
| Charitable contribution | - | 3,767 | ||||||
| Stock based compensation | 1,480,412 | 1,712,623 | ||||||
| Net book value of intangible assets | 592,560 | 639,731 | ||||||
| Net book value of fixed assets | - | 6,727 | ||||||
| Total current deferred tax assets | 7,133,965 | 13,678,653 | ||||||
| Current deferred tax liabilities: | ||||||||
| Net book value of fixed assets | (6,429 | ) | - | |||||
| Total current deferred tax liabilities | (6,429 | ) | - | |||||
| Net current deferred tax assets | 7,177,432 | 13,678,653 | ||||||
| Valuation allowance | (7,177,432 | ) | (13,678,653 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the positive and negative evidence available, management has determined that a valuation allowance of $7.2 million and $13.7 million are required at December 31, 2018 and 2017, respectively, to reduce the deferred tax assets to amounts that are more likely than not to be realized. 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, 2018 the Company had U.S. federal and state net operating loss carryforwards (“NOLS”) of $21.1 million and $11.1 million, respectively. These NOLs expire beginning in 2034. 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.
F-22
As required by the provisions of ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of NOL or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If applicable, interest costs and penalties related to unrecognized tax benefits are required to be calculated and would be classified as interest and penalties in general and administrative expense in the statement of operations. As of December 31, 2018, and 2017, no liability for unrecognized tax benefit was required to be reported. No interest or penalties were recorded during the years ended December 31, 2018 and 2017. The Company does not expect any significant changes in its unrecognized tax benefits in the next year. The Company files U.S. federal and Alabama, Florida, Georgia, and Tennessee state income tax returns. As of December 31, 2018, the Company’s U.S. federal and state tax returns remain subject to examination by tax authorities beginning with the tax year ended December 31, 2015. However, due to NOLs being generated and carried forward from tax years ended December 31, 2010, 2012, & 2014, these tax years may also be subject to examination.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. One of the provisions of the Tax Act was a one time transaction tax on the accumulated post-1986 foreign earnings. It has been determined that the Company will not be impacted by this tax. Under ASC 740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies, to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. There is no further change to its assertion on maintaining a full valuation allowance against its U.S. deferred tax assets. Due to the change in the federal tax rate from 34% to 21%, which in turn changes the effective state tax rate from 3.69% to 4.41%, the Company’s gross deferred tax assets at December 31, 2017 of approximately $20.7 million were revalued to approximately $13.7 million with a corresponding offset to the valuation allowance. All of the provisions of the Tax Reform Act have been accounted for and properly quantified.
Note 17. SEGMENT INFORMATION
Management determines the reportable segments based on the internal reporting used by our executives to evaluate performance and to assess where to allocate resources. The Company evaluates segment performance based on the segment gross profit before corporate expenses.
Summarized below are the total net sales and segment operating profit for each reporting segment:
| Year Ended | ||||||||||||||||
| Net Sales | Segment Gross Profit | |||||||||||||||
| December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | |||||||||||||
| Vapor | $ | 6,281,198 | $ | 5,910,697 | $ | 3,630,088 | $ | 3,343,297 | ||||||||
| Grocery | 8,365,842 | 7,037,447 | 3,534,799 | 2,922,533 | ||||||||||||
| Total | $ | 14,647,040 | $ | 12,948,144 | 7,164,887 | 6,265,830 | ||||||||||
| Corporate expenses | 10,146,813 | 16,555,638 | ||||||||||||||
| Operating loss | (2,981,926 | ) | (10,289,808 | ) | ||||||||||||
| Corporate other income (expense), net | (10,181,335 | ) | 133,446 | |||||||||||||
| Net loss from continuing operations | (13,163,261 | ) | (10,156,362 | ) | ||||||||||||
| Net gain from discontinued operations | - | (281,483 | ) | |||||||||||||
| Net loss | $ | (13,163,261 | ) | $ | (9,874,879 | ) | ||||||||||
For the year ended December 31, 2018 depreciation and amortization was approximately $0.1 million and $0.3 million for Vapor and Grocery, respectively.
For the year ended December 31, 2017 depreciation and amortization was $0.1 million and $0.3 million for Vapor and Grocery, respectively.
F-23
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 27, 2019.
| 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 27, 2019 | ||
| Jeffrey Holman | and Director | |||
| /s/ John A. Ollet | Chief Financial Officer | March 27, 2019 | ||
| John A. Ollet | (Principal Financial and Accounting Officer) | |||
| /s/ Clifford J. Friedman | Director | March 27, 2019 | ||
| Clifford J. Friedman | ||||
| /s/ Anthony Panariello | Director | March 27, 2019 | ||
| Anthony Panariello |
27
28
* 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.
29
Exhibit 21.1
List of Subsidiaries
| Subsidiaries | Jurisdiction | |
| The Vape Store Inc. | Florida | |
| Vaporin, Inc. (inactive) | Delaware | |
| Healthy Choice Markets, Inc. | Florida | |
| Smoke Anywhere USA Inc. (inactive) | Florida | |
| Emagine the Vape Store, LLC (inactive) | Delaware | |
| IVGI Acquisitions, Inc. (inactive) | Delaware | |
| Vapormax Franchising LLC. (inactive) | Delaware | |
| Vaporin, LLC (inactive) | Florida | |
| Healthy Choice Markets 2, LLC | Florida | |
| The Vitamin Store, LLC | Florida | |
Exhibit 23.1
Independent Registered Public Accounting Firm’s Consent
We consent to the incorporation by reference in the Registration Statement of Healthier Choices Management Corp. on Form S-3 [File No. 333-206053 and File No. 333-203490] and on Form S-8 [File No. 333-188888], of our report dated March 27, 2019, with respect to our audits of the consolidated financial statements of Healthier Choices Management Corp. as of December 31, 2018 and 2017 and for the years ended December 31, 2018 and 2017, which report is included in this Annual Report on Form 10-K of Healthier Choices Management Corp. for the year ended December 31, 2018.
/s/ Marcum LLP
Marcum LLP
New York, NY
March 27, 2019
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Jeffrey Holman, certify that:
1. I have reviewed this annual report on Form 10-K of Healthier Choices Management Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 27, 2018
| /s/ Jeffrey Holman | |
| Jeffrey Holman | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, John Ollet, certify that:
1. I have reviewed this annual report on Form 10-K of Healthier Choices Management Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting
Date: March 27, 2018
| /s/ John Ollet | |
| John Ollet | |
| Chief Financial Officer | |
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Healthier Choices Management Corp. (the “Company”) on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof, I, Jeffrey Holman, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| 1. | The quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and | |
| 2. | The information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 27, 2018
| /s/ Jeffrey Holman | |
| Jeffrey Holman | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
In connection with the quarterly report of Healthier Choices Management Corp. (the “Company”) on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof, I, John Ollet, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| 1. | The quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and | |
| 2. | The information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 27, 2018
| /s/ John Ollet | |
| John Ollet | |
| Chief Financial Officer | |
| (Principal Financial Officer) |
Document and Entity Information - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2018 |
Mar. 27, 2019 |
Jun. 30, 2018 |
|
| Document and Entity Information [Abstract] | |||
| Entity Registrant Name | Healthier Choices Management Corp. | ||
| Entity Central Index Key | 0000844856 | ||
| Trading Symbol | HCMC | ||
| Amendment Flag | false | ||
| Current Fiscal Year End Date | --12-31 | ||
| Document Type | 10-K | ||
| Document Period End Date | Dec. 31, 2018 | ||
| Document Fiscal Year Focus | 2018 | ||
| Document Fiscal Period Focus | FY | ||
| Entity Filer Category | Non-accelerated Filer | ||
| Entity Well-known Seasoned Issuer | No | ||
| Entity Voluntary Filers | No | ||
| Entity Current Reporting Status | Yes | ||
| Entity Shell Company | false | ||
| Entity Small Business | true | ||
| Entity Emerging Growth Company | false | ||
| Entity Ex Transition Period | false | ||
| Entity Public Float | $ 2,900,000 | ||
| Entity Common Stock, Shares Outstanding | 66,634,387,066 |
Consolidated Balance Sheets (Parenthetical) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Accounts receivable, net allowance | $ 3,000 | $ 19,000 |
| Common stock, par value | $ 0.0001 | $ 0.0001 |
| Common stock, shares authorized | 750,000,000,000 | 750,000,000,000 |
| Common stock, shares issued | 66,623,514,522 | 29,348,867,108 |
| Common stock, shares outstanding | 66,623,514,522 | 29,348,867,108 |
| Series B convertible preferred stock, par value | $ 1,000 | |
| Series B convertible preferred stock, shares authorized | 30,000 | |
| Series B convertible preferred stock, shares issued | 20,150 | |
| Series B convertible preferred stock, shares outstanding | 20,150 | |
| Series B convertible preferred stock aggregate liquidation preference | $ 20,200,000 |
Organization, Going Concern, Basis of Presentation, and Recent Developments |
12 Months Ended |
|---|---|
Dec. 31, 2018 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| ORGANIZATION, GOING CONCERN, BASIS OF PRESENTATION, AND RECENT DEVELOPMENTS | Note 1. ORGANIZATION, GOING CONCERN, BASIS OF PRESENTATION, AND RECENT DEVELOPMENTS
Organization
Healthier Choices Management Corp. (the “Company”) is a holding company focused on providing consumers with healthier daily choices with respect to nutrition and other lifestyle alternatives. The Company currently operates ten retail vape stores in the Southeast region of the United States, through which it offers e-liquids, vaporizers and related products. The Company also operates Ada’s Natural Market, a natural and organic grocery store, through its wholly owned subsidiary Healthy Choice Markets, Inc. Ada’s Natural Market and Paradise Health and Nutrition offers fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, health & beauty products and natural household items. The Company also sells vitamins and supplements on the Amazon.com marketplace through its wholly owned subsidiary Healthy U Wholesale, Inc. The Company markets the Q-Cup™ technology under the vape segment; this patented technology is based on a small, quartz cup called the Q-Cup™, which a customer partially fills with either cannabis or CBD concentrate (approximately 50mg) purchased from a third party. The Q-Cup™ is then inserted into the Q-Cup™ Tank or Globe, that heats the cup from the outside without coming in direct contact with the solid concentrate. This Q-Cup™ technology provides significantly more efficiency and an “on the go” solution for consumers who prefer to vape concentrates either medicinally or recreationally.
