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MDBX > SEC Filings for MDBX > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for MEDBOX, INC.

Form 10-Q for MEDBOX, INC.


15-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Information in this Quarterly Report on Form 10-Q 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. 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 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 provide medicine-dispensing technology to clients who are involved in dispensing alternative medicine and conventional pharmaceuticals to end-users. Our systems provide control, accountability, and security. Since inception we have focused primarily on the medical marijuana marketplace. Based upon unsolicited inquiries from interested institutional entities we came to understand our technology could be applied to the broader pharmaceutical marketplace. While most individuals associate drug dispensing with pharmacies, whether freestanding or within a hospital setting, numerous other environments dispense pharmaceuticals and these organization, from urgent care facilities to drug rehabilitation, to hospice, to physician offices, to assisted living centers, to prisons, must wrestle with ways to make drugs available but control their distribution. Certain common pharmaceuticals are frequent targets for theft and misuse. 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.

We generate revenues from various sources including consulting services we provide to startup alternative medical marijuana clinics, sale of our medicine dispensing system and refrigerated add-on device, the sale of licensing rights, the sale of retail locations and the sale of territories. While to date we have waived monthly maintenance and recurring consulting fees for existing completed contracts, during 2014 we expect that we will earn fees from ongoing maintenance and consulting services provided to the purchasers of our machines. The continued success of our primary business will depend on states continuing to legalize the use of marijuana for medical purposes and, equally importantly, such states and the individual localities in such states, to the extent required by the applicable state legislation, adopting a corresponding process to license alternative medicine clinics to dispense the medical marijuana, as well as 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 $25,000 for each machine (including the POS system). To date most sales have been system sales that include a refrigerated unit that works with the Medbox which retails for between $15,000 and $25,000 depending on competitive pressures. 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. In addition, we also re-sell inactive dispensary locations that we acquire, which may include dispensary units and other hardware and furniture that are completely ready for operation. Gross margins on 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 has been undertaken.


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3. Other revenue includes sales of territory rights, sales of licenses and sales of existing retail locations. We enter in transactions with clients who are interested in buying existing retail locations, buying previously issued retail licenses or are interesting in developing certain territories independent of Medbox. Terms are each deal are varied and the sales arrangements may or may not include the future delivery of dispensing machines. We sometimes purchase inactive retail locations or license rights and resell them to new clients.

4. Continuing maintenance revenue. During 2014, we expect to begin billing for monthly ongoing support and equipment maintenance of varying amounts between $75 up to $495 per month per location in which our machines are installed, based on geographic area.

Three Months Ended March 31, 2014 and March 31, 2013

Results of Operations

Overview of Results. We reported a consolidated net loss of $1,259,422, for the three months ended March 31, 2014 and $330,380 for the three months ended March 31, 2013. The increase in net loss of $929,042 was primarily due to the change in legislation in San Diego, as discussed above, as well as the write off of Massachusetts inventoried license acquisition costs during the quarter. These events masked the success the Company had in selling both a completed retail dispensary location in Arizona and the sale of territory rights in Colorado to a non-affiliated shareholder of the Company. In addition, cost controls put in place in late 2013 resulted in significant reductions in operating expenses for the quarter as compared to the comparable quarter in 2013.

Revenues. Total revenues consisted of revenues from Medbox system sales, location build-outs fees, consulting fees collected by matching existing clients with new capital partners, sale of the exclusive rights for the sale of Medbox patented dispensing systems in a specific Colorado territory and consulting service fees, which are often bundled together in a single offering to clients. During the first three months of 2014, the revenue also includes the sales of vaporizers and accessories of the Company's subsidiary Vaporfection International, Inc. ("VII").

                                                                           $ Increase
      Revenue Description        March 31, 2014       March 31, 2013       (Decrease)
   Consulting                   $        119,497     $        545,522     $   (426,025 )
   Sale of locations and
   management rights, related
   party                                 650,000              200,000          450,000
   VII-Product sales                      25,053                    -           25,053
   Sale of territories,
   related party                         500,000              500,000                -
   -  Gross revenues                   1,294,550            1,245,522           49,028

   Allowances and refunds               (962,780 )                  -         (962,780 )
   Net revenues                 $        331,770     $      1,245,522     $   (913,752 )

Consulting revenue decreased 78.1% or $426,025 to $119,497 for the three months ended March 31, 2014, from $545,522 for the three months ended March 31, 2013. This change in revenue was due to the fact that the Company did not recognize any revenue for its San Diego market clients in the first quarter of 2014. In addition, due to delays in adopting final regulations in other states and the timing of application submittals for other states, revenue was not fully recognized for many of our clients.

