AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 20, 2016
REGISTRATION NO. 333-207464
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
MEDBOX, INC.
(Exact
name of registrant as specified in its charter)
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Nevada |
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3585 |
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45-3992444 |
(State or jurisdiction of
incorporation or organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(I.R.S. Employer
Identification No.) |
600 Wilshire Blvd., Ste. 1500
Los Angeles, CA 90017
800-762-1452
(Address and
telephone number of principal executive offices)
Jeffery Goh
Chief Executive Officer
Medbox, Inc.
600
Wilshire Blvd. Ste. 1500
Los Angeles, CA 90017
800-762-1452
(Name,
address and telephone number of agent for service)
Copies to:
Blase P. Dillingham, Esq.
Scott A. Schwartz, Esq.
Manatt, Phelps & Phillips, LLP
11355 West Olympic Boulevard
Los Angeles, CA 90064
(310) 312-4000
(310)
312-4224 Facsimile
Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. x
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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DEREGISTRATION OF SECURITIES
Medbox,
Inc. (the Company) filed a registration statement on Form S-1 (File No. 333-207464) (the Registration Statement) registering up to 207,494,120 shares of the Companys common stock, including 193,847,216 shares
issuable upon conversion of convertible debentures, 1,176,316 shares issuable as interest on convertible debentures, and 12,470,588 shares issuable upon the exercise of warrants, for resale by investors (the Investors) who purchased the
convertible debentures from the Company in private offerings on July 10, 2015, August 14, 2015 and August 20, 2015. In connection with the original issuance of the debentures, the Company agreed to file the Registration Statement to facilitate
the resale of the Common Stock underlying the debentures (including interest) and warrants issued in connection with the debentures, by the Investors. The Securities and Exchange Commission (the Commission) declared the original
Registration Statement effective on December 15, 2015.
Pursuant to the undertaking of the Company as required by Item 512(a)(3) of Regulation S-K,
the Company is filing this Post-Effective Amendment No. 1 to the Registration Statement in part to deregister 51,847,216 shares issuable upon conversion of the convertible debentures, all of the shares issuable as interest on the convertible
debentures, and the all of the shares issuable upon the exercise of the warrants, because the Company does not presently have enough authorized and unissued common stock to issue such shares. The total number of shares being so deregistered is
65,494,120. The total number shares remaining registered and covered by this Post-Effective Amendment No. 1 to the Registration Statement is 142,000,000.
PROSPECTUS
MEDBOX, INC.*
142,000,000 Shares of Common Stock
This prospectus relates to the
public offering of up to 142,000,000 shares of common stock of Medbox, Inc.* by the selling stockholders issuable upon conversion of principal under convertible debentures.
The selling stockholders may sell common stock from time to time in the principal market on which the common stock is traded at the prevailing market price or
in negotiated transactions.
We will not receive any of the proceeds from the sale of common stock by the selling stockholders. We will pay the expenses
of registering these shares.
We are an emerging growth company under applicable Securities and Exchange Commission rules and are subject to
reduced public company reporting requirements.
Investing in our common
stock involves a high degree of risk. You should consider carefully the risk factors beginning on page 10 of this prospectus before purchasing any of the shares offered by this
prospectus.
Our common stock is quoted on the OTCQB and trades under the symbol MDBX. The last reported sale price of our common stock on
the OTCQB on January 15, 2016, was $0.02 per share.
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of
this prospectus is January 20, 2016.
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Effective on or about January 28, 2016, Medbox, Inc. intends to changes its name to Notis Global, Inc. |
TABLE OF CONTENTS
You may only rely on the information contained in this prospectus or that we have referred you to. We have not
authorized anyone to provide you with different information. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the common stock offered by this prospectus. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any common stock in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this prospectus nor any sale made in connection with this prospectus
shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this prospectus or that the information contained by reference to this prospectus is correct as of any time after its date.
Prospectus Summary
This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the
section entitled Risk Factors before deciding to invest in our common stock.
About Us
Medbox, Inc. (the Company) is a Nevada corporation formed on June 16, 1977. Medbox provides specialized services to the
marijuana industry and sells associated patented products, including its medical vaporization devices. The Company works with clients who currently operate or seek to enter into the retail, cultivation and dispensary marijuana markets in those
states where approved. We seek to obtain licenses to operate dispensaries, cultivations centers and manufacturing facilities through Medbox or an affiliated company. We contract with unaffiliated third-party operators to manage the day-to-day
operations of these facilities and assign them the right to manage and operate the facilities in exchange for a percentage of operating income or a fixed fee based on applicable state law. We also provide ongoing consulting services to independent
operators. In addition, through our wholly owned subsidiary, Vaporfection International, Inc. (VII), the Company sells a line of vaporizer and accessory products online and through distribution partners. The Company is headquartered in
Los Angeles, California.
For the years ended December 31, 2014, December 31, 2013, and December 31, 2012, we had net
losses of approximately $16,540,000, $3,791,000 and $1,758,000, respectively. For the nine months ended September 30, 2015, we had a net loss of approximately $25,120,000, an accumulated deficit of approximately $47,199,000, a
stockholders deficit of approximately $12,593,000 and a working capital deficit of approximately $15,685,000.
Our principal
executive offices are located at 600 Wilshire Blvd., Ste. 1500, Los Angeles, CA 90017. Our telephone number is 800-762-1452. Our website address is www.medbox.com. We do not incorporate the information on or accessible through our website into this
prospectus, and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.
References to Medbox, we, us, our and similar words refer to the Company and its wholly-owned
subsidiaries, unless the context indicates otherwise.
Effective on or about January 28, 2016 (the Name Change Date),
Medbox, Inc. intends to changes its name to Notis Global, Inc. Following the Name Change Date, references herein to Medbox, we, us, our or the Company shall refer to Notis Global, Inc.
Recent Developments
Submission of
Matters to a Vote of Security Holders
On June 30, 2015, the Board of Directors of Medbox and the holders of a majority of the
Companys voting securities approved by written consent an amendment to the Companys Articles of Incorporation to increase the authorized number of shares of the Companys common stock from 100,000,000 shares to 400,000,000 shares,
par value of $0.001 per share. The Companys Board of Directors approved the increase of authorized capital so that it would have additional shares of common stock available for issuance upon the conversion or exercise of outstanding
convertible debt securities and warrants and for future capital raises. Approval of the stockholders was obtained without a meeting in accordance with Section 78.320 of the Nevada Revised Statutes. On October 5, 2015, the Company filed
with the Securities and Exchange Commission a Definitive Schedule 14C Information Statement regarding the matter submitted to a vote of our security holders. The increase of authorized capital became effective upon the filing of an amendment to our
Articles of Incorporation with the Securities and Exchange Commission on October 27, 2015 (the COI Amendment). The COI Amendment is filed as Exhibit 3.11 to the Registration Statement.
On August 21, 2015, Medbox, P. Vincent Mehdizadeh (VM), PVM International, Inc., (PVM), and Vincent Chase,
Incorporated, (VC) (VM, PVM and VC, collectively, the VM Group) and each member of
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the Board of Directors of the Company, namely, Ned Siegel, Mitch Lowe and Jennifer Love, entered into a certain Second Amendment to Voting Agreement, dated August 21, 2015 (the Second
Amendment) amending in certain respects that certain Voting Agreement dated January 21, 2015 among such parties as previously amended by that certain First Amendment to Voting Agreement (the First Amendment) dated
August 11, 2015 (collectively, the Voting Agreement).
Pursuant to the First Amendment, the VM Group previously agreed
(i) to extend the Expiration Date of the Voting Agreement from January 20, 2016 to July 20, 2016, provided the Company made certain pre-payments on the remaining $478,877 balance due under that certain Promissory Note dated
June 30, 2015 in the original amount of $628,877 by the Company in favor of PVM (the Note), and (ii) to forebear from exercising its rights to appoint a director to the Board of Directors of the Company (under Section 4 of
that certain Settlement Agreement dated January 21, 2015 among the Company and the VM Group, the Settlement Agreement), until the Expiration Date of the Voting Agreement as extended by the First Amendment.
Pursuant to the Second Amendment, the VM Group and the Company:
(a) further extended the Expiration Date of the Voting Agreement to July 20, 2018;
(b) provided that the Company would make (and the Company has made) certain accelerated pre-payments on the $328,877 balance under the Note
consisting of: (i) three equal payments of principal in the amount of $82,220, together with accrued and unpaid interest, payable on each of August 24, 2015, August 31, 2015 and September 8, 2015, and (ii) one final
payment on September 14, 2015 equal to the remaining principal and accrued and unpaid interest due under the Note;
(c) provided
that the VM Group would forebear from exercising its right to appoint a director to the Board of Directors of the Company (under Section 4 of that certain Settlement Agreement), until the Expiration Date of the Voting Agreement as extended by
the Second Amendment; and
(d) the VM Group executed, that certain Consent of Stockholders of Medbox, Inc. (the Consent)
approving the following amendments of the Articles of Incorporation (the Articles) of the Company:
(i) elimination of the
provisions of Section IV of the Articles giving the holders of the Series A Convertible Preferred Stock of the Company (the Preferred) disproportionately greater voting rights than the holders of Common Stock and instead providing for
the Preferred to have one vote per common share on an as- converted basis voting as a single class with the common shares upon any matter submitted to the stockholders for a vote, and
(ii) to eliminate the provisions of Section V of the Articles providing the holders of a majority of the outstanding shares of Preferred the
right to approve any corporate action except for: (1) actions which would adversely alter or change the rights, preferences, privileges or restrictions of the Preferred or increase the authorized number thereof, (2) any changes to the
terms of the Preferred; (3) creation of any new class of shares having preferences over or being on a parity with the Preferred as to dividends or assets, unless the purpose of creation of such class is, and the proceeds to be derived from the
sale and issuance thereof are to be used for, the retirement of all Preferred then outstanding; or, (4) any payment of dividends or other distributions or any redemption or repurchase of options or warrants to purchase stock of the Company,
except for repurchases of options or stock issued under an equity incentive plan approved by the Board.
Change of Control
Effective August 24, 2015, Vincent Chase, Incorporated cancelled without consideration all of its 2 million shares of preferred stock
and 3 million shares of Common Stock. As a result of this action, neither VM nor any of its affiliates holds a majority of the voting power of the Company, which to the Companys knowledge is no longer held by a single person or entity or
group thereof.
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Elections and Resignations of Directors; Office Appointments
On September 24, 2015, Jennifer Love resigned from her positions as a member of the Board of Directors of the Company, the chairperson of
the Companys audit committee, and a member of its special committee, effective immediately. Director Love confirmed that she resigned due to time constraints and new professional obligations and not due to any disagreement with the Company. On
September 28, 2015, the Company also appointed its Board Chairperson, Ambassador Ned L. Siegel, to serve as interim Chairperson of its Audit Committee.
On October 15, 2015 Jeffrey Goh, President and Interim Chief Executive Officer of the Company, was elected to the Board of Directors. On
January 5, 2016, Mr. Goh was promoted to Chief Executive Officer and President of the Company.
On October 28, 2015 Manuel
Flores, was elected to the Board of Directors. Mr. Flores was also appointed to serve as (i) Chairman of the Audit Committee of the Board in place of Mr. Ned L. Siegel, and (ii) as a member of each of the Compensation
Committee and the Governance and Nominating Committee of the Board.
On January 5, 2016, Clint Pyatt, the Companys Senior Vice
President, Operations and Government Relations, was promoted to Chief Operating Officer of the Company. He continues to act as Senior Vice President, Government Relations.
Conversion of Preferred Stock
On November 16, 2015, Bruce Bedrick converted the remaining 1,000,000 shares of outstanding preferred stock of the Company into 5,000,000
common stock, and no shares of preferred stock remain outstanding.
August 14, 2015 Convertible Debt Financing
On August 14, 2015, the Company entered into a securities purchase agreement (the August 14 Purchase Agreement) with an
accredited investor (the August 14 Investor) pursuant to which the Company agreed to sell, and the August 14 Investor agreed to purchase, convertible debentures (the August 14 Debentures) in the aggregate principal
amount of up to $3,979,877, in up to 11 tranches. Of the aggregate principal amount, up to $1,000,000 was eligible for purchase by the August 14 Investor in its sole discretion at a closing to occur by October 15, 2015 (the
Option).
The initial closing in the aggregate principal amount of $650,000 occurred on August 15, 2015. The remaining
closings were modified, and the Option was exercised, pursuant to that certain September 4 Amendment described below. The August 14 Debentures bear interest at the rate of 10% per year and mature 12 months after issuance.
Each of the August 14 Debentures are convertible by the August 14 Investor at any time, in whole or in part, into shares of the
Companys common stock at a conversion price that is the lower of (a) $0.75, or (b) a 49% discount to the lowest daily volume weighted average price of the Companys common stock during the 30 trading days prior to the
conversion date.
The Company may prepay the Debentures in cash, prompting a 30% premium or, subject to certain conditions, in shares of
common stock valued at 51% of the lowest volume weighted average price of the Companys common stock for the 30 prior trading days.
In connection with the August 14 Purchase Agreement, the Company entered into a registration rights agreement (the Registration
Rights Agreement) with the August 14 Investor, pursuant to which the Company agreed to file this Registration Statement on Form S-1 (this Registration Statement) for the resale of shares of common stock issuable upon
conversion of, or payable as interest on, the August 14 Debentures, within 45 days of the closing date of the Purchase Agreement, and to have such registration statements become effective within 120 days of the closing date of the Purchase
Agreement.
The August 14 Investor shall have a right of first refusal to participate in future equity financings of the Company on
the same terms as any new investors for a period of twelve months from the closing of the last
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August 14 Debenture issued under the August 14 Purchase Agreement. The Company also shall not enter into other variable rate transactions other than with pre-existing investors, so long
as the August 14 Investor holds more than $2,000,000 in debentures of the Company, including pre-existing debentures. The August 14 Investor also entered into a Security Agreement securing the amounts underlying the August 14
Debentures on the same terms that the Company accepted with the August 20 Investor (described below).
If the Company fails to
deliver to the holder any certificate for shares of common stock of the Company upon conversion of an August 14 Debenture within 3 trading days of the date specified by the holder in any conversion notice (the August 14 Purchase Agreement
Share Delivery Date), the Company will be required pay to the August 14 Investor, in cash, as liquidated damages, $1,000 per trading day for each trading day after such August 14 Purchase Agreement Share Delivery Date until such
certificates are delivered or the holder rescinds such conversion.
As noted above, the Companys right to make payments of principal
and interest under the August 14 Debentures in common stock is subject to certain conditions, including: (a) the Company will have duly honored all conversions and redemptions of the holder, (b) the Company will have paid all amounts
(including any liquidated damages owed due to a failure to delivery certificates by any August 14 Purchase Agreement Share Delivery Date) owing to the holder, (c)(i) there is an effective registration statement for the resale of the shares
of common stock issuable upon conversion of the August 14 Debentures or (ii) such shares may be resold pursuant to Rule 144 under the Securities Act, (d) the common stock is trading on the OTCQB or other eligible market or exchange,
(e) there is a sufficient number of authorized but unissued and otherwise unreserved shares of common stock for the issuance the shares issuable pursuant to the August 14 Purchase Agreement, (f) there is no existing Event of Default
(as defined in the August 14 Debentures) and no existing event which, with the passage of time or the giving of notice, would constitute such an Event of Default, (g) the issuance of the shares would not cause the holders beneficial
ownership of the Companys common stock to exceed 4.99%, (h) there has been no public announcement of a pending or proposed Fundamental Transaction or Change of Control Transaction (as defined in the August 14 Debentures) that has not
been consummated, (i) the holder is not in possession of any information provided by the Company that constitutes, or may constitute, material non-public information, and (j) the Company has timely filed all reports required to be filed by
the Company since the initial Closing pursuant to the Exchange Act.
Amendment of August 14 Purchase Agreement
On September 4, 2015, the Company entered into a First Amendment to Securities Purchase Agreement (the September 4 Amendment)
with the August 14 Investor, amending in certain respects August 14 Purchase Agreement.
Pursuant to the September 4
Amendment, the parties agreed that the aggregate principal amount of the August 14 Debentures would be $3,978,880, which the August 14 Investor would purchase in 9 tranches (each, a Closing), none of which would be subject to
the Option. In effect, the August 14 Investor exercised the Option and allocated the $1,000,000 available thereunder among several of the tranche closing dates.
As noted, the initial Closing in the amount of $650,000 took place on August 14, 2015. The remaining amounts were rescheduled to be
purchased by the August 14 Investor in Closings on the dates and in the amounts as follows: $82,220 was purchased on August 24, 2015; $207,220 was purchased on August 28, 2015; $457,220 was purchased on September 4, 2015; $82,220
was purchased on September 11, 2015; $250,000 was purchased on September 18, 2015, $100,000 of which was assigned to the July 2015 Investor (defined below) on October 14, 2015; $250,000 was purchased on October 23, 2015;
$1,250,000 was to be purchased on the date that is 3 business days after date that this Registration Statement becomes effective (the Effective Date); and $750,000 was to be purchased on the date that is 7 business days after the
Effective Date (collectively, the Effective Date Debentures). The parties agreed and the August 14 Investor purchased $100,000 of the Effective Date Debentures on October 14, 2015, $150,000 of the Effective Date Debentures on
November 13, 2015 and $450,000 of the Effective Date Debentures on November 20, 2015. The balance of the Effective Date Debentures closed as set forth below.
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Second Amendment of August 14 Purchase Agreement
On December 9, 2015 the parties agreed pursuant to a Second Amendment to Securities Purchase Agreement that the $1,300,000 balance of the
Effective Date Debentures would be purchased as follows: $300,000 of the debentures was purchased on December 11, 2015, $105,263 of the debentures was purchased on or about December 17, 2015, $631,579 of the debentures was purchased on
January 4, 2016 and $263,158 of the debentures was purchased on January 8, 2016.
With regard to each of the foregoing Closings
under the August 14 Purchase Agreement, as amended, the August 14 Investor is and were irrevocably bound to purchase each August 14 Debenture, subject only to conditions outside of the August 14 Investors control or that
the August 14 Investor cannot cause not to be satisfied, none of which are related to the market price of the Companys common stock. In other words, each Closing that has not yet occurred will occur on a time-based event or upon the
occurrence of an event outside of the August 14 Investors control.
In connection with entry into the August 14 Purchase
Agreement and issuance of the August 14 Debentures, the Company paid certain legal fees of the August 14 Investor relating to the August 14 Purchase Agreement.
August 14 Debenture Amendment and Restriction Agreement with August 14 Investor and affiliates; Assignment of certain
August 14 Debentures
On December 28, 2015, the Company and the August 14 Investor and certain affiliates thereof
including the July 2015 Investor (defined below) entered into a Debenture Amendment and Restriction Agreement (the DARA), pursuant to which the August 14 Investor and its affiliates agreed to be restricted from converting any of
their convertible debentures into common stock until February 21, 2016, subject to certain limitations described below (the Restriction). In connection with the DARA, the August 14 Investor and certain of its affiliates agreed
to assign, as of the effective date of the DARA, approximately $390,000 of its convertible debentures (unrelated to the August 14 Purchase Agreement) to an affiliate of the August 20 Investor (defined below) (the December 2015
Assignee) in exchange for the amount of principal outstanding under such debentures plus a premium in cash from the December 2015 Assignee (collectively, the December 2015 Assigned Debentures). The accrued and unpaid interest under
the December 2015 Assigned Debentures remained payable by the Company to the August 14 Investor or its affiliates and convertible into shares of common stock of the Company, subject to the terms of the 2015 Assigned Debentures. Interest will
continue to accrue under the 2015 Assigned Debentures in favor of the December 2015 Assignee following the date of the DARA.
Pursuant to
the DARA, the August 14 Investor also agreed to amend the terms of each of its retained convertible debentures that were not assigned to the December 2015 Assignee (including the August 14 Debentures) (the Retained Debentures),
such that the Retained Debentures are convertible at a 40% discount to the lowest trading price of the Companys common stock during the 30 consecutive prior trading days, rather than at a 49% discount to the lowest volume
weighted-average price during the 30 consecutive prior trading days (the Adjustment).
As consideration to the
August 14 Investor and its Affiliates for entering into the DARA, the August 14 Investor was issued a promissory note from the Company in the principal amount of $700,000 (the December 2015 Promissory Note). The December 2015
Promissory Note has a term of 10 months, accrues interest at a rate of 10% per annum, and is not convertible other than in an event of default, in which case it is convertible on the terms of the other debentures held by the August 14
Investor. Outstanding principal and accrued interest under the December 2015 Promissory Note may be pre-paid at any time by the Company without penalty.
The December 2015 Assignee shall also acquire from the August 14 Investor $650,000 of the August 14 Debentures upon the declaration
of effectiveness of this Post-Effective Amendment to the Companys Registration Statement reflecting the terms of the Agreement, at the option of the December 2015 Assignee any date prior to such declaration of effectiveness (the
Option), pursuant to a Purchase and Assignment Agreement between the August 14 Investor and its affiliates, on the one hand and the December 2015 Assignee on the other hand.
In the event that this Post-Effective Amendment is not declared effective by the close of business on January 25, 2016 or the affiliate
of the August 20 Investor does not exercise the Option such time, then the Restriction shall be lifted, and the principal amount under the Promissory Note shall be reduced to $350,000 with the other $350,000 of principal due under the
Promissory Note being automatically deemed to be forgiven.
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In the event that this Post-Effective Amendment is not declared effective by February 1,
2016, then the Adjustment shall be changed from a 40% discount to the lowest trading price of the Companys common stock during the 30 consecutive prior trading days to a 45% discount to the lowest trading price of the Companys common
stock during such time period.
August 20, 2015 Convertible Debt Financing
On August 20, 2015, the Company entered into a securities purchase agreement (the August 20 Purchase Agreement) with an
accredited investor (the August 20 Investor) pursuant to which the Company agreed to sell, and the August 20 Investor agreed to purchase, convertible debentures (the August 20 Debentures) in the aggregate principal
amount of $1,500,000, in three tranches (each, a Closing).
The initial Closing in the aggregate principal amount of $400,000
occurred on August 24, 2015. The second closing in the amount of $400,000 occurred on October 2015, and the third closing in the amount of $700,000 was to occur within two days of the Effective Date (the Third Closing). The
August 20 Debentures bear interest at the rate of 5% per year and mature 12 months after issuance.
Each of the August 20
Debentures are convertible at any time, in whole or in part, at the option of the August 20 Investor into shares of the Companys common stock at a conversion price that is the lower of (a) $0.75, or (b) a 49% discount to the
lowest daily volume weighted average price of the Companys common stock during the 30 trading days prior to the conversion date. The Company may prepay the Debentures in cash, prompting a 30% premium.
The parties also entered into a warrant instrument granting the August 20 Investor the right to purchase shares of common stock of the
Company equal to the principal amount of the applicable August 20 Debenture divided by a price (the Reference Price) equal to 120% of the last reported closing price of the Companys common stock on the applicable closing date
of the August 20 Debenture, at an exercise price equal to the Reference Price, with a three year term (the August 20 Warrants).
In connection with the August 20 Purchase Agreement, the Company and August 20 Investor entered into a registration rights agreement
(the August 20 Registration Rights Agreement), pursuant to which the Company agreed to file a registration statement for the resale of shares of common stock issuable upon conversion of, or payable as interest on, the August 20
Debentures, and the common stock issuable upon exercise of the August 20 Warrants, within 45 days of the closing date of the August 20 Purchase Agreement, and to have this Registration Statement become effective within 120 days of the
closing date of the August 20 Purchase Agreement.
The August 20 Investor shall have a right of first refusal to participate in
future equity financings of the Company on the same terms as any new investors for a period of twelve months from the closing of the last August 20 Debenture issued under the August 20 Purchase Agreement.
In connection with entry into the August 20 Purchase Agreement and issuance of the August 20 Debentures, the Company pays an
affiliate of the August 20 Investor a commitment fee of 5% of the principal amount of each August 20 Debenture at each Closing, and the Company also paid certain legal fees of the August 20 Investor relating to the August 20
Purchase Agreement.
If the Company fails to deliver to the August 20 Investor any certificate for shares of common stock of the
Company upon conversion of an August 20 Debenture within 3 trading days of the date specified by the holder in any conversion notice (the August 20 Purchase Agreement Share Delivery Date), the Company will be required to pay to the
August 20 Investor, in cash, as liquidated damages, $1,000 per trading day for each trading day after such August 20 Purchase Agreement Share Delivery Date until such certificates are delivered or the holder rescinds such conversion.
As noted above, the Companys right to make payments of principal and interest under the August 20 Debentures in common stock
is subject to certain conditions, including: (a) the Company will have duly honored all
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conversions and redemptions of the August 20 Investor, (b) the Company will have paid all amounts (including any liquidated damages owed due to a failure to deliver certificates by any
August 20 Purchase Agreement Share Delivery Date) owing to the August 20 Investor, (c)(i) there is an effective registration statement for the resale of the shares of common stock issuable upon conversion of the August 20
Debentures or (ii) such shares may be resold pursuant to Rule 144 under the Securities Act, (d) the common stock is trading on the OTCQB or other eligible market or exchange, (e) there is a sufficient number of authorized but unissued
and otherwise unreserved shares of common stock for the issuance the shares issuable pursuant to the August 20 Purchase Agreement, (f) there is no existing Event of Default (as defined in the August 20 Debentures) and no existing
event which, with the passage of time or the giving of notice, would constitute such an Event of Default, (g) the issuance of the shares would not cause the holders beneficial ownership of the Companys common stock to exceed
4.99%, (h) there has been no public announcement of a pending or proposed Fundamental Transaction or Change of Control Transaction (as defined in the August 20 Debentures) that has not been consummated, (i) the holder is not in
possession of any information provided by the Company that constitutes, or may constitute, material non-public information, and (j) the Company has timely filed all reports required to be filed by the Company since the initial Closing pursuant
to the Exchange Act.
Amendment of August 20 Purchase Agreement
Effective September 18, 2015, the August 20 Investor and the Company entered into a supplemental agreement (the Supplemental
Agreement) which amended the August 20 Purchase Agreement to provide the sale by the Company and the purchase by the August 20 Investor of two additional tranches of August 20 Debentures (each, an additional Closing
under the August 20 Purchase Agreement). The first Closing of $100,000 closed on September 18, 2015 and that the second tranche of $100,000 closed October 28, 2015.
In connection with the two additional Closings under the Supplemental Agreement, the Company also agreed to issue additional August 20
Warrants (on the same terms as the warrants previously issued to the August 20 Investor under the August 20 Purchase Agreement) applicable to each new August 20 Debenture.
The new August 20 Debentures and new August 20 Warrants are subject to the August 20 Registration Rights Agreement.
Second Amendment to the August 20 Purchase Agreement
On November 16, 2015, the Company and the August 20 Investor entered into a second supplemental agreement (the Second
Supplemental Agreement), providing for the Third Closing be amended to occur in five tranches, with four tranches of $125,000 of Debentures having closed on each of November 16, 23, 30 and December 7, 2015 and a fifth closing of
$200,000 of Debentures closed within two (2) days of the Effective Date.
Other than as reflected in the Supplemental Agreement and
the Second Supplemental Agreement, the terms of the August 20 Purchase Agreement remained unchanged.
With regard to each of the
Closings under the August 20 Purchase Agreement, as amended, the August 20 Investor is irrevocably bound to purchase each August 20 Debenture, subject only to conditions outside of the August 20 Investors control or that
the August 20 Investor cannot cause not to be satisfied, none of which are related to the market price of the Companys common stock. In other words, each Closing that has not yet occurred will occur on a time-based event or upon the
occurrence of an event outside of the August 20 Investors control.
Entry into Security Agreement
In connection with entry into the August 20 Purchase Agreement and August 14 Purchase Agreement, the investors party to such
agreements and the Company entered into a Security Agreement, dated August 21, 2015 (the
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Security Agreement) securing the amounts underlying the August 14 Debentures and the August 20 Debentures. The Security Agreement grants a security interest in all assets
and personal property of the Company, subject to certain excluded real property assets. The security interests under the Security Agreement terminated following the Effective Date.
July 2015 Debenture
On July 10, 2015, another accredited investor and affiliate of the August 14 Investor (the July 2015 Investor) purchased
a separate Convertible Debenture (the July 2015 Debenture) in the aggregate principal amount of $500,000, that closed in five weekly tranches (each, a Closing) between July 10 and August 15, 2015. The July 2015
Debenture is in substantially the same form as the August 14 Debentures, except that the July 2015 Debenture is convertible into shares of the Companys common stock at a conversion price that is the lower of (a) $0.75, or (b) a
49% discount to the lowest daily volume weighted average price of the Companys common stock during the 40 trading days prior to the conversion date and had no commitment fee. On October 14, 2015, the August 14 Investor assigned the
right to purchase August 14 Debentures in the principal amount of $100,000 to the July 2015 Investor and the July 2015 Investor purchased such August 15 Debentures on the same day.
October 2015 Debentures
On October 14, 2015, the Company issued seven debentures in the aggregate of $2,000,000 to a service provider (the October 2015
Investor) as consideration for services previously rendered to the Company on the same terms as the August 14 Debentures and August 14 Purchase Agreement (the October 2015 Debentures and October 2015 Purchase
Agreement, respectively) except that the October 2015 Purchase Agreement does not provide for registration rights to the October 2015 Investor with regard to the shares underlying the October 2015 Debentures. The service provider has agreed
with the Company not to convert the October 2015 Debentures for any amount in excess of fees payable for services previously rendered to the Company at the time of conversion. To the extent that the sale of shares underlying the October 2015
Debentures do not satisfy outstanding amounts payable to the service provider, such amounts will remain payable to the service provider by the Company. The shares underlying the October 2015 Debentures are not being registered under this
Registration Statement.
The Farm Operating Agreement
On November 4, 2015, the Company signed an operating agreement with an independent contractor to perform cultivating services at a 320
acre farm owned by the Company near Pueblo, CO (the Farm). The agreement has an initial term of five years. The contractor is to cultivate hemp outdoors and in greenhouses. The proceeds from sale of products related to the outdoor
cultivation, after direct expenses, shall be distributed 90% to the Company and 10% to the contractor. The proceeds from the sale of products related to the greenhouse cultivation, after direct expenses, shall be distributed 99% to the Company and
1% to the contractor.
Farming Agreement
On December 18, 2015, the Company and its subsidiary EWSD I, LLC (EWSD), entered into a Farming Agreement (the Farming
Agreement) with Whole Hemp Company (Whole Hemp), pursuant to which Whole Hemp will manufacture products from hemp and cannabis crops it will grow on EWSD farmland, and the Company will build greenhouses for such activities up to an
aggregate size of 200,000 square feet. Whole Hemp will pay all preapproved costs of such construction on or before September 30, 2017 as partial consideration for a revocable license to use the greenhouses and a separate 10-acre plot of EWSD
farmland (the 10 Acres). EWSD will retain ownership of the greenhouses.
For the first growing season commencing
October 1, 2016, the Company will receive a percentage of gross sales of all Whole Hemp products on a monthly basis, and the Companys share will increase incrementally based on the extent of crops planted on EWSD farmland according to a
mutually agreed schedule. The Company will continue to share in the gross sales of all Whole Hemp products during each subsequent growing season, to be paid on a monthly basis, provided that the Company has used commercially reasonable efforts to
provide certain marketing services in international markets and certain other marketing related services and assistance developing a seed program. In addition, the Company will receive 50% of Whole Hemps gross profits from the farming
activities on the 10 Acres.
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Commencing in the second growing season, the Company may provide marketing, sales, and related
services to Whole Hemp in connection with the sale of products generated from the EWSD farmland, of which the Company will retain a percentage of gross sales. Further, the Company will receive half of the gross profits from the sale of products
produced from crops grown on a dedicated 40-acre parcel of Whole Hemps farmland in exchange for marketing, sales, and related services provided by the Company on an exclusive basis.
Whole Hemp is responsible for obtaining all requisite permits and approvals from governmental authorities necessary to conduct the farming
activities and for compliance with all federal, state and local regulations and procedures related to its business.
Pursuant to the
Farming Agreement, the Company also granted Whole Hemp a warrant (the Warrant) to purchase 4,000,000 shares of Company common stock at an exercise price of $0.50 per share, exercisable at any time within 5 years.
The Farming Agreement is effective until September 30, 2026 and may be extended by either party for a 5-year period.
Growers Agent Agreement
On December 18 2015, the Company also entered into a Growers Agent Agreement (the Growers Agent Agreement) with
Whole Hemp, pursuant to which the Company will provide marketing, sales, and related services on behalf of Whole Hemp in connection with the sale of its Cannabidiol oil product, from which the Company will receive a percentage of gross revenues
(other than the sale of such product generated from the EWSD 10 Acres and the Whole Hemp 40-acre plot subject to the Farming Agreement). The Growers Agent Agreement is effective until September 30, 2025.
Under the Growers Agent Agreement, for the period ending December 31, 2015, the Company will act as agent for Whole Hemp in
connection with the sale of up to 25 kilograms of product in exchange for a fee of up to $600,000. Thereafter, the Company will sell the product on behalf of Whole Hemp on a commission basis.
The Company may not act as agent of any other grower, distributor or manufacturer of the same product unless such other party agrees, and
Whole Hemp refuses, to sell a set amount of such product to a purchaser below the minimum price then in effect under the Growers Agent Agreement.
About This Offering
This prospectus
includes the resale of 142,000,000 shares of common stock issuable upon conversion of principal of the August 14 Debentures, the August 20 Debentures and the July 2015 Debenture.
Because of the variable nature of the conversion prices under the terms of the August 14 Debentures, the August 20 Debentures and
the July 2015 Debenture (collectively, the Debentures), the number of shares that the Company may issue upon conversion of the Debentures cannot presently be determined. The number of shares in the offering that are issuable upon
conversion of the principal amount under the Debentures was estimated based on approximately 15% of the amount of shares the Company would issue if the remaining principal amount outstanding under the debentures was converted into shares on
January 8, 2016 at an assumed conversion price of $0.00765 (which is equal to 51% of the lowest volume weighted average closing price of the 30 prior trading days).
As of the date of this prospectus, an aggregate of $6,103,880 has been loaned to the Company pursuant to the August 14 Purchase
Agreement, the August 20 Purchase Agreement and the July 2015 Debenture and an aggregate of $328,944 in fees have been paid to the investors. No sums remain payable under the terms of the August 14 Purchase Agreement and the August 20
Purchase Agreement as of the date hereof.
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RISK FACTORS
Investing in our common stock involves a high degree of risk. Current investors and potential investors should consider carefully the risks
and uncertainties described below together with all other information contained in this prospectus before making investment decisions with respect to our common stock. The business, financial condition and operating results of the Company can be
affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Companys actual results of operations and financial
condition to vary materially from past, or from anticipated future, results of operations and financial condition. If any of the following risks actually occur, our business, financial condition, results of operations and our future growth prospects
would be materially and adversely affected. Under these circumstances, the trading price and value of our common stock could decline, resulting in a loss of all or part of your investment. The risks and uncertainties described in this prospectus are
not the only ones facing us. Additional risks and uncertainties of which we are not presently aware, or that we currently consider immaterial, may also affect our business operations.
Past financial performance should not be considered to be a reliable indicator of future performance, and current and potential investors
should not use historical trends to anticipate results or trends in future periods.
Risks Related to Our Business
Our continued success is dependent on additional states legalizing medical marijuana and additional localities in California and other states passing
legislation to allow dispensaries.
Continued development of the medical marijuana market is dependent upon continued legislative
authorization of marijuana at the state level for medical purposes and, in certain states, including California, based on the specifics of the legislation passed in that state, and on local governments authorizing a sufficient number of
dispensaries. Any number of factors could slow or halt the progress. Furthermore, progress, while encouraging, is not assured, and the process normally encounters set-backs before achieving success. While there may be ample public support
for legislative proposals, key support must be created in the legislative committee or a bill may never advance to a vote. Numerous factors impact the legislative process. Any one of these factors could slow or halt the progress and adoption of
marijuana for medical purposes, which would limit the market for our services and products and negatively impact our business and revenues.
There
is no track record for companies pursuing our strategy and if our strategy is unsuccessful, we will not be profitable and our stockholders could lose their investments.
There is no track record for companies pursuing our business strategy, and there is no guarantee that our business strategy will be successful
or profitable. If our strategy is unsuccessful, we may fail to meet our objectives and not realize anticipated revenues or profits from the business we pursue, which may cause the value of the Company to decrease, thereby potentially causing our
stockholders to lose their investments. The success of our strategy will depend on numerous factors including:
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the success of dispensary and cultivation operations at locations where we may enter into contracts to oversee the management of the location; |
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our ability to work with suitable business owners to serve each dispensary or cultivation center and our ability to arrange and oversee license applications; |
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our ability to find real estate to purchase, in markets where we plan to hold real estate, and sellers willing to enter into contracts at reasonable prices; |
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our ability to find landlords that charge reasonable rent for each property used for the submission of a license application; and |
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our ability to obtain adequate financing to market and produce our portable vaporizer products. |
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We may not succeed in entering into management rights agreements with licensees.
We enter into real estate purchase agreement contracts to help business owners operate and develop cultivation centers and dispensaries under
licenses we hold or are held by affiliate companies. Prior to or following receipt of the license, we seek to enter into a management rights agreements with the business owner for such location, pursuant to which the entity grants us the
exclusive, assignable right and obligation to manage the operations for such location in exchange for a percentage of the income generated by such operations or a fixed fee based on applicable law. There is no assurance business owners will grant us
management rights for their dispensaries or centers. If we fail to enter into management rights agreements, or to assign such management rights as planned, our business will suffer.
The alternative medicine industry faces strong opposition.
It is believed by many that well-funded, significant businesses may have a strong economic opposition to the medical marijuana industry as
currently formed. We believe that the pharmaceutical industry clearly does not want to cede control of any compound that could become a strong selling drug. For example, medical marijuana will likely adversely impact the existing market
for Marinol, the current marijuana pill sold by mainstream pharmaceutical companies. The pharmaceutical industry is well funded with a strong and experienced lobby that eclipses the funding of the medical marijuana movement. Any inroads
the pharmaceutical industry makes in halting or rolling back the medical marijuana movement could have a detrimental impact on the market for our services and products and thus on our business, operations and financial condition.
Marijuana remains illegal under federal law.
Marijuana remains illegal under federal law. It is a schedule-I controlled substance. Even in those jurisdictions in which the use
of medical marijuana has been legalized at the state level, its prescription is a violation of federal law. The United States Supreme Court has ruled in United States v. Oakland Cannabis Buyers Coop. and Gonzales v.
Raich that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes. Therefore, federal law criminalizing the use of marijuana preempts state laws that legalize its use for medicinal
purposes. Presently, despite federal law, many states are maintaining existing laws and passing new ones in this area. This may be because the Obama Administration has made a policy decision to allow states to implement these laws and not
prosecute anyone operating in accordance with applicable state law.
Regardless of the Obama Administrations policy decision, the
federal government may at any time choose to enforce the federal law, and, in the past, it has investigated medical marijuana businesses in the various states in which we do business. Moreover, we face another presidential election cycle in 2016,
and a new administration could introduce a less favorable policy. A change in the federal attitude towards enforcement could cripple the industry.
Although we do not market, sell, or produce marijuana or marijuana related products, there is a risk that we could be deemed to facilitate the
selling or distribution of marijuana in violation of the federal Controlled Substances Act, or be deemed to be aiding or abetting, or being an accessory to, a violation of the Controlled Substances Act. Additionally, even if the Federal
government does not prove a violation of the Controlled Substances Act, the federal government may seize, through civil asset forfeiture proceedings, certain Company assets, such as equipment, real estate, moneys and proceeds if the government can
prove a substantial connection between these assets and marijuana distribution or cultivation.
Adverse actions taken by the federal
government may lead to delays of our business operations, disruptions to our revenue streams, losses of substantial assets, and substantial litigation expenses. Furthermore, the medical marijuana industry is our primary target market, and if this
industry were unable to operate, we would lose the majority of our potential clients, which would have a negative impact on our business, operations and financial condition.
We and people and businesses that we do business with may have difficulty accessing the service of banks, which may make it difficult for them to
purchase our products and services.
As discussed above, the use of marijuana is illegal under federal law. Therefore, there
is a strong argument that banks cannot accept for deposit funds from the drug trade and therefore cannot do business with our clients that
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traffic in marijuana, and clinic operators often have trouble finding a bank willing to accept their business. On February 14, 2014, the U.S. Department of the Treasury Financial Crimes
Enforcement Network (FinCEN) released guidance to banks clarifying Bank Secrecy Act (BSA) expectations for financial institutions seeking to provide services to marijuana-related businesses. In addition, U.S.
Rep. Jared Polis (D-CO) has stated he will seek an amendment to banking regulations and laws in order to allow banks to transact business with state-authorized medical marijuana businesses. While these are positive developments, there can be no
assurance this legislation will be successful, or that, even with the FinCEN guidance, banks will decide to do business with medical marijuana retailers, or that, in the absence of actual legislation, state and federal banking regulators will not
strictly enforce current prohibitions on banks handling funds generated from an activity that is illegal under federal law. The inability of potential clients in our target markets to open accounts and otherwise use the services of banks may
make it difficult for such potential clients to purchase our products and services and could materially harm our business.
We may have difficulty
accessing bankruptcy courts.
As discussed above, the use of marijuana is illegal under federal law. Therefore, there is a strong
argument that the federal bankruptcy courts cannot provide relief for parties who engage in marijuana or marijuana-related businesses. Recent bankruptcy rulings have denied bankruptcies for dispensaries upon the justification that businesses cannot
violate federal law and then claim the benefits of federal bankruptcy for the same activity and upon the justification that courts cannot ask a bankruptcy trustee to take possession of, and distribute marijuana assets as such action would violate
the Controlled Substances Act. Therefore, we may not be able to seek the protection of the bankruptcy courts and this could materially affect our business or our ability to obtain credit.
State and municipal governments in which we do business or seek to do business may have, or may adopt laws that adversely affect our ability to do
business.
While the federal government has the right to regulate and criminalize marijuana, which it has in fact done, state and
municipal governments may adopt additional laws and regulations that further criminalize or negatively affect marijuana businesses. States that currently have laws that decriminalize or legalize certain aspects of marijuana, such as medical
marijuana, could in the future, reverse course and adopt new laws that further criminalize or negatively affect marijuana businesses. Additionally, municipal governments in these states may have laws that adversely affect marijuana businesses, even
though there are no such laws at the state level. For example, municipal governments may have zoning laws that restrict where marijuana operations can be located and the manner and size of which they can expand and operate. These municipal laws,
like the federal laws, may adversely affect our ability to do business, and adverse enforcement actions under these laws may lead to costly litigation and a closure of the businesses with which we have contracts or royalty-fee structures in place,
in turn, affecting our own business. Moreover, if additional states do not adopt laws that legalize certain aspects of the marijuana industry, we may not be able to expand our business in the manner in which we prefer.
Also, given the complexity and rapid change of the federal, state and local laws pertaining to marijuana, the Company may incur substantial
legal costs associated with complying with these laws and in acquiring the necessary state and local licenses required by our business endeavors. For example, some states permit entities to enter into joint venture relationships with individual
license holders that provide for revenue sharing arrangements. In other states, revenue sharing is not permitted, and we will accept fee-for-service arrangement on a cost-plus basis for our services. State and municipal governments may also limit
the number of specialized licenses available or apply stringent compliance requirements necessary to maintain the license. These developments may limit our ability to expand our negatively affect our business model.
We have a limited operating history and operate in a new industry, and we may not succeed.
We have a limited operating history and may not succeed. We are subject to all risks inherent in a developing business enterprise. Our
likelihood of continued success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with agricultural enterprises, retail operations and manufacturing of specialty
products and the competitive and regulatory environment in which we operate. For example, the medical marijuana industry is a new industry that, as a whole, may not succeed, particularly if the Federal government changes course and decides to
prosecute those dealing in medical marijuana
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under Federal law. If that happens, there may not be an adequate market for our services or products. As a new industry, there are not established players whose business models we can follow
or build upon. Similarly, there is limited information about comparable companies available for potential investors to review in making a decision about whether to invest in Medbox. Furthermore, as the medical marijuana industry is a new market, it
is ripe for technological advancements that could limit or eliminate the need for our products.
You should further consider, among other
factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages. For example, unanticipated expenses, problems, and technical difficulties may occur and they may result in
material delays in the operation of our business, in particular with respect to our new products. We may not be able to successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so,
such failure could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment.
We will require additional capital to finance our operations in the future, but that capital may not be available when it is needed and could be
dilutive to existing stockholders.
We will require additional capital for future operations. We plan to finance anticipated
ongoing expenses and capital requirements with funds generated from the following sources:
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cash provided by operating activities; |
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available cash and cash investments; and |
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capital raised through debt and equity offerings. |
Current conditions in the capital markets
are such that traditional sources of capital may not be available to us when needed or may be available only on unfavorable terms. Our ability to raise additional capital will depend on conditions in the capital markets, economic conditions and
a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure you that we will be able to successfully raise additional capital at all or on terms that are acceptable to
us. If we cannot raise additional capital when needed, it may have a material adverse effect on our liquidity, financial condition, results of operations and prospects. Furthermore, if we raise capital by issuing stock, the holdings of our
existing stockholders will be diluted and the market price of our common stock could decline.
If we raise capital by issuing debt
securities, such debt securities would rank senior to our common stock upon our bankruptcy or liquidation. If we raise capital by issuing equity securities, they may be senior to our common stock for the purposes of dividend and liquidating
distributions, which may adversely affect the market price of our common stock. Finally, upon dissolution or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a
distribution of our available assets prior to the holders of our common stock.
We may incur substantial costs as a result of our agreement to
purchase stock of MedVend, Inc.
In March 2013, we entered into a Membership Interest Purchase Agreement with the holders (the
MedVend Sellers) of 94.8% of the equity interests in MedVend Holdings, LLC, the holding company for MedVend, LLC (MedVend), a bio-tech company that features a patented automated medicine dispensing machine used for
traditional prescription pharmaceutical dispensing, and several related entities. Pursuant to the agreement, we agreed to acquire 50% of the equity interests in MedVend Holdings in exchange for $4.1 million to be paid $300,000 in cash at
closing and $3.8 million to be paid in either cash or our common stock on the 10th business day after the one-year anniversary of the closing. As noted below, we were subsequently served with a complaint alleging that the Sellers did not
have authority to enter into the transaction with us because the consent of the minority stockholders was required. We are in litigation with the MedVend Sellers to rescind the Membership Interest Purchase Agreement. If we are unable to
rescind this agreement, we will owe the $300,000 in cash and $3.8 million in cash or shares of our common stock to the Sellers.
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Our financial statements may not be comparable to those of other companies.
Pursuant to Section 107(b) of the JOBS Act, we have elected to use the extended transition period for complying with new or revised
accounting standards under Section 102(b)(2) of The JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply
to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates, and our stockholders and potential investors may have difficulty in analyzing our operating results
if comparing us to such companies.
The success of our new and existing products and services is uncertain.
We have committed, and expect to continue to commit, significant resources and capital to develop and market existing products and services
enhancements and new products and services. These products and services are relatively untested, and we cannot assure you that we will achieve market acceptance for these products and services, or other new products and services that we may offer in
the future. Moreover, these and other new products and services may be subject to significant competition with offerings by new and existing competitors in the business of dispensing regulated pharmaceutical products. In addition, new products,
services and enhancements may pose a variety of technical challenges and require us to attract additional qualified employees. The failure to successfully develop and market these new products, services or enhancements or to hire qualified employees
could seriously harm our business, financial condition and results of operations.
Our business is dependent upon continued market acceptance by
consumers.
We are substantially dependent on continued market acceptance of our Medbox machines and our vaporizer products by
consumers. Although we believe that the use of dispensing machines and vaporizers in the United States is gaining better consumer acceptance, we cannot predict the future growth rate and size of this market.
If we are able to expand our operations, we may be unable to successfully manage our future growth.
If we are able to expand our operations in the United States and in other countries where we believe our services and products will be
successful, we may experience periods of rapid growth, which will require additional resources. Any such growth could place increased strain on our management, operational, financial and other resources, and we will need to hire, train,
motivate, and manage additional employees, as well as attract management, sales, finance and accounting, international, technical, and other professionals. In addition, we will need to expand the scope of our infrastructure and our physical
resources. Any failure to expand these areas and implement appropriate procedures and controls in an efficient manner and at a pace consistent with our business objectives could have a material adverse effect on our business and results of
operations.
Our business may expose us to product liability claims for damages resulting from the design or manufacture of our products. Product
liability claims, whether or not we are ultimately held liable for them, could have a material adverse effect on our business and results of operations.
We may be subject to product liability claims if any of our products are alleged to be defective or cause harmful effects. Product liability
claims or other claims related to our products, regardless of their outcome, could require us to spend significant time and money in litigation, divert management time and attention, require us to pay significant damages, harm our reputation or
hinder acceptance of our products. Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable or reasonable terms. An inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our products.
Our prior operating results may not be indicative of our future results.
You should not consider prior operating results with respect to revenues, net income or any other measure to be indicative of our future
operating results. We are presently transitioning to a new business model. The timing and amount of future revenues will depend almost entirely the success of our new model and our ability to provide services to new customers. Our future
operating results will depend upon many other factors, including:
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our ability to successfully implement our new business model, including developing properties and selling management rights associated with monitoring security and compliance attributes for such properties,
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our ability to develop and market product enhancements and new products, |
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The restatement of the financial
information in our Form 10 Registration Statement and Quarterly Reports on Form 10-Q for the first three quarters of 2014 and related investigations are and will continue to be time consuming and expensive and have had, and could continue to have, a
material adverse effect on our financial condition, results of operations or cash flows.
We devoted substantial resources to the
completion of the restatement of Financial Statements in our Form 10 Registration Statement and Quarterly Reports on Form 10-Q for the first three quarters of 2014 (the Restatements) and to compliance with the SECs
investigation of our financial reporting and revenue recognition methodologies as well as internal control failures that precipitated the Restatements. As a result of these efforts, we have incurred significant fees and expenses, primarily for
additional audit, financial, legal and related costs for the Restatements. We expect to continue to incur additional fees and expenses in connection with complying with the SECs investigation, applicable SEC reporting requirements, and the
operation of some of our processes and internal controls. These costs, as well as the substantial management time devoted to address these issues, has had, and could continue to have, a material adverse effect on our financial condition, results of
operations or cash flows.
We are the subject of litigation relating to the Restatements and the SEC investigation, which could adversely affect our
business, results of operations or cash flows.
As previously reported, the Company is presently the subject of a non-public
investigation by the SEC related to the Companys revenue recognition methodologies that led to the Restatements among other matters.
The Company is presently subject to litigation, described under the heading Legal Proceedings in this prospectus, and in the
future could be subject to other proceedings or actions arising in relation to the Restatements or the SEC investigation or related matters. This litigation and any other regulatory proceedings or actions may be time consuming, expensive and
distracting from the conduct of our business. In the event that there is an adverse ruling in any legal or regulatory proceeding or action, we may be required to make payments to third parties that could have a material adverse effect on our
business, financial condition, results of operations or cash flows. Furthermore, regardless of the merits of any claim, legal proceedings may result in substantial legal expense and also result in the diversion of time and attention by our
management.
Our insurance coverage may not cover any costs and expenses related to this or any future litigation. In addition, we have
paid and continue to pay legal counsel fees incurred by our present and former directors, officers and employees who are involved with the SEC inquiry, the Restatements, and the related review by the Board of Directors. Furthermore, Restatements and
the SEC investigations and related litigation could impair our reputation, could cause our customers and partners to lose confidence in us, and could make it more difficult to attract new customers and entities to enter into real estate purchase
agreements with or to act as assignees of management rights agreements, allowing us to operate our business or to retain qualified individuals to serve on the board of directors or as executive officers.
Our lack of adequate D&O insurance may also make it difficult for us to retain and attract talented and skilled directors and officers.
We are and may in the future be subject to additional litigation, including potential class action and stockholder derivative
actions. Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can remain unknown for significant periods of time. Although we have obtained directors
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and officers liability (D&O) insurance to cover such risk exposure for our directors and officers, the amount of D&O insurance we have obtained is lower than customary for
public companies. Such insurance generally pays the expenses (including amounts paid to plaintiffs, fines, and expenses including attorneys fees) of officers and directors who are the subject of a lawsuit as a result of their service to the
Company. The amount of D&O insurance we have obtained may not be adequate to cover such expenses should such a lawsuit occur, and our deductibles are higher than we may be able to pay. While neither Nevada law nor our Articles of
Incorporation or bylaws require us to indemnify or advance expenses to our officers and directors involved in such a legal action, we have entered into an indemnification agreement with our Chief Executive Officer, Chief Financial Officer and
independent directors and intend to enter into similar agreements with other officers and directors in the future. Without adequate D&O insurance, the amounts we would pay to indemnify our officers and directors should they be subject to legal
action based on their service to the Company could have a material adverse effect on our financial condition, results of operations and liquidity. Furthermore, our lack of adequate D&O insurance may make it difficult for us to retain and
attract talented and skilled directors and officers, which could adversely affect our business.
If we are unable to maintain effective internal
control over our financial reporting, the reputational effects could materially adversely affect our business.
Under the
provisions of Section 404(a) of the Sarbanes-Oxley Act of 2002, as amended by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted rules requiring public companies to perform an evaluation of Internal Control
over Financial Reporting (Internal Controls) and to report on our evaluation in our Annual Report on Form 10-K. Our Internal Controls constitute a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with GAAP. However, as discussed in greater detail in Item 9A of this Form 10-K, the Company identified material weaknesses in its Internal Controls resulting in restatement of its
consolidated financial statements. If our remediation of such reported material weakness is ineffective, or if in the future we are unable to maintain effective Internal Controls, additional resulting material restatements could occur,
regulatory actions could be taken, and a resulting loss of investor confidence in the reliability of our financial statements could materially adversely affect the value of our common stock. We may be required to expend substantial funds and
resources in order to rectify any deficiencies in our Internal Controls. Further, if lenders lose confidence in the reliability of our financial statements it could have a material adverse effect on our ability to fund our operations.
The integration of the Vaporfection acquisition may be more costly and time consuming than we initially expected and the acquired product line may not
be able to be sold at sufficient gross margin and volume levels in order to support the operations or justify the recorded values for intangible assets or goodwill.
The acquisition of Vaporfection International, Inc. in April 2013 included a requirement that we invest approximately $1,600,000 over time for
various past obligations and future operations. Among the assets we acquired were an existing product line and a developmental product. With the popularity of vaporizer products increasing, many competitors have entered the market, some of
whom are very well capitalized. In addition, the market leader has significant early advantages over our product and we expect to have to significantly reduce our production costs for our products to be competitive in the
market. Furthermore, significant advertising is needed to generate demand for the products in an overcrowded vaporizer environment. With the existing cost structure of the acquired product and the high cost of entering the market, we may
not be able to generate sufficient gross product margin on sales to support the operations of this subsidiary.
We may be unable to adequately
protect or enforce our patents and proprietary rights.
Our continuing success depends, in part, on our ability to protect our
intellectual property and maintain the proprietary nature of our technology through a combination of patents, licenses and other intellectual property arrangements, without infringing the proprietary rights of third parties. We cannot assure
you that these patents will be held valid if challenged, or that other parties will not claim rights in or ownership of our patent and other proprietary rights. We also cannot assure you that our pending patents will be issued. Moreover,
patents issued to us or those we license patents from may be circumvented or fail to provide adequate protection.
16
We depend upon key personnel, the loss of which could seriously harm our business.
Our operating performance is substantially dependent on the continued services of our executive officers and key employees, in particular,
Jeffrey Goh, our President and Interim Chief Executive Officer, and C. Douglas Mitchell, our Chief Financial Officer. The unexpected loss of the services of Mr. Goh, or Mr. Mitchell could have a material adverse effect on our
business, operations, financial condition and operating results, as well as the value of our common stock.
Marijuana dispensed by our products are
subject to numerous governmental regulations and it can be costly to comply with these regulations and to develop compliant products and processes.
Various herbal medicines dispensed by our products are subject to rigorous regulation by the U.S. Food and Drug Administration, and numerous
international, supranational, federal, and state authorities. The process of obtaining regulatory approvals to market a drug or medical device can be costly and time-consuming, and approvals might not be granted for future products, or additional
indications or uses of existing products, on a timely basis, if at all. Delays in the receipt of, or failure to obtain approvals for, future products, or new indications and uses, could result in delayed realization of product revenues, reduction in
revenues, and in substantial additional costs. In addition, no assurance can be given that we will remain in compliance with applicable FDA and other regulatory requirements once clearance or approval has been obtained for a product.
These requirements include, among other things, regulations regarding manufacturing practices, product labeling, and advertising.
Laws and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our business, and we cannot
predict the impact that future regulations may have on us.
Local, state and federal medical marijuana laws and regulations are
broad in scope and they are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our sales or marketing practices. In addition, violations of these laws, or
allegations of such violations, could disrupt our business and result in a material adverse effect on our revenues, profitability, and financial condition.
In addition, it is possible that regulations may be enacted in the future that will be directly applicable to Medbox and our services and
products. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated,
could have on our business. These potential effects could include, however, requirements for the revisions to our products to meet new standards, the recall or discontinuance of certain products, or additional record keeping and reporting
requirements. Any or all of these requirements could have a material adverse effect on our business, financial condition, and results of operations.
Risks Related to the Companys Common Stock
Our stock price has been extremely volatile.
The market price of our common stock has been extremely volatile and could be subject to further significant fluctuations due to changes in
sentiment in the market regarding our operations or business prospects, among other factors.
Among the factors that could affect our
stock price are:
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the conversion of convertible debentures held by investors into shares of common stock based upon the terms of the debentures, including conversion of the August 14 Debentures, the August 20 Debentures, the
July 2015 Debenture and the October 2015 Debenture; |
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our announcements regarding our Restatements and the status of the ongoing SEC investigation and related stockholder litigation; |
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industry trends and the business success of our vendors; |
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actual or anticipated fluctuations in our quarterly financial and operating results and operating results that vary from the expectations of our management or of securities analysts and investors; |
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our failure to meet the expectations of the investment community and changes in the investment community; |
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recommendations or estimates of our future operating results; |
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announcements of strategic developments, acquisitions, dispositions, financings, product developments and other materials events by us or our competitors; |
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regulatory and legislative developments; |
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general market conditions; |
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other domestic and international macroeconomic factors unrelated to our performance; and |
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additions or departures of key personnel. |
We may not have enough unauthorized common stock reserved to
meet requirements under convertible debentures issued to investors.
We have issued convertible debentures to investors in order
to raise capital. The debentures are convertible into common stock at a discount to market price at the election of the investor, subject to certain restrictions set forth in the debentures. Pursuant to the terms of the debentures, we are required
to reserve unissued shares of Common Stock equal to 200% of the shares of stock into which the debentures are convertible at a given market price. Because the market price of our common stock is not fixed, the Company, at a given time, may not have
enough available shares of Common Stock to meet this reserve requirement and may need to undertake efforts to authorize and reserve additional stock or to enter into other capital raising transactions in order to retire debentures and lower the
requirements for the stock reserve. If the Company is not able to carry out the foregoing actions, the investors could take action against the Company or declare or enforce an event of default under the debentures, which would permit the investors
to accelerate the repayment of principal and interest under the debentures plus penalties, increased interest rates following the default, and the right to liquidated damages of $1,000 per trading day upon the Companys failure to convert the
debentures.
Because our common stock is not listed on any national securities exchange, investors may find it difficult to buy and sell our shares.
Our common stock is not listed on any national securities exchange. Accordingly, investors may find it more difficult to buy and
sell our shares than if our common stock was traded on an exchange. Although our common stock is traded on the OTCQB, it is an unorganized, inter-dealer, over-the-counter market which provides significantly less liquidity than the NASDAQ Capital
Market or other national securities exchanges. These factors may have an adverse impact on the trading and price of our common stock.
Sales by our
stockholders of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock.
A substantial portion of our total outstanding shares of common stock may be sold into the market under Rule 144 promulgated under the
Securities Act. Such sales could cause the market price of our common stock to drop, even if our business is doing well. Such sales may include sales by officers and directors of the Company, who have entered into pre-arranged stock trading
plans to sell shares of the Companys common stock beneficially owned by them, established under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.
Furthermore, the market price of our common stock could decline as a result of the perception that such sales could occur. These sales,
or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate.
18
Our preferred stock may have rights senior to those of our common stock which could adversely affect
holders of our common stock.
Our Articles of Incorporation give our Board of Directors the authority to issue additional series
of preferred stock without a vote or action by our stockholders. The Board also has the authority to determine the terms of preferred stock, including price, preferences and voting rights. The rights granted to holders of preferred stock in the
future may adversely affect the rights of holders of our common stock. Any such authorized class of preferred stock may have a liquidation preference a pre-set distribution in the event of a liquidation that would reduce the
amount available for distribution to holders of common stock or superior dividend rights that would reduce the amount of dividends that could be distributed to common stockholders. In addition, an authorized class of preferred stock may have
voting rights that are superior to the voting rights of the holders of our common stock. For a description of the voting and conversion rights relating to the Companys Series A Preferred Stock see Note 17 to our consolidated financial
statements for the year ended December 31, 2014 included herein. Presently, there are no shares of preferred stock outstanding.
We are an
emerging growth company and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various
reporting requirements applicable to other public companies, but not to emerging growth companies, including, but not limited to, a requirement to present only two years of audited financial statements, an exemption from the auditor attestation
requirement of Section 404 of the Sarbanes-Oxley Act, reduced disclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies and no requirement to seek non-binding advisory votes on
executive compensation or golden parachute arrangements. We have elected to adopt these reduced disclosure requirements. We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these
exemptions. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile.
We do not expect to pay any cash dividends in the foreseeable future.
We intend to retain our future earnings, if any, in order to reinvest in the development and growth of our business and, therefore, do not
intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations,
capital requirements, and such other factors as our Board of Directors deems relevant. Accordingly, investors may need to sell their shares of our common stock to realize a return on their investment, and they may not be able to sell such
shares at or above the price paid for them.
We can sell additional shares of common stock without consulting stockholders and without offering
shares to existing stockholders, which would result in dilution of existing stockholders interests in Medbox and could depress our stock price.
Our Articles of Incorporation authorize 400,000,000 shares of common stock, of which 240,646,727 shares of common stock are issued and
outstanding as of January 8, 2016, and 10,000,000 shares of preferred stock, of which no shares are outstanding as of January 8, 2016, and our Board of Directors is authorized to issue additional shares of our common stock and preferred
stock, including up to 535,744 shares of common stock authorized under our 2014 Equity Incentive Plan. Although our Board of Directors intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to our then existing
stockholders in connection with any future issuance of our capital stock, the future issuance of additional shares of our common stock or preferred stock convertible into common stock would cause immediate, and potentially substantial, dilution to
our existing stockholders, which could also have a material effect on the market value of the shares.
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FORWARD-LOOKING STATEMENTS
Information in this prospectus contains 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, future, plan, 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 and products, 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 this prospectus. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this
prospectus 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.
Additional risks and uncertainties resulting from our restatement of our consolidated financial statements in
the our Form 10 Registration Statement and in our Quarterly Reports on Form 10-Q for the first three quarters of 2014, among others, could, (i) cause us to incur substantial additional legal, accounting and other expenses, (ii) result in
additional shareholder, governmental or other actions, or adverse consequences from class action or derivative suits from stockholders or the formal investigation being conducted by the Securities and Exchange Commission (SEC),
(iii) cause our customers and contract partners to lose confidence in us; (iv) result in removal of the Companys stock from the over-the-counter bulletin board quotation system (the OTCBB), or (v) result in
additional failures of the Companys internal controls if the Companys remediation efforts are not effective. Any one or more of such risks and uncertainties could have a material adverse effect on us or the value of our common stock.
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USE OF PROCEEDS
We are filing the registration statement of which this prospectus is a part to permit the holder of the shares of our common stock described
in the section entitled Selling Stockholders to resell such shares. We will receive no proceeds from the sale of shares of common stock offered by the selling stockholders.
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SELLING STOCKHOLDERS
This prospectus relates to the public offering of up to 142,000,000 shares of common stock of the Company by the selling stockholders issuable
upon conversion of principal under convertible debentures.
