Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MDBX > SEC Filings for MDBX > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for MEDBOX, INC.

Form 10-Q for MEDBOX, INC.


14-Aug-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 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 has been undertaken. Our introduction of our portable miVape product in late third quarter of 2014 is expected to provide a cost effective product with industry standard margins while providing significant value to the customer.

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 operating existing dispensary locations, buying previously issued dispensary licenses, or are interested in developing certain territories with the assistance of Medbox. Terms for each deal are varied and the sales arrangements typically include the delivery of our dispensing technology and dispensary location build-out.


Table of Contents

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 contemplated to be operated at the leased location. The Company currently has a real estate referral arrangement with MJ Holdings 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.

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 auditing and accountability support to dispensary operators. The Company expects to generate revenue from providing monthly auditing and accountability support to dispensary operators through Medbox's Advisory & Audit Oversight Committee (AAOC). Services entail bi-weekly onsite audits of client dispensaries to ensure regulatory compliance, transaction and taxation reporting transparency, and adherence to state licensing guidelines for licensing renewal purposes. Fees vary in each market area.

Comparison of the three months ended June 30, 2014 and 2013

Overview of Results

The Company reported a consolidated net loss of $1,480,259 for the three months ended June 30, 2014 and net income of $465,480 for the three months ended June 30, 2013. The decrease in net income of $1,945,739 was primarily due to a few key factors related to the reduction in revenue and the increase in certain identified costs. Revenue was down for the current period as delays in adoption of final regulations in certain states and the ultimate timing of the application process in states with final regulations reduced and delayed the opportunity to apply for new licenses and consequently delayed the notice of the results of any license application made. In addition, revenue was further reduced by additional sales allowances and refunds recorded due to a legislative change in the San Diego market area which reduced the ability of certain clients to obtain licenses and triggered certain contract refunds. Operating costs increases relating to increases in bad debt provisions on certain accounts receivable, increases in research and development expenses that in comparable periods were often paid directly by an affiliate but now is being incurred directly by the Company and increases in sales and marketing expenses related to additional sales staffing, product promotion of vaporizers and lobbying cost increases to better understand individual states' regulations.

Revenue

Total revenue consisted of revenue from Medbox system sales, location build-outs
fees, referral fees and revenue sharing from real estate transactions with
partners, sale of the territory rights and consulting service 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 months
                                      ended         For the three
                                     June, 30       months ended        Increase
         Revenue Description           2014         June, 30 2013      (Decrease)
      Consulting agreements        $          -     $   1,555,268     $  (1,555,268 )
      Sale of locations and
      management rights                 220,000                 -           220,000
      VII-product sales                  15,916            19,552            (3,636 )
      Sale of territories               100,000                 -           100,000
      Finder's fee                       98,532                 -            98,532
      Gross revenue                     434,448         1,574,820        (1,140,372 )
      Allowances and refunds           (266,930 )               -          (266,930 )
      Net revenue                  $    167,518     $   1,574,820     $  (1,407,302 )

Consulting Revenue

The revenue for the three months ending June 30, 2014 decreased $1,555,268 compared to three months ended June 30, 2013. Revenue of $700,000 was recorded in the second quarter of 2013 from a single client for the sale of a new location in Arizona. The decrease in this type of revenue is mainly due to the fact that local government decisions on license applications has extended out past the end of the current quarter. In addition, due to delays in adopting final regulations in other states and the timing of application submittals for those states we are delayed in completing the application process and executing on our business model.

The Company's 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 second quarter of 2014. The work on the Oregon location and delivery of the location to the client is expected to be finalized in the third quarter of 2014.


Table of Contents

The Company's revenue model is significantly different in the second quarter of 2014 as compared to second 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 set upfront fee. The Company is in the process of modifying its consulting engagements by providing ongoing management and support services for clients so that the consulting contract would continue in perpetuity. The impact of this change is that we expect revenue to be based upon the passage of time and the ability of the individual locations to continue operations.

Sale of locations and management rights

During the second quarter of 2014 the Company sold 50% of its management rights in one Arizona location for $175,000. Additionally, the Company recorded revenue of $45,000 from two clients for the opportunity to be on the Board of Directors of a management company.

VII-Product sales

In the second quarter of 2014, the Company sold $15,916 of vaporizer products and accessories through our VII operating subsidiary. This is a reduction of $3,636 or 18.6% compared to $19,522 sold in three months ended June 30, 2013. We expect to be able to release our newest portable vaporizer product for general availability late in the third quarter of 2014.

Sale of territories

During three months ended June 30, 2014 the Company sold for $100,000, exclusive rights to one of its clients to be the first to apply for the first five contracts that the Company is awarded in the state of Oregon using the Company's services. There were no similar revenues in the comparable period of 2013.