Although the total change in gross revenue was relatively modest, the components of revenue changed significantly. The revenues from the sale of locations and management rights increased $450,000 to $650,000 for three months ended March 31, 2014 from $200,000 for the three months ended March 31, 2013. The current year revenue related to a sale of an Arizona location for $150,000 and the sale of a 50% interest in management rights for an Arizona location to a non-affiliated shareholder of the Company for $500,000.

In the first quarter of 2014 the Company sold exclusive rights to place the Medbox patented dispensing systems in Denver, Colorado for $500,000 to the same non-affiliated shareholder of the Company mentioned above in the management rights sale. There were no machines shipment attached to the agreement and no need to accrue for cost of machines. A similar transaction took place during the first quarter of 2013 when the Company sold exclusive rights to place the Medbox patented dispensing systems in the State of Michigan for $500,000 which included the possible shipment of 15 machines. The Company accrued as a cost of goods sold the amount of $300,000 related to this contract. In the fourth quarter of 2013, the Company reassessed the costs of the machines and adjusted the accrued amount to $150,000.


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In the first quarter of 2014, we sold $25,053 of vaporizer product and accessories through our VII operating subsidiary. The subsidiary was acquired on April 2, 2013. We expect to be able to release our newest portable vaporizer product for general availability during the third quarter of 2014.

Due to the change in business and legal environment in the San Diego market, the total number of licenses offered by the City of San Diego area was reduced from 130 to 32 based upon the approved legislation in late March 2014. As the result of the change in legislation in San Diego, we may not be able to perform on our contractual obligations for the clients who opted for the San Diego market and whose contracts included refund provisions in the event the client does not receive a license. During the first quarter of 2014, we negotiated payments in the first quarter totaling $88,000 and reduced accounts receivable for $90,000 for certain clients in the San Diego market which reduced revenue through an increase in our provision for sales allowances of $178,000. In addition we estimated the amount of future revenue reductions, aggregate refunds and accounts receivable write-off that would be expected to occur for other clients wanting to get licenses in the San Diego market. As a direct result of the reduction in available licenses and tighter zoning restrictions, the Company recorded an additional provision for sales allowances of $784,780 in the quarter related to the reversal of past revenue recognized on San Diego contracts. In addition, the Company recorded a provison for doubtful accounts in the amount of $561,855 and a. provision for customer refundsof $222,925 expected to be paid for those clients which we estimated will not be successful in obtaining a license. Provisions for sales allowances is disclosed as a separate line in the Consolidated Statements of Operations in order to increase understandability for users. There were no such events in 2013 . During the first quarter of 2013 the Company recognized revenue for work performed on various contracts in the amount of $540,000 from the contracts with clients who applied for licenses for San Diego locations prior to the change in the legislation. The Company has applied for licenses in this market and currently believes it is in position to proceed with the steps necessary with the local government to procure up to eight licenses for clients paying a premium due to the limited number of licenses being issued.

Cost of revenues. Our cost of revenues includes systems costs for our systems sales and construction, build-out, licenses or rights repurchased from old clients and resold to new clients, and permits for our consulting activities. Also during the three months ending March 31, 2014 cost of revenue included costs associated with our Vaporfection International, Inc. subsidiary which included the product cost of vaporizers and accessories, the fulfilment activities associated with sales orders and the Company's purchasing department. These costs did not exist in the first three months of 2013.

We had cost of revenues of $891,920 for the three months ended March 31, 2014 and $620,060 for the three months ended March 31, 2013. Cost of revenues increased $271,860 or 43.8% primarily due to the following four factors.

As described above, the costs of revenue of the Company's subsidiary VII did not exist during the three months ended March 31, 2013. For the three months ended March 31, 2014 the cost of goods sold of VII added $65,167 to the consolidated cost of revenue.

The second factor relating to the increase in costs of revenue was the write off of the costs accumulated for the development of the Massachusetts market in the first quarter of 2014. The Company holds in its inventory the capitalized costs incurred during development of new markets. These are charged to cost of revenues after finalizing work on the consulting agreements for specific market by allocation of total capitalized costs to the number of clients/licenses in the specific market. In late January 2014 the announcements for awarding licenses for dispensaries in Massachusetts were issued; according to which the Company did not obtain any licenses in that state. As a result, the inquired costs for developing the market of Massachusetts were expensed as a "write off charge" to cost of revenues in January 31, 2014 in the amount of $259,782.

As a direct link between revenues and costs of revenues, the Company incurred $363,374 in increased costs associated with procuring management rights and locations in order to generate the $450,000 increase in revenues from sale of locations and management rights for three months ended March 31, 2014 compared to three months ended March 31, 2013.