The following table sets forth, based on information provided to us by the
selling stockholders or known to us, the name of each selling stockholder, the nature of any position, office or other material relationship, if any, which the selling stockholder has had, within the past three years, with us or with any of our
predecessors or affiliates, and the number of shares of our common stock beneficially owned by the stockholder before this offering. The number of shares owned are those beneficially owned, as determined pursuant to Exchange Act Rule 13d-3, and
the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares of common stock as to which a person has sole or shared voting power or investment power
and any shares of common stock which the person has the right to acquire within 60 days through the exercise of any option, warrant or right, through conversion of any security or pursuant to the automatic termination of a power of attorney or
revocation of a trust, discretionary account or similar arrangement. None of the selling stockholders is a broker-dealer or an affiliate of a broker-dealer.
Under the terms of the Debentures, the Company shall not affect any conversion of principal and/or interest of the Debenture (or exercise of
any warrants) to the extent that, after giving effect to the conversion the selling stockholder would, together with its affiliates, beneficially own in excess of 4.99% of the common stock of the Company (excluding stock underlying Debentures or
unexercised warrants or other securities). The number of shares in the table below do not reflect this limitation. The selling stockholders may sell all, some or none of their shares in this offering. See Plan of Distribution.
We have assumed all shares of common stock reflected on the table will be sold from time to time in the offering covered by this
prospectus. Because the selling stockholders may offer all or any portion of the shares of common stock listed in the table below, no estimate can be given as to the amount of those shares of common stock covered by this prospectus that will be
held by the selling stockholders upon the termination of the offering.
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Selling Stockholder |
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Number of Shares Beneficially Owned Before Offering |
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Number of Shares Offered |
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Number of Shares Beneficially Owned After Offering |
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Percentage of Common Stock Beneficially Owned After Offering (1) |
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Redwood Management LLC (2) |
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642,842,362 |
(3) |
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80,000,000 |
(4) |
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559,842,362 |
(5) |
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70.1 |
% |
YA Global Master SPV, Ltd. (6) |
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424,778,669 |
(7) |
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39,000,000 |
(8) |
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365,778,669 |
(9) |
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61.0 |
% |
RDW Capital LLC (10) |
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642,842,362 |
(11) |
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3,000,000 |
(12) |
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559,842,362 |
(13) |
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70.1 |
% |
Hudson Street, LLC (14) |
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424,778,669 |
(15) |
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20,000,000 |
(16) |
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365,778,669 |
(17) |
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61.0 |
% |
(1) |
Based on 240,646,727 shares of common stock issued and outstanding as of January 8, 2016. |
(2) |
Figures in columns 2 and 4 include shares of common stock beneficially owned by Redwood Fund II LLC (Redwood II), Redwood Fund III, Ltd. (Redwood III) and RDW Capital LLC, each of which is an
affiliate of Redwood Management LLC (Redwood Management). Gary Rogers and John DeNobile have joint voting and dispositive power over the securities of the Company held by the selling stockholder, as well as Redwood II, and Redwood III.
John DeNobile has voting and dispositive power over the securities of the Company held by RDW Capital LLC. Neither Redwood II or Redwood III are selling stockholders. |
(3) |
Represents (i) 2,000,000 shares of common stock held by the selling stockholder or their affiliates on January 8, 2016, plus (ii) 634,509,921 shares of common stock issuable to selling stockholder or its
affiliates upon conversion of outstanding August 14 Debentures and October 2015 Debentures (including accrued interest thereunder), based on a conversion price of 51% of the lowest volume weighted average price for the 30 consecutive trading
days prior to January 8, 2016, and (iii) 6,332,441 shares of common stock issuable to selling stockholder or their affiliates upon exercise of warrants. |
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(4) |
Represents 80,000,000 shares issuable upon conversion of principal under August 14 Debentures. |
(5) |
Represents (i) 2,000,000 shares of common stock held by the selling stockholder or its affiliates on January 8, 2016, plus (ii) 551,509,921 shares of common stock issuable to selling stockholder or its
affiliates upon conversion of outstanding debentures that are not being registered in this Registration Statement (including interest thereunder) as if such debentures were converted on January 8, 2016, plus (iii) 6,332,441 shares of
common stock issuable to selling stockholder or its affiliates upon exercise of warrants. |
(6) |
Mark Angelo has voting and dispositive power over the securities of the Company held by the selling stockholder. |
(7) |
Represents (i) 6,715,726 shares of common stock held by selling stockholder and its affiliates as of January 8, 2016, plus (ii) 387,891,375 shares of common stock issuable selling stockholder or its
affiliates upon conversion of outstanding August 14 Debentures and August 20 Debentures (including accrued interest thereunder), based on a conversion price of 51% of the lowest volume weighted average price for the 30 consecutive trading
days prior to January 8, 2016, plus (iii) 30,171,568 shares of common stock issuable to the selling stockholder upon conversion of outstanding warrants. |
(8) |
Represents 39,000,000 shares issuable upon conversion of principal under the August 20 Debentures. |
(9) |
Represents (i) 6,715,726 shares of common stock held by selling stockholder and its affiliates as of January 8, 2016, plus (ii) 328,891,375 shares of common stock issuable to selling stockholder
and its affiliates upon conversion of outstanding debentures (including interest) that are not being registered in this Registration Statement as if such debentures were converted on January 8, 2016, plus (iii) 30,171,568 shares of common
stock issuable to the selling stockholder upon conversion of outstanding warrants. |
(10) |
Figures in columns 2 and 4 include shares of common stock beneficially owned by RDW Capital, LLC (RDW), which is an affiliate of Redwood Management. John DeNobile has voting and dispositive power over the
securities of the Company held by the selling stockholder. |
(11) |
Represents (i) 2,000,000 shares of common stock held by the selling stockholder or their affiliates on January 8, 2016, plus (ii) 634,509,921 shares of common stock issuable to selling stockholder or its
affiliates upon conversion of outstanding August 14 Debentures and October 2015 Debentures (including accrued interest thereunder), based on a conversion price of 51% of the lowest volume weighted average price for the 30 consecutive trading
days prior to January 8, 2016, and (iii) 6,332,441 shares of common stock issuable to selling stockholder or their affiliates upon exercise of warrants. |
(12) |
Represents 3,000,000 shares issuable upon conversion of principal under July 2015 Debenture, plus the August 14 Debenture assigned to the July 2015 Investor. |
(13) |
Represents (i) 2,000,000 shares of common stock held by the selling stockholder or its affiliates on January 8, 2016, plus (ii) 551,509,921 shares of common stock issuable to selling stockholder or its
affiliates upon conversion of outstanding debentures that are not being registered in this Registration Statement (including interest thereunder) as if such debentures were converted on January 8, 2016, plus (iii) 6,332,441 shares of
common stock issuable to selling stockholder or its affiliates upon exercise of warrants. |
(14) |
Mark Angelo has voting and dispositive power over the securities of the Company held by the selling stockholder. |
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(15) |
Represents (i) 6,715,726 shares of common stock held by selling stockholder and its affiliates as of January 8, 2016, plus (ii) 387,891,375 shares of common stock issuable selling stockholder or its
affiliates upon conversion of outstanding August 14 Debentures and August 20 Debentures (including accrued interest thereunder), based on a conversion price of 51% of the lowest volume weighted average price for the 30 consecutive trading
days prior to January 8, 2016, plus (iii) 30,171,568 shares of common stock issuable to the selling stockholder or its affiliates upon conversion of outstanding warrants into common stock. |
(16) |
Represents 20,000,000 shares issuable upon conversion of principal under the August 14 Debentures assigned to Hudson Street, LLC. |
(17) |
Represents (i) 6,715,726 shares of common stock held by selling stockholder and its affiliates as of January 8, 2016, plus (ii) 328,891,375 shares of common stock issuable to selling stockholder
and its affiliates upon conversion of outstanding debentures (including interest) that are not being registered in this Registration Statement as if such debentures were converted on January 8, 2016, plus (iii) 30,171,568 shares of common
stock issuable to an affiliate of the selling stockholder upon conversion of outstanding warrants. |
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PLAN OF DISTRIBUTION
The selling stockholders, as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of common stock
or interests in shares of common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of
their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices
at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.
The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein:
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ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
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block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction; |
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purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
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an exchange distribution in accordance with the rules of the applicable exchange; |
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privately negotiated transactions; |
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short sales effected after the date the registration statement of which this prospectus is a part is effective; |
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through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; |
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broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; |
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a combination of any such methods of sale; and |
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any other method permitted by applicable law. |
The selling stockholders may, from time to
time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock,
from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the
selling beneficial owners for purposes of this prospectus.
In connection with the sale of our common stock or interests therein, the
selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders
may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into
option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of the common
stock less discounts or commissions, if any. Each of the selling stockholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly
or through agents. We will not receive any of the proceeds from this offering.
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The selling stockholders also may resell all or a portion of the shares in open market
transactions in reliance upon Rule 144 under the Securities Act of 1933, as amended (the Securities Act), provided that they meet the criteria and conform to the requirements of that rule.
The selling stockholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein
may be underwriters within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the
Securities Act. Selling stockholders who are underwriters within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.
To the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase prices and
public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this prospectus.
In order to comply with the securities laws of some states, if
applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied with.
We have advised the selling stockholders that the
anti-manipulation rules of Regulation M under the Securities Exchange Act of 1934, as amended (the Exchange Act) may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In
addition, to the extent applicable we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the
Securities Act. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.
We have agreed to indemnify the selling stockholders against liabilities, including liabilities under the Securities Act and state securities
laws, relating to the registration of the shares offered by this prospectus.
We have agreed with the selling stockholders to keep the
registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement,
or (2) the date on which all of the shares may be sold without restriction pursuant to Rule 144 of the Securities Act.
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DESCRIPTION OF SECURITIES TO BE REGISTERED
The following description of our capital stock is a summary of the material terms of our capital stock. This summary is subject to and
qualified in its entirety by our Articles of Incorporation and bylaws.
Our authorized capital stock consists of 410,000,000 shares of
stock consisting of (i) 400,000,000 shares of common stock, $0.001 par value per share and (ii) 10,000,000 shares of preferred stock, $0.001 par value per share.
Common Stock
The Board of Directors is
authorized to issue, without stockholder approval, any authorized but unissued shares of our common stock. Each share of our common stock is entitled to share pro rata in dividends and distributions with respect to our common stock when, as and
if declared by the Board of Directors from funds legally available therefore. No holder of any shares of common stock has any preemptive right to subscribe for any of our securities. Upon our dissolution, liquidation or winding up, the
assets will be divided pro rata on a share-for-share basis among holders of the shares of common stock after any required distribution to the holders of preferred stock, if any. All shares of common stock outstanding are fully paid and
non-assessable.
Voting Rights
Holders of common stock are entitled to one vote per share on all matters voted on generally by the stockholders, including the election of
directors, and, except as otherwise required by law or except as provided with respect to any series of preferred stock, the holders of the shares possess all voting power. The holders of shares of our common stock do not have cumulative voting
rights in connection with the election of the Board of Directors, which means that the holders of more than 50% of such outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose, and,
in such event, the holders of the remaining shares will not be able to elect any of our directors.
Liquidation Rights
Subject to any preferential rights of any series of preferred stock, holders of shares of common stock are entitled to share ratably in our
assets legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up.
Absence of
Other Rights
Holders of common stock have no preferential, preemptive, conversion or exchange rights.
Preferred Stock
The Board of Directors
is authorized, without further stockholder approval, to issue from time to time any of our authorized but unissued shares of preferred stock. The preferred stock may be issued in one or more series and the Board of Directors may fix the rights,
preferences and designations thereof. Holders of our preferred stock are not entitled to any preemptive or preferential rights to subscribe for additional shares of our capital stock.
The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes,
could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding voting stock.
Series A Preferred Stock
5,000,000 shares of Preferred Stock have been designated Series A Preferred Stock, of which no shares are issued and outstanding as of the date
of this prospectus.
27
Dividend Rights
Holders of the Series A Preferred Stock are entitled to receive dividends or other distributions with the holders of the common stock on an as
converted basis when, as and if declared by our Board of Directors.
Conversion Rights
Each share of Series A Preferred Stock is convertible, at the option of the holder thereof and subject to notice requirements described in our
Articles of Incorporation, at any time, into five shares of our common stock.
Liquidation Preference
In the event of our liquidation, dissolution or winding up, holders of Series A Preferred Stock are entitled to receive, prior to the holders
of the other series of preferred stock and prior and in preference to any distribution of the assets or surplus funds of the Company to the holders of any other shares of our stock, an amount equal to $1.00 per share of Series A Preferred Stock
held, plus all declared but unpaid dividends thereon. A liquidation includes the acquisition of the Company by another entity or the sale of all or substantially all of our assets, unless the holders of a majority of the Series A Preferred
Stock agree otherwise.
Voting Rights
The holders of Series A Preferred Stock vote as a single class with the holders of our common stock. Holders of Series A Preferred Stock
have such number of votes as is determined by multiplying (a) the number of shares of Series A Preferred Stock held by such holder, (b) the number of issued and outstanding shares of the Series A Preferred Stock and common stock on a
fully-diluted basis, and (c) 0.00000025.
Additional Voting Rights
The consent of the holders of a majority of the outstanding shares of Series A Preferred Stock is required for us to do any of the following:
(i) take any action that would alter, change or affect the rights, preferences, privileges or restrictions of the Series A Preferred Stock, increase the authorized number of shares of the Series A Preferred Stock or designate any other series
of Preferred Stock; (ii) increase the size of any of our equity incentive plans or arrangements; (iii) make fundamental changes to our business; (iv) make any changes to the terms of the Series A Preferred Stock or to our Articles of
Incorporation or bylaws, including by designation of any stock; (v) create a new class of shares having preferences over or being on a parity with the Series A Preferred Stock as to dividends or assets, unless the purpose of creation of such
class is, and the proceeds to be derived from the sale and issuance thereof are to be used for, the retirement of all Series A Preferred Stock then outstanding; (vi) make any change in the size or number of authorized Directors;
(vii) repurchase any of the our common stock; (viii) sell, convey or otherwise dispose of, or create or incur any mortgage, lien, charge or encumbrance on or security interest in or pledge of, or sell and leaseback, all or substantially
all of our property or business or more than 50% of our stock in a single transaction; (ix) make any payment of dividends or other distributions or any redemption or repurchase of stock or options or warrants to purchase our stock; or
(x) sell any additional shares of preferred stock.
Voting Agreement
On January 21, 2015, the Company, Mr. Mehdizadeh, PVM, and Vincent Chase, Incorporated, (collectively, the VM Parties)
entered into an agreement pursuant to which, among other things, the parties agreed to not increase the size of the Board and to vote in favor of and to not remove directors Siegel, Lowe, Love and Marsala for a period of 12 months (the
Voting Agreement). Each of the directors of the Company is also a party to the Voting Agreement. The Voting Agreement prevents the shareholders of the Company that are a party to the Voting Agreement from voting in favor of electing new
directors to the Board for a period of 12 months from January 21, 2015. On August 11, 2015 and August 21, 2015 the parties to the Voting Agreement entered into a first and second amendment thereto extending the expiration of the
Voting Agreement to July 20, 2016 and then July 20, 2018, respectively. Mr. Marsala and Ms. Love are not presently serving on the Board, and the Voting Agreement presently only applies to Mssrs. Siegel and Lowe. The Voting
Agreement, as amended, could discourage potential investors from buying our stock.
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Anti-Takeover Provisions of Our Articles of Incorporation and bylaws and Nevada Law
General
A number of provisions of
our Articles of Incorporation and bylaws and Nevada Law deal with matters of corporate governance and certain rights of stockholders. The following discussion is a general summary of certain provisions of our articles and bylaws that might be
deemed to have a potential anti-takeover effect. The following description of certain of the provisions of our articles and bylaws is necessarily general and reference should be made in each case to the articles and bylaws.
Absence of Cumulative Voting
There is no cumulative voting in the election of our directors. Cumulative voting means that holders of stock of a corporation are
entitled, in the election of directors, to cast a number of votes equal to the number of shares that they own multiplied by the number of directors to be elected. Because a stockholder entitled to cumulative voting may cast all of his votes for
one nominee or disperse his votes among nominees as he chooses, cumulative voting is generally considered to increase the ability of minority stockholders to elect nominees to a corporations board of directors. The absence of cumulative voting
means that the holders of a majority of our shares can elect all of the directors then standing for election and the holders of the remaining shares will not be able to elect any directors.
Authorized Shares
As indicated
above, our Articles of Incorporation currently authorize the issuance of 400,000,000 shares of common stock and 10,000,000 shares of preferred stock. The authorization of shares of common stock and preferred stock in excess of the amount issued
and outstanding provides our Board of Directors with flexibility to effect, among other transactions, equity financings, acquisitions, stock dividends, stock splits and stock options or other stock-based compensation, and other corporate
actions. The unissued authorized shares also may be used by our Board of Directors consistent with its fiduciary duty to deter future attempts to gain control of Medbox.
Acquisition of Controlling Interest
The Nevada Revised Statutes contain provisions governing acquisition of a controlling interest of a Nevada corporation. These provisions
provide generally that any person or entity that acquires a certain percentage of the outstanding voting shares of a Nevada corporation may be denied voting rights with respect to the acquired shares, unless the holders of a majority of the voting
power of the corporation, excluding shares as to which any of such acquiring person or entity, an officer or a director of the corporation, and an employee of the corporation exercises voting rights, elect to restore such voting rights in whole or
in part. These provisions apply whenever a person or entity acquires shares that, but for the operation of these provisions, would bring voting power of such person or entity in the election of directors within any of the following three
ranges:
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one-fifth or more but less than one-third; |
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one-third or more but less than a majority; or |
The stockholders or board of directors of a corporation may elect to
exempt the stock of the corporation from these provisions through adoption of a provision to that effect in the articles of incorporation or bylaws of the corporation. Our Articles of Incorporation and bylaws do not exempt our common stock from
these provisions.
These provisions are applicable only to a Nevada corporation that:
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has 200 or more stockholders of record, at least 100 of whom have addresses in Nevada appearing on the stock ledger of the corporation; and |
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does business in Nevada directly or through an affiliated corporation. |
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The existence of these provisions may discourage companies or persons interested in acquiring a
significant interest in or control of our company, regardless of whether such acquisition may be in the interest of our stockholders.
Combinations
with Interested Stockholders
Nevadas combinations with interested stockholders statutes prohibit certain
business combinations between certain Nevada corporations and any person deemed to be an interested stockholder for two years after such person first becomes an interested stockholder unless (i) the
corporations Board of Directors approves the combination (or the transaction by which such person becomes an interested stockholder) in advance, or (ii) the combination is approved by the Board of Directors and 60% of the
corporations voting power not beneficially owned by the interested stockholder, its affiliates and associates. Furthermore, in the absence of prior approval, certain restrictions may apply even after such two-year period. For purposes of
these statutes, an interested stockholder is any person who is (x) the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the corporation, or (y) an affiliate or
associate of the corporation and at any time within the two previous years was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding shares of the corporation. The definition of the term
combination is sufficiently broad to cover most significant transactions between the corporation and an interested stockholder.
Note, however, that these provisions only apply if the corporation has securities (i) listed on a national securities exchange or
(ii) traded in an organized market and has least 2,000 holders and a market value of at least $20 million exclusive of insider holdings, and that the provisions do not apply to any person who became an interested stockholder before such
time. Therefore, these provisions do not currently apply to the Company.
Subject to certain timing requirements set forth in the
statutes, a corporation may elect not to be governed by these statutes. We have not included any such provision in our Articles of Incorporation.
The effect of these statutes may be to potentially discourage parties interested in taking control of the Company from doing so if it cannot
obtain the approval of our Board of Directors.
Summary of Anti-Takeover Provisions
The foregoing provisions of our Articles of Incorporation and bylaws and Nevada law could have the effect of discouraging an acquisition of
Medbox or stock purchases in furtherance of an acquisition, and could accordingly, under certain circumstances, discourage transactions that might otherwise have a favorable effect on the price of our common stock. In addition, such provisions
may make Medbox less attractive to a potential acquirer and/or might result in stockholders receiving a lesser amount of consideration for their shares of common stock than otherwise could have been available.
Our Board of Directors believes that the provisions described above are prudent and will reduce vulnerability to takeover attempts and certain
other transactions that are not negotiated with and approved by our Board of Directors. Our Board of Directors believes that these provisions are in our best interests and the best interests of our stockholders. In the Board of
Directors judgment, the Board of Directors is in the best position to determine our true value and to negotiate more effectively for what may be in the best interests of our stockholders. Accordingly, the Board of Directors believes that
it is in our best interests and in the best interests of our stockholders to encourage potential acquirors to negotiate directly with the Board of Directors and that these provisions will encourage such negotiations and discourage hostile takeover
attempts.
Despite the Board of Directors belief as to the benefits to us of the foregoing provisions, these provisions also may
have the effect of discouraging a future takeover attempt in which stockholders might receive a substantial premium for their shares over then current market prices and may tend to perpetuate existing management. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to do so. The Board of Directors, however, believes that the potential benefits of these provisions outweigh their possible disadvantages.
30
DESCRIPTION OF BUSINESS
Our clients currently operate or plan to establish dispensaries for the sale of marijuana for medical use or retail operations for the sale of
marijuana for recreational use or cultivation centers for the cultivation of marijuana, in those states where approved. Under our new business model, we seek to obtain licenses to operate dispensaries, cultivation centers and manufacturing
facilities with the licenses held by Medbox or an affiliated company. We contract with unaffiliated third-party operators to manage the day-to-day operations of cultivation centers, dispensaries and manufacturing facilities we develop and assign
them the rights to manage and operate the dispensary in exchange for a percentage of operating income or a fixed fee based on applicable state law. We also provide ongoing consulting services, for which we receive recurring revenues. We also sell a
line of portable vaporizers and accessories under the Vaporfection brand name. In September 2015 we launched a portable line of vaporizers called miVape in the market place.
In 2014, we arranged for the submission of 36 license applications in five states on behalf of clients. We have obtained 5 licenses or
registrations in the States of Oregon, Illinois, Washington and California for or on behalf of clients or for potential clients. We intend to retain the management rights for these locations and will seek to assign the rights to third parties for a
fee. Most of the current dispensary and cultivation sites are expected to begin conducting business in 2015 and 2016. We are also currently in discussions with third-party license holders that operate dispensaries and cultivation centers to provide
them consulting, training, compliance and regulatory support.
We are party to a master lease Portland, OR that we lease to an operator of
a dispensary. We also own 320 acres in the greater Pueblo, CO area and have engaged an independent farmer to cultivate hemp on the site. We are in escrow (with a planned closing for on or about December 1, 2015) for a dispensary site in San
Diego to be operated by an independent operator.
We are building a consistent, predictable and valuable revenue model based upon our
knowledge and expertise in the regulation of the cannabis industry and by helping our clients function efficiently in a developing industry. State and local laws regarding the operations of dispensaries, retail centers and cultivation centers for
marijuana vary. In states where revenue sharing with cannabis companies is permissible, our business structure will revolve around charging fees based upon a percentage of operating income, as defined in the business contract, generated from our
clients businesses. In states where revenue sharing is not permissible, agreements that we enter into with our clients will provide for fee-for-service arrangements on a cost-plus basis.
Our business model involves the following:
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Real Estate Acquisition and Leasing. We acquire real estate, either by purchase or lease in states where marijuana cultivation and sale have been approved, and build out licensed and approved cultivation centers,
dispensaries and manufacturing facilities, engaging independent licensed growers to operate the business. |
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Management and Operation. We contract with unaffiliated third-party operators to manage the day-to-day operations of cultivation centers, dispensaries and manufacturing facilities we develop and assign them the
rights to manage and operate the dispensary in exchange for a percentage of operating income or a fixed fee based on applicable state law. |
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Financing. We help independent business owners finance their business, including financing the cost of obtaining a license to do business, acquiring applicable zoning permits and building out their cultivation
centers or dispensaries. |
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Compliance. As part of our consulting services, we help independent business owners and managers solve issues they face in the highly regulated marijuana dispensary, cultivation and retail markets. We will assist
and advise clients in the compliance of applicable state and local laws through periodic audits of the businesss operating procedures, vetted against applicable regulations and best practices. Many states and municipalities require documented
compliance with state and local regulations and |
ordinances. We work with business owners and managers to professionally
manage their facilities, establish operating policies and procedures, and document adherence to their states laws to comply with applicable ordinances.
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The success of our business will depend on states continuing to legalize the use of marijuana for
medical and recreational purposes and, through applicable state legislation, adopting at the state and local level a corresponding process for licensing alternative clinics that dispense medicinal and recreational marijuana and for licensing
cultivation facilities required to grow the plants.
Corporate History
We were originally incorporated on June 16, 1977 in the State of Nevada as Rabatco, Inc. In May 2000, we changed our name to
MindfulEye, Inc. At that time, MindfulEye was in the business of operating self-serve kiosks where consumers could download movies onto a flash drive. Although MindfulEye had continuous operations and non-cash assets, revenues through the operation
of the kiosks were minimal. That business has since been discontinued. On November 25, 2011, P. Vincent Mehdizadeh, the founder of MDS and creator of the Medbox dispensing system, purchased 5,421,500 shares of common stock of the
Company, after which he owned 50% of the outstanding shares of common stock of the Company. On August 30, 2011, in anticipation of the transaction discussed below, we changed our name to Medbox, Inc.
Pursuant to a Stock Purchase Agreement between Medbox, Inc. and PVM International, Inc. (PVMI) dated as of December 31, 2011,
pursuant to which two separate closings occurred on January 1, 2012 and December 31, 2012, the Company acquired from PVMI all of the outstanding shares of common stock in (i) MDS, (ii) Medicine Dispensing Systems, Inc. (our
Arizona subsidiary), and (iii) Medbox, Inc. (our California subsidiary that is currently inactive), in exchange for two million shares of the Companys common stock and a $1 million promissory note. The promissory note was repaid in
full on April 16, 2013.
PVMI is an entity wholly-owned by P. Vincent Mehdizadeh. It is a separate entity from our subsidiary,
MDS.
Prescription Vending Machines, Inc. a California corporation, d/b/a Medicine Dispensing Systems (MDS) is a for-profit
corporation organized on February 15, 2008, under the laws of the State of California. Mr. Mehdizadeh, MDSs founder, developed the Medbox.
In August 2012, Mr. Mehdizadeh purchased the remainder of the outstanding shares of the Company in a private transaction and transferred
such shares to a holding company named Vincent Chase, Inc., controlled by Mr. Mehdizadeh at that time.
Effective August 24,
2015, Vincent Chase, Incorporated (VM) cancelled without consideration all of its 2 million shares of preferred stock and 3 million shares of Common Stock. As a result of this action, neither VM nor any of its affiliates,
including Mr. Mehdizadeh holds a majority of the voting power of the Company, which to the Companys knowledge is no longer held by a single person or entity or group thereof.
On November 16, 2015, Bruce Bedrick converted 1,000,000 shares of Series A preferred stock into 5,000,000 shares of common stock, and no
shares of preferred stock remain outstanding.
Key Legal Entities
Medbox, Inc., a Nevada corporation, operates the business directly and through the utilization of 6 operating subsidiaries, as follows:
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Prescription Vending Machines, Inc., a California corporation, d/b/a Medicine Dispensing Systems in the State of California (MDS), which distributes our Medbox product and provides related consulting
services. |
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Vaporfection International, Inc., a Florida corporation through which we distribute our medical vaporizing products and accessories. |
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Medbox Property Investments, Inc., a California corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers. |
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MJ Property Investments, Inc., a Washington corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers in the state of Washington. |
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Medbox Management Services, Inc., a California corporation specializing in providing management oversight and compliance services to state-licensed dispensaries for cultivation, dispensing, and marijuana
infused products. |
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EWSD I, LLC, an Arizona corporation, owns property in Colorado. |
Sales Channels
We work with funding partners, bankers in our industry, established dispensary operators, local entrepreneurs and experienced cultivators in
our industry to find new business opportunities. We participate in industry trade shows and have formed a network of business contacts with whom we plan engage and retain as clients for new locations and to whom we will provide consulting, training,
compliance and regulatory support.
After we find and qualify leads, we work to develop a business plan for the applicable dispensary or
cultivation center and then move to developing contracts that govern the relationship for establishing and developing the dispensary or center.
Regulatory Requirements for Procurement of Licenses
While we are not required to obtain governmental approval in connection with providing the services we offer or for the products we sell,
establishing an operating dispensary requires governmental approval, usually at the local and state level. Such approval is obtained through a complex licensing process that is newly adopted by the states in almost all cases, which we monitor
on behalf of our clients. The regulatory framework includes a rule-making procedure with a period for public comment. This is traditionally followed by draft rules posted by the department of health for the state or other consumer affairs department
charged by the state to facilitate the impending dispensary program. Thereafter, final rules are posted. The entire post legislative process can take six months to one year to fully implement. Licenses are typically granted within three to six
months of final rules being adopted and implemented.
Our Products and Services
Acquisition of Vaporfection International, Inc.
On March 22, 2013, we entered into a Securities Purchase Agreement with Vapor Systems International, LLC, to acquire all of the
outstanding shares of common stock of Vaporfection International, Inc., a wholly-owned subsidiary of Vapor Systems International, LLC formed in contemplation of the transaction and to which Vapor Systems International, LLC subsequently transferred
all its operations and assets in exchange for warrants to purchase shares of Medbox, Inc. common stock, which warrants could be exercised at a later date at the election of Vapor Systems International, LLC. The closing of this acquisition took
place on April 1, 2013.
Through our subsidiary Vaporfection International, Inc., we distribute of a line of medical vaporizing
products including award-winning Vaporfection vaporizers. Awards won by the Vaporfection vaporizers include the High Times Magazines Cannabis Cup, Product of the Year Best Vaporizer 2011 for the viVape and Best Vaporizer, Kush Expo
2012, for the viVape 2.
Our purchase of Vaporfection International included its inventory of Vaporfection vaporizers. Vaporfections
patented designs using Vapor Glass and Vapor Touch technology, featuring laboratory grade glass on glass heating element, heating chamber airway, and touch screen temperature control provide a directed stream of pure heated
air into the herb, which causes it to release its medicinal ingredient into the vapor. This process allows patients to ingest medicine in hospitals, treatment facilities, and even their homes, without disturbing others nearby.
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Vaporfection currently has two flagship products, one of which is a handheld portable device
called the miVape and was launched in the market place September 2015. Vaporfections other product is the viVape 2 unit that is a tabletop vaporizing unit.
The Medbox
The Medbox dispensing system
is intended for the control and dispensing of medical marijuana, and is an optional component of the build out services that we provide for dispensaries. The Medbox can also be sold separately, but only in states that have regulatory systems in
place to license alternative medicine clinics. We do not market or sell Medboxes in states that have de-criminalized the possession of medical marijuana if they have not put a licensing mechanism in place for clinics.
Patents, Trademarks and Intellectual Property
The Company has a number of patents and filed patent applications relating to its Medbox technology and its Vaporfection product
technology. One such patent is related to the Medbox medicine dispensing system and a second is related to the Seed to Sale technology. An additional 8 issued patents relate to both designs and heating element technology of our vaporizers. We
own 6 additional filed patent applications related to the Medbox machine technology and have 3 patent applications related to the vaporizer technology. Finally, the company owns the following registered trademarks for our vaporizer line of products
covering the names miVape, vivape, vaporfection, aqua vape, vaporsense and vaporglass.
More detailed information regarding our issued patent related to the Medbox dispensary system is as follows.
Patent Number US 7,844,363 B1
Patent
Number US 7,844,363 B1, is for a medicine dispensing system that allows for safe and secure access for patients that require medicine, while still giving clinic operators a powerful tool to help with inventory control and medication management. The
machine limits abuse and insures that patient data is securely kept onsite, at the pharmacy location, via computer-based application. The patent, which expires in November 2028, is owned by the Company.
The Alternative Medicine Market
We
market our services and products to the alternative medicine (medical marijuana) marketplace.
As the development of the alternative
medicine market is partially a function of state legislation, there are some states in which we cannot operate, but that we monitor in case they change or adopt favorable marijuana legislation. We are able to target our limited sales and
marketing resources to the few new markets that are introduced each year, if any. This way, we can cover the available territories and feature our service offerings in the media during the legislative process prior to the opening of a new
market. We believe that this media coverage cultivates brand awareness and a certain level of credibility.
As noted above, we market
our service offerings in states that have regulatory systems in place to license alternative medicine clinics. Of these states, we currently consider Arizona, California, Nevada, Illinois, Oregon and Washington to be our primary target
market. We provide licensing and application support in states outside of California through phone, email, in-person client meetings when necessary, and also through the use of video-conferencing. While we have contractors located in some
of our target market states, most client matters are accomplished remotely.
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The Vaporfection Vaporizer Market
Our target market for our vaporizer products is patients who use inhaled medications. We market our vaporizer products to distributors and
customers alike through the use of social media, print ads, and online marketing channels. We also market our vaporizer products directly to state licensed dispensaries for sale to their registered patients.
Competition
Competition Dispensary Retail
Location Advisory and Consulting Services
Novus Acquisition & Development
Novus focuses on offering consulting services to the medical marijuana market in states where medical marijuana is legalized. Novus also offers
healthcare coverage for marijuana-related products that are not covered by standard healthcare programs.
American Cannabis Company
American Cannabis Company, offers consulting services as well as products, and helps plan for a projects business model, including
development of its operations and management practices. It also assists with application for licenses at the local and state level.
AmeriCann, Inc.
AmeriCann develops cannabis cultivation facilities and provides capital for cannabis entrepreneurs in the State of Illinois. It also provides
capital for the acquisition of land, working capital and construction for facilities.
United Cannabis Company
UCANN manages and invests in a group that has obtained provisional licenses for cultivation, production and processing of cannabis in Las
Vegas, Nevada. UCANN has not yet begun operations, and is working on building a headquarter facility in Nevada. It intends to offer products and services to dispensaries in the Las Vegas market.
Competition Vaporfection Vaporizers
There are a myriad of vaporizing products currently available in the marketplace. We believe our proprietary glass on glass technology and
attractive packaging allows for users to experience the cleanest and healthiest vapor in the industry. In September 2015, we entered the portable vaporizer market through the development of our new product miVape.
Competition in the portable vaporizer markets is led by a product called Pax manufactured by a company called Ploom. A summary list of a
representative selection of competitors to our miVape product, based on publicly available information about these products, is below.
Vaporizer Comparison-Portable Models
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Brand |
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Vaporfection |
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Ploom |
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Organicix |
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Organicix |
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Arizer |
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Firefly |
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Model |
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miVape |
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PAX |
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DaVinci Vaporizer |
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DaVinci Ascent |
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Solo |
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Firefly |
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Style |
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Portable |
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Portable |
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Portable |
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Portable |
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Portable Diffuser |
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Portable |
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Vaporization Method |
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Convection |
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Conduction (Oven) |
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Conduction |
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Passive Convection |
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Conduction |
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Convection - Instant Heat |
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Materials to Vaporize |
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Herb, concentrates |
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Herbs only |
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Herbs, Oils (with oil tank optional), Waxes |
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Herbs, Oils, Waxes |
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Herbs |
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Herbs |
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Heating Element |
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Quartz heating element |
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Stainless Steel air chamber |
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Stainless Steel |
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Glass lined ceramic, all glass vapor path |
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Ceramic |
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Borosilicate Glass Heating Chamber, Element is proprietary Super Alloy |
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Power Source |
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Replaceable Litium Ion |
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Lithium Ion |
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Lithium-Ion |
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Lithium-ion |
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Lithium-Ion |
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Rechargable/ Replaceable Lithium-Ion |
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Battery Life |
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TBD |
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2 hours continuous use |
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~ 45 min to 1 hour |
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3 hours + |
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1-2 hours continuous use |
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1 Hour or so, 45 min to charge |
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Heat Up Time |
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1 minute (to 350 F) |
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at least 30 seconds (lowest setting) |
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1 min 30 seconds |
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~ 55 seconds |
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15 seconds- 2 min 30 seconds |
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Varies on how long you hold heat button |
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Temperature Settings |
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0 450 F |
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Low (370), Medium (390), High (410) |
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100 430 F |
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up to 430F |
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Levels 1-7 (122F -410F) |
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Max 400 F |
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Exterior |
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High Temp Plastic |
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Anodized Aluminum |
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High Temp Plastic |
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Brushed Aluminum Cast with various finishes |
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Aluminum |
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Vapor Path: Stainless Steel Plating; Chassis: Aircraft Aluminum; Window: Quartz Crystal |
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Number of Cycles per charge |
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~ 7 |
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5 |
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3-5 |
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Unknown |
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5-7 |
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Varies on use, probably about 10 - 15 inhalations based on reviews |
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Size |
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4.175 x 2.3 x 1.1 |
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4.13 x 1.4 x 7/8 |
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4 x 2.3 x 1 |
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4.47 x 2.24 x 1.03 |
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4.5 x 1.75 x 1.75 |
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5 3/8 x 2 x 7/8 |
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Weight |
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.5 lbs |
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.8 lbs |
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.35 lbs |
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.425 lbs |
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.52 lbs |
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.61 lbs |
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Warranty |
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3 years |
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10 years |
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2 years |
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|
2 years |
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2 year manufacturer, 1 year on battery, lifetime on element |
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5 year limited warranty |
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MSRP |
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~$ |
249 |
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250 |
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199 |
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$ |
249 |
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224 |
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$ |
269.95 |
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35
Expansion
Our long-range plans include expanding the marketing of our products in Canada and Europe.
Employees and Independent Contractors
As
of December 31, 2014, we had five full time employees and we also use the services of three independent contractors. These independent contractors perform the services of sales, business development, and real estate procurement, in addition to
project manager duties in various localities outside of California.
Implications of Emerging Growth Company Status
As a company with less than $1 billion in revenue in our last fiscal year, we are defined as an emerging growth company under the
Jumpstart Our Business Startups (JOBS) Act. We will retain emerging growth company status until the earliest of:
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The last day of the fiscal year during which our annual revenues are equal to or exceed $1 billion; |
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The last day of the fiscal year following the fifth anniversary of our first sale of common stock pursuant to a registration statement filed under the Securities Act of 1933, as amended, which we refer to in this
document as the Securities Act; |
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The date on which we have issued more than $1 billion in nonconvertible debt in a previous three-year period; or |
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The date on which we qualify as a large accelerated filer under Rule 12b-2 adopted under the Securities Exchange Act of 1934, as amended (the Exchange Act) (i.e., an issuer with a public float of
$700 million that has been filing reports with the U.S. Securities and Exchange Commission (SEC) under the Exchange Act for at least 12 months). |
36
As an emerging growth company, we may take advantage of specified reduced disclosure and other
requirements that are otherwise applicable generally to SEC reporting companies. For so long as we remain an emerging growth company we will not be required to:
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have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Wall Street Reform and Consumer Protection Act of 2002; |
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comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditors report providing additional information
about the audit and the financial statements (i.e., an auditor discussion and analysis); |
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submit certain executive compensation matters to stockholder non-binding advisory votes; |
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submit for stockholder approval golden parachute payments not previously approved; |
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disclose certain executive compensation related items, as we will be subject to the scaled disclosure requirements of a smaller reporting company with respect to executive compensation disclosure; and |
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present more than two years of audited financial statements and two years of selected financial data in a registration statement for our initial public offering of our securities. |
Pursuant to Section 107(b) of the JOBS Act, we have elected to use the extended transition period for complying with new or revised
accounting standards under Section 102(b)(2) of The JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards
apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates. Section 107 of the JOBS Act provides that our decision to opt into the extended
transition period for complying with new or revised accounting standards is irrevocable.
37
DESCRIPTION OF PROPERTY
At present, we do not own any real property other than as follows:
We own a 2,400 square foot retail space at 17905 Highway 536, Mount Vernon, WA 98273.
We are party to a 9,730 square foot master lease in Portland, OR at 729 SE Powell Blvd., Portland, Oregon 97202 that we sub-lease to an
operator of a dispensary.
We currently lease office space at 600 Wilshire Blvd. Suite 1500, Los Angeles, CA (3839 square foot office).
Our leases began on April 7, 2015, and terminates on September 29, 2016. The lease provides for monthly rent of approximately $7,500. The Company plans to sublease the former office in West Hollywood, CA.
On August 7, 2015, we acquired certain real property comprised of 320-acres of agricultural land in Pueblo, Colorado (the Acquired
Property). The transaction was structured as a purchase, pursuant to a certain Agreement of Purchase and Sale of Membership Interest (the Acquisition Agreement) entered into July 23, 2015 between and East West Secured
Development, LLC (the Seller) and the Company, of 100% of the membership interest of EWSD I, LLC (EWSD) upon EWSDs simultaneous purchase from Southwest Farms, Inc. (Southwest) of the Acquired Property. The
closing occurred on August 7, 2015, as a result of which the Company, through its new, wholly-owned subsidiary, EWSD, became the owner of the Acquired Property.
In connection with EWSDs purchase of the Acquired Property, EWSD entered into a secured promissory note (the Note) with
Southwest in the principal amount of $3,670,000. Interest on the outstanding principal balance of the Note shall accrue at the rate of five percent (5.0%) per annum. The Note shall be payable by EWSD in thirty-five payments of principal and
interest, which shall be calculated based upon an amortization period of thirty years, commencing on September 1, 2015 and continuing thereafter on the first day of each calendar month through and including July 1, 2018; and one final
balloon payment of all unpaid principal and accrued but unpaid interest on August 1, 2018. The Note is secured by a deed of trust (the Deed of Trust) and assignment of rents (Assignment of Rents and Leases) encumbering
the Acquired Property.
In connection with the Closing, EWSD also entered into an unsecured promissory note (the Unsecured
Note) with the Seller, in respect of payments previously made by Seller to Southwest, in the principal amount of $830,000. Interest on the outstanding principal balance of the Unsecured Note shall accrue at the rate of six percent
(6.0%) per annum. The Unsecured Note shall be payable by EWSD in thirty-five payments of principal and interest, which shall be calculated based upon an amortization period of thirty years, commencing on September 1, 2015 and continuing
thereafter on the first day of each calendar month through and including July 1, 2018; and one final balloon payment of all unpaid principal and accrued but unpaid interest on August 1, 2018.
The purchase price to acquire EWSD (subject to the Note and the Unsecured Note) consisted of (i) $500,000 paid by the Company in cash as
a deposit into the escrow for the Acquired Property, and (ii) the Companys agreement to pay Seller a royalty of 3% of the adjusted gross revenue, if any, from operation of the Acquired Property (including sale of any portion of or
interest in the Acquired Property less any applicable expenses) for the three-year period beginning on January 1, 2016 payable 50% in cash and 50% in Company common stock. The number of shares due in connection with any such payment shall be
determined by dividing the dollar amount of such payment by the volume-weighted average price of the Companys common shares for the thirty trading days prior to the due date of the payment. Adjusted gross revenue means gross revenue after
deduction of Colorado state cannabis sales tax.
38
LEGAL PROCEEDINGS
On May 22, 2013, Medbox initiated litigation in the United States District Court in the District of Arizona against three shareholders of
MedVend Holdings LLC (Medvend) in connection with a contemplated transaction that Medbox entered into for the purchase of an approximate 50% ownership stake in Medvend for $4.1 million. The lawsuit alleges fraud and related claims
arising out of the contemplated transaction during the quarter ended June 30, 2013. The litigation is pending and Medbox has sought cancellation due to a fraudulent sale of the stock because the selling shareholders lacked the power or
authority to sell their ownership stake in MedVend, and their actions were a breach of representations made by them in the agreement. On November 19, 2013 the litigation was transferred to United States District Court for the Eastern District
of Michigan. MedVend recently joined the suit pursuant to a consolidation order executed by a new judge assigned to the matter. In the litigation, the selling shareholder defendants seek alternatively to have the transaction performed, or to have it
unwound and be awarded damages and allege breach of the agreement by Medbox and that $600,000 was wrongfully retained by the Company. Medbox has denied liability with respect to any and all such counterclaims. A new litigation schedule was recently
issued setting trial for September 2015. On June 5, 2014, the Company entered into a purchase and sale agreement (the Medvend PSA) with PVM International, Inc. (PVMI) concerning this matter. Pursuant to the Medvend PSA,
the Company sold to PVMI the Companys rights and claims attributable to or controlled by the Company against those three certain stockholders of Medvend, known as Kaplan, Tartaglia and Kovan (the Medvend Rights and Claims), in
exchange for the return by PVMI to the Company of 30,000 shares of the Companys common stock. PVMI is owned by Vincent Mehdizadeh, the Companys largest stockholder. The Company will have the right, under the Medvend PSA, to purchase from
PVMI, at any time, the Medvend Rights and Claims, for the consideration provided by PVMI, plus the sum of any of PVMIs reasonable expenditures incurred in pursuit of the Medvend Rights and Claims. The court has not yet ruled on the
substitution of PVMI as plaintiff in this matter. If necessary, the Company plans to vigorously defend against this matter. The case is in the discovery stage, and, at this time, the Company cannot determine whether the likelihood of an unfavorable
outcome of the dispute is probable or remote, nor can they reasonably estimate a range of potential loss, should the outcome be unfavorable.
On February 20, 2015 Michael A. Glinter, derivatively and on behalf of nominal defendants Medbox, Inc. the Board and certain executive
officers (Pejman Medizadeh, Matthew Feinstein, Bruce Bedrick, Thomas Iwanskai, Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer Love, and C. Douglas Mitchell) filed a suit in the Superior Court of the State of California for the County of Los
Angeles. The suit alleges breach of fiduciary duties and abuse of control by the defendants. Relief is sought awarding damages resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to
reform and improve its corporate governance and internal procedures to comply with applicable law. This action has been stayed pending the outcome of the actions filed in the United States District Court for the District of Nevada (Calabrese and
Gray). Due to the early stages of this suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be
unfavorable.
On January 21, 2015 Josh Crystal on behalf of himself and of all others similarly situated filed a class action lawsuit
in the U.S. District Court for Central District of California against Medbox, Inc., and certain past and present members of the Board (Pejman Medizadeh, Bruce Bedrick, Thomas Iwanskai, Guy Marsala, and C. Douglas Mitchell). The suit alleges
that the Company issued materially false and misleading statements regarding its financial results for the fiscal year ended December 31, 2013 and each of the interim financial periods that year. The plaintiff seeks relief of compensatory
damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On April 23, 2015, the Court issued an Order consolidating the three related cases in this matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox,
Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff. On July 27, 2015 Plaintiffs filed a Consolidated Amended Complaint. The Company must file a responsive pleading on or before December 4, 2015. The Company intends to
vigorously defend against these suits. Due to the early stages of the suits the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential
loss, should the outcome be unfavorable.
On January 18, 2015, Ervin Gutierrez filed a class action lawsuit in the U.S. District
Court for the Central District of California. The suit alleges violations of federal securities laws through public announcements and filings that were materially false and misleading when made because they misrepresented and failed to disclose that
the Company was recognizing revenue in a manner that violated US GAAP. The plaintiff seeks relief for compensatory
39
damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On April 23, 2015, the Court issued an Order consolidating the three related cases in this
matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox, Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff. On July 27, 2015 Plaintiffs filed a Consolidated Amended Complaint. The Company must file a responsive pleading on or
before December 4, 2015. The Company intends to vigorously defend against this suit. Due to the early stages of the suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote,
nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
On January 29, 2015, Matthew Donnino
filed a class action lawsuit in the U.S. District Court for Central District of California. The suit alleges that the Company issued materially false and misleading statements regarding its financial results for the fiscal year ended
December 31, 2013 and each of the interim financial periods that year. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On April 23, 2015, the
Court issued an Order consolidating the three related cases in this matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox, Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff. On July 27, 2015 Plaintiffs filed a Consolidated
Amended Complaint. The Company must file a responsive pleading on or before December 4, 2015. The Company intends to vigorously defend against this suit. Due to the early stages of the suit the Company is unable to determine whether the
likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
On February 12, 2015, Jennifer Scheffer, derivatively on behalf of Medbox, Guy Marsala, Ned Siegel, Mitchell Lowe and C. Douglas
Mitchell filed a lawsuit in the Eighth Judicial District Court of Nevada seeking damages for breaches of fiduciary duty regarding the issuance and dissemination of false and misleading statements and regarding allegedly improper and unfair related
party transactions, unjust enrichment and waste of corporate assets. On April 17, 2015, Ned Siegel and Mitchell Lowe filed a Motion to Dismiss. On April 20, 2015, the Company filed a Joinder in the Motion to Dismiss. On July 27, 2015,
the Court held a hearing on and granted the Motion to Dismiss without prejudice. Due to the early stages of the suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it
reasonably estimate a range of potential loss, should the outcome be unfavorable.
On March 10, 2015 Robert J. Calabrese,
derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the United States District Court for the District of Nevada against certain Company officers and/or directors (Ned L. Siegel, Guy Marsala, J. Mitchell Lowe, Pejman Vincent
Mehdizadeh, Bruce Bedrick, and Jennifer S. Love). The suit alleges breach of fiduciary duties and gross mismanagement by issuing materially false and misleading statements regarding the Companys financial results for the fiscal year ended
December 31, 2013 and each of the interim financial periods. Specifically the suit alleges that defendants caused the Company to overstate the Companys revenues by recognizing revenue on customer contracts before it had been earned. The
plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Due to the early stages of the suit the Company is unable to determine whether the likelihood of an
unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
On March 27, 2015 Tyler Gray, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the United States District
Court for the District of Nevada against the Companys Board of Directors and certain executive officers (Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, Thomas Iwanski, Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer S. Love,
and C. Douglas Mitchell). The suit alleges breach of fiduciary duties and abuse of control. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing.
Additionally the plaintiff seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate representative of the Company, and that the defendants have breached and/or aided and abetted
the breach of their fiduciary duties to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. Due to
the early stages of this suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
40
On May 20, 2015 Patricia des Groseilliers, derivatively and on behalf of nominal defendant
Medbox, Inc., filed a suit in the United States District Court for the District of Nevada against the Companys Board of Directors and certain executive officers (Pejman Vincent Mehdizadeh, Ned Siegel, Guy Marsala, J. Mitchell Lowe, Bruce
Bedrick, Jennifer S. Love, Matthew Feinstein, C. Douglas Mitchell, and Thomas Iwanski). The suit alleges breach of fiduciary duties and unjust enrichment. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all
damages sustained as a result of the alleged wrongdoing. Additionally the plaintiff seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate representative of the Company, and
that the defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and improve its corporate governance and
internal procedures to comply with applicable law. Due to the early stages of this suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range
of potential loss, should the outcome be unfavorable.
On June 3, 2015 Mike Jones, derivatively and on behalf of nominal defendant
Medbox, Inc., filed a suit in the U.S. District Court for Central District of California against the Companys Board of Directors and certain executive officers (Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer S. Love, C. Douglas Mitchell,
Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, and Thomas Iwanski). The suit alleges breach of fiduciary duties, abuse of control, and breach of duty of honest services. The plaintiff seeks relief for compensatory damages and
reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally the plaintiff seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate
representative of the Company, and that the defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and
improve its corporate governance and internal procedures to comply with applicable law. On July 20, 2015, the Court issued an Order consolidating this litigation with those previously consolidated in the Central District (Crystal, Gutierrez,
and Donnino). Due to the early stages of this suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome
be unfavorable.
On July 20, 2015 Kimberly Freeman, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the
Eighth Judicial District Court of Nevada against the Companys Board of Directors and certain executive officers (Pejman Vincent Mehdizadeh, Guy Marsala, Ned Siegel, J. Mitchell Lowe, Jennifer S. Love, C. Douglas Mitchell, and Bruce Bedrick).
The suit alleges breach of fiduciary duties and unjust enrichment. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally the plaintiff
seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate representative of the Company, and that the defendants have breached and/or aided and abetted the breach of their
fiduciary duties to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. Due to the early stages of
this suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
On October 16, 2015, solely to avoid the costs, risks, and uncertainties inherent in litigation, the parties to the class actions and
derivative lawsuits named above entered into settlements that collectively effect a global settlement of all claims asserted in the class actions and the derivative actions. The global settlement provides, among other things, for the release and
dismissal of all asserted claims. The global settlement is contingent on final court approval, respectively, of the settlements of the class actions and derivative actions. As a result of amounts already reflected in the Companys financial
statements, and the coverage by the Companys insurance carrier, the final terms of the settlements are not expected to have a material adverse effect on the Companys financial position or results of operations.
Class Settlement
On
December 1, 2015, Medbox and the class plaintiffs in Josh Crystal v. Medbox, Inc., et al., Case No. 2:15-CV-00426-BRO (JEMx), pending before the United States District Court for the Central District of California (the Court)
notified the Court of the settlement. The Court has stayed the action pending the Courts review of the
41
settlement and directed the parties to file a stipulation of settlement on or before December 18, 2015. If preliminarily approved, the settlement provides for notice to be given to the
class, a period for opt outs and a final approval hearing. The principal terms of the settlement are:
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A cash payment to a settlement escrow account in the amount of $1,850,000 of which $150,000 will be paid by the Company and $1,700,000 will be paid by the Companys insurers; |
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A transfer of 2,300,000 shares of Medbox common stock to the settlement escrow account, of which 2,000,000 shares would be contributed by Medbox and 300,000 shares by Bruce Bedrick; |
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The net proceeds of the settlement escrow, after deduction of Court-approved administrative costs and any Court-approved attorneys fees and costs would be distributed to the Class; |
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Releases of claims and dismissal of the action. |
By entering into the settlement, the settling
parties have resolved the class claims to their mutual satisfaction. Defendants have not admitted the validity of any claims or allegations and the settling plaintiffs have not admitted that any claims or allegations lack merit or foundation.
Derivative Settlements
As previously announced on October 22, 2015, on October 16, 2015, the Company, in its capacity as a nominal defendant, entered into a
memorandum of understanding of settlement (the Settlement) in the following shareholder derivative actions: (1) Mike Jones v. Guy Marsala, et al., in the U.S. District Court for Central District of California; (2) Jennifer
Scheffer v. P. Vincent Mehdizadeh, et al., in the Eighth Judicial District Court of Nevada; (3) Kimberly Y. Freeman v. Pejman Vincent Mehdizadeh, et al., in the Eighth Judicial District Court of Nevada; (4) Tyler Gray v. Pejman Vincent
Mehdizadeh, et al., in the U.S. District Court for the District of Nevada; (5) Robert J. Calabrese v. Ned L. Siegel, et al., in the U.S. District Court for the District of Nevada; (6) Patricia des Groseilliers v. Pejman Vincent Mehdizadeh,
et al., in the U.S. District Court for the District of Nevada; (7) Michael A. Glinter v. Pejman Vincent Mehdizadeh, et al., in the Superior Court of the State of California for the County of Los Angeles (the Shareholder Derivative
Lawsuits). In addition to the Company, Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, Thomas Iwanski, Guy Marsala, J. Mitchell Lowe, Ned Siegel, and C. Douglas Mitchell were named as defendants in all of the lawsuits, and
Jennifer S. Love was named in all of the lawsuits but the Scheffer action (the Individual Defendants).
On December 3,
2015, the parties in the Jones v. Marsala action advised the Court of the settlements in the Shareholder Derivative Lawsuits and that the parties would be submitting the settlement to the Court in the Jones action for approval. The Court thereafter
issued an order vacating all pending dates in the action and ordered Plaintiff to file the Stipulation and Agreement of Settlement for the Courts approval, which was filed on December 18, 2015. The hearing on the motion for preliminary
approval of the settlement will be held on January 25, 2016. By the terms of the settlement, such approval would provide for a release of the claims in the Shareholder Derivative Actions and a bar against continued prosecution of all claims
covered by the release. By entering into the Settlement, the settling parties have resolved the derivative claims to their mutual satisfaction. The Individual Defendants have not admitted the validity of any claims or allegations and the settling
plaintiffs have not admitted that any claims or allegations lack merit or foundation.
Under the terms of the Settlement, the Company
agrees to adopt and adhere to certain corporate governance processes in the future. In addition to these corporate governance measures, the Companys insurers, on behalf of the Individual Defendants, will make a payment of $300,000 into the
settlement escrow account and Messrs. Mehdizadeh and Bedrick will deliver 2,000,000 and 300,000 shares, respectively, of their Medbox, Inc. common stock into the settlement escrow account. Subject to Court approval, the funds and common stock in the
settlement escrow account will be paid as attorneys fees and expenses, or as service awards to plaintiffs.
The Settlement remains
subject to approval by the Court. The Court must determine whether (1) the terms and conditions of the Settlement are fair, reasonable, and adequate in the best interest of the Company and its stockholders, (2) if the judgment, as provided
for in the Settlement, should be entered, and (3) if the request of plaintiffs counsel for an award of attorneys fees and reimbursement of expenses should be granted.
42
The Company does not expect the proposed Class or Derivative settlements would have a material
impact on its financial condition or operating results.
On October 27, 2015, separate from the above lawsuits and settlement,
Richard Merritts, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the Superior Court of the State of California for the County of Los Angeles against the Board and certain executive officers (Guy Marsala, J. Mitchell
Lowe, Ned Siegel, Jennifer S. Love, C. Douglas Mitchell, Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, Jeff Goh, and Thomas Iwanski). The suit alleges breach of fiduciary duties by the defendants. Relief is sought awarding
damages resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law.
On December 26, 2014, Medicine Dispensing Systems, a wholly-owned subsidiary of Medbox, filed a suit against Kind Meds, Inc. to collect
fees of approximately $550,000 arising under a contract to establish a dispensary. Kind Meds, Inc. filed a cross complaint against Medicine Dispensing Systems for breach of contract and breach of implied covenant of good faith and fair dealing,
claiming damages of not less than $500,000. We believe that the cross complaint is without merit. We will continue to pursue this Kind Meds for the amounts owed under the contract and will vigorously defend ourselves against the cross complaint. At
this time the Company in unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
The Company commenced arbitration proceedings against a former employee on June 13, 2013 related to employment claims asserted by the
employee. Thereafter, the employee filed a suit in Los Angeles County Superior Court. The suit was stayed pending the outcome of the arbitration and thereafter dismissed without prejudice. The Company obtained a favorable arbitration award. The
Company then filed an Application to Confirm the Arbitration Award in Arizona Superior Court, Maricopa County. After being unable to serve the employee, the Company performed service by publication and filed proofs of publication for service on the
employee on February 27, 2015 and March 2, 2015. If the arbitration award is not enforced, the employees claim can be re-filed in California.
In October 2014, the Board of Directors of the Company appointed a special board committee (the Special Committee) to investigate
a federal grand jury subpoena pertaining to the Companys financial reporting which was served upon the Companys accountants as well as certain alleged wrongdoing raised by a former employee of the Company. The Company was subsequently
served with two SEC subpoenas in early November 2014. The Company is fully cooperating with the grand jury and the SEC. In connection with its investigation of these matters, the Special Committee in conjunction with the Audit Committee initiated an
internal review by management and by an outside professional advisor of certain prior period financial reporting of the Company. The outside professional advisor reviewed the Companys revenue recognition methodology for certain contracts for
the third and fourth quarters of 2013. As a result of certain errors discovered in connection with the review by management and its professional advisor, the Audit Committee, upon managements recommendation, concluded on December 24, 2014
that the consolidated financial statements for the year ended December 31, 2013 and for the third and fourth quarters therein, as well as for the quarters ended June 30, 2014, June 30, 2014 and September 30, 2014, should no
longer be relied upon and would be restated to correct the errors. On March 6, 2015 the audit committee determined that the consolidated financial statements for the year ended December 31, 2012, together with all three, six and nine month
financial information contained therein, and the quarterly information for the first two quarters of the 2013 fiscal year should also be restated. On March 11, 2015, the Company filed its restated Form 10 Registration Statement with the SEC
with restated financial information for the years ended December 31, 2012 and December 31, 2013, and on March 16, 2015, the Company filed amended and restated quarterly reports on Form 10-Q, with restated financial information for the
periods ended June 30, June 30 and September 30, 2014, respectively.
43
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis of financial condition and results of operations in
conjunction with the financial statements and related notes appearing elsewhere in this prospectus.
Overview
Medbox provides specialized services to operators of cannabis dispensaries, cultivation centers, manufacturers and research and development
facilities in those states where approved. The Company also sells a line of portable vaporizers and accessories under the Vaporfection brand name.
Our clients currently operate or plan to establish dispensaries for the sale of marijuana for medical use or retail operations for the sale of
marijuana for recreational use or cultivation centers for the cultivation of marijuana, in those states where approved. Under our new business model, we seek to obtain licenses to operate dispensaries, cultivation centers and manufacturing
facilities with the licenses held by Medbox or an affiliated company. We contract with unaffiliated third-party operators to manage the day-to-day operations of cultivation centers, dispensaries and manufacturing facilities we develop and assign
them the rights to manage and operate the dispensary in exchange for a percentage of operating income or a fixed fee based on applicable state law. We also provide ongoing consulting services, for which we receive recurring revenues. We also sell a
line of portable vaporizers and accessories under the Vaporfection brand name. In September 2015 we launched a portable line of vaporizers called miVape in the market place.
We began our business model with entering into one-time consulting agreements to help our clients obtain a license to sell or cultivate
marijuana and to assist them with the build out of a location for their business, including the sale to the client of a Medbox dispensing system, pursuant to a consulting agreement that we refer to as our Turn-Key Business Establishment
Agreement. Historically, we have generated revenue from various sources on a one-time basis for services that we provide to clients in helping them create, license, build out and open dispensaries and cultivation centers. We are
now transitioning to a recurring revenue model as described below.
Under our new business model, we seek to obtain licenses to operate
dispensaries, cultivation centers and manufacturing facilities with the licenses held by Medbox or an affiliated company. We contract with unaffiliated third-party operators to manage the day-to-day operations of cultivation centers, dispensaries
and manufacturing facilities we develop and assign them the rights to manage and operate the dispensary in exchange for a percentage of operating income or a fixed fee based on applicable state law. We also provide ongoing consulting services, for
which we receive recurring revenues. We also sell portable and tabletop vaporizers and accessories under the Vaporfection brand name. In the third quarter of 2015, we began to sell a portable line of vaporizers called miVape in the market place.
In 2014, we arranged for the submission of 36 license applications in five states on behalf of clients. We have obtained 5 licenses or
registrations in the States of Oregon, Illinois, Washington and California for or on behalf of clients or for potential clients. We intend to retain the management rights for these locations and will seek to assign the rights to third parties for a
fee. Most of the current dispensary and cultivation sites are expected to begin conducting business in 2015 and 2016. We are also currently in discussions with third-party license holders that operate dispensaries and cultivation centers to provide
them consulting, training, compliance and regulatory support.
We are party to a master lease Portland, OR that we lease to an operator of
a dispensary. We also own 320 acres in the greater Pueblo, CO area and have engaged an independent farmer to cultivate hemp on the site. We are in escrow (with a planned closing for on or about December 1, 2015) for a dispensary site in San
Diego to be operated by an independent operator.
We are planning to build a consistent, predictable and valuable revenue model based upon
our knowledge and expertise in the regulation of the cannabis industry and by helping our clients function efficiently in a developing industry. State and local laws regarding the operations of dispensaries, retail centers and cultivation centers
for marijuana vary. In states where revenue sharing with cannabis companies is permissible, our business structure will revolve around charging fees based upon a percentage of operating income, as defined in the business contract, generated from our
clients businesses. In states where revenue sharing is not permissible, agreements that we enter into with our clients will provide for fee-for-service arrangements on a cost-plus basis.
44
About Our New Business Model
In March 2014, Medbox formed an affiliated company, Allied Patient Care, Inc., to apply for a license to operate a medical marijuana dispensary
in the Portland, OR area. Allied Patient Care, Inc., is a non-profit entity incorporated under Oregon law and controlled by an independent contractor who has signed an independent contractor agreement with Medbox. Medbox paid for the costs to obtain
the license and those expenses were recognized as inventory in our December 31, 2013 and December 31, 2012 consolidated financial statements reflected in our Form 10 both before and after restatements that were filed with the SEC in our
Amendment No. 3 to Form 10 on March 11, 2015. The costs remained in inventory after the restatement because Medbox had, by the time of the restatement, obtained the license and secured a location for the dispensary.
In order to assure the City of Portland that the dispensary would be operated in a suitable area, on May 7, 2014 Medbox leased an
approximately 9,730 square foot facility in the City of Portland. The lease provides for a term of 5 years, through May 7, 2019, and Medbox pays $7,400 per month as rent for the master lease for the facility. In July, 2014, Allied Patient Care
was granted a license from the Oregon Health Authority to operate a medical marijuana dispensary in Portland, OR at the site leased by Medbox. Medbox then completed tenant improvements to build out the dispensary in the leased space. The tenant
improvements were recorded as deferred costs on the consolidated balance sheet of Medbox and will be amortized proportionately to the recognition of revenue.