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 continuation of the Company as a going concern and realization of assets and satisfaction of liabilities in the normal course of business and do not include any adjustments that might result from the outcome of any uncertainties related to our going concern assessment. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values.
The Company currently and historically has reported net losses and cash outflows from operations. As of December 31, 2018, cash and cash equivalents totaled approximately $7.1 million. While we anticipate that our current cash, cash equivalents, and cash to be generated from operations will be sufficient to meet our projected operating plans for the foreseeable future through a year and a day from the issuance of these consolidated financial statements, should we require additional funds (either through equity or debt financings, collaborative agreements or from other sources), we have no commitments to obtain such additional financing and we may not be able to obtain any such additional financing on terms favorable to us, or at all.
During the second quarter of 2018, the Company entered into a $2.0 million line of credit agreement with a financial institution that is subject to annual renewal with a variable interest rate that it is based on a rate of 1% over what is earned on the collateral amount. The collateral amount established in the arrangement with the financial institution is $2.0 million. The Company has $0.1 million of availability as of December 31, 2018.
Sourcing and Vendors.
We source from multiple suppliers. These suppliers range from small independent businesses to multinational conglomerates. For the fiscal years ended December 31, 2018 and 2017, approximately 30% and 40% of our total purchases were from one vendor.
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial statements are prepared in accordance with GAAP. The consolidated financial statements include the accounts of all subsidiaries in which the Company holds a controlling financial interest as of the financial statement date.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Healthy Choice Markets, Inc., Healthy Choice Markets 2, LLC (“Paradise Health and Nutrition”), The Vitamin Store, LLC, Healthy U Wholesale, Inc., The Vape Store, Inc. (“Vape Store”), Vaporin, Inc. (“Vaporin”), Smoke Anywhere U.S.A., Inc. (“Smoke”), Emagine the Vape Store, LLC (“Emagine”), IVGI Acquisition, Inc., Vapormax Franchising LLC, Vaporin LLC, and Vaporin Florida, Inc. All intercompany accounts and transactions have been eliminated in consolidation. |
Summary of Significant Accounting Policies |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain prior period amounts in the consolidated financial statements related to stock splits and the sale of discontinued operations have been reclassified to conform to the current period's presentation. No changes to the Company's net loss were made as a result of such reclassifications.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the operating decision makers, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company's decision-making group are the senior executive management team. The Company and the decision-making group view the Company's operations and manage its business as two operating segments. All long-lived assets of the Company reside in the U.S.
Use of Estimates in the Preparation of the Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include allowances, reserves and write-downs of receivables and inventory, valuing equity securities and hybrid instruments, share-based payment arrangements, deferred taxes and related valuation allowances, and the valuation of the assets and liabilities acquired in business combinations. Certain of management's estimates could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and records adjustments when necessary.
Revenue Recognition
Revenues from product sales and services rendered, net of promotional discounts, manufacturer coupons and rebates, return allowances, and sales and consumption taxes, are recorded when products are delivered, title passes to customers and collection is likely to occur. Title passes to customers at the point of sale for retail and upon delivery of products for wholesale. Return allowances, which reduce revenue, are estimated using historical experience.
The Company recognizes revenue in accordance with the following five-step model:
Accounting Standards Update ("ASU") No. 2014-9, Revenue from Contracts with Customers ("ASU 2014-9"), is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition guidance. The Company adopted the standard on January 1, 2018 using the full retrospective method, which requires reporting entities to apply the standard as of the earliest period presented in their financial statements. The adoption of the new standard resulted in an immaterial impact to the consolidated statements of operations for reclassifying $13,000 to net loss and an immaterial impact to the consolidated balance sheets for reclassifying $61,000 of contract liabilities from accrued expenses as of December 31, 2017. Contract liabilities consist of gift card and loyalty point program liabilities. See "Accounts Receivable, Contract Assets, and Deferred Revenue" significant accounting policy.
Adoption of ASU 2014-09 impacted the previously reported results for the year ended December 31, 2017 as follows:
Adoption of ASU 2014-09 impacted the previously reported balance sheet as of December 31, 2017 as follows:
Shipping and Handling
Shipping charges billed to customers are included in net sales and the related shipping and handling costs are included in cost of sales. For the years ended December 31, 2018 and 2017, shipping and handling costs of approximately $101,000 and $100,000, were included in cost of sales, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less, when purchased, to be cash and cash equivalents. The majority of the Company's cash and cash equivalents are concentrated in one large financial institution, which is in excess of Federal Deposit Insurance Corporation (FDIC) coverage. At December 31, 2018, cash in excess of FDIC limits of $250,000 per financial institution were approximately $6.0 million. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests, as deposits are held in excess of federally insured limits. The Company's cash equivalent at December 31, 2018 was a money market account. The Company has not experienced any losses in such accounts.
Accounts Receivable, Contract Assets and Contract Liabilities
Accounts receivable are claims to consideration which are unconditional; meaning no performance obligations remain for the Company and only the passage of time is necessary before collection. Contract assets are distinguished from accounts receivable as performance obligations remain before claims to consideration become unconditional. By nature of the Company's operations, contract assets are typically not recognized. Contract liabilities are recorded when customers transfer consideration in advance of delivery of products or services, which the Company records for gift cards and loyalty reward programs. When one party to an arrangement performs before the other(s), the Company records an account receivable, contract asset or contract liability.
The majority of arrangements with customers contain one performance obligation: to provide a distinct set of products or services. Most performance obligations are satisfied simultaneously as the Company exchanges products or services for customer payment. Exceptions include gift cards and loyalty rewards, for which the Company has a performance obligation to deliver products or services at a future date. As gift cards are purchased and loyalty points earned, contract liabilities are recorded until the performance obligations are satisfied through delivery of products or services or breakage based on gift card and loyalty reward program term limits. The Company's breakage policy is twenty-four months for gift cards, twelve months for Grocery loyalty rewards, and six months for Vapor loyalty rewards. Loyalty rewards are earned at five percent on qualifying purchases and the reward functions as an allocation of transaction price from the period earned by the customer to the period the performance obligation is satisfied by the Company. As such, all contract liabilities are expected to be recognized within a twenty-four month period.
Concentration of accounts receivable consist of the following:
Due from Merchant Credit Card Processor
Due from merchant credit card processor represents monies held by the Company's credit card processors. The funds are being held by the merchant credit card processors pending satisfaction of their hold requirements and expiration of charge backs/refunds from customers.
Inventories
Inventories are stated at average cost. If the cost of the inventories exceeds their net realizable value, provisions are recorded to write down excess inventory to their net realizable value. The Company's inventories consist primarily of merchandise available for resale, such as fresh produce, perishable grocery items and non-perishable consumable goods.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the expected useful life of the respective asset, after the asset is placed in service. Revenue earning property and equipment includes signage, furniture and fixtures, computer hardware, appliance, cooler, displays with useful lives range from two to seven years. Leasehold improvements are amortized over life of lease.
Identifiable Intangible Assets and Goodwill
Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain identifiable intangible assets are amortized over 3 and 15 years. Similar to tangible personal property and equipment, the Company periodically evaluates identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indefinite-lived intangible assets, such as goodwill are not amortized.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In connection with this review, the Company also reevaluates the depreciable lives for these assets. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset's carrying value.
The Company assesses the carrying amounts of goodwill for recoverability on at least an annual basis or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, and the useful life over which cash flows will occur. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for the Company.
