Form 10-Q/A for MEDBOX, INC.
16-Mar-2015
Quarterly Report
Information in this Quarterly Report on Form 10-Q/A may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different than the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.
Examples of forward-looking statements include, but are not limited to, statements regarding our proposed services, market opportunities and acceptance, expectations for revenues, cash flows and financial performance, and intentions for the future. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” in the Company’s Registration Statement on Form 10 Amendment 2 filed with the Securities and Exchange Commission (the “SEC”) on May 13, 2014 and any amendment thereto. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Quarterly Report on Form 10-Q/A will in fact be accurate. Further, we do not undertake any obligation to publicly update any forward-looking statements, except as may be required under applicable securities laws. As a result, you should not place undue reliance on these forward-looking statements
Overview
We are a leading dispensary infrastructure and licensing specialist, patented technology provider, and partner to the cannabis industry. We offer our patented systems, software and consulting services to pharmacies, alternative medicine dispensaries and local governments in the U.S. and provide medicine-dispensing and compliance technology to clients who are involved in dispensing alternative medicine to end-users. Our systems provide control, accountability, and security. In addition, we provide business opportunities to interested entrepreneurs that want to get involved in the industry by allowing them to participate in the management functions of the dispensary, or being a member of the governing body of the dispensary’s corporate entity, or even own the real estate that houses the dispensary or cultivation facility. Since inception we have focused primarily on the medical marijuana marketplace. Our products and services are directed to help these facility operators gain greater control over these drugs while allowing dispensing in a more economical and controlled manner. In addition, in April of 2013, we purchased Vaporfection International, Inc. which has an award winning tabletop model vaporizer and is about to introduce a portable vaporizer.
We generate revenue from various sources including consulting services we provide to medical marijuana entrepreneurs, sale of our medicine dispensing technologies, the sale of licensing rights, the sale of management rights, the development and sale of geographic territories, referral fees and revenue sharing from real estate transactions with partners, revenue from providing monthly auditing and accountability support to dispensary operators and the sale of vaporizers and certain limited accessories. The continued success of our primary business will depend on states continuing to legalize the use of marijuana for medical purposes and, equally important, having such states and the individual localities in such states, to the extent required by the applicable state legislation, adopt a corresponding process to both license alternative medicine clinics for dispensing the medical marijuana and licensing cultivation facilities required to grow the plant. The success of our business will require a continuation of the current federal policy of not enforcing the federal prohibition on the use of marijuana in states that have legalized it.
Our current revenue model consists of the following income streams:
1. Consulting fee revenues. This revenue stream is a consistent component of our current and anticipated future revenues and is negotiated at the time of the contract. In jurisdictions where there is intense competition for a limited number of licenses, we believe the Medbox model, with its incorporated security measures, promotes a distinct advantage in the application selection process in the states where an applicant is graded on the ability to demonstrate compliance.
2. Revenues on dispensary unit and vaporizer sales. Medbox machines retail for approximately $50,000 for each machine set (including the POS system). In addition, many consulting contracts bundle the sale of the dispensary units within the scope of deliverables to be provided that might also include location build out costs Gross margins on our tabletop vaporizer sales and accessories are expected to initially average out to a net loss position due to initial higher manufacturing costs prior to the cost reduction process that we have undertaken. Our introduction of our portable miVape product in the second quarter of 2015 is expected to provide a cost effective product with industry standard margins while providing significant value to the customer.
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3. Other revenue includes sales of territory rights, sales/leases of management rights of newly awarded dispensary licenses, and sales/leases of management rights of newly acquired dispensary licenses and physical locations. We enter in transactions with clients who are interested in being granted the right to have us engage exclusively with them in certain territories (which we describe as territory rights), operating existing dispensary locations and buying previously issued dispensary licenses. Terms for each deal are varied and the sales arrangements typically include the delivery of our dispensing technology and dispensary location build-out. We will also seek to enter into contracts to assign exclusive management rights we have been granted by licensees under management rights agreements for retail, dispensary, or cultivation centers which we have facilitated the granting of licenses for.4. Revenue from referral fees and revenue sharing from real estate transactions with partners. The Company expects to generate revenue from matching its clients with a real estate financing partner to facilitate property purchases and subsequent leasebacks to our clients at a premium to market rates due to the sensitive use (in particular, marijuana retail (sale for recreational purposes), dispensary (sale for medical purposes) and cultivation (marijuana growth and production of marijuana edibles) contemplated to be operated at the leased location. The Company currently has a real estate referral arrangement with MJ Holdings, entered into in May 2014, whereby MJ Holdings issues warrants to purchase shares of its common stock on a monthly basis to the Company during the term of the arrangement and the Company in turn refers industry specific real estate transactions to MJ Holdings in exchange for a 50/50 income sharing split. The agreement is not limited to any specific geographic area. The agreement has an initial 6 month term and will renew automatically for successive one month terms subject to the right of either party to terminate the agreement upon 5 days’ written notice.