In April 2015, Medbox signed an Operator Agreement (the Agreement) with an independent operator to manage and operate the
dispensary in Portland. The term of the Agreement is for five years with an option to extend the term for an additional five years at the discretion of the operator.
The operators responsibilities under the Agreement include: the hiring and supervision of all the employees of the dispensary operation,
establishing prices for products sold at the dispensary, purchasing of all inventory, establishing and revising policies and procedures, receiving, holding and disbursing funds, maintaining bank accounts and making payments on accounts payable and
fees, and collections of accounts receivable, and arranging for sales and marketing. Medbox is making the leased facility available to the operator pursuant to a sublease with a 5-year term beginning May 1, 2015, under which the operator will
pay rent of $8,000 per month to Medbox. Medbox is sub-licensing its license for the operations of the dispensary to the independent operator in exchange for a procurement fee of $400,000 and the payment of a percentage of the operating profits of
the dispensary during the term of the Agreement. Upon execution and delivery of the Agreement, the independent operator paid $50,000 of the procurement fee with the remaining $350,000 to be paid monthly in the amount of gross receipts less payroll
and costs of inventories. The $350,000 was evidenced by a note between the operator and the Company. If the procurement fees are not paid within six months, the payment terms become a minimum monthly payment of $5,000. An annual licensor fee of five
percent (5%) of the annual gross profit of the dispensary is to commence after the procurement fee is paid in full. These license fee payments are to be made within twenty days of the close of each monthly accounting period, with a true-up at
year end.
Upon the closing of the Agreement, the Company recognized the $400,000 procurement fee as Deferred Revenue, because not all
services required under the Agreement had been rendered by the Company. As of June 30, 2015, the Company determined it was not assured of the timing of the collectability of the note and set up an allowance in the amount of $350,000 for the
note, and has reduced the Deferred Revenue by the same amount, to a remaining balance of Deferred Revenue of $50,000.
Based on the
responsibilities of the independent operator as set forth in the Agreement, and detailed above, the Company has determined that it does not hold a controlling financial interest in the dispensary and is not the primary beneficiary, and, therefore,
the Company is not consolidating the Dispensary in its financial statements.
45
Revenue Recognition
The Company will recognize revenue pursuant to the foregoing transaction when it is realized or realizable and earned. The Agreement evidences
that an arrangement exists, and that the price is fixed or determinable. Services are rendered each month as the operator leases the dispensary and operates as sub-licensee under the license from the Oregon Health Authority. Each period, the Company
will evaluate whether collectability is reasonably assured. The Company will recognize the deferred revenue as the amounts due on the note are received, at which time collectability is reasonably assured. The Company will recognize revenue after the
procurement fee is paid in full, when it receives the accounting report from the independent operator at the end of each monthly period, provided collection is reasonably assured. Medbox has not yet recognized any revenue under the Agreement because
the sales volume from the continuing operations has not yet reached a level to allow the operator to make payments against the procurement fee. Medbox did receive and recognize rental income from the sublease of $8,000 per month for the months April
to July 2015 and, correspondingly, recorded rent expense of $7,400 per month under the master lease.
Medbox is currently in negotiations
to terminate the Agreement, and it is expected that the Agreement will end in the fourth quarter of 2015. Medbox plans to immediately engage a new independent operator to operate the day-to-day operations of the Portland dispensary. It is
anticipated that the Company will enter into a new agreement which will call for the independent operator to pay a fixed percentage of revenue to Medbox for the sub-licensing of the license as well as monthly rent under a new sublease. It is also
anticipated that Medbox will recognize revenue each month based on its percentage of revenue due from the new operator under the new agreement, provided that the collection of the fee is reasonably assured, along with sublease rental income to be
earned monthly.
Farm Transaction
In July 2015, Medbox closed on the acquisition of a 320 acre farm near Pueblo, CO (the Farm). Medbox plans to use this property to:
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Cultivate and process hemp |
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Store water for municipal uses |
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Excavate and sell aggregate |
The Farm may be used to cultivate and process cannabis in the
future depending on how laws and regulations evolve in Pueblo and other municipalities in the State of Colorado.
For the cultivation of
hemp, Medbox plans to clear the land, install greenhouses and other farming structures and equipment and to provide irrigation, with the cost of the improvements recorded on the consolidated balance sheet of Medbox and depreciated over their useful
lives. Medbox has already obtained a license from the Colorado Department of Agriculture to cultivate hemp on the Farm.
On
November 4, 2015, Medbox engaged an independent operator to plant the hemp seeds, cultivate and irrigate the crop, harvest the crop and process the end product. The term of the engagement is for five years, with the opportunity to renew for
successive, two year terms, if agreed by the parties. The independent operator will receive 10% of the profits of the Farm, after deduction of direct expenses. The first crops are expected to be harvested and processed in the first half of 2016.
Multiple crop cycles are expected each year beginning in 2016.
Water storage and aggregate excavation are long-term possible uses for the
Farm. Medbox has not begun active planning to exploit the water and aggregate resources on the Farm. It is anticipated that planning for water and aggregate development will begin in late 2016 or 2017, with related accounting policies developed
concurrently with project planning.
The following discussion should be read in conjunction with the consolidated financial statements and
related notes provided in this prospectus.
46
Comparison of the three months ended September 30, 2015 and 2014
The Company reported a condensed consolidated net loss of approximately $9,292,000, for the three months ended September 30, 2015 and
approximately $3,797,000 for the three months ended September 30, 2014. The increase in net loss of approximately $5,495,000 was primarily due to increases in the change in fair value of the derivative liabilities, the amortization of the debt
discount and financing costs. The additional increase in general and administrative expenses was partially offset by a decrease in cost of revenues. The Company is in the process of modifying its business model to provide ongoing management and
support services for clients so that contracts that we enter into would provide recurring revenue. During this transition period to our 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.
Revenue
Total revenue for the three months ended September 30, 2015, consisted of amounts of deferred revenue which were recognized in the current
period for consulting agreements and the sale of territory rights to a related party, as well as revenue from sales of vaporizers and accessories of the Companys subsidiary Vaporfection International, Inc. (VII).
The revenue for the three months ended September 30, 2015 and 2014 increased by approximately $141,000 due to increased recognition of
deferred revenue of $151,000 due to completion of obligations to clients along with introduction of our new portable vaporizers which led to an increase in sales of approximately $66,000. In the second quarter of 2015 the Company began receiving
rental income under a sublease which increased the third quarter revenue with $16,000 for the quarter. There was no corresponding rental income in the second quarter of 2014. This was offset by approximately $92,000 in referral fees recognized in
2014; there was no corresponding referral revenue for 2015.
Cost of revenue
Cost of revenues decreased approximately $1,157,000 in the third quarter of 2015 as compared to the same period in 2014. The decrease was
primarily due to the decrease in new market development costs. In addition, during the third quarter of 2014, the Company recorded an inventory write-down for slow moving inventory of vaporizers and incurred charges from escrow deposits, which did
not recur in the third quarter of 2015. These decreases were partially offset by an additional charge in the third quarter of 2015 to write off deposits paid to the Companys supplier, who filed for bankruptcy.
On May 4, 2015, AVT, Inc., a manufacturing partner of the Company announced that it had commenced a voluntary filing for restructuring
and court protection under Chapter 11 of the United States Bankruptcy Code. Additionally, during the second quarter of 2015, the Company completed a strategic review of the Medbox machines and concluded that the machines would have a reduced role in
future marketing and sales efforts. As a result of the strategic review, the Company evaluated the inventory and the related deposits in connection with reduced demand and strategic shift and concluded a write down of both assets was required. The
bankruptcy of AVT, Inc. further complicated the process to convert the inventory and advances to cash and, therefore, was an additional factor in the decision to write down the inventory and record a valuation reserve against the deposits.
Accordingly, during the second quarter of 2015, the Company evaluated the realizability of the dispensing machines and deposits, and wrote the inventory down by approximately $61,000 to an estimated net realizable value of $110,000 and recorded a
valuation reserve against the deposits of approximately $100,000 resulting in net deposits of approximately $33,000. During the three months ended September 30, 2015, the Company ended negotiations with the supplier and bankruptcy counsel
advised that collection of deposits and availability of inventory from the supplier was unlikely. Accordingly, the remaining deposit and inventory valued at $143,000 were written off.
During the third quarter of 2015, new market development costs decreased by approximately $710,000 as compared to the same period in 2014. New
market development costs consist of costs incurred in new markets prior to securing a location and obtaining a license for new dispensary or cultivation facilities. During the three months ended September 30, 2015, the costs of developing the
new markets in San Diego, Illinois, Washington and Nevada were approximately $361,000 compared to costs of approximately $1,070,000 for the third quarter of 2014. While the locations related to the new market development costs are the same for both
periods, the costs incurred were higher in the third quarter of 2014 because of front-loaded costs in the development cycle which include initial application costs, research costs and legal and zoning work.
47
During the third quarter of 2014, the Company recorded an approximately $329,000 write down of
slow moving, older models of vaporizer inventory; there was no corresponding write down during 2015.
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 credited towards the purchase price of the real estate but in most cases represent charges in lieu of rent. The charges in lieu of rent and
other non-refundable charges paid to real estate sellers were recorded as expense in the statement of operations in the amount of approximately $296,000 for the three months ended September 30, 2014, compared to approximately $40,000 during the
same period of 2015, a decrease of approximately $256,000.
Rental expense on the master lease for the Portland sublease income described
above was $22,200.
Operating Expenses
Operating expenses consist of all other costs incurred during the period other than cost of revenue. The Company incurred approximately
$3,610,000 in operating expenses for the three months ended September 30, 2015 compared to approximately $2,365,000 for the three months ended September 30, 2014. The increase of approximately $1,245,000 was primarily due to the increase
in general and administrative expenses of $1,522,000.
Sales and Marketing expenses
Sales and marketing expenses include employee costs, outside services for sales and marketing consultants, lobbying costs, travel and
entertainment and sales lead generation. Sales and marketing costs decreased by approximately $215,000 in the third quarter of 2015 compared to the same period of 2014 primarily due to a non-recurring marketing expense in the third quarter of 2014
for the San Diego market of approximately $150,000 and a decrease in employee costs of approximately $43,000.
Research and development expenses
Research and development expenses for the third quarter of 2014 in the amount of approximately $62,000 consists of engineering work
done on the software enhancements of the Medbox, additional research on vaporizers, and patent related expenses. There were no similar expenses during the same period of 2015.
48
General and administrative
General and administrative expenses include salary costs, including stock based compensation, professional costs, including the costs
associated with being a public company and consultants, rent and other costs. The expenses incurred during the three month periods ended September 30, 2015 and 2014 are summarized and described below:
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Change in, |
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For the three months ended September, 30 2015 |
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|
For the three months ended September, 30 2014 |
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Increase (Decrease) |
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Salary and related: |
|
|
|
|
|
|
|
|
|
|
|
|
Employee costs and bonuses |
|
$ |
208,883 |
|
|
$ |
108,754 |
|
|
$ |
100,129 |
|
Payroll fees |
|
|
32,168 |
|
|
|
24,213 |
|
|
|
7,955 |
|
Stock based compensation |
|
|
1,039,173 |
|
|
|
1,031,640 |
|
|
|
7,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal salary and related |
|
|
1,280,224 |
|
|
|
1,164,607 |
|
|
|
115,617 |
|
Professional costs: |
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|
|
|
|
|
|
|
|
|
|
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Costs of being public |
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|
753,362 |
|
|
|
99,078 |
|
|
|
654,284 |
|
Fund raising consultants |
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|
8,500 |
|
|
|
50,833 |
|
|
|
(42,333 |
) |
Legal costs |
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|
892,106 |
|
|
|
112,766 |
|
|
|
779,340 |
|
Professional accounting and audit services |
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|
48,184 |
|
|
|
41,313 |
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|
|
6,871 |
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Independent contractors costs |
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|
155,427 |
|
|
|
97,119 |
|
|
|
58,308 |
|
Management fee - Vincent Chase, Inc. |
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|
|
|
|
|
75,000 |
|
|
|
(75,000 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
Subtotal professional costs |
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|
1,857,579 |
|
|
|
476,109 |
|
|
|
1,381,470 |
|
Rent expense |
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|
70,181 |
|
|
|
59,057 |
|
|
|
11,124 |
|
Other: |
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|
|
|
|
|
|
|
|
|
|
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Insurance |
|
|
165,627 |
|
|
|
43,469 |
|
|
|
122,158 |
|
Travels, meetings and conferences |
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|
63,665 |
|
|
|
17,412 |
|
|
|
46,253 |
|
Bad debt |
|
|
|
|
|
|
123,600
|
|
|
|
(123,600 |
) |
Other (sum of smaller accounts) |
|
|
68,753 |
|
|
|
100,049 |
|
|
|
(31,296 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal other |
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|
298,045 |
|
|
|
284,530 |
|
|
|
13,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative |
|
$ |
3,506,029 |
|
|
$ |
1,984,303 |
|
|
$ |
1,521,726 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Salary costs
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 approximately $1,000,000 in stock compensation expense for each of the quarters ended September 30, 2014 and 2015.
Employee costs and bonuses increased due to the addition of the full time CFO in October 2014 along with a Senior VP of Operations and
Government relations and a Senior VP of Business Development in 2015 to lead the growth and development of the business.
Professional costs
Legal costs increased during the three months ended September 30, 2015 as compared to the same period in 2014, mainly as the Company dealt
with more general corporate legal matters, including the costs to defend the legal actions and shareholders law suits brought against the Company, assist the Company with contracting and to provide general corporate counsel.
49
Costs of being public include legal fees for our Securities and Exchange Commission counsel,
filing fees, independent directors fees and bonuses and investor relations costs. During the three months ended September 30, 2015, these amounts increased as compared to the same period of the previous year due to our registration statement on
Form S-1 filed with the SEC on October 16, 2015, our form 14C Information Statement, informing our shareholders of an amendment to our charter to increase authorized stock filed on September 24, 2015, our August 2015 convertible note
financing, modifications to convertible debenture loan agreements and related filings, directors bonus, and additional SEC compliance.
Rent
The Company moved to new offices in Los Angeles, CA in April 2015 to reduce occupancy costs. Rent expense increased over the third
quarter of 2014 due to the fact that the previously occupied office space in West Hollywood was only partially subleased. The sublease on the new office has a term of 18 months and with monthly rent of approximately $7,500. The Company plans to
sublease the office in West Hollywood, CA and continues to accrue rent expense while the space is being marketed.
Other costs
Other expense increased mostly due to new increased costs of approximately $122,000 for directors and officers liability coverage.
In addition, the Companys development of the newly acquired farm in Colorado and other markets led to an increase in travel of $46,000 for three months ended September 30, 2015 compared to the same period of 2014.
During the third quarter of 2014, the Company identified past due accounts receivable as doubtful for collection and recorded bad debt expense
of $123,600. There were no similar events during the third quarter of 2015.
Other Income (Expense)
Other income (expense) includes the financing costs associated with the issuance of our July 2014 convertible debenture, September 2014
convertible debenture, and August 2015 convertible debentures, including the amortization of the debt discount and the change in fair value of the derivative liability. As disclosed in Note 5 of the accompanying financial statements, the reset
provision for the subsequent sale of any dilutive issuance at a lower sale or exercise price than the then current conversion price results for accounting purposes as a liability being recognized for the fair value of the derivative. This derivative
is remeasured each period end, with the change in fair value for the three months ending September 30, 2015 of approximately $2,544,000 of expense being recognized in Other income (expense). This derivative also results in a debt discount for
the initial fair value recognized for the derivative. The debt discount also includes the fair value of the warrants issued in connection with the convertible debentures. This debt discount is amortized over the life of the convertible debenture, or
until conversion if earlier, which amounted to approximately $2,072,000 for the three months ended September 30, 2015. Additionally, the current quarter closings to convertible debentures resulted in the calculated fair value of the debt being
greater than the face amounts of the debt by approximately $522,000 with this excess amount being immediately expensed as Financing costs.
Interest expense for the stated interest on our convertible debentures incurred in the three months ended September 30, 2015 amounted to
approximately $135,000. During the three months ended September 30, 2015 the Company incurred interest expense of approximately $35,000 related to notes for the purchase of the land in Colorado, which closed in the third quarter of 2015 and
approximately $22,000 related to the promissory note issued in relation to the purchase of property in Washington State.
Comparison of the nine months
ended September 30, 2015 and 2014
The Company reported a condensed consolidated net loss of approximately $25,120,000, for the
nine months ended September 30, 2015 and approximately $6,803,000 for the nine months ended September 30, 2014. The increase in net loss of approximately $18,317,000 was primarily due to increases in general and administrative
50
expenses, the amortization of the debt discount and financing costs, offset by a decrease in costs of revenue. The Company is in the process of modifying its business model to provide ongoing
management and support services for clients so that contracts we enter into with clients would provide recurring revenue. During this transition period to our 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.
Operating expenses
increased for the nine months ended September 30, 2015 compared to the same period of 2014 mainly due to the introduction during the third quarter of 2014 of a new stock compensation plan to attract new talent to the Board of Directors and the
management team which added to operating costs stock compensation expense of approximately $4,300,000 for the current period. Other causes of operating expense increases were increased legal expense to defend shareholders suits, assist the
Company with contracting and to provide general corporate counsel of approximately $2,001,000 and public company expenses including the professional fees for restatements, Registration Statement and periodic filings with the SEC of approximately
$1,488,000.
Revenue
Total revenue
consisted of deferred revenue which was recognized in the current period for consulting agreements, sale of territory rights to a related party and revenue from sales of vaporizers and accessories of the Companys subsidiary Vaporfection
International, Inc. (VII).
The revenue for the nine months ended September 30, 2015 and 2014 decreased by approximately
$59,000 due to non-recurring 2014 transactions including $175,000 for sale of management rights in one Arizona location and approximately $190,000 in referral fees. There were no similar transactions in 2015.
During the nine months ended September 30, 2015, we recorded an increase of approximately $131,000 in consulting revenue due to
recognition of deferred revenue from completion of obligations to clients along with an increase of approximately $58,000 in vaporizer and accessories sales due to introduction of our new portable vaporizers. Also, during the nine months ended
September 30, 2015, the Company received rental income of $32,000 under a sublease; there was no corresponding rental income in the same period of 2014.
Allowances and refunds
During the first
nine months of 2014, the Company recorded an allowance for refunds of $60,000 for San Diego clients. There were no corresponding transactions during the same period of 2015.
Cost of revenue
Cost of revenues
decreased approximately $1,654,000 for the nine months ended September 30, 2015 as compared to the same period of 2014. The decrease was primarily due to the decrease in new market development costs. In addition, during the third quarter of
2014, the Company recorded an inventory write-down for slow moving inventory of vaporizers, which did not recur in the third quarter of 2015. These decreases were partially offset by an additional charge in the third quarter of 2015 to write off
deposits paid to the Companys supplier who filed for bankruptcy.
On May 4, 2015, AVT, Inc., a manufacturing partner of the
Company announced that it had commenced a voluntary filing for restructuring and court protection under Chapter 11 of the United States Bankruptcy Code. Additionally, during the second quarter of 2015, the Company completed a strategic review of the
Medbox machines and concluded that the machines would have a reduced role in future marketing and sales efforts. As a result of the strategic review, the Company evaluated the inventory and the related deposits in connection with reduced demand and
strategic shift and concluded a write down of both assets was required. The bankruptcy of AVT, Inc. further complicated the process to convert the inventory and advances to cash and, therefore was an additional factor in the decision to write down
the inventory and record a valuation reserve against the deposits. Accordingly, during the second quarter of 2015 the Company evaluated the realizability of the dispensing machines and deposits, and wrote the inventory down by approximately $61,000
to an estimated net realizable value of $110,000 and recorded a valuation reserve against the deposits of approximately $293,000 resulting in net deposits
51
of $33,000. During the three months ended September 30, 2015 the Company ended negotiations with the supplier and bankruptcy counsel advised that collection of deposits and availability of
inventory from the supplier was unlikely. Accordingly, the remaining deposit and inventory valued at $143,000 were written off.
During
the first nine months of 2015 new market development costs decreased by approximately $1,539,000 compared to the same period of 2014. Cost of inventory for the nine months ended September 30, 2014 includes the cost of one property sold with the
balance consisting of costs to develop markets in San Diego, Illinois, Washington, Nevada. New market development costs consist of costs incurred in new markets prior to securing a location and obtaining a license for new dispensary or cultivation
facilities in the state. While the locations related to the new market development costs are the same for both comparable periods, the costs incurred were higher in the first nine months of 2014 because of front-loaded costs in the development cycle
which include initial application costs, research costs and legal and zoning work.
During the nine months ended September 30, 2014,
the Company recorded approximately $329,000 for the write down of slow moving, older models of vaporizer inventory; there was no corresponding write down during 2015.
Rental expense on the Portland master lease for the sublease income described above was $37,000.
Operating Expenses
Operating expenses
consist of all other costs incurred during the period other than cost of revenue. The Company incurred approximately $13,069,905 in operating expenses for the nine months ended September 30, 2015 compared to approximately $4,069,000 for the
nine months ended September 30, 2014. The increase of approximately $9,001,000 was primarily due to the increase in general and administrative expenses of $9,444,000 slightly offset by a decrease in sales and marketing expenses of $307,000.
Sales and Marketing expenses
Sales
and marketing expenses include employee costs, outside services for sales and marketing consultants, lobbying costs, travel and entertainment and sales lead generation. The Company incurred approximately $442,000 and $749,000 in sales and marketing
expenses for the nine months ended September 30, 2015 and 2014, respectively. The decrease of approximately $307,000 was primarily due to a decrease of $222,000 in marketing expense which was principally due to a non-recurring marketing expense
during the third quarter of 2014 for the San Diego market of approximately $150,000 and a decrease of approximately $107,000 in lobbying expense as the Company focused on developing specific opportunities as opposed to opening new markets and
finding new sites.
Research and development expenses
Research and development expenses of approximately $137,000 incurred during the nine months ended September 30, 2014 consisted of
engineering work done on the software enhancements of the Medbox, additional research on vaporizers, and patent related expenses. There were no similar expenses during the same period of 2015.
52
General and administrative
General and administrative expenses include salary costs, including stock based compensation, professional costs, including the costs
associated with being a public company and consultants, rent and other costs. The expenses incurred during the nine months ended September 30, 2015 and 2014 are summarized and described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in, |
|
For the nine months ended September, 30 2015 |
|
|
For the nine months ended September, 30 2014 |
|
|
Increase (Decrease) |
|
Salary and related: |
|
|
|
|
|
|
|
|
|
|
|
|
Employee costs and bonuses |
|
$ |
670,559 |
|
|
|
230,996 |
|
|
$ |
439,563 |
|
Payroll fees |
|
|
89,283 |
|
|
|
68,383 |
|
|
|
20,900 |
|
Stock based compensation |
|
|
5,331,382 |
|
|
|
1,031,640 |
|
|
|
4,299,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal salary and related |
|
|
6,091,224 |
|
|
|
1,331,019 |
|
|
|
4,760,205 |
|
Professional costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Costs of being public |
|
|
1,747,190 |
|
|
|
259,652 |
|
|
|
1,487,538 |
|
Fund raising consultants |
|
|
64,601 |
|
|
|
63,333 |
|
|
|
1,268 |
|
Legal costs |
|
|
2,269,456 |
|
|
|
268,334 |
|
|
|
2,001,122 |
|
Settlements expenses related to executive separation |
|
|
514,597 |
|
|
|
|
|
|
|
514,597 |
|
Lobbying costs |
|
|
|
|
|
|
22,700 |
|
|
|
(22,700 |
) |
Professional accounting and audit services |
|
|
638,363 |
|
|
|
117,158 |
|
|
|
521,205 |
|
Independent contractors costs |
|
|
215,702 |
|
|
|
241,098 |
|
|
|
(25,396 |
) |
Management fee - Vincent Chase, Inc. |
|
|
|
|
|
|
150,000 |
|
|
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal professional costs |
|
|
5,449,909 |
|
|
|
1,122,275 |
|
|
|
4,327,634 |
|
Rent expense |
|
|
180,729 |
|
|
|
172,679 |
|
|
|
8,050 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
|
457,063 |
|
|
|
106,969 |
|
|
|
350,094 |
|
Travels, meetings and conferences |
|
|
156,177 |
|
|
|
31,874 |
|
|
|
124,303 |
|
Bad debt |
|
|
|
|
|
|
148,600 |
|
|
|
(148,600 |
) |
Other (sum of smaller accounts) |
|
|
292,542 |
|
|
|
269,966 |
|
|
|
22,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal other |
|
|
905,782 |
|
|
|
557,409 |
|
|
|
348,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative |
|
$ |
12,627,644 |
|
|
$ |
3,183,382 |
|
|
$ |
9,444,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary costs
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 approximately $4,299,000 in stock compensation expense in the first nine months of 2015 as compared to the same period of the previous year.
Employee costs and bonuses increased due to the addition of the full time CFO in October 2014 along with a Senior VP of Operations and
Government relations and a Senior VP of Business Development in 2015 to lead the growth and development of the business.
53
Professional costs
Legal costs increased during the nine months ended September 30, 2015 over 2014, mainly as the Company dealt with more general corporate
legal matters, including the costs to defend the legal actions and shareholders law suits brought against the Company, assist the Company with contracting and to provide general corporate counsel. During the second quarter of 2015 the Companys
recorded a liability to indemnify its former CEO Dr. Bruce Bedrick for legal expenses in the amount of approximately $430,000 principally in connection with shareholders law suits.
Costs of being public include legal fees for our Securities and Exchange Commission counsel, filing fees, independent directors fees and
bonuses and investor relations costs. During the nine months ended September 30, 2015, these amounts increased as compared to the same period of the previous year caused by preparation of our restated financial statements in 2015 (as discussed
in Note 19 to our financial statements for the year ended December 31, 2014 included in our Form 10K filed with the SEC on March 26, 2015), registration statement on Form S-1 filed with the SEC on April 9, 2015 which became effective
on June 11, 2015, a second Form S-1, filed with the SEC on October 16, 2015, which has not yet become effective, a Form 14C shareholder information statement filed on September 24, 2015, modifications to convertible debenture loan
agreements and related filings, directors bonus, and additional SEC compliance. In addition of the aforementioned reasons, the Company incurred an increase of $521,000 in professional accounting and audit service. These costs in 2015 mainly
include the independent registered accounting firm and independent consultants in relation to the restatements of the previous years ended December 31, 2013 and 2012, and the interim periods, as well as the audit for the year ended
December 31, 2014 and registration statements on Form S-1 and amendments thereto and the form 14C.
Settlement expense of
approximately $515,000 includes the severance payments and related costs payable to Guy Marsala, former CEO of the Company in addition to approximately $335,000 for stock options issued in connection with his separation agreement.
Rent
The Company moved to new offices in
Los Angeles, CA in April 2015 to reduce occupancy costs. Rent expense increased over the first nine months of 2014 due to the fact that the previously occupied office space in West Hollywood was only partially subleased. The sublease on the new
office has a term of 18 months and with monthly rent of approximately $7,500. The Company plans to sublease the office in West Hollywood, CA and continues to accrue rent expense while the space is being marketed.
Other costs
Other expense increased
mostly due to new increased costs of approximately $350,000 for directors and officers liability coverage. In addition, the Companys participation in multiple professional tradeshows and investor conferences and development of the
newly acquired farm in Colorado and other markets led to an increase in travel expenses of approximately $124,000 for the nine months ended September 30, 2015 compared to the same period of 2014.
During the third quarter of 2014, the Company identified past due accounts receivable as doubtful for collection and recorded bad debt expense
of $148,600. There were no similar events during the third quarter of 2015.
Other Income (Expense)
Other income (expense) includes the financing costs associated with the issuance of our July 2014 convertible debenture, September 2014
convertible debenture, and August 2015 convertible debentures, including the amortization of the debt discount and the change in fair value of the derivative liability. As disclosed in Note 5 of the accompanying financial statements, the reset
provision for the subsequent sale of any dilutive issuance at a lower sale or exercise price than the then current conversion price results for accounting purposes as a liability being recognized for the fair value of the derivative. This derivative
is remeasured each period end, with the change in fair
54
value for the nine months ended September 30, 2015 of approximately $509,000 of income being recognized in Other income (expense). This derivative also results in a debt discount for the
initial fair value recognized for the derivative. The debt discount also includes the fair value of the warrants issued in connection with the convertible debentures. This debt discount is amortized as Other expense over the life of the convertible
debenture, or until conversion if earlier, which amounted to approximately $8,122,000 for the nine months ended September 30, 2015. Additionally, the convertible debenture closings during the first nine months of 2015 resulted in the calculated
fair value of the debt being greater than the face amounts of the debt by approximately $2,822,000 with this excess amount being immediately expensed as Financing costs.
Interest expense for the stated interest on our convertible debentures incurred for the nine months ended September 30, 2015 amounted to
approximately $302,000. In the January 30, 2015 amendment to the July 2014 and September 2014 debentures (see Note 5 in accompanying financial statements) the payment schedule was amended to no longer require amortization payments. In
connection with the amortization payments, there was a 30% premium which was recognized as accrued interest until such time as the payments were scheduled to be paid. As the amendment removed the amortization payments, this 30% accrued interest will
no longer be settled, and, therefore, approximately $100,000 in accrued interest has been reversed. In addition, the Company incurred approximately $43,000 of interest on the promissory note issued in relation to the purchase of property in
Washington State and approximately $35,000 of interest related to notes for the purchase of the land in Colorado. All of the above resulted in interest expense (including immaterial other amounts of interest expense) of approximately $289,000 for
the nine months ended September 30, 2015.
Also during the second quarter of 2015 the Company recorded $75,000 in other income due to
recovery of previously written off accounts receivable.
Comparison of the years ended December 31, 2014 and 2013
Overview of Results
The
Company reported a consolidated net loss of $16,541,334 for the year ended December 31, 2014, an increase of $12,749,894 compared to a loss of $3,791,440 for the same period of 2013. This was primarily due to a few key factors related to a
reduction in revenue, an increase in non-cash stock based compensation, an increase in interest expenses due to use of convertible debentures carrying a high financing cost, an increase in expenses related to being a public company and costs
associated with the SEC investigation and the grand jury investigation of the Companys financial reporting, increased costs related to pursuing new licenses in new markets, costs of re-valuing slow moving inventory of the old style vaporizers
and a slight increase in sales and marketing expenses.
During 2014, the Company hired a new CEO and CFO and reconstituted its Board of
Directors. In an effort to attract new talent to management and the Board of Directors, the Company introduced a new stock compensation plan that added $4.4 million to operating costs.
Additionally, the Companys revenue model was significantly different in 2014 as compared to 2013. This difference was mainly due to the
fact that the Company was 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 consulting contracts would continue over a longer period. During our 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.
The Companys subsidiary VII was acquired on April 1, 2013.
Accordingly, VII expenses did not exist for the first quarter of 2013, but were included in total amounts for the year of 2014. For purposes of comparison, the VII expenses are presented as a separate line item in the management discussion and
analysis section.
Revenue
Revenue consisted of Medbox system sales, location build-outs fees, referral fees and consulting service fees, which are often bundled together
in a single offering to clients and revenue from sales of vaporizers and accessories
55
from VII. For the year ended December 31, 2014 consolidated net revenues decreased by $1,432,951 compared to the same period of 2013 mostly due to a reduction in consulting and build
outs revenue by $1,610,444 as offset by an increase in referral fees revenue by $203,165.
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Description |
|
For the year ended December 31, 2014 |
|
|
For the year ended December 31, 2013 |
|
|
Increase (Decrease) |
|
Consulting and Build-outs |
|
$ |
157,200 |
|
|
$ |
1,767,644 |
|
|
$ |
(1,610,444 |
) |
Sale of locations and management rights, unrelated parties |
|
|
175,000 |
|
|
|
150,000 |
|
|
|
25,000 |
|
Sale of territory rights, related party |
|
|
75,301 |
|
|
|
|
|
|
|
75,301 |
|
VII-Product sales |
|
|
85,741 |
|
|
|
144,439 |
|
|
|
(58,698 |
) |
Referral fees |
|
|
203,165 |
|
|
|
|
|
|
|
203,165 |
|
Gross revenues |
|
|
696,407 |
|
|
|
2,062,083 |
|
|
|
(1,365,676 |
) |
Allowances and refunds |
|
|
(67,275 |
) |
|
|
|
|
|
|
(67,275 |
) |
Net revenues |
|
$ |
629,132 |
|
|
$ |
2,062,083 |
|
|
$ |
(1,432,951 |
) |
Consulting Revenue
The consulting and build out revenue for the year 2013 was due mostly to achievement of milestones and delivery of facilities in Arizona to our
clients. The consulting revenue for the year ended December 31, 2014 decreased by $1,610,444 compared to the same period of 2013, due principally to a large decline in build outs in 2014. This change in revenue was due mainly to delays in
adopting final governmental regulations and the timing of application submittals for other states and, therefore, revenue was not fully recognized during this period for many of our clients. The Company could not fulfill its contractual obligations
and record revenue for its San Diego clients due to broad changes in regulation leading to a decrease in the number of available licenses from 130 to 32 in San Diego County. Due to the reduction of licenses being offered in San Diego, we had to
cancel and/or refund payments to many of our clients. The initial San Diego contracts and the cancelation were all recorded in 2013 in the restated financial statements, the refunds were made during the year 2014. Also during the third quarter of
2014, the Company applied for licenses on behalf of its clients in the States of Nevada and Illinois, and was able to obtain eight provisional cultivation licenses in Nevada and one dispensary authorization license in Illinois on for its clients.
The Company is also pursuing two recreational retail licenses and one Tier 2 production/processor license in the State of Washington which are currently in the process of being reviewed and approved.
As of December 31, 2014, the Company obtained a provisional license in the State of Oregon and fully built out the location and the
dispensary location there. The dispensary is expected to open in the second quarter of 2015.
Sale of locations and management rights
Revenue from the sale of locations and management rights to operate locations increased by $25,000 during the year ended December 31, 2014
as compared to the year ended December 31, 2013. This increase is due mostly to the sale of management rights in an Arizona location for $175,000. The revenue from sale of the locations for the year ended December 31, 2013 consisted of the
sale of one location in Arizona for $150,000.
Sale of territory rights, related party
On March 28, 2014, the Company entered into a sale for exclusive rights with a related party to place the Medbox patented dispensing
systems in Denver, Colorado for $500,000. This $500,000 is being recognized ratably over the five year term of the agreement, with $75,301 recognized as revenue in the twelve months ended December 31, 2014.
There was no similar revenue in the comparable period of 2013.
56
Referral fee
During the year ended December 31, 2014, the Company entered into an agreement with MJ Holdings, Inc., (the Referral
Agreement) a publicly traded company that provides real estate financing and related solutions to licensed marijuana operators. Medbox will market MJ Holdings real estate financial products and offerings to its consulting clients and
will refer all incoming real estate financing related opportunities to MJ Holdings (See Note 10 Marketable securities to the Notes to our Consolidated Financial Statements in this Report for more information). Pursuant to the Referral
Agreement, MJ Holdings, Inc. agreed to issue to the Company, 33,333 warrants to purchase common stock of MJ Holdings, Inc. on each months anniversary during the six month term of the contract. The revenue recognized for the year ended
December 31, 2014 from the Referral Agreement was $203,165. There was no comparable revenue during 2013.
VII-Product sales
During the year ended December 31, 2014, the Company generated $85,741 from the sale of vaporizer products and accessories through
VII. VII was acquired on April 2, 2013 and, therefore, there was no income for a comparable annual period for vaporizer sales in 2013. We plan to release our new portable vaporizer product to the general public during the second quarter of
2015. We expect the new vaporizer product to restore sales volume for our subsidiary VII.
Cost of revenue
Cost of revenue includes costs incurred to obtain permits and licenses before the license is granted and the location is secured as well as
costs for our dispensing systems manufacturing and sales, location build-out, repurchases of licenses or rights from former clients that can be resold to new clients and the costs associated with operating VII which include the cost of
producing vaporizers and accessories, adjustments for valuations of inventory, fulfilment activities associated with sales orders and operation of the Companys inventory management department.
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Revenue |
|
For the year ended December 31, 2014 |
|
|
For the year ended December 31, 2013 |
|
|
Increase (Decrease) |
|
Cost of inventory and build-outs |
|
$ |
884,958 |
|
|
$ |
2,161,909 |
|
|
$ |
(1,276,951 |
) |
New markets development costs |
|
|
1,990,815 |
|
|
|
276,468 |
|
|
|
1,714,347 |
|
Write off of vaporizer inventory |
|
|
329,154 |
|
|
|
|
|
|
|
329,154 |
|
Charge for abandoned site |
|
|
140,000 |
|
|
|
|
|
|
|
140,000 |
|
Charges from escrow deposits |
|
|
235,757 |
|
|
|
|
|
|
|
235,757 |
|
VII-Product cost |
|
|
215,967 |
|
|
|
222,372 |
|
|
|
(6,405 |
) |
Total costs of revenue |
|
$ |
3,796,651 |
|
|
$ |
2,660,749 |
|
|
$ |
1,135,902 |
|
Cost of inventory and build-outs
Total costs of inventory and build-outs decreased by $1,276,951 during the year ended December 31, 2014 as compared to the same period of
2013. The decrease was due mainly to the completion of numerous projects in Arizona during 2013. We did not have comparable project completions in 2014.
New markets development costs
The
decrease in cost of inventory and build outs from 2013 to 2014 was totally offset by an increase of $1,714,347 in costs associated with the pursuit of licenses in the States of Washington, Nevada and Illinois as a result of new legislation changes
there. After obtaining final approvals, the Company will have to invest additional funds to bring locations in those states to the level of compliance required by the applicable state and/or city and to perform the interior build-out.
VII-Product cost
The Company incurred
costs of $215,967 for the year ended December 31, 2014 associated with VII which included the cost of producing vaporizers and accessories, fulfilment activities associated with sales orders, and the operation of the Companys purchasing
department. As previously described, this amount cannot be directly compared to the year ended December 31, 2013 due to the fact that VII was acquired on April 2, 2013.
57
Write off of vaporizer inventory
During the third quarter of 2014, the Company wrote down slow moving, older models of its vaporizer inventory with a charge to cost of revenue
of $329,154.
Charge for abandoned site
During the year ended December 31, 2014, due to unfavorable terms demanded by the sellers to extend the escrow and closing date, the
Company allowed the escrows to expire on three agreements with an aggregate purchase price of $3,195,000 and had to forfeit $140,000 in earnest money.
Charges from escrow deposits
During
2014, the Company entered into numerous real estate contracts to secure locations during 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 of $235,757 for the year ended December 31, 2014, in the statement of operations. There were no similar transactions during 2013.
Operating Expenses
Operating expenses
consist of all other costs incurred during the period other than cost of revenue. Operating expenses increased by $7,089,385 during year ended December 31, 2014 as compared to the year ended December 31, 2013. This was primarily due to an
increase of $6,652,770 in general and administrative costs, further described below.
Sales and Marketing expenses
Sales and marketing expenses include public relations and promotion, lobbying, purchased advertising, travel and entertainment and outside
consulting services for sales and marketing and sales lead generation. Sales and marketing expenses increased by $269,244 during the year ended December 31, 2014 compared to the year ended December 31, 2013 principally due to an
increase in VII sales and marketing expenses related to product promotions and lobbying in order to promote the Company in the states/markets of interest.
Research and development
Research and
development consists of engineering work done on the software enhancements of the Medbox, additional research on vaporizers, and patent-related expenses. Our research and development expenses for the year ended December 31, 2014 increased
by $167,371 as compared to the year ended December 31, 2013. The increase is due to the Companys investments in developing the new vaporizer, additional investment in development of new tracking technologies for cultivation facilities
that we intend to sell to our clients as a package with their consulting agreements, upgrading the point-of-sale system and software for new generations of the dispensing machines, as well as for patent attorneys fees to manage and apply for patents
to protect the Companys intellectual property.
General and administrative
General and administrative expenses include costs of being a public company, legal, lobbying, accounting, payroll, consulting, rent and other
costs. The Companys general and administrative expenses increased by $6,652,770 for the year ended December 31, 2014 as compared to year ended December 31, 2013.
58
The increase is primarily due to the introduction in 2014 of the Companys new stock-based
compensation plan for executive officers and directors with the related cost of $4,415,799. Additional reasons for the increase include higher costs associated with being a public company, which totaled $517,653 for the year ended December 31,
2014, an increase of $1,020,124 in legal costs due to the SEC and Department of Justice investigation into the Companys financial reporting, related party transactions and other matters (see Note 19 to the Notes to our Consolidated Financial
Statements in this Report for more information) and an increase in employee and independent contractors costs of $426,920 as the Company added staff to build infrastructure and support future growth, as well as additional expenses of $278,952
related to warrants settlement with various previous owners of VII.
Other Income (Expense)
Other income (expense) swung from income of $6,905 to expense of $3,088,751 for the year ending December 31, 2014, an increase of
$3,095,656. This is primarily due to expense caused by a change in fair value of derivative liabilities of $1,805,990 related to the new convertible notes and the interest charge from the convertible notes payable in the amount of $1,282,761. The
convertible notes payable funded in the third quarter of 2014 and, accordingly, there are no corresponding charges in 2013.
Net Loss
As a result of the factors set forth above, our net loss increased by $12,749,894 to $16,541,334 for the year ended December 31, 2014
compared to $3,791,440 for the year ended December 31, 2013.
Comparison of the years ended December 31, 2013 and 2012
Overview of Results
Revenue increased
$885,254 or 75.2%, to $2,062,083 for the year ended December 31, 2013, from $1,176,829 for the year ended December 31, 2012, primarily as a result of the completion of contracts for our Arizona customers. The increase was caused
principally by recognition of revenue in 2013 that was deferred in 2012 for our Arizona contracts. Openings of Alternative Medicine Clinics (AMC) in Arizona were delayed by court action that was not resolved until 2013. During 2012,
we were unable to recognize revenues from our Arizona clients due to year-end litigation in the Arizona courts after Arizona passed a medical marijuana law that provided for the permitting and operation of AMCs, which was then challenged in the
courts by Arizonas governor. This litigation froze our ability to complete our construction build outs and deliver Medbox machines to our clients in Arizona, and, as a result, we deferred recognition of revenue already received from these
Arizona clients while the case was pending and the dispensary licensing program was on hold.
Our Vaporfection International, Inc.
(VII) subsidiary contributed $144,439 of revenues during the twelve months ended December 31, 2013; there was no similar revenue in 2012.
The Company had a negative gross margin of $598,666 during 2013, operational costs of $3,195,679 eroded the result, to a pretax loss of
$3,787,440, which is $2,209,203 greater than the previous year pretax loss of $1,758,237. Our gross profit decreased from $125,694 to a gross loss of $598,666 principally due to the cost of build outs for Arizona dispensaries that totaled $1.2
million that was expensed in 2013.
Our operating expenses increased from $1.9 million in 2012 to $3.2 million in 2013. Our operating
expense increase for 2013 was primarily attributed to higher general and administrative expenses related to raising capital and regulatory compliance in connection with the filing of our Registration Statement on Form S-1, subsequently withdrawn,
and the filing of our Form 10 registration statement in order to register our common stock under and become subject to the periodic reporting requirements of the Exchange Act. In addition, we incurred significant legal costs as we litigated on
behalf of our Arizona clients to allow them to move forward with the dispensary licenses that the state of Arizona had awarded them. Additionally, our newly acquired subsidiary reported a net loss of $316,928 during the nine-month period from
our acquisition of it on April 1, 2013 through December 31, 2013. All of the above factors contributed to an increase in the net loss from $1,758,237 in 2012 to $3,791,440 in 2013.
59
Revenue
Total revenues for the years ending December 31, 2013 and 2012 consisted of revenues from Medbox system sales, location build out fees and
consulting fees. The increase of $900,000 from 2012 to 2013 was caused principally from the recognition of $1.3 million in revenue in 2013 that was deferred from 2012 for our Arizona contracts. As noted above, openings of AMCs in Arizona were
delayed by court action that was not resolved until 2013. During 2012, we were unable to recognize revenues from our Arizona clients due to litigation in the Arizona courts after Arizona passed a medical marijuana law that provided for the
permitting and operation of AMCs, which was then challenged in the courts by Arizonas governor. This litigation froze our ability to complete our construction build outs and deliver Medbox machines to our clients in Arizona, and, as a
result, we deferred recognition of revenue already received from these Arizona clients while the case was pending and the dispensary licensing program was on hold. In addition, sales from our new VII subsidiary contributed $144,439 to total revenue
during 2013; this business was acquired on April 1, 2013 and, as such, there were no similar revenues during 2012.
Cost of Revenues
Our cost of revenues includes systems costs for our systems sales and construction, build-out, license and permit fees on behalf of our clients
for our consulting activities. Cost of revenues increased $1,609,614, or 153.1%, to $2,660,749 for the year ended December 31, 2013 from $1,051,135 during the year ended December 31, 2012, as a result of increased costs related to the
build-out of locations for our clients due to delays in implementing the Arizona program discussed above and costs related to zoning and site acquisition during 2013. Costs of $260,000, accumulated for an unsuccessful effort to develop the market in
Massachusetts, were included in cost of revenue for 2013.
Also, our newly acquired VII subsidiary contributed $222,372 to the total of
costs of revenue during 2013. Cost of revenues as a percentage of revenues increased to 129.0% during the year ended December 31, 2013 from 89.3% during the year ended December 31, 2012, as a result of revenue generating construction costs
incurred during the year ended December 31, 2013 related to the Arizona location build-outs and additional zoning and legal costs associated with new client consulting and location sourcing.
Operating Expenses
Selling, general and
administrative expenses, which we refer to as operating expenses, consist of all costs incurred during the year other than cost of revenues. Operating expenses increased $1,316,696 or 70.1% to $3,195,680 for the year ending
December 31, 2013 compared to $1,878,983 for the same period in 2012. The Companys 2013 operational expenses consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
2012 |
|
2013 Operating Expenses |
|
Consolidated |
|
|
MDS |
|
|
Medbox |
|
|
VII |
|
|
Consolidated |
|
Selling and marketing |
|
$ |
664,383 |
|
|
|
625,776 |
|
|
|
5,500 |
|
|
|
33,107 |
|
|
|
806,221 |
|
Research & development |
|
$ |
74,861 |
|
|
|
74,861 |
|
|
|
0 |
|
|
|
0 |
|
|
|
176,964 |
|
General and administrative |
|
$ |
2,456,435 |
|
|
|
1,099,162 |
|
|
|
1,178,802 |
|
|
|
178,472 |
|
|
|
895,798 |
|
Total Operating Expenses |
|
$ |
3,195,679 |
|
|
|
1,799,799 |
|
|
|
1,184,302 |
|
|
|
211,579 |
|
|
|
1,878,983 |
|
The largest component of the increase in operating expenses during 2013 compared to 2012 was the increase in
general and administrative expenses, which increased $1,560,637 or 174.22%, to $2,456,435 The reasons for this increase are analyzed below under General and administrative.
Selling and marketing expenses totaled $664,383 for the year ended December 31, 2013. In order to strengthen the MDS
competitive advantage in the consulting market within the industry the Company had been developing a new tracking technology, for bio-metric chain of custody seed-to-sale tracking, and for cultivation facilities. During 2013, the Company incurred
$74,861 for the research and development of the tracking technology. There were no similar expenses in 2012. Management expected that selling and marketing expenses would grow significantly in 2014 as it expected significant expansion of business
opportunities for MDS in 2014 due to favorable changes in the industry, including expansion of medical and recreational marijuana into new U.S. jurisdictions.
60
Overall selling and marketing expenses include professional public relations and
promotion, purchased advertising, travel and entertainment and outside services for sales and marketing consultants and sales lead generation. The breakdown of sales and marketing expenses is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
MDS |
|
|
Medbox |
|
|
VII |
|
Public Relations |
|
$ |
69,691 |
|
|
|
69,691 |
|
|
|
|
|
|
|
|
|
Consulting/Outside Services |
|
$ |
407,341 |
|
|
|
383,114 |
|
|
|
|
|
|
|
24,227 |
|
Advertising |
|
$ |
146,998 |
|
|
|
135,925 |
|
|
|
5,500 |
|
|
|
5,573 |
|
Other |
|
$ |
40,353 |
|
|
|
37,046 |
|
|
|
|
|
|
|
3,307 |
|
Total Sales & Marketing |
|
$ |
664,383 |
|
|
|
625,776 |
|
|
|
5,500 |
|
|
|
33,107 |
|
The Sales and Marketing decrease of $141,838 is partially due to recruitment of qualified and experienced
consultants that account for $407,341 (or 61.3%) out of the total sales and marketing expense who did a better job of managing costs. Advertising expense for the year was due to promotional campaigns in specialized magazines and publications.
Another factor in reduction of advertising costs were referrals and word-of-mouth advertising from our existing and growing clientele base.
Research and development consists of engineering work done on software enhancements of the Medbox technology along with
development of new products at VII. In 2013, we invested in developing new tracking technologies for cultivation facilities that we intend to sell to clients as a package with their consulting agreement. In addition we believe that this software
will give our clients a competitive advantage in the process of applying for licenses for cultivation facilities due to increased oversight and inventory tracking in all phases of management and operation of the facility through a biometric chain of
custody of all cultivated products.
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 increased $1,560,637 or 174.22 % for the year ending December 31, 2013 to $2,456,435 compared to
$895,798 during the year ended December 31, 2012. The significant increase in these costs during 2013 compared to 2012 is primarily related to significant legal and accounting expense incurred in preparing our Form S-1 and Form 10
registration statements. During the year we incurred approximately $91,000 in legal fees in connection with the preparation and filing of our Form S-1 and Form 10 registration statements; there were no such expenses in 2012. In order to comply
with financial and reporting, corporate governance and internal control requirements for SEC reporting companies we incurred expenses for professional accounting services in the amount of $202,310 for the year ending December 31, 2013. This
represents an increase of $25,346 or 14.32% from the $176,964 for the year ended December 31, 2012.
Due to the Companys growth
and development and the development of the industry itself, we hired 5 additional new experienced consultants during 2013. Employee costs, which includes compensation and benefit expenses, increased $172,907, or 96.1%, to $352,907 for the
year ending December 31, 2013 compared to $180,000 during 2012.
During 2013 we incurred significant legal fees in connection with
assisting our clients in Arizona in order to allow them to utilize the dispensary licenses that they were granted by the state following a legal challenge by the governor. We also incurred significant legal and accounting expenses during 2013 in
connection with the preparation of our Form 10 and a registration statement on Form S-1 that was withdrawn. In addition, we also incurred expenses of $184,167 to financial advisors.
We expected that general and administrative expenses would continue to increase during 2014 as we built out our infrastructure to comply with
Exchange Act and SEC reporting rules and regulations.
Income Taxes
Because the company incurred a significant loss we did not record any tax provision for federal tax for the year 2013. We accrued $4,000 for
the minimum state income tax.
61
Net Loss
As a result of the above factors, our net loss increased $2,033,203, or 115.6%, to $3,791,440 during the year ended December 31, 2013 from
a net loss of $1,758,237 during the year ended December 31, 2012.
Liquidity and Capital Resources
September 30, 2015
As of
September 30, 2015, the Company had cash on hand of approximately $347,000 compared to approximately $101,000 at December 31, 2014.
Cash
Flow
During the nine months ended September 30, 2015 cash was primarily used to fund operations and pursue license application
processes.
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, |
|
Cash flow |
|
2015 |
|
|
2014 |
|
Net cash used in operating activities |
|
$ |
(6,124,372 |
) |
|
$ |
(4,651,145 |
) |
Net cash used in investing activities |
|
|
(583,754 |
) |
|
|
(713,759 |
) |
Net cash provided by financing activities |
|
|
6,953,705 |
|
|
|
6,547,344 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
$ |
245,579 |
|
|
$ |
1,182,440 |
|
|
|
|
|
|
|
|
|
|
Cash Flows Operating Activities
During the nine months ended September 30, 2015, cash flows used in operating activities were approximately $6,124,000, consisting
primarily of the net loss for the first nine months of 2015 of approximately $25,120,000, reduced for non-cash adjustments for amortization of the debt discount of approximately $8,122,000, stock based compensation of approximately $5,331,000,
financing costs of approximately $2,822,000, inventory write off of approximately $497,000, charges from escrow deposits of $280,000 and depreciation and amortization of approximately $90,000. The net loss is increased for the non-cash adjustments
of a gain from the change in fair value adjustment of derivative liability of approximately $509,000. Additional significant components of cash used in operating activities were a decrease in accrued expenses of approximately $488,000 related
primarily to the payment of legal bills included in accrued expenses at December 31, 2014, increase in prepaid insurance expenses and other prepaid expenses of approximately $382,000 related primarily to the advance funding for the
Companys annual director and officers insurance policy and payment of retainers, decrease in customer deposits of approximately $468,000 due to refunds and completion on some agreements and increase in deferred costs of approximately $300,000
related to the costs associated with Operating Agreement with an unrelated party (the Operator) in which the Operator will manage and operate the Dispensary for which the Company holds the license in Portland, Oregon. These operating
uses of cash were primarily offset by an increase of approximately $2,522,000 due to the timing and deferral of the payment of trade payables, an increase in accrued settlement and severance expenses of approximately $912,000 mainly related to Guy
Marsala separation and Bruce Bedrick indemnification for legal expenses related to shareholder lawsuits, a decrease in inventory of approximately $276,000 primarily related to transfer of the accumulated cost for construction and development of the
Portland, Oregon dispensary to deferred costs and accrued expenses for directors bonuses in the amount of approximately $260,000.
During the nine months ended September 30, 2014, cash flows used in operating activities were approximately $4,651,000, consisting
primarily of the net loss for the first nine months of 2014 of approximately $6,803,000, reduced for non-cash adjustments of depreciation and amortization of approximately $59,000, the establishment of a non-cash bad debt provision of $60,000,
amortization of a debt discount of approximately $216,000, and stock based compensation of approximately $1,032,000 and increased for the non- cash adjustments of gain from fair value adjustment of derivative liability of approximately $548,000,
fair value of marketable securities received as payment for services of approximately $190,000. An additional component of cash used in operating activities was an increase in prepaid expenses and other assets of approximately $897,000 related
62
primarily to net deposits paid into escrow accounts of approximately $634,000, deferred loan costs of $196,000 related to convertible notes payable and the balance of the advance funding of
approximately $78,000 for the Companys annual director and officers liability insurance policy. These operating uses of cash were offset by a decrease in inventory of approximately $111,000, and a net decrease of accounts receivable of
approximately $213,000, increases in accounts payable and accrued expenses of approximately $908,000 due to the timing and deferral of the payment of trade payables and the overall increase in operating costs. In addition, customer deposits and
deferred revenue provided net cash during the nine month periods of approximately $807,000 and $390,000, respectively, primarily due to the increase in customer deposits collected on contracts prior to work being completed and revenue recognized.
Cash Flows Investing Activities
During the nine months ended September 30, 2015, cash flows used in investing activities was approximately $583,000, consisting primarily
of the $500,000 cash portion of the Farm acquisition, and approximately $84,000 for construction and equipment related to the Farm. During the nine months ended September 30, 2014, cash flows used in investing activities were approximately
$714,000, consisting of the purchase of one property held for resale for $399,594, intangible assets additions for a domain name and patent costs of approximately $166,000, purchases of fixed assets of approximately $33,000 and increases in the
balances of notes receivable of $115,000.
Cash Flows Financing Activities
During the nine months ended September 30, 2015, cash flows provided by financing activities were approximately $6,954,000, consisting
mainly of approximately $7,432,000 of proceeds (net of issuance costs of approximately $353,000 from the additional note issuances of the July 2014, September 2014, and August 2015 convertible notes payable of approximately $7,640,000) and
$150,000 in the issuance of convertible debentures to two of our Directors. This was offset mainly by $625,000 in payments on notes payable to a related party. During the nine months ended September 30, 2014, cash flows provided by financing
activities were approximately $6,547,000, consisting of approximately $2,443,000 of proceeds from issuance of common stock, $3,500,000 of proceeds from issuance of convertible notes payable net, proceeds from related party notes payable of
approximately $380,000 and net proceeds from short term notes of approximately $300,000, offset by payments on a note payable of $75,000 which we acquired as a part of the VII purchase.
Future Liquidity and Cash Flows
Management believes that the Companys cash balances on hand, cash flows expected to be generated from operations, proceeds from current
and future expected debt issuances and proceeds from future share capital issuances will be sufficient to fund the Companys net cash requirements through September, 2016. However, in order to execute the Companys long-term growth
strategy, which may include selected acquisitions of businesses or facilities that may bolster the expansion of the Companys management services business, and purchases of real estate which would be used as a basis for acquiring retail
dispensary and cultivation facilities in regulated markets, the Company will need to raise additional funds through public or private equity offerings, debt financings, or other means.
On July 24, 2015, the Company entered into an Agreement of Purchase and Sale of Membership Interest with East West Secured Development,
LLC to purchase 100% of the membership interest of EWSD I, LLC which has entered into an agreement with Southwest Farms, Inc. to purchase certain real property comprised of 320-acres of agricultural land in Pueblo, Colorado (the the
Farm). We are in active negotiations to secure an independent operator to manage the Farm for hemp cultivation. We expect the first harvest of product from the Farm in early 2016 with continuing operations and harvests throughout 2016.
We have obtained 5 licenses or registrations in the States of Oregon, Illinois, Washington and California for or on behalf of clients or for
potential clients. We intend to retain the management rights for these locations and will seek to assign the rights to third parties for a fee. Most of the current dispensary and cultivation sites are expected to begin conducting business in 2015
and 2016. We are also currently in discussions with third-party license holders that operate dispensaries and cultivation centers to provide them consulting, training, compliance and regulatory support.
63
During the first nine months of 2015, we received approximately $7,432,000 in net funding from
our lenders.
On August 14, 2015, the Company entered into a Securities Purchase Agreement whereby the Company agreed to issue
convertible debentures in the aggregate principal amount of approximately $4 million. Approximately $1.7 million of the commitment was funded before September 30, 2015. The remaining $2.3 million is expected to be funded in the fourth quarter
of 2015 when we expect our Registration Statement on Form S-1 filed October 16, 2015 to become effective.
On August 20, 2015,
the Company also entered into a Securities Purchase Agreement with another investor, in the aggregate principal amount of up to $1,500,000, which was amended on September 19, 2015, to increase the principal by an additional $200,000. Through
September 30, 2015, two tranches totaling $500,000 have been funded. The remaining $1.2 million is expected to be funded in the fourth quarter of 2015 when we expect our second Registration Statement on Form S-1 filed in 2015 to become
effective.
Management is actively seeking additional financing and expects to complete additional financing arrangements in the next few
months. The Company expects that these plans will provide it the necessary liquidity to continue operations for the next 12 months.
The
Company will continue to execute on its business model by attempting to raise additional capital through the sales of debt or equity securities or other means, however there is no guarantee that such financing will be available on terms acceptable
to the Company, or at all. If the Company is unable to obtain adequate debt or equity financing, it may be forced to slow or reduce the scope of operations and expansion, and its business would be materially affected.
In addition, our VII subsidiary used cash for the production and promotion of its portable vaporizer product which we released in April 2015
at the Denver trade show. Our VII subsidiary is expected to be a net user of cash until the new product sales ramp up. VII is expected to swing to positive cash flow later in 2015.
On October 27, 2015 we filed an amendment to Articles of Incorporation in the State of Nevada to increase the authorized number of shares
of the Companys common stock from 100,000,000 shares to 400,000,000 shares, par value of $0.001 per share.
As of December 31, 2014
As of December 31, 2014, the Company had cash on hand decrease by $66,821 to $101,182 as compared to cash on hand of
$168,003 on December 31, 2013. This was due to the net loss and cash used in operating activities of $6,319,400 which was financed by stock sale proceeds of $2,442,859 and net proceeds from issuance of convertible notes payable of $3,475,000.
Cash Flow
During the year ended
December 31, 2014 cash was primarily used to fund operations and in the process of pursuing license applications. See below for additional discussion and analysis regarding cash flow.
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
Cash flow |
|
2014 |
|
|
2013 |
|
Net cash used in operating activities |
|
$ |
(6,319,400 |
) |
|
$ |
(3,743,397 |
) |
Net cash used in investing activities |
|
|
(418,797 |
) |
|
|
(1,499,451 |
) |
Net cash provided by financing activities |
|
|
6,671,376 |
|
|
|
4,383,949 |
|
|
|
|
Net increase (decrease) in cash |
|
$ |
(66,821 |
) |
|
$ |
(858,899 |
) |
64
Cash Flows Operating Activities
The cash flows used in operating activities increased by $2,576,003 for the year ended December 31, 2014 as compared to the year ended
December 31, 2013. This was primarily due to the increase in net loss of $12,749,894 offset by the non-cash charge of $4,415,799 for the Companys stock-based compensation awards, non-cash change in fair value of derivative liability of
$1,805,990 and amortization of the debt discount related to convertible debentures of $935,290, an increase in accounts payable of $2,117,217, an increase in deferred revenue of $805,394, and cash provided by customer deposits of $248,985.
Cash Flows Investing Activities
The cash flows used in investing activities decreased by $1,080,654 for the year ended December 31, 2014 compared to the year ended
December 31, 2013. This was due primarily to advances on investments of $1,250,000 during 2013, for which there were no corresponding advances during 2014. On February 8, 2013, the Company entered into an agreement with Bio-Tech Medical
Software, Inc. (Bio-Tech) which would allow the Company to purchase 833,333 shares of common stock of Bio-Tech, representing 25% of Bio-Techs total issued and outstanding shares of common stock, for $1,500,000. The Company
advanced $600,000 of such amount upon execution of the Bio-Tech agreement with the remaining balance of $900,000 due and payable in installments at various dates by August 25, 2013. On March 12, 2013, the Company entered into an agreement
with three members of MedVend Holdings LLC (MedVend) whereby the Company would acquire 50% of their equity interest in MedVend. The purchase price of the equity interest was $4,100,000. The Company paid an advance of $300,000 upon
execution of the contract for the right to purchase and another $300,000 was disbursed as an additional investment to MedVend. In addition, during 2014, the Company received proceeds from repayment of a note receivable in the amount of $115,000,
issued in 2013.
Additionally, the Company used cash for the purchase of property held for resale in 2014 for $399,594.
Cash Flows Financing Activities
The cash flows provided from financing activities increased by $2,287,427 for the year ended December 31, 2014 compared to the year ended
December 31, 2013. During 2014 we raised approximately $6,671,376 including $3,475,000 from new issuances of convertible debentures net of issuance costs and $2,442,859 from the issuance of the Companys common stock and $828,517 from the
issuance of notes payable as compared to $4,383,949 raised during 2013 including $4,486,541 from the issuance of the Companys common stock and $810,000 in capital contributed by related parties less payments of $896,285 as payments on notes
payable.
Future Liquidity and Cash Flows
Management believes that the Companys cash balances on hand, cash flows expected to be generated from operations, proceeds from current
and future expected debt issuances and proceeds from future share capital issuances will be sufficient to fund the Companys net cash requirements through June, 2016. However, in order to execute the Companys long-term growth
strategy, which may include selected acquisitions of businesses that may bolster the expansion of the Companys management services business, and purchases of real estate which would be used as a basis for acquiring retail dispensary and
cultivation facilities in regulated markets, the Company will need to raise additional funds through public or private equity offerings, debt financings, or other means.
Our financial statements were prepared on a going concern basis. The going concern basis assumes that the Company will continue in operation
for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The Company has an accumulated deficit of approximately $47,199,000 as of September 30, 2015. During the nine
months ended September 30, 2015, the Company had a net loss of approximately $25,120,000, negative cash flow from operations of approximately $6,124,000 and negative working capital of approximately $15,685,000. The Company will need to raise
capital in order to fund its operations. These factors, among others, raise substantial doubt about the Companys ability to continue as a going concern. The ability to continue as a going concern is dependent on the Companys ability to
raise additional capital and implement a business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
65
Our backlog includes 11 provisional licenses subject to final approval by governmental
authorities which may or may not release new licenses in accordance with their own stated timelines. If final licenses are granted, we will receive additional funding from customers in 2015.
During the second quarter of 2015, the Companys Registration Statement on Form S-1A became effective. During the first half of 2015, we
received $4,792,000 in funding from our lenders.