During the third quarter of 2017, we changed the date of our annual impairment test from December 31st to September 30th. We believe the change in accounting principle related to changing our annual impairment testing date did not delay, accelerate, or avoid an impairment charge. We have determined that this change in accounting principle is preferable under the circumstances and does not result in adjustments to our financial statements when applied retrospectively. Our 2018 annual impairment test resulted in no impairment being recorded. Management also performed a qualitative analysis at December 31, 2018 to determine whether any triggering events have occurred since the annual test date of September 30, 2018, which would indicate an impairment. Management determined no triggering events had occurred through December 31, 2018.
Advertising
The Company expenses advertising costs as incurred.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740, "Income Taxes" ("ASC 740"). Under this method, income tax expense is recognized as the amount of: (i) taxes payable or refundable for the current year and (ii) future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of available evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Stock-Based Compensation
The Company accounts for stock-based compensation for employees and directors under ASC Topic No. 718, "Compensation-Stock Compensation" ("ASC 718"). These standards define a fair value based method of accounting for stock-based compensation. In accordance with ASC 718, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using an appropriate valuation model, whereby compensation cost is the fair value of the award as determined by the valuation model at the grant date. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. 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.
Derivative Instruments
The Company accounts for free-standing derivative instruments and hybrid instruments that contain embedded derivative features in accordance with ASC Topic No. 815, "Derivative Instruments and Hedging Activities," ("ASC 815") as well as related interpretations of this topic. In accordance with this topic, derivative instruments and hybrid instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument.
The Company estimates fair values of derivative instruments and hybrid instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For complex instruments, the Company utilizes custom Monte Carlo simulation models. For less complex instruments, such as free-standing warrants, the Company generally uses the Binomial Lattice model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk-free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as the Binomial Lattice model or the Black-Scholes-Merton valuation model) are highly volatile and sensitive to changes in the trading market price of the Company's common stock. Since derivative financial instruments are initially and subsequently carried at fair values, the Company's net income (loss) going forward will reflect the volatility in these estimates and assumption changes. Under ASC 815, increases in the trading price of the Company's common stock and increases in fair value during a given financial period result in the application of non-cash derivative losses. Conversely, decreases in the trading price of the Company's common stock and decreases in trading fair value during a given financial period result in the application of non-cash derivative gains.
Fair Value Measurements
The fair value framework under FASB's guidance requires the categorization of assets and liabilities into three levels based upon the assumptions used to measure the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, would generally require significant management judgment. The three levels for categorizing assets and liabilities under the fair value measurement requirements are as follows:
Nonfinancial assets such as goodwill, other intangible assets, and long-lived assets held and used are measured at fair value when there is an indicator of impairment and recorded at fair value when impairment is recognized or for a business combination
Sequencing Policy
Under ASC 815-40-35, the Company has adopted a sequencing policy, whereby, in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company's inability to demonstrate it has sufficient authorized shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares.
Adopted Accounting Pronouncements
As more fully described above, on January 1, 2018, the Company adopted ASU No. 2014-9 using the full retrospective method, which requires reporting entities to apply the standard as of the earliest period presented in their financial statements.
In August 2016, the FASB issued ASU 2016-15 (Topic 230), "Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments". The new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. The adoption of this standard did not have a significant impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). ASU 2016-02 establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and annual and interim periods thereafter, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.
In July 2017, the FASB issued a two-part ASU No. 2017-11, I "Accounting for Certain Financial Instruments with Down Round Features" and II "Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception". The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements. |
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Acquisition and Disposal |
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| ACQUISITION AND DISPOSAL | Note 3. ACQUISITION AND DISPOSAL
Paradise Health and Nutrition and The Vitamin Store
During the fourth quarter of 2018, the Company’s wholly-owned subsidiary, Healthy Choice Markets 2, LLC (the “Paradise Buyer”), closed on its acquisition of substantially all of the assets of Paradise Health Foods, Inc. (“Paradise”), which owned and operated health and nutrition stores in Melbourne, Florida and Palm Bay, Florida (the “Paradise Acquisition”). In addition, the Paradise Buyer assumed certain leasehold obligations and entered into a short-term transition agreement with the sole stockholder of Paradise. The cash purchase price to acquire the assets and business of Paradise was approximately $2.28 million. Contemporaneous with the Paradise closing, Healthy U Wholesale, Inc. (the “TVS Buyer”), entered into, and closed, a Membership Interest Purchase Agreement to acquire 100% of the equity interests in The Vitamin Store, LLC (“TVS”) (the “TVS Acquisition” and, together with the Paradise Acquisition, the “Acquisitions”). TVS operates an online vitamin, supplement, and health-related products business at www.thevitaminstore.com. The cash purchase price to acquire TVS was approximately $973,000.
The Acquisitions were accounted for under the acquisition method of accounting. Accordingly, the acquired assets and assumed liabilities were recorded at their estimated fair values, and operating results for Paradise and TVS are included in the consolidated financial statements from the effective date of acquisition of December 14, 2018. The allocation of the purchase price is summarized as follows:
Goodwill arising from the transactions mainly consist of the expected operational synergies upon acquisition of the combined entity and intangibles not qualifying for separate recognition. Goodwill is not expected to be deductible for income tax purposes in the tax jurisdiction of the acquired business. The tradenames/trademarks will be amortized on a straight-line basis over their expected useful lives range from nine years to ten years. Customer relationships will be amortized on a straight-line basis over their expected useful lives range from five years to ten years. The non-compete agreement will be amortized on a straight-line basis over its expected useful life of four years.
The following presents the unaudited pro-forma combined results of operations of the Company with Paradise and TVS as if the acquisition occurred on January 1, 2017.
The unaudited pro-forma results of operations are presented for information purposes only and are based on estimated financial operations. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2018 or to project potential operating results as of any future date or for any future periods. |
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Disaggregation of Revenues |
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| DISAGGREGATION OF REVENUES | Note 4. DISAGGREGATION OF REVENUES
The Company reports the following segments in accordance with management guidance: Vapor and Grocery. When the Company prepares its internal management reporting to evaluate business performance, we disaggregate revenue into the following categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
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Investment |
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| INVESTMENT | Note 5. INVESTMENT
During 2018, the Company invested $150,000 in 85,714 common stock shares at MJ Holdings, Inc. (“MJNE”), a publicly traded company. The investment was made based on the assumption of an increase in MJNE stock due to the sales agreement with the Company. The Company recorded the investment in MJNE at fair value with changes in the fair value reported through the income statement as the stock is traded on the OTC market. Investment is classed with Level 1 of the valuation hierarchy. Fair value for the investment is based on quoted prices in active markets.
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Inventories |
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| INVENTORIES | Note 6. INVENTORIES
Inventories are stated at average cost. If the cost of the inventories exceeds their market value, provisions are recorded to write down excess inventory to its net realizable value. Throughout the year, the Company had independent third party counts of its inventory and recorded the write down of inventories amounting to $0.3 million and $0.7 million, approximately, in 2018 and 2017 respectively, as a result of the findings. The Company’s inventories consist primarily of merchandise available for resale .
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Notes Receivable and Other Income |
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| NOTES RECEIVABLE AND OTHER INCOME | Note 7. NOTES RECEIVABLE AND OTHER INCOME
On September 6, 2018, the Company entered into a secured, 36-month promissory note with VPR Brands L.P. for $582,260. The note is composed of a principal amount of $500,000 (the “Promissory Note”) and an outstanding balance from prior secured notes of $82,260 (the “Note”). The Note bears an interest rate of 7%, which payments thereunder are $4,141 weekly, with such payments commencing as of September 14, 2018. The Company records all proceeds related to the interest of the Note as interest income as proceeds are received.
A summary of the Note as of December 31, 2018 is presented below:
For the year ended December 31, 2018, the Company had a reversal of the valuation allowance reserve and notes receivable collections of approximately $0.5 million recorded to other income in the Consolidated Statement of Operations. |
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Property & Equipment and Capital Lease Obligations |
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| PROPERTY & EQUIPMENT and CAPITAL LEASE OBLIGATIONS | Note 8. PROPERTY & EQUIPMENT and CAPITAL LEASE OBLIGATIONS
Property and equipment consists of the following
The Company incurred approximately $0.2 million of depreciation expense for the years ended December 31, 2018 and 2017. |
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| GOODWILL AND INTANGIBLE ASSETS | Note 9. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the premium paid over the fair value of the intangible and net tangible assets acquired in the Acquisitions and Merger and other retail business acquisitions. The Company assesses the carrying value of its goodwill on at least an annual basis.
The changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 are as follows:
Intangible assets, net are as follows:
Amortization expense was approximately $0.2 million for the period ended December 31, 2018 and 2017.