Finder fee

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 10 - Marketable securities and customer deposits). Revenue recognized in three months ended June 30, 2014 from this agreement was $98,532. There were no similar revenues for the three months ended June 30, 2013.

Allowances and refunds

Due to the change in business and legal environment in the San Diego market (for details see below "Comparison of the six months ended June 30, 2014 to 2013", Revenue) the Company recorded an additional provision for sales allowances of $266,930 in the second quarter of 2014 related to the reversal of revenue recognized on San Diego contracts for contract work the Company had previously completed but for which either refunds to clients will be made or a reduction in a previous billing occurred due to change in the regulations.

Provisions for sales allowances is disclosed as a separate line in the Consolidated Statements of Operations. There were no such events in 2013. During the three months ended June 30, 2013, the Company recognized revenue for work performed on various contracts in the amount of $718,000 from the contracts with clients who applied for licenses for San Diego locations prior to the change in the legislation.

Cost of revenue

Our cost of revenue includes systems costs for our systems sales and construction, build-out, licenses or rights repurchased from former clients and resold to new clients, and permits for our consulting activities and 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.

During the three months ended June 30, 2014, the costs of revenue increased by $367,520 or 203.0% to $548,557 compared to $181,037 for the three months ended June 30, 2013. This was mainly due to the increase in the charge to operations of inventory costs and additional expenses related to the changes in San Diego legislation, which were partially offset by the reduction in construction and build outs costs.

Cost of inventory

The increase is mainly due to the charge to operations of inventory cost of $325,000 which represents the cost for the 50% of Company's management rights in one of the Arizona locations sold for $175,000 during the second quarter.


Table of Contents

Constructions and build-outs

The costs for construction and build-outs decreased by $123,064 during three months ended June 30, 2014 compared to the same period of 2013. This was due to delays in adopting final regulations in states in which the Company intends to submit license applications and the timing of application submittal deadlines for other states thereby delaying the need to construct facilities.

Other costs of revenue

During the second quarter of 2014, the Company expensed $60,000 that were incurred for the development of two locations and $56,000 of deposits previously paid for securing certain locations in San Diego, which became obsolete after the introduction of changes in the legislation as previously described.

VII-Product cost

For the three months ended June 30, 2014, the cost of goods sold of VII was $47,870 compared to $47,626 for the three months ended June 30, 2013. Cost of goods sold include costs associated with shipping and storing the product along with personnel assigned the function to manage the inventory.

Operating Expenses

Operating expenses consist of all other costs incurred during the period other than cost of revenue. The Company incurred $1,137,232 in operating expenses for three months ended June 30, 2014 compared to $832,456 for the three months ended June 30, 2013. The increase of $304,776 or 36.6% was primarily due to the increase in selling and marketing expenses of $125,779, increases in research and development expenses of $57,033 and increases in general and administrative expense of $121,964.

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 $286,784 and $161,005 in sales and marketing expenses for the three months ended June 30, 2014 and 2013, respectively. The expense increased by $125,779 or 78.1% in the second quarter of 2014 compared to the second quarter of 2013. Sales and marketing expenses for three months ending June 30, 2014 and 2013 represents 66.0% and 10.2% respectively, of gross revenues, before the provision for sales allowances and refunds. The expenses incurred during the three month periods ended June 30, 2014 and 2013 are summarized and described below.

                                   For the three     For the three
                                   months ended      months ended        Increase
      Expense Description          June, 30 2014     June, 30 2013      (Decrease)
      VII sales and marketing
      expense                      $      61,337     $      35,605     $      25,732
      Lobbying                            92,785                 -            92,785
      Public relationship
      expense                              9,625            27,416           (17,791 )
      Employee costs                      38,937                 -            38,937
      Independent contractors
      costs                               26,763            40,895           (14,132 )
      Meetings, conferences and
      trade shows                         35,865             2,862            33,003
      Purchased advertising                9,815            29,188           (19,373 )
      Other (sum of smaller
      accounts)                           11,657            25,039           (13,382 )
        Total sales and
      marketing                    $     286,784     $     161,005     $     125,779

During three months ended June 30, 2014 and 2013, the Company incurred $61,337 and $35,605 in marketing and sales expenses related to VII activity. The increase is related to the fact that the Company is preparing to launch a new vaporizer product during the third quarter of 2014.

The Company incurred lobbying expenses in the second quarter of 2014 in the amount $92,785 in order to promote the Company in states/markets of interest and to better understand the regulations being developed in those state or local governments. To maximize efficiency, the Company is utilizing services of lobbying experts from the specific states/market of interest. In addition, this strategy led to a decrease of $17,791 in public relations expenses to $9,625 for the three months ended June 30, 2014 compared to $27,416 for the three months ended June 30, 2013.