On August 14, 2015, the Company entered into the August 14 Purchase Agreement
whereby the Company agreed to the August 14 Debentures in the aggregate principal amount of up $3,979,877 to fund in up to 11 tranches. The initial closing in the aggregate principal amount of $650,000 occurred on August 14, 2015. The
second closing in the amount of $185,000 occurred on August 28, 2015, the third closing in the amount of $125,000 occurred on September 4, 2015, the fourth through seventh closings will be in the amount of $60,000 each and will occur
beginning on September 11, 2015 with the remaining 3 closings occurring every 2 weeks thereafter, the eighth closing in the amount of $250,000 will occur 3 days after the filing of this registration statement, the ninth closing
in the amount of $250,000 will occur 8 days after the filing of this registration statement, the tenth closing in the amount of $1,278,877 will occur within 3 business days of the effective date of the registration statement filed by the
Company for the resale of the shares of common stock issuable upon conversion of the August 2015 Debentures and the eleventh closing, at the sole option of the purchaser in the amount of up to $1,000,000 will occur by October 15, 2015. The
August 2015 Debentures bear interest at the rate of 10% per year and are convertible at any time, in whole or in part, at the option of the holders into shares of the Companys common stock at a conversion price that is the lower of
(a) $0.75, or (b) a 49% discount to the lowest daily VWAP (as reported by Bloomberg) of the Common Stock during the 30 trading days prior to the conversion date.
On September 4, 2015, the Company entered into the September 4 Amendment with the August 14 Investor, amending in certain
respects August 14 Purchase Agreement.
Pursuant to the September 4 Amendment, the parties agreed that the aggregate principal
amount of the August 14 Debentures would be $3,978,880, which the August 14 Investor would purchase in 9 tranches (each, a Closing), none of which would be subject to the Option. In effect, the August 14 Investor exercised
the Option and allocated the $1,000,000 available thereunder among several of the tranche closing dates.
As noted, the initial Closing in
the amount of $650,000 took place on August 14, 2015. The remaining amounts were rescheduled to be purchased by the August 14 Investor in Closings on the dates and in the amounts as follows: $82,220 was purchased on August 21, 2015;
$207,220 was purchased on August 28, 2015; $457,220 was purchased on September 4, 2015; $82,220 was purchased on September 11, 2015; $250,000 will be purchased on the date that is 3 business days after the this Registration Statement;
$250,000 will be purchased on the date that is 8 business days after the filing of this Registration Statement; $1,250,000 will be purchased on the date that is 3 business days after date that this Registration Statement becomes effective (the
Effective Date); and $750,000 will be purchased on the date that is 7 business days after the Effective Date.
After this
Registration Statement becomes effective, the Company is planning to raise additional equity capital. The Company will continue to execute on its business model by attempting to raise additional capital through the sales of debt or equity securities
or other means, however there is no guarantee that such financing will be available on terms acceptable to the Company, or at all. If the Company is unable to obtain adequate debt or equity financing, it may be forced to slow or reduce the scope of
operations and expansion, and its business would be materially affected.
During the year ended December 31, 2014, the Company paid
$930,000 either by deposit into fifteen escrow accounts or direct payments to sellers, to secure the purchase and/or extend the closing dates on real estate to be used for future retail/cultivation facilities with an aggregate purchase price of
$26,830,000. During 2014, the Company allowed the escrows to expire on three agreements with an aggregate purchase price of $3,195,000 and forfeited $140,000 in earnest money due to unfavorable terms demanded by the sellers to extend the escrow
and closing date. The Company was also not successful in obtaining licenses for another ten locations with an aggregated sale price of $21,515,000 and deposits in escrow totaling $685,000. As a result, all escrow accounts were closed and $235,757
was forfeited and $419,167 was refunded to the Company.
66
During July 2014, one of the real estate properties on which the Company opened escrow was
foreclosed upon and the agreement was canceled and the escrowed money in the amount of $10,000 was reimbursed to the Company on July 28, 2014.
During the nine months ended September 30, 2015, the Company recovered approximately $105,000 and forfeited approximately $280,000 out of
escrow deposits outstanding as of December 31, 2014. As of September 30, 2015 the Company has only one open real estate agreement for a property in San Diego with a purchase price of $875,000 and related outstanding deposit of $15,000.
In addition, our VII subsidiary has cash demands for the production and promotion of its portable vaporizer product which we released in
April 2015 at the Denver trade show. These additional investments along with continued investment into the operating cost of this business will continue to be a net user of cash until the Vaporfections cash requirements can be re-evaluated
after the new product reaches wider distribution.
Off Balance Sheet Transactions
We do not have any off-balance sheet credit exposure.
Critical Accounting Policies and Estimates
Our significant accounting policies are summarized in Note 2 to the Consolidated Financial Statements. The additional discussion below
addresses only our most significant judgments:
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements as well as the reported
expenses during the reporting periods. The Companys significant estimates and assumptions include the valuation of the Companys common stock used in the valuation of goodwill, accounts receivable and note receivable collectability,
inventory, the valuation of restricted stock and warrants received from customers, the amortization and recoverability of capitalized patent costs and useful lives of long-lived assets, the derivative liability, and income tax expense. Some of these
judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the
estimates and assumptions were made. Actual results could differ from these estimates.
Fair Value of Financial Instruments
Pursuant to ASC No. 825, Financial Instruments, the Company is required to estimate the fair value of all financial instruments included
on its balance sheets. The carrying value of cash, accounts receivable, other receivables, inventory, accounts payable and accrued expenses and notes payable, related party notes payable, customer deposits, provision for customer refunds and short
term loans payable approximate their fair value due to the short period to maturity of these instruments. The Companys marketable securities and related customer deposits require fair value measurement on a recurring basis as the Company has
received advance payment of restricted stock in a publicly traded company for contracted services and received warrants for service provided to an unrelated third party. The Company has no exposure to gain or loss on the increase or decrease in the
value of the marketable securities received as a payment from customer as any shortfall in the ultimate liquidated value of the securities will be supplemented by additional restricted stock from the customer and any liquidation in excess of the
Companys billings will be returned to the customer. The securities received as a payment for services provided will be exposed to gains or losses following their initial evaluation as of the date the revenue was earned.
Warrants and other financial assets received as a payment for the services provided are recorded as Marketable securities. The
Company uses the Black-Scholes model to measure the value of the warrants. At each reporting date the Company reevaluates the value of marketable securities and recognizes any changes in value to other comprehensive income (loss) under
Unrealized gain or losses from marketable securities.
67
Embedded derivative The Companys convertible notes payable include embedded features
that require bifurcation due to a reset provision and are accounted for as a separate embedded derivative (see Note 13). The Company has estimated the fair market value of the embedded derivative of the Notes based on a weighted probability model.
The key valuation assumptions used consist of the price of the Companys stock, a risk free interest rate based on the average yield of a 26 or 52 week Treasury note and expected volatility of the Companys common stock all as of the
measurement dates, and various estimated reset exercise prices allocated by probability. The Company considers these inputs Level 3 assumptions, based on the application of the estimated probability rate being considered an unobservable input.
The assets or liabilitys fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is
significant to the fair value measurement. The following table provides a summary of the relevant assets and liabilities that are measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) |
|
|
Quoted Prices for Similar Assets or Liabilities in Active Markets (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
$ |
94,776 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
94,776 |
|
Derivative liability |
|
|
3,691,853 |
|
|
|
|
|
|
|
|
|
|
|
3,691,853 |
|
Total |
|
$ |
3,786,629 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,786,629 |
|
The following table sets forth a summary of the changes in the fair value of the Companys Level 3
financial liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
For the year ended December 31, 2014 |
|
|
|
Total |
|
Beginning balance |
|
$ |
|
|
Initial recognition of conversion feature |
|
|
1,885,863 |
|
Change in fair value of conversion feature |
|
|
1,805,990 |
|
Ending balance |
|
$ |
3,691,853 |
|
Revenue Recognition
We enter into transactions with clients who require our expertise and are interested in being granted the right to have us engage exclusively
with them in certain territories (which we describe as territory rights) to obtain the necessary licenses to operate a dispensary for the location, and to consult in daily operations of the dispensary.
Terms for each deal are varied and the sales arrangements typically include the delivery of our dispensing technology and dispensary location
build-out. Medbox machines retail for approximately $50,000 for each machine set (including the POS system), and normally our contracts include the sale of the dispensary units within the scope of options to be provided that might also include
location build out costs. Currently, our standard contracts have a five year term, call for an upfront, non-refundable consulting fee, and contain options including acquiring a Medbox dispensary machine and having the Company perform the buildouts
for the location, at set prices. The Company has determined these optional purchases each constitute a separate purchasing decision, and therefore are considered a separate arrangement for revenue recognition purposes.
Revenue on each of these options are evaluated for recognition when and if the customer decides to enter into the arrangement.
68
Based on these contracts, and other auxiliary agreements, our current revenue model consists of
the following income streams:
Consulting fee revenues and build-outs
Consulting fee revenues is a consistent component of our current and anticipated future revenues and is negotiated at the time we enter into a
contract. Consulting revenue consists of providing ongoing consulting services over the life of the contract, to the established business in the areas of regulatory compliance, security, operations and other matters to operate the dispensary. The
majority of the consulting fees arise from the upfront, non-refundable consulting fee in our standard contract, and is recognized using the straight line method over the life of the contract. Consulting fee revenue is only recognized when the
following four criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales price is fixed and determinable and 4) collectability is reasonably assured.
Revenue for the build-outs of the dispensary, if the customer chooses to have it performed by the Company, is recognized after issuance of a
certificate of occupancy for the newly completed facility. This consists of a complete interior build-out of the retail store front including necessary construction (not to include installation of plumbing, electrical, HVAC systems and masonry),
furniture fixtures and security system.
Due to the uncertainties inherent in the emerging industry, the Company deferred recognition of
revenue for sale of completed dispensaries with licenses until the issuance of a certificate of occupancy by the municipality. The certificate of occupancy is the final approval to open a dispensary in the customers community, at which time
all criteria for revenue recognition, including delivery and acceptance, has been met. Additionally, at the time of the issuance of the certificate of occupancy, under the contract terms, all payments owed by the customer have been received by the
Company.
Unbilled costs and associated fees related to the build-outs are recorded in inventory and subject to valuation testing at each
quarter end for net realizable value (lower of cost or market) and collectability
Cost of Revenue
Cost of revenue consists primarily of expenses associated with the delivery and distribution of our products and services. These include
expenses related to the manufacture of our dispensary units, construction expense related to the customer dispensary, site selection and establishment of licensing requirements, and consulting expense for the continued management of the dispensary
unit build out, server and security equipment, rent expense, energy and bandwidth costs, and support and maintenance costs prior to when the client moves in. We only begin capitalizing costs when we have obtained a license and a site for operation
of a customer dispensary or cultivation center. The previously capitalized costs are charged to cost of revenue in the same period that the associated revenue is earned. In the case where it is determined that previously inventoried costs are in
excess of the projected net realizable value of the sale of the licenses then the excess cost above net realizable value is written off to cost of revenues. In addition, cost of revenue related to our vaporizer line of products consists of direct
procurement cost of the products along with costs associated with order fulfilment, shipping, inventory storage and inventory management costs.
Recent
Accounting Pronouncements
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of
Financial Statements Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU 2014-15). The guidance in ASU 2014-15 sets forth managements responsibility to
evaluate whether there is substantial doubt about an entitys ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements,
management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entitys ability to continue as a going concern for one year from the date the financial statements are issued or are available to be
issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as
69
well as whether it is probable that managements plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial
doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted. The Company has elected to early adopt this guidance in the current
interim period.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU
2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods for public business entities beginning after December 15, 2017, including interim
periods within that reporting period. The new standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2014-09 will have on its financial statements and
related disclosures. The Company has not yet selected a transition method nor determined the effect of the standard on its ongoing financial reporting.
70
MARKET PRICE OF AND DIVIDENDS ON REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market for Securities
The Companys common stock is quoted on the OTCQB under the symbol MDBX.
The following table sets forth, for the periods indicated, the range of high and low intraday closing bid information per share of our common
stock.
|
|
|
|
|
|
|
|
|
Fiscal Quarters |
|
High Sale Price |
|
|
Low Sale Price |
|
First Quarter 2013 |
|
$ |
98.00 |
|
|
$ |
25.10 |
|
Second Quarter 2013 |
|
$ |
38.40 |
|
|
$ |
14.02 |
|
Third Quarter 2013 |
|
$ |
39.00 |
|
|
$ |
23.5 |
|
Fourth Quarter 2013 |
|
$ |
27.49 |
|
|
$ |
8.11 |
|
First Quarter 2014 |
|
$ |
93.50 |
|
|
$ |
20.98 |
|
Second Quarter 2014 |
|
$ |
30.00 |
|
|
$ |
13.25 |
|
Third Quarter 2014 |
|
$ |
18.54 |
|
|
$ |
7.90 |
|
Fourth Quarter 2014 |
|
$ |
15.20 |
|
|
$ |
4.25 |
|
First Quarter 2015 |
|
$ |
6.95 |
|
|
$ |
1.38 |
|
Second Quarter 2015 |
|
$ |
1.60 |
|
|
$ |
0.11 |
|
Third Quarter 2015 |
|
$ |
0.27 |
|
|
$ |
0.05 |
|
Fourth Quarter 2015 |
|
$ |
0.14 |
|
|
$ |
0.01 |
|
The above prices reflect representative inter-dealer quotations, without retail markup, markdown or other fees
or commissions, and may not represent actual transactions.
As of January 8, 2016, there were approximately 1,335 holders of record
of the Companys common stock. Between January 1, 2016 and January 8, 2016 the high and low reported sales price of our common stock was $0.04 and $0.02, respectively, and on January 8, 2016 the closing price of our common stock
was $0.03.
Dividends
The Company
has never declared or paid any cash dividends on its common stock. The Company currently intends to retain future earnings, if any, to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in
the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The Company had no equity compensation plans as of December 31, 2013.
In August 2014, the Company adopted the Medbox, Inc. 2014 Equity Incentive Plan, under which up to 2,000,000 shares of common stock are
authorized for issuance to directors, officers, employees and consultants of the Company.
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
71
DIRECTORS AND EXECUTIVE OFFICERS
Below are the names and certain information regarding the Companys executive officers and directors.
|
|
|
|
|
|
|
NAME |
|
AGE |
|
|
POSITION |
Jeffrey Goh |
|
|
51 |
|
|
Chief Executive Officer, President, and Director |
C. Douglas Mitchell |
|
|
65 |
|
|
Chief Financial Officer |
Clint Pyatt |
|
|
44 |
|
|
Chief Operating Officer |
J. Mitchell Lowe |
|
|
63 |
|
|
Director |
Ned L. Siegel |
|
|
64 |
|
|
Director |
Manuel Flores |
|
|
43 |
|
|
Director |
The business background and certain other information about our directors and executive officers is set forth
below:
Jeffrey Goh
Mr. Goh has served as our President Chief Executive Officer since January 5, 2016 and was previously Interim Chief Executive Officer
and President since July 2015. Mr. Goh previously served as Chief Operating Officer of the Company since April 2015. Prior to joining Medbox, Mr. Goh was Chief Executive Officer of Corazonas Foods, a producer of heart-healthy snack food
products that help to reduce LDL cholesterol, from 2012 to 2014. Mr. Goh also previously served as Chief Executive Officer of Two Chefs on a Roll, a custom producer of savory and bakery private label food products, from 2001 to 2010. Throughout
his career, Mr. Goh has focused on leading and developing businesses involved in fast-growing sectors of food, technology and international commerce.
C. Douglas Mitchell
Mr. Mitchell has served as our Chief Financial Officer since October 2014. Mr. Mitchell was a Partner with Hardesty, LLC an executive
services and consulting firm between August of 2011 and August of 2015. In August of 2015, Mr. Mitchell became a partner at CSuite Financial Partners (CSuite), an executive services and consulting firm. Mr. Mitchell intends to
remain a CSuite while he serves as Chief Financial Officer of the Company.
Mr. Mitchells prior experience includes serving
from December of 2013 to July of 2014 as a Consultant to Commerce Casino, the largest card club in California; from April 2013 to November 2013 as Interim Chief Financial Officer at Performance Team Freight Systems, Inc., a logistics and
transportation company; from August 2012 to December 2012 as a Consultant to Boot Barn, a footwear and apparel retailer; from April 2012 to June 2012 as a Consultant and Provisional Director for the Orange County Superior Court of California in a
pending civil lawsuit and from August 2011 to February 2012 as the interim Chief Financial Officer for Street Surfing, LLC, an international manufacturer and distributor of wheeled recreational goods.
From April of 2004 to August of 2011, Mr. Mitchell was a Partner at Tatum, LLC, also an executive services and consulting firm.
Mr. Mitchells prior experience during his last three years at Tatum, LLC includes serving from November of 2009 to August of 2011 as a Consultant to Stearns Lending, Inc., a mortgage broker, and from January 2008 to August of 2009 as
Interim Chief Financial Officer and Chief Financial Officer for Commerce Energy Group, Inc., a publicly-held independent marketer of retail electricity and natural gas to residential, commercial, industrial and institutional end-use customers.
Mr. Mitchell also served as Chief Financial Officer for Chicago Pizza & Brewery, Inc. (now renamed BJs Restaurants, Inc.), a multi-location restaurant chain listed on NASDAQ from 2002 to 2004 and as Vice President and Corporate
Controller for Del Taco, Inc. a privately held multi location restaurant chain and franchisor from 1994 to 2002. Earlier in his career, Mr. Mitchell served as Senior Audit Manager at Coopers & Lybrand (now part of
PricewaterhouseCoopers). Mr. Mitchell earned a Bachelor of Science degree in Business Administration from the University of Southern California. He received his CPA certificate in California.
During an engagement with Hardesty, Mr. Mitchell served as Interim Chief Financial Officer for a distressed company, Street Surfing, LLC.
After a detailed analysis in January 2012, the board of directors determined the best course for the companys shareholders was to file an assignment for the benefit of creditors in the California courts and sell the assets of the estate to an
investment fund.
72
Clint Pyatt
On January 5, 2016, Clint Pyatt, 44, Senior Vice President, Operations and Government Relations, was promoted to Chief Operating Officer
of the Company. He will continue to act as Senior Vice President, Government Relations. Mr. Pyatt has served in his present roles with the Company since May 20, 2015. Mr. Pyatt previously was Chief Executive Officer of CorGreen
Technologies, Inc., a provider of products and services to licensed medical marijuana and recreational operators. Earlier, he held management positions in finance and real estate. He also served in the U.S. Marine Corps for six years in several
operational capacities, including participation in Desert Shield, Desert Storm and Somalia rescue efforts. Mr. Pyatt was diagnosed with cancer and was recommended to use medicinal cannabis to help his recovery. As a result of his related
medical bills, Mr. Pyatt filed for personal bankruptcy on March 15th, 2013.
J. Mitchell Lowe
The Company elected J. Mitchell Lowe, co-founder of Netflix and former Redbox president, to its Board of Directors on March 3,
2014. Mr. Lowe was our first independent director and based on his diverse background and wide-ranging expertise, we expect that he will assist us with various aspects of our business, including strategy development and implementation,
executive recruiting and corporate governance matters. Mr. Lowe has been a groundbreaking leader in the home entertainment and tech industries since the 1980s, when he started Video Droid, a rental movie vending machine and store. After
starting Video Droid and spending years crafting websites for video stores, Mr. Lowe was asked to help in the formation of Netflix in partnership with Marc Randolph and Reed Hasting. He served as Vice President of Business Development and
strategic alliances for Netflix from 1998 to 2003, departing just after their initial public offering to join a small team from McDonalds to form what became Redbox DVD Rental Kiosks. At Redbox, Mr. Lowe began as Chief Operating Officer,
becoming President in early 2009, and playing a pivotal role in scaling Redbox from a handful of rental kiosks to nearly 32,000 kiosks and over $1.5 billion in annual revenue. Since leaving Redbox in 2011, he has served as an independent
consultant for entrepreneurs and startups. He was CEO of a company called Quarterly Co., which is a mail subscription service, from September 2012 to July 2014.
Our Board of Directors believes that Mr. Lowes qualifications to serve as a Director of Medbox include his extensive experience in
the retail kiosk industry and with startup companies generally, his strategic expertise, his business and managerial experience as discussed above and his long-term relationships. While Medbox offers solutions that are not comparable to kiosks per
se, the fact that he has successfully directed large companies rollout of cutting-edge technology adds immense value to our company. We will also take advantage of his corporate governance experience as we grow and evolve as a public company.
Ned L. Siegel
Ambassador Siegel
has served on our Board of Directors since April 2014 and was appointed as Chairman of the Board on December 17, 2014. Ambassador Siegel has served as President of The Siegel Group, Inc. a real estate development, management services and
consulting company since September 1997. From October 2007 until January 2009, he served as the United States Ambassador to the Commonwealth of The Bahamas. He received a BA from the University of Connecticut in 1973 and JD from the Dickinson
School of Law in 1976. In December 2014, he received an honorary degree of Doctor of Business Administration from the University of South Carolina. Ambassador Siegel also serves on the Board of Directors of PositiveID Corp., HealthWarehouse.com,
Inc., and Viscount Systems, Inc. Ambassador Siegels managerial experience and contacts with government agencies qualifies him to serve on the Companys Board of Directors.
73
Manuel Flores
Mr. Flores has served on our Board of Directors since October 2015. Mr. Flores is a partner in the Chicago office of
Arnstein & Lehr. Prior to joining his law firm, Mr. Flores served as the Acting Secretary at the Illinois Department of Financial and Professional Regulation from November 2012 until January 2015. As Acting Secretary Mr. Flores
had direct oversight of the development of the Illinois medical cannabis dispensary regulations. From February 2011 until November 2012, Mr. Flores served as Director of the Division of Banking of the Illinois Department of Financial and
Professional Regulation. As a member of the Conference of State Bank Supervisors during such time, Mr. Flores worked with state regulators from around the country to shape policy on significant and emerging issues in the financial services
industry. Prior to serving in such role, Mr. Flores spent one year as the Acting Chairman for the Illinois Commerce Commission involved with regulating investor-owned utilities in the areas of electricity, gas, water and telecommunications.
Prior to the ICC, he served as 1st Ward Alderman on the Chicago City Council for nearly two terms and before that he served as an Assistant States Attorney in the Office of the Cook County States Attorney from 2000 to 2003.
Mr. Flores extensive regulatory background in the cannabis industry and experience in various government banking and finance offices in the State of Illinois qualifies him to serve on the Companys Board of Directors.
There are no family relationships between any of our executive officers and directors.
Board Leadership Structure and Role in Risk Oversight
Mr. Siegel, an independent Director, serves as the Chairman of our Board of Directors.
Our Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives and reviews
periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our companys assessment of risks. The Board of Directors focuses on the most significant risks facing our company and our companys
general risk management strategy, and also ensures that risks undertaken by our Company are consistent with the boards appetite for risk. While the board oversees our companys risk management, management is responsible for day-to-day
risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.
Terms of Office
The Companys
directors are elected at the annual meeting of shareholders to hold office until the annual meeting of shareholders for the ensuing year or until their successors have been duly elected and qualified. The Companys directors are also parties to
a Voting Agreement described in this Registration Statement, pursuant to which, shares held by Vincent Mehdizadeh and his affiliated companies will vote in favor of retaining the current members of the Board through July 2018.
The Companys officers are appointed by the Companys Board of Directors and hold office until removed by the Board.
Involvement in Certain Legal Proceedings
To our knowledge, except as set forth above, our directors and executive officers have not been involved in any of the following events during
the past ten years:
|
1. |
any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
|
|
2. |
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
|
3. |
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his
involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; |
74
|
4. |
being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated; |
|
5. |
being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or
state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
|
|
6. |
being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons associated with a member. |
75
EXECUTIVE COMPENSATION
Summary Compensation Table
The following
sets forth the compensation paid by Medbox during 2014 and 2013 to our Chief Executive Officer, our Chief Financial Officer, and three other individuals who formerly served as our Chief Executive Officer, our Chief Operating Officer and Principal
Financial Officer, and our Chief Financial Officer, respectively, during 2014 (the named executive officers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position |
|
Year |
|
|
Salary |
|
|
Bonus |
|
|
Stock Awards (9) |
|
|
All other Compensation |
|
|
Total |
|
Guy Marsala (1)(8) |
|
|
2014 |
|
|
$ |
146,485 |
|
|
$ |
31,250 |
|
|
$ |
969,747 |
|
|
$ |
13,125 |
(5) |
|
$ |
1,160,607 |
|
Former Chief Executive Officer and President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Douglas Mitchell (11) |
|
|
2014 |
|
|
$ |
39,583 |
|
|
|
|
|
|
|
|
|
|
$ |
28,305 |
(7) |
|
$ |
67,888 |
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Bruce Bedrick (2) |
|
|
2014 |
|
|
$ |
86,085 |
|
|
|
|
|
|
|
|
|
|
$ |
25,000 |
(6) |
|
$ |
111,085 |
|
Former Chief Executive Officer and Director |
|
|
2013 |
|
|
$ |
133,991 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
133,991 |
|
|
|
|
|
|
|
|
Vincent Mehdizadeh (3) |
|
|
2014 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
168,625 |
(4) |
|
$ |
168,625 |
|
Former Chief Operating Officer, Chairman of the Board, Principal Financial Officer |
|
|
2013 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
262,500 |
(4) |
|
$ |
262,500 |
|
|
|
|
|
|
|
|
Thomas Iwanski (10) |
|
|
2014 |
|
|
$ |
88,108 |
|
|
|
|
|
|
$ |
875,000 |
|
|
|
|
|
|
$ |
963,108 |
|
Former Chief Financial Officer |
|
|
2013 |
|
|
$ |
66,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
66,208 |
|
(1) |
Mr. Marsala was appointed as Chairman, President and Chief Executive Officer on July 23, 2014. In December 2014, Mr. Siegel was appointed Chairman. On June 30, 2015, Mr. Marsala resigned as an officer and
director on the Board. |
(2) |
Dr. Bedrick resigned as Chief Executive Officer on July 23, 2014 and as a director on August 18, 2014. The compensation set forth for Dr. Bedrick does not include fees of $0 and $113,613 respectively
during the years ended December 31, 2014 and 2013, that the Company paid to Kind Clinics, LLC, a company owned by Dr. Bedrick, for marketing support services. |
(3) |
Mr. Mehdizadeh resigned as Chief Operating Officer and director of the Company and was appointed as Senior Strategist and Founder of the Company on April 10, 2014. Mr. Mehdizadeh resigned as an officer of
the Company on October 13, 2014 and served as a consultant to the Company until December 8, 2014. |
(4) |
Consists of payments to Vincent Chase, Incorporated, wholly owned by Mr. Mehdizadeh except for the period of April to May 2013, for Mr. Mehdizadehs services to the Company. |
(5) |
Consists of a housing allowance of $13,125. |
(6) |
Consists of consulting fees paid to Dr. Bedrick. |
(7) |
Consists of $7,500 of housing allowance and $20,805 earned as consulting fees paid to Hardesty LLC before Mr. Mitchell was appointed Chief Financial Officer. |
(8) |
On October 24, 2014, Mr. Marsala was awarded 50,000 restricted stock units, with a fair market value of $711,500, that immediately vested into shares of common stock. On October 24, 2014, Mr. Marsala
was awarded an additional 22,753 restricted stock units, with a fair market value of $258,247, that immediately vested into shares of common stock. |
76
(9) |
The amount listed in the Stock Awards column reflects the fair value of the stock awards granted in accordance with FASB ASC Topic 718, which calls for the stock or restricted stock units to be valued based on the
market price of the Companys common stock on the grant date. |
(10) |
Mr. Iwanski resigned on October 16, 2014, and received 100,000 restricted stock units for his service to the Company that vested between October 21, 2014 and January 5, 2015. |
(11) |
Mr. Mitchell was appointed as Chief Financial Officer on October 16, 2014. |
Former Officers
Prior to
his resignation on July 23, 2014, Dr. Bedrick was employed as our Chief Executive Officer on an at-will basis at an annual salary of $120,000.
On August 18, 2014 Dr. Bedrick resigned from all remaining officer and directorship positions in all of the Companys
subsidiaries and he entered into a consulting agreement with the Company to perform general advisory services to the CEO and the Company. We paid Dr. Bedrick $12,500 per month for his services. This contract was terminated effective
October 31, 2014. We paid Dr. Bedrick a total of $25,000 in consulting fees in 2014.
Mr. Mehdizadeh previously served as
our Chief Operating Officer, and subsequently as our Founder and Senior Strategist. As noted above, on October 13, 2014, Mr. Mehdizadeh resigned as an officer of the Company and then served as a consultant. Pursuant to our consulting
agreement with Mr. Mehdizadeh, we paid Mr. Mehdizadeh a monthly fee of $25,000, which was reduced to $12,500 per month if Mr. Mehdizadeh is engaged in trading any of the Companys securities at any time within the preceding 30
day period. Mr. Mehdizadehs consulting agreement was terminated on December 8, 2014. We paid Mr. Mehdizadeh a total of $168,625 in fees in 2014.
In connection with Mr. Marsalas election as President, Chief Executive Officer and Chairman, on July 23, 2014, the Company
entered into an employment agreement with Mr. Marsala (the Marsala Employment Agreement). Pursuant to the Marsala Employment Agreement, the Company agreed to engage Mr. Marsala, and Mr. Marsala agreed to serve as the
Companys President, Chief Executive Officer and Chairman, for a two-year term, which term could have been automatically extended for successive additional one-year terms, unless either party provided written notice to the other 90 days prior
to the expiration of the initial term or any successive term, that Mr. Marsalas engagement will not be extended. The Company agreed to pay Mr. Marsala a salary of $330,000 per year and to pay Mr. Marsala $2,500 per month
for living expenses in the West Hollywood, California area. Mr. Marsala was also be entitled to an annual bonus of up to $250,000, including up to $125,000 in cash and up to $125,000 in equity of the Company, subject to performance
criteria and objectives to be established by mutual agreement of the Board of Directors and Mr. Marsala within 90 days of the effective date of the Marsala Employment Agreement, and thereafter from time to time by the Board of Directors in
consultation with Mr. Marsala. Mr. Marsala was also entitled to an award of restricted stock units, to be issued within 90 days of the effective date of the Marsala Employment Agreement, under an equity incentive plan to be adopted by the
Company, in the amount of the greater (by value) of 50,000 shares of common stock or $500,000 of common stock based on the volume weighted average price for the 30 day period prior to the date of the grant. The 2014 Medbox Equity Incentive Plan was
adopted on August 28, 2014. In October 2014, Mr. Marsala was granted 50,000 shares under his employment agreement, another 20,000 shares for his performance in the third quarter of 2014 and 2,753 shares as part of his third quarter bonus.
The Company also agreed to make an equal stock award to Mr. Marsala on each anniversary date of the Employment Agreement.
On
June 30, 2015, Mr. Marsala resigned as an officer and director on the Board. In connection with his resignation, the Company and Mr. Marsala entered into a Separation Agreement dated June 30, 2015. Pursuant to the terms of the
Separation Agreement, Mr. Marsala is entitled to receive $500,000 in severance pay, payable in equal monthly installments of $30,000, and a grant of options to purchase up to $335,275 of shares of common stock at an exercise price based on the
closing price of the Companys common stock on June 30, 2015, in lieu of any rights under his employment agreement, which was terminated. The Separation Agreement contains customary representations and covenants and provides for certain
releases and indemnities by Mr. Marsala and the Company.
77
Mr. Marsalas Restricted Stock Unit grants vested as follows: 50,000 shares on
August 6, 2014 and 22,753 shares on October 24, 2014. Mr. Mitchells grant of 7,500 shares for his first quarter of employment as our Chief Financial Officer was approved on February 10, 2015 and vested on the same
date.
On December 16, 2014, the Company entered into an Amendment to Employment Agreement with our then Chief Executive Officer, Guy
Marsala (the Marsala Amendment). Pursuant to the Marsala Amendment, in the event that either Mr. Marsala is terminated without cause or resigns from the Company for good reason, as such terms are defined in his Employment Agreement,
then he shall receive an award of either 50,000 shares of Company common stock or $500,000 worth of Company common stock based on the volume-weighted average price for the thirty-day period prior to the date of the grant, whichever is higher
and an award of shares of Company common stock equal to the number of shares that is two times the full amount of the award of Company common stock comprising Mr. Marsalas Annual Bonus (as such term is defined in Mr. Marsalas
employment agreement) for the present year, as determined by the Board of Directors provided that such stock award shall be reduced by all shares already awarded to Mr. Marsala as a part of his Annual Bonus prior to the date of termination.
Chief Financial Officer
In connection with Mr. Mitchells election as Chief Financial Officer, on October 16, 2014, the Company entered into an
employment agreement with Mr. Mitchell (the Mitchell Employment Agreement). Pursuant to the Mitchell Employment Agreement, the Company agreed to engage Mr. Mitchell, and Mr. Mitchell agreed to serve as the Companys
Chief Financial Officer, for a two-year term, which term will automatically be extended for successive additional one-year terms, unless either party provides written notice to the other 90 days prior to the expiration of the initial term or any
successive term, that the Mitchell Employment Agreement will not be renewed. The Company agreed to pay Mr. Mitchell a salary of $190,000 per year and to pay Mr. Mitchell $2,500 per month for living expenses in the West Hollywood,
California area. Mr. Mitchell will also be entitled to an annual bonus of up to 35% of his salary, payable up to 50% in cash and the balance payable in equity of the Company, subject to performance criteria and objectives to be established by
mutual agreement of the CEO of the Company and Mr. Mitchell within 90 days of the effective date of the Mitchell Employment Agreement, and thereafter from time to time by the CEO in consultation with Mr. Mitchell. Mr. Mitchell will
also be entitled to an award of restricted stock units, to be issued within 90 days of the effective date of the Mitchell Employment Agreement, under the Companys Equity Incentive Plan, in the amount of 7,500 shares of common stock each
calendar quarter Mr. Mitchell serves as Chief Financial Officer of the Company. Mr. Mitchells grant of 7,500 shares for his first quarter of employment as our Chief Financial Officer was approved on February 10, 2015.
The Company may terminate the Mitchell Employment Agreement with or without Cause (as defined in the Mitchell Employment Agreement) upon
written notice to Mr. Mitchell. In the event the Company terminates the Mitchell Employment Agreement without Cause, Mr. Mitchell terminates the Mitchell Employment Agreement with Good Reason (as defined in the Mitchell Employment
Agreement), or the Mitchell Employment Agreement is not renewed as a result of notice to Mr. Mitchell provided 90 days prior to expiration of the initial or a renewal term, Mr. Mitchell will be entitled to payment of one-half his annual
salary. Termination by the Company within 365 days of a Change of Control (as defined in the Mitchell Employment Agreement) in the absence of Cause will conclusively be deemed a termination by the Company without Cause.
On December 16, 2014, the Company entered into an Amendment to Employment Agreement with our Chief Financial Officer, C. Douglas Mitchell
(the Mitchell Amendment). Pursuant to the Mitchell Amendment, in the event that Mr. Mitchell is terminated without cause or resigns from the Company for good reason, as such terms are defined in Mr. Mitchells Employment
Agreement, then Mr. Mitchell shall receive an award of 60,000 shares of the Companys common stock reduced by the number of shares of the Companys common stock issued (or issuable) pursuant to any RSUs granted prior to the date
of such termination in respect of any calendar quarter for the 12 month period for the present year and an award of shares of the Companys common stock equal to the number of shares that is two times the full amount of the award of Company
common stock comprising Mr. Mitchells Annual Bonus (as such term is defined in Mr. Mitchells employment agreement) for the present year, as determined by the Board of Directors, provided that such stock award shall be reduced
by all shares already awarded to Mr. Mitchell as a part of his Annual Bonus prior to the date of termination.
78
Chief Executive Officer
On April 22, 2015, the Board of Company appointed Jeffrey Goh as Chief Operating Officer, effective immediately. In connection with his
appointment as Chief Operating Officer, Mr. Goh and the Company agreed that Mr. Gohs annual base salary would be $300,000, subject to annual increases of between 5% and 7% based upon performance goals and the Companys financial
results. Mr. Goh is eligible to receive a cash bonus of up to a maximum of $150,000 per year (Cash Bonus), plus a bonus grant of restricted stock units convertible into Company common stock up to a maximum of $150,000 per year
(Equity Bonus). Each of the Cash Bonus and Equity Bonus are determined based upon the achievement of performance goals to be mutually agreed upon amongst Mr. Goh and the Board of Directors for the given year. Mr. Goh shall also
be entitled to receive an award of 100,000 restricted stock units convertible into Company common stock on each anniversary of the original date of his employment with the Company. In the event that Mr. Goh terminates his employment with or
without cause or the Company terminates Mr. Gohs employment without cause, Mr. Goh shall be entitled to receive a severance payment equivalent to 6, 12, or 18 months of base salary, based upon whether the length of
Mr. Gohs employment with the Company at the time of termination is less than 12 months, greater than 12 months but less than 24 months, or greater than 24 months, respectively.
Effective June 30, 2015, Jeffrey Goh, was promoted to President and interim Chief Executive Officer of the Company. On January 5, 2016,
Mr. Goh was promoted to Chief Executive Officer and President of the Company.
Chief Operational Officer
In connection with his appointment as Chief Operating Officer, the Company entered into an Executive Employment Agreement with Clint Pyatt
effective January 1, 2016.
Under the Employment Agreement, the Company will pay Mr. Pyatt an annual base salary of $240,000,
subject to a 5% to 7% annual increase as determined by the Companys Board of Directors. Mr. Pyatt is eligible to receive an annual cash bonus and an annual bonus in the form of a fully vested restricted stock unit (RSU)
grant, each with a yearly target of $120,000 based on Mr. Pyatts achievement of mutually agreed annual goals. Any RSUs granted to Mr. Pyatt under the Employment Agreement will be governed by the Companys 2014 Equity Incentive
Plan and related RSU award agreements.
Mr. Pyatts employment is at-will and subject to termination by the Company
at any time or by Mr. Pyatt upon 60 days written notice. In the event the Company terminates Mr. Pyatt without Cause (as defined in the Employment Agreement), or Mr. Pyatt resigns for Good Reason (as defined in the Employment
Agreement), Mr. Pyatt will be entitled to severance payments equal to his base salary for a period of either 6 months or 1 year, depending on the timing of such termination or resignation, subject to Mr. Pyatts full release of claims
against the Company. During the one-year period following his termination or resignation, the Employment Agreement prohibits Mr. Pyatt from encouraging the Companys employees to leave its employ.
Compensation of Directors
We currently
do not compensate our employee directors for their service as directors.
Mr. Lowe entered into a Director Retention Agreement with
the Company and its majority shareholder on March 3, 2014. The term expires on March 31, 2016, unless Mr. Lowe is elected to a subsequent term, which would cause the term of the agreement to extent until March 31, 2017. Pursuant
to the agreement, Mr. Lowe receives a fee of $4,000 per month during the term, which may be adjusted to $5,000 per month as determined by the CEO of the Company and Mr. Lowe. Mr. Lowe received the following award under the Medbox 2014
Equity Incentive Plan pursuant to the agreement: during the first year of the agreement, the Company issued 178,125 shares of Restricted Stock, vesting over roughly a six month period beginning September 1, 2014, and 65,625 Restricted Stock
Units, vesting over a six month period beginning September 1, 2014. For each of his second and third year of service (if elected for a third year), Mr. Lowe will receive 100,000 shares of stock, comprising 75,000 shares of restricted stock
vesting quarterly over a 12 month period, and 25,000 Restricted Stock Units vesting quarterly over a 12 month period.
79
Ambassador Siegel entered into a Director Retention Agreement with the Company and its majority
shareholder on April 1, 2014. The term expires on March 31, 2016, unless Ambassador Siegel is elected to a subsequent term, which would cause the term of the agreement to extend until March 31, 2017. Pursuant to the agreement,
Ambassador Siegel receives a fee of $4,000 per month during the term, which may be adjusted to $5,000 per month as determined by the CEO of the Company and Ambassador Siegel. Ambassador Siegel received the following award under the Medbox 2014
Equity Incentive Plan pursuant to the agreement: during the first year, Ambassador Siegel received 168,750 shares of restricted stock vested over a six month period beginning September 1, 2014 and 56,250 Restricted Stock Units which vested over
a six month period beginning September 1, 2014. For each of his second and third year of service (if elected for a third year), Ambassador Siegel will receive 100,000 shares of stock, comprising 75,000 shares of restricted stock vesting
quarterly over a 12 month period, and 25,000 Restricted Stock Units vesting quarterly over a 12 month period.
Ms. Love entered into
a Director Retention Agreement with the Company and its majority shareholder on October 22, 2014. The term expires on March 31, 2016, unless Ms. Love is elected to a subsequent term, which would cause the term of the agreement to
extent until March 31, 2017. Pursuant to the agreement, Ms. Love receives a fee of $4,000 per month during the term, which may be adjusted to $5,000 per month as determined by the CEO of the Company and Ms. Love. Ms. Love
received the following stock award under the Medbox 2014 Equity Incentive Plan pursuant to the agreement: For her service from the date of the agreement through December 31, 2014, Ms. Love received 19,452 restricted stock units which
vested immediately. For subsequent years through the end of the term of the agreement, or end of her director services. Ms. Love received 100,000 shares of stock, comprised of 100,000 shares of restricted stock units which vest quarterly over a
12 month period. Ms. Love resigned from the Board of Directors on September 24, 2015.
On December 16, 2014, each of the
Companys non-employee directors entered into an amendment to their retention agreement (the Retention Agreement Amendment). Pursuant to the Retention Agreement Amendment, in the event that the director is removed from the Board for
any reason on or prior to March 31, 2016, all of the directors unvested shares of restricted stock and unvested restricted stock units granted under the restricted stock award agreements and the restricted stock unit award agreements
between such director and the Company shall immediately vest on the date of such removal, and all of the directors vested restricted stock units shall be paid out on the date of such removal, except for the directors vested restricted
stock units granted pursuant to the First Year Inducement Grant (as such term is defined in the director retention agreement), which shall be paid out in accordance with the original schedule set forth in the director retention agreement, and the
aggregate amount of all director fees the director would have earned for the remainder of the term of the director retention agreement and the additional term of the director retention agreement beginning April 1, 2015 and ending March 31,
2017 if the director had not been removed from the Board shall be paid to the director in one lump-sum payment on the date of such removal.
|
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|
|
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|
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|
|
|
|
|
|
|
|
2014
Director Compensation Table |
|
|
|
Fees earned |
|
|
Restricted Stock Awards (6) |
|
|
Restricted Stock Units Awards (6) |
|
|
All Other Compensation |
|
|
Total |
|
Ned L. Siegel |
|
$ |
33,000 |
|
|
$ |
1,755,000 |
(1) |
|
$ |
585,000 |
(2) |
|
|
|
|
|
$ |
2,373,000 |
|
J. Mitchell Lowe |
|
$ |
43,000 |
|
|
$ |
1,852,500 |
(3) |
|
$ |
682,500 |
(4) |
|
|
|
|
|
$ |
2,578,000 |
|
Jennifer Love |
|
$ |
9,419 |
|
|
$ |
|
|
|
$ |
1,313,972 |
(5) |
|
|
|
|
|
$ |
1,323,391 |
|
Matthew Feinstein |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes 84,375 shares vesting in 2014 and 84,375 vesting in 2015 |
(2) |
Includes 28,125 RSUs vesting in 2014 and 28,125 vesting in 2015 |
(3) |
Includes 93,750 shares vesting in 2014 and 84,375 vesting in 2015 |
80
(4) |
Includes 37,500 RSUs vesting in 2014 and 28,125 vesting in 2015 |
(5) |
Includes 19,452 RSUs vesting in 2014 and 100,000 vesting in 2015 |
(6) |
The amounts listed in the Restricted Stock Awards and Restricted Stock Unit Awards column reflect the fair value of the stock awards granted in accordance with FASB ASC Topic 718, which calls for the restricted stock or
restricted stock units to be valued based on the market price of the Companys common stock based on the grant date. |
Equity
Compensation Plan Information
In August 2014, the Company adopted the Medbox, Inc. 2014 Equity Incentive Plan, under which up to
2,000,000 shares of common stock are authorized for issuance to directors, officers, employees and consultants of the Company.
81
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of January 8, 2016 with respect to the beneficial ownership of the
outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the Companys executive officers and directors; and (iii) the Companys directors and executive officers as a group. Except as
otherwise indicated, to our knowledge each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
The percentage of class beneficially owned is based on 240,646,727 shares of common stock issued and outstanding as of January 8, 2016.
Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Pursuant to the rules of the SEC, shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise
of options or warrants or the conversion of convertible securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be beneficially owned and outstanding for the
purpose of computing the percentage ownership of any other person shown in the table.
|
|
|
|
|
|
|
|
|
Name |
|
Number of Shares
Beneficially
Owned |
|
|
Percentage of
Outstanding Shares
Beneficially
Owned |
|
Jeffrey Goh (1) |
|
|
2,917,442 |
|
|
|
1.21 |
% |
C. Douglas Mitchell (2) |
|
|
496,830 |
|
|
|
|
* |
Clint Pyatt (3) |
|
|
271,941 |
|
|
|
|
* |
J. Mitchell Lowe (4) |
|
|
2,036,956 |
|
|
|
|
* |
Ned L. Siegel (5) |
|
|
4,971,316 |
|
|
|
2.07 |
% |
Manuel Flores (6) |
|
|
484,574 |
|
|
|
|
* |
All officers and directors as a group (6 persons) |
|
|
11,179,059 |
|
|
|
4.65 |
% |
(1) |
Includes 196,078 RSUs that have vested pursuant to Mr. Gohs Employment Agreement filed with the Securities and Exchange Commission as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q filed
August 14, 2015 and 49,020 RSUs that vest within 60 days of January 8, 2016. Includes 625,000 shares of common stock awarded as bonus compensation for the period April 1, 2015 through September 30, 2015. |
(2) |
Includes 276,493 Restricted Stock Units exercisable into shares at the election of the holder. Mr. Mitchell was awarded the RSUs pursuant to his Employment Agreement, dated October 16, 2014, filed with the
Securities and Exchange Commission as Exhibit 10.1 to the Companys Current Report on Form 8-K filed October 21, 2014. Includes 60,763 shares of common stock awarded as bonus compensation for the period July 16, 2015 through
September 30, 2015. |
(3) |
Includes 218,750 shares of common stock awarded as bonus compensation for the period April 30, 2015 through September 30, 2015. |
(4) |
Includes shares of common stock underlying 237,778 warrants immediately exercisable at $0.22 per share issued pursuant to the terms of the warrants contained in that certain subordinated convertible note the form of
which is included as Exhibit 10.30 of this Registration Statement, which such note was converted by Mr. Lowe on September 3, 2015 at a price of $0.11 per share. Also includes 65,625 restricted stock units issued pursuant to
Mr. Lowes Retention Agreement, which is included as Exhibit 10.32 of this Registration Statement. Also includes 325,000 shares of common stock awarded to each non-employee member of the Companys Board within 15 days after the end of
the fourth quarter of 2015 as directors fees for such quarter. |
82
(5) |
Includes shares of common stock underlying 258,555 warrants immediately exercisable at $0.40 per share issued pursuant to the terms of the warrants contained in that certain subordinated convertible note the form of
which is included as Exhibit 10.30 of this Registration Statement, which such note was converted by Mr. Siegel on July 9, 2015 at a price of $0.20 per share. Also includes 56,250 restricted stock units issued pursuant to
Mr. Siegels Retention Agreement, which is included as Exhibit 10.33 of this Registration Statement. Also includes 325,000 shares of common stock awarded to each non-employee member of the Companys Board within 15 days after the end
of the fourth quarter of 2015 as directors fee for such quarter. Includes 1,196,988 shares awarded as compensation for Special Assignments for the period October 1, 2014 through July 31, 2015, and 1,429,500 awarded as compensation for Special
Assignments for the period August 1, 2015 through December 31, 2015. |
(6) |
Includes pro-rated portion of 325,000 shares of common stock awarded to each non-employee member of the Companys Board within 15 days after the end of the fourth quarter of 2015 as directors fees for such
quarter. |
The address of all persons listed is c/o Medbox, Inc., 600 Wilshire Blvd. Suite 1500, Los Angeles, CA, 90017.
83
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Certain Relationships and Related Transactions
We previously had an outstanding note with PVM International, Inc. (PVMI), a California corporation wholly owned by
Mr. Mehdizadeh, previously our Chief Operating Officer and one of our directors (and currently our largest stockholder), in connection with the sale of MDS to Medbox, Inc. The note was issued on January 1, 2012 for an original amount
of $1 million and began paying interest of 10% on January 1, 2013. The note contained a maturity date of December 31, 2012, which was voluntarily extended by oral agreement of the parties to June 30, 2013 and has since been
satisfied in full. In addition, on January 1, 2012, we issued to PVMI 2,000,000 shares of the Companys common stock for the use of the PVMI patent related to our dispensing systems. The note was repaid in full and terminated on
April 16, 2013.
We used Vincent Chase, Incorporated, a company that is wholly owned by Mr. Mehdizadeh for management advisory
and consulting services. We incurred fees of $168,625 and $262,500, respectively, during the years ended December 31, 2014 and 2013, to Vincent Chase, Incorporated for Mr. Mehdizadehs advisory services provided through Vincent
Chase, Incorporated. Mr. Mehdizadeh received no other compensation from Medbox during these periods other than the fees paid to Vincent Chase, Incorporated. During the period April to May 2013, Vincent Chase, Incorporated was wholly owned
by Dr. Bruce Bedrick, our-then Chief Executive Officer and a director. Mr. Mehdizadeh transferred Vincent Chase Incorporated to Dr. Bedrick without consideration on a temporary basis as Mr. Mehdizadeh addressed some personal
matters.
We used Kind Clinics, LLC a company owned by Dr. Bedrick, previously our Chief Executive Officer and a director, for
marketing support services, including developing leads (including through the Kind Clinics website) interested in alternative medicine consulting services. We incurred fees of $0 and $113,613 respectively during the years ended December 31,
2014 and 2013.
On June 5, 2014, the Company entered into and closed a purchase and sale agreement (the Bio Tech PSA)
with PVMI. Pursuant to the Bio Tech PSA, the Company sold to PVMI the Companys rights and claims attributable to or controlled by the Company as a result of the Companys transactions with Bio Tech Medical Software, Inc. (the Bio
Tech Rights and Claims), in exchange for the return by PVMI to the Company of 30,000 shares of the Companys common stock. The amount of consideration paid by PVMI was determined based on the book value of the Bio Tech Rights and Claims
and the closing price of the Companys common stock on June 5, 2014. The Company will have the right, under the Bio Tech PSA, to purchase from PVMI, the Bio Tech Rights and Claims, at any time, for the consideration provided by PVMI, plus
the sum of any of PVMIs reasonable expenditures incurred in pursuit of the Bio Tech Rights and Claims. The reason the Company entered into the Bio Tech PSA was that the Company, after negotiating a settlement with Bio-Tech (see Legal
Proceedings), realized that it would not have sufficient resources to fully develop its business relationship with Bio Tech in light of other core business opportunities that the Company was intending to develop.
On June 5, 2014, the Company entered into and closed a purchase and sale agreement (the Medvend PSA) with PVMI. Pursuant to
the Medvend PSA, the Company sold to PVMI the Companys rights and claims attributable to or controlled by the Company as a result of the Companys transactions with those three certain stockholders of Medvend, Inc. known as Kaplan,
Tartaglia and Kovan (the Medvend Rights and Claims), in exchange for the return by PVMI to the Company of 30,000 shares of the Companys common stock. The amount of consideration paid by PVMI was determined based on the book value
of the Medvend Rights and Claims and the closing price of the Companys common stock on June 5, 2014. The Company will have the right, under the Medvend PSA, to purchase from PVMI, at any time, the Medvend Rights and Claims, for the
consideration provided by PVMI, plus the sum of any of PVMIs reasonable expenditures incurred in pursuit of the Medvend Rights and Claims. The reason the Company entered into the Medvend PSA was as follows. The initial transaction with the
Medvend stockholders is the subject of litigation (see Legal Proceedings). In light of this litigation and the additional legal costs that are expected to be incurred relating to this litigation, PVMI offered to purchase the Medvend
Rights and Claims, as a result of which the Company will not incur the costs and uncertainty of such litigation. As a result, the Company determined that removing this asset from the balance sheet for stock valued at $600,000 was in the best
interests of the shareholders.
84
During the year ended December 31, 2014, the Company issued four notes payable to PVM
International Inc. (PVMI), a related party which is 100% owned by a co-founder of the Company, Mr. Mehdizadeh, in the amounts of $250,000, $100,000, $500,000, and $375,000. These notes were subsequently partially repaid leaving
$388,477 outstanding as of December 31, 2014. On October 17, 2014 the company entered into an assignment agreement with PVMI through which PVMI assigned all rights and titles for any opened escrow on real estate purchase agreements in San
Diego in exchange for a related party notes payable from the Company. As of the signing date the agreement was valued at $190,400 which represented the value of escrow deposits paid by PVMI for eight different real estate agreements. On
August 15, 2014, the Company issued a note payable to Vincent Chase, Inc., in the amount of $100,000. The notes bear no interest and are payable on demand. The aggregate amount of outstanding payables to related parties as of December 31,
2014 was $678,877.
On July 23, 2014, PVMI assigned to the Company, for no consideration, the patent, patent applications, trademarks
and related intellectual property for Medbox products, which the Company had licensed from PVMI for $1.
On July 21, 2014 the Company
paid PVMI $75,000 for money paid by PVMI into escrow for real estate purchases in the San Diego, California area to be used for retail dispensary center license applications.
Upon Dr. Bedricks resignation as a director on August 18, 2014, the Company entered into a consulting agreement with
Dr. Bedrick, pursuant to which the Company agreed to pay Dr. Bedrick a monthly fee of $12,500 for consulting services to be performed by Dr. Bedrick. The consulting agreement was terminated October 31, 2014.
On October 13, 2014, in connection with Vincent Mehdizadehs resignation as an officer of the Company, the Company entered into a
consulting agreement with Mr. Mehdizadeh, pursuant to which the Company agreed to pay Mr. Mehdizadeh a monthly fee of $25,000 for consulting services, which will be reduced to $12,500 per month if Mr. Mehdizadeh is engaged in trading
any of the Companys securities at any time within the preceding 30 day period. Mr. Mehdizadehs consulting agreement was terminated on December 8, 2014 and a total of $12,375 was paid to Mr. Mehdizadeh under this agreement.
In connection with the Closing of the Purchase Agreement Amendments for financings entered into by the Company in July 2014 and September
2014, Mr. Ned L. Siegel, the chairman of the Companys Board, entered into two separate subordinated convertible promissory notes with the Company on January 5, 2015 and January 30, 2015, respectively, each in the principal
amount of $50,000 and having a three year term and an interest rate of 8% per annum (the Siegel Notes). In addition, Mr. Mitchell Lowe, a member of the Board, entered into one subordinated convertible promissory note with the
Company on February 2, 2015 in the principal amount of $50,000 and having a three year term and an interest rate of 8% per annum (the Lowe Note). During the third quarter of 2015, both Mr. Siegel and Mr. Lowe
converted all of the outstanding balance of the Siegel Notes and the Lowe Note into approximately 994,000 shares of the Companys common stock.
In connection therewith, Mr. Siegel and Mr. Lowe each received a warrant, exercisable for a period of five (5) years from the
date of grant, to purchase an amount of Company Common Stock equal to 50% of the principal sum under each of the Siegel Notes and the Lowe Note, respectively, at an exercise price equal to 200% of the applicable Conversion Price (the
Warrants). The Conversion Price of the Warrants is either (i) 85% of the volume-weighted average price of the Common Stock for the thirty trading days prior to notice of Conversion or (ii) 85% of the per share price of the
Companys next common stock offering of not less than $2 million. Mr. Siegel and Mr. Lowe also received registration rights for the shares underlying the Siegel Notes and the Lowe Notes, respectively.
On January 21, 2015, the Company, Mr. Mehdizadeh, PVM, and Vincent Chase, Incorporated, (collectively, the VM Parties)
entered into an agreement pursuant to which, among other things, the parties agreed to not increase the size of the Board and to vote in favor of and to not remove directors Siegel, Lowe, Love and Marsala for a period of 12 months (the
Voting Agreement). Each of the directors of the Company is also a party to the Voting Agreement. The Voting Agreement prevents the stockholders of the Company from electing new directors to the Board for a period of 12 months from
January 21, 2015. This could discourage potential investors from buying our stock.
85
On August 21, 2015, Medbox and the VM Group and each member of the Board of Directors of the
Company, namely, Ned Siegel, Mitch Lowe and Jennifer Love, entered into a certain Second Amendment to Voting Agreement, dated August 21, 2015 (the Second Amendment) amending in certain respects that certain Voting Agreement dated
January 21, 2015 among such parties as previously amended by that certain First Amendment to Voting Agreement (the First Amendment) dated August 11, 2015 (collectively, the Voting Agreement).
Pursuant to the First Amendment, the VM Group previously agreed (i) to extend the Expiration Date of the Voting Agreement from
January 20, 2016 to July 20, 2016, provided the Company made certain pre-payments on the remaining $478,877 balance due to PVM on an outstanding promissory note (Note 7), and (ii) to forebear from exercising its rights to appoint a
director to the Board of Directors of the Company (under Section 4 of that certain Settlement Agreement dated January 21, 2015 among the Company and the VM Group, the Settlement Agreement), until the Expiration Date of the
Voting Agreement as extended by the First Amendment.
Pursuant to the Second Amendment, the VM Group and the Company:
(a) further extended the Expiration Date of the Voting Agreement to July 20, 2018,
(b) provided that the Company would make certain accelerated pre-payments on the $328,877 balance under the Note consisting of: (i) three
equal payments of principal in the amount of $82,220, together with accrued and unpaid interest, payable on each of August 24, 2015, August 31, 2015 and September 8, 2015, and (ii) one final payment on September 14,
2015 equal to the remaining principal and accrued and unpaid interest due under the Note (the payments have all been paid as of September 30, 2014);
(c) provided that the VM Group would forebear from exercising its right to appoint a director to the Board of Directors of the Company (under
Section 4 of that certain Settlement Agreement), until the Expiration Date of the Voting Agreement as extended by the Second Amendment; and
(d) the VM Group executed, that certain Consent of Stockholders of Medbox, Inc. (the Consent) approving the following amendments
of the Articles of Incorporation (the Articles) of the Company:
(i) elimination of the provisions of Section IV of the
Articles giving the holders of the Series A Convertible Preferred Stock of the Company (the Preferred) disproportionately greater voting rights than the holders of Common Stock and instead providing for the Preferred to have one vote per
common share on an as- converted basis voting as a single class with the common shares upon any matter submitted to the stockholders for a vote, and
(ii) to eliminate the provisions of Section V of the Articles providing the holders of a majority of the outstanding shares of Preferred the
right to approve any corporate action except for: (1) actions which would adversely alter or change the rights, preferences, privileges or restrictions of the Preferred or increase the authorized number thereof, (2) any changes to the
terms of the Preferred; (3) creation of any new class of shares having preferences over or being on a parity with the Preferred as to dividends or assets, unless the purpose of creation of such class is, and the proceeds to be derived from the
sale and issuance thereof are to be used for, the retirement of all Preferred then outstanding; or, (4) any payment of dividends or other distributions or any redemption or repurchase of options or warrants to purchase stock of the Company,
except for repurchases of options or stock issued under an equity incentive plan approved by the Board.
Effective August 24, 2015,
Vincent Chase, Incorporated, which is owned by the former CEO of the Company, cancelled without consideration all of its 2 million shares of Preferred Stock and 3 million shares of Common Stock. As a result of this action, neither VM nor
any of its affiliates holds a majority of the voting power of the Company, which to the Companys knowledge is no longer held by a single person or entity or group thereof. New Age Investment Consulting, Inc. (New Age) contributed
$810,000 and $561,000 in 2013 and 2012, respectively, to provide funding for growth for the Company. Yocelin Legaspi, the owner of New Age was in a relationship and lived with our controlling shareholder, Vincent Mehdizadeh, and New Age is a
stockholder of the Company. During the first quarter of 2014, the Company completed a contract with New Age in the amount of $400,000 which was recognized as a Customer deposit on the Companys balance sheet. In addition, New Age paid the
Company $150,000 for an amount owed to the Company by an unrelated third party to facilitate development at an existing dispensary where the unrelated party purchased an interest during the period. Furthermore, on March 28, 2014, the Company
entered into an agreement with New Age for territory rights in Colorado for $500,000. The agreement has a term of five years and, in accordance with the Companys revenue policy, the revenue will be recognized over the five year term.
86
Director Independence
J. Mitchell Lowe, Manuel Flores and Ned L. Siegel are independent as that term is defined under Nasdaq Marketplace Rules.
87
ADDITIONAL INFORMATION
Federal securities laws require us to file information with the SEC concerning our business and operations. Accordingly, we file annual,
quarterly, and current reports, and other information with the SEC. You can inspect and copy this information at the public reference facility maintained by the SEC at 100 F Street, NE, Washington, D.C. 20549.
You can get additional information about the operation of the SECs public reference facilities by calling the SEC at 1-800-SEC-0330. The
SEC also maintains a web site (http://www.sec.gov) at which you can read or download our reports and other information.
We have filed
with the SEC a registration statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the common stock being offered hereby. As permitted by the rules and regulations of the SEC, this prospectus does not contain all the
information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to Medbox, Inc. and the common stock offered hereby, reference is made to the registration statement, and such exhibits
and schedules. A copy of the registration statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the SEC at the addresses set forth above, and copies of all or any part of
the registration statement may be obtained from such offices upon payment of the fees prescribed by the SEC. In addition, the registration statement may be accessed at the SECs web site.
88
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
Neither our Articles of Incorporation nor bylaws prevent us from indemnifying our officers, directors and agents to
the extent permitted under the Nevada Revised Statute (NRS). NRS Section 78.7502 provides that a corporation shall indemnify any director, officer, employee or agent of a corporation against expenses, including attorneys fees,
actually and reasonably incurred by him in connection with any defense to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to
Section 78.7502(1) or 78.7502(2), or in defense of any claim, issue or matter therein.
NRS 78.7502(1) provides that a corporation
may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of
the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including attorneys fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) is
not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that
the person is liable pursuant to NRS 78.138 or did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, or that, with respect to any criminal action or
proceeding, he or she had reasonable cause to believe that the conduct was unlawful.
NRS Section 78.7502(2) provides that a
corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that
he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise
against expenses, including amounts paid in settlement and attorneys fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS 78.138; or
(b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought
or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.
NRS Section 78.7502(3) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in subsections 1 and 2, or in defense of any claim, issue or matter therein, the corporation shall indemnify him or her against expenses, including attorneys fees, actually and
reasonably incurred by him or her in connection with the defense.
NRS Section 78.747(1) provides that except as otherwise
provided by specific statute, no director or officer of a corporation is individually liable for a debt or liability of the corporation, unless the director or officer acts as the alter ego of the corporation. The court as a matter of law must
determine the question of whether a director or officer acts as the alter ego of a corporation. (2) A stockholder, director or officer acts as the alter ego of a corporation if: (a) The corporation is influenced and governed by the
stockholder, director or officer; (b) There is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other; and (c) Adherence to the corporate fiction of a separate
entity would sanction fraud or promote a manifest injustice. (3) The question of whether a stockholder, director or officer acts as the alter ego of a corporation must be determined by the court as a matter of law.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, we have been informed that, in the opinion of the
89
SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.
90
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for us by Fennemore Craig, P.C., Reno, Nevada.
91
EXPERTS
The audited consolidated financial statements of Medbox, Inc. as of December 31, 2014 and for the year then ended, appearing in this
prospectus and registration statement have been audited by Marcum LLP, an independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein and in the registration statement, and are included in
reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The audited consolidated financial
statements of Medbox, Inc. as of December 31, 2013 and for the two years then ended, appearing in this prospectus and registration statement have been audited by Q Accountancy, an independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein and in the registration statement, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
92
Index to Consolidated Financial Statements
|
|
|
|
|
Page |
Reports of Independent Registered Public Accounting Firms |
|
F-1 - F-2 |
Consolidated Balance Sheets at December 31, 2014 and 2013 |
|
F-3 |
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2014, 2013 and
2012 |
|
F-4 |
Consolidated Statements of Changes in Stockholders Equity (Deficit) for the years ended December 31,
2014, 2013 and 2012 |
|
F-5 |
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and
2012 |
|
F-6 |
Notes to Consolidated Financial Statements |
|
F-7 - F-34 |
Condensed Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31,
2014 |
|
F-35 |
Condensed Consolidated Statements of Comprehensive Loss for the Nine Months Ended September
30, 2015 and 2014 (Unaudited) |
|
F-36 |
Condensed Consolidated Statement of Stockholders Deficit for the Nine Months Ended September
30, 2015 (Unaudited) |
|
F-37 |
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2015 and 2014 (Unaudited) |
|
F-38 |
Notes to Condensed Consolidated Financial Statements (Unaudited) |
|
F-39 - F-69 |
F-i
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and
Shareholders of Medbox, Inc.