The weighted-average remaining amortization period of the Company’s amortizable intangible assets is approximately 8 years as of December 31, 2018. The estimated future amortization of the intangible assets is as follows:
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Contract Assets and Liabilities |
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| CONTRACT ASSETS AND LIABILITIES | Note 10. CONTRACT ASSETS AND LIABILITIES
The Company’s contract assets consist of sales commissions to third parties that support and facilitate the completion of complex transactions, for which the Company has a performance obligation to pay, due to the fact that the sales agreements were fully executed. During the year ended December 31, 2018, the Company paid sales commissions of $180,000 related to the initial sale of the Q-Cup (see Note 13). As such, all contract assets are expected to be recognized as the order is being delivered to the customers.
The Company’s contract liabilities consist of customer deposits, gift cards and loyalty rewards, for which the Company has a performance obligation to deliver products when customers redeem balances or terms expire through breakage. The Company’s breakage policy is twenty-four months for gift cards, twelve months for Grocery loyalty rewards, and six months for Vapor loyalty rewards. As such, all contract liabilities are expected to be recognized within a twenty-four month period.
A summary of the contract liabilities activity for the years ended December 31, 2018 and 2017 is presented below:
(1) See Note 13. “Commitments and Contingencies” for additional information. |
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Line of Credit |
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| Line of Credit [Abstract] | |
| LINE OF CREDIT | Note 11. LINE OF CREDIT
During the second quarter of 2018, the Company entered into a $2.0 million line of credit agreement with a financial institution that is subject to annual renewal with a variable interest rate of 3% as of December 31, 2018. The collateral amount established in the arrangement with the financial institution is $2.0 million. As of December 31, 2018, the Company had $0.1 million of availability from line of credit. The maturity date for the line of credit is April 13, 2019. |
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| Term Loan Credit Agreement | Note 12. 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, 2018). The proceeds of the Term Note are to be used for acquisitions and for general working capital requirements.
The Credit Agreement contains a customary financial covenant for a minimum debt service coverage ratio of 1.25 to 1.0. The Credit Agreement matures on December 31, 2023. In addition, the Credit Agreement provides for monthly principle payments of $22,333 commencing in January 2019 plus applicable interest, and mandatory prepayments with a portion of excess cash flow.
The obligations under the Credit Agreement and the Term Note are guaranteed by the Company and its wholly owned subsidiary, Healthy U Wholesale, Inc.
Principal repayments to be made during the next five years, at which time the long-term debt will be fully repaid, as follow:
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| COMMITMENTS AND CONTINGENCIES | Note 13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its Florida office and warehouse facilities under a three-year lease. The lease provides for annual rental payments, including taxes, of approximately $100,000 per year. The Company also leases its Vape and Grocery stores.
Future minimum lease payments under non-cancelable operating leases that have initial or remaining terms in excess of one year at December 31, 2018 are due as follows:
Rent expense for the years ended December 31, 2018 and 2017 was approximately $732,000 and $741,000, respectively, is included in selling, general and administrative expenses in the accompanying consolidated statement of operations.
Exclusive Distribution Agreement
On August 17, 2018, the Company entered into an Exclusive Distribution Agreement with MJ Holdings, Inc. (“MJNE”). The Agreement grants MJNE the right to exclusively sell and distribute the Company’s patented and patent approved quartz ‘Q-Cup’ technology (the “Q-cups”) for the use with cannabis and CBD in the Nevada territory. Pursuant to the terms of the Agreement, MJNE agreed to purchase $2,000,000 in Q-Cups from the Company, of which MJNE delivered the full purchase price in advance. As of December 31, 2018, the Company had a balance of $0.3 million from the purchase price advance the initial term of the Agreement is for one year with additional successive one-year renewals, subject to certain standard termination provisions.
The Company has the option to terminate the Agreement on 30 days’ written notice if MJNE fails to purchase a sufficient minimum quantity of Q-cups from the Company. For each renewal term, MJNE’s minimum purchase obligation for the Q-cups is $6 million per year, subject to mutually agreed upon adjustments based upon the first year sales.
Legal Proceedings
From time to time the Company may be involved in various claims and legal actions arising in the ordinary course of our business. 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, 2018 and 2017, the Company recorded expenses of $59,000 and $21,000 as part of its cost of goods. |
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| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| STOCKHOLDERS' EQUITY | Note 14. STOCKHOLDERS’ EQUITY
Equity Plans
On July 7, 2015, the stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”), which is a broad-based plan and awards granted may be restricted stock, restricted stock units, options and stock appreciation rights. The Plan was subsequently amended to increase the number of shares of common stock available for grants to 100,000,000,000. The 2015 Plan had 11,130,249,996 shares of common stock available for grant as of December 31, 2018.
The Company’s 2009 Equity Incentive Plan (the “2009 Plan”) was adopted by the stockholders on November 24, 2009. The 2009 Plan provides for the granting of incentive stock options to employees, the granting of non-qualified stock options to employees, non-employee directors and consultants, and the granting of restricted stock to employees, non-employee directors and consultants in connection with their retention and/or continued employment by the Company. Options issued under the 2009 Plan generally have a ten-year term and generally become exercisable over a four-year period. Shares subject to awards that expire unexercised or are forfeited or terminated will again become available for issuance under the 2009 Plan. No participant in the 2009 Plan can receive option grants and/or restricted shares for more than 20% of the total shares subject to the 2009 Plan. The 2009 Plan had no shares of common stock available for grant as of December 31, 2018.
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 in exchange for certain Series A Warrants. A total of 20,722 shares of Series B Stock were exchanged for 46,048,318 (adjusted figures summarized in table below) of Series A Warrants (including those warrants issuable pursuant to a unit purchase option). Each share of Series B Stock “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 $0.0001 per share.
Warrants
The shares issuable upon the exercise of the Series A Warrants are calculated (1) using a Black Scholes Value of $1.5 million per share and a closing stock bid price of $0.0001 per share and (2) assuming the Company delivers only common stock upon exercise of the Series A Warrants and not cash payments as permitted under the terms of the Series A Warrants.
At the years ended December 31, 2018 and 2017, the warrants were valued at the tender offer price of $0.45 and $0.22, respectively, per warrant. Management believes the warrant exchange transaction price, which took place during the 3rd quarter of 2018, is the best indicator of fair value as it is a Level 2 valuation and no material events indicating the fair value has changed occurred through December 31, 2018. As a result, the Company recorded $971,000 of an unrealized loss as a result of the revaluation as of December 31, 2018
A summary of warrant activity for the years ended December 31, 2018 and 2017 is presented below:
A summary of the approximate outstanding warrant common stock equivalents for the years ended December 31, 2018 and 2017 are as follows:
Pursuant to the Series A warrant agreement, the Black Scholes value is calculated by a third-party and utilized in calculating the warrant common stock equivalents at the point of cashless exercise. As such, the value is computed at the end of each reporting period to determine the amount of warrant common stock equivalents outstanding using the formula below:
(Series A warrants * Black Scholes Value) / closing common stock bid price as of two trading days prior.
See Note 15 – Fair Value Measurements for additional details related to the Series A Warrants that were exchanged
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 This restricted stock will vest one year following the date of issuance provided that the grantee remains an employee of the Company through the vesting date . 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.
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 of the Company. The Chief Financial 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. During the year ended December 31, 2018, the Company recognized stock-based compensation expense of $125,000 from the awarded shares to the Chief Financial Officer.
Stock Options
During the year ended December 31, 2018, the Company granted options for the purchase of 975,000,000 shares of its common stocks, at an aggregate grant date value of $97,500 or $0.0001 per option shares.
The fair value of employee stock options was estimated using the following Black-Scholes assumptions:
A summary of option activity during the years ended December 31, 2018 and 2017 is as follows:
During the years ended December 31, 2018 and 2017, the Company recognized stock-based compensation expense of approximately $1.7 million and $7.5 million, respectively, in connection with the amortization of stock options, net of recovery of stock-based charges for forfeited stock options. Stock-based compensation expense is included as part of selling, general and administrative expense in the accompanying consolidated statements of operations .
At December 31, 2018, the amount of unamortized stock-based compensation expense on unvested stock options granted to employees, directors and consultants was approximately $0.2 million, which will be amortized over a weighted average period of 1.9 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:
Weighted average shares used in calculating basic and diluted net income (loss) per share are as follows:
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Fair Value Measurements of Derivate Liabilities |
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| FAIR VALUE MEASUREMENTS OF DERIVATE LIABILITIES | Note 15. FAIR VALUE MEASUREMENTS OF DERIVATE LIABILITIES
The following table summarizes the liabilities measured at fair value on a recurring basis as of December 31, 2018:
The following table summarizes the liabilities measured at fair value on a recurring basis as of December 31, 2017:
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Income Taxes |
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| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAXES | Note 16. INCOME TAXES
The Company did not have a provision for income taxes (current or deferred tax expense) for tax years ended December 31, 2018 and 2017. 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:
As of December 31, 2018 and 2017, the Company’s deferred tax assets and liabilities consisted of the effects of temporary differences attributable to the following:
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 of $7.2 million and $13.7 million are required at December 31, 2018 and 2017, respectively, to reduce the deferred tax assets to amounts that are more likely than not to be realized. 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, 2018 the Company had U.S. federal and state net operating loss carryforwards (“NOLS”) of $21.1 million and $11.1 million, respectively. These NOLs expire beginning in 2034. 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.