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 $38,937 for the three months ended June 30, 2014. There were no similar costs in the second 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 $14,132 to $26,763 for the three months ended June 30, 2014 compared with $40,895 for the same period of 2013.


Table of Contents

During the three months ended June 30, 2014, the Company incurred increased expenses for meetings, conferences and trade shows in the amount of $33,003. This additional expense allowed the Company to promote its products and services to a broad range of possible clients at more specialized events, to become informed about competitors and their products and to receive general and specific knowledge of the industry. The Company reduced purchased advertising expenses by $13,382 as compared to the same period of 2013 because of the current emphasis on the attendance at conferences and trade shows as mentioned above versus purchased advertising.

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 owned by a co-founder. Our research and development expenses for the three months ended June 30, 2014 and 2013, were $67,033 and $10,000, respectively, and represent 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 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.

General and administrative

General and administrative expenses include legal, lobbying, accounting, payroll, consulting, rent and other costs. The Company's general and administrative expenses increased by $121,964 or 18.4% to $783,415 for the three months ended June 30, 2014 compared to $661,451 for the three month period ended June 30, 2013. The expenses incurred during the three month periods ended June 30, 2014 and 2013 are summarized and described below:

                                   For the three     For the three
                                   months ended      months ended        Increase
      Expense Description          June, 30 2014     June, 30 2013      (Decrease)
      VII general and
      administrative expenses      $      35,607     $      32,355     $       3,252
      Costs of being public              126,693             6,904           119,789
      Bad debt expense                   145,000                 -           145,000
      Insurance                           38,100                 -            38,100
      Rent expense                        52,129            29,893            22,236
      Fund raising consultants             6,250            65,000           (58,750 )
      Professional accounting
      services                            17,750            63,500           (45,750 )
      Management fee - Vincent
      Chase, Inc.                         37,500            75,000           (37,500 )
      Legal costs                         91,698           148,972           (57,274 )
      Lobbying costs                           -            47,134           (47,134 )
      Employee costs                      43,611            84,833           (41,222 )
      Independent contractors
      costs                               71,685            22,171            49,514
      Charity and donations               21,500               300            21,200
      Other (sum of smaller
      accounts)                           95,892            85,389            10,503
       Total general and
      administrative               $     783,415     $     661,451     $     121,964

The increase of $121,964 for the three months ended June 30, 2014 compared to three months ended June 30, 2013 is primarily due to the increase in the provision for doubtful accounts receivable in the amount of $145,000, increases in costs related to being a public company of $119,789, increases in insurance costs of $38,100 and increases in rent expense of $22,236 offset by the reductions in fund raising consultant costs of $58,750, decreases in outside professional accounting services of $45,750, reductions in management fee of $37,500 and reductions in legal costs of $57,274.

During the three months ended June 30, 2014 the Company incurred $126,693 in costs related to being a public company such as SEC related legal costs, investor relations costs, SEC filing costs and independent directors' compensation cost which in aggregate increased by $119,789 compared to the same period of 2013.

As described in Note 9 to the financial statements during the second quarter of 2014, the Company identified some of the accounts receivable as doubtful for collection and charged to operations the amount of $145,000. There were no similar events during the second quarter of 2013.

Insurance expense increase by $38,100 during the three months ended June 30, 2014 due to the introduction in 2014 of directors' and officers' insurance. There was no such expense during the same period of 2013.

The rent expense during the three months ended June 30, 2014 increased by $22,236 to $52,129 compared to $29,893 for three months ended June 30, 2013. This change is due to the fact that the Company increased the amount of leased office space which led to monthly rent increase from $5,303 to $14,396. Also during the three months ended June 30, 2014 the Company incurred an additional $3,562 in rent expense for our Arizona office. There was no such rent expense during the same period of 2013.


Table of Contents

The Company reduced by $58,750 fund raising expenses during three months ended June 30, 2014, compared to the same period of 2013.

The Company improved its cost management through engaging employees and independent contractors instead of sourcing an outside firm's services for some of the activities. This led to a decrease of $45,750 in professional accounting service expense to $17,750 for the three months ended June 30, 2014, compared to $63,500 for the three months ended June 30, 2013. At the same time this led to an increase in the Company's expenses related to independent contractors by $49,514 to $71,685 for the three months ended June 30, 2014 compared to $22,171.

A significant reduction of general and administrative expenses of $12,500 per month is due to a temporary 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 second quarter of 2014 compared to the same . . .

  Add MDBX to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MDBX - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.