We have audited the accompanying consolidated balance sheet of Medbox, Inc. (the Company) as of
December 31, 2014, and the related consolidated statements of comprehensive loss, changes in stockholders equity/(deficit) and cash flows for the year then ended. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our
audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Medbox, Inc., as of December 31, 2014, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has a significant working capital deficit and an accumulated deficit as of December 31,
2014, and has incurred a significant net loss and negative cash flows from operations for the year then ended. The foregoing matters raise substantial doubt about the Companys ability to continue as a going concern. Managements plans in
regards to these matters are also described in Note 2. These consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
/s/ Marcum LLP
Los Angeles, CA
March 26, 2015
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Medbox, Inc.
We have audited the accompanying consolidated balance sheet of Medbox, Inc. as of December 31, 2013 and the related consolidated statements of
operations, changes in stockholders equity and cash flows for the two years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Medbox, Inc. as of December 31, 2013, and the results of its operations and its cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.
Q Accountancy Corporation
Irvine, California
March 28, 2014, except for the effects of the restatement as discussed in Note 15 to the consolidated financial statements (not presented herein)
appearing under Item 15 of the Companys Amended Registration Statement on Form 10, as to which the date is March 6, 2015.
F-2
MEDBOX, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
101,182 |
|
|
$ |
168,003 |
|
Marketable securities |
|
|
94,776 |
|
|
|
184,800 |
|
Accounts receivable |
|
|
8,774 |
|
|
|
339,735 |
|
Notes receivable |
|
|
|
|
|
|
115,000 |
|
Inventory |
|
|
961,236 |
|
|
|
632,986 |
|
Deposits in escrow |
|
|
400,476 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
66,220 |
|
|
|
89,241 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,632,664 |
|
|
|
1,529,765 |
|
Property and equipment, net of accumulated depreciation of $50,192 and $21,123, respectively |
|
|
158,318 |
|
|
|
140,658 |
|
Assets held for resale |
|
|
399,594 |
|
|
|
|
|
Investments, at cost |
|
|
|
|
|
|
1,200,000 |
|
Intangible assets, net of accumulated amortization of $83,500 and $32,750 respectively |
|
|
709,153 |
|
|
|
682,429 |
|
Goodwill |
|
|
1,260,037 |
|
|
|
1,090,037 |
|
Deposits and other assets |
|
|
104,726 |
|
|
|
98,726 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,264,492 |
|
|
$ |
4,741,615 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity/(Deficit) |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,713,627 |
|
|
$ |
305,934 |
|
Accrued interest payable |
|
|
372,937 |
|
|
|
|
|
Accrued expenses |
|
|
610,497 |
|
|
|
142,380 |
|
Deferred revenue, current |
|
|
204,091 |
|
|
|
683,621 |
|
Notes payable |
|
|
261,434 |
|
|
|
75,000 |
|
Related party notes payable |
|
|
678,877 |
|
|
|
111,794 |
|
Convertible notes payable, net of discount of $1,225,573 |
|
|
2,524,427 |
|
|
|
|
|
Derivative Liability |
|
|
3,691,853 |
|
|
|
|
|
Customer deposits |
|
|
1,525,808 |
|
|
|
785,861 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
11,583,551 |
|
|
|
2,104,590 |
|
Deferred revenue, less current portion |
|
|
568,515 |
|
|
|
|
|
Deferred tax liability |
|
|
160,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
12,312,066 |
|
|
|
2,104,590 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 19) |
|
|
|
|
|
|
|
|
Stockholders Equity/(Deficit) |
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value: 10,000,000 authorized; 3,000,000 and 3,000,000 issued and outstanding as of December 31, 2014
and 2013, respectively |
|
|
3,000 |
|
|
|
3,000 |
|
Common stock, $0.001 par value: 100,000,000 authorized, 30,496,909 and 29,525,750 issued and outstanding as of December 31,
2014 and 2013, respectively |
|
|
30,497 |
|
|
|
29,526 |
|
Additional paid-in capital |
|
|
15,315,110 |
|
|
|
8,156,358 |
|
Common stock subscribed |
|
|
|
|
|
|
(15,000 |
) |
Treasury stock |
|
|
(1,209,600 |
) |
|
|
|
|
Accumulated deficit |
|
|
(22,078,193 |
) |
|
|
(5,536,859 |
) |
Accumulated other comprehensive loss |
|
|
(108,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity/(deficit) |
|
|
(8,047,574 |
) |
|
|
2,637,025 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity/(deficit) |
|
$ |
4,264,492 |
|
|
$ |
4,741,615 |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-3
MEDBOX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Revenue |
|
$ |
621,106 |
|
|
$ |
2,062,083 |
|
|
$ |
1,176,829 |
|
Revenue from related party |
|
|
75,301 |
|
|
|
|
|
|
|
|
|
Less: allowances and refunds |
|
|
(67,275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
|
629,132 |
|
|
|
2,062,083 |
|
|
|
1,176,829 |
|
Cost of revenues |
|
|
3,796,651 |
|
|
|
2,660,749 |
|
|
|
1,051,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit/(loss) |
|
|
(3,167,519 |
) |
|
|
(598,666 |
) |
|
|
125,694 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
933,627 |
|
|
|
664,383 |
|
|
|
806,221 |
|
Research and development |
|
|
242,232 |
|
|
|
74,861 |
|
|
|
176,964 |
|
General and administrative |
|
|
9,109,205 |
|
|
|
2,456,435 |
|
|
|
895,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
10,285,064 |
|
|
|
3,195,679 |
|
|
|
1,878,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(13,452,583 |
) |
|
|
(3,794,345 |
) |
|
|
(1,753,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
(1,282,761 |
) |
|
|
6,905 |
|
|
|
(4,948 |
) |
Change in fair value of derivative liabilities |
|
|
(1,805,990 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(3,088,751 |
) |
|
|
6,905 |
|
|
|
(4,948 |
) |
Loss before provision for income taxes |
|
|
(16,541,334 |
) |
|
|
(3,787,440 |
) |
|
|
(1,758,237 |
) |
Provision for income taxes |
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(16,541,334 |
) |
|
$ |
(3,791,440 |
) |
|
$ |
(1,758,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share attributable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.55 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.55 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
30,067,693 |
|
|
|
28,971,983 |
|
|
|
25,119,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
30,067,693 |
|
|
|
28,971,983 |
|
|
|
25,119,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(16,541,334 |
) |
|
$ |
(3,791,440 |
) |
|
$ |
(1,758,237 |
) |
Unrealized loss from marketable securities |
|
|
(108,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(16,649,722 |
) |
|
$ |
(3,791,440 |
) |
|
$ |
(1,758,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-4
MEDBOX, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY/(DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
|
|
|
Treasury Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Common Stock Subscribed |
|
|
Shares |
|
|
Amount |
|
|
Additional Paid-In Capital |
|
|
Retained Earnings (Accumulated) (Deficit) |
|
|
Accumulated Other Comprehensive Loss |
|
|
Total Stockholders Equity |
|
Balances at January 1, 2012 |
|
|
6,000,000 |
|
|
$ |
6,000 |
|
|
|
20,829,678 |
|
|
$ |
20,830 |
|
|
$ |
|
|
|
|
0 |
|
|
$ |
|
|
|
$ |
270,545 |
|
|
$ |
12,818 |
|
|
$ |
|
|
|
$ |
310,193 |
|
Issuance of common stock for acquisition PVMI |
|
|
|
|
|
|
|
|
|
|
4,000,000 |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Buyout of PVMI shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,000 |
) |
|
|
|
|
|
|
|
|
|
|
(125,000 |
) |
Issuance of common stock, net of issuance costs |
|
|
|
|
|
|
|
|
|
|
2,463,366 |
|
|
|
2,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
855,952 |
|
|
|
|
|
|
|
|
|
|
|
858,415 |
|
Subscriptions for common stock, net of issuance costs |
|
|
|
|
|
|
|
|
|
|
74,100 |
|
|
|
74 |
|
|
|
(153,250 |
) |
|
|
|
|
|
|
|
|
|
|
153,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributions, related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
561,000 |
|
|
|
|
|
|
|
|
|
|
|
561,000 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,758,237 |
) |
|
|
|
|
|
|
(1,758,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2012 |
|
|
6,000,000 |
|
|
|
6,000 |
|
|
|
27,367,144 |
|
|
|
27,367 |
|
|
|
(153,250 |
) |
|
|
|
|
|
|
|
|
|
|
1,711,673 |
|
|
|
(1,745,419 |
) |
|
|
|
|
|
|
(153,629 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of issuance costs |
|
|
|
|
|
|
|
|
|
|
2,115,100 |
|
|
|
2,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,484,426 |
|
|
|
|
|
|
|
|
|
|
|
4,486,541 |
|
Cancellation of preferred stock |
|
|
(3,000,000 |
) |
|
|
(3,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds of common stock subscribed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,250 |
|
|
|
|
|
|
|
|
|
|
|
(138,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants for acquisition of Vaporfection |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,166,000 |
|
|
|
|
|
|
|
|
|
|
|
1,166,000 |
|
Issuance of common stock for accounts payable |
|
|
|
|
|
|
|
|
|
|
43,506 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,509 |
|
|
|
|
|
|
|
|
|
|
|
119,553 |
|
Capital contributions, related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
810,000 |
|
|
|
|
|
|
|
|
|
|
|
810,000 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,791,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2013 |
|
|
3,000,000 |
|
|
|
3,000 |
|
|
|
29,525,750 |
|
|
|
29,526 |
|
|
|
(15,000 |
) |
|
|
|
|
|
|
|
|
|
|
8,156,358 |
|
|
|
(5,536,859 |
) |
|
|
|
|
|
|
2,637,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of issuance costs |
|
|
|
|
|
|
|
|
|
|
485,830 |
|
|
|
486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,427,373 |
|
|
|
|
|
|
|
|
|
|
|
2,427,859 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
178,125 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,415,621 |
|
|
|
|
|
|
|
|
|
|
|
4,415,799 |
|
Exercise of warrants |
|
|
|
|
|
|
|
|
|
|
252,812 |
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares to settle accounts payable |
|
|
|
|
|
|
|
|
|
|
54,392 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
316,011 |
|
|
|
|
|
|
|
|
|
|
|
316,065 |
|
Proceeds from common stock subscribed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
Treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,000 |
) |
|
|
(1,209,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,209,600 |
) |
Unrealized loss from marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(108,388 |
) |
|
|
(108,388 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,541,334 |
) |
|
|
|
|
|
|
(16,541,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2014 |
|
|
3,000,000 |
|
|
$ |
3,000 |
|
|
|
30,496,909 |
|
|
$ |
30,497 |
|
|
$ |
|
|
|
|
(60,000 |
) |
|
$ |
(1,209,600 |
) |
|
$ |
15,315,110 |
|
|
$ |
(22,078,193 |
) |
|
$ |
(108,388 |
) |
|
$ |
(8,047,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
MEDBOX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(16,541,334 |
) |
|
$ |
(3,791,440 |
) |
|
$ |
(1,758,237 |
) |
Adjustments to reconcile net income loss to net cash: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
79,819 |
|
|
|
69,564 |
|
|
|
29,922 |
|
Gain on the sale of property and equipment |
|
|
|
|
|
|
(20,682 |
) |
|
|
|
|
Provisions and allowances |
|
|
67,275 |
|
|
|
|
|
|
|
|
|
Gain on sale of investments and property and equipment |
|
|
(9,600 |
) |
|
|
|
|
|
|
|
|
Market value of securities received for services |
|
|
(203,165 |
) |
|
|
|
|
|
|
|
|
Change in fair value of derivative liability |
|
|
1,805,990 |
|
|
|
|
|
|
|
|
|
Amortization of debt discount |
|
|
935,290 |
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
|
4,415,799 |
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
263,686 |
|
|
|
518,171 |
|
|
|
(1,042,000 |
) |
Inventory |
|
|
(328,250 |
) |
|
|
(48,180 |
) |
|
|
(316,254 |
) |
Deposits in escrow |
|
|
(400,476 |
) |
|
|
|
|
|
|
|
|
Prepaid expenses and other assets |
|
|
17,021 |
|
|
|
(36,725 |
) |
|
|
|
|
Accounts payables |
|
|
1,723,759 |
|
|
|
(393,458 |
) |
|
|
190,668 |
|
Accrued interest payable |
|
|
372,990 |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
|
468,064 |
|
|
|
|
|
|
|
|
|
Customer deposits |
|
|
924,747 |
|
|
|
675,762 |
|
|
|
|
|
Deferred revenue |
|
|
88,985 |
|
|
|
(716,409 |
) |
|
|
1,451,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(6,319,400 |
) |
|
|
(3,743,397 |
) |
|
|
(1,444,871 |
) |
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of note receivable |
|
|
|
|
|
|
(115,000 |
) |
|
|
|
|
Receipts on notes receivable, net |
|
|
115,000 |
|
|
|
|
|
|
|
104,650 |
|
Purchase of property and equipment, net |
|
|
(46,729 |
) |
|
|
(134,451 |
) |
|
|
|
|
Purchase of real estate |
|
|
(399,594 |
) |
|
|
|
|
|
|
|
|
Purchase of intangible assets, net |
|
|
(87,474 |
) |
|
|
|
|
|
|
|
|
Advances for investments |
|
|
|
|
|
|
(1,250,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in (provided by) investing activities |
|
|
(418,797 |
) |
|
|
(1,499,451 |
) |
|
|
104,650 |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Receipts on advances to officer |
|
|
|
|
|
|
|
|
|
|
177,050 |
|
Contribution from related parties |
|
|
|
|
|
|
810,000 |
|
|
|
561,000 |
|
Payments on a long term debt |
|
|
|
|
|
|
(16,307 |
) |
|
|
(15,771 |
) |
Payments on (proceeds from) notes payable |
|
|
(75,000 |
) |
|
|
(150,000 |
) |
|
|
50,000 |
|
Dividends paid to subsidarys shareholders |
|
|
|
|
|
|
|
|
|
|
(49,965 |
) |
Proceeds from (payments on) Related parties notes payable |
|
|
567,083 |
|
|
|
(746,285 |
) |
|
|
744,038 |
|
Proceeds from issuance of notes payable |
|
|
261,434 |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net |
|
|
2,442,859 |
|
|
|
4,486,541 |
|
|
|
858,415 |
|
Proceeds from issuance of convertible notes payable, net |
|
|
3,475,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
6,671,376 |
|
|
|
4,383,949 |
|
|
|
2,324,767 |
|
Net decrease (increase) in cash |
|
|
(66,821 |
) |
|
|
(858,899 |
) |
|
|
984,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period |
|
|
168,003 |
|
|
|
1,026,902 |
|
|
|
42,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period |
|
$ |
101,182 |
|
|
$ |
168,003 |
|
|
$ |
1,026,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
2,834 |
|
|
$ |
2,106 |
|
|
$ |
4,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes |
|
$ |
|
|
|
$ |
10,851 |
|
|
$ |
59,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities received for accounts receivable |
|
$ |
(184,000 |
) |
|
$ |
184,800 |
|
|
$ |
125,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed for Vaporfection |
|
$ |
|
|
|
$ |
73,739 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued as repayment of debt |
|
$ |
|
|
|
$ |
53,500 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of preferred stock |
|
$ |
|
|
|
$ |
3,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for accounts payable |
|
$ |
316,065 |
|
|
$ |
119,536 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock received for sale of advances on investments |
|
$ |
1,200,000 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants issued for Vaporfection |
|
$ |
|
|
|
$ |
1,166,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for related party notes payable |
|
$ |
|
|
|
$ |
|
|
|
$ |
125,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for PVMI |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-6
MEDBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BUSINESS ORGANIZATION, NATURE OF OPERATIONS
Business Description
Medbox, Inc. (the
Company) was incorporated in the state of Nevada on June 16, 1977, originally as Rabatco, Inc., subsequently changing its name on May 12, 2000 to MindfulEye, Inc., and again on August 30, 2011 to Medbox, Inc. Medbox, Inc.
provides specialized consulting services to the marijuana industry and sells associated patented products, including its Medbox medical dispensing system and medical vaporization devices. The Company works with clients who seek to enter the medical
and cultivation marijuana markets in those states where approved. Medbox offers turnkey solutions that assist with licensing and compliance, site selection, design and permitting, safety and security, along with full build-out and operational
oversight. Medboxs consulting solutions and technology create structure and process for clients and their respective businesses in this rapidly emerging sector. In addition, through its wholly owned subsidiary, Vaporfection International, Inc.
(VII), the Company sells a line of vaporizer and accessory products online and through distribution partners. The Company is headquartered in Los Angeles, California.
On December 31, 2011, Medbox, Inc. entered into a Stock Purchase Agreement with PVM International, Inc. (PVMI). Pursuant to two separate
closings held on January 1, 2012 and December 31, 2012, the Company acquired from PVMI all of the outstanding shares of common stock in (i) Prescription Vending Machines, Inc., (PVM) (ii) Medicine Dispensing Systems, Inc.
(MDS, Inc.) (its Arizona subsidiary), and (iii) Medbox, Inc. (its California subsidiary that is currently inactive) (these three listed subsidiaries are hereafter referred to as the PVMI Named Subsidiaries), in exchange
for two million shares of the Companys common stock and a $1 million promissory note.
The transaction between Medbox, Inc. and PVMI was
accounted for as a reverse acquisition, where Medbox, Inc. (the legal acquirer) is considered the accounting acquiree and the PVMI Named Subsidiaries (the legal acquiree) are considered the accounting acquirer. The assets and liabilities are
transferred at their historical cost with the capital structure of Medbox, Inc. Medbox, Inc. is deemed a continuation of the business of PVMI Named Subsidiaries and the historical financial statements of PVMI Named Subsidiaries are the historical
financial statements of Medbox, Inc.
The Companys PVM subsidiary was incorporated in the state of California in 2008 and its subsidiary, MDS, Inc.
was incorporated in the state of Arizona in 2011.
On March 22, 2013, the Company entered into a Securities Purchase Agreement with Vapor Systems
International, LLC to acquire 100% of the outstanding common stock of VII in exchange for warrants to purchase 260,854 shares of the Companys common stock. In addition, the Company agreed to provide up to $1,600,000 in working capital to VII
at the Companys sole discretion which included $175,000 paid to the inventor of certain patents including a warrant to purchase 5,000 shares of the Companys common stock. This transaction was closed in April 2013.
Medbox, Inc., a Nevada corporation, operates the business directly and through the utilization of 6 operating subsidiaries, as follows:
|
|
|
Prescription Vending Machines, Inc., a California corporation, d/b/a Medicine Dispensing Systems in the State of California (MDS), which distributes our Medbox product and provides related consulting
services described further below. |
|
|
|
Vaporfection International, Inc., a Florida corporation through which we distribute our medical vaporizing products and accessories. |
|
|
|
Medbox Property Investments, Inc., a California corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers. |
|
|
|
MJ Property Investments, Inc., a Washington corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers in the state of Washington. |
F-7
|
|
|
Medbox Management Services, Inc., a California corporation specializing in providing management oversight and compliance services to state-licensed dispensaries for cultivation, dispensing, and marijuana
infused products (MIPS). |
|
|
|
Medicine Dispensing Systems, Inc., an Arizona corporation, which distributes our Medbox dispensing system and provides related consulting services in the State of Arizona. |
In order to obtain the license for one of the Companys clients the Company registered an affiliated nonprofit corporation Allied Patient Care, Inc. in
the state of Oregon.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The
consolidated financial statements include the accounts of Medbox, Inc. and its wholly owned subsidiaries, as named in Note 1 above. All intercompany transactions have been eliminated.
Use of Estimates
The preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent liabilities at the date of the consolidated financial statements as well as the reported expenses during the reporting periods. The Companys significant estimates and assumptions include the valuation of the Companys common
stock used in the valuation of goodwill, accounts receivable and note receivable collectability, inventory, advances on investments, the valuation of restricted stock and warrants received from customers, the amortization and recoverability of
capitalized patent costs and useful lives of long-lived assets the derivative liability, and income tax expense. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. Although the
Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results could differ from these estimates.
Concentrations of Credit Risk
The Company maintains cash
balances at several financial institutions in the Portland, Oregon, Los Angeles, California area and Florida. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced
any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible.
Three customers, one of which is a related party through the entitys stock ownership in the Company (customer C) represented 72.1% of the total
revenue of $629,132 for the year ended December 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
January -December 2014 |
|
|
December 31, 2013 |
|
|
January -December 2013 |
|
Customer |
|
Accounts Receivable |
|
|
Revenue |
|
|
Accounts Receivable |
|
|
Revenue |
|
|
|
Amount, $ |
|
|
% |
|
|
Amount, $ |
|
|
% |
|
|
Amount, $ |
|
|
% |
|
|
Amount, $ |
|
|
% |
|
A |
|
$ |
|
|
|
|
|
% |
|
$ |
203,165 |
|
|
|
32.3 |
% |
|
$ |
150,000 |
|
|
|
44.20 |
% |
|
$ |
325,000 |
|
|
|
15.8 |
% |
B |
|
|
|
|
|
|
|
|
|
|
175,000 |
|
|
|
27.8 |
|
|
|
115,200 |
|
|
|
33.9 |
|
|
|
|
|
|
|
|
|
C |
|
|
|
|
|
|
|
|
|
|
75,301 |
|
|
|
12.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
0.0 |
|
|
|
453,466 |
|
|
|
72.1 |
|
|
|
265,200 |
|
|
|
78.1 |
|
|
$ |
325,000 |
|
|
|
15.8 |
% |
Total |
|
$ |
8,774 |
|
|
|
100 |
% |
|
$ |
629,132 |
|
|
|
100.00 |
% |
|
$ |
339,735 |
|
|
|
100 |
% |
|
$ |
2,062,083 |
|
|
|
100.00 |
% |
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. The Company incurred advertising and marketing costs of $933,627, $644,383 and $806,221 for the years
ended December 31, 2014, 2013 and 2012, respectively.
F-8
Research and Development
Research and development expenses are charged to operations as incurred. The Company incurred research and development costs of $242,232, $74,861 and $176,964
for the years ended December 31, 2014 2013 and 2012, respectively.
Fair Value of Financial Instruments
Pursuant to ASC No. 825, Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its
balance sheets. The carrying value of cash, accounts receivable, other receivables, inventory, accounts payable and accrued expenses and notes payable, related party notes payable, customer deposits, provision for customer refunds and short term
loans payable approximate their fair value due to the short period to maturity of these instruments. The Companys marketable securities and related customer deposits require fair value measurement on a recurring basis as the Company has
received advance payment of restricted stock in a publicly traded company for contracted services and received warrants for service provided to unrelated third party. The Company has no exposure to gain or loss on the increase or decrease in the
value of the marketable securities received as a payment from customer as any shortfall in the ultimate liquidated value of the securities will be supplemented by additional restricted stock from the customer and any liquidation in excess above the
Companys billings will be returned to the customer. The securities received as a payment for services provided will be exposed to gains or losses following their initial evaluation as of the date the revenue was earned.
Warrants and other financial assets received as a payment for the services provided are recorded as Marketable securities under the current assets
if they are expected to be realized within 12 months. The Company uses the Black-Scholes model to measure the value of the warrants. At each reporting date the Company will reevaluate the value of marketable securities and record any changes in
value to other comprehensive income (loss) under Unrealized gain or losses from marketable securities.
Unrealized gain or loss from
marketable securities occurs in the process of the reevaluation of the warrants or other financial assets after their initial recognition valuation. At each reporting date the Company reevaluates the value of marketable securities and reflects the
change in the statement of changes in equity under other comprehensive income (loss).
Embedded derivative The Companys convertible notes
payable include embedded features that require bifurcation due to a reset provision and are accounted for as a separate embedded derivative (see Note 13). The Company has estimated the fair market value of the embedded derivative of the Notes based
on a weighted probability model. The key valuation assumptions used consist of the price of the Companys stock, a risk free interest rate based on the average yield of a one year Treasury note and expected volatility of the Companys
common stock all as of the measurement dates, and various estimated reset exercise prices allocated by probability. The Company considers these inputs Level 3 assumptions, based on the application of the estimated probability rate being considered
an unobservable input.
A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
|
|
|
Level 1 |
|
Quoted prices in active markets for identical assets or liabilities. |
|
|
Level 2 |
|
Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or
indirectly. |
|
|
Level 3 |
|
Significant unobservable inputs that cannot be corroborated by market data. |
F-9
The assets or liabilitys fair value measurement within the fair value hierarchy is based upon the lowest
level of any input that is significant to the fair value measurement. The following table provides a summary of the relevant assets and liabilities that are measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level
1) |
|
|
Quoted Prices for Similar Assets or Liabilities in Active Markets (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
$ |
94,776 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
94,776 |
|
Derivative liability |
|
|
3,691,853 |
|
|
|
|
|
|
|
|
|
|
|
3,691,853 |
|
Total |
|
$ |
3,786,629 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,786,629 |
|
|
|
|
|
|
|
|
Total |
|
|
Quoted Prices in
Active Markets for Identical Assets or Liabilities (Level 1) |
|
|
Quoted Prices for Similar Assets or Liabilities in Active Markets (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
$ |
184,800 |
|
|
$ |
184,800 |
|
|
$ |
|
|
|
$ |
|
|
Total |
|
$ |
184,800 |
|
|
$ |
184,800 |
|
|
$ |
|
|
|
$ |
|
|
The following table sets forth a summary of the changes in the fair value of the Companys Level 3 financial liabilities
that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
For the year ended December 31, 2014 |
|
|
|
Total |
|
Beginning balance |
|
$ |
|
|
Initial recognition of conversion feature |
|
|
1,885,863 |
|
Change in fair value of conversion feature |
|
|
1,805,990 |
|
Ending balance |
|
$ |
3,691,853 |
|
Revenue Recognition
Our
current revenue model consists of the following income streams:
Consulting fee revenues.
Consulting fee revenues. This revenue stream is a consistent component of our current and anticipated future revenues and is negotiated at the time we enter
into a contract. In jurisdictions where there is intense competition for a limited number of dispensing or cultivating licenses, we believe the Medbox model, with its incorporated security measures, promotes a distinct advantage in the application
selection process for such licenses, especially in the states where an applicant is graded on the ability to demonstrate compliance with applicable law.
Consulting fee revenue is only recognized when the following four criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has
occurred or services have been rendered, 3) sales price is fixed and determinable and 4) collectability is reasonable assured. For multi-year contracts with upfront payments made by customers, the upfront payments are recognized over the longer of
the contract period or the customer relationship. For contracts that include multiple deliverables such as the build out of customer facilities, the Company recognizes revenue when a milestone is reached in the contract such as securing the
location, delivery of dispensing machines or completion of the facility.
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. Bundling through consulting packages is the most common way that we sell and distribute Medboxes. 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 implementation of the cost reduction process that we have undertaken. The 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.
F-10
Revenue on dispensary unit sales is only recognized when the following four criteria are met: 1) persuasive
evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales price is fixed and determinable and 4) collectability is reasonable assured. For contracts that include multiple deliverables such as the build out
of customer facilities, the Company recognizes revenue when a milestone is reached in the contract such as securing the location, delivery of dispensing machines or completion of the facility. The contract terms are broken down in specific
milestones with specific attributable revenue to be earned upon successful completion of the milestone terms. (i.e. if a milestone is completing construction on a client dispensary, the condition for the revenue to be recorded is after issuance of a
certificate of occupancy for the newly completed facility. The Company will record a specified amount of revenue attributable to this milestone based on the contract). Equipment sales not associated with a consulting contract are recognized as the
product is shipped and title passes. Vaporizer sales are recognized as the product is shipped.
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 into 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 for which we have facilitated the granting of licenses.
Other revenue is only
recognized when the following four criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales price is fixed and determinable and 4) collectability is reasonable assured. For
multi-year contracts with upfront payments made by customers, the upfront payments are recognized over the longer of the contract period or the customer relationship. For contracts that include multiple deliverables such as the build out of customer
facilities, the Company recognizes revenue when a milestone is reached in the contract such as securing the location, delivery of dispensing machines or completion of the facility. The contract terms are broken down in specific milestones with
specific attributable revenue to be earned upon successful completion of the milestone terms. (i.e. if a milestone is completing construction on a client dispensary, the condition for the revenue to be recorded is after issuance of a certificate of
occupancy for the newly completed facility. The Company will record a specified amount of revenue attributable to this milestone based on the contract. Advance payments from clients in advance of work performed are recorded as customer deposits on
the balance sheet.
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).
Referral fee and
revenue sharing revenue is only recognized when the following four criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales price is fixed and determinable and 4)
collectability is reasonable assured. For multi-year contracts with upfront payments made by customers, the upfront payments are recognized over the longer of the contract period or the customer relationship. If all required deliverables are
complete, the referral fee will be recognized when the customer closes on the subject transaction.
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.
F-11
Monthly compliance and accountability support revenue is only recognized when the following four criteria are
met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales price is fixed and determinable and 4) collectability is reasonable assured. Revenue is recognized monthly as the services
are delivered to clients.
Cost of Revenue
Cost of
revenue consists primarily of expenses associated with the delivery and distribution of our products and services. These include expenses related to the manufacture of our dispensary units, construction expense related to the customer dispensary,
site selection and establishment of licensing requirements, and consulting expense for the continued management of the dispensary unit build out, server and security equipment, rent expense, energy and bandwidth costs, and support and maintenance
costs prior to when the client moves in. We only begin capitalizing costs when we have obtained a license and a site for operation of a customer dispensary or cultivation center. The previously capitalized costs are charged to cost of revenue in the
same period that the associated revenue is earned. In the case where it is determined that previously inventoried costs are in excess of the projected net realizable value of the sale of the licenses then the excess cost above net realizable value
is written off to cost of revenues. In addition, cost of revenue related to our vaporizer line of products consists of direct procurement cost of the products along with costs associated with order fulfilment, shipping, inventory storage and
inventory management costs.
Inventory
Inventory is
stated at the lower of cost or market value. Cost is determined on a cost basis that approximates the first-in, first-out (FIFO) method.
Work in
process and related capitalized costs includes costs to build out a dispensary in Portland Oregon that is expected to open in the second quarter of 2015. Costs include tenant improvements to the facility, furniture, fixtures and Medbox dispensary
units to be used by the licensed operator. It is anticipated this dispensary will be operated by a Medbox licensed operator and revenue and related cost of revenue will be recorded in the statement of operations in the second quarter of 2015.
Basic and Diluted Net Loss Per Share
Basic net
income/loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share include the effects of any outstanding
options, warrants and other potentially dilutive securities. The Company did not consider any potential common shares in the computation of diluted loss per share for the periods ending December 31, 2014, 2013 and 2012, due to the net loss, as
they would have an anti-dilutive effect on EPS.
As of December 31, 2014 and 2013, the Company has 3,000,000 shares of Series A preferred stock
outstanding with par value of $0.001 that could be converted into 15,000,000 shares of the Companys common stock. As of December 31, 2012 there were 6,000,000 shares of Series A preferred stock outstanding, which could be
converted into 30,000,000 shares. Additionally the Company has 206,480 warrants to purchase common stock outstanding as of December 31, 2014. The Company also has $3,750,000 in convertible debentures outstanding at December 31, 2014, whose
underlying shares were not included as they are convertible at the holders option at an initial fixed conversion price of $11.75.
Accounts
Receivable and Allowance for Bad Debts
The Company is subject to credit risk as it extends credit to our customers for work performed as specified in
individual contracts. The Company extends credit to its customers, mostly on an unsecured basis after performing certain credit analysis. Our typical terms require the customer to pay a portion of the contract price up front and the rest upon
certain agreed milestones. The Companys management periodically reviews the creditworthiness of its customers and provides for probable uncollectible amounts through a charge to operations and a credit to an
F-12
allowance for doubtful accounts based on our assessment of the current status of individual accounts. Accounts still outstanding after the Company has used reasonable collection efforts are
written off through a charge to the allowance for doubtful accounts. As of December 31, 2014 and December 31, 2013, the Companys management considered all accounts outstanding fully collectible.
Property and Equipment
Property and equipment are
recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the
straight-line method for financial statement purposes. The Company uses accelerated depreciation methods for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
|
|
|
|
|
Vehicles |
|
|
5 years |
|
Furniture and Fixtures |
|
|
5 years |
|
Office equipment |
|
|
3 years |
|
Assets Held for Resale
During 2014, the Company has entered into various real estate purchase agreements to support the filing of retail dispensary or cultivation facility licenses
in certain states and localities. The cost of the acquired real estate is included in Assets Held for Resale on the consolidated balance sheet. The Company intends to sell the real estate to a long term investor after the license is
granted. The Company does not depreciate assets held for resale.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740. The Company recognizes deferred tax liabilities and
assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities are classified as current and
non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
In addition, the Companys management performs an evaluation of all uncertain income tax positions taken or expected to be taken in the course of
preparing the Companys income tax returns to determine whether the income tax positions meet a more likely than not standard of being sustained under examination by the applicable taxing authorizes. This evaluation is required
to be performed for all open tax years, as defined by the various statutes of limitations, for federal and state purposes.
Commitments and
Contingencies
Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events occur or fail to occur. The Companys management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of
judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Companys legal counsel evaluates the perceived merits of any legal
proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
F-13
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the
amount of the liability can be estimated, then the estimated liability would be accrued in the Companys consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is
reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
The Company accrues all legal costs expected to be incurred per event, up to the amount of their deductible.
Recent Accounting Pronouncements
In May 2014, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it
expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective. The new standard is
effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The new standard permits the use of
either the retrospective or cumulative effect transition method. We are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor
have we determined the effect of the standard on our ongoing financial reporting.
Managements Evaluation of Subsequent Events
The Company evaluates events that have occurred after the balance sheet date of December 31, 2014, through the date which the consolidated financial
statements were issued. Based upon the review, other than described in Note 20 Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the
consolidated financial statements.
Going Concern
The Company recently revised its business model and completed a restatement of its financial statements. The revision to the business model which plans for
long term contracts to manage dispensaries or cultivation centers tends to defer revenue and cash flow while expensing the costs to develop markets currently. The recentlycompleted restatements and the on-going investigations by the SEC and the
Department of Justice have added general and administrative expenses. The Company also operates in a new, emerging industry where business models are still developing and finalizing new deals can take longer than in more mature industries.
The financial statements were prepared on a going concern basis. The going concern basis assumes that the Company will continue in operation for the
foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. During the year ended December 31, 2014, the Company had a net loss of approximately $16.5 million, negative cash flow
from operations of $6.3 million and negative working capital of $10.0 million. The Company will need to raise capital in order to fund its operations. These factors, among others, raise substantial doubt about the Companys ability to continue
as a going concern. The ability to continue as a going concern is dependent on the Companys ability to raise additional capital and implement a business plan. The financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
As disclosed in our Form 8-K dated January 28, 2015, our lenders have committed to an
additional $3.3 million in funding as our annual SEC filings are completed and the Form S-1 filed with the SEC. Due diligence is in process between an investor and our majority shareholder to sell his majority position which would also yield
$5 million in new equity capital for the Company over the next 18 months (see Note 20). Management is committed to conducting a road show after the Form S-1 is declared effective to raise additional equity capital in 2015. The Company expects
that these plans will provide it the necessary liquidity through the first quarter of 2016.
F-14
To address its financing requirements, the Company will seek financing through debt and equity financings. It is
uncertain the Company can obtain financing to fund operating deficits until profitability is achieved. This need may be adversely impacted by: uncertain market conditions, approval of sites and licenses by regulatory bodies and adverse operating
results. The outcome of these matters cannot be predicted at this time.
NOTE 3 ACQUISITION
On March 22, 2013, the Company entered into a purchase agreement for 100% of the issued and outstanding common stock of Vaporfection
International Inc. (VII) owned by Vapor Systems International LLC (VSI). The Company closed the transaction on April 1, 2013. The Company issued 260,854 warrants to shareholders of VII allowing them to purchase one
(1) share of Medbox common stock at $.001 per share beginning April 1, 2014. These warrants were valued for the Companys accounting purposes at $4.47 per warrant, determined by the Companys independent appraiser. In addition,
the Company assumed certain liabilities and a 10% convertible note of VII in the aggregate amount of approximately $470,000. The total value of the acquisition was approximately $1,635,000 and the purchase price has been allocated as per the
Companys independent valuation as follows:
|
|
|
|
|
Machinery and equipment |
|
$ |
70,000 |
|
IP and related technology |
|
|
287,000 |
|
Amortizable intangible assets: |
|
|
|
|
Customer contracts and related relationships |
|
|
314,000 |
|
Trade name, trademark, and domain name |
|
|
46,000 |
|
Non-compete covenants |
|
|
23,000 |
|
Goodwill |
|
|
895,000 |
|
Total assets acquired |
|
|
1,635,000 |
|
Fair value of liabilities assumed |
|
|
(469,000 |
) |
Net fair value |
|
$ |
1,166,000 |
|
The amortizable intangible assets have useful lives not exceeding ten years. No amounts have been allocated to in-process
research and development and $895,000 was originally allocated to Goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired.
From the date of acquisition through March 31, 2014, the purchase price allocation period, the liabilities assumed have been increased by approximately
$205,000, as they have been accrued or settled. Accordingly, an additional $10,000 and $195,000 was allocated to Goodwill in the years ended December 31, 2014 and 2013, respectively.
The warrants included a standard anti-dilution provision, which was triggered by the stock dividend declared on December 18, 2013. On or about
September 17, 2014, some but not all of the holders of certain warrants for the Companys common stock issued in connection with the Companys 2013 purchase of Vaporfection International, Inc. filed suit against the Company in Circuit
Court in Palm Beach County, Florida. There was a dispute as to the adjustment of the exercise price, and the suit was resolved in a settlement agreement dated December 29, 2014, which maintained the anti-dilution adjustment as well as an
additional 50,000 warrants being issued to certain of the former VII shareholders. The additional warrants were valued at approximately $280,000, which has been recognized as legal expense in the accompanying consolidated financial statements. The
expense was determined using the Black Scholes Merton model, with key valuation assumptions used that consist of the price of the Companys stock at settlement date, a risk free interest rate based on the average yield of a 3 year Treasury note
and expected volatility of the Companys common stock all as of the measurement date. As of December 31, 2014, 252,812 of the warrants were exercised by the former owners of VII.
In addition to the above warrants, the purchase agreement and associated consulting contract with the prior management company of the business unit calls for
additional shares of common stock to be issued in the event that the performance of the business unit exceeds $11,818,140 of accumulated EBITDA over the subsequent 4 year
F-15
operating period. The performance payout is contingent upon future events and accordingly the Company has treated the obtainment of that performance provision as being remote and consequently has
not assigned any future value to the purchase price.
The amortizable intangible assets, based on their non-deductibility for tax purposes, gave rise to a
deferred tax liability in the amount of $160,000. Goodwill was increased accordingly, the balance after the purchase price allocation adjustments disclosed previously is $1,260,037 at December 31, 2015.
The Company evaluated Goodwill at year end, and as the Company determined that based on qualitative factors it was not more likely than not that there was not
any impairment, they performed Step 1 of the Goodwill impairment test. Since the fair value, based on undiscounted expected future cash flows, was in excess of the units carrying value, the Company concluded no impairment was necessary to recognize
as of December 31, 2014.
The Company evaluated the Intangible assets with definite lives for any indications of impairment and determined that the
same cash projections used for the Goodwill impairment test resulted in a conclusion that no impairment of Intangible assets was necessary.
NOTE 4 INVESTMENTS
On February 8, 2013, the Company entered into an agreement with Bio-Tech Medical Software, Inc. (Bio-Tech) which would
allow the Company to purchase 833,333 shares of common stock, which represented 25% of Bio-Techs issued and outstanding shares of common stock, for $1,500,000. The Company advanced $600,000 upon execution of this agreement for the right
to purchase with the remaining balance of $900,000 due and payable in installments at various dates by August 25, 2013. On June 26, 2013, the Company notified Bio-Tech that it was canceling the agreement.
On February 27, 2014, the Company signed a settlement agreement, and in connection therewith, a second amended and restated technology license agreement
with Bio-Tech. Pursuant to the second amended and restated technology license agreement, the Company received full licensed right to biometric inventory tracking technology for the term of five years with no additional monies due. All stock transfer
between companies was canceled and rescinded.
On June 5, 2014 the Company entered into a sale agreement with an affiliate company owned by the
co-founder of the Company for the sale of all Bio-Tech rights and claims and a contribution for legal costs of $4,800 in exchange for the return of 30,000 shares of the Companys common stock with a fair value of $604,800, valued at the market
price of the Companys common shares on the date of the agreement. These shares are treated as treasury stock and can be reissued.
On March 12,
2013, the Company entered into an agreement with three members of MedVend Holdings LLC (MedVend) whereby the Company would acquire 50% of their equity interest in MedVend. The purchase price of the equity interest was $4,100,000. The
Company paid an advance of $300,000 upon execution of the contract for the right to purchase and another $300,000 was disbursed as an additional investment to MedVend. In May 2013, the three members of MedVend were named in a lawsuit by that
entitys minority shareholders alleging improper conveyance of the three members ownership interest in MedVend to the Company. Accordingly, also in May 2013, Medbox filed suit against MedVend and the three members of that entity that
were involved in the transaction (Note 19).
The shares of common stock received for the Bio-Tech and MedVend sales to the affiliate company are
recorded as treasury stock at cost of $1,209,600 for 60,000 shares.
NOTE 5 INVENTORY
Inventory at December 31, 2014 and 2013 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
Work in process and related capitalized costs |
|
$ |
308,867 |
|
|
$ |
242,488 |
|
Deposits on dispensing machines |
|
|
325,973 |
|
|
|
138,423 |
|
Vaporizers and accessories |
|
|
154,930 |
|
|
|
193,575 |
|
Dispensing machines |
|
|
171,466 |
|
|
|
58,500 |
|
Total inventory, net |
|
$ |
961,236 |
|
|
$ |
632,986 |
|
F-16
Work in process and related capitalized costs includes costs to build out a dispensary in Portland Oregon that is
expected to open in the second quarter of 2015. Costs include tenant improvements to the facility, furniture, fixtures and Medbox dispensary units to be used by the licensed operator. It is anticipated this dispensary will be operated by a Medbox
licensed operator and revenue and related cost of revenue will be recorded in the statement of operations in the second quarter of 2015.
During the year
ended December, 31, 2014, the Company wrote down slow moving, older models of vaporizer inventory with a charge to cost of revenue of $329,154. The Company determined there was no obsolete or slow moving inventory as of December 31, 2013 and
2012.
NOTE 6 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2014 and 2013 consists of:
|
|
|
|
|
|
|
|
|
Property and Equipment |
|
December 31, 2014 |
|
|
December 31, 2013 |
|
Office equipment |
|
$ |
22,421 |
|
|
$ |
17,192 |
|
Furniture and fixtures |
|
|
74,404 |
|
|
|
73,567 |
|
Website development |
|
|
46,922 |
|
|
|
46,922 |
|
Product tooling |
|
|
64,763 |
|
|
|
24,100 |
|
|
|
|
208,510 |
|
|
|
161,781 |
|
Less accumulated depreciation |
|
|
(50,192 |
) |
|
|
(21,123 |
) |
Property and equipment, net |
|
$ |
158,318 |
|
|
$ |
140,658 |
|
Product tooling costs are related to the tooling of a new product by VII. These tooling costs are accumulated and capitalized
until launch date of the new product which is expected to commence in the second quarter of 2015.
Depreciation expense for the years ending
December 31, 2014, 2013 and 2012 was approximately $29,000, $37,000 and $30,000, respectively.
NOTE 7 ASSETS HELD FOR RESALE
In the course of seeking licenses for new locations, the Company has to enter into real estate purchase agreements in order to secure the
sites to be developed for clients dispensaries and cultivation centers. The Company intends to close on the real estate where purchase agreements have been signed, or to seek partners to replace the Company on each property purchased. During
the second quarter of 2014 one of the Companys subsidiaries entered into a real estate purchase agreement for a Washington state property. The purchase transaction was closed during the third quarter for a total purchase price of $399,594
partially financed by a promissory note for $249,000. The note bears an interest rate of 12% per year and matures on January 30, 2015. The balance of Assets held for resale as of December 31, 2014 is $399,594. There were no such
assets as of December 31, 2013.
NOTE 8 INTANGIBLE ASSETS
The Company acquired certain intangible assets with its purchase of 100% of the outstanding common stock of VII on April 1,
2013. The Company accounts for intangible assets acquired in a business combination, if any, under the purchase method of accounting at their estimated fair values at the date of acquisition. Intangibles are either amortized over their
estimated lives, if a definite life is determined, or are not amortized if their life is considered indefinite.
|
|
|
|
|
|
|
|
|
Intangible assets |
|
December 31, 2014 |
|
|
December 31, 2013 |
|
Distributor relationship |
|
$ |
314,000 |
|
|
$ |
314,000 |
|
IP/technology/patents |
|
|
324,653 |
|
|
|
332,179 |
|
Domain names |
|
|
131,000 |
|
|
|
46,000 |
|
Non-compete covenants |
|
|
23,000 |
|
|
|
23,000 |
|
Subtotal |
|
|
792,653 |
|
|
|
715,179 |
|
Less accumulated amortization |
|
|
(83,500 |
) |
|
|
(32,750 |
) |
Intangible assets, net |
|
$ |
709,153 |
|
|
$ |
682,429 |
|
F-17
The estimated useful lives for significant intangible assets are as follows:
|
|
|
|
|
Distributor Relationship |
|
|
10 years |
|
Domain Names |
|
|
10 years |
|
IP/Technology/Patents |
|
|
10 years |
|
Non-Compete covenants |
|
|
3 years |
|
The Companys management has evaluated the intangible assets and does not believe any impairment of intangible assets has
occurred as of December 31, 2014 and 2013.
NOTE 9 ACCOUNTS AND NOTES RECEIVABLE
Accounts receivables
Periodically the
Company assesses and reviews the receivables for collectability. As of December 31, 2014 and 2013, the Companys management considered all outstanding accounts receivables fully collectible.
During the year ended December 31, 2014, the Company identified $132,640 of accounts receivable and $75,000 in Notes Receivable where management
determined that collection was not likely and therefore the Company recognized bad debt expense of $207,640. The Company will continue to make efforts to collect the full value of the various receivables.
Notes Receivable current
During December 2013, the
Company entered into a multiple advance secured promissory note for $1,000,000 with a Canadian partner. This note is due and payable, together with interest at 5% per annum, on December 10, 2018. As of December 31, 2013 the
outstanding balance of this note receivable was $115,000. During 2014 the Company advanced to the Canadian partner an additional $40,000, bringing the total outstanding to $155,000. On October 20, 2014, the note receivable was cancelled and
repaid in full, including accrued interest of $6,424.
During the third quarter of 2014 one of the Companys clients signed a Note Receivable for
$75,000 as a payment on accounts receivable, with a maturity date of December 31, 2014. However, at December 31, 2014 management determined that collection was not likely, and recognized bad debt expense of $75,000 in connection with the
Note Receivable.
Periodically the Company assesses and reviews the Notes Receivable for collectability. As of December 31, 2013, the Companys
management considered all remaining accounts outstanding fully collectible.
NOTE 10 MARKETABLE SECURITIES
Marketable securities of the Company represent the shares received as a payment from clients for services provided.
|
|
|
|
|
|
|
|
|
Marketable securities |
|
Value as of December 31, 2014 |
|
|
Value as of December 31, 2013 |
|
Shares received as a payment from client |
|
$ |
|
|
|
$ |
184,800 |
|
Securities from MJ Holdings, Inc. |
|
|
94,776 |
|
|
|
|
|
Total marketable securities |
|
$ |
94,776 |
|
|
$ |
184,800 |
|
F-18
On September 5, 2014 the Company received as a deposit 7,000,000 restricted shares in a publicly traded
entity, currently called Endocan, as payment for $300,000 in accounts receivable billed to a customer. The restriction on the shares lapsed in 2014. The value of these unliquidated shares was held as collateral against the outstanding amounts owed
to the Company up to $300,000 (the value of receivable of the client) until such time that the shares are liquidated and only at the time that the cash proceeds are used to pay off the receivable will any excess cash received be returned to the
client in accordance with the contract. The fair value of the shares as of December 31, 2013 (with 12% restricted stock discount as of December 31, 2013) was $184,800. At December 31, 2014 the Company evaluated the shares for
impairment, and noted that Endocan is not currently making material information publicly available, is delinquent on their SEC filings, and is thinly traded on the OTC pink sheets. Furthermore, the last filed financial statements show minimal assets
and liabilities of over $1,000,000. Management concluded these factors were indications of impairment, and determined the shares were fully impaired, with the decline being other-than-temporary. As the shares were being held as a deposit against the
receivable balance, the fair value was also recognized as a customer deposit, and the impairment will therefore fully reduce the related customer deposit, and not be recognized as an impairment expense.
On May 19, 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. The Company will market MJ Holdings real estate financial products and offerings to its consulting clients and will direct all incoming real estate related opportunities to MJ Holdings. Under the
agreement, the Company will receive 50% of management fees and profits realized from the real estate opportunities it presents, in addition to warrants to purchase shares in MJ Holdings. The initial term of the agreement was six months which could
have been extended on a month to month basis, but the agreement was terminated at the end of the six month term. MJ Holdings, Inc. agreed to issue to the Company, for this six month term of the contract, 33,333 warrants to purchase common stock
on each months anniversary of the contract. As of December 31, 2014 the Company received six tranches of warrants for the services provided under the agreement. The following table represents the initial recognition value and subsequent
adjustment as of reporting date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
Initial Fair Value |
|
|
Fair Value at Conversion |
|
|
Gain or (Loss) |
|
|
Fair Value as of December 31, 2014 |
|
Warrant #1 |
|
$ |
95,866 |
|
|
$ |
(94,719 |
) |
|
$ |
(1,147 |
) |
|
$ |
|
|
Warrant #2 |
|
|
2,666 |
|
|
|
|
|
|
|
5,513 |
|
|
|
8,179 |
|
Warrant #3 |
|
|
53,867 |
|
|
|
|
|
|
|
(44,947 |
) |
|
|
8,920 |
|
Warrant #4 |
|
|
30,600 |
|
|
|
|
|
|
|
(20,282 |
) |
|
|
10,318 |
|
Warrant #5 |
|
|
7,133 |
|
|
|
|
|
|
|
12,920 |
|
|
|
20,053 |
|
Warrant #6 |
|
|
13,033 |
|
|
|
|
|
|
|
12,623 |
|
|
|
25,656 |
|
Total |
|
$ |
203,165 |
|
|
$ |
(94,719 |
) |
|
$ |
(35,320 |
) |
|
$ |
73,126 |
|
At initial recognition the value of warrants is recorded as Marketable securities and Revenue for
services provided. Subsequent to initial recognition all valuation adjustments are reflected through other comprehensive income (loss) as Unrealized gain or losses from marketable securities. In June 2014, Warrant #1 was converted to
10,825 shares of MJ Holdings common stock through the cashless exercise option. The fair value of the shares as of December 31, 2014 was $21,650, which represents a $73,069 unrealized loss on marketable securities. The Company uses the
published closing price of the stock to value the stock held by the Company.
The Company uses a Black-Scholes model to measure the value of the warrants.
The following assumptions were used by the Company for the Black-Scholes model valuation of the warrants as of their initial valuation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Black-Scholes Calculator Data |
|
Initial Valuation and Recognition |
|
|
|
#1 |
|
|
#2 |
|
|
#3 |
|
|
#4 |
|
|
#5 |
|
|
#6 |
|
Warrant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price, $ |
|
|
8.69 |
|
|
|
4.00 |
|
|
|
8.00 |
|
|
|
6.15 |
|
|
|
2.01 |
|
|
|
2.02 |
|
Exercise price, $ |
|
|
6.42 |
|
|
|
8.45 |
|
|
|
7.87 |
|
|
|
6.95 |
|
|
|
3.53 |
|
|
|
2.56 |
|
Time to maturity, Years |
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
1.0 |
|
|
|
1.0 |
|
Annual risk-free rate, % |
|
|
0.05 |
|
|
|
0.05 |
|
|
|
0.05 |
|
|
|
0.05 |
|
|
|
0.04 |
|
|
|
0.11 |
|
Annualized volatility, % |
|
|
70.0 |
|
|
|
70.0 |
|
|
|
70.0 |
|
|
|
70.0 |
|
|
|
70.0 |
|
|
|
70.0 |
|
Black-Scholes Value per warrant, $ |
|
|
2.876 |
|
|
|
0.080 |
|
|
|
1.616 |
|
|
|
0.918 |
|
|
|
0.214 |
|
|
|
0.391 |
|
Number of warrants/shares |
|
|
33,333 |
|
|
|
33,333 |
|
|
|
33,333 |
|
|
|
33,333 |
|
|
|
33,333 |
|
|
|
33,333 |
|
Total value of warrants/shares, $ |
|
|
95,866 |
|
|
|
2,666 |
|
|
|
53,867 |
|
|
|
30,600 |
|
|
|
7,133 |
|
|
|
13,033 |
|
F-19
The following data were used by the Company for the Black-Scholes model valuation of the warrants as of
December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Warrants |
|
As of December 31, 2014 |
|
|
|
#2 |
|
|
#3 |
|
|
#4 |
|
|
#5 |
|
|
#6 |
|
Warrant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price, $ |
|
|
2.00 |
|
|
|
2.00 |
|
|
|
2.00 |
|
|
|
2.00 |
|
|
|
2.00 |
|
Exercise price, $ |
|
|
8.45 |
|
|
|
7.87 |
|
|
|
6.95 |
|
|
|
3.53 |
|
|
|
2.56 |
|
Time to maturity, Years |
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.0 |
|
Annual risk-free rate, % |
|
|
0.22 |
|
|
|
0.22 |
|
|
|
0.22 |
|
|
|
0.22 |
|
|
|
0.22 |
|
Annualized volatility, % |
|
|
120.0 |
|
|
|
120.0 |
|
|
|
120.0 |
|
|
|
120.0 |
|
|
|
120.0 |
|
Black-Scholes Value per warrant, $ |
|
|
0.25 |
|
|
|
0.27 |
|
|
|
0.31 |
|
|
|
0.60 |
|
|
|
0.77 |
|
Number of warrants/shares |
|
|
33,333 |
|
|
|
33,333 |
|
|
|
33,333 |
|
|
|
33,333 |
|
|
|
33,333 |
|
Total value of warrants/shares, $ |
|
|
8,179 |
|
|
|
8,920 |
|
|
|
10,318 |
|
|
|
20,053 |
|
|
|
25,656 |
|
NOTE 11 CUSTOMER DEPOSITS
Advance payments from customers are recorded as customer deposits on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
Customer deposits |
|
December 31, 2014 |
|
|
December 31, 2013 |
|
Advance payments from customers |
|
$ |
1,450,770 |
|
|
$ |
710,225 |
|
Advance payments for vaporizers |
|
|
75,038 |
|
|
|
75,636 |
|
Total customer deposits |
|
$ |
1,525,808 |
|
|
$ |
785,861 |
|
NOTE 12 SHORT-TERM DEBT
On July 28, 2014 one of the Companys subsidiaries executed a promissory note for $249,000 for the purchase of real estate (also
see Note 7). The note matures on January 30, 2015 and bears 12.0% interest annually. The interest is payable monthly starting August 1, 2014 with a final, sixth payment on January 1, 2015. In the event of a default, as defined, the
interest rate increases to 18%, there is a one-time 5% late charge on the principal balance, and the note can be accelerated. Subsequent to December 31, 2014, the Company was in default of the repayment terms, and the note terms were modified.
(see Note 20).
The other portion of the notes payable balance represents the outstanding balance in the amount of $12,434 for product liability
insurance. The financing of product liability insurance bears 5.99% interest and is payable in monthly payments of $2,524 for nine months with the first payment due on September 5, 2014 and the last payment due on May 5, 2015.
The notes payable to related parties bear no interest.
The
December 31, 2013 balance of the $75,000 note payable to an unrelated third party was paid in full during 2014.
F-20
NOTE 13 CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY
On July 21, 2014, as amended on September 19, 2014 and October 20, 2014, the Company entered into a Securities Purchase
Agreement whereby the Company agreed to issue convertible debentures (July 2014 Purchase Agreement Debentures) in the aggregate principal amount of $3,500,000, in five tranches. The initial closing in the aggregate principal amount of
$1,000,000 occurred on July 21, 2014. The second closing in the amount of $1,000,000 occurred on August 26, 2014; the third of $500,000 on September 26, 2014; and the fourth of $250,000 on November 24, 2014. The fifth closing was
modified in January, 2015 (See Note 20). The July 2014 Purchase Agreement Debentures bear interest at the rate of 10% per year. The debt is due July 21, 2015, with repayment, including accrued principal and accrued interest, beginning
on the eleventh day of the fourth month after issuance and will continue on the eleventh day of each following 8 successive months thereafter.
Also on
September 19, 2014, as amended on October 20, 2014, the Company entered into a securities purchase agreement pursuant to which it agreed to issue convertible debentures (September 2014 Purchase Agreement Debentures)
(collectively the Notes) in the aggregate principal amount of $2,500,000, in two tranches. The initial closing in the principal amount of $1,000,000 occurred on September 19, 2014. The second closing, of $1,500,000, is to occur
within 2 days of the effective date of the registration statement filed by the Company for the resale of the shares of common stock issuable upon conversion of the September 2014 Purchase Agreement Debentures. The September 2014 Purchase Agreement
Debentures bear interest at the rate of 5% per year. The debt is due September 19, 2015, with repayment, including accrued principal and accrued interest, due in nine monthly installments, commencing the fourth month after issuance.
Both the July 2014 Purchase Agreement Debentures and September 2014 Purchase Agreement Debentures, share the following significant terms:
Conversion All amounts are convertible at any time, in whole or in part, at the option of the holders into shares of the Companys
common stock at a conversion price, or Fixed Conversion Price, which is subject to adjustment as described below.
The Notes are initially
convertible into shares of the Companys common stock at the initial Fixed Conversion Price of $11.75 per share. The Fixed Conversion Price is subject to adjustment for stock splits, combinations or similar events. If the Company makes any
subsequent equity sales (subject to certain exceptions), under which an effective price per share that is lower than the Fixed Conversion Price, then the conversion price will be reduced to equal such price. The July 2014 Securities Purchase
Agreement exempts any sales pursuant to the September 2014 Purchase Agreement Debentures from the July 2014 Purchase Agreement Debentures conversion price adjustments.
Beginning four months (as subsequently amended) after the initial closing, the Company will begin making amortization payments on the debt in
cash, prompting a 30% premium or, at their option and subject to certain conditions, in shares of common stock valued at 70% of the lowest volume weighted average price of the common stock for the 20 prior trading days. However, in the event the
registration statement filed by the Company in connection with the respective purchase agreements is not effective within 120 days of the initial closing date under the July 2014 Purchase Agreement and 120 days of the initial closing date under the
September 2014 Purchase Agreement, the July 2014 Purchase Agreement Debentures and the September 2014 Purchase Agreement Debentures, respectively, conversion rate will be, during the period commencing 120 days after the initial closing
date until the registration statement is effective, equal to 63% of the lowest volume weighted average price of the common stock for the 20 prior trading days. If the aforementioned registration statement is not effective within 160 days of the
initial closing date, each of the debentures conversion rate will be, during the period commencing 160 days after the initial closing date until the registration statement is effective, equal to 60% of the lowest volume weighted average price
of the common stock for the 20 prior trading days.
In connection with each of the purchase agreements, the Company entered into a registration rights
agreement with the respective investors, pursuant to which the Company agreed to file a registration statement for the resale of the shares of common stock issuable upon conversion of, or payable as principal and interest on, the respective
debentures, within 45 days of the initial closing date under each agreement, and to have such registration statements declared effective within 120 days of the initial closing dates of each purchase agreement. The registration statement was not
declared effective within 120 days, and the amortization payment conversion rate was adjusted accordingly.
F-21
The $3,750,000 million principal amount of the Notes were issued net of $275,000 debt discount. The conversion
feature of the notes meets the definition of a derivative under ASC 815 and due to the reset provision upon subsequent sales of securities at a price lower than the fixed conversion price, requires bifurcation and is accounted for as a derivative
liability. The derivative was initially recognized at its estimated fair value of $1.885 million and created a discount on the Notes that will be amortized over the life of the Notes using the effective interest rate method. The fair value of
the embedded derivative will be measured and recorded at fair value each subsequent reporting period and changes in fair value will be recognized in the statement of operations as a gain or loss on derivative. For the year ended December 31,
2014 the Company recognized a loss on the change in fair value of derivative liabilities of $1,805,990. See Note 2 Fair value measure for additional information on the fair value and gains or losses on the embedded derivative.
As a result of a new convertible debentures loan agreements entered into in January 2015 (Note 20), which include a conversion rate equal to the lower of
(a) $5.00 or (b) 51% of the lowest VWAP for the 20 consecutive Trading Days ending on the Trading Day that is immediately prior to the applicable Conversion Date, the reset provision terms of the July 2014 and September 2014 convertible
debentures were triggered and the original fixed conversion price were adjusted accordingly.
NOTE 14 PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other currents assets consisted of:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
Rent |
|
$ |
|
|
|
$ |
3,962 |
|
Directors & officers insurance |
|
|
31,491 |
|
|
|
|
|
Professional fees |
|
|
10,000 |
|
|
|
52,739 |
|
Other vendors |
|
|
24,729 |
|
|
|
32,540 |
|
Prepaid expenses and other current assets |
|
$ |
66,220 |
|
|
$ |
89,241 |
|
Deposits in escrow
Deposits in escrow consist of amounts paid to open escrow accounts for the purchase of multiple properties to be used to develop retail dispensary or product
cultivation facilities.
NOTE 15 RESTRICTED STOCK AND RESTRICTED STOCK UNITS (RSUs)
On July 23, 2014, in connection with the election of a new Chairman, President and CEO, the Company entered into a two year employment
contract with the new CEO. Under the employment contract, the CEO received an award of RSUs, to be issued within 90 days of the effective date of the Employment Agreement, under the Equity Incentive Plan adopted by the Company, in the amount
of the greater (by value) of 50,000 shares of common stock or $500,000 of common stock based on the volume weighted average price for the 30 day period prior to the date of the grant. In October the Company granted 50,000 RSUs in accordance with the
employee contract. The Company also agreed to make an equal stock award to the CEO on each anniversary date of the employment agreement. The RSUs vest immediately during each year of the employment contract. During the third quarter of
2014, 20,000 additional shares were approved to increase the CEOs first year RSU grant from 50,000 RSUs to 70,000 RSUs (see Note 16 for a more detailed discussion of the additional grant). As of December 31, 2014, the fair
value of the grant was approximately $970,000 which is being amortized over the CEOs one year service period.
On August 21, 2014, the
Compensation Committee of the Board of Directors granted Restricted Stock and RSUs to two Board members who were elected to the Board on April 9, 2014. Under the award, the Directors received 346,875 shares of restricted stock and 121,875
RSUs under which the holders have the right to receive 121,875 shares of common stock. The grant date fair value of the restricted stock was $3,607,500 and the grant date fair
F-22
value of the RSUs was $1,267,500. The restricted Stock and RSUs vest over the remaining first year of the new Board members term ending on March 31, 2015. The fair value of
the grant is being amortized over the period from the date of grant, August 21, 2014 to the end of the first year of the Board members term, March 31, 2015. Under the Board members contracts, additional grants will be made for
the second year of the contract.
During October 2014 the Compensation Committee of the Board of Directors granted 19,452 RSUs to a new Board member
who was elected to the Board on October 22, 2014. The Board members contract calls for grants of 100,000 RSUs for each succeeding year of service beginning on April 1, 2015, which vest quarterly.