As required by the provisions of ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of NOL or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If applicable, interest costs and penalties related to unrecognized tax benefits are required to be calculated and would be classified as interest and penalties in general and administrative expense in the statement of operations. As of December 31, 2018, and 2017, no liability for unrecognized tax benefit was required to be reported. No interest or penalties were recorded during the years ended December 31, 2018 and 2017. The Company does not expect any significant changes in its unrecognized tax benefits in the next year. The Company files U.S. federal and Alabama, Florida, Georgia, and Tennessee state income tax returns. As of December 31, 2018, the Company’s U.S. federal and state tax returns remain subject to examination by tax authorities beginning with the tax year ended December 31, 2015. However, due to NOLs being generated and carried forward from tax years ended December 31, 2010, 2012, & 2014, these tax years may also be subject to examination.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. One of the provisions of the Tax Act was a one time transaction tax on the accumulated post-1986 foreign earnings. It has been determined that the Company will not be impacted by this tax. Under ASC 740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies, to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. There is no further change to its assertion on maintaining a full valuation allowance against its U.S. deferred tax assets. Due to the change in the federal tax rate from 34% to 21%, which in turn changes the effective state tax rate from 3.69% to 4.41%, the Company’s gross deferred tax assets at December 31, 2017 of approximately $20.7 million were revalued to approximately $13.7 million with a corresponding offset to the valuation allowance. All of the provisions of the Tax Reform Act have been accounted for and properly quantified. |
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Segment Information |
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| SEGMENT INFORMATION | Note 17. 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:
For the year ended December 31, 2018 depreciation and amortization was approximately $0.1 million and $0.3 million for Vapor and Grocery, respectively.
For the year ended December 31, 2017 depreciation and amortization was $0.1 million and $0.3 million for Vapor and Grocery, respectively. |
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Summary of Significant Accounting Policies (Policies) |
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| Reclassifications | Reclassifications
Certain prior period amounts in the consolidated financial statements related to stock splits and the sale of discontinued operations have been reclassified to conform to the current period's presentation. No changes to the Company's net loss were made as a result of such reclassifications. |
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| Segment Reporting | Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the operating decision makers, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company's decision-making group are the senior executive management team. The Company and the decision-making group view the Company's operations and manage its business as two operating segments. All long-lived assets of the Company reside in the U.S. |
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| Use of Estimates in the Preparation of the Financial Statements | Use of Estimates in the Preparation of the Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include allowances, reserves and write-downs of receivables and inventory, valuing equity securities and hybrid instruments, share-based payment arrangements, deferred taxes and related valuation allowances, and the valuation of the assets and liabilities acquired in business combinations. Certain of management's estimates could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and records adjustments when necessary. |
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| Revenue recognition | Revenue Recognition
Revenues from product sales and services rendered, net of promotional discounts, manufacturer coupons and rebates, return allowances, and sales and consumption taxes, are recorded when products are delivered, title passes to customers and collection is likely to occur. Title passes to customers at the point of sale for retail and upon delivery of products for wholesale. Return allowances, which reduce revenue, are estimated using historical experience.
The Company recognizes revenue in accordance with the following five-step model:
Accounting Standards Update ("ASU") No. 2014-9, Revenue from Contracts with Customers ("ASU 2014-9"), is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition guidance. The Company adopted the standard on January 1, 2018 using the full retrospective method, which requires reporting entities to apply the standard as of the earliest period presented in their financial statements. The adoption of the new standard resulted in an immaterial impact to the consolidated statements of operations for reclassifying $13,000 to net loss and an immaterial impact to the consolidated balance sheets for reclassifying $61,000 of contract liabilities from accrued expenses as of December 31, 2017. Contract liabilities consist of gift card and loyalty point program liabilities. See "Accounts Receivable, Contract Assets, and Deferred Revenue" significant accounting policy.
Adoption of ASU 2014-09 impacted the previously reported results for the year ended December 31, 2017 as follows:
Adoption of ASU 2014-09 impacted the previously reported balance sheet as of December 31, 2017 as follows:
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| Shipping and Handling | Shipping and Handling
Shipping charges billed to customers are included in net sales and the related shipping and handling costs are included in cost of sales. For the years ended December 31, 2018 and 2017, shipping and handling costs of approximately $101,000 and $100,000, were included in cost of sales, respectively. |
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| Cash and Cash Equivalents | Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less, when purchased, to be cash and cash equivalents. The majority of the Company's cash and cash equivalents are concentrated in one large financial institution, which is in excess of Federal Deposit Insurance Corporation (FDIC) coverage. At December 31, 2018, cash in excess of FDIC limits of $250,000 per financial institution were approximately $6.0 million. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests, as deposits are held in excess of federally insured limits. The Company's cash equivalent at December 31, 2018 was a money market account. The Company has not experienced any losses in such accounts. |
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| Accounts Receivable, Contract Assets and Contract Liabilities | Accounts Receivable, Contract Assets and Contract Liabilities
Accounts receivable are claims to consideration which are unconditional; meaning no performance obligations remain for the Company and only the passage of time is necessary before collection. Contract assets are distinguished from accounts receivable as performance obligations remain before claims to consideration become unconditional. By nature of the Company's operations, contract assets are typically not recognized. Contract liabilities are recorded when customers transfer consideration in advance of delivery of products or services, which the Company records for gift cards and loyalty reward programs. When one party to an arrangement performs before the other(s), the Company records an account receivable, contract asset or contract liability.
The majority of arrangements with customers contain one performance obligation: to provide a distinct set of products or services. Most performance obligations are satisfied simultaneously as the Company exchanges products or services for customer payment. Exceptions include gift cards and loyalty rewards, for which the Company has a performance obligation to deliver products or services at a future date. As gift cards are purchased and loyalty points earned, contract liabilities are recorded until the performance obligations are satisfied through delivery of products or services or breakage based on gift card and loyalty reward program term limits. The Company's breakage policy is twenty-four months for gift cards, twelve months for Grocery loyalty rewards, and six months for Vapor loyalty rewards. Loyalty rewards are earned at five percent on qualifying purchases and the reward functions as an allocation of transaction price from the period earned by the customer to the period the performance obligation is satisfied by the Company. As such, all contract liabilities are expected to be recognized within a twenty-four month period.
Concentration of accounts receivable consist of the following:
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| Due from Merchant Credit Card Processor | Due from Merchant Credit Card Processor
Due from merchant credit card processor represents monies held by the Company's credit card processors. The funds are being held by the merchant credit card processors pending satisfaction of their hold requirements and expiration of charge backs/refunds from customers. |
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| Inventories | Inventories
Inventories are stated at average cost. If the cost of the inventories exceeds their net realizable value, provisions are recorded to write down excess inventory to their net realizable value. The Company's inventories consist primarily of merchandise available for resale, such as fresh produce, perishable grocery items and non-perishable consumable goods. |
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| Property and Equipment | Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the expected useful life of the respective asset, after the asset is placed in service. Revenue earning property and equipment includes signage, furniture and fixtures, computer hardware, appliance, cooler, displays with useful lives range from two to seven years. Leasehold improvements are amortized over life of lease. |
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| Identifiable Intangible Assets and Goodwill | Identifiable Intangible Assets and Goodwill
Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain identifiable intangible assets are amortized over 3 and 15 years. Similar to tangible personal property and equipment, the Company periodically evaluates identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indefinite-lived intangible assets, such as goodwill are not amortized. |
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| Impairment of Long-Lived Assets | Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In connection with this review, the Company also reevaluates the depreciable lives for these assets. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset's carrying value.
The Company assesses the carrying amounts of goodwill for recoverability on at least an annual basis or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, and the useful life over which cash flows will occur. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for the Company.
During the third quarter of 2017, we changed the date of our annual impairment test from December 31st to September 30th. We believe the change in accounting principle related to changing our annual impairment testing date did not delay, accelerate, or avoid an impairment charge. We have determined that this change in accounting principle is preferable under the circumstances and does not result in adjustments to our financial statements when applied retrospectively. Our 2018 annual impairment test resulted in no impairment being recorded. Management also performed a qualitative analysis at December 31, 2018 to determine whether any triggering events have occurred since the annual test date of September 30, 2018, which would indicate an impairment. Management determined no triggering events had occurred through December 31, 2018. |
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| Advertising | Advertising
The Company expenses advertising costs as incurred. |
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| Income Taxes | Income Taxes
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740, "Income Taxes" ("ASC 740"). Under this method, income tax expense is recognized as the amount of: (i) taxes payable or refundable for the current year and (ii) future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of available evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized. |
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| Stock-Based Compensation | Stock-Based Compensation
The Company accounts for stock-based compensation for employees and directors under ASC Topic No. 718, "Compensation-Stock Compensation" ("ASC 718"). These standards define a fair value based method of accounting for stock-based compensation. In accordance with ASC 718, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using an appropriate valuation model, whereby compensation cost is the fair value of the award as determined by the valuation model at the grant date. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Stock-based compensation for non-employees is measured at the grant date, is re-measured at subsequent vesting dates and reporting dates, and is amortized over the service period. |
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| Derivative Instruments | Derivative Instruments
The Company accounts for free-standing derivative instruments and hybrid instruments that contain embedded derivative features in accordance with ASC Topic No. 815, "Derivative Instruments and Hedging Activities," ("ASC 815") as well as related interpretations of this topic. In accordance with this topic, derivative instruments and hybrid instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument.