5. Revenue from the matching of joint venture participants with soon to be licensed dispensaries. The Company expects to generate revenue from clients that wish to participate in the industry and have traditional business background, experience, and strong ties to the state in question where the application is being made. Fees vary in each market area.
6. Revenue from providing monthly compliance and accountability support to dispensary operators. The Company expects to generate revenue from providing monthly compliance and accountability support to dispensary operators. Such services will entail bi-weekly onsite reviews of client dispensaries to ensure regulatory compliance, transaction and taxation reporting transparency, and adherence to state licensing guidelines for licensing renewal purposes. Fees will vary in each market area. The Company expects to provide such services based upon internal standards we have established which we believe, if properly followed, will greatly aid the location licensee in its compliance with state and local laws concerning operations of the location. The Company will not require a specific license to provide such services
The Company reported a consolidated net loss of $3,796,532 for the three months ended September 30, 2014 and $1,011,002 for the three months ended September 30, 2013. The increase in net loss of $2,785,530 was primarily due to a few key factors related to the reduction in revenue and increase in operating expenses. Revenue was down for the current period partially due to delays in adoption of final regulations in certain states and delays in approving license applications. Additionally, the Company’s revenue model is significantly different in the third quarter of 2014 as compared to third quarter of 2013. This difference is mainly due to the fact that the Company is moving away from the business model of obtaining licenses for clients for a one-time upfront fee. The Company is in the process of modifying its business model to provide ongoing management and support services for clients so that the consulting contract would continue in perpetuity. During the transition period to a new business model, expenses to secure new contracts and licenses are incurred and revenue is deferred principally until new licenses are obtained and new dispensaries and cultivation centers begin operating.
During the third quarter of 2014, the Company hired a new CEO and introduced a new stock compensation plan to attract new talent to the Board of Directors and the management team which added to operating costs including stock compensation expense of $1 million for the quarter. Other causes of operating expense increases were higher bad debt expense, increased public company expenses, higher insurance costs, and increases in sales and marketing expenses related to additional sales staffing, product promotion and lobbying cost increases.
Revenue
Total revenue consisted of revenue from consulting agreements, sale of locations
and management rights and finder's fees which are often bundled together in a
single offering to clients and revenue from sales of vaporizers and accessories
of the Company's subsidiary Vaporfection International, Inc. ("VII").
For the three For the three
months ended months ended
September 30, September 30, Increase
Revenue Description 2014 2013 (Decrease)
Consulting agreements $ 40,455 $ - $ 40,455
Delivery of facilities 1,265,313 (1,265,313 )
Sale of territories, related party 25,192 - 25,192
Finder's fee 91,600 - 91,600
VII-Product sales 15,829 48,865 (33,036 )
Gross revenues 173,076 1,314,178 (1,141,102 )
Net revenues $ 173,076 $ 1,314,178 $ (1,141,102 )
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Consulting revenue for the three months ended September 30, 2014 increased $40,455 compared to the three months ended September 30, 2013, as there was no consulting revenue recognized in the corresponding period of the prior year.
Delivery of facilities
Revenue for the three months ended September 30, 2013 resulted from the recognition of revenue due to the achievement of milestones and delivery of operating facilities to the clients in Arizona. There were no deliveries in the corresponding period in 2014.
A Company client obtained a provisional license in the state of Oregon but because of delays with local permits for interior build-outs the Company was not able to finalize the delivery of the facility to the client during the third quarter of 2014. The work on the Oregon location and delivery of the location to the client is expected to be finalized in the second quarter of 2015.
Sale of territories, related party
In the first six months of 2014, the Company entered into a sale for exclusive rights to place the Medbox patented dispensing systems in Denver, Colorado to a related party, for which the related party paid $500,000. This $500,000 is being recognized over the five year term of the agreement, with $25,192 recognized as revenue in the three months ended September 30, 2014.