The costs for construction and build outs decreased $265,793 during three months ended March 31, 2014 compared to three months ended March 31, 2013. This decrease was due to the fact that in the first quarter of 2013 the Company supported build-out costs for locations of our clients in Arizona. There were no build-outs in progress during first three months of 2014. In addition, because no build-outs existed in the first quarter of 2014, the outside services and legal costs related to build-out expenses incorporated in the costs of revenue decreased by $55,134 to $13,427 for the three months ended March 31, 2014 from $68,561 incurred during three months ended March 31, 2013.


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Operating Expenses. Operating expenses, consist of all other costs incurred during the period other than cost of revenues. Operating expenses were $712,924 for three months ended March 31, 2014 a decrease of $242,510 or 25.4% as compared to $955,434 for the same period of 2013. The decrease in operating expenses of $242,510, or approximately 25%, was primarily due to a decrease in selling and marketing expenses and a decrease in general and administrative expenses which were part of a tighter rein on 3rd party legal and marketing costs and were offset by the first time inclusion of the operating cost of VII which was acquired on April 1, 2013. Similar to revenue and costs of revenue aforementioned, the Company did not have in the first quarter of 2013 the operational expenses related to VII activity, which added $113,278 to the total of operating expenses incurred during the three months ended March 31, 2014. If we exclude the VII operating expenses "the comparable" company's operational expenses decreased $355,788 for three months ended March 31, 2014 compared to the same period of 2013.

Selling and marketing expenses

Sales and Marketing expenses. Sales and marketing include professional public relations and promotion, purchased advertising, travel and entertainment and outside services for sales and marketing consultants and sales lead generation. Our sales and marketing expenses for the three months ended March 31, 2014 and 2013, were $141,554 and $254,252, respectively. Sales and marketing expenses for three months ending March 31, 2014 and 2013 represents 10.9% and 20.4% respectively, of gross revenues, before the provision of sales returns. The changes occurred during the three months period ended March 31, 2014 and 2013 are summarized and described below.

                                                                              $ Increase
      Description of Change         March 31, 2014       March 31, 2013       (Decrease)
 VII sales and marketing expense   $         42,048     $              -     $     42,048
 Lead generation-Kind Clinics                     -              113,613         (113,613 )
 Public relations firm expense                    -               20,550          (20,550 )
 Added a sales manager                       27,837                    -           27,837
 Reduction in sales consultants              43,022               81,919          (38,897 )
 Not explained                               28,637               38,170           (9,533 )
 Total sales and marketing         $        141,544     $        254,252     $   (112,708 )

During three months ended March 31, 2014 the Company incurred $42,048 in marketing and sales expenses related to VII activity, there were no similar expense during three months ended March 31, 2013.

The change is mostly due to the one-time event during first quarter of 2013 when company incurred expenses for sales and marketing support and leads generation from Kind Clinics in the amount of $113,613, a related party.

Also during the year 2013 the Company incurred $20,550 in expenses for the services of a public relations company to promote its image and increase lead generation, there were no such expense in the first quarter of 2014.

To perform the day-to-day marketing operations the company uses independent contractors. The Company reduced the sales and marketing expense related to independent contractors by $38,897 for the three months ended March 31, 2014 compared to the same period of 2013.

Also the Company incurred costs for a head of sales, for an additional expense of $27,837 in the three months ended March 31, 2014. There were no such similar expense in the same period of 2013.

Research and development

Research and development consists of engineering work done on the software enhancements of the Medbox. This work is funded in connection with an affiliate company of Vincent Mehdizadeh. Our research and development expenses for the three months ended March 31, 2014 and 2013, were $8,000 and $8,500, respectively, and represent the Company's contribution to investments in developing of a new tracking technologies for cultivation facilities that we intend to sell to clients as a package with their consulting agreement. In addition the Company believes that this software will give our clients a competitive advantage in the process of applying for licenses for cultivation facilities.


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General and administrative

General and administrative expenses are those related to day-to-day activity and management. These expenses include legal, lobbying, accounting, payroll, consulting and other costs. General and administrative expenses were $563,370 during the three months period ended March 31, 2014 a decrease of $129,312 or 18.7%, from $692,682 during the three months ended March 31, 2013. The changes occurred during the three months period ended March 31, 2014 and 2013 are summarized and described below.

                                                                           $ Increase
     Description of Change       March 31, 2014       March 31, 2013       (Decrease)
   Initial reporting of VII
   expenses                     $         71,230     $              -     $     71,230
   Legal costs                            74,960              145,572          (70,612 )
   Professional accounting
   services                               35,448                    -           35,448
   Fund raising consultants               23,105               80,000          (56,895 )
   Investor relations
   expenses                               12,582                    -           12,582
   Rent expense                           50,652               14,021           36,631
   Lobbying costs                         22,700               53,873          (31,173 )
   Management fee - Vincent
   Chase, Inc.                            37,500               75,000          (37,500 )
   Management fee - Kind
   Clinics                                     -               61,019          (61,019 )
   Not explained                         235,193              263,197          (28,004 )
   Total sales and marketing    $        563,370     $        692,682     $   (129,312 )

During three months ended March 31, 2014 the Company had an increase of $71,230 in general and administrative expenses related to VII activity as there were no similar expenses during three months ended March 31, 2013.