A summary of the activity related to restricted stock and RSUs for the year ended December 31, 2014 is presented below:
|
|
|
|
|
|
|
|
|
Restricted stock |
|
Total shares |
|
|
Grant date fair value |
|
Restricted stock non-vested at January 1, 2014 |
|
|
|
|
|
$ |
|
|
Restricted stock granted |
|
|
346,875 |
|
|
|
10.40 |
|
Restricted stock vested |
|
|
(178,125 |
) |
|
|
10.40 |
|
Restricted stock forfeited |
|
|
|
|
|
|
|
|
Restricted stock non-vested at December 31, 2014 |
|
|
168,750 |
|
|
$ |
10.40 |
|
|
|
|
|
|
|
|
|
|
Restricted stock units (RSUs) |
|
Total shares |
|
|
Grant date fair value |
|
Restricted stock non-vested at January 1, 2014 |
|
|
|
|
|
$ |
|
|
Restricted stock granted |
|
|
422,980 |
|
|
|
10.84 |
|
Restricted stock vested |
|
|
(223,396 |
) |
|
|
11.19 |
|
Restricted stock forfeited |
|
|
|
|
|
|
|
|
Restricted stock non-vested at December 31, 2014 |
|
|
199,584 |
|
|
$ |
10.70 |
|
A summary of the expense related to restricted stock and RSUs for the year ended December 31, 2014 is presented below:
|
|
|
|
|
Summary of the expense related to Restricted Stock and RSUs |
|
Year ended December 31, 2014 |
|
Restricted Stock |
|
$ |
663,262 |
|
RSUs |
|
|
3,752,537 |
|
|
|
$ |
4,415,799 |
|
There were not any restricted stock or RSU activity in the year ended December 31, 2013.
NOTE 16 RELATED PARTY TRANSACTIONS
The aggregate amount of outstanding payables to related parties as of December 31, 2014 and 2013 was $678,877 and $111,794,
respectively.
During 2012, the Company issued notes payable to a shareholder in the aggregate amount of $125,000 in exchange for the shareholders
original investment in PVM common stock. The notes bear no interest and are due on demand. As of December 31, 2012, the outstanding balance on the notes was $94,000 and as of December 31, 2013, the notes were paid in full.
On January 1, 2012, the Company issued a note payable to PVMI which is 100% owned by the founder of the Company in the amount of $1,000,000 along with
the issuance of 4,000,000 shares of the Companys common stock for 100% of PVMI Named Subsidiaries and for the exclusive use of patents related to PVMIs dispensing systems.
F-23
The note was secured with 1,000,000 shares of the Companys common stock. The note was due on demand and bore interest at 10% of the outstanding balance beginning January 1, 2013.
The balance at December 31, 2012 was $775,038 and as of December 31, 2013, the note was paid in full.
The Company utilizes Kind Clinics, LLC,
which is 100% owned by the former Chief Executive Officer of the Company, Dr, Bruce Bedrick, for management advisory and consulting services. During the year ended December 31, 2012, the Company incurred $113,613 in fees for these
services.
For the year ended December 31, 2012 the Company utilized AVT, Inc., for the procurement, manufacture and assembly of its dispensary
units. During 2012, the Company incurred approximately $480,000 and $510,000 in manufacturing costs. In addition, the Companys existing inventory of dispensary units was held at AVT, Inc.s manufacturing facility in Corona, California on
behalf of the Company. The Company believes that its transactions with AVT, Inc. during 2012 were completed on an arms-length basis.
The Company utilizes
Vincent Chase Inc., which is a related party and 100% owned by a co-founder of the Company for management advisory and consulting services. During the years ended December 31, 2014, 2013 and 2012, the Company incurred fees of $168,625,
$262,500 and $230,706, respectively, for these services. The contract for the aforementioned services was terminated on December 8, 2014.
During
2013, the Company issued two promissory notes payable to Vincent Chase Inc., on September 20, 2013, in the amount of $150,000 and on October 28, 2013 in the amount of $100,000. At December 31, 2013, the outstanding amount for the
combined notes was $111,794. These notes were repaid in full during 2014.
During the year ended December 31, 2014, the Company issued four notes
payable to PVM International Inc. (PVMI), a related party which is 100% owned by a co-founder of the Company, in the amounts of $250,000, $100,000, $500,000, and $375,000. These notes were subsequently partially repaid leaving
$388,477 outstanding as of December 31, 2014. On October 17, 2014 the Company entered into an assignment agreement with PVMI through which PVMI assigned all rights and titles for any opened escrow on real estate purchase agreements in San
Diego in exchange for a related party notes payable from the Company. As of the signing date the agreement was valued at $190,400 which represented the value of escrow deposits paid by PVMI for eight different real estate agreements.
On July 21, 2014, the Company also paid $75,000 to PVMI as a partial payment for advances made by PVMI for escrow deposits used to secure properties for
possible license acquisition in the San Diego market area.
On August 15, 2014, the Company issued a note payable to Vincent Chase, Inc., in the
amount of $100,000.
The notes bear no interest and are payable on demand.
The Company utilized Dr. Bruce Consulting which is a related party and 100% owned by one of Companys major shareholders and former Chief Executive
Officer for management consulting and advisory service. During the year ended December 31, 2014, the Company incurred expenses in the amount of $43,750 for consulting and advisory services to Dr. Bruce Consulting. For the year ending
December 31, 2013, the Company paid salary to Dr. Bruce Bedrick, the former Chief Executive Officer in the gross amount of $133,991.
During the
application process for dispensaries and cultivation centers in Illinois, which took place in September, 2014, Dr. Bruce Bedrick, a major shareholder, provided funding to the applicant entity in the amount of $500,000. This amount was returned
by the applicant entity to Dr. Bruce Bedrick by September 30, 2014.
During the third quarter of 2014, the CEO of the Company and the Chairman
of the Board, Mr. Guy Marsala received 20,000 shares from the founder and major shareholder of the Company out of his personal holdings to compensate for his superior performance. On October 24, 2014 the Compensation Committee of the Board
of Directors recommended that shares be returned to the founder and issued by the Company as part of the yearly RSU grant. In November 2014, Mr. Marsala returned 20,000 shares to founder and major shareholder and 20,000 additional shares were
approved to increase Mr. Marsalas first year RSU grant from 50,000 RSUs to 70,000 RSUs.
F-24
Related parties contributed $810,000 and $561,000 in 2013 and 2012, respectively, to provide funding for growth
for the Company. During the first quarter of 2014, the Company completed a contract with a related party and, a shareholder in the amount of $400,000 which was recognized as a Customer deposit in the Companys balance sheet. In addition, the
same related party paid the Company $150,000 for an amount owed to the Company by an unrelated third party to facilitate development at an existing dispensary where the unrelated party purchased an interest during the period. In addition on
March 28, 2014 the Company entered into an agreement with a related party for territory rights in Colorado for $500,000. The agreement has a term of five years and in accordance with the Companys revenue policy, the revenue will be
recognized over the five year term.
During the third quarter of 2014, the Company created the following affiliated entities in connection with license
applications: A. Hanna Growers, Inc., Herbal Choice of Illinois, Inc., Natures Treatment of Illinois, Inc., Green Blossom of Illinois, Inc., Midwestern Compassionate Care of Illinois, Inc., Midwestern Wellness Group of Illinois,
Inc., Green Blossom, Inc., Natures Treatment, Inc. and Herbal Choice, Inc.
NOTE 17 STOCKHOLDERS EQUITY
Preferred Stock
In November 2011, the
Company issued 6,000,000 shares of $0.001 par value Series A convertible preferred stock to the founder and a shareholder of the Company. This preferred stock can be converted to common stock at a ratio of 1 (one) share of Series A Preferred
Stock to 5 (five) shares of common stock. In October 2012, 3,000,000 shares of Series A Preferred Stock were returned to the Company by the shareholder and reissued to the founder. In January 2013, the founder returned to the Company the
3,000,000 shares of Series A Preferred Stock and they were immediately cancelled. As of September 30, 2014, there are 3,000,000 shares of Series A Preferred Stock outstanding.
The Series A Preferred Stock has special voting rights when voting as a class with the Common Stock as follows: (i) the holders of Series A
Preferred Stock shall have such number of votes as is determined by multiplying (a) the number of shares of Series A Preferred Stock held by such holder, (b) the number of issued and outstanding shares of the Corporations Series
A Preferred Stock and Common Stock (collectively, the Common Stock) on a Fully-Diluted Basis (as hereinafter defined), as of the record date for the vote, or, if no such record date is established, as of the date such vote is taken or
any written consent of stockholders is solicited, and (c) 0.00000025; and (ii) the holders of Common Stock shall have one vote per share of Common Stock held as of such date. Fully-Diluted
Basis mean that the total number of issued and outstanding shares of the Companys Common Stock shall be calculated to include (a) the shares of Common Stock issuable upon exercise and/or conversion of all of the following securities
(collectively, Common Stock Equivalents): all outstanding (a) securities convertible into or exchangeable for Common Stock, whether or not then convertible or exchangeable (collectively, Convertible Securities),
(b) subscriptions, rights, options and warrants to purchase shares of Common Stock, whether or not then exercisable (collectively, Options), and (c) securities convertible into or exchangeable or exercisable for Options or
Convertible Securities and any such underlying Options and/or Convertible Securities.
Common Stock
On June 5, 2014 the Company entered into two separate sales agreements with an affiliate company owned by the co-founder of the Company. The first was for
the sale of all of the Companys Bio-Tech rights and claims, as consideration for which the Company received 30,000 shares of the Companys common stock with a fair value of $604,800, as based on the market price of the common stock. The
second was for the sale of all the MedVend rights and claims in exchange for 30,000 shares of the Companys common stock, with a fair value of $604,800 as based on the market price of the common stock. These 60,000 shares of common stock
received back by the Company are treated as treasury stock and can be reissued.
During January, 2014, the Company issued 485,830 shares of its common
stock at the price of $5.00 per share, resulting in net cash proceeds of $2,427,859.
F-25
On December 18, 2013 the Company declared a two-for-one (2:1) forward stock split on its outstanding
common stock, effectuated in the form of a common stock dividend. The stock dividend, aggregating in 14,762,875 common shares, was issued on and announced by the Financial Industry Regulatory Authority (FINRA) on February 3,
2014. Accordingly, the Companys consolidated financial statements have been retroactively stated for all periods presented to reflect the 2:1 forward stock split.
On September 8, 2014 the Company issued 93,751 shares of common stock to two board members from a total grant of 346,875 awarded by the Compensation
Committee to board members. On October 7, 2014 additional 84,374 shares were issued to the same board members.
During the fourth quarter of 2014 the
Company issued 52,892 shares of its common stock, valued at $316,065 as based on the market price of the common stock, as a payment of certain accounts payables.
During 2013, the Company issued 2,115,100 shares of common stock at an average price $2.23, resulting in net cash proceeds of $4,486,541. In
addition, during 2013, the Company had non-cash additions to equity from the issuances of warrants and common stock in connection with the VII acquisition of $1,285,553.
During 2012, the Company sold approximately 2,463,000 shares of common stock for proceeds of approximately $858,000. The balance of $153,250 for the remaining
74,100 shares is to be received in 2013.
On January 1, 2012, the Company issued 4,000,000 shares of the Companys common stock as
consideration for 100% of certain named subsidiaries PVMI, a related party, and for the exclusive use of patents related to PVMIs dispensing systems. (see Note 16)
NOTE 18 INCOME TAXES
The Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides that
deferred tax assets and liabilities are recorded based on the differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences.
Deferred income taxes are provided for temporary differences arising from using the straight-line depreciation method for financial statement purposes and
accelerated methods of depreciation for income taxes, including differences between book and tax for amortizing organization expenses. In addition, deferred income taxes are recognized for certain expense accruals, allowances and net operating
loss carry forwards available to offset future taxable income, net of valuation allowances for potential expiration and other contingencies that could impact the Companys ability to recognize the benefit.
The Company is required to file federal and state income tax returns. Various taxing authorities may periodically audit the Companys income tax
returns. These audits would include questions regarding the Companys tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions.
The Company is in the process of an examination by the Internal Revenue Service of the year ended December 31, 2011.
Management has performed its evaluation of all other income tax positions taken on all open income tax returns and has determined that there were no positions
taken that do not meet the more likely than not standard. Accordingly, there are no provisions for income taxes, penalties or interest receivable or payable relating to uncertain income tax provisions in the accompanying
consolidated financial statements.
From time to time, the Company may be subject to interest and penalties assessed by various taxing
authorities. These amounts have historically been insignificant and are classified as other expenses when they occur.
F-26
Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense
for tax and financial reporting purposes. Significant components of the Companys deferred tax assets and liabilities are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Customer deposits |
|
$ |
295,000 |
|
|
$ |
293,000 |
|
Deferred revenue |
|
|
35,000 |
|
|
|
|
|
Share based compensation |
|
|
1,760,000 |
|
|
|
|
|
NOL carryforward |
|
|
5,400,000 |
|
|
|
2,377,000 |
|
Total deferred tax asset |
|
|
7,490,000 |
|
|
|
2,670,000 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
285,000 |
|
Intangible asset amortization |
|
|
20,000 |
|
|
|
|
|
|
|
|
20,000 |
|
|
|
285,000 |
|
|
|
|
7,470,000 |
|
|
|
2,385,000 |
|
Less: Valuation allowance |
|
|
(7,470,000 |
) |
|
|
(2,385,000 |
) |
|
|
$ |
|
|
|
$ |
|
|
A valuation allowance has been recorded against the realizability of the net deferred tax asset such that no value is recorded
for the asset in the accompanying consolidated financial statements. The valuation allowance increased $5,085,000 between the year ended December 31, 2014 and 2013.
The Company has net operating loss carryforwards available for federal and state tax purposes of approximately $13,510,000, at December 31, 2014, which
expire in varying amounts through 2034.
For the years ended December 31, 2014, 2013 and 2012, a reconciliation of the statutory rate and effective
rate for the provisions for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Federal Tax statutory rate |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
|
34.00 |
% |
State tax statutory rate |
|
|
6.00 |
% |
|
|
8.84 |
% |
|
|
8.84 |
% |
Permanent differences |
|
|
(6.72 |
)% |
|
|
|
% |
|
|
|
|
Valuation allowance |
|
|
(33.28 |
)% |
|
|
(42.84 |
)% |
|
|
(42.84 |
)% |
Effective rate |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
NOTE 19 COMMITMENTS AND CONTINGENCIES
The Company leases property for its day to day operations and has recently begun leasing facilities for possible retail dispensary locations
and cultivation locations as part of the process of applying for retail dispensary and cultivation licenses.
Office Leases
On August 1, 2011, the Company entered into a lease agreement for office space located in West Hollywood, California through June 30, 2017 at a
monthly rate of $14,397. Starting July 1, 2014, the monthly rent increased by 3% to $14,828 per month.
In addition, the Company leased office
facilities located at West Hills, California and Scottsdale, Arizona from unrelated third parties at a monthly rate of $1,300 and $1,420. The West Hills lease was on a month to month basis. The Arizona lease was a non-auto renewing lease with the
most current agreement covering the period from May 1, 2014 to October 31, 2014. The Arizona lease term expired on October 31, 2014. The Company terminated the West Hills and Scottsdale leases effective November 1, 2014.
F-27
On December 17, 2013 the Companys subsidiary Vaporfection International Inc. entered into a 1 year
non-cancelable office lease in Deerfield Beach, Florida. The lease started on January 1, 2014 at a monthly rate of $1,981. As of December 31, 2014 this lease was terminated.
The Company rents virtual offices/meeting spaces in Seattle and Illinois on a month to month basis for an aggregate of approximately $705 per month. The
payment is charged to rent expense as incurred.
Total rent expense under operating leases for the year ended December 31, 2014, 2013 and 2012, was $
204,726, $139,330 and $124,727, respectively
Retail/Cultivation facility leases
The Companys business model of acquiring retail dispensary and cultivation licenses has made it important to acquire real estate either through lease
arrangements or through purchase agreements in order to secure a possible license. On May 8, 2014, the Company entered into a lease agreement for five years with a monthly payment of $7,400 in order to apply for a license and build-out of a
location for a client. Also, on July 22, 2014 one of the Companys subsidiaries Medbox Property Investments, Inc., entered into a new lease for a facility which will be used in the application process for both a dispensary and cultivation
facility. The Company paid an initial security deposit of $30,000 and the lease is payable monthly at a rate of $20,000 per month. The lease has a five year term, but is contingent upon license approval which allows for early termination of the
lease after January 1, 2015 if the license is not granted. Due to the fact that the Company was unsuccessful in obtaining the license related to the mentioned facility the lease agreement was terminated in November 2014.
The following table is a summary of our material contractual lease commitments as of December 31, 2014:
|
|
|
|
|
|
|
|
|
Year Ending |
|
Office Rent |
|
|
Retail/Cultivation Facility Lease |
|
2015 |
|
$ |
177,936 |
|
|
$ |
88,800 |
|
2016 |
|
|
177,936 |
|
|
|
88,800 |
|
2017 |
|
|
88,968 |
|
|
|
88,800 |
|
2018 |
|
|
|
|
|
|
88,800 |
|
2019 |
|
|
|
|
|
|
29,600 |
|
Total |
|
$ |
444,840 |
|
|
$ |
384,800 |
|
Real Estate Commitments
As part of the changes in the Companys business model, the Company entered in various real estate purchase agreements at various times in order to allow
the filing of retail dispensary or cultivation facility licenses in certain states and localities. These purchase agreements generally provide for a period of due diligence and a termination clause in the event that the Company is unable to obtain a
license for its client. The agreements generally also provide for some monthly payment from escrow in order to compensate the real estate owner for the passage of time until the sale transaction is complete. Most of these payment releases from
escrow are nonrefundable but applicable towards the purchase price if the Company decides to proceed with the purchase. Subject to approval of the license for a dispensary or cultivation center, the Company intends to close on the real estate where
purchase agreements have been signed, or to seek partners to replace the Company on each property purchased.
During the year ended December 31,
2014, the Company paid $930,000, either by deposit into fifteen escrow accounts or direct payments to sellers, to secure the purchase and/or extend the closing dates on real estate to be used for future retail/cultivation facilities with an
aggregate purchase price of $26,830,000. During the same period, the Company allowed the escrows to expire on three agreements with an aggregate purchase price of $3,195,000 and forfeited $140,000 in earnest money due to unfavorable terms
demanded by the sellers to extend the escrow and closing date.
The Company was not successful in obtaining licenses for another ten locations with an
aggregated sales price of $21,515,000 and deposits in escrow totaling $685,000. As a result all escrow accounts were closed with $235,757 forfeited and $419,167 refunded to the Company in 2014, with an additional $30,076 of escrow deposits to be
refunded in January 2015.
F-28
The remaining two real estate purchase agreements have closing dates of March 31, 2015.
During July, 2014, one of the real estate properties on which the Company opened escrow was foreclosed upon and the agreement was canceled and the escrow in
the amount of $10,000 was reimbursed to the Company on July 28, 2014.
During the second quarter of 2014 one of the Companys subsidiaries
entered into a real estate purchase agreement in Washington state. The purchase transaction was closed during the third quarter for a total purchase price of $399,594 partially financed by a promissory note for $249,000.
A summary of open real estate purchase transactions as of December 31, 2014 is represented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property |
|
Purchase price |
|
|
Closing date |
|
|
Net escrow balance |
|
|
Date escrow opened |
|
|
Additional rents/fees paid to extend closing date |
|
1 |
|
$ |
820,000 |
|
|
|
03/31/2015 |
|
|
|
55,000 |
|
|
|
06/28/2014 |
|
|
$ |
9,808 |
|
2 |
|
|
1,300,000 |
|
|
|
03/30/2015 |
|
|
|
50,000 |
|
|
|
10/17/2014 |
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
265,400 |
|
|
|
07/21/2014 |
|
|
|
|
|
Escrow deposits to be refunded |
|
|
|
|
|
|
|
|
|
|
30,076 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,120,000 |
|
|
|
|
|
|
$ |
400,476 |
|
|
|
|
|
|
$ |
9,808 |
|
Line 3 represents the advance on July 21, 2014 of $75,000 to PVMI, a related party, as a partial payment for advances
made by PVMI for escrow deposits used to secure properties for possible license acquisition in the San Diego market area and $190,400 from the assignment agreement.
On October 17, 2014, the Company entered into an assignment agreement with PVMI through which PVMI assigned all rights and titles for any opened escrow
on real estate purchase agreements in San Diego in exchange for a related party notes payable from the Company. As of the signing date the agreement was valued at $190,400 which represented the value of escrow deposits paid by PVMI for eight
different real estate agreements. Also on the date of the assignment agreement the Company paid $50,000 into an escrow account (line item 2 from the table above) for PVMI. The escrow was related to one of the eight real estate purchase agreements
that were part of the assignment.
Board of Directors and Officers
On October 13, 2014, Mr. Vincent Mehdizadeh resigned as an officer of the Company. Mr. Mehdizadeh continued to serve as a consultant to the
Company. In his new role, Mr. Mehdizadeh provided consulting services under the title of Founder and Senior Advisor. In connection therewith, on October 13, 2014, the Company entered into a consulting agreement with
Mr. Mehdizadeh, pursuant to which the Company agreed to pay Mr. Mehdizadeh a monthly fee of $25,000 for consulting services to be performed by Mr. Mehdizadeh. The monthly consulting fee was reduced to $12,500 per month if
Mr. Mehdizadeh is engaged in trading any of the Companys securities at any time within the preceding 30 day period. The consulting agreement had a two-year term., and a total of $12,375 was paid to Mr. Mehdizadeh under this
agreement. Mr. Mehdizadehs consulting agreement was terminated on December 8, 2014.
On October 16, 2014, Thomas Iwanski resigned as
Chief Financial Officer, and C. Douglas (Doug) Mitchell was elected as Chief Financial Officer of the Company and Corporate Secretary.
Mr. Iwanski agreed to serve as a consultant to the Company for a transition period. The Company agreed to pay Mr. Iwanski $10,000 for services
provided during the month of October 2014 and $200 per hour for consulting services rendered after October 31, 2014. The Company also agreed to issue Mr. Iwanski 100,000 Restricted Stock Units (RSUs) for his service
to the Company.
F-29
In connection with Mr. Doug Mitchells election as Chief Financial Officer, on October 16, 2014,
the Company entered into an employment agreement with Mr. Mitchell (the Employment Agreement). Pursuant to the Employment Agreement, the Company agreed to engage Mr. Mitchell, and Mr. Mitchell agreed to serve as the
Companys Chief Financial Officer, for a two-year term, which term will automatically be extended for successive additional one-year terms, unless either party provides written notice to the other 90 days prior to the expiration of the initial
term or any successive term, that the Employment Agreement will not be renewed. The Company agreed to pay Mr. Mitchell a salary of $190,000 per year and to pay Mr. Mitchell $2,500 per month for living expenses in the West Hollywood,
California area. Mr. Mitchell will also be entitled to an annual bonus of up to 35% of his salary, payable of up to 50% in cash and the balance payable in equity of the Company, subject to performance criteria and objectives to be established
by mutual agreement of the CEO of the Company and Mr. Mitchell within 90 days of the effective date of the Employment Agreement, and thereafter from time to time by the CEO in consultation with Mr. Mitchell. Mr. Mitchell will also be
entitled to an award of restricted stock units, to be issued within 90 days of the effective date of the Employment Agreement, under the Companys Equity Incentive Plan, in the amount of 7,500 shares of common stock each calendar quarter
Mr. Mitchell serves as Chief Financial Officer of the Company.
The Company may terminate the Employment Agreement with or without Cause (as defined
in the Employment Agreement) upon written notice to Mr. Mitchell. In the event the Company terminates the Employment Agreement without Cause, Mr. Mitchell terminates the Employment Agreement with Good Reason (as defined in the Employment
Agreement), or the Employment Agreement is not renewed as a result of notice to Mr. Mitchell provided 90 days prior to expiration of the initial or a renewal term, Mr. Mitchell will be entitled to payment of one-half his annual salary.
Termination by the Company within 365 days of a Change of Control (as defined in the Employment Agreement) in the absence of Cause will conclusively be deemed a termination by the Company without Cause.
On October 22, 2014, Jennifer S. Love was elected to the board of directors of the Company. Ms. Love was also elected to serve as Chairperson of the
Audit Committee. Jennifer Love was granted 19,452 RSUs for 2014. Her contract calls for grants of 100,000 RSUs for each succeeding year of service beginning on April 1, 2015.
Contingencies SEC investigation
In October 2014
the Board of Directors of the Company appointed a special board committee (the Special Committee) to investigate a federal grand jury subpoena pertaining to the Companys financial reporting which was served upon the Companys
then independent public accounting firm, as well as certain alleged wrongdoing raised by a former employee of the Company. Thereafter the Company was served with two subpoenas from the Securities and Exchange Commission in early November 2014. In
connection with its investigation of these matters, the Special Committee in conjunction with the Audit Committee initiated an internal review by management and by an outside professional advisor of certain prior period financial reporting of the
Company. As a result of this review, the Company determined there were errors in properly recording the revenue on certain customer contracts, capital contributions from related parties and improper capitalization of inventory costs. As a result,
the Company restated the Companys consolidated financial statements for the years ended December 31, 2012 and 2013 reported in the Companys General Form of Registration of Securities on Form 10/A and the condensed consolidated
financial statements as of and for the quarterly periods ended March 31, June 30, and September 30, 2014 and 2013.
The SEC is trying to
determine whether there have been any violations of the Federal Securities Laws. It said further that the fact of the investigation does not mean that it has concluded that the Company or anyone else has broken the law or that it has a negative
opinion of any person, entity or security. The Company is cooperating with the SEC in the investigation.
Registration Statement
The registration rights agreement entered into in connection with the July and September 2014 purchase agreements required the Company to have a Form S-1
declared effective on or before November 18, 2014. Due to the restatement discussed above, the registration statement has been delayed. As a result of the withdraw of the Form S-1, in January 2015 the Company agreed with the lenders to adjust
the conversion rate for the amortization payments and reduced the volume weighted average price for 20 days prior to the issuance to 51%. See Note 20 Subsequent Events for purchase agreement modifications finalized in January 2015.
F-30
Litigation
On May 22, 2013, Medbox initiated litigation in the United States District Court in the District of Arizona against three shareholders of MedVend Holdings
LLC (Medvend) in connection with a contemplated transaction pursuant to which Medbox entered into for the purchase of an approximate 50% ownership stake in MedVend for $4,100,000. The Company paid an advance of $300,000 upon execution of
the contract, and another $300,000 was disbursed as an additional investment to MedVend. The lawsuit alleges fraud and related claims arising out of the contemplated transaction during the quarter ended March 31, 2013. The litigation is
pending and Medbox has sought cancellation of the agreement due to a fraudulent sale of the stock because the selling shareholders lacked power or authority to sell their ownership stake in MedVend, and their actions were a breach of representations
made by them in the agreement. On November 19, 2013 the litigation was transferred to United States District Court for the Eastern District of Michigan. MedVend recently joined the suit pursuant to a consolidation order executed by a new
judge assigned to the matter. In the litigation, the selling shareholder defendants seek alternatively to have the transaction performed, or to have it unwound and seek damages. Medbox has denied liability with respect to any and all such
counterclaims. A new litigation schedule was recently issued setting trial for September 2015. On June 5, 2014, the Company entered into a purchase and sale agreement (the Medvend PSA) with PVM International, Inc. (PVMI)
concerning this matter. Pursuant to the Medvend PSA, the Company assigned to PVMI the Companys rights and claims attributable to or controlled by the Company against those three certain selling stockholders of Medvend, known as Kaplan,
Tartaglia and Kovan, (the Medvend Rights and Claims) in exchange for the return by PVMI to the Company of 30,000 shares of the Companys common stock. PVMI is owned by Vincent Mehdizadeh, the Companys largest stockholder.
The Company will have the right, under the Medvend PSA, to purchase from PVMI, at any time, the Medvend Rights and Claims, for the consideration provided by PVMI, plus the sum of any of PVMIs reasonable expenditures incurred in pursuit of the
Medvend Rights and Claims. The Court has not yet ruled on the substitution of PVMI as plaintiff in this matter. If necessary, the Company plans to vigorously defend against this matter. The case is in the discovery stage, and, at this time, the
Company cannot determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can they reasonably estimate a range of potential loss, should the outcome be unfavorable.
In January 2015, three separate class action suits were been filed against the Company, certain past and present members of management, and the Companys
Board of Directors. These suits allege that the Company violated federal securities laws by allegedly making materially false and misleading statements regarding the Companys financial results. The Company has only been served with a complaint
on one of these cases, Crystal v. Medbox, Inc., Mehdizadeh, Bedrick, Iwanski, Marasala, and Mitchell. On February 12, 2015, the Court issued an Order Extending Time to Respond to Complaint until such time any related actions are
consolidated, a lead plaintiff and lead counsel are appointed by the Court, the lead plaintiff serves an operative complaint, and certain other events. The Company intends to vigorously defend itself against these suits. Due to the early
stages of the suits, the Company is unable to determine whether the likelihood of an unfavorable outcome of these suits is probable or remote, nor can it reasonably estimate a range of potential loss, including coverage by the Companys
insurance carrier, should the outcome be unfavorable.
On February 20, 2015, a derivative claim was filed, entitled Glitner v. Medbox, wherein the
Company was named as both a nominal plaintiff and a defendant and all members of the Companys Board of Directors were named as individual defendants. The lawsuit seeks damages for breach of fiduciary duties and abuse of control.
The Company intends to vigorously defend itself against these suits. Due to the early stages of the suits, the Company is unable to determine whether the
likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
The Company has accrued an additional $500,000 in legal fees to represent amounts they are expecting to pay in excess of the defense costs paid by their
insurance Company.
The Company also is the plaintiff in a legal action with a customer to collect past due balances in the amount of approximately
$550,000 from the customer. The customer filed a cross complaint for breach
F-31
of contract and breach of implied covenant of good faith and fair dealing in which the customer claims damages of not less than $500,000. The Company does not believe the cross complaint is
meritorious and intends to continue to pursue the amounts due from the customer, and to vigorously defend itself against the claim. At this time, the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is
probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
NOTE 20 SUBSEQUENT EVENTS
Litigation
On or about January 9,
2015, PVM International, Inc., Vincent Chase, Inc., and Vincent Mehdizadeh, in his individual capacity, (collectively the VM Parties) jointly executed that certain Action by Written Consent of the Stockholders of Medbox, Inc.
(the Written Consent) seeking to appoint four successor directors the Companys board of directors (the Board) as of January 29, 2015.
On January 16, 2015, the Company filed a complaint in Los Angeles Superior Court disputing the legal effectiveness of the Written Consent (the
Complaint).
On January 21, 2015, the Company, P. Vincent Mehdizadeh, PVM International, Inc., (PVM), and Vincent Chase,
Incorporated, (VC) entered into an agreement pursuant to which (1) the VM Parties acknowledged that the Written Consent was cancelled and withdrawn, (2) the parties agreed to enter into a Voting Agreement to vote in favor of
and to not remove directors Ned L. Siegel (Siegel), Mitch Lowe (Lowe), Jennifer Love (Love) and Guy Marsala (Marsala) for a period of 12 months (the Voting Agreement), (3) the Company
would dismiss the Complaint with prejudice, (4) the Board would meet with Mr. Mehdizadeh on specified dates during the term of the agreement to discuss and to hear matters of interest or concern of Mr. Mehdizadeh, as a stockholder of
the Company (the Agreement). Each of the directors of the Company are also parties to the Voting Agreement.
Pursuant to the terms of the
Agreement, the VM Parties may on or before January 25, 2015, present a term sheet to the Company from an accredited investor to invest in not less than $1,000,000 in restricted common stock of the Company on terms as reasonably agreed to by the
Board (the Private Placement). In addition, either as part of the closing of the Private Placement or otherwise at the request of Mr. Mehdizadeh, Mr. Mehdizadeh shall have the right to appoint a person nominated by
Mr. Mehdizadeh with industry experience and reasonably acceptable to the Board as the fifth director of the Company.
Amendment and Modification
of the July 2014 Financing
On July 21, 2014, Medbox, Inc. (the Company) entered into a securities purchase agreement (the
Purchase Agreement) with accredited investors (the Investors) pursuant to which the Company agreed to sell, and the Investors agreed to purchase, convertible debentures (the Debentures) in the aggregate principal
amount of $3,000,000, in three tranches, each in the amount of $1,000,000. The initial closing under the Purchase Agreement, for Debentures in the aggregate principal amount of $1,000,000 occurred on July 21, 2014. See the Companys
Current Report on Form 8-K filed with the Securities and Exchange Commission (the SEC) on July 25, 2014. The Investors subscribed for an additional $1,000,000 on August 25, 2014, an additional $500,000 on
September 24, 2014, and an additional $250,000 on November 24, 2014 (collectively, with the July 21 Debenture, the Original Debentures).
On January 30, 2015, the Company and the Investors entered into an Amendment, Modification and Supplement to the Purchase Agreement (the Purchase
Agreement Amendment) pursuant to which the Investors will purchase an additional $1,800,000 in seven Modified Closings: (1) $200,000 was funded at the Closing of the Purchase Agreement Amendment; (2) $100,000 will be funded within
thirty (30) days of the Closing; (3) $100,000 will be funded within two days following the filing of a registration statement with the SEC to register the shares underlying the Debentures (the Registration Statement) and of the
Company having filed with the SEC a restatement of the Companys consolidated financial statements as described in the Companys Current Report on Form 8-K filed with the SEC on December 22,
2014; (4) $100,000 will be funded within two days of receipt of the first comment letter from the SEC with regard to the Registration Statement; (5) $500,000 will be funded within two days of the date that the Registration Statement is
declared effective by the SEC; (6) $500,000 will be funded within five days of the date that the Registration Statement is declared effective by the SEC; and (7) $100,000 will be funded within each of 90,
F-32
120, 150, and 180 days from the Closing of the Purchase Agreement Amendment. The Parties entered into a Modified Debenture Agreement for the $200,000 that was funded at the Closing and agreed to
use the same form of Modified Debenture for each of the other foregoing Modified Closings (collectively, the Modified Debentures). The parties also entered into a warrant instrument granting the Investor the right to purchase shares of
common stock of the Company equal to the principal amount of the applicable Modified Debenture divided by a price (the Reference Price) equal to 120% of the last reported closing price of the Common stock on the applicable closing date
of the Modified Debenture, at an exercise price equal to the Reference Price, with a three year term. The Company also entered into a Debenture Amendment Agreement and an Amended and Restated Debenture for the amount outstanding under the original
Debenture, (1) reflecting the terms set forth above, (2) providing for accrued and unpaid interest to be payable upon conversion or maturity rather than on specified payment dates and (3) amending the conversion price of the Debenture
to be equal to the lower of $5.00 or 51% of the lowest volume weighted average price for the 20 consecutive trading days prior to the applicable conversion date. In connection with the Purchase Agreement Amendment, the Company is also required to
open a new dispensary in Portland, Oregon during the first calendar quarter of 2015, as a condition to closing the fourth, fifth and sixth Modified Closings set forth above. With respect to each of the Modified Closings, the Company will pay a fee
to the Investors in the amount equal to 5% of the Subscription Amount of the applicable Modified Closing. The Company must also file the Registration Statement by April 30, 2015 (as amended), and it must be declared effective by June 15,
2015 in order to avoid default and acceleration under the Amended and Restated Debenture.
On March 13, 2015 the Company and the Investors entered
into a further amendment (March 2015 Amendment) to the July 21, 2014, 10% Convertible debentures, as amended January 30, 2015, whereby the fixed conversion rate was lowered to $1.83, and the anti-dilution reset provision on all
previous debentures was triggered. In addition, the March 2015 Amendment modified the filling date requirement for the Registration Statement to be April 30, 2015.
Amendment and Modification of September 2014 Financing
On September 19, 2014, the Company entered into a securities purchase agreement (the Purchase Agreement) with an accredited investor (the
Investor) pursuant to which the Company agreed to sell, and the Investor agreed to purchase, convertible debentures (the Debentures) in the aggregate principal amount of $2,500,000, in two tranches, the first in the amount of
$1,000,000, and the second in the amount of $1,500,000. The initial closing under the Purchase Agreement, for a Debenture in the principal amount of $1,000,000, occurred on September 19, 2014. See the Companys Current Report on Form 8-K
filed with the SEC on September 24, 2014.
On January 28, 2015, the Company and the Investors entered into an Amendment, Modification and
Supplement to the September 19, 2014 Purchase Agreement (Note (the Purchase Agreement Amendment) pursuant to which the remaining $1,500,000 will be funded in four Modified Closings: (1) $100,000 was funded at the Closing of the
Purchase Agreement Amendment; (2) $100,000 will be funded within two days following the filing of a registration statement with the SEC to register the shares underlying the Debentures (the Registration Statement) and of the Company
having filed with the SEC a restatement of the Companys consolidated financial statements as described in the Companys Current Report on Form 8-K filed with the SEC on December 22, 2014; (3) $100,000 will be funded within two
days of receipt of the first comment letter from the SEC with regard to the Registration Statement; and (4) $1,200,000 will be funded within two days of the date that the Registration Statement is declared effective by the SEC. The Parties
entered into a Modified Debenture Agreement for the $100,000 that was funded at the Closing and agreed to use the same form of Modified Debenture for each of the other foregoing Modified Closings (collectively, the Modified Debentures).
The parties also entered into a warrant instrument granting the Investor the right to purchase shares of common stock of the Company equal to the principal amount of the applicable Modified Debenture divided by a price (the Reference
Price) equal to 120% of the last reported closing price of the Common stock on the applicable closing date of the Modified Debenture, at an exercise price equal to the Reference Price, with a three year term. The Company also entered into a
Debenture Amendment Agreement and an Amended and Restated Debenture for the amount outstanding under the original Debenture, (1) reflecting the terms set forth above, (2) providing for accrued and unpaid interest to be payable upon
conversion or maturity rather than on specified payment dates and (3) amending the conversion price of the Debenture to be equal to the lower of $5.00 or 51% of the lowest volume weighted average price for the 20 consecutive trading days prior
to the applicable conversion date. In connection with the Purchase Agreement Amendment, the Company is also required to open a new dispensary in Portland, Oregon during the first calendar quarter of 2015, as a condition to closing the second, third
and fourth Modified Closings set forth above. With respect to each of the Modified Closings, the
F-33
Company will pay a fee to the Investors in the amount equal to 5% of the Subscription Amount of the applicable Modified Closing. The Company must also file the Registration Statement by
April 30, 2015 (as amended), and it must be declared effective by June 15, 2015 in order to avoid default and acceleration under the Amended and Restated Debenture.
In connection with the Closing of the Purchase Agreement Amendments for the July 2014 Financing and the September 2014 Financing, Mr. Ned L. Siegel,
the chairman of the Companys Board, entered into two separate subordinated convertible promissory notes with the Company on January 5, 2015 and January 30, 2015, respectively, each in the principal amount of $50,000 and having a
three year term and an interest rate of 8% per annum (the Siegel Notes). In addition, Mr. Mitchell Lowe, a member of the Board, entered into one subordinated convertible promissory note with the Company on February 2, 2015
in the principal amount of $50,000 and having a three year term and an interest rate of 8% per annum (the Lowe Note).
Mr. Siegel
and Mr. Lowe are entitled to receive a warrant, exercisable for a period of five (5) years from the date of grant, to purchase an amount of Company Common Stock equal to 50% of the principal sum under each of the Siegel Notes and the Lowe
Note, respectively, at an exercise price equal to 200% of the applicable Conversion Price (the Warrants). The Conversion Price of the Warrants is either (i) 85% of the volume-weighted average price of the Common Stock for the thirty
trading days prior to notice of Conversion or (ii) 85% of the per share price of the Companys next common stock offering of not less than $2 million. Mr. Siegel and Mr. Lowe also received registration rights for the shares
underlying the Siegel Notes and the Lowe Notes, respectively.
Notes payable
During February 2015 the Company entered into a modified loan agreement with the holder of a $249,000 note payable when they were unable to repay the note on
its maturity date. Under the revised loan agreement, the Company agreed with the lender to an extension of the maturity date to July 1, 2015, and increased the interest rate to 18% plus a late charge in the amount of 5% of the principal balance
of the note.
Shares issued
On January 15, 2015
the Company issued 206,480 shares to satisfy the conversion of remaining warrants related to the settlement with various previous owners of Vapor Systems International, LLC.
Share purchase and transfer
On March 5, 2015
Mr. Mehdizadeh announced that an agreement has been executed with Lizada Capital LLC, an investor in the field of legal cannabis products, that would result in the transfer of the majority of Mr. Mehdizadehs shares of the Company to
that firm. Under the agreement, Lizada would purchase 22,160,000 shares, representing 2,000,000 preferred shares and 12,160,000 common shares of Medbox for consideration of approximately $15 million. A total of $5 million of the funds have been
designated for purchase of restricted shares of the Companys common stock, directly from the Company, at $2 per share in the name of Mr. Mehdizadehs holding company, PVM International, Inc.
The transaction has 6 separate closings over the course of 18 months, with each of the first five closings being in the amount of $2 million dollars to be
paid to Mehdizadehs holding company and Medbox equally, or $1 million to each party, to satisfy the $5 million dollar direct investment component of the transaction. The 6th and final closing has a performance contingency and is in the
amount of $5 million dollars paid directly to Mehdizadehs holding company.
A representative of Lizada will join Medboxs Board of Directors
within the next 90 days, after the first closing is set to occur.
F-34
MEDBOX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 (unaudited) |
|
|
December 31, 2014 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
346,761 |
|
|
$ |
101,182 |
|
Marketable securities |
|
|
94,817 |
|
|
|
94,776 |
|
Accounts receivable |
|
|
|
|
|
|
8,774 |
|
Inventory |
|
|
187,844 |
|
|
|
961,236 |
|
Deposits in escrow |
|
|
15,000 |
|
|
|
400,476 |
|
Prepaid insurance |
|
|
240,428 |
|
|
|
31,491 |
|
Prepaid expenses and other current assets |
|
|
172,039 |
|
|
|
34,729 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,056,889 |
|
|
|
1,632,664 |
|
Property and equipment, net of accumulated depreciation of $59,210 and $50,192, respectively |
|
|
573,470 |
|
|
|
158,318 |
|
Land |
|
|
4,945,000 |
|
|
|
|
|
Assets held for resale |
|
|
|
|
|
|
399,594 |
|
Construction in progress |
|
|
68,959 |
|
|
|
|
|
Intangible assets, net of accumulated amortization of $123,567 and $83,500 respectively |
|
|
669,086 |
|
|
|
709,153 |
|
Note receivable, net of allowance of $350,000 |
|
|
|
|
|
|
|
|
Goodwill |
|
|
1,260,037 |
|
|
|
1,260,037 |
|
Deferred Costs |
|
|
299,018 |
|
|
|
|
|
Deposits and other assets |
|
|
140,212 |
|
|
|
104,726 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,012,671 |
|
|
$ |
4,264,492 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payables |
|
$ |
3,609,486 |
|
|
$ |
1,713,627 |
|
Accrued interest payable |
|
|
324,330 |
|
|
|
372,937 |
|
Accrued expenses |
|
|
122,663 |
|
|
|
610,497 |
|
Accrued expenses directors |
|
|
185,498 |
|
|
|
|
|
Accrued settlement and severance expenses |
|
|
912,065 |
|
|
|
|
|
Deferred revenue, current |
|
|
219,487 |
|
|
|
204,091 |
|
Notes payable |
|
|
431,415 |
|
|
|
261,434 |
|
Related party notes payable |
|
|
|
|
|
|
678,877 |
|
Convertible notes payable, net of discount of $266,497 and $1,225,573, respectively |
|
|
4,993,891 |
|
|
|
2,524,427 |
|
Derivative Liability |
|
|
4,885,286 |
|
|
|
3,691,853 |
|
Customer deposits |
|
|
1,057,340 |
|
|
|
1,525,808 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
16,741,461 |
|
|
|
11,583,551 |
|
Notes Payable, less current portion |
|
|
4,326,484 |
|
|
|
|
|
Deferred revenue, less current portion |
|
|
378,041 |
|
|
|
568,515 |
|
Deferred tax liability |
|
|
160,000 |
|
|
|
160,000 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
21,605,986 |
|
|
|
12,312,066 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9) |
|
|
|
|
|
|
|
|
Stockholders Deficit |
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value: 10,000,000 authorized; 1,000,000 and 3,000,000 issued and outstanding as of September 30, 2015
and December 31, 2014, respectively |
|
|
1,000 |
|
|
|
3,000 |
|
Common stock, $0.001 par value: 100,000,000 authorized, 99,250,518 and 30,496,909 issued and outstanding as of September 30,
2015 and December 31, 2014, respectively |
|
|
99,250 |
|
|
|
30,497 |
|
Additional paid-in capital |
|
|
35,823,112 |
|
|
|
15,315,110 |
|
Treasury stock |
|
|
(1,209,600 |
) |
|
|
(1,209,600 |
) |
Accumulated deficit |
|
|
(47,198,689 |
) |
|
|
(22,078,193 |
) |
Accumulated other comprehensive loss |
|
|
(108,388 |
) |
|
|
(108,388 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders deficit |
|
|
(12,593,315 |
) |
|
|
(8,047,574 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit |
|
$ |
9,012,671 |
|
|
$ |
4,264,492 |
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-35
MEDBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 3 months ended September 30 |
|
|
For the 9 months ended September 30 |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Revenue |
|
$ |
288,961 |
|
|
$ |
147,884 |
|
|
$ |
390,156 |
|
|
$ |
534,082 |
|
Revenue, related party |
|
|
25,192 |
|
|
|
25,192 |
|
|
|
74,754 |
|
|
|
50,110 |
|
Less: allowances and refunds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
|
314,153 |
|
|
|
173,076 |
|
|
|
464,910 |
|
|
|
524,192 |
|
Cost of revenues |
|
|
656,383 |
|
|
|
1,813,562 |
|
|
|
1,837,711 |
|
|
|
3,492,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss |
|
|
(342,230 |
) |
|
|
(1,640,486 |
) |
|
|
(1,372,801 |
) |
|
|
(2,967,913 |
) |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
103,765 |
|
|
|
319,204 |
|
|
|
442,261 |
|
|
|
749,212 |
|
Research and development |
|
|
|
|
|
|
61,623 |
|
|
|
|
|
|
|
136,656 |
|
General and administrative |
|
|
3,506,029 |
|
|
|
1,984,303 |
|
|
|
12,627,644 |
|
|
|
3,183,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,609,794 |
|
|
|
2,365,130 |
|
|
|
13,069,905 |
|
|
|
4,069,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(3,952,024 |
) |
|
|
(4,005,616 |
) |
|
|
(14,442,706 |
) |
|
|
(7,037,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
(195,426 |
) |
|
|
(123,007 |
) |
|
|
(289,226 |
) |
|
|
(71,343 |
) |
Financing Costs |
|
|
(522,379 |
) |
|
|
|
|
|
|
(2,822,011 |
) |
|
|
|
|
Change in fair value of derivative liabilities |
|
|
(2,544,014 |
) |
|
|
548,315 |
|
|
|
509,057 |
|
|
|
548,315 |
|
Amortization of debt discount |
|
|
(2,071,898 |
) |
|
|
(216,224 |
) |
|
|
(8,121,537 |
) |
|
|
(216,224 |
) |
Other income (expense) |
|
|
(6,208 |
) |
|
|
|
|
|
|
45,927 |
|
|
|
(26,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(5,339,925 |
) |
|
|
209,084 |
|
|
|
(10,677,790 |
) |
|
|
234,237 |
|
Loss before provision for income taxes |
|
|
(9,291,949 |
) |
|
|
(3,796,532 |
) |
|
|
(25,120,496 |
) |
|
|
(6,802,926 |
) |
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(9,291,949 |
) |
|
$ |
(3,796,532 |
) |
|
$ |
(25,120,496 |
) |
|
$ |
(6,802,926 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share attributable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.13 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
|
$ |
(0.22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.13 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.54 |
) |
|
$ |
(0.22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
73,524,951 |
|
|
|
30,371,299 |
|
|
|
46,945,806 |
|
|
|
30,472,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
73,524,951 |
|
|
|
30,371,299 |
|
|
|
46,945,806 |
|
|
|
30,472,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(9,291,949 |
) |
|
|
(3,796,532 |
) |
|
|
(25,120,496 |
) |
|
|
(6,802,926 |
) |
Unrealized loss from marketable securities |
|
|
|
|
|
|
(158,507 |
) |
|
|
|
|
|
|
(158,507 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(9,291,949 |
) |
|
$ |
(3,955,039 |
) |
|
$ |
(25,120,496 |
) |
|
$ |
(6,961,433 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-36
MEDBOX, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Additional Paid-In Capital |
|
|
Common Stock Subscribed |
|
|
Accumulated Deficit |
|
|
Accumulated Other Comprehensive Loss |
|
|
Total Stockholders Deficit |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
|
|
|
|
Balances at December 31, 2014 |
|
|
3,000,000 |
|
|
$ |
3,000 |
|
|
|
30,496,909 |
|
|
$ |
30,497 |
|
|
|
(60,000 |
) |
|
$ |
(1,209,600 |
) |
|
$ |
15,315,110 |
|
|
$ |
|
|
|
$ |
(22,078,193 |
) |
|
$ |
(108,388 |
) |
|
$ |
(8,047,574 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
147,145 |
|
|
$ |
147 |
|
|
|
|
|
|
|
|
|
|
|
5,331,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,331,382 |
|
Exercise of warrants |
|
|
|
|
|
|
|
|
|
|
206,480 |
|
|
|
206 |
|
|
|
|
|
|
|
|
|
|
|
278,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278,951 |
|
Issuance of shares to settle accounts payable |
|
|
|
|
|
|
|
|
|
|
1,633,047 |
|
|
|
1,633 |
|
|
|
|
|
|
|
|
|
|
|
363,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
364,728 |
|
Conversions of convertible notes payable |
|
|
|
|
|
|
|
|
|
|
67,475,105 |
|
|
|
67,475 |
|
|
|
|
|
|
|
|
|
|
|
10,090,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,157,662 |
|
Issuance of warrants in connection with convertible notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,304,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,304,522 |
|
Exercise of warrants in connection with convertible notes payable |
|
|
|
|
|
|
|
|
|
|
2,291,832 |
|
|
|
2,292 |
|
|
|
|
|
|
|
|
|
|
|
135,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,510 |
|
Share cancelation |
|
|
(2,000,000 |
) |
|
|
(2,000 |
) |
|
|
(3,000,000 |
) |
|
|
(3,000 |
) |
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss from marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,120,496 |
) |
|
|
|
|
|
|
(25,120,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2015 |
|
|
1,000,000 |
|
|
$ |
1,000 |
|
|
|
99,250,518 |
|
|
$ |
99,250 |
|
|
|
(60,000 |
) |
|
$ |
(1,209,600 |
) |
|
$ |
35,823,112 |
|
|
$ |
|
|
|
$ |
(47,198,689 |
) |
|
$ |
(108,388 |
) |
|
$ |
(12,593,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-37
MEDBOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the 9 months ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(25,120,496 |
) |
|
$ |
(6,802,926 |
) |
Adjustments to reconcile net loss to net cash: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
90,315 |
|
|
|
59,364 |
|
Provisions and allowances |
|
|
|
|
|
|
60,000 |
|
Gain on sale of investments and property and equipment |
|
|
|
|
|
|
(9,600 |
) |
Charges from escrow deposits |
|
|
280,400 |
|
|
|
|
|
Inventory valuation reserve |
|
|
497,439 |
|
|
|
|
|
Market value of securities received for services |
|
|
|
|
|
|
(190,132 |
) |
Change in fair value of derivative liability |
|
|
(509,057 |
) |
|
|
(548,315 |
) |
Amortization of debt discount |
|
|
8,121,537 |
|
|
|
216,224 |
|
Financing costs |
|
|
2,822,011 |
|
|
|
|
|
Stock based compensation |
|
|
5,331,382 |
|
|
|
1,031,640 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
8,774 |
|
|
|
213,424 |
|
Inventories |
|
|
275,953 |
|
|
|
110,788 |
|
Deposits in escrow |
|
|
55,076 |
|
|
|
|
|
Prepaid insurance |
|
|
(208,937 |
) |
|
|
|
|
Prepaid expenses and other assets |
|
|
(172,796 |
) |
|
|
(896,954 |
) |
Deferred costs |
|
|
(299,018 |
) |
|
|
|
|
Accounts payables |
|
|
2,521,976 |
|
|
|
907,684 |
|
Accrued interest payable |
|
|
214,886 |
|
|
|
|
|
Accrued expenses |
|
|
(487,834 |
) |
|
|
|
|
Accrued expenses directors |
|
|
185,498 |
|
|
|
|
|
Accrued settlement and severance expenses |
|
|
912,065 |
|
|
|
|
|
Customer deposits |
|
|
(468,468 |
) |
|
|
807,347 |
|
Deferred revenue |
|
|
(175,078 |
) |
|
|
390,311 |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(6,124,372 |
) |
|
|
(4,651,145 |
) |
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Issuance of note receivable |
|
|
|
|
|
|
(115,000 |
) |
Purchase of property and equipment |
|
|
(14,795 |
) |
|
|
(32,982 |
) |
Purchase of real estate |
|
|
(500,000 |
) |
|
|
(399,594 |
) |
Purchase of intangible assets |
|
|
|
|
|
|
(166,183 |
) |
Construction in Progress |
|
|
(68,959 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(583,754 |
) |
|
|
(713,759 |
) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Payments on notes payable |
|
|
(3,535 |
) |
|
|
(75,000 |
) |
Related party notes payable |
|
|
(624,888 |
) |
|
|
379,880 |
|
Proceeds from issuance of notes payable |
|
|
|
|
|
|
299,605 |
|
Proceeds from issuance of common stock |
|
|
|
|
|
|
2,442,859 |
|
Proceeds from issuance of convertible notes payable, net fees of approximately $352,000 |
|
|
7,432,128 |
|
|
|
3,500,000 |
|
Proceeds from issuance of convertible notes payable from related parties |
|
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
6,953,705 |
|
|
|
6,547,344 |
|
Net decrease in cash |
|
|
245,579 |
|
|
|
1,182,440 |
|
Cash and cash equivalents, beginning of period |
|
|
101,182 |
|
|
|
168,003 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
346,761 |
|
|
$ |
1,350,443 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,151 |
|
|
$ |
37,078 |
|
|
|
|
|
|
|
|
|
|
Cash paid for income tax |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Common stock issued upon debt conversion |
|
$ |
6,261,474 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for accounts payable |
|
$ |
364,728 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Purchase of land with notes payable |
|
$ |
5,000,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-38
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BUSINESS ORGANIZATION, NATURE OF OPERATIONS
Medbox, Inc, which is incorporated in the state of Nevada (the Company), provides specialized consulting services to the
marijuana industry and sells associated patented products, and medical vaporization devices. The Company works with clients who seek to enter the medical and cultivation marijuana markets in those states where approved. Medbox offers turnkey
solutions that assist with licensing and compliance, site selection, design and permitting, safety and security, along with full build-out and operational oversight. The Companys consulting solutions and technology create structure and process
for clients and their respective businesses in this rapidly emerging sector. In addition, through its wholly owned subsidiary, Vaporfection International, Inc. (VII), the Company sells a line of vaporizer and accessory products online
and through distribution partners. The Company is headquartered in Los Angeles, California.
The Company holds the license to operate a dispensary in
Portland, Oregon, and a master lease on the property in which the dispensary is located. The Company entered into an Operating Agreement with an unrelated party (the Operator) in which the Operator will manage and operate the Dispensary.
Per the terms of the Agreement, the Dispensary is under the exclusive supervision and control of Operator, which shall be responsible for the proper and efficient operation of the Dispensary. The term of the Agreement includes an initial
term, which is five years, and a renewal term for an additional five years. The renewal term is at the discretion of the Operator.
The procurement fee
for the dispensary was $400,000 (initially classified in Deferred Revenue), of which $50,000 was paid upon execution and delivery of the Agreement, and the remaining $350,000 is to be paid monthly in the amount of gross receipts less payroll and
costs of inventories. If the procurement fees are not paid within six months, the payment terms become a minimum monthly payment of $5,000. As of the date of this report, there have been no amounts available under the above calculation to make
payments towards the procurement fees.
The remaining $350,000 is evidenced by a Note Receivable to the Company. As of June 30, 2015 the Company
determined it was not assured of the timing of the collectability of the Note Receivable and therefore has set up an allowance in the amount of $350,000 for the Note Receivable, and has reduced the Deferred Revenue to $50,000.
After the Procurement Fee is paid in full, it is the parties plan that ownership of the Dispensary (through a new merged corporation) will be
apportioned 51% to Operator and 49% to Medbox. The Agreement also includes an annual Licensor Fee of 5% of the annual Gross Revenues, which will begin after the Procurement Fees have been paid in full.
The Company has determined that they do not hold the controlling financial interest in the Dispensary and are not the primary beneficiary, and therefore will
not consolidate the Dispensary in their financial statements.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The
consolidated financial statements include the accounts of Medbox, Inc. and its wholly owned subsidiaries:
|
|
|
Prescription Vending Machines, Inc., a California corporation, d/b/a Medicine Dispensing Systems in the State of California (MDS), which distributes our Medbox product and provides related consulting
services described further below. |
|
|
|
Vaporfection International, Inc., a Florida corporation through which we distribute our medical vaporizing products and accessories. |
F-39
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
|
|
|
Medbox Property Investments, Inc., a California corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers. |
|
|
|
MJ Property Investments, Inc., a Washington corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers in the state of Washington. |
|
|
|
Medbox Management Services, Inc., a California corporation specializing in providing management oversight and compliance services to state-licensed dispensaries for cultivation, dispensing, and marijuana
infused products (MIPS). |
|
|
|
EWSD I, LLC, an Arizona corporation that owns property in Colorado. |
All intercompany transactions, amounts
and balances have been eliminated.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
(U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed consolidated financial statements as
well as the reported expenses during the reporting periods. The Companys significant estimates and assumptions include the valuation of the Companys common stock used in the valuation of goodwill, accounts receivable and note receivable
collectability, inventory, advances on investments, the valuation of restricted stock and warrants received from customers, the amortization and recoverability of capitalized patent costs and useful lives of long-lived assets, the derivative
liability, and income tax expense. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. Although the Company believes that its estimates and assumptions are reasonable, they are
based upon information available at the time the estimates and assumptions were made. Actual results could differ from these estimates.
Basis of
Presentation
The accompanying unaudited interim financial statements and related notes have been prepared in accordance with U.S. GAAP for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission for Interim Reporting. Accordingly, they do not include all of the information and footnotes required by
U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, considered necessary for a fair presentation
of the results for the interim periods presented. The results for the three and nine months ended September 30, 2015 are not necessarily indicative of results to be expected for a full year, any other interim periods or any future year or
period.
The accompanying unaudited interim financial statements and the information included under the heading Managements Discussion and
Analysis or Plan of Operation should be read in conjunction with our companys audited financial statements and related notes included in our companys Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on
March 26, 2015.
The condensed consolidated balance sheet data as of December 31, 2014 was derived from audited consolidated financial
statements.
The Company has performed a review of all subsequent events through the date the unaudited interim financial statements were issued, and has
determined that no additional disclosures are necessary.
F-40
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Concentrations of Credit Risk
The Company maintains cash balances at several financial institutions in California, Illinois, and Florida. Accounts at each institution are insured by
the Federal Deposit Insurance Corporation up to $250,000. At September 30, 2015 and December 31, 2014, the Companys uninsured balances totaled $22,504 and $0, respectively. The Company has not experienced any losses in such
accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible.
Advertising and Marketing Costs
Advertising and
marketing costs are expensed as incurred. The Company incurred advertising and marketing costs of approximately $0 and $319,000 for the three months ended September 30, 2015 and 2014, respectively and approximately $0 and $749,000 for the nine
months ended September 30, 2015 and 2014, respectively.
Fair Value of Financial Instruments
Pursuant to ASC No. 825, Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its
balance sheets. The carrying value of cash, accounts receivable, other receivables, inventory, accounts payable and accrued expenses and notes payable, related party notes payable, customer deposits, provision for customer refunds and short term
loans payable approximate their fair value due to the short period to maturity of these instruments. The Companys marketable securities and customer deposits require fair value measurement on a recurring basis as the Company has received
warrants for service provided to unrelated third party. The securities received as a payment for services provided will be exposed to gains or losses following their initial evaluation as of the date the revenue was earned.
Warrants and other financial assets received as a payment for the services provided are recorded as Marketable securities under the current assets
if they are expected to be realized within 12 months. The Company uses the Black-Scholes model to measure the value of the warrants. At each reporting date the Company will reevaluate the value of marketable securities and record any changes in
value to other comprehensive income (loss) under Unrealized gain or losses from marketable securities.
Embedded derivative The
Companys convertible notes payable include embedded features that require bifurcation and are accounted for as a separate embedded derivative (see Note 5). The Company has estimated the fair market value of the embedded derivative of the Notes
based on a weighted probability model. The key valuation assumptions used consist of the price of the Companys stock, a risk free interest rate based on the average yield of a one year Treasury note and expected volatility of the
Companys common stock all as of the measurement dates, and various estimated reset exercise prices allocated by probability. The Company considers these inputs Level 3 assumptions.
A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
|
|
|
Level 1 |
|
Quoted prices in active markets for identical assets or liabilities. |
|
|
Level 2 |
|
Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or
indirectly. |
|
|
Level 3 |
|
Significant unobservable inputs that cannot be corroborated by market data. |
F-41
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The assets or liabilitys fair value measurement within the fair value hierarchy is based upon the
lowest level of any input that is significant to the fair value measurement. The following table provides a summary of the liabilities that are measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) |
|
|
Quoted Prices for Similar Assets or Liabilities in Active Markets (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
September 30, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
$ |
94,817 |
|
|
$ |
21,650 |
|
|
$ |
|
|
|
$ |
73,167 |
|
Derivative liability |
|
|
4,885,286 |
|
|
|
|
|
|
|
|
|
|
|
4,885,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,980,103 |
|
|
$ |
21,650 |
|
|
$ |
|
|
|
$ |
4,958,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth a summary of the changes in the fair value of the Companys Level 3 financial liabilities
that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
For the nine months ended September 30, 2015 |
|
|
|
Total |
|
Balance at January 1, 2015 |
|
$ |
3,691,853 |
|
Additions |
|
|
5,531,201 |
|
Reclassified to equity upon conversion |
|
|
(3,828,711 |
) |
Change in fair value of conversion feature |
|
|
(509,057 |
) |
|
|
|
|
|
Ending balance |
|
$ |
4,885,286 |
|
|
|
|
|
|
Revenue Recognition
We
enter into transactions with clients who require our expertise and are interested in being granted the right to have us engage exclusively with them in certain territories (which we describe as territory rights) to obtain the necessary licenses to
operate a dispensary or cultivation center for the location, and to consult in daily operations of the dispensary or cultivation center.
Terms for each
deal are varied and the sales arrangements typically include the delivery of our dispensing technology and dispensary location build-out and/or consultation on the location, licensing, build out and operation of a cultivation center. Medbox
machines retail for approximately $50,000 for each machine set (including the POS system), and normally our contracts include the sale of the dispensary units within the scope of options to be provided that might also include location build out
costs. Currently, our standard contracts have a five year term, call for an upfront, non-refundable consulting fee, and contain options including acquiring a Medbox dispensary machine and having the Company perform the buildouts for the location, at
set prices. The Company has determined these optional purchases each constitute a separate purchasing decision, and therefore are considered a separate arrangement for revenue recognition purposes. Revenue on each of these options are evaluated for
recognition when and if the customer decides to enter into the arrangement.
F-42
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Based on these contracts, and other auxiliary agreements, our current revenue model consists of the following
income streams:
Consulting fee revenues and build-outs
Consulting fee revenues is a consistent component of our current and anticipated future revenues and is negotiated at the time we enter into a contract.
Consulting revenue consists of providing ongoing consulting services over the life of the contract, to the established business in the areas of regulatory compliance, security, operations and other matters to operate the dispensary. The majority of
the consulting fees arise from the upfront, non-refundable consulting fee in our standard contract, and is recognized using the straight line method over the life of the contract. Consulting fee revenue is only recognized when the following four
criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales price is fixed and determinable and 4) collectability is reasonably assured.
Revenue for the build-outs of the dispensary or cultivation center, if the customer chooses to have it performed by the Company, is recognized after issuance
of a certificate of occupancy for the newly completed facility. This consists of a complete interior build-out of the retail store front including necessary construction (not to include installation of plumbing, electrical, HVAC systems and
masonry), furniture fixtures and security system.
Due to the uncertainties inherent in the emerging industry, the Company deferred recognition of revenue
for sale of completed dispensaries with licenses until the issuance of a certificate of occupancy by the municipality. The certificate of occupancy is the final approval to open a dispensary in the customers community, at which time all
criteria for revenue recognition, including delivery and acceptance, has been met. Additionally, at the time of the issuance of the certificate of occupancy, under the contract terms, all payments owed by the customer have been received by the
Company. Similarly, recognition of revenue for sale of completed cultivation center is deferred until all licensing and permitting is completed and approved.