There was no similar revenue in the comparable period of 2013.
In the third quarter of 2014, the Company sold $15,829 of vaporizer products and accessories through our VII operating subsidiary compared to $48,865 during three months ended September 30, 2013. We expect to be able to release our newest portable vaporizer product for general availability late in the second quarter of 2015. We expect the new vaporizer product to restore sales volumes for this product line in 2015.
During the second quarter of 2014, the Company entered into an agreement with MJ Holdings, Inc., a publicly traded company that provides real estate financing and related solutions to licensed marijuana operators. Medbox agreed to market MJ Holdings’ real estate financial products and offerings to its consulting clients and agreed to direct all incoming real estate related opportunities to MJ Holdings (for details see also note to financial statements, Note 11). Revenue recognized in three months ended September 30, 2014 related to this agreement was $91,600. There were no similar revenues for the three months ended September 30, 2013.
Cost of revenue
Our cost of revenue includes costs to obtain permits and licenses along with costs for our systems sales and construction, build-out, licenses or rights repurchased from former clients and resold to new clients and costs associated with our Vaporfection International, Inc. subsidiary which includes the product cost of vaporizers and accessories, the fulfillment activities associated with sales orders and the Company’s purchasing department.
For the three For the three
months ended months ended
September, 30 September, 30 Increase
Costs of Revenue 2014 2013 (Decrease)
Cost of inventory $ 1,070,165 $ 264,925 $ 805,240
Construction and build-outs - 1,230,377 (1,230,377 )
VII-Product cost 42,512 73,252 (30,740 )
Re-valuation of vaporizer inventory 329,154 - 329,154
Charge for abandoned site 100,000 - 100,000
Charges from escrow deposits 195,712 - 195,712
Other costs of revenue 76,019 72,941 3,078
Total costs of revenue $ 1,813,562 $ 1,807,030 $ 6,532
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Cost of inventory
Cost of inventory increased during the third quarter of 2014 to due to the costs associated with developing the new markets in San Diego, Illinois, Washington, Nevada and Oregon as compared to the same period of 2013 when the Company charged to the cost of inventory $264,925 for two locations sold.
Constructions and build-outs
During the third quarter of 2013, the Company reached milestones and delivered operating facilities to the clients in Arizona and incurred the related cost of revenue. There were no similar milestone achievements and deliveries in the corresponding period in 2014.
VII-Product cost
For the three months ended September 30, 2014, the cost of goods sold of VII was $45,512 compared to $73,252 for the three months ended September 30, 2013. Cost of goods sold includes costs associated with shipping and storing the product along with personnel assigned the function to manage the inventory. The reduction in VII product cost of $30,740 is due exclusively to reduction in VII sales.
Re-valuation of vaporizer inventory
During the third quarter of 2014 the Company wrote down slow moving, older models of vaporizer inventory with a charge to cost of revenue of $329,154.
Charge for abandoned site
During third quarter of 2014, one of the Company’s subsidiaries – MJ Property Investments, Inc. allowed the escrows to expire on two real estate purchase agreements with an aggregate purchase price of $2,500,000. As a result the Company forfeited $100,000 in earnest money due to unfavorable terms demanded by the sellers to extend the escrow and closing date.
During 2014, the Company entered into numerous real estate contracts to secure locations in connection with the licensing process. The contracts allow the Company to demonstrate to licensing authorities that the locations are available for use as a dispensary or cultivation location. The contracts are generally structured with an escrow deposit, a deferred closing until a license is granted and periodic withdrawals from the deposit to compensate the seller for holding the property off the market in escrow during the pendency of the license application. The periodic transfers out of escrow to the seller are in some cases creditable towards the purchase price but in most cases represent charges in lieu of rent. The charges in lieu of rent and other non-refundable charges paid to property sellers have been recorded as expense in the statement of operations in the amount of $195,712 for the three months ended September 30, 2014.
Operating Expenses
Operating expenses consist of all other costs incurred during the period other than cost of revenue. The Company incurred $2,365,130 in operating expenses for the three months ended September 30, 2014 compared to $641,741 for the three months ended September 30, 2013. The increase of $1,723,389 was primarily due to introduction of the new stock based compensation plan. As noted above, during the third quarter of 2014, the Company introduced a new stock compensation plan to attract new talent to the Board of Directors and the management team which added $1,031,640 in stock compensation expense for the quarter. Other factors which contributed to the increase in operating expenses were increase in selling and marketing expenses of $228,068, increases in general and administrative expense of $430,291 and increases in research and development expenses of $33,390.