The Company estimates fair values of derivative instruments and hybrid instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For complex instruments, the Company utilizes custom Monte Carlo simulation models. For less complex instruments, such as free-standing warrants, the Company generally uses the Binomial Lattice model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk-free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as the Binomial Lattice model or the Black-Scholes-Merton valuation model) are highly volatile and sensitive to changes in the trading market price of the Company's common stock. Since derivative financial instruments are initially and subsequently carried at fair values, the Company's net income (loss) going forward will reflect the volatility in these estimates and assumption changes. Under ASC 815, increases in the trading price of the Company's common stock and increases in fair value during a given financial period result in the application of non-cash derivative losses. Conversely, decreases in the trading price of the Company's common stock and decreases in trading fair value during a given financial period result in the application of non-cash derivative gains. |
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| Fair Value Measurements | Fair Value Measurements
The fair value framework under FASB's guidance requires the categorization of assets and liabilities into three levels based upon the assumptions used to measure the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, would generally require significant management judgment. The three levels for categorizing assets and liabilities under the fair value measurement requirements are as follows:
Nonfinancial assets such as goodwill, other intangible assets, and long-lived assets held and used are measured at fair value when there is an indicator of impairment and recorded at fair value when impairment is recognized or for a business combination |
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| Sequencing Policy | Sequencing Policy
Under ASC 815-40-35, the Company has adopted a sequencing policy, whereby, in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company's inability to demonstrate it has sufficient authorized shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares. |
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| Adopted Accounting Pronouncements | Adopted Accounting Pronouncements
As more fully described above, on January 1, 2018, the Company adopted ASU No. 2014-9 using the full retrospective method, which requires reporting entities to apply the standard as of the earliest period presented in their financial statements.
In August 2016, the FASB issued ASU 2016-15 (Topic 230), "Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments". The new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. The adoption of this standard did not have a significant impact on its consolidated financial statements. |
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| Recently Issued Accounting Pronouncements | Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). ASU 2016-02 establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and annual and interim periods thereafter, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.
In July 2017, the FASB issued a two-part ASU No. 2017-11, I "Accounting for Certain Financial Instruments with Down Round Features" and II "Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception". The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements. |
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Summary of Significant Accounting Policies (Tables) |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of previously reported results |
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| Schedule of concentration of accounts receivable |
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Acquisition and Disposal (Tables) |
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| Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of allocation of purchase price |
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| Schedule of pro-forma consolidated results of operation |
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Disaggregation of Revenues (Tables) |
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| Revenue from Contract with Customer [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of disaggregate revenue |
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Investment (Tables) |
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| Payables and Accruals [Abstract] | |||||||||||||||||||||||||||
| Schedule of investments |
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Inventories (Tables) |
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| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of inventories |
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Notes Receivable and Other Income (Tables) |
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| Receivables [Abstract] | |||||||||||||||||||||||||||||||||||||||
| Schedule of notes receivable |
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Property & Equipment and Capital Lease Obligations (Tables) |
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| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of property and equipment |
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Goodwill and Intangible Assets (Tables) |
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| Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of carrying amount of goodwill |
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| Schedule of intangible assets |
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| Schedule of estimated future amortization of the intangible assets |
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Contract Assets and Liabilities (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contract Assets and Liabilities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of contract liabilities |
(1) See Note 15. "Commitments and Contingencies" for additional information. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Term Loan Credit Agreement (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | ||||||||||||||||||||||||||||||||||||
| Notes to Financial Statements | ||||||||||||||||||||||||||||||||||||
| Schedule of repayments of long-term debt |
|
|||||||||||||||||||||||||||||||||||
Commitments and Contingencies (Tables) |
12 Months Ended | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | ||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||
| Schedule of future minimum lease payments under non-cancelable operating leases |
|
Stockholders' Equity (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of warrant activity |
|
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| Summary of the outstanding warrant common stock equivalents |
|
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| Schedule of summary of stock option outstanding under various plans |
|
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| Summary of anti-dilutive activities excluded from basic and dilutive loss per share |
|
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| Schedule of shares used in calculating basic and diluted net income (loss) per share |
|
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Fair Value Measurements of Derivate Liabilities (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of liabilities measured at fair value on a recurring basis | The following table summarizes the liabilities measured at fair value on a recurring basis as of December 31, 2018:
The following table summarizes the liabilities measured at fair value on a recurring basis as of December 31, 2017:
|
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Income Taxes (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of reconciliation of expected tax expense (benefit) |
|
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| Schedule of deferred tax assets and liabilities |
|
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Segment Information (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of net sales and segment operating loss |
|
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Organization, Going Concern, Basis of Presentation, and Recent Development (Details) |
6 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|
|
Jun. 30, 2018
USD ($)
|
Dec. 31, 2018
USD ($)
integer
|
Dec. 31, 2017
USD ($)
|
Dec. 31, 2016
USD ($)
|
|
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||
| Cash and cash equivalents | $ 7,061,253 | $ 7,883,191 | $ 13,366,272 | |
| Line of credit agreement | $ 2,000,000 | 100,000 | ||
| Description of line of credit and variable interest rate | The Company entered into a $2.0 million line of credit agreement with a financial institution that is subject to annual renewal with a variable interest rate that it is based on a rate of 1% over what is earned on the collateral amount. The collateral amount established in the arrangement with the financial institution is $2.0 million. | |||
| Line of credit collateral amount | $ 2,000,000 | |||
| Concentration risk percentage | 30.00% | 40.00% | ||
| Number of vendor | integer | 1 | |||
Summary of Significant Accounting Policies (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Vapor sales, net | $ 6,281,198 | $ 5,910,697 |
| Grocery sales, net | 8,365,842 | 7,037,447 |
| Gross profit | 7,164,887 | 6,265,830 |
| Net loss | $ (13,163,261) | (9,874,879) |
| ASU Impact [Member] | ||
| Vapor sales, net | 43,496 | |
| Grocery sales, net | (56,447) | |