Unbilled costs and associated fees related to the build-outs are recorded in inventory and are subject to valuation testing at each quarter end for net
realizable value (lower of cost or market) and collectability.
Other revenue includes sales of territory, location, and management rights
The Company at times enters into specific contracts to assign exclusive location and management rights, for a dispensary, that the Company has been granted
through a license approved by local authorities. These rights are transferred under a management rights agreement to an operator for retail, dispensary, or cultivation centers. The Company also has one agreement with a related party in which they
granted the related party the exclusive rights to a certain territory.
Other revenue is only recognized when the following four criteria are met: 1)
persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales price is fixed and determinable and 4) collectability is reasonably assured. In the sale of the territory rights to the related party,
the revenue is being recognized over the term of the agreement.
Revenues on VII product sales. Our VII subsidiary sells table top vaporizer
machines and accessories. Vaporizer sales are recognized as the product is shipped unless otherwise agreed with the customer.
Revenue from referral
fees. The Company had an agreement, which expired in November 2014, for referral services to explore matching its clients with a real estate financing partner to facilitate property purchases and subsequent leasebacks to clients. Referral fee
revenue was recognized over the life of the agreement.
F-43
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Cost of Revenue
Cost of revenue consists primarily of expenses associated with the delivery and distribution of our products and services. These include expenses related to
the manufacture of our dispensary units, construction expense related to the customer dispensary, site selection and establishment of licensing requirements, and consulting expense for the continued management of the dispensary unit build out,
server and security equipment, rent expense, energy and bandwidth costs, and support and maintenance costs prior to when the client moves in. We only begin capitalizing costs when we have obtained a license and a site for operation of a customer
dispensary or cultivation center. The previously capitalized costs are charged to cost of revenue in the same period that the associated revenue is earned. In the case where it is determined that previously inventoried costs are in excess of the
projected net realizable value of the sale of the licenses then the excess cost above net realizable value is written off to cost of revenues. In addition, cost of revenue related to our vaporizer line of products consists of direct procurement cost
of the products along with costs associated with order fulfilment, shipping, inventory storage and inventory management costs.
Inventory
Inventory is stated at the lower of cost or market value. Cost is determined on a cost basis that approximates the first-in, first-out (FIFO) method.
Work in process and related capitalized costs includes costs to build out a dispensary in Portland Oregon that opened in the second quarter of 2015. Costs
include tenant improvements to the facility, furniture, fixtures and Medbox dispensary units to be used by the licensed operator. The costs related to the Portland dispensary have been classified in deferred costs until the related revenue is
recognized.
Basic and Fully Diluted Net Income/Loss Per Share
Basic net income/loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per share includes the effects of any outstanding options, warrants and other potentially dilutive securities. The Company did not consider any potential common shares in the computation of diluted
loss per share for the three and nine months ending September 30, 2015 and 2014, due to the net loss, as they would have an anti-dilutive effect on EPS.
As of September 30, 2014, the Company had 3,000,000 shares of Series A preferred stock outstanding with par value of $0.001 that could have been
converted into 15,000,000 shares of the Companys common stock. On August 24, 2015, 2 million shares of Series A preferred stock was cancelled, leaving 1 million shares outstanding at September 30, 2015 .
Additionally the Company has approximately 14,084,000 warrants to purchase common stock outstanding as of September 30, 2015. The Company also has approximately $4,994,000 in convertible debentures outstanding at September 30, 2015, whose
underlying shares were not included that are convertible at the holders option at a conversion price of the lower of $0.75 or 51% of the VWAP over the last 40 days prior to conversion (subject to reset upon a future dilutive financing).
Income Taxes
The Company accounts for income taxes under
the asset and liability method in accordance with ASC No. 740. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax
returns. Under this method, deferred tax
F-44
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if
it is more likely than not that the Company will not realize tax assets through future operations.
In addition, the Companys management performs an
evaluation of all uncertain income tax positions taken or expected to be taken in the course of preparing the Companys income tax returns to determine whether the income tax positions meet a more likely than not standard of being
sustained under examination by the applicable taxing authorizes. This evaluation is required to be performed for all open tax years, as defined by the various statutes of limitations, for federal and state purposes. An IRS audit is still open
on the year ended December 31, 2011, in which the Company received a notice of deficiency for the amount of approximately $60,000. The Company is in discussions with the IRS to set up a payment plan for the amount owed.
Commitments and Contingencies
Certain conditions may
exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Companys management and its legal counsel
assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such
proceedings, the Companys legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then
the estimated liability would be accrued in the Companys financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Going Concern
The accompanying unaudited interim
financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company has an accumulated deficit of approximately $47,199,000 as of
September 30, 2015. During the nine months ended September 30, 2015, the Company had a net loss of approximately $25,120,000, negative cash flow from operations of approximately $6,124,000 and negative working capital of approximately
$15,685,000. The Company will need to raise capital in order to fund its operations.
These factors, among others, raise substantial doubt about the
Companys ability to continue as a going concern. The ability to continue as a going concern is dependent on the Companys ability to raise additional capital and implement a business plan. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a going concern.
F-45
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
On August 14, 2015 and August 20, 2015, the Company entered into two Securities Purchase Agreements
with two separate investors, in the aggregate principal amount of up to approximately $5,480,000 (collectively the August 2015 Debentures), of which approximately $2,729,000 was funded during the third quarter of 2015, with up to a
remaining $2,751,000 still to be funded.
Management is actively seeking additional financing and expects to complete additional financing arrangements in
the next few months. The Company expects that these plans will provide it the necessary liquidity to continue operations for the next 12 months.
To
address its financing requirements, the Company will continue to execute on its business model by attempting to raise additional capital through the sales of debt or equity securities or other means. It is uncertain the Company can obtain financing
to fund operating deficits until profitability is achieved. This need may be adversely impacted by: uncertain market conditions, approval of sites and licenses by regulatory bodies and adverse operating results. The outcome of these matters cannot
be predicted at this time.
Recent Accounting Pronouncements
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements Going Concern (Subtopic
205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU 2014-15). The guidance in ASU 2014-15 sets forth managements responsibility to evaluate whether there is substantial doubt about an
entitys ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or
events, in the aggregate, raise substantial doubt about the entitys ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include
consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that managements plans to address the
substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods
thereafter. Early application is permitted. The Company has elected to early adopt this guidance in the current interim period.
In May 2014,
the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to
which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual
reporting periods for public business entities beginning after December 15, 2017, including interim periods within that reporting period. The new standard permits the use of either the retrospective or cumulative effect transition method. The
Company is currently evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures. The Company has not yet selected a transition method nor determined the effect of the standard on its ongoing financial
reporting.
NOTE 3 ASSET ACQUISITION
On July 24, 2015, the Company entered into an Agreement of Purchase and Sale of Membership Interest (the Acquisition
Agreement) with East West Secured Development, LLC (the Seller) to purchase 100% of the membership interest of EWSD I, LLC (EWSD) which has entered into an agreement with Southwest Farms, Inc. (Southwest) to
purchase certain real property comprised of 320-acres of agricultural land in Pueblo, Colorado (the Acquired Property or the Farm).
F-46
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 ASSET ACQUISITION, CONTINUED
The purchase price to acquire EWSD consisted of (i) $500,000 paid by the Company as a deposit into the
escrow for the Acquired Property, and (ii) the Companys future payments to Seller of a royalty of 3% of the adjusted gross revenue, if any, from operation of the Acquired Property (including sale of any portion of or interest in the
Acquired Property less any applicable expenses) for the three-year period beginning on January 1, 2016. Such royalty payments shall be payable 50% in cash and 50% in Company common stock (the Royalty Payment). The Company determined
that the royalty payments could not be estimated at the time of acquisition, and therefore the contingent payments have not been recognized as part of the acquisition price. The contingent consideration will be remeasured to fair value each
subsequent period until the contingency is resolved, in this case, for the three year period beginning on January 1, 2016, with any changes in fair value recognized in earnings. Per the terms of the agreement, the closing is deemed to have
occurred when the Special Warranty Deed is recorded (which occurred on August 7, 2015), all terms of the purchase agreement for the Farm have been complied with, including the Farm closing, which also took place on August 7, 2015.
Therefore the acquisition date has been determined to be August 7, 2015. There were no assets or liabilities of EWSD on the acquisition date.
In
connection with EWSDs purchase of the Acquired Property, EWSD entered into a secured promissory note (the Note) with Southwest in the principal amount of $3,670,000. Interest on the outstanding principal balance of the Note shall
accrue at the rate of five percent per annum. The Note shall be payable by EWSD in thirty-five payments of principal and interest, which shall be calculated based upon an amortization period of thirty years, commencing on September 1, 2015
and continuing thereafter on the first day of each calendar month through and including July 1, 2018; and one final balloon payment of all unpaid principal and accrued but unpaid interest on August 1, 2018. The Note is secured by a deed of
trust, security agreement, assignment of rents and financing statement encumbering the Acquired Property.
In connection with the closing (the
Closing) on the Farm, EWSD also entered into an unsecured promissory note (the Unsecured Note) with the Seller, in respect of earnest money payments previously made by Seller to Southwest, in the principal amount of $830,000.
Interest on the outstanding principal balance of the Unsecured Note shall accrue at the rate of six percent per annum. The Unsecured Note shall be payable by EWSD in thirty-five payments of principal and interest, which shall be calculated based
upon a hypothetical amortization period of thirty years, commencing on September 1, 2015 and continuing thereafter on the first day of each calendar month through and including July 1, 2018; and one final balloon payment of all unpaid
principal and accrued but unpaid interest on August 1, 2018. The balance owing on the two notes is $4,485,763 as of September 30, 2015.
Principal payments due on the notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Promissory Note |
|
|
Unsecured Promissory Note |
|
|
Total |
|
2015 |
|
$ |
8,851 |
|
|
|
301,658 |
|
|
|
310,509 |
|
2016 |
|
|
54,691 |
|
|
|
27,299 |
|
|
|
81,990 |
|
2017 |
|
|
58,007 |
|
|
|
30,635 |
|
|
|
88,642 |
|
2018 |
|
|
3,536,670 |
|
|
|
467,952 |
|
|
|
4,004,622 |
|
Current maturities related to these notes as presented on the accompanying Balance Sheet, amount to $378,278.
The Closing occurred on August 7, 2015, as a result of which the Company, through its new, wholly-owned subsidiary, EWSD, became the owner of the
Acquired Property.
F-47
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 ASSET ACQUISITION, CONTINUED
The Company has determined that the Acquired Property is an acquisition of assets and does not constitute a
business. Prior to its acquisition by the Company, the Acquired Property was leased to a farmer who cultivated corn on 150 of its 320 acres. The Company intends to engage an independent contractor to manage the operations and hire its own new staff
to initially cultivate hemp on the Acquired Property. No employees of the former farm will work in the new operation. The new operation will have an entirely new customer base, sales force and marketing plan as well as new production techniques and
a new trade name. Management has determined that the purchase of the Acquired Property and planned operations do not constitute continuation of the prior business and therefore it does not meet the criteria for a business acquisition. The Acquired
Property was determined to have a fair value of $5,000,000, based on the $500,000 cash payment and the amounts due under the Secured and Unsecured notes for its purchase from third parties.
The purchase price is comprised of:
|
|
|
|
|
Cash deposit |
|
$ |
500,000 |
|
Note Payable to Southwest |
|
|
3,670,000 |
|
Note Payable to EWSD (Seller) |
|
|
830,000 |
|
|
|
$ |
5,000,000 |
|
The assets acquired included various buildings that were on the land. The Company did not acquire the Farm to obtain or use
these buildings, and are replacing two of the buildings with new buildings that will better suit the Companys planned operations, and renovating the greenhouses to also better serve the Companys planned operations. The buildings which
remain are a mechanics shop and a processing building, which the Company will utilize as is. The fair value of these two buildings has been determined to be $55,000. Therefore the purchase price has been allocated $4,945,000 to Land and $55,000 to
Buildings and structures (included in Property and equipment on the accompanying Balance Sheet).
NOTE 4 INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is determined on a standard cost basis that approximates the first-in,
first-out (FIFO) method.
The consolidated inventories at September 30, 2015 and December 31, 2014 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
|
December 31, 2014 |
|
Work in process and related capitalized costs |
|
$ |
|
|
|
$ |
308,867 |
|
Deposits on dispensing machines |
|
|
|
|
|
|
325,973 |
|
Vaporizers and accessories |
|
|
187,844 |
|
|
|
154,930 |
|
Dispensing machines |
|
|
|
|
|
|
171,466 |
|
|
|
|
|
|
|
|
|
|
Total inventory, net |
|
$ |
187,844 |
|
|
$ |
961,236 |
|
|
|
|
|
|
|
|
|
|
On May 4, 2015, AVT, Inc., the manufacturing partner of the Company, announced that they had commenced a voluntary filing
for restructuring and court protection under Chapter 11 of the United States Bankruptcy Code. Dispensing machines and Deposits on dispensing machines noted in schedule above are with AVT. Additionally, during the second quarter of 2015, the Company
completed a strategic review of the Medbox machines and concluded that they would take a reduced role in future marketing efforts. As a result of the strategic review, the Company evaluated the inventory and the related deposits in connection with
reduced demand and concluded a
F-48
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 INVENTORIES, CONTINUED
write down of both assets was required. The bankruptcy of the manufacturing partner further complicates the process to convert the inventory and advances to cash and therefore is an additional
factor in the decision to write down the inventory and record a valuation reserve against the deposits. During the three months ended September 30, 2015, the Company ended negotiations with the supplier and bankruptcy counsel advised that
collection of deposits and availability of inventory from the supplier was unlikely. Accordingly, the remaining deposit and inventory valued at $142,500 were written off.
Work in process and related capitalized costs includes costs to build out a dispensary in Portland, Oregon that opened in the second quarter of 2015 (Note 1).
The costs related to the Portland dispensary have been classified in deferred costs until the related revenue is recognized.
NOTE 5 CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY
On July 21, 2014, as amended on September 19, 2014 and October 20, 2014, the Company entered into a Securities Purchase
Agreement whereby the Company agreed to issue convertible debentures (July 2014 Debentures) in the aggregate principal amount of $3,500,000, in five tranches. The initial closing in the aggregate principal amount of $1,000,000 occurred
on July 21, 2014. The second closing in the amount of $1,000,000 occurred on August 26, 2014; the third of $500,000 on September 26, 2014. The fourth and fifth, each in the amount of $500,000, were to occur within 2 and 5 business
days, respectively, of the effective date of the registration statement filed by the Company for the resale of the shares of common stock issuable upon conversion of the July 2014 Debentures. The Registration statement was withdrawn and terminated
in December 2014, and a new registration statement was filed on April 9, 2015. The July 2014 Debentures bear interest at the rate of 10% per year. The debt is due July 21, 2015, with the original agreement calling for amortization
payments, including accrued principal and accrued interest, beginning on the eleventh day of the fourth month after issuance and will continue on the eleventh day of each following eight successive months thereafter.
Also on September 19, 2014, as amended on October 20, 2014, the Company entered into a securities purchase agreement pursuant to which it agreed to
issue convertible debentures (September 2014 Debentures) in the aggregate principal amount of $2,500,000, in two tranches. The initial closing in the principal amount of $1,000,000 occurred on September 19, 2014. The second closing,
of $1,500,000, is to occur within 2 days of the effective date of the registration statement filed by the Company for the resale of the shares of common stock issuable upon conversion of the September 2014 Debentures. The September 2014 Debentures
bear interest at the rate of 5% per year. The debt is due September 19, 2015, and the original agreement called for amortization payments, including accrued principal and accrued interest, due in nine monthly installments, commencing the
fourth month after issuance.
Both the original July 2014 Purchase Agreement Debentures and September 2014 Debentures prior to subsequent amendment, share
the following significant terms:
All amounts are convertible at any time, in whole or in part, at the option of the holders into shares of
the Companys common stock at a conversion price. The Notes were initially convertible into shares of the Companys common stock at the initial Fixed Conversion Price of $11.75 per share. The Fixed Conversion Price is subject to adjustment
for stock splits, combinations or similar events. If the Company makes any subsequent equity sales (subject to certain exceptions), under which an effective price per share is lower than the Fixed Conversion Price, then the conversion price will be
reduced to equal such price.
F-49
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY, CONTINUED
The Company may make the amortization payments on the debt in cash, prompting a 30% premium or, subject to
certain conditions, in shares of common stock valued at 70% of the lowest volume weighted average price of the common stock for the 20 prior trading days.
In connection with each of the purchase agreements, the Company entered into a registration rights agreement with the respective investors, pursuant to which
the Company agreed to file a registration statement for the resale of the shares of common stock issuable upon conversion of, or payable as principal and interest on, the respective debentures, within 45 days of the initial closing date under each
agreement, and to have such registration statements declared effective within 120 days of the initial closing dates of each purchase agreement. Through subsequent modifications of the July 2014 Debentures and September 2014 Debentures, the required
date to file the registration statement and the effective date of the registration statement have been changed to April 15, 2015 and July 15, 2015, respectively. The registration statement was filed on April 9, 2015, and became
effective on June 11, 2015.
The conversion feature of the July 2014 Debenture and the September 2014 debenture meets the definition of a derivative
and due to the reset provision to occur upon subsequent sales of securities at a price lower than the fixed conversion price, requires bifurcation and is accounted for as a derivative liability. The derivative was initially recognized at its
estimated fair value of approximately $1,885,000 and created a discount on the Notes that will be amortized over the life of the Notes using the effective interest rate method. The fair value of the embedded derivative is measured and recognized at
fair value each subsequent reporting period and the changes in fair value are recognized in the Statement of Operations as Change in fair value of derivative liability. For the nine months ended September 30, 2015 the Company recognized a gain
on the change in fair value of derivative liabilities of approximately $509,000 (including the change in fair value related to the new convertible debentures issued in the first, second and third quarters of 2015 discussed below). See Note 2 Fair
value measure for additional information on the fair value and gains or losses on the embedded derivative.
On January 30, 2015, the Company and the
Investors entered into an Amendment, Modification and Supplement to the Purchase Agreement (the Purchase Agreement Amendment or the Modification) pursuant to which the Investors agreed to purchase an additional $1,800,000 in
seven Modified Closings: (1) $200,000 was funded at the Closing of the Purchase Agreement Amendment; (2) $100,000 to be funded within thirty (30) days of the Closing; (3) $100,000 to be funded within two days following the filing
of a registration statement with the SEC to register the shares underlying the Debentures (the Registration Statement) and of the Company having filed with the SEC a restatement of the Companys consolidated financial statements as
described in the Companys Current Report on Form 8-K filed with the SEC on December 22, 2014; (4) $100,000 to be funded within two days of receipt of the first comment letter from the SEC with regard to the Registration Statement;
(5) $500,000 to be funded within two days of the date that the Registration Statement is declared effective by the SEC; (6) $500,000 to be funded within five days of the date that the Registration Statement is declared effective by the
SEC; and (7) $100,000 to be funded within each of 90, 120, 150, and 180 days from the Closing of the Purchase Agreement Amendment. The Modification also eliminated the amortization payments discussed above, and provided for accrued and unpaid
interest to be payable upon conversion or maturity rather than on specified payment dates. The Company is also required to open a new dispensary in Portland, Oregon during the first calendar quarter of 2015(which was later modified to April 30,
2015). The Company must also file the Registration Statement by March 8, 2015 (later amended), and it must be declared effective by June 15, 2015 in order to avoid default and acceleration under the Amended and Restated Debenture. As noted
above, the Registration Statement was filed on April 9, 2015, and became effective June 11, 2015.
On March 13, 2015 the Company and the
Investors entered into a further amendment (March 2015 Amendment) to the July 21, 2014, 10% Convertible debentures, as amended January 30, 2015, whereby the
F-50
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY, CONTINUED
reset of the fixed conversion rate to $1.83 caused by recent dilutive issuances was reiterated for all previously issued notes. In addition, the March 2015 Amendment modified the opening date of
the Portland, Oregon dispensary to be April 30, 2015. Neither of these modified terms had an impact on the accounting treatment of the Debentures.
The July 2014 financing was further modified on March 23, 2015. The closing dates of the financing were again modified, investments by two members of the
Board of Directors (Board) was required, and the deadline for filing of the registration statement was changed to no later than April 15, 2015, and its effective date to no later than July 15, 2015. Neither of these
modified terms had an impact on the accounting treatment of the Debentures.
On April 9, 2015, the Company and their investors entered into an
Amendment, Modification and Supplement to the July 2014 convertible debenture, which amends the closings as set forth in the March 23, 2015 Modification, to increase the amounts due in the third tranche, due two days after the filing of the
Registration Statement, to $450,000.
On January 28, 2015, the Company and the Investors entered into an Amendment, Modification and Supplement to
the September 2014 Debenture, pursuant to which the remaining $1,500,000 will be funded in four Modified Closings as set forth in the agreement, and contains other modifications with the same terms as was contained in the January 30, 2015
Modification.
The Company considered if the above modifications should be accounted for as an extinguishment or modification of the existing debt. The
Company first evaluated if the modification of terms could be considered a troubled debt restructuring, but the modification did not meet the criteria as the Investors did not grant a concession to the Company for economic or legal reasons related
to any financial difficulties of the Company. The majority of the modifications related to deadlines being extended for certain required events. The only financial modification was to revise the payment schedule on the Debentures to eliminate the
amortization payments and instead require all to be due at maturity. The Company concluded this is not regarded as a concession as it is not the forgiveness of any interest payments, nor reduction of principal, nor change to the maturity date.
Therefore, the modification of the terms was evaluated to determine if the changes in the Debentures future cash flows were in excess of 10% and considered substantial, which would require the Debentures to be accounted for as extinguished and
replaced with new debt. As the modification resulted in a less than 10% estimated change in future cash flows, the Company concluded that the modification of the terms of the July 2014 and September 2014 Debentures was to be accounted for as a
modification of the existing Debentures.
As part of the January 30, 2015 Modification, the Parties entered into a Modified Debenture Agreement for
the $200,000 that was funded at the Closing and agreed to use the same form of Modified Debenture for each of the other foregoing Modified Closings (collectively, the Modified Debentures). The fixed conversion price of the Modified
Debenture was the lower of $5.00 or 51% of the lowest volume weighted average price for the 20 consecutive trading days prior to the applicable conversion date. This new fixed conversion price was a dilutive issuance to the outstanding July 2014 and
September 2014 Debentures, thereby triggering a reset of the older fixed conversion price. As a result of the reset to the conversion price, at January 30, 2015, the derivative liability was remeasured to a fair value of approximately
$2,690,000, using a weighted probability model as estimated by management. A decrease in fair value of the derivative liability of approximately $1,072,000 was recognized as a gain on the Statement of Consolidated Comprehensive Loss in the nine
months ended September 30, 2015.
The additional Modified Debentures under the July 2014 Debentures closed on February 27, 2015 in the amount of
$100,000, March 13, 2015 in the amount of $50,000, March 16, 2015 in the amount of $25,000, March 20,
F-51
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY, CONTINUED
2015 in the amount of $75,000 and on March 26, 2015 in the amount of $150,000. All these Modified Debentures have a fixed conversion price of the lower of $1.83 or 51% of the VWAP for the
last 20 days prior to the conversion. This new fixed conversion price was a dilutive issuance to the outstanding July 2014 and September 2014 Debentures, thereby triggering a reset of the previous $5 fixed conversion price. This reset resulted in
the derivative liability being revalued at February 27, 2015, using a weighted probability model for a fair value of $2,720,000, for a decrease in fair value of approximately $334,000, recognized as a gain on the Statement of Consolidated
Comprehensive Loss.
The additional Modified Debentures under the September 2014 Debentures closed on January 29, 2015 in the amount of $100,000 and
February 24, 2015 in the amount of $100,000. These Modified Debentures have a fixed conversion price of the lower of $5.00 or 51% of the VWAP for the last 20 days prior to the conversion. This new fixed conversion price was a dilutive issuance
to the outstanding July 2014 and September 2014 Debentures, thereby triggering a reset of the previous $5.00 fixed conversion price. The resulting reset and remeasurement of the fair value of the derivative liability is included in the amounts of
the change to fair value discussed above.
The additional fundings of the July 2014 Modified Debentures under the closing schedule detailed above resulted
in $2,811,500 being received during the second quarter. The first $300,000 had a fixed conversion price of the lower of $1.83 or 51% of the VWAP for the last 40 days prior to the conversion. The April 17, 2015 closing contained a fixed
conversion price of the lower of $0.88 or 51% of the VWAP for the last 40 days prior to the conversion. This new fixed conversion price was a dilutive issuance to the outstanding July 2014 and September 2014 Debentures, thereby triggering a reset of
the previous $1.83 fixed conversion price. This reset resulted in the derivative liability being revalued at April 17, 2015, using a weighted probability model for a fair value of $3,287,000, for a increase in fair value of approximately
$1,764,000, recognized as a loss on the Statement of Consolidated Comprehensive Loss during the second quarter of 2015.
There was additional funding of
$1,300,000 of the September 2014 Modified Debentures under the closing schedule detailed above. These Modified Debentures all have a fixed conversion price of the lower of $0.88 or 51% of the VWAP for the last 40 days prior to the conversion.
The Directors convertible debentures required under the March 23, 2015 Modification, issued in the first quarter of 2015, total $150,000, and have
a three year term and an interest rate of 8% per annum. They were originally convertible at a fixed conversion price of the lower of $1.83 or 51% of the VWAP for the last 20 days prior to conversion. As with the Modified Debentures, the
debentures included a reset provision, which resulted in the conversion feature being bifurcated and accounted for as a derivative liability, with an initial fair value of $132,175. The directors convertible debentures also reset on
February 27, 2015 and April 17, 2015, with the changes to fair value included in the amounts disclosed above.
The Modified Debentures also
included a warrant instrument granting the Investor the right to purchase shares of common stock of the Company equal to the principal amount of the applicable Modified Debenture divided by a price equal to 120% of the last reported closing price of
the Common stock on the applicable closing date of the Modified Debenture, with a three year term.
F-52
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY, CONTINUED
The warrants issued in the nine months ended September 30, 2015 in connection with all the Modified
Debentures detailed above, and the August 2015 Securities Purchase Agreement (August 2015 Debentures) discussed below, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Date issued |
|
Number of warrants |
|
|
Exercise price |
|
|
Fair Value |
|
July 2014 Modified Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2015 |
|
|
40,552 |
|
|
$ |
4.93 |
|
|
$ |
159,601 |
|
February 26, 2015 |
|
|
45,537 |
|
|
|
2.20 |
|
|
|
79,904 |
|
March 13, 2015 |
|
|
21,151 |
|
|
|
2.36 |
|
|
|
39,965 |
|
March 16, 2015 |
|
|
10,575 |
|
|
|
2.36 |
|
|
|
19,981 |
|
March 20, 2015 |
|
|
41,946 |
|
|
|
1.79 |
|
|
|
59,942 |
|
March 27, 2015 |
|
|
75,758 |
|
|
|
1.98 |
|
|
|
119,888 |
|
April 2, 2015 |
|
|
60,386 |
|
|
|
1.66 |
|
|
|
74,025 |
|
April 2, 2015 |
|
|
30,193 |
|
|
|
1.66 |
|
|
|
37,012 |
|
April 10, 2015 |
|
|
107,914 |
|
|
|
1.39 |
|
|
|
112,460 |
|
April 17, 2015 |
|
|
41,667 |
|
|
|
1.20 |
|
|
|
37,680 |
|
April 24, 2015 |
|
|
127,119 |
|
|
|
1.18 |
|
|
|
112,635 |
|
April 24, 2015 |
|
|
21,186 |
|
|
|
1.18 |
|
|
|
18,772 |
|
May 1, 2015 |
|
|
156,250 |
|
|
|
.96 |
|
|
|
113,133 |
|
May 7, 2015 |
|
|
134,615 |
|
|
|
.78 |
|
|
|
79,234 |
|
May 8, 2015 |
|
|
42,000 |
|
|
|
.75 |
|
|
|
23,768 |
|
May 15, 2015 |
|
|
200,000 |
|
|
|
.75 |
|
|
|
113,365 |
|
May 22, 2015 |
|
|
250,000 |
|
|
|
.60 |
|
|
|
113,366 |
|
May 29, 2015 |
|
|
258,621 |
|
|
|
.58 |
|
|
|
112,537 |
|
June 5, 2015 |
|
|
288,462 |
|
|
|
.52 |
|
|
|
120,738 |
|
June 12, 2015 |
|
|
930,233 |
|
|
|
.43 |
|
|
|
303,246 |
|
June 19, 2015 |
|
|
3,448,276 |
|
|
|
.29 |
|
|
|
751,159 |
|
|
|
|
|
September 2014 Modified Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2015 |
|
|
18,038 |
|
|
|
5.54 |
|
|
|
80,156 |
|
February 13, 2015 |
|
|
57,870 |
|
|
|
1.73 |
|
|
|
96,689 |
|
April 2, 2015 |
|
|
181,159 |
|
|
|
1.66 |
|
|
|
222,109 |
|
April 24, 2015 |
|
|
90,579 |
|
|
|
1.10 |
|
|
|
80,548 |
|
May 15, 2015 |
|
|
200,000 |
|
|
|
.75 |
|
|
|
113,365 |
|
June 12, 2015 |
|
|
1,744,186 |
|
|
|
.43 |
|
|
|
570,248 |
|
|
|
|
|
August 2015 Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
August 24, 2015 |
|
|
6,666,667 |
|
|
|
.06 |
|
|
|
321,757 |
|
September 18, 2015 |
|
|
588,235 |
|
|
|
.17 |
|
|
|
82,804 |
|
|
|
|
|
Directors |
|
|
|
|
|
|
|
|
|
|
|
|
January 5, 2015 |
|
|
129,305 |
|
|
|
.40 |
|
|
|
39,901 |
|
January 30, 2015 |
|
|
129,250 |
|
|
|
.40 |
|
|
|
39,916 |
|
February 2, 2015 |
|
|
237,778 |
|
|
|
.22 |
|
|
|
16,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,375,508 |
|
|
|
|
|
|
$ |
4,266,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company determined that the warrants were properly classified in equity as there is no cash settlement provision and the
warrants have a fixed exercise price and therefore result in an obligation to deliver a known number of shares.
F-53
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY, CONTINUED
Effective September 18, 2015, the holder of the September 2014 Debentures and the Company agreed to
amend its September 2014 Warrants, to reduce the exercise price of the warrants to purchase an aggregate of 2,291,832 shares of the Companys common stock to six cents per share. The holder agreed to exercise in full those warrants in cash
within three trading days of the filing with the SEC of a Form 8-K, which occurred on September 18, 2015. During the three months ended September 30, 2015, approximately 2,292,000 warrants were exercised.
Effective September 18, 2015, the holder of the July 2014 Debentures and the Company agreed to amend its July 2014 Warrants, to reduce the exercise price
of the warrants to purchase an aggregate of 6,332,441 shares of Common Stock to six cents per share. The holder agreed to exercise in full those warrants in cash within three trading days of the filing with the SEC of a Form 8-K, which occurred on
September 18, 2015. As of September 30, 2015 the warrants have not yet been exercised, and will be upon the finalization of the increase in authorized shares (Note 8).
As a result of the conversion feature being bifurcated and recognized as a derivative liability, the Company evaluated the warrants and determined that they
have a sufficient number of authorized and unissued shares as of September 30, 2015, after consideration of the subsequent increased authorized shares, (See Note 10), to settle all existing commitments.
The Company adopted a sequencing policy that reclassifies contracts, with the exception of stock options, from equity to assets or liabilities for those with
the earliest inception date first. Future issuance of securities will be evaluated as to reclassification as a liability under our sequencing policy of earliest inception date first until either all of the convertible debentures are converted or
settled.
During the nine months ended September 30, 2015, $4,420,000 principal of the July 2014 Debentures and $1,710,000 principal and
approximately $49,000 accrued interest of the September 2014 Debentures, and $150,000 principal of the Directors debentures, in addition to approximately $49,000 accrued interest were converted into approximately 67,475,000 of the Companys
common shares at an average price of $0.09, based on 51% of the calculated VWAP. Upon conversion, the derivative fair value for the amounts converted were remeasured through the date of conversion, with the conversion date fair value reclassified to
equity, amounting to $4,519,000 in the nine months ended September 30,2015. As a result of the conversions, the resulting decrease of fair value of approximately $1,730,000 of the related debt discount was recognized on the Statement of
Consolidated Comprehensive Loss.
August 2015 Debentures
On August 14, 2015, the Company entered into a Securities Purchase Agreement whereby the Company agreed to issue convertible debentures in the aggregate
principal amount of up $3,979,877. The initial closing in the aggregate principal amount of $650,000 occurred on August 14, 2015. An additional 5 payments were made in the total amount of $1,078,880 through September 30, 2015. The seventh
tranche in the amount of $250,000 will occur 8 days after the filing of a registration statement filed by the Company for the resale of the shares of common stock issuable upon conversion of the August 2015 Debentures, the eighth tranche in the
amount of $1,250,000 will occur within 3 business days of the effective date of the registration statement and the ninth tranche, in the amount of $750,000 will occur within 7 business days of the effective date of the registration statement. The
August 2015 Debentures bear interest at the rate of 10% per year.
On August 20, 2015, the Company also entered into a Securities Purchase
Agreement with another investor, in the aggregate principal amount of up to $1,500,000 (collectively the August 2015 Debentures), which was
F-54
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY, CONTINUED
amended on September 19, 2015, to increase the principal by an additional $200,000. Through September 30, 2015, two tranches totaling $500,000 have been funded. A third tranche in the
amount of $500,000 (after amendment) is to occur within two days after the filing of a registration statement, with the fourth tranche in the amount of $700,000 to occur within 2 days of the effective date of the registration statement.
The August 2015 Debentures contain the following significant terms:
The debentures all mature in one year from the date of each individual closing.
All amounts are convertible at any time, in whole or in part, at the option of the holders into shares of the Companys common stock at a fixed
conversion price. The conversion price is the lower of (a) $0.75, or (b) a 49% discount to the lowest daily VWAP (as reported by Bloomberg) of the Common Stock during the 30 trading days prior to the conversion date. The Fixed Conversion
Price is subject to adjustment for stock splits, combinations or similar events. If the Company makes any subsequent equity sales (subject to certain exceptions), under which an effective price per share is lower than the Fixed Conversion Price,
then the conversion price will be reset to equal such price. The Company may prepay the Debentures in cash, prompting a 30% premium or, subject to certain conditions, in shares of common stock valued at 51% of the lowest volume weighted average
price of the common stock for the 30 prior trading days. The premium will be recognized at such time as the Company may choose to prepay the Debentures.
In connection with each of the purchase agreements, the Company entered into a registration rights agreement with the respective investors, pursuant to which
the Company agreed to file a registration statement for the resale of the shares of common stock issuable upon conversion of, or payable as principal and interest on, the respective debentures, within 45 days of the initial closing date under
each agreement, and to have such registration statements declared effective within 120 days of the initial closing dates of each purchase agreement. The pre-effective registration statement was filed with the SEC on October 16, 2015.
The conversion feature of the August 2015 Debenture meets the definition of a derivative and due to the reset provision to occur upon subsequent sales of
securities at a price lower than the fixed conversion price, requires bifurcation and is accounted for as a derivative liability. The derivative was initially recognized at its estimated fair value of approximately $2,345,000 and created a discount
on the Notes that will be amortized over the life of the Notes using the effective interest rate method. The fair value of the embedded derivative is measured and recognized at fair value each subsequent reporting period and the changes in fair
value are recognized in the Statement of Operations as Change in fair value of derivative liability (discussed above). See Note 2 Fair value measure for additional information on the fair value and gains or losses on the embedded derivative.
The debenture entered into with the second investor on August 20, 2015 included a warrant instrument granting the Investor the right to purchase shares
of common stock of the Company equal to the principal amount of the applicable Debenture divided by a price equal to 120% of the last reported closing price of the Common stock on the applicable closing date of the Debenture, with a three year term.
During the three months ending September 30, 2015, there were 7,254,902 warrants issued, with a fair value of $404,561, calculated with the Black Sholes Merton model. There were no conversions of the August 2015 Debentures during the three
months ended September 30, 2015.
Entry into Security Agreement
In connection with entry into the August 20 Purchase Agreement and August 14 Purchase Agreement, the investors party to such agreements and the
Company entered into a Security Agreement, dated August 21, 2015,
F-55
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY, CONTINUED
securing the amounts underlying the August 14 Debentures and the August 20 Debentures. The Security Agreement grants a security interest in all assets and personal property of the
Company, subject to certain excluded real property assets. The security interests under the Security Agreement shall terminate following the date the registration statement is declared effective.
July 2015 Debenture
On July 10, 2015, another
accredited investor (the July 2015 Investor) purchased a separate Convertible Debenture (the July 2015 Debenture) in the aggregate principal amount of $500,000, that closed in five weekly tranches between July 10 and
August 15, 2015. The July 2015 Debenture is in substantially the same form as the August 14 Debentures, and does not include issuance of warrants . As such, the conversion feature was also determined to require bifurcation, and derivative
accounting. All amounts related to the July 2015 derivative liability are included in amounts disclosed above for the August 2015 debentures.
On
October 14, 2015, the August 14 Investor assigned the right to purchase August 14 Debentures in the principal amount of $100,000 to the July 2015 Investor and the July 2015 Investor purchased such August 15 Debentures on the same
day.
NOTE 6 SHARE BASED AWARDS, RESTRICTED STOCK AND RESTRICTED STOCK UNITS (RSUs)
On July 23, 2014, in connection with the election of a new Chairman, President and CEO, the Company entered into a two year employment
contract with the new CEO. Under the employment contract, the CEO received an award of RSUs, to be issued within 90 days of the effective date of the Employment Agreement, under the Equity Incentive Plan adopted by the Company, in the amount
of the greater (by value) of 50,000 shares of common stock or $500,000 of common stock based on the volume weighted average price for the 30 day period prior to the date of the grant. The Company also agreed to make an equal stock award to the CEO
on each anniversary date of the employment agreement. The fair value of the awards, as determined on grant date, was $711,500 which was being amortized over the CEOs one year service period. On June 30, 2015, Guy Marsala, President, Chief
Executive Officer, and director of the Company, tendered his resignation as President and Chief Executive Officer of the Company and as a director on the Companys board, effective immediately (Note 9). The remaining value of
Mr. Marsalas grants was recorded as expense in the second quarter of 2015. In connection with Mr. Marsalas separation agreement approximately 2,580,000 options with a 10 year term were granted at an exercise price of $0.13. The
fair value of $335,117 was calculated using the Black Sholes Merton model, and was immediately expensed.
On August 21, 2014, the Compensation
Committee of the Board granted Restricted Stock and RSUs to two Board members who were elected to the Board on April 9, 2014. Under the award, the Directors received 346,875 shares of restricted stock and 121,875 RSUs under which
the holders have the right to receive 121,875 shares of common stock. The grant date fair value of the restricted stock was $3,607,500 and the grant date fair value of the RSUs was $1,267,500. The restricted Stock and RSUs vested over
the remaining first year of the new Board members term ending on March 31, 2015. The fair value of the grant was amortized over the period from the date of grant, August 21, 2014 to the end of the first year of the Board
members term, March 31, 2015. Under the Board members contracts, additional grants will be made for the second year of the contract.
During October 2014, the Compensation Committee of the Board granted 19,452 RSUs to a new Board member who was elected to the Board on October 22,
2014. The Board members contract calls for grants of 100,000 RSUs for each succeeding year of service beginning on April 1, 2015, which vest quarterly. On September 24,
F-56
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 SHARE BASED AWARDS, RESTRICTED STOCK AND RESTRICTED STOCK UNITS (RSUs),
CONTINUED
2015, the same Board member resigned from her positions as a member of the board of directors of the Company, chairperson of the Companys audit committee and a member of its special
committee, effective immediately. Stock compensation expense for this director in the second and third quarter was $353,000 and $197,000, respectively, which completes recognition of stock compensation expense for her service. The remaining 50,000
unvested RSUs were forfeited upon her resignation.
On February 10, 2015, the Compensation Committee of the Board granted 100,174 RSUs to
certain officers and employees of the Company as for retention and bonuses. The grant date fair value of the RSUs was approximately $114,000. The RSUs vest every six months through December 31, 2016. The fair value of the grant is
being amortized over the period from the date of grant, February 10, 2015 through the vesting dates in six month increments.
On January 15,
2015, the Board granted 75,000 RSUs to a consultant, which vest in 25,000 installments quarterly through July 15, 2015, beginning with 25,000 which vested immediately on the grant date. The grant date fair value of the RSUs was
approximately $450,000.
On May 11, 2015, the Board granted 38,600 RSUs to various officers and employees, which vested immediately on the grant
date. The grant date fair value of the RSUs was approximately $20,000, which was immediately expensed.
On May 11, 2015, the new CEO (Note 9)
was awarded 196,078 RSUs in connection with his retention agreement. The grant date fair value of the RSUs was approximately $100,000. The RSUs vest quarterly through May 11, 2016.
On August 26, 2015, the Board granted 79,917 RSUs to various officers and employees, which vested immediately on the grant date. The grant date fair
value of the RSUs was approximately $12,000, which was immediately expensed.
On August 31, 2015, the Board granted 156,250 RSUs to the CFO of
the Company, which vested immediately on the grant date. The grant date fair value of the RSUs was approximately $25,000, which was immediately expensed.
F-57
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 SHARE BASED AWARDS, RESTRICTED STOCK AND RESTRICTED STOCK UNITS (RSUs),
CONTINUED
A summary of the activity related to restricted stock and RSUs for the nine months ended September 30,
2015 is presented below:
|
|
|
|
|
|
|
|
|
Restricted stock |
|
Total shares |
|
|
Grant date fair value |
|
Restricted stock non-vested at January 1, 2015 |
|
|
168,750 |
|
|
$ |
10.40 |
|
Restricted stock granted |
|
|
150,000 |
|
|
|
|
|
Restricted stock vested |
|
|
(206,250 |
) |
|
|
10.40 |
|
Restricted stock forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock non-vested at September 30, 2015 |
|
|
112,500 |
|
|
$ |
10.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units (RSUs) |
|
Total shares |
|
|
Grant date fair value |
|
RSUs non-vested at January 1, 2015 |
|
|
199,584 |
|
|
|
$10.70 |
|
RSUs granted |
|
|
698,522 |
|
|
|
$0.51 - $6.07 |
|
RSUs vested |
|
|
(590,502 |
) |
|
|
$0.51 - $6.07 |
|
RSUs forfeited |
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs non-vested September 30, 2015 |
|
|
257,604 |
|
|
$ |
0.51 - $10.70 |
|
|
|
|
|
|
|
|
|
|
A summary of the expense related to restricted stock, RSUs and stock option awards for the three and nine months ended
September 30, 2015 is presented below:
|
|
|
|
|
|
|
|
|
Summary of the expense related to Restricted Stock and RSUs |
|
For the three months ended September 30, 2015 |
|
|
For the nine months ended September 30, 2015 |
|
Restricted Stock |
|
$ |
390,000 |
|
|
$ |
2,420,782 |
|
RSUs |
|
|
574,840 |
|
|
|
2,501,150 |
|
Stock options |
|
|
|
|
|
|
335,117 |
|
Common stock |
|
|
74,333 |
|
|
|
74,333 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,039,173 |
|
|
$ |
5,331,382 |
|
|
|
|
|
|
|
|
|
|
On August 11, 2015, the Compensation Committee, with the Boards approval, granted the Chairman of the Board a bonus
of $371,666. The bonus is to be paid 20% in common stock of Medbox at $.0621 per share (the share price of the Companys common stock on the date of grant) for a total grant of 1,196,988 shares, issued under the Medbox, Inc. 2014 Equity
Incentive Plan. The remainder is to be paid in cash, including $50,000 which was paid in June and July, with the balance in monthly payments of $30,918 from August 2015 to March 2016.
NOTE 7 RELATED PARTY TRANSACTIONS
During the year ended December 31, 2014, the Company issued four notes payable to PVM International Inc. (PVMI), a related
party which is 100% owned by a co-founder of the Company, in the amounts of $250,000, $100,000, $500,000, and $375,000. These notes were subsequently partially repaid leaving $284,488 outstanding as of June 30, 2014. On October 17,
2014 the Company entered into an assignment agreement with PVMI through which PVMI assigned all rights and titles for any opened escrow on real estate purchase agreements in San Diego in
F-58
exchange for a related party notes payable from the Company. As of the signing date the agreement was valued at $190,400 which represented the value of escrow deposits paid by PVMI for eight
different real estate agreements. All of the notes and amounts owed under the assignment agreement were repaid in full during the third quarter of 2015.
F-59
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 RELATED PARTY TRANSACTIONS, CONTINUED
On March 28, 2014, the Company entered into an agreement with a related party for territory rights in
Colorado for $500,000. The agreement has a term of five years and in accordance with the Companys revenue recognition policy, the revenue will be recognized over the five year term. Approximately $350,000 remains in deferred revenue as of
September 30, 2015.
During the third quarter of 2014, the Company created the following affiliated entities in connection with license applications:
A. Hanna Growers, Inc., Herbal Choice of Illinois, Inc., Natures Treatment of Illinois, Inc., Green Blossom of Illinois, Inc., Midwestern Compassionate Care of Illinois, Inc., Midwestern Wellness Group of Illinois, Inc., Green Blossom, Inc.,
Natures Treatment, Inc. and Herbal Choice, Inc.
NOTE 8 STOCKHOLDERS EQUITY
Common Stock
Authorized share
increase
On June 30, 2015, the Board of Directors of the Company and the holders of a majority of the Companys voting securities
approved by written consent an amendment to the Companys Articles of Incorporation to increase the authorized number of shares of the Companys common stock from 100,000,000 shares to 400,000,000 shares, par value of $0.001 per share. The
Companys Board of Directors approved the increase of authorized capital so that it will have sufficient shares of common stock available for issuance upon the conversion or exercise of currently outstanding convertible debt securities and
warrants and for future capital raises. The Company filed a Schedule 14C Information Statement regarding the matter submitted to a vote of their security holders with the Securities and Exchange Commission. The increase of authorized capital
approved by the stockholders became effective on October 27, 2015.
Change of Control
Effective August 24, 2015, Vincent Chase, Incorporated, which is owned by the former CEO of the Company, cancelled without consideration all of its
2 million shares of Preferred Stock and 3 million shares of Common Stock. As a result of this action, neither VM nor any of its affiliates holds a majority of the voting power of the Company, which to the Companys knowledge is no
longer held by a single person or entity or group thereof.
For common shares which were issued upon conversion of the convertible debentures during the
nine months ended September 30, 2015 see Note 5.
During the nine months ended September 30, 2015 the Company issued 1,633,047 shares of its
common stock, valued at approximately $365,000 as based on the market price of the common stock on the date of settlement, as a payment of certain accounts payables.
In addition, in January, 2015, the Company issued 206,480 of their common stock upon exercise of the warrants held by various previous owners of VII.
NOTE 9 COMMITMENTS AND CONTINGENCIES
The Company leases property for its day to day operations and facilities for possible retail dispensary locations and cultivation locations
as part of the process of applying for retail dispensary and cultivation licenses.
F-60
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 COMMITMENTS AND CONTINGENCIES, CONTINUED
Office Leases
On August 1, 2011, the Company entered into a lease agreement for office space located in West Hollywood, California through June 30, 2017 at a
monthly rate of $14,397. Starting July 1, 2014, the monthly rent increased by 3% to $14,828 per month. The Company moved to new offices in Los Angeles, CA in April 2015. The sublease on the new office has a term of 18 months and with monthly
rent of $7,486. The Company plans to sublease the office in West Hollywood, CA.
Total rent expense under operating leases for the three months ended
September 30, 2015 and 2014 was approximately $90,000 and $53,000, respectively. Rent expense for the nine months ended September 30, 2015 and 2014 was approximately $211,000 and $157,000, respectively.
Retail/Cultivation facility leases
The Companys
business model of acquiring retail dispensary and cultivation licenses often requires us to acquire real estate either through lease arrangements or through purchase agreements in order to secure a possible license. On May 8, 2014, the Company
entered into a lease agreement for the Portland dispensary for five years with a monthly payment of $7,400 in order to apply for a license and build-out of a location for a client.
On July 22, 2014 one of the Companys subsidiaries Medbox Property Investments, Inc., entered into a new lease for a facility which was to be used
in the application process for both a dispensary and cultivation facility. The Company paid an initial security deposit of $30,000 and the lease was payable monthly at a rate of $20,000 per month. The lease had a five year term, but was contingent
upon license approval which allowed for early termination of the lease after January 1, 2015 if the license was not granted. Due to the fact that the Company was unsuccessful in obtaining the license related to the mentioned facility the lease
agreement was terminated in November 2014 and the Company forfeited the security deposit.
The following table is a summary of our material contractual
lease commitments as of September 30, 2015:
|
|
|
|
|
|
|
|
|
Year Ending |
|
Office Rent |
|
|
Retail/Cultivation Facility Lease |
|
2015 |
|
$ |
66,942 |
|
|
$ |
22,200 |
|
2016 |
|
|
245,310 |
|
|
|
88,800 |
|
2017 |
|
|
88,968 |
|
|
|
88,800 |
|
2018 |
|
|
|
|
|
|
88,800 |
|
2019 |
|
|
|
|
|
|
29,600 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
401,220 |
|
|
$ |
318,200 |
|
|
|
|
|
|
|
|
|
|
Real Estate Commitments
Through December 31, 2014 the Company paid $930,000 either by deposit into twelve escrow accounts or direct payments to sellers, to secure the purchase
and/or extend the closing dates on real estate to be used for future retail/cultivation facilities with an aggregate purchase price of $26,830,000. The real estate purchase agreements had closing dates varying between December 1, 2014 and
February 10, 2015.
During 2014, the Company entered into numerous real estate contracts to secure locations during the licensing process. The
contracts allow the Company to demonstrate to licensing authorities that the locations are available
F-61
MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 COMMITMENTS AND CONTINGENCIES, CONTINUED
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 of $195,712 for the nine months ended September 30, 2014 in the statement of
operations. During the third quarter of 2014, one of the Companys 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 the second
quarter of 2014 one of the Companys subsidiaries entered into a real estate purchase agreement in Washington state. The purchase transaction was closed during the third quarter of 2014 for a total purchase price of $399,594 partially financed
by a promissory note for $249,000. The note was due January 30, 2015 and bore interest at twelve percent (12%). The Company did not repay the note on its maturity date, and is therefore is incurring the default interest rate of eighteen percent
(18%). The property was classified as Assets held for resale as of December 31, 2014 because the Companys plan was to sell the property to a third party to hold as a lessor to the operator of the dispensary. (See Note 10, Subsequent
Events) On September 30, 2015, the Company, through its subsidiary, entered into an amendment to the Note Payable, whereby the maturity date was extended to April 1, 2017, with the interest at twelve percent (12%).
During the nine months ended September 30, 2015 the Company recovered approximately $105,000 and forfeited approximately $280,000 out of escrow deposits
outstanding as of December 31, 2014. As of September 30, 2015 the Company has only one open real estate agreement for a property in San Diego with a purchase price of $875,000 and related outstanding deposit of $15,000
Officers
On June 30, 2015, Guy Marsala, President,
Chief Executive Officer, and director of the Company since July 23, 2014, tendered his resignation as President and Chief Executive Officer of the Company and as a director on the Companys board, effective immediately. Mr. Marsala
confirmed that such resignation is not because of a disagreement with the Company on any matter relating to its operations, policies or practices.
In
connection with his resignation, the Company and Mr. Marsala entered into a Separation Agreement dated June 30, 2015. Pursuant to the terms of the Separation Agreement, Mr. Marsala is entitled to receive $500,000 in severance pay,
payable in equal monthly installments of $30,000, and a grant of options to purchase up to $335,275 of shares of common stock at an exercise price based on the closing price of the Companys common stock on June 30, 2015, in lieu of any
rights under his employment agreement, which was terminated.
Chief Operating Officer/Chief Executive Officer
On April 22, 2015, the Board of Company appointed Jeffrey Goh as Chief Operating Officer, effective immediately. In connection with his appointment as
Chief Operating Officer, Mr. Goh and the Company have agreed that Mr. Gohs annual base salary will be $300,000, subject to annual increases of between 5% and 7% based upon performance goals and the Companys financial results.
Mr. Goh will be eligible to receive a cash bonus of up to a maximum of $150,000 per year (Cash Bonus), plus a bonus grant of restricted stock units convertible into Company common stock up to a maximum of $150,000 per year
(Equity Bonus). Each of the Cash Bonus and Equity Bonus shall be determined based upon the achievement of performance goals to be
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MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 COMMITMENTS AND CONTINGENCIES, CONTINUED
mutually agreed upon amongst Mr. Goh and the Board of Directors for the given year. Mr. Goh shall also be entitled to receive an award of 100,000 restricted stock units convertible into
Company common stock on each anniversary of the original date of his employment with the Company. In the event that Mr. Goh terminates his employment with or without cause or the Company terminates Mr. Gohs employment without cause,
Mr. Goh shall be entitled to receive a severance payment equivalent to 6, 12, or 18 months of base salary, based upon whether the length of Mr. Gohs employment with the Company at the time of termination is less than 12 months,
greater than 12 months but less than 24 months, or greater than 24 months, respectively.
Effective June 30, 2015, Jeffrey Goh, was promoted to
President and interim Chief Executive Officer of the Company.
Voting Agreement
On August 21, 2015, Medbox, P. Vincent Mehdizadeh (VM), PVM International, Inc., (PVM), and Vincent Chase, Incorporated,
(VC) (VM, PVM and VC, collectively, the VM Group) and each member of the Board of Directors of the Company, namely, Ned Siegel, Mitch Lowe and Jennifer Love, entered into a certain Second Amendment to Voting Agreement, dated
August 21, 2015 (the Second Amendment) amending in certain respects that certain Voting Agreement dated January 21, 2015 among such parties as previously amended by that certain First Amendment to Voting Agreement (the
First Amendment) dated August 11, 2015 (collectively, the Voting Agreement).
Pursuant to the First Amendment, the VM Group
previously agreed (i) to extend the Expiration Date of the Voting Agreement from January 20, 2016 to July 20, 2016, provided the Company made certain pre-payments on the remaining $478,877 balance due to PVM on an outstanding
promissory note (Note 7), and (ii) to forebear from exercising its rights to appoint a director to the Board of Directors of the Company (under Section 4 of that certain Settlement Agreement dated January 21, 2015 among the Company
and the VM Group, the Settlement Agreement), until the Expiration Date of the Voting Agreement as extended by the First Amendment.
Pursuant
to the Second Amendment, the VM Group and the Company:
(a) further extended the Expiration Date of the Voting Agreement to July 20,
2018,
(b) provided that the Company would make certain accelerated pre-payments on the $328,877 balance under the Note consisting of:
(i) three equal payments of principal in the amount of $82,220, together with accrued and unpaid interest, payable on each of August 24, 2015, August 31, 2015 and September 8, 2015, and (ii) one final payment on
September 14, 2015 equal to the remaining principal and accrued and unpaid interest due under the Note (the payments have all been paid as of September 30, 2014);
(c) provided that the VM Group would forebear from exercising its right to appoint a director to the Board of Directors of the Company (under
Section 4 of that certain Settlement Agreement), until the Expiration Date of the Voting Agreement as extended by the Second Amendment; and
(d) the VM Group executed, that certain Consent of Stockholders of Medbox, Inc. (the Consent) approving the following amendments
of the Articles of Incorporation (the Articles) of the Company:
(i) elimination of the provisions of Section IV of the
Articles giving the holders of the Series A Convertible Preferred Stock of the Company (the Preferred) disproportionately greater voting rights than the holders of Common Stock and instead providing for the Preferred to have one vote per
common share on an as- converted basis voting as a single class with the common shares upon any matter submitted to the stockholders for a vote, and
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MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 COMMITMENTS AND CONTINGENCIES, CONTINUED
(ii) to eliminate the provisions of Section V of the Articles providing the holders of a
majority of the outstanding shares of Preferred the right to approve any corporate action except for: (1) actions which would adversely alter or change the rights, preferences, privileges or restrictions of the Preferred or increase the
authorized number thereof, (2) any changes to the terms of the Preferred; (3) creation of any new class of shares having preferences over or being on a parity with the Preferred as to dividends or assets, unless the purpose of creation of
such class is, and the proceeds to be derived from the sale and issuance thereof are to be used for, the retirement of all Preferred then outstanding; or, (4) any payment of dividends or other distributions or any redemption or repurchase of
options or warrants to purchase stock of the Company, except for repurchases of options or stock issued under an equity incentive plan approved by the Board.
Litigation
On May 22, 2013, Medbox initiated
litigation in the United States District Court in the District of Arizona against three shareholders of MedVend Holdings LLC (Medvend) in connection with a contemplated transaction that Medbox entered into for the purchase of an
approximate 50% ownership stake in Medvend for $4.1 million. The lawsuit alleges fraud and related claims arising out of the contemplated transaction during the quarter ended June 30, 2013. The litigation is pending and Medbox has sought
cancellation due to a fraudulent sale of the stock because the selling shareholders lacked the power or authority to sell their ownership stake in MedVend, and their actions were a breach of representations made by them in the agreement. On
November 19, 2013 the litigation was transferred to United States District Court for the Eastern District of Michigan. MedVend recently joined the suit pursuant to a consolidation order executed by a new judge assigned to the matter. In the
litigation, the selling shareholder defendants seek alternatively to have the transaction performed, or to have it unwound and be awarded damages and allege breach of the agreement by Medbox and that $600,000 was wrongfully retained by the Company.
Medbox has denied liability with respect to any and all such counterclaims. A new litigation schedule was recently issued setting trial for September 2015. On June 5, 2014, the Company entered into a purchase and sale agreement (the
Medvend PSA) with PVM International, Inc. (PVMI) concerning this matter. Pursuant to the Medvend PSA, the Company sold to PVMI the Companys rights and claims attributable to or controlled by the Company against those
three certain stockholders of Medvend, known as Kaplan, Tartaglia and Kovan (the Medvend Rights and Claims), in exchange for the return by PVMI to the Company of 30,000 shares of the Companys common stock. PVMI is owned by Vincent
Mehdizadeh, the Companys largest stockholder. The Company will have the right, under the Medvend PSA, to purchase from PVMI, at any time, the Medvend Rights and Claims, for the consideration provided by PVMI, plus the sum of any of PVMIs
reasonable expenditures incurred in pursuit of the Medvend Rights and Claims. The court has not yet ruled on the substitution of PVMI as plaintiff in this matter. If necessary, the Company plans to vigorously defend against this matter. The case is
in the discovery stage, and, at this time, the Company cannot determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can they reasonably estimate a range of potential loss, should the outcome be
unfavorable.
On February 20, 2015, Michael A. Glinter, derivatively and on behalf of nominal defendants Medbox, Inc. the Board and certain executive
officers (Pejman Medizadeh, Matthew Feinstein, Bruce Bedrick, Thomas Iwanskai, Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer Love, and C. Douglas Mitchell) filed a suit in the Superior Court of the State of California for the County of Los
Angeles. The suit alleges breach of fiduciary duties and abuse of control by the defendants. Relief is sought awarding damages resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to
reform and improve its corporate governance and internal procedures to comply with applicable law. This action has been stayed pending the outcome of the actions filed in the United States District Court for the District of Nevada (Calabrese and
Gray). Due to the early stages of this suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be
unfavorable.
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MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 COMMITMENTS AND CONTINGENCIES, CONTINUED
On January 21, 2015, Josh Crystal on behalf of himself and of all others similarly situated filed a
class action lawsuit in the U.S. District Court for Central District of California against Medbox, Inc., and certain past and present members of the Board (Pejman Medizadeh, Bruce Bedrick, Thomas Iwanskai, Guy Marsala, and C. Douglas Mitchell). The
suit alleges that the Company issued materially false and misleading statements regarding its financial results for the fiscal year ended December 31, 2013 and each of the interim financial periods that year. The plaintiff seeks relief of
compensatory damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On April 23, 2015, the Court issued an Order consolidating the three related cases in this matter: Crystal v. Medbox, Inc., Gutierrez
v. Medbox, Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff. On July 27, 2015 Plaintiffs filed a Consolidated Amended Complaint. The Company must file a responsive pleading on or before December 4, 2015. The Company
intends to vigorously defend against these suits. Due to the early stages of the suits the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range
of potential loss, should the outcome be unfavorable.
On January 18, 2015, Ervin Gutierrez filed a class action lawsuit in the U.S. District Court
for the Central District of California. The suit alleges violations of federal securities laws through public announcements and filings that were materially false and misleading when made because they misrepresented and failed to disclose that the
Company was recognizing revenue in a manner that violated US GAAP. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On April 23, 2015, the Court issued
an Order consolidating the three related cases in this matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox, Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff. On July 27, 2015 Plaintiffs filed a Consolidated Amended Complaint.
The Company must file a responsive pleading on or before December 4, 2015. The Company intends to vigorously defend against this suit. Due to the early stages of the suit the Company is unable to determine whether the likelihood of an
unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
On
January 29, 2015, Matthew Donnino filed a class action lawsuit in the U.S. District Court for Central District of California. The suit alleges that the Company issued materially false and misleading statements regarding its financial results
for the fiscal year ended December 31, 2013 and each of the interim financial periods that year. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On
April 23, 2015, the Court issued an Order consolidating the three related cases in this matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox, Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff. On July 27, 2015 Plaintiffs
filed a Consolidated Amended Complaint. The Company must file a responsive pleading on or before December 4, 2015. The Company intends to vigorously defend against this suit. Due to the early stages of the suit the Company is unable to
determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
On February 12, 2015, Jennifer Scheffer, derivatively on behalf of Medbox, Guy Marsala, Ned Siegel, Mitchell Lowe and C. Douglas Mitchell filed a lawsuit
in the Eighth Judicial District Court of Nevada seeking damages for breaches of fiduciary duty regarding the issuance and dissemination of false and misleading statements and regarding allegedly improper and unfair related party transactions, unjust
enrichment and waste of corporate assets. On April 17, 2015, Ned Siegel and Mitchell Lowe filed a Motion to Dismiss. On April 20, 2015, the Company filed a Joinder in the Motion to Dismiss. On July 27, 2015, the Court held a hearing
on and granted the Motion to Dismiss without prejudice. Due to the early stages of the suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a
range of potential loss, should the outcome be unfavorable.
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MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 COMMITMENTS AND CONTINGENCIES, CONTINUED
On March 10, 2015 Robert J. Calabrese, derivatively and on behalf of nominal defendant Medbox, Inc.,
filed a suit in the United States District Court for the District of Nevada against certain Company officers and/or directors (Ned L. Siegel, Guy Marsala, J. Mitchell Lowe, Pejman Vincent Mehdizadeh, Bruce Bedrick, and Jennifer S. Love). The suit
alleges breach of fiduciary duties and gross mismanagement by issuing materially false and misleading statements regarding the Companys financial results for the fiscal year ended December 31, 2013 and each of the interim financial
periods. Specifically the suit alleges that defendants caused the Company to overstate the Companys revenues by recognizing revenue on customer contracts before it had been earned. The plaintiff seeks relief for compensatory damages and
reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Due to the early stages of the suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or
remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
On March 27, 2015 Tyler Gray, derivatively and
on behalf of nominal defendant Medbox, Inc., filed a suit in the United States District Court for the District of Nevada against the Companys Board of Directors and certain executive officers (Pejman Vincent Mehdizadeh, Matthew Feinstein,
Bruce Bedrick, Thomas Iwanski, Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer S. Love, and C. Douglas Mitchell). The suit alleges breach of fiduciary duties and abuse of control. The plaintiff seeks relief for compensatory damages and
reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally the plaintiff seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate
representative of the Company, and that the defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and
improve its corporate governance and internal procedures to comply with applicable law. Due to the early stages of this suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote,
nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
On May 20, 2015 Patricia des Groseilliers, derivatively
and on behalf of nominal defendant Medbox, Inc., filed a suit in the United States District Court for the District of Nevada against the Companys Board of Directors and certain executive officers (Pejman Vincent Mehdizadeh, Ned Siegel, Guy
Marsala, J. Mitchell Lowe, Bruce Bedrick, Jennifer S. Love, Matthew Feinstein, C. Douglas Mitchell, and Thomas Iwanski). The suit alleges breach of fiduciary duties and unjust enrichment. The plaintiff seeks relief for compensatory damages and
reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally the plaintiff seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate
representative of the Company, and that the defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and
improve its corporate governance and internal procedures to comply with applicable law. Due to the early stages of this suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote,
nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
On June 3, 2015 Mike Jones, derivatively and on behalf
of nominal defendant Medbox, Inc., filed a suit in the U.S. District Court for Central District of California against the Companys Board of Directors and certain executive officers (Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer S. Love,
C. Douglas Mitchell, Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, and Thomas Iwanski). The suit alleges breach of fiduciary duties, abuse of control, and breach of duty of honest services. The plaintiff seeks relief for compensatory
damages and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally the plaintiff seeks declaratory judgments that plaintiff may maintain the action on
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MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 COMMITMENTS AND CONTINGENCIES, CONTINUED
behalf of the Company, that the plaintiff is an adequate representative of the Company, and that the defendants have breached and/or aided and abetted the breach of their fiduciary duties to the
Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. On July 20, 2015, the Court issued an Order
consolidating this litigation with those previously consolidated in the Central District (Crystal, Gutierrez, and Donnino). Due to the early stages of this suit the Company is unable to determine whether the likelihood of an unfavorable outcome of
the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.