Sales and Marketing expenses
Sales and marketing expenses include public relations and promotion, lobbying, purchased advertising, travel and entertainment and outside services for sales and marketing consultants and sales lead generation. The Company incurred $319,204 and $91,136 in sales and marketing expenses for the three months ended September 30, 2014 and 2013, respectively. The expense increased by $228,068 in the third quarter of 2014 compared to the third quarter of 2013. The expenses incurred during the three month periods ended September 30, 2014 and 2013 are summarized and described below.
For the three For the three
months ended months ended
September, 30 September, 30 Increase
Change in, 2014 2013 (Decrease)
Promotions and purchased advertising $ 185,193 $ 17,668 $ 167,525
Lobbying 18,500 - 18,500
Public relationship expense - 7,800 (7,800 )
Employee costs 60,063 - 60,063
Independent contractors costs 23,540 48,297 (24,757 )
Outside services 390 7,935 (7,545 )
Meetings, conferences and trade shows 20,483 9,436 11,047
Other 11,035 - 11,035
Total sales and marketing $ 319,204 $ 91,136 $ 228,068
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The Company incurred lobbying expenses in the second quarter of 2014 in the amount $18,500 in order to promote the Company in states/markets of interest and to participate in the development of new regulations. The Company utilized more lobbying firms in 2014 and reduced public relations expense in a focused effort to secure new licenses.
To perform day-to-day marketing operations, the Company uses independent contractors who are managed by a sales executive who is a Company employee. The employment of a sales executive in 2014 led to additional costs of $60,063 for the three months ended September 30, 2014. There were no similar costs in the third quarter of 2013. Better management and supervision of independent contractors and in-house expertise allowed the Company to reduce the cost of independent contractors by $24,757 to $23,540 for the three months ended September 30, 2014 compared with $48,297 for the same period of 2013.
During the three months ended September 30, 2014, the Company incurred increased expenses for meetings, conferences and trade shows in the amount of $11,047. This additional expense allowed the Company to promote its products and services to a broad range of possible clients at more specialized events. Other sales and marketing expenses for the three months ended September 30, 2014 consist mainly of employee benefit costs and other expenses. There were no similar expenses for the same period of 2013.
Research and development consists of engineering costs for software enhancements to Medbox machines, additional research on vaporizers and patent related expenses. Our research and development expenses for the three months ended September 30, 2014 and 2013, were $61,623 and $28,233, respectively. Costs increased due to the Company’s investment in developing new tracking technologies for cultivation facilities that we intend to sell to clients as a package with their consulting agreements, upgrading the POS and software for the new generations of the dispensing machines and patent attorneys fees to manage and apply for patents to protect the Company’s intellectual property.
General and administrative
General and administrative expenses include costs associated with being a public company, legal, lobbying, accounting, payroll, consulting, rent and other costs. The Company’s general and administrative expenses for the three months ended September 30, 2014 increased by $430,291 to $1,031,640 compared to $522,372 for the three months ended September 30, 2013. The expenses incurred during the three month periods ended September 30, 2014 and 2013 are summarized and described below:
For the three For the three
months ended months ended
September, 30 September, 30 Increase
Change in, 2014 2013 (Decrease)
VII general and administrative expenses $ 37,434 $ 57,663 $ (20,229 )
Bad debt expense 123,600 - 123,600
Costs of being public 116,490 18,403 98,087
Fund raising consultants 50,833 36,075 14,758
Legal costs 110,976 71,537 39,439
Lobbying costs - 21,791 (21,791 )
Professional accounting services 41,313 42,125 (812 )
Employee costs 97,504 53,824 43,680
Independent contractors costs 97,119 30,004 67,115
Management fee - Vincent Chase, Inc. 75,000 75,000 -
Insurance 43,469 - 43,469
Rent expense 53,114 48,069 5,045
Charity and donations 1,500 10,300 (8,800 )
Other (sum of smaller accounts) 104,311 57,581 46,730
Total general and administrative 952,663 $ 522,372 $ 430,291
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MAPH Enterprises, LLC | (305) 414-0128 | 1501 Venera Ave, Coral Gables, FL 33146 | new@marijuanastocks.com