| Gross profit | (12,951) | |
| Net loss | (12,951) | |
| As reported [Member] | ||
| Vapor sales, net | 5,867,201 | |
| Grocery sales, net | 7,093,894 | |
| Gross profit | 6,278,781 | |
| Net loss | $ (9,861,928) | |
Summary of Significant Accounting Policies (Details 1) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|---|
| Accounts Payable and Accrued expenses | $ 1,301,418 | $ 951,528 | |
| Contract liabilities | 442,630 | 61,312 | $ 34,564 |
| Total current liabilities | 5,617,660 | 11,246,648 | |
| Accumulated deficit | (25,734,088) | (12,570,827) | |
| Total stockholders' equity | $ 8,426,769 | 444,298 | $ 2,508,256 |
| As reported [Member] | |||
| Accounts Payable and Accrued expenses | 1,050,599 | ||
| Total current liabilities | 11,284,407 | ||
| Accumulated deficit | (12,608,586) | ||
| Total stockholders' equity | 406,539 | ||
| ASU 2014-09 Impact [Member] | |||
| Accounts Payable and Accrued expenses | (99,071) | ||
| Contract liabilities | 61,312 | ||
| Total current liabilities | (37,759) | ||
| Accumulated deficit | 37,759 | ||
| Total stockholders' equity | $ 37,759 |
Summary of Significant Accounting Policies (Details 2) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Significant Accounting Policies [Line Items] | ||
| Concentration of risk, percentage | 30.00% | 40.00% |
| Customer A [Member] | Accounts receivable [Member] | ||
| Significant Accounting Policies [Line Items] | ||
| Concentration of risk, percentage | 27.00% | |
| Customer B [Member] | Accounts receivable [Member] | ||
| Significant Accounting Policies [Line Items] | ||
| Concentration of risk, percentage | 21.00% | |
| Customer C [Member] | Accounts receivable [Member] | ||
| Significant Accounting Policies [Line Items] | ||
| Concentration of risk, percentage | 19.00% | |
| Customer D [Member] | Accounts receivable [Member] | ||
| Significant Accounting Policies [Line Items] | ||
| Concentration of risk, percentage | 55.00% | |
Summary of Significant Accounting Policies (Details Textual) |
12 Months Ended | ||
|---|---|---|---|
|
Dec. 31, 2018
USD ($)
integer
|
Dec. 31, 2017
USD ($)
|
Dec. 31, 2016
USD ($)
|
|
| Summary of Significant Accounting Policies (Textual) | |||
| Cash in excess of FDIC limits | $ 250,000 | ||
| Financial institution amount | 6,000,000 | ||
| Contract liabilities from accrued expenses | $ 61,000 | ||
| Net loss and an immaterial impact | 13,000 | ||
| Shipping and handling costs | 101,000 | 100,000 | |
| Cash and cash equivalents | $ 7,061,253 | $ 7,883,191 | $ 13,366,272 |
| Number of operating segments | integer | 2 | ||
| Maximum [Member] | |||
| Summary of Significant Accounting Policies (Textual) | |||
| Identifiable intangible assets amortization period | 15 years | ||
| Property and equipment useful lives | 7 years | ||
| Minimum [Member] | |||
| Summary of Significant Accounting Policies (Textual) | |||
| Identifiable intangible assets amortization period | 3 years | ||
| Property and equipment useful lives | 2 years | ||
Acquisition and Disposal (Details 1) - Paradise Health and Nutrition and The Vitamin Store [Member] - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Business Acquisition [Line Items] | ||
| Net loss from continuing operations | $ (12,477,815) | $ (9,440,870) |
| Net loss per share: | ||
| Continuing operations | ||
| Discontinued operations | ||
| Net income (loss) per share basic and diluted | ||
| Weighted average number of shares outstanding | 42,696,521,421 | 26,199,887,696 |
| Vapor sales, net [Member] | ||
| Business Acquisition [Line Items] | ||
| Sales | $ 6,281,198 | $ 5,910,697 |
| Grocery sales, net [Member] | ||
| Business Acquisition [Line Items] | ||
| Sales | $ 14,800,909 | $ 13,616,530 |
Disaggregation of Revenues (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Disaggregation of Revenue [Line Items] | ||
| Total revenue | $ 14,647,040 | $ 12,948,144 |
| Vapor sales, net [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total revenue | 6,281,198 | 5,910,697 |
| Grocery sales, net [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total revenue | 8,365,842 | 7,037,447 |
| Food service/restaurant [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total revenue | 1,526,934 | 1,487,925 |
| Online/e-Commerce [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total revenue | 666,927 | 59,066 |
| Wholesale Grocery [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total revenue | 29,077 | 1,115 |
| Wholesale Vapor [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total revenue | 7,728 | 319,862 |
| Retail Grocery [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total revenue | 6,142,904 | 5,489,341 |
| Retail Vapor [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total revenue | $ 6,273,470 | $ 5,590,835 |
Investment (Details) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Investment | $ 90,857 | |
| Mark to Market [Member] | ||
| Investment | (59,143) | |
| Fair Value Measurements Using Quoted Prices in Active Market (Level 1) [Member] | ||
| Investment | $ 150,000 |
Investment (Details Textual) |
Dec. 31, 2018
USD ($)
shares
|
|---|---|
| Investment (Textual) | |
| Invested amount | $ | $ 150,000 |
| Investments on common stock shares | shares | 85,714 |
Inventories (Details) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Inventories: | ||
| Inventories, Total | $ 1,864,619 | $ 861,650 |
| Vapor Business [Member] | ||
| Inventories: | ||
| Inventories, Total | 425,062 | 386,593 |
| Grocery Business [Member] | ||
| Inventories: | ||
| Inventories, Total | $ 1,439,557 | $ 475,057 |
Inventories (Details Textual) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Inventory [Line Items] | ||
| Inventory write down | $ 281,116 | $ 392,071 |
| Independent Third Party [Member] | ||
| Inventory [Line Items] | ||
| Inventory write down | $ 300,000 | $ 700,000 |
Notes Receivable and Other Income (Details) |
12 Months Ended |
|---|---|
|
Dec. 31, 2018
USD ($)
| |
| Short-term Debt [Line Items] | |
| Interest Rate | 5.50% |
| Promissory Notes [Member] | |
| Short-term Debt [Line Items] | |
| Due Date | 9/6/2021 |
| Interest Rate | 7.00% |
| Loan Amount | $ 582,260 |
| Payments Received | 54,253 |
| Remaining Balance | $ 528,007 |
Notes Receivable and Other Income (Details Textual) - USD ($) |
12 Months Ended | |
|---|---|---|
Sep. 06, 2018 |
Dec. 31, 2018 |
|
| Notes Receivable and Other Income (Textual) | ||
| Other income | $ 500,000 | |
| Notes Payable, Other Payables [Member] | ||
| Notes Receivable and Other Income (Textual) | ||
| Promissory note term | 36 months | |
| Principal amount | $ 500,000 | |
| Secured notes | 82,260 | |
| Debt payments | $ 4,141 | |
| Bears interest rate | 7.00% | |
| Promissory Notes [Member] | ||
| Notes Receivable and Other Income (Textual) | ||
| Secured amount | $ 582,260 | |
| Vpr Brands [Member] | Promissory Notes [Member] | ||
| Notes Receivable and Other Income (Textual) | ||
| Secured amount | $ 582,260 |
Property & Equipment and Capital Lease Obligations (Details) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Property, Plant and Equipment [Line Items] | ||
| Property plant and equipment, gross | $ 1,076,248 | $ 983,277 |
| Less: accumulated depreciation and amortization | (579,209) | (393,771) |
| Total property and equipment | 497,039 | 589,506 |
| Displays [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property plant and equipment, gross | 316,380 | 370,092 |
| Furniture and fixtures [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property plant and equipment, gross | 266,216 | 239,855 |
| Leasehold improvements [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property plant and equipment, gross | 128,004 | 102,195 |
| Computer hardware & equipment [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property plant and equipment, gross | 129,876 | 114,930 |
| Other [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property plant and equipment, gross | $ 235,772 | $ 156,205 |
Property & Equipment and Capital Lease Obligations (Details Textual) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Property & Equipment and Capital Lease Obligations (Textual) | ||
| Depreciation expense | $ 200,000 | $ 200,000 |
Goodwill and Intangible Assets (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Goodwill and Intangible Assets Disclosure [Abstract] | ||
| Beginning balance | $ 481,314 | $ 481,314 |
| Goodwill from Acquisition | 956,000 | |
| Ending balance | $ 1,437,314 | $ 481,314 |
Goodwill and Intangible Assets (Details 2) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| For the years ending December 31, | ||
| 2019 | $ 481,136 | |
| 2020 | 480,511 | |
| 2021 | 473,511 | |
| 2022 | 458,126 | |
| 2023 | 217,823 | |
| Thereafter | 951,097 | |
| Total | $ 3,062,204 | $ 1,559,531 |
Goodwill and Intangible Assets (Details Textual) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Goodwill and Intangible Assets Disclosure [Abstract] | ||
| Weighted-average remaining amortization period | 8 years | |
| Amortization expense | $ 20,000 | $ 20,000 |
Contract Assets and Liabilities (Details) - USD ($) |
12 Months Ended | |||
|---|---|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|||
| Contract Assets and Liabilities [Abstract] | ||||
| Beginning balance as January 1, | $ 61,312 | $ 34,564 | ||
| Issued | 77,637 | 82,872 | ||
| Redeemed | (105,378) | (59,385) | ||
| Breakage recognized | 796 | 3,260 | ||
| Customer deposits | [1] | 408,263 | ||
| Ending balance as of September 30, | $ 442,630 | $ 61,312 | ||
| ||||
Contract Assets and Liabilities (Details Textual) |
12 Months Ended |
|---|---|
|
Dec. 31, 2018
USD ($)
| |