One of the most significant changes represents the reduction of $70,612 in legal costs for the three months ended March 31, 2014 of $74,960 compared to $145,572 for the three months ended March 31, 2013. This is mostly due to two factors. Firstly, the Company incurred $114,147 in legal cost related to the lawsuit on the behalf of the Company's Arizona clients, this matter was finalized in 2013 and had no comparable costs in 2014. Secondly, in the process of becoming a public company in order to comply with the related requirements, the Company incurred additional expenses related to SEC filings in the amount of $49,543, there were no such expenses for the three months ended March 31, 2013.

In addition, in order to comply with SEC requirement regarding financial reporting, corporate governance and internal control the Company incurred additional expenses for the three months ended March 31, 2014 for professional accounting services in the amount of $35,448, there were no such expenses during the three months ended March 31, 2013.

During the three months ended March 31, 2014 the Company significantly decreased the expenses related to fund raising consultants by $56,895 to $23,105 as of March 31, 2014 from $80,000 incurred for the three months ended March 31, 2013. However, during the same period of 2014, the Company incurred additional investor relations expenses in the amount of $12,582, there were no such expenses during first three months of 2013.

The rent expense during three months ended March 31, 2014 increased by $36,631 to $50,652 from $14,021 for three months ended March 31, 2013. This change is due to the fact that the Company increased the leased space which led to monthly rent increase from $5,303 to $14,396. Also during the three months ended March 31, 2014, the Company incurred $3,566 in rent expense for our Arizona office, there were no such expense during the same period of 2013.

Due to the fact that some lobbying relationships were transferred to the majority owner of the Company, the lobbying expenses decreased by $31,173 for the three months ended March 31, 2014 to $22,700, compared to $53,873 incurred during three months ended March 31, 2013.

A significant reduction of general and administrative expenses of $12,500 per month is due to the reduction in the fees from $25,000 to $12,500, paid for management consulting to Vincent Chase, Inc., a related party company. This led to savings of $37,500 for the first quarter of 2014 compared to the same period of 2013.

During the three months ended March 31, 2013 the Company incurred $61,019 in consulting fees paid to one of its founders and shareholders, there were no such expenses during first quarter of 2014.

The Company expects that its general and administrative expenses will increase during 2014 as we add additional management talent and build out our infrastructure to comply with public company reporting requirements.


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Gross Margin

Due to changes described above the Gross Margin decreased by $1,185,612 or 189.6% resulting in a gross loss of $560,150 for the three months ended March 31, 2014 compared to a gross profit of $625,462 for the three months ended March 31, 2013. This change can mainly be attributable to the Massachusetts write off in the amount of $259,782 and the creation of provision for sales returns related to the San Diego legislative changes in the amount $784,780 during three months ended March 31, 2014. None of similar events happened during the same period of 2013.

Net Loss

As a result of the above factors our net loss increased $929,042, or 281.2%, from a loss of $330,380 for the three months ended March 31, 2013 to a loss of $1,259,422 for the three months ended March 31, 2014.

Liquidity and Capital Resources

Cash Flows - Operating Activities

During three months ended March 31, 2014, cash flows used in operating activities were $430,373, consisting primarily of a net loss of $1,259,422, increases in accounts receivable of $194,810, prepaid expenses and deposits of $172,317, decrease in accounts payable and accrued expenses of $62,628 and offset by reduction in inventory of $200,298 and adjustment of sales allowances of $962,780. During the three months ended March 31, 2013 cash flows provided by operating activities were $539,943, consisting of a net loss of $330,380.

Cash Flows - Investing Activities

During the three months ended March 31, 2014, cash flows used in investing activities were $154,748, consisting primarily of purchase of property and equipment of $36,484 and purchase of intangible assets related to domain name and patents of $103,264. During the three months ended March 31, 2013, cash flows used in investing activities were $1,514,172, consisting primarily of $1,475,850 in advances for investments.

Cash Flows - Financing Activities

During three months ended March 31, 2014, cash flows provided by financing activities were $2,394,874, consisting primarily of $2,442,859 of proceeds from issuance of common stock, and $122,135 from short term loan, offset by payments on related party notes payable of $95,120 and payments on notes payable of $75,000. During the three months ended March 31, 2013, cash flows provided by financing activities were $ 992,248 which consisted of $1,425,328 of proceeds . . .

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