On July 20, 2015
Kimberly Freeman, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the Eighth Judicial District Court of Nevada against the Companys Board of Directors and certain executive officers (Pejman Vincent Mehdizadeh, Guy
Marsala, Ned Siegel, J. Mitchell Lowe, Jennifer S. Love, C. Douglas Mitchell, and Bruce Bedrick). The suit alleges breach of fiduciary duties and unjust enrichment. The plaintiff seeks relief for compensatory damages and reasonable costs and
expenses for all damages sustained as a result of the alleged wrongdoing. Additionally the plaintiff seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate representative of the
Company, and that the defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and improve its corporate
governance and internal procedures to comply with applicable law. Due to the early stages of this suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably
estimate a range of potential loss, should the outcome be unfavorable.
On December 26, 2014, Medicine Dispensing Systems, a wholly-owned subsidiary
of Medbox, filed a suit against Kind Meds, Inc. to collect fees of approximately $550,000 arising under a contract to establish a dispensary. Kind Meds, Inc. filed a cross complaint against Medicine Dispensing Systems for breach of contract and
breach of implied covenant of good faith and fair dealing, claiming damages of not less than $500,000. We believe that the cross complaint is without merit. We will continue to pursue this Kind Meds for the amounts owed under the contract and will
vigorously defend ourselves against the cross complaint. At this time the Company in unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss,
should the outcome be unfavorable.
The Company commenced arbitration proceedings against a former employee on June 13, 2013 related to employment
claims asserted by the employee. Thereafter, the employee filed a suit in Los Angeles County Superior Court. The suit was stayed pending the outcome of the arbitration and thereafter dismissed without prejudice. The Company obtained a favorable
arbitration award. The Company then filed an Application to Confirm the Arbitration Award in Arizona Superior Court, Maricopa County. After being unable to serve the employee, the Company performed service by publication and filed proofs of
publication for service on the employee on February 27, 2015 and March 2, 2015. If the arbitration award is not enforced, the employees claim can be re-filed in California.
In October 2014, the Board of Directors of the Company appointed a special board committee (the Special Committee) to investigate a federal grand
jury subpoena pertaining to the Companys financial reporting which was served upon the Companys accountants as well as certain alleged wrongdoing raised by a former employee of the Company. The Company was subsequently served with two
SEC subpoenas in early November 2014. The Company is fully cooperating with the grand jury and the SEC. In connection with its investigation of these matters, the Special Committee in conjunction with the Audit Committee initiated an internal review
by management and by an outside professional advisor of certain prior period financial reporting of the Company. The outside professional advisor reviewed the Companys revenue recognition methodology for certain contracts
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MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 COMMITMENTS AND CONTINGENCIES, CONTINUED
for the third and fourth quarters of 2013. As a result of certain errors discovered in connection with the review by management and its professional advisor, the Audit Committee, upon
managements recommendation, concluded on December 24, 2014 that the consolidated financial statements for the year ended December 31, 2013 and for the third and fourth quarters therein, as well as for the quarters ended June 30,
2014, June 30, 2014 and September 30, 2014, should no longer be relied upon and would be restated to correct the errors. On March 6, 2015 the audit committee determined that the consolidated financial statements for the year
ended December 31, 2012, together with all three, six and nine month financial information contained therein, and the quarterly information for the first two quarters of the 2013 fiscal year should also be restated. On March 11, 2015, the
Company filed its restated Form 10 Registration Statement with the SEC with restated financial information for the years ended December 31, 2012 and December 31, 2013, and on March 16, 2015, the Company filed amended and restated
quarterly reports on Form 10-Q, with restated financial information for the periods ended March 31, June 30 and September 30, 2014, respectively.
NOTE 10 SUBSEQUENT EVENTS
Share purchase and transfer
On
March 5, 2015, Mr. Mehdizadeh announced that an agreement has been executed with Lizada Capital LLC, an investor in the field of legal cannabis products, that would result in the transfer of the majority of Mr. Mehdizadehs
shares of the Company to that firm. As of September 30, 2015, the prospective buyer has cancelled this agreement.
October 2015 Debentures
On October 14, 2015, the Company issued seven debentures in the aggregate of $2,000,000 to a service provider (the October 2015
Investor) as consideration for services previously rendered to the Company on the same terms as the August 14 Debentures and August 14 Purchase Agreement (the October 2015 Debentures and October 2015 Purchase
Agreement, respectively) except that the October 2015 Purchase Agreement does not provide for registration rights to the October 2015 Investor with regard to the shares underlying the October 2015 Debentures. The service provider has agreed
with the Company not to convert the October 2015 Debentures for any amount in excess of fees payable for services previously rendered to the Company at the time of conversion. To the extent that the sale of shares underlying the October 2015
Debentures do not satisfy outstanding amounts payable to the service provider, such amounts will remain payable to the service provider by the Company.
Lease
On October 14, 2015, one of the
Companys subsidiaries entered into a lease regarding a property in Washington state (Note 9). The lease has a five year term, with monthly lease payments of $2,500. The property had been classified as Asset held for resale during previous
periods, but as managements plans regarding the property have changed, as evidenced by the subsequent period lease, it was reclassified as Property and equipment as of September 30, 2015.
Settlements
As disclosed in Note 9, class actions
and derivative lawsuits were filed against and purportedly on behalf of the Company captioned (1) Josh Crystal v. Medbox, Inc., et al. , in the U.S. District Court for Central District of California; (2) Matthew Donnino v.
Medbox, Inc., et al. , in the U.S. District Court for Central District of California; (3) Ervin Gutierrez v. Medbox, Inc., et al., in the U.S. District Court for Central District of California;
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MEDBOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 SUBSEQUENT EVENTS, CONTINUED
(4) Mike Jones v. Guy Marsala, et al. , in the U.S. District Court for Central District of California; (5) Jennifer Scheffer v. P. Vincent Mehdizadeh, et al. , in the
Eighth Judicial District Court of Nevada; (6) Kimberly Y. Freeman v. Pejman Vincent Mehdizadeh, et al., in the Eighth Judicial District Court of Nevada; (7) Tyler Gray v. Pejman Vincent Mehdizadeh, et al. , in the U.S.
District Court for the District of Nevada; (8) Robert J. Calabrese v. Ned L. Siegel, et al. , in the U.S. District Court for the District of Nevada; (9) Patricia des Groseilliers v. Pejman Vincent Mehdizadeh, et al. , in the
U.S. District Court for the District of Nevada; (10) Michael A. Glinter v. Pejman Vincent Mehdizadeh, et al. , in the Superior Court of the State of California for the County of Los Angeles. The complaints named as defendants the
Company, prior and current members of the board of directors of the Company, and prior and current officers of the Company. The complaints alleged that the Company issued materially false and misleading statements regarding its financial results for
the fiscal years ended December 31, 2012 and December 31, 2013 and each of the interim financial periods during those years and for each of the first three interim financial periods for the fiscal year ended 2014. The derivative lawsuits
alleged breach of fiduciary duties, unjust enrichment, waste of corporate assets, abuse of control, and breach of duty of honest services.
On
October 16, 2015, solely to avoid the costs, risks, and uncertainties inherent in litigation, the parties to the class actions and derivative lawsuits entered into settlements, that collectively effect a global settlement of all claims asserted
in the class actions and the derivative actions. The global settlement provides, among other things, for the release and dismissal of all asserted claims. The global settlement is contingent on final court approval, respectively, of the settlements
of the class actions and derivative actions. As a result of amounts already reflected in the Companys financial statements, and the coverage by the Companys insurance carrier, the final terms of the settlements are not expected to have a
material adverse effect on the Companys financial position or results of operations.
Board of Directors appointment
On October 15, 2015, Jeff Goh, 51, President and Interim Chief Executive Officer of the Company was elected to the board of directors of the Company.
The Farm Operating Agreement
On November 4,
2015, the Company signed an operating agreement with an independent contractor to perform cultivating services at the Farm. The independent operator will receive 10% of the profits of the Farm, after deduction of direct expenses. The term of the
agreement is five years from the date of the agreement, with the parties permitted to extend the term through mutual agreement by successive two year terms.
New Litigation
On October 27, 2015, Richard
Merritts, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the Superior Court of the State of California for the County of Los Angeles against the Board and certain executive officers (Guy Marsala, J. Mitchell Lowe,
Ned Siegel, Jennifer S. Love, C. Douglas Mitchell, Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, Jeff Goh, and Thomas Iwanski). The suit alleges breach of fiduciary duties by the defendants. Relief is sought awarding damages
resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. Merritts lawsuit has not
been served.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. |
Other Expenses of Issuance and Distribution. |
We will pay all expenses in connection
with the registration and sale of the common stock by the selling shareholders. The estimated expenses of issuance and distribution are set forth below.
|
|
|
|
|
SEC filing fee |
|
$ |
2,100 |
* |
Legal expenses |
|
$ |
100,000 |
* |
Accounting expenses |
|
$ |
25,000 |
* |
Miscellaneous |
|
$ |
10,000 |
* |
Total |
|
$ |
137,100 |
* |
Item 14. |
Indemnification of Directors and Officers. |
Neither our Articles of Incorporation nor
bylaws prevent us from indemnifying our officers, directors and agents to the extent permitted under the Nevada Revised Statute (NRS). NRS Section 78.7502 provides that a corporation shall indemnify any director, officer, employee
or agent of a corporation against expenses, including attorneys fees, actually and reasonably incurred by him in connection with any the defense to the extent that a director, officer, employee or agent of a corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred to Section 78.7502(1) or 78.7502(2), or in defense of any claim, issue or matter therein.
NRS 78.7502(1) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys
fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit
or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person is liable pursuant to NRS 78.138 or did not act in good faith and in a manner
which he or she reasonably believed to be in or not opposed to the best interests of the corporation, or that, with respect to any criminal action or proceeding, he or she had reasonable cause to believe that the conduct was unlawful.
NRS Section 78.7502(2) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys fees actually and
reasonably incurred by him in connection with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals there from, to be liable to
the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the
circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.
NRS Section 78.7502(3) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections 1 and 2, or in defense of any claim, issue or matter therein, the corporation shall indemnify him or her against
expenses, including attorneys fees, actually and reasonably incurred by him or her in connection with the defense.
NRS
Section 78.747(1) provides that except as otherwise provided by specific statute, no director or officer of a corporation is individually liable for a debt or liability of the corporation, unless the director or officer acts as the alter ego of
the corporation. The court as a matter of law must determine the question of whether a director or officer acts as the alter ego of a corporation. (2) A stockholder, director or officer acts as the alter ego of a corporation if: (a) The
corporation is influenced and governed by the stockholder, director or officer; (b) There is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other; and
(c) Adherence to the corporate fiction of a separate entity would sanction fraud or promote a manifest injustice. (3) The question of whether a stockholder, director or officer acts as the alter ego of a corporation must be determined by
the court as a matter of law.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the
event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.
Item 15. |
Recent Sales of Unregistered Securities. |
On November 11, 2011, we issued an
aggregate of 6,000,000 shares of our Series A Preferred Stock to Vincent Mehdizadeh and Shannon Illingworth in exchange for services rendered to the Company. 3,000,000 shares were subsequently cancelled and returned to treasury.
On June 13, 2013, we issued to Moodys Capital Solutions, Inc. warrants to purchase 15,000 shares of our common stock at an exercise
price of $31 as consideration for their services as finder in identifying an accredited investor who participated in our private offering. The warrants expire June 13, 2018.
From January 1, 2012 through December 31, 2012, the Company sold 1,168,733 shares of common stock to accredited investors for an
average of $1.15 per share, or aggregate proceeds of $1,359,050, including carry-over shares through January of 2013, deemed by management to be materially part of the prior period.
On April 1, 2013, we issued warrants to purchase 260,864 shares of our common stock to Vapor Systems International in exchange for the
outstanding shares of Vaporfection International, Inc., which is now our wholly owned subsidiary, which were subsequently split up and reissued to the individual owners of Vapor Systems International, LLC. The warrants have an exercise price of
$.001 per share, subject to adjustment for stock dividends, subdivisions or combinations of the common stock, reclassifications and similar transactions, and are exercisable beginning on March 21, 2014 until April 1, 2018.
During the year ending December 31, 2013 we issued 1,079,303 shares of common stock to various accredited investors and received
aggregate gross proceeds in the amount of $5,772,094 (of which $4,486,541 was cash and $1,285,553 non-cash).
From January to March 31, 2014 the Company issued 485,830 shares of common stock to
accredited investors at a price of $5.00 per share raising proceeds of $2,429,150.
The Company issued 6,540 shares to its attorneys for
legal fees on November 12, 2014 at a price of $6.59 per share and 46,352 shares to its attorneys for legal fees on December 31, 2014 at $5.11 per share. The Company also issued 252,812 shares to former shareholders of Vaporfection as
part of a settlement agreement to resolve a litigation dispute.
The August 14, 2015 Convertible Debt Financing, the August 20,
2015 Convertible Debt Financing and the July 2015 Debenture, including amendments and modifications are described in the prospectus to this registration statement under the heading Recent Developments and are incorporated into this
Item 15 by reference.
On October 14, 2015, the Company issued seven debentures in the aggregate of $2,000,000 to the October
2015 Investor as consideration for services previously rendered to the Company. The debentures and related purchase agreement have the same terms as the August 14 Debentures and August 14 Purchase Agreement (the October 2015
Debentures and October 2015 Purchase Agreement, respectively) except that the October 2015 Purchase Agreement does not provide for registration rights to the October 2015 Investor with regard to the shares underlying the October
2015 Debentures. The October 15 Investor has agreed with the Company return any shares from conversions of October 2015 Debentures remaining after all fees payable for services previously rendered to the Company prior to the time of conversion
have been collected by the October 15 Investor through the sale of such shares. To the extent that the sale of shares underlying the October 2015 Debentures do not satisfy outstanding amounts payable to the service provider, such amounts will
remain payable to the service provider by the Company.
In connection with the foregoing, we relied upon the exemption from registration
provided by Section 4(a)(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering.
Between
December 18 and 22, 2015, the Company sold 5,718,082 shares of common stock under its 2014 Plan to certain officers and other employees and consultants of the Company at a price of $0.0188 per share for an aggregate of $107,500. All employees,
directors and officers of the Company were entitled to participate in the employee stock purchase plan. The Company relied upon the exemption from registration provided by Section 506(b) of Regulation D and/or Section 4(a)(2) of the Securities
Act of 1933, as amended, for transactions not involving a public offering.
On December 22, 2015, the Company sold 833,332 shares of
common stock to certain service providers to the Company at a price of $0.0188 per share for an aggregate of $20,000. The Company relied upon the exemption from registration provided by Section 506(c) of Regulation D and/or Section 4(a)(2) of
the Securities Act of 1933, as amended, for transactions not involving a public offering.
|
|
|
Exhibit
Number |
|
Description |
|
a. Financial Statements |
|
We have included the following financial statements and notes with this registration statement: |
|
1. Audited Consolidated Financial Statements and Notes to the Consolidated Financial Statements as of December 31, 2014 and 2013 and for the years ended December 31, 2014, December 31, 2013 and
December 31, 2012 and Unaudited Interim Condensed Consolidated Financial Statements and Notes to the Interim Condensed Consolidated Financial Statements as of September 30, 2015 and September 30, 2014. |
|
b. Exhibits |
|
|
3.1 |
|
Articles of Incorporation filed with the Secretary of State on June 16, 1977 (1) |
|
|
3.2 |
|
Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on September 18, 1998 (1) |
|
|
3.3 |
|
Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on May 12, 2000 (1) |
|
|
|
|
|
3.4 |
|
Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on November 16, 2006 (1) |
|
|
3.5 |
|
Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on January 11, 2008 (1) |
|
|
3.6 |
|
Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on August 4, 2009 (1) |
|
|
3.7 |
|
Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on August 21, 2009 (1) |
|
|
3.8 |
|
Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on February 14, 2011 (1) |
|
|
3.9 |
|
Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on August 30, 2011 (1) |
|
|
3.10 |
|
Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on July 15, 2013 (2) |
|
|
3.11 |
|
Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on October 27, 2015** |
|
|
3.12 |
|
Amended and Restated Bylaws of Medbox, Inc. dated July 11, 2013 (2) |
|
|
3.13 |
|
Amendment No. 1 to Restated Bylaws of Medbox, Inc. dated December 16, 2014 (10) |
|
|
3.14 |
|
Amendment No. 2 to Amended and Restated Bylaws of Medbox Inc. dated December 22, 2014 (11) |
|
|
4.1 |
|
Form of Common Stock Certificate of Medbox, Inc. (2) |
|
|
4.2 |
|
Form of Certificate for the Series A Preferred Stock (2) |
|
|
5.1 |
|
Opinion of Fennemore Craig, P.C.* |
|
|
10.1 |
|
Stock Purchase Agreement, effective as of December 31, 2011, by and among Medbox, Inc. and PVM International, Inc. (1) |
|
|
10.2 |
|
Amended and Restated Stock Purchase Agreement effective as of February 26, 2013, by and between Medbox, Inc. and Bio-Tech Medical Software, Inc. (1) |
|
|
10.3 |
|
Amended and Restated Technology License Agreement, dated as of February 26, 2013, by and between Bio-Tech Medical Software, Inc. and Medbox, Inc. (2) |
|
|
10.4 |
|
Membership Interest Purchase Agreement dated as of March 12, 2013 between Medbox, Inc. and Darryl B. Kaplan, Claudio Tartaglia and Eric Kovan (MedVend Holdings) (2) |
|
|
10.5 |
|
Securities Purchase Agreement dated as of March 22, 2013, by and among Medbox, Inc. and Vapor Systems International, LLC (1) |
|
|
10.6 |
|
Amendment Securities Purchase Agreement by and Medbox, Inc. and Vapor Systems International, LLC, dated July 5, 2013 and effective as of March 22, 2013 (2) |
|
|
10.7 |
|
Bio-Tech Purchase and Sale Agreement (4) |
|
|
10.8 |
|
Med Vend Purchase and Sale Agreement (4) |
|
|
10.9 |
|
Form of Securities Purchase Agreement (5) |
|
|
10.10 |
|
Form of Registration Rights Agreement (6) |
|
|
|
Exhibit Number |
|
Description |
|
|
10.11 |
|
Form of Debenture (5) |
|
|
10.12 |
|
Employment Agreement for Guy Marsala (7) |
|
|
10.13 |
|
Consulting Agreement with Bruce Bedrick (8) |
|
|
10.14 |
|
Securities Purchased Agreement (9) |
|
|
10.15 |
|
Registration Rights Agreement (9) |
|
|
10.16 |
|
Form of Debenture (9) |
|
|
10.17 |
|
Amendment No. 1 to Securities Purchase Agreement (9) |
|
|
10.18 |
|
Agreement, dated January 21, 2015, by and among the Company, P. Vincent Mehdizadeh and PVM International, Inc., and Invent Chase, Incorporated (12) |
|
|
10.19 |
|
Voting Agreement, dated January 21, 2015, by and among the Company, P. Vincent Mehdizadeh, PVM International, Inc. and Vincent Chase, Incorporated (12) |
|
|
10.20 |
|
Form of Purchase Agreement Amendment July 2014 Financing (13) |
|
|
10.21 |
|
Form of Amended and Restated Debenture July 2014 Financing (13) |
|
|
10.22 |
|
Form of Modified Debenture July 2014 Financing (13) |
|
|
10.23 |
|
Form of Debenture Agreement Amendment July 2014 Financing (13) |
|
|
10.24 |
|
Form of Warrant July 2014 Financing (13) |
|
|
10.25 |
|
Form of Purchase Agreement Amendment September 2014 Financing (13) |
|
|
10.26 |
|
Form of Amended and Restated Debenture September 2014 Financing (13) |
|
|
10.27 |
|
Form of Modified Debenture September 2014 Financing (13) |
|
|
10.28 |
|
Form of Debenture Agreement Amendment September 2014 Financing (13) |
|
|
10.29 |
|
Form of Warrant September 2014 Financing (13) |
|
|
10.30 |
|
Form of Subordinated Convertible Siegel and Lowe Note (13) |
|
|
10.31 |
|
Medbox, Inc. 2014 Equity Incentive Plan (15) |
|
|
10.32 |
|
Lowe Director Retention Agreement (18)+ |
|
|
10.33 |
|
Siegel Director Retention Agreement (19)+ |
|
|
10.34 |
|
Love Director Retention Agreement (16)+ |
|
|
10.35 |
|
Form of Amendment to Director Retention Agreement (21)+ |
|
|
10.36 |
|
C. Douglas Mitchell Employment Agreement, dated October 16, 2014 (17)+ |
|
|
10.37 |
|
Amendment to Marsala Employment Agreement, dated December 16, 2014 (21)+ |
|
|
10.38 |
|
Amendment to Mitchell Employment Agreement, dated December 16, 2014 (21)+ |
|
|
10.39 |
|
Exclusive Trademark and Patent License Agreement Between PVM International, Inc. and Medbox, Inc., dated as of April 1, 2013 (1) |
|
|
10.40 |
|
Promissory Note issued to PVMI dated January 1, 2012 (2) |
|
|
10.41 |
|
Agreement between Prescription Vending Machines, Inc. and AVT, Inc. dated February 10, 2010 (1) |
|
|
|
Exhibit
Number |
|
Description |
|
|
10.42 |
|
Settlement Agreement by and between Medbox, Inc. and Bio-Tech Medical Software, Inc. dated as of February 27, 2014 (14) |
|
|
10.43 |
|
Second Amended and Restated Technology License Agreement, dated February 27, 2014, between Bio-Tech Medical Software, Inc. and Medbox, Inc. (3) |
|
|
10.44 |
|
Amendment to Purchase Agreement Amendment (22) |
|
|
10.45 |
|
Written Waiver Agreement (22) |
|
|
10.46 |
|
Debenture Amendment Agreement (22) |
|
|
10.47 |
|
Amendment to Amendment Modification and Supplement to Securities Purchase Agreement, dated April 8, 2015 (23) |
|
|
10.48 |
|
Second Amendment to Amendment Modification and Supplement to Securities Purchase Agreement, dated April 24, 2015 (23) |
|
|
10.49 |
|
Second Written Waiver Agreement, dated April 24, 2015 (23) |
|
|
10.50 |
|
Third Amendment to Amendment Modification and Supplement to Securities Purchase Agreement, dated May 15, 2015 (24) |
|
|
10.51 |
|
Third Written Waiver Agreement, dated May 15, 2015 (24) |
|
|
10.52 |
|
Employment Agreement of Jeffrey Goh, dated May 1, 2015 (25)+ |
|
|
10.53 |
|
Promissory Note, dated June 30, 2015 (26) |
|
|
10.54 |
|
Guy Marsala Separation Agreement, dated June 30, 2015 (26) |
|
|
10.55 |
|
First Amendment to Voting Agreement, dated August 11, 2015 among the Company, the VM Group and each member of the board of directors of the Company (27) |
|
|
10.56 |
|
Form of Securities Purchase Agreement, dated August 14, 2015 between the Company and the August 14 Investor (27) |
|
|
10.57 |
|
Registration Rights Agreement, dated August 14, 2015 between the Company and the August 14 Investor (27) |
|
|
10.58 |
|
Form of Debenture between the Company and the August 14 Investor (27) |
|
|
10.59 |
|
Second Amendment to Voting Agreement, dated August 21, 2015 among the Company, the VM Group and each member of the board of directors of the Company (28) |
|
|
10.60 |
|
Securities Purchase Agreement, dated August 20, 2015 between the Company and the August 20 Investor (29) |
|
|
10.61 |
|
Registration Rights Agreement, dated August 20, 2015 between the Company and the August 20 Investor (29) |
|
|
10.62 |
|
Form of Debenture under August 20 Securities Purchase Agreement (29) |
|
|
10.63 |
|
Form of Warrant under August 20 Securities Purchase Agreement (29) |
|
|
10.64 |
|
Form of Security Agreement, dated August 21, 2015 between the Company and certain investors (29) |
|
|
10.65 |
|
First Amendment to Securities Purchase Agreement, dated September 4, 2015, among the Company and the August 14 Investor (30) |
|
|
10.66 |
|
Supplemental Agreement, dated September 18, 2015 between the Company and the September 2014 Investor (31) |
|
|
|
|
|
10.67 |
|
September 2014 Warrant Amendment, dated September 18, 2015 (31) |
|
|
10.68 |
|
Side Letter, dated September 22, 2015, to Securities Purchase Agreements, dated August 14, 2015 and July 21, 2014, as amended, and the 10% Convertible Debentures issued thereunder, among the Company and the August 14
Investor (32) |
|
|
10.69 |
|
Supplemental Agreement, dated September 28, 2015 between the Company and the July 2014 Investor (33) |
|
|
10.70 |
|
July 2014 Warrant Amendment, dated September 28, 2015 (33) |
|
|
10.71 |
|
Side Letter, dated September 29, 2015, to Securities Purchase Agreement, dated September 19, 2014, as amended, the 5% Convertible Debenture issued April 3, 2015 thereunder, and Securities Purchase Agreement, dated August 20, 2015,
as amended, among the Company and the August 20 Investor (34) |
|
|
10.72 |
|
Purchase Agreement, dated October 14, 2015 between the Company and the October 2015 Investor** |
|
|
10.73 |
|
Form of Debenture between the Company and the October 2015 Investor** |
|
|
10.74 |
|
Agreement of Purchase and Sale of Membership Interest entered into July 23, 2015 between and East West Secured Development, LLC and the Company of 100% of the membership interest of EWSD I, LLC (35) |
|
|
10.75 |
|
Secured Promissory Note of EWSD (35) |
|
|
10.76 |
|
Deed of Trust securing Promissory Note (35) |
|
|
10.77 |
|
Assignment of Rents and Leases encumbering the real property (35) |
|
|
10.78 |
|
Unsecured Promissory Note (35) |
|
|
10.79 |
|
Second Supplemental Agreement dated November 16, 2015 between the Company and the August 20 Investor (36) |
|
|
10.80 |
|
Joint Venture Agreement, dated November 4, 2015, between Mark Marsh and the Company** |
|
|
10.81 |
|
Second Amendment to Securities Purchase Agreement, dated December 9, 2015, between the Company and the August 14 Investor.** |
|
|
10.82 |
|
Debenture Amendment and Restriction Agreement, dated December 24, 2015 among the Company and the August 14 Investor and the July 2015 Investor. (37) |
|
|
10.83 |
|
Promissory Note, dated December 24, 2015, issued to the August 14 Investor. (37) |
|
|
10.84 |
|
Purchase and Assignment Agreement, dated December 28, 2015 among the August 14 Investor and certain affiliates thereof and the December 2015 Investor.* |
|
|
10.85 |
|
Farming Agreement, dated December 18, 2015 among the Company, EWSD I, LLC, and Whole Hemp Company, LLC* |
|
|
10.86 |
|
Growers Agent Agreement, dated December 18, 2015 between the Company and Whole Hemp Company, LLC* |
|
|
16.1 |
|
Letter from Q Accountancy Corporation to the Security and Exchange Commission dated February 5, 2015 (20) |
|
|
21.1 |
|
Subsidiaries of Medbox, Inc.** |
|
|
23.1 |
|
Consent of Marcum LLP * |
|
|
23.2 |
|
Consent of Q Accountancy Corporation * |
|
|
23.3 |
|
Consent of Fennemore Craig, P.C. (included in Exhibit 5.1) |
|
|
101.INS |
|
XBRL Instance Document ** |
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document ** |
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document ** |
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document ** |
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document ** |
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document ** |
(1) |
Incorporated by reference from the Registrants Registration Statement on Form 10 file no. 000-54928, originally filed on April 10, 2013. |
(2) |
Incorporated by reference from the Registrants Registration Statement on Form S-1, as amended, file no. 333-189993, originally filed on July 17, 2013. |
(3) |
Incorporated by reference from Amendment No. 1 to the Registrants Registration Statement on Form 10 file no. 000-54928, originally filed on May 13, 2014. |
(4) |
Incorporated by reference from Registrants Current Report on Form 8-K (File 000-54928), originally filed on June 10, 2014. |
(5) |
Incorporated by reference from Registrants Current Report on Form 8-K (File No. 000-54928), filed with the Commission on July 25, 2014. |
(6) |
Incorporated by reference from the Registrants Amendment to Current Report on Form 8-K/A (File No. 000-54928) filed with the Commission on July 29, 2014. |
(7) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928), filed with the Commission on July 29, 2014. |
(8) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928), filed with the Commission on August 22, 2014. |
(9) |
Incorporated by reference the Registrants Current Report on Form 8-K (File No. 000-54928), filed with the Commission on September 24, 2014. |
(10) |
Incorporated by reference the Registrants Current Report on Form 8-K (File No. 000-54928), filed with the Commission on December 22, 2014. |
(11) |
Incorporated by reference the Registrants Current Report on Form 8-K (File No. 000-54928), filed with the Commission on December 30, 2014. |
(12) |
Incorporated by reference the Registrants Current Report on Form 8-K (File No. 000-54928), filed with the Commission on January 26, 2015. |
(13) |
Incorporated by reference the Registrants Current Report on Form 8-K (File No. 000-54928), filed with the Commission on February 2, 2015. |
(14) |
Incorporated by reference to the Amendment No. 1 to the Registrants Registration Statement on Form 10 File No. 000-54928, filed with the Commission on March 31, 2014. |
(15) |
Incorporated by reference to the Registrants Registration Statement on Form S-8 (File No. 333-198441), filed with the Commission on August 28, 2014. |
(16) |
Incorporated by reference to Amendment No. 1 to the Registrants Current Report on Form 8-K (File No. 000-54928), filed with the Commission on March 25, 2015. |
(17) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928), filed with the Commission on October 21, 2015. |
(18) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928), filed with the Commission on March 25, 2015. |
(19) |
Incorporated by reference to Amendment No. 2 to the Registrants Current Report on Form 8-K (File No. 000-54928), filed with the Commission on March 25, 2015. |
(20) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928) filed with the Commission on February 6, 2015. |
(21) |
Incorporated by reference to the Registrants Annual Report on Form 10-K (File No. 000-54928) filed with the Commission on March 26, 2015. |
(22) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928) filed with the Commission on April 3, 2015. |
(23) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928) filed with the Commission on April 24, 2015. |
(24) |
Incorporated by reference Amendment No. 1 to the Registrants Registration Statement on Form S-1 (Registration No. 333-203299) filed with the Commission on May 11, 2015. |
(25) |
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No. 000-54928) filed with the Commission on August 14, 2015. |
(26) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928) filed with the Commission on July 7, 2015. |
(27) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928) filed with the Commission on August 19, 2015. |
(28) |
Incorporated by reference to the Registrants first Current Report on Form 8-K (File No. 000-54928) filed with the Commission on August 26, 2015. |
(29) |
Incorporated by reference to the Registrants second Current Report on Form 8-K (File No. 000-54928) filed with the Commission on August 26, 2015. |
(30) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928) filed with the Commission on September 11, 2015. |
(31) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928) filed with the Commission on September 18, 2015. |
(32) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928) filed with the Commission on September 28, 2015. |
(33) |
Incorporated by reference to the Registrants first Current Report on Form 8-K (File No. 000-54928) filed with the Commission on October 2, 2015. |
(34) |
Incorporated by reference to the Registrants second Current Report on Form 8-K (File No. 000-54928) filed with the Commission on October 2, 2015. |
(35) |
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (File No. 000-54928) filed with the Commission on November 12, 2015. |
(36) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928) filed with the Commission on November 17, 2015. |
(37) |
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-54928) filed with the Commission on December 29, 2015. |
+ |
Management compensatory arrangement |
|
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 406 under the Securities Act of 1933. |
1. The undersigned registrant hereby undertakes to file, during any
period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933.
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement.
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
Provided, however, that paragraphs (B)(1)(i) and (B)(1)(ii) of this
section do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the registration statement.
2. The undersigned registrant hereby undertakes that, for the purpose of determining any liability under the Securities Act of 1933, as
amended, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
3. The undersigned registrant hereby undertakes to remove from registration by means of a post-effective amendment any of the
securities being registered that remain unsold at the termination of the offering.
4. The undersigned registrant hereby undertakes
that, for purposes of determining any liability under the Securities Act, each filing of the registrants annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing of an
employee benefit plans annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
5. The undersigned registrant hereby undertakes that, for the purposes of determining
liability to any purchaser:
If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as
part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
6. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors,
officers and controlling persons of the undersigned registrant according the foregoing provisions, or otherwise, the undersigned registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on January 20, 2016.
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Medbox, Inc. |
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By: |
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/s/ Jeffrey Goh |
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Jeffrey Goh |
Its: |
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President and Chief Executive Officer
(Principal Executive Officer) |
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By: |
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/s/ C. Douglas Mitchell |
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C. Douglas Mitchell |
Its: |
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Chief Financial Officer (Principal Financial
and Accounting Officer) |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed
below by the following persons in the capacities and on the dates indicated.
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/s/ Jeffrey Goh |
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January 20, 2016 |
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Jeffrey Goh |
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President and Chief Executive Officer (principal executive officer) |
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/s/ C. Douglas Mitchell |
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January 20, 2016 |
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C. Douglas Mitchell |
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Chief Financial Officer (principal financial and accounting officer) |
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* |
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January 20, 2016 |
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J. Mitchell Lowe |
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Director |
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January 20, 2016 |
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Ned L. Siegel |
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Director |
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January 20, 2016 |
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Manuel Flores |
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Director |
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*By: |
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/s/ C. Douglas Mitchell |
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C. Douglas Mitchell |
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Attorney-in-fact |
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Exhibit 5.1
FENNEMORE CRAIG, P.C.
300 E. Second Street
Suite 1510
Reno, Nevada 89501
(775)
788-2200
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Law Offices |
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Denver |
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(303) 291-3200 |
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Las Vegas |
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(702) 692-8000 |
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Nogales |
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(520) 281-3480 |
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Phoenix |
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(602) 916-5000 |
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Reno |
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(775) 788-2200 |
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Tucson |
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(520) 879-6800 |
January 20, 2016
Medbox, Inc.
600 Wilshire Blvd., Suite 1500
Los Angeles, CA 90017
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Re: |
Registration of Common Stock of Medbox, Inc. |
Ladies and Gentlemen:
We are acting as special Nevada counsel for Medbox, Inc., a Nevada corporation (the Company), in connection with the registration
by the Company under the Securities Act of 1933, as amended (the Act), of up to 142,000,000 shares of Common Stock, par value $0.001 per share, of the Company (such shares being registered, the Common Stock), to be offered to
the public under Post-Effective Amendment No. 1 to Form S-1 Registration Statement 333-207464 relating to such offering (the Registration Statement) being filed with the United States Securities and Exchange Commission on or about
the date hereof. Capitalized terms used in this opinion and not otherwise defined or that do not constitute a proper noun (e.g., Certificate of Corporate Existence) have the meaning given to those terms in the Registration Statement.
We have examined originals or copies of each of the documents listed below:
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1. |
Certificate of Corporate Existence relating to the Company, issued by the Nevada Secretary of State; |
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2. |
The Articles of Incorporation of the Company (as amended to date) certified by the Secretary of the Company on the date hereof; |
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3. |
The Amended and Restated Bylaws of the Company dated as of December 28, 2010, certified by the Secretary of the Company on the date hereof; |
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4. |
Resolutions of the Board of Directors of the Company, certified by the Secretary of the Company on the date hereof. |
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5. |
A Securities Purchase Agreement dated as of August 14, 2015, by and between the Company and Redwood Management, LLC (the August 14
Investor), and a |
FENNEMORE CRAIG
Medbox, Inc.
January 20, 2016
Page
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first amendment thereto dated September 4, 2015 (as so amended, the August 14 Purchase Agreement), which agreement provided for the purchase of certain convertible debentures (the August 14
Debentures); |
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6. |
A Securities Purchase Agreement dated as of August 20, 2015, by and between the Company and Yorkville Advisors Global, L.P. (the August 20 Investor), a Supplemental Agreement, dated September 18,
2015, and a Second Supplemental Agreement, dated November 16, 2015, each amending and supplementing such Securities Purchase Agreement, (as so amended and supplemented, the August 20 Securities Purchase Agreement) which agreement
provided for the purchase of certain convertible debentures (the August 20 Debentures) and a warrant to purchase shares of the Companys common stock (the August 20 Warrant); |
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7. |
The form of the August 14 Debentures as amended by the DARA (defined below); |
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8. |
The form of the August 20 Debentures; |
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9. |
A debenture dated July 10, 2015, issued to the August 14 Investor, as amended by an Agreement of Acknowledgment and Amendment of 10% Convertible Debenture dated as of September 28, 2015 and as further
amended by the DARA (the July 2015 Debenture and together with the August 14 and August 20 Debentures, the Debentures) |
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10. |
A Debenture Amendment and Restriction Agreement dated December 24, 2015, by and among the Company, the August 14 Investor, RDW Capital, LLC, Redwood Fund II, LLC and Redwood Fund III Ltd. (the
DARA); and |
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11. |
The Registration Statement. |
We have examined originals or copies of such other corporate
records, certificates of corporate officers and public officials and other agreements and documents as we have deemed necessary or advisable for purposes of this opinion letter. We have relied upon the certificates of all public officials and
corporate officers with respect to the accuracy of all factual matters contained therein.
Based upon the foregoing, and subject to the
following, it is our opinion that, when (a) the Registration Statement has become effective under the Act; (b) as to any Debentures issuable pursuant to either the August 14 or August 20 Purchase Agreement, such Debentures are
issued pursuant to either such Agreement; and (c) the Common Stock (including shares of Common Stock issued pursuant to a Debenture in lieu of interest) has been issued and delivered in accordance with the relevant Debenture or August 20
Warrants (as applicable) and
FENNEMORE CRAIG
Medbox, Inc.
January 20, 2016
Page
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as contemplated by the Registration
Statement, such Common Stock will be duly authorized, validly issued, fully paid and non-assessable. In giving the foregoing opinions, we have assumed that at the time of issuance of shares of Common Stock the Company will have sufficient authorized
but unissued shares of its common stock available for issuance.
The opinions expressed above are limited to the laws of the State of
Nevada, including reported judicial decisions. This Opinion Letter is intended solely for use in connection with the registration and offering of the Common Stock as described in the Registration Statement and resales of the Common Stock, and it may
not be reproduced or filed publicly, without the written consent of this firm; provided, however, we hereby consent to the filing of this Opinion Letter as an exhibit to the Registration Statement and to the use of our name under the heading
Legal Matters contained in the Prospectus included in the Registration Statement. In giving this consent, we do not hereby admit that we are in a category of persons whose consent is required pursuant to Section 7 of the Securities
Act of 1933 or the rules and regulations of the Securities and Exchange Commission promulgated thereunder.
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Very truly yours, |
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/s/ Fennemore Craig, P.C. |
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FENNEMORE CRAIG, P.C. |
Exhibit 10.84
PURCHASE AND ASSIGNMENT AGREEMENT
THIS PURCHASE AND ASSIGNMENT AGREEMENT (this Agreement) is entered into on December 28, 2015 by and between
REDWOOD MANAGEMENT, LLC, REDWOOD FUND II LLC, AND REDWOOD FUND III LTD (collectively, the Assignor), and HUDSON STREET, LLC (the Assignee).
WHEREAS, Assignor is the legal and beneficial owner of those certain convertible debentures listed on Exhibit
A attached hereto (the Convertible Debentures) issued by Medbox, Inc., a Nevada corporation (the Issuer). The Convertible Debentures were issued pursuant to the terms of the securities
purchase agreements and Transaction Documents (as defined in such securities purchase agreement) entered into by the Issuer on July 21, 2014, as amended and supplemented from time to time, and on August 14, 2015 (the
Financing Documents) with Redwood Management LLC, Redwood Fund II LLC, and Redwood Fund III Ltd; and
WHEREAS,
Assignor desires to irrevocably sell and assign to Assignee, and Assignee desires to purchase and accept from Assignor, an aggregate of $1,039,773.82 of principal amount of Convertible Debentures as indicated on Exhibit A
(the Assigned Debentures) in exchange for the sum of $1,351,705.97 (the Purchase Price). The Purchase Price will be paid in accordance with Section 2 hereof.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Assignment. On the date hereof, the Assignor hereby absolutely, irrevocably
and unconditionally sells, assigns, conveys, contributes and transfers (collectively, the Assignment) to the Assignee all of its right, title and interest to the Assigned Debentures. The Assignee accepts such Assignment. Among
other things, the Assignee is acquiring all rights to convert the Assigned Debentures into the Issuers common stock (the Common Shares) in accordance with their terms. Contemporaneously with the execution and delivery of
this Agreement, Assignor shall deliver to the Issuer written instructions (a) to record the transfer of the Assigned Debentures to the Asignee, and (b) to issue and deliver to the Assignee a convertible debenture payable to Assignee in an
original principal amount equal to the amount of the Assigned Debentures and the same form and tenor of the Assigned Debentures (the Hudson Debentures). Notwithstanding the foregoing, the effectiveness of the assignment of the
August 14, 2015 10% Convertible Debenture (the August Debenture) in the principal amount of $650,000 shall occur on the date that a post-effective amendment to the registration statement (File 333-207464) amending such
registration statement to include, among other things, the Assignee as a selling shareholder of the August Debenture, is filed by the Issuer and declared effective by the U.S. Securities and Exchange Commission, or such earlier date as the Assignee
may elect by written notice to the Assignor (the Second Closing Date).
2. Purchase Price. The Purchase Price
shall be $1,351,705.97. The Assignee shall pay the Purchase Price to the Assignor as follows: (A) $506,705.97 of the Purchase Price shall be paid within one business days of the Assignee obtaining confirmations (to the sole and exclusive
satisfaction of the Assignee) from its broker and clearing firms (i) that the Common Shares underlying the Hudson Debentures will be accepted for deposit in the Assignees brokerage accounts and (ii) approve the sale of the underlying
Common Shares by the Assignee without restriction or delay, and (B) $845,000.00 of the Purchase Price shall be paid within one business day of the Second Closing Date. The Assignee may terminate this Agreement at any time prior to payment of
the first portion of the Purchase Price without recourse to Assignor or any other party.
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3. Additional Documents. The Assignor agrees to take such further action and to execute
and deliver, or cause to be executed and delivered, any and all other documents which are, in the opinion of the Assignee or its counsel, necessary or desirable to carry out the terms and conditions of this Assignment.
4. Effective Date and Counterpart Signature. This Agreement shall be effective as of the date first written above. This Agreement, and
acceptance of same, may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Confirmation of execution by telex or by telecopy, telefax, or
scanned and sent via electronic mail in a commonly used format such as .pdf of a facsimile signature page shall be binding upon that party so confirming.
5. Representations and Warranties of the Assignee.
a) Organization: Authority. The Assignee is an entity duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with full right, corporate, partnership or other applicable power and authority to enter into and to consummate the transactions contemplated by this Agreement and otherwise to carry out its obligations thereunder,
and the execution, delivery and performance by the Assignee of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate or similar action on the part of the Assignee. This Agreement, when executed and
delivered by the Assignee, will constitute a valid and legally binding obligation of the Assignee, enforceable against the Assignee in accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors rights generally, or (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other
equitable remedies.
b) Investment Experience: Access to Information and Preexisting Relationship. The Assignee (a) either
alone or together with its representatives, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of this investment and make an informed decision to so invest, and has so evaluated
the risks and merits of such investment, (b) has the ability to bear the economic risks of this investment and can afford a complete loss of such investment, (c) understands the terms of and risks associated with the acquisition of the
Assigned Debentures, including, without limitation, a lack of liquidity, price transparency or pricing availability and risks associated with the industry in which the Issuer operates, (d) has had the opportunity to review such disclosure
regarding the Issuer, its business, its financial condition and its prospects as the Assignee has determined to be necessary in connection with the Assignment of the Assigned Debentures.
c) Restrictions on Transfer. The Assignee understands that (a) the Assigned Debentures and the Common Stock underlying the
Assigned Debentures have not been registered under the Securities Act of 1933 (the Securities Act) or the securities laws of any state, (b) the Assigned Debentures and the Common Stock underlying the Assigned Debentures are
and will be restricted securities as said term is defined in Rule 144 of the Rules and Regulations promulgated under the Securities Act (Rule 144), (c) the Assigned Debentures and the Common Stock underlying the
Assigned Debentures may not be sold, pledged or otherwise transferred unless a registration statement for such transaction is effective under the Securities Act and any applicable state securities laws, or unless an exemption from such registration
provisions is available with respect to such transaction, and (d) the the Assigned Debentures and the Common Stock underlying the Assigned Debentures may bear a standard Rule 144 restrictive legend.
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d) General Solicitation. The Assignee is not accepting such Assignment as a result of any
advertisement, article, notice or other communication regarding the Assigned Debentures published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or
general advertisement.
e) No Conflicts: Advice. Neither the execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, does or will violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or other restriction of any government, governmental agency, or court to which the Assignee is
subject or any provision of its organizational documents or other similar governing instruments, or conflict with, violate or constitute a default under any agreement, credit facility, debt or other instrument or understanding to which the Assignee
is a party. The Assignee has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with the Assignment of the Assigned Debentures.
f) No Litigation. There is no action, suit, proceeding, judgment, claim or investigation pending, or to the knowledge of the Assignee,
threatened against the Assignee which could reasonably be expected in any manner to challenge or seek to prevent, enjoin, alter or materially delay any of the transactions contemplated hereby.
g) Consents. No authorization, consent, approval or other order of, or declaration to or filing with, any governmental agency or body
or other Person is required for the valid authorization, execution, delivery and performance by the Assignee of this Agreement and the consummation of the transactions contemplated hereby.
6. Representations, Warranties and Covenants of the Assignor. The Assignor hereby represents, warrants and covenants to the
Assignee, each of the following, which representations, warranties and covenants are being relied upon by the Assignee in connection with the purchase and assignment of the Assigned Debentures. The Assignor expressly agrees that the Assignee has not
investigated or verified, and has no duty to investigate or verify, the representations, warranties and covenants set forth herein.
a)
Ownership. The Assignor is the sole and exclusive owner of the Assigned Debentures and is conveying to Assignee all of its right, title and interest to the Assigned Debentures, free and clear of all liens, mortgages, pledges, security
interests, encumbrances or charges of any kind or description and upon consummation of the transaction contemplated herein good title in Assigned Debentures. The Assignor has not entered into any agreement to sell, assign or transfer any Assigned
Debentures to any person or entity (other than to Assignee pursuant to this Agreement) and has not granted to any person or entity any right (by way of option, warrant or otherwise) to acquire any Assigned Debentures. The Assignor is not restricted
in any way from assigning the Assigned Debentures to the Assignee hereunder, and the Assigned Debentures are not subject to any agreement that may prohibit or limit the Assignees ability to sell, assign or convert the Assigned Debentures or
sell or assign the underlying Common Shares. The Assignor agrees to fully defend, protect, indemnify and save harmless the Assignee and its lawful successors and assigns from any and all adverse claims that may be made by a party against
Assignors ownership of the Assigned Debentures or the underlying Common Shares.
b) Convertible Debentures. The Assignor
acquired the Convertible Debentures from the Issuer pursuant to the Financing Documents. The Assignor has no obligations or liabilities of any kind remaining due to the Issuer related to or with respect to the Assigned Debentures or which may act as
an offset or setoff against all rights being acquired by the Assignee in connection with the Assignment and the Assigned Debentures, or act as a defense by the Issuer to the enforcement of all rights held by the
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Assignee in the Assigned Debentures. The Assignee is not assuming any obligations or liabilities of the Assignor whatsoever and, in that regard, the Assignee shall not be liable or obligated to
perform any of the Assignors past agreements, if any, of any nature, which are or may be owed by the Assignor to the Issuer. The Conversion Price of the Assigned Debentures is set forth in Section 4(b) of the Convertible Debentures, and
that pursuant to an adjustment pursuant to the terms of the Convertible Debentures, the Fixed Conversion Price was reduced to $0.75.
c)
Payment for the Assigned Debentures. The Assignor acquired the Assigned Debentures pursuant to the Financing Documents. Pursuant to the Financing Documents, the Assigned Debentures were fully paid for in cash on the dates set out in
Exhibit A. Attached as Exhibit B hereto are true and correct proofs of payment under each of the Assigned Debentures. The Assignor shall provide the Assignee with copies of all the Financing
Document and shall send the original Assigned Debentures to the Issuer for re-issuance to the Assignee.
d) No Consents, Approvals,
Violations or Breaches. Neither the execution and delivery of this Agreement by the Assignor, nor the consummation by Assignor of the transactions contemplated herby, will (i) require any consent, approval, authorization or permit of, or
filing, registration or qualification with or prior notification to, any governmental or regulatory authority under any law of the United States, any state or any political subdivision thereof applicable to Assignor, (ii) violate any statute,
law, ordinance, rule or regulation of the United States, any state or any political subdivision thereof, or any judgment, order, writ, decree or injunction applicable to Assignor or any of Assignors properties or assets, the violation of which
would have a material adverse effect upon Assignor, or (iii) violate, conflict with, or result in a breach of any provisions of, or constitute a default (or any event which, with or without due notice or lapse of time, or both, would constitute
a default) under, or result in the termination of, or accelerate the performance required by, any of the terms, conditions or provisions of any Convertible Debentures, bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Assignor is a party or by which Assignor or any of Assignors properties or assets may be bound which would have a material adverse effect upon Assignor.
e) Non-affiliate. The Assignor is not an affiliate of the Issuer as of the date hereof, and has not been an
affiliate of the Issuer for the 90 days immediately preceding the date hereof. During such 90- day period, no affiliate of the Assignor (including, without limitation, any officer, director, investment adviser, or shareholder
of 10% of more of the shares of the Issuers common stock) has served as an affiliate of the Issuer. For purposes hereof, the term affiliate shall have the meaning ascribed under Rule 144.
f) Non Shell Company. The Assignor has made inquiry of the Issuer or its counsel and has been advised that the Issuer is not, and has
never been, a shell issuer as described in paragraph (i)(1) of Rule 144, and the Assignor is aware of no circumstances indicating that Assignor is an underwriter with respect to the Assigned Debentures described herein, or that the assignment of
Assigned Debentures to Assignee us part of a distribution of securities of the Issuer.
g) Lock Up. The Assignor agrees that
beginning on the date hereof and expiring on the close of business on February 21, 2016, neither it, nor any of its affiliates will convert, assign, or transfer any convertible debentures issued by the Issuer into shares of common stock. In
connection with the foregoing, the Assignor shall enter into a formal lock up agreement in a form satisfactory to the Assignee. The Assignor shall not make any changes to the lock up agreement without the consent of the Assignee. The Assignor
represents to the Assignee that as of the date hereof, the Assignor holds no more than 2 million Common Shares of the Issuer. Notwithstanding the foregoing, in the event that the Assignor has not by the close of business on January 25,
2016 assigned the August Debenture to the Assignee, or an affiliate thereof, then the restrictions set forth in this Section 6(g) shall be lifted.
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7. Exemption for Resale under Securities Act. With a view towards qualifying the
Assignment of the Convertible Debentures to the Assignee as a resale exempt from registration under Section 4(a)(7) of the Securities Act, the parties hereby represent and agree as follows:
a) The Assignee is an accredited investor (as defined in Regulation D of the Securities Act );
b) The Assignee is not accepting such Assignment as a result of any advertisement, article, notice or other communication regarding the
Assigned Debentures published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement;
c) The Issuer is a reporting company;
d) The Assignment is not by the Issuer or a subsidiary of the Issuer;
e) Neither the Assignor nor any person being paid in connection with the Assignment is a bad actor, as described in Regulation D;
f) The Issuer is neither in bankruptcy or receivership, nor is it a blank check, blind pool or shell company;
g) The transaction does not involve an unsold allotment to, or participation by, a broker or dealer as an underwriter or a redistribution; and
h) The Convertible Debentures have been outstanding for at least 90 days prior to the Assignment.
8. Governing Law: Submissions to Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTURED IN ACCORDANCE WITH THE LAWS OF NEW
JERSEY, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES. EACH PARTY AGREES THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING IN ANY WAY TO THIS AGREEMENT SHALL BE BROUGHT IN A COURT OF COMPETENT JURISDICTION SITTING IN THE STATE OR FEDERAL
COURTS OF UNION COUNTY, NEW JERSEY. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.
9. Amendments. No provision hereof may be waived or modified other than by an instrument in
writing signed by the party against whom enforcement is sought.
10. Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
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11. Joint Construction. The parties hereto agree that this Agreement shall be deemed to
have been drafted jointly by the parties hereto, and no construction shall be made against either party.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first
above written.
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ASSIGNOR: |
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REDWOOD MANAGEMENT, LLC |
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By: |
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/s/ Gary Rogers |
Name: |
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Gary Rogers |
Title: |
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Manager |
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REDWOOD FUND II LLC |
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By: |
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/s/ Gary Rogers |
Name: |
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Gary Rogers |
Title: |
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Manager |
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REDWOOD FUND III LTD |
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By: |
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/s/ Gary Rogers |
Name: |
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Gary Rogers |
Title: |
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Manager |
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ASSIGNEE: |
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HUDSON STREET, LLC. |
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By: |
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/s/ Mark Angelo |
Name: |
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Mark Angelo |
Title: |
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The Issuer hereby acknowledges this Agreement and the Assignment of the Assigned Debentures by the Assignor to the
Assignee, and the Issuer shall register the Assignment in the name of the Assignee on its books and records. The Issuer hereby irrevocably instructs its transfer agent (and any successor transfer agent) to register the Assignment in the name of the
Assignee as set forth herein. The Issuer further agrees and confirms that all statements as to the principal amount of the Assigned Debentures, the receipt of payment for the Assigned Debentures, and the Issuers relationship with the Assignor
are true and correct.
Acknowledged and Agreed as of the date first set forth above.
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MEDBOX, INC. |
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By: |
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/s/ Jeffrey Goh |
Name: |
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Jeffrey Goh |
Title: |
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Chief Executive Officer and President |
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CONFIDENTIAL TREATMENT REQUESTED
FARMING AGREEMENT
This
FARMING AGREEMENT (this Agreement) is made and effective as of December 18, 2015, by and between Medbox, Inc., a Nevada corporation, dba Notis Global (Notis), EWSD I, LLC, an
Arizona limited liability company (EWSD) and Whole Hemp Company, a Colorado limited liability company (Whole Hemp), collectively referred to as the Parties.
RECITALS
A. Whole
Hemp, directly or through affiliates, grows hemp and cannabis crops for the production of Products (defined below).
B. Whole Hemp is also
entering into a Growers Agent Agreement (Sales Agreement) with Notis in order to authorize Notis to act on behalf of Whole Hemp in the marketing, negotiation and sale of certain Product, as such services are further
described therein.
C. EWDS is a wholly owned subsidiary of Notis and owns the Notis Farmland.
D. The Parties desire to enter into this Agreement for the purpose of Notis building certain greenhouses on its farm for Whole Hemp to use
grow hemp and cannabis crops.
NOW THEREFORE, the Parties agree as follows:
1. Farmlands.
(a) The
Notis Farmlands means those certain lands located at 214 East 39th Lane, Highway 96, Pueblo, Colorado, 81006, and the Whole Hemp Farmlands means those certain lands located in La Junta CO . The Notis Farmlands
and the Whole Hemp Farmlands collectively are referred to as the Farmlands.
(b) Whole Hemp owns the Whole Hemp
Farmlands. It cultivates, plants, grows and harvests Products (as defined below) on the Whole Hemp Farmlands and manufactures Products (including, without limitation, oil produced by way of extraction) from hemp and cannabis crops (collectively, the
Farming Activities).
(c) The Parties desire for Whole Hemp to conduct Farming Activities on a portion of the Notis
Farmlands, to be identified by Notis and upon which Notis will build one or more turn-key greenhouses up to an aggregate size of 200,000 square feet, suitable to cultivate, plant, grow and harvest (but not manufacture) hemp crops (the
Greenhouse(s)), as further described below.
(d) As used herein, the term Products means all parts
of hemp or marijuana plant, whether growing or not; the seeds thereof; the resin, oil or other components extracted from any part of such plant; including, without limitation, the mature stalks of such plant, fiber produced from any part of such
plant, the seeds thereof and any extracts therefrom, oil, cake, powder and every other compound, manufacture, salt, derivative, mixture, or preparation of any of the foregoing.
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
1
2. Greenhouse(s); 10 Acres and Grant of License.
(a) Notis will use best efforts to diligently build the Greenhouse(s) on the Notis Farmlands. The Greenhouse(s) will be owned by EWSD at all
times and Whole Hemp waives any ownership rights or claims thereto. As part of the consideration for the License (defined below). Whole Hemp will pay to Notis an amount equal to 100% of all preapproved costs (soft and hard) incurred by Notis in
building the Greenhouse(s) (the Base License Fee). Whole Hemp may pay the Base License Fee in one or more installments, but must pay the total Base License Fee to Notis no later than September 30,2017. If Whole Hemp fails to
fully pay the Base License Fee by September 30, 2017, then any outstanding amount of the Base License Fee shall bear interest from October 1, 2017 through the date fully paid at a rate equal to 3% in excess of the annual prime interest
rate being charged at the time by JP Morgan Chase, or any successor thereto. Whole Hemp shall put up as collateral an equal amount of CBD oil that at the present market price is equal to the outstanding amount owed to Notis for the preapproved costs
incurred by Notis in building the Greenhouses.
(b) As and when the Greenhouse(s) are built out in 10,000 or more square feet increments.
Whole Hemp will begin and conduct Farming Activities thereon. Whole Hemp will also conduct Farming Activities within those certain 10 acres depicted on Exhibit A attached hereto, and located on the Notis Farmlands (10 Acres).
Whole Hemp shall devote sufficient manpower, supplies and resources, all at its sole cost, to perform such Farming Activities so as to maximize crop production, Products and sales in each Crop Season (as defined below). As part of the consideration
for the License to the 10 Acres, Notis will receive 50% of gross profits (revenues minus direct costs) received from the sales of Products from the 10 Acres, which Whole Hemp will pay to Notis within 5 days of receipt of any such sales amounts.
(c) EWSD hereby grants to Whole Hemp and its agents and employees, (collectively, its Representatives), during the Term a
revocable license (License) to the 10 Acres and the Greenhouses, together with reasonable ingress and egress access thereto (License Areas) for sole purpose of performing the Farming Activities thereon, on and
subject to the terms and conditions herein. EWSD will own all existing and future improvements and fixtures made or installed upon the License Areas, whether constructed or installed by EWSD, Whole Hemp or a related third party, and Whole Hemp
waives any ownership rights or claims thereto.
(d) In connection with the Farming Activities on the License Areas, Whole Hemp shall (and
shall cause its Representatives to) use the highest standard of care to keep all work areas within the License Areas safe and to properly construct and secure all work areas created or used by Whole Hemp or its Representatives to prevent harm to
Notis, EWSD, and their employees, agents, invitees and property. Whole Hemp shall (and shall cause its Representatives to) use the highest standard of care to keep any equipment used or brought onto the Notis Farmlands by Whole Hemp or its
Representatives under its absolute and complete control at all times, and said equipment shall be used only in the License Areas and, in all circumstances, at the sole risk of Whole Hemp. Whole Hemp shall (and shall cause its Representatives to)
perform all Farming Activities with the highest due care, diligence and in cooperation with Notis, EWSD and their customers, employees, agents and invitees to avoid accident, damage or harm to persons or property and unreasonable delay to or
interference with the operations or business of such parties. Whole Hemp shall (and shall cause its Representatives to) conduct the Farming Activities in a manner and at times that are intended to minimize any impairment of access or traffic by the
aforementioned parties, or other inconvenience or disturbance to the operations or businesses of such parties.
(e) Whole Hemp shall (and
shall cause its Representatives to) strictly comply with: (i) all applicable federal, state and local laws (including, without limitation, environmental laws), in the conduct of all Activities and while on the Property (provided that it is
understood that there may be a
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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conflict with the Farming Activities and the Controlled Substances Act), and (ii) generally accepted professional and industry standards. Whole Hemp, at its sole cost and expense, shall be
responsible for obtaining and maintaining any and all permits and approvals from any governmental authority that may / be necessary for it to conduct the Farming Activities Whole Hemp shall be solely responsible for and ensure that all
government-required inspections or reports, if any regarding the Farming Activities are properly and timely conducted or submitted.
(f)
Whole Hemp shall be solely responsible for, and be considered the generator of, all wastes associated with Farming Activities. No Hazardous Materials (defined below) should result from any of the Farming Activities. As used herein,
Hazardous Materials means all hazardous or toxic substances, wastes, materials (whether solids, liquids or gases) or chemicals, petroleum (including crude oil or any fraction thereof) and petroleum products, asbestos and
asbestos-containing materials, pollutants, contaminants and by-products regulated pursuant to or forming the basis of liability under any Environmental Law. Environmental Law means any applicable laws or orders relating to the
protection of the environment or natural resources or human health and safety as it relates to environmental protection, and relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution,
labeling, testing, processing, discharge, release, threatened release, control or cleanup of any Hazardous Materials in the environment and including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. § 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. App. § 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. § 6901 et seq.), the Clean Water Act (33 U.S.C. § 1251 et seq.), the Clean
Air Act (42 U.S.C. § 7401 et seq.) the Toxic Substances Control Act (15 U.S.C. § 2601 et seq.), and the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. § 136 et seq.) and their state and local counterparts, to the extent
each is applicable and as each has been amended and the regulations promulgated pursuant thereto.
(g) Whole Hemp will pay Notis an
equitable percentage for Whole Hemps use of all utilities supplied to the Notis Farmlands by any utility company, whether public or private, including but not limited to, fuel, water gas, sewage, common security, electricity and other charges
incurred by EWSD in providing utilities to the Notis Farmlands, as reasonably determined by Notis. Such sums shall be paid by Whole Hemp within 15 days of invoice therefor. Such utilities shall exclude telephone, wi-fi, and internet service which
shall be separately installed and provided for by each Party with their own respective service providers.
(h) Whole Hemp will not permit
any mechanics, materialmens or other similar liens or claims to stand against the Notis Farmlands for labor or material furnished in connection with any Farming Activities performed by Whole Hemp or its Representatives. Upon written notice of
any such lien or claim delivered to Whole Hemp by Notis or EWSD, Whole Hemp shall either immediately (i) pay and discharge such lien or claim, or (ii) bond and contest the validity and the amount of such lien, provided Whole Hemp
(a) immediately pays any judgment rendered; (b) immediately pays all proper costs and charges; and (c) has the lien or claim released at its sole expense. This Section shall survive the expiration or termination of this Agreement.
(i) Whole Hemp hereby agrees to indemnify, defend (with counsel reasonably acceptable to Notis and EWSD), and hold harmless Notis, EWSD
and their employees, officers, directors, shareholders, partners, members, agents, representatives, affiliates, lenders, successors and assigns (each, an Indemnified Party; collectively, the Indemnified Parties)
from and against any and all liabilities, claims, suits, actions, judgments, demands, costs, damages, fines, penalties, losses and expenses (including but not limited to reasonable attorneys fees) (collectively, Losses),
including but not limited to Losses related to environmental contamination, environmental laws, the handling of
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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Hazardous Materials, natural resource damage or remediation, incurred or suffered by, or claimed against any Indemnified Party (which shall include claims against Notis and/or EWSD by another
Indemnified Party, and shall exclude consequential or special or punitive damages), which may arise, directly or indirectly, in whole or in part, from, out of, by reason of or in connection with the performance of the / Farming Activities by Whole
Hemp