| Contract Assets and Liabilities (Textual) | |
| Sales of paid commissions amount | $ 180,000 |
Line of Credit (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Jun. 30, 2018 |
|
| Line of Credit (Textual) | ||
| Line of credit agreement | $ 100,000 | $ 2,000,000 |
| Variable interest rate | 3.00% | |
| Line of credit collateral amount | $ 2,000,000 | |
| Line of credit maturity date | Apr. 13, 2019 |
Term Loan Credit Agreement (Details) |
Dec. 31, 2018
USD ($)
|
|---|---|
| Year | |
| 2019 | $ 280,000 |
| 2020 | 280,000 |
| 2021 | 280,000 |
| 2022 | 280,000 |
| 2023 | 280,000 |
| Total | $ 1,400,000 |
Term Loan Credit Agreement (Details Textual) |
12 Months Ended |
|---|---|
|
Dec. 31, 2018
USD ($)
| |
| Notes to Financial Statements | |
| Debt instrument interest rate, percentage | 5.50% |
| Bears interest | 1.50% |
| Debt instrument face amount | $ 1,400,000 |
| Covenant description | The Credit Agreement contains a customary financial covenant for a minimum debt service coverage ratio of 1.25 to 1.0. |
| Credit agreement, description | The Credit Agreement provides for monthly principle payments of $22,333 commencing in January 2019 plus applicable interest, and mandatory prepayments with a portion of excess cash flow. |
Commitments and Contingencies (Details) |
Dec. 31, 2018
USD ($)
|
|---|---|
| Commitments and Contingencies Disclosure [Abstract] | |
| 2019 | $ 919,000 |
| 2020 | 754,000 |
| 2021 | 646,000 |
| 2022 | 569,000 |
| Total | $ 2,888,000 |
Commitments and Contingencies (Details Textual) - USD ($) |
1 Months Ended | 12 Months Ended | |
|---|---|---|---|
Aug. 17, 2018 |
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Commitments and Contingencies (Textual) | |||
| Rent expense | $ 732,000 | $ 741,000 | |
| Purchase obligation | $ 6,000,000 | ||
| Proceeds from purchase of assets | $ 2,000,000 | ||
| Exclusive distribution agreement description | The Company had a balance of $0.3 million from the purchase price advance the initial term of the Agreement is for one year with additional successive one-year renewals, subject to certain standard termination provisions. | ||
| Annual rental payments, description | The Company leases its Florida office and warehouse facilities under a three-year lease. The lease provides for annual rental payments, including taxes, of approximately $100,000 per year. The Company also leases its Vape and Grocery stores. | ||
| Fontem License Agreement [Member] | |||
| Commitments and Contingencies (Textual) | |||
| Percentage of royalty rate | 5.25% | ||
| Royalty expense | $ 59,000 | $ 21,000 | |
Stockholders' Equity (Details) - Warrant [Member] - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Number of Warrants | ||
| Warrants Outstanding, Beginning | 33 | 42 |
| Unit Purchase Agreement Issued UPOs | 3 | |
| Warrants exchanged pursuant to Series B Preferred Stock issuance | (33) | |
| Warrants exercised | 0 | (1) |
| Warrants repurchased | (8) | |
| Warrants Outstanding, Ending | 3 | 33 |
| Exercisable | 3 | |
| Weighted Average Exercise Price | ||
| Outstanding, Beginning | $ 1,520,919 | $ 1,736,000 |
| Unit Purchase Agreement Issued UPOs | (630,042) | |
| Warrants exchanged pursuant to Series B Preferred Stock issuance | 630,042 | |
| Warrants exercised | 1,523,947 | 320,540 |
| Warrants repurchased | 1,532,038 | |
| Outstanding, Ending | 1,522,692 | $ 1,520,919 |
| Exercisable | $ 1,520,692 | |
| Weighted Average Remaining Term (Yrs.) | ||
| Weighted Average Remaining Term (Yrs.), Beginning | 2 years 7 months 6 days | 3 years 7 months 6 days |
| Weighted Average Remaining Term (Yrs.), Ending | 1 year 7 months 6 days | |
| Weighted Average Remaining Term (Yrs.), Exercisable | 1 year 7 months 6 days | |
Stockholders' Equity (Details 1) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Equity [Abstract] | ||
| Warrants outstanding (A) | 2.7348 | 33.2198 |
| Black Scholes value (B) | 1,522,692 | 1,520,919 |
| Subtotal (C)=(A) x (B) | $ 4,164,258 | $ 50,524,625 |
| Closing bid stock price (D) | $ 0.0001 | $ 0.0001 |
| Warrant common stock equivalent (C)/(D) | 41,643,000,000 | 505,246,000,000 |
Stockholders' Equity (Details 2) - Stock Options [Member] - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Number of Options | ||
| Outstanding, Beginning | 87,155,008,480 | 5,001,000,004 |
| Options granted | 975,000,000 | 82,893,750,000 |
| Options exercised | (787,777,800) | (10,000,000) |
| Options forfeited or expired | (19,030,000,000) | (729,741,524) |
| Outstanding, Ending | 68,312,230,680 | 87,155,008,480 |
| Exercisable | 68,312,230,680 | |
| Weighted Average Exercise Price | ||
| Outstanding, Beginning | $ 0.0001 | $ 0.0001 |
| Options granted | 0.0001 | 0.0001 |
| Options exercised | 0.0001 | 0.0001 |
| Options forfeited or expired | 0.0001 | 0.0001 |
| Outstanding, Ending | 0.0001 | $ 0.0001 |
| Exercisable | $ 0.0001 | |
| Weighted Average Remaining Term (Yrs.) | ||
| Weighted Average Remaining Term (Yrs) Outstanding, Beginning | 9 years | 10 years |
| Weighted Average Remaining Term (Yrs) Outstanding, Ending | 8 years | 9 years |
| Weighted Average Remaining Term (Yrs), Exercisable | 8 years | |
Stockholders' Equity (Details 3) - shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Securities excluded from calculation of basic and dilutive income (loss) per share | 311,456,043,452 | 594,140,211,741 |
| Stock options [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Securities excluded from calculation of basic and dilutive income (loss) per share | 68,312,230,680 | 88,893,899,200 |
| Warrant [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Securities excluded from calculation of basic and dilutive income (loss) per share | 41,642,670,772 | 505,246,312,541 |
| Preferred Stock [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Securities excluded from calculation of basic and dilutive income (loss) per share | 201,501,142,000 | |
Stockholders' Equity (Details 4) - shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Equity [Abstract] | ||
| Basic | 42,696,521,421 | 26,199,887,696 |
| Effect of exercise stock options | ||
| Effect of exercise warrants | ||
| Diluted | 42,696,521,421 | 26,199,887,696 |
Fair Value Measurements of Derivate Liabilities (Details) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| LIABILITIES | ||
| Derivative liabilities – warrants | $ 1,722,928 | $ 10,231,697 |
| Total derivative liabilities – warrants | 1,722,928 | 10,231,697 |
| Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | ||
| LIABILITIES | ||
| Derivative liabilities – warrants | ||
| Total derivative liabilities – warrants | ||
| Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | ||
| LIABILITIES | ||
| Derivative liabilities – warrants | 1,722,928 | 10,231,697 |
| Total derivative liabilities – warrants | 1,722,928 | 10,231,697 |
| Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | ||
| LIABILITIES | ||
| Derivative liabilities – warrants | ||
| Total derivative liabilities – warrants |
Income Taxes (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Income Tax Disclosure [Abstract] | ||
| U.S. federal statutory rate | $ (2,764,285) | $ (3,353,056) |
| State and local taxes, net of federal benefit | (591,439) | (334,994) |
| Settlement of warrants | 10,122,599 | |
| Change in valuation allowance | (6,551,117) | (3,717,877) |
| True-up & deferred adjustment | 5,155 | 1,619 |
| Stock based compensation | 88,903 | 258,394 |
| Other permanent items | 7,882 | 5,697 |
| Forfeitures & expiration of stock comp | 45,915 | |
| Change in tax rate | 7,036,850 | |
| Other | (244,630) | 57,452 |
| Income tax provision (benefit) | ||
Income Taxes (Details 1) - USD ($) |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Current deferred tax assets: | ||
| NOL & AMT credit carryforward | $ 4,928,275 | $ 11,106,460 |
| Inventory reserves and allowances | 132,718 | 209,345 |
| Charitable contribution | 3,767 | |
| Stock based compensation | 1,480,412 | 1,712,623 |
| Net book value of intangible assets | 592,560 | 639,731 |
| Net book value of fixed assets | 6,727 | |
| Total current deferred tax assets | 7,133,965 | 13,678,653 |
| Current deferred tax liabilities: | ||
| Net book value of fixed assets | (6,429) | |
| Total current deferred tax liabilities | (6,429) | |
| Net current deferred tax assets | 7,177,432 | 13,678,653 |
| Valuation allowance | (7,177,432) | (13,678,653) |
| Net deferred tax assets |
Income Taxes (Details Textual) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Income Taxes (Textual) | ||
| Valuation allowance | $ 7,177,432 | $ 13,678,653 |
| Net operating loss carryforward expiration date | Dec. 31, 2034 | |
| Deferred tax assets | 20,700,000 | |
| Deferred tax assets, valuation allowance | $ 13,700,000 | |
| Description of deferred tax asset revalued | Due to the change in the federal tax rate from 34% to 21%, which in turn changes the effective state tax rate from 3.69% to 4.41%, the Company's gross deferred tax assets at December 31, 2017 of approximately $20.7 million were revalued to approximately $13.7 million with a corresponding offset to the valuation allowance. | |
| Income tax provision (benefit) | ||
| U.S. federal [Member] | ||
| Income Taxes (Textual) | ||
| Net operating loss carryforward | 21,100,000 | |
| State [Member] | ||
| Income Taxes (Textual) | ||
| Net operating loss carryforward | $ 11,100,000 | |
Segment Information (Details Textual) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Vapor [Member] | ||
| Segment Information (Textual) | ||
| Depreciation and amortization | $ 100,000 | $ 100,000 |
| Grocery [Member] | ||
| Segment Information (Textual) | ||
| Depreciation and amortization | $ 300,000 | $ 300,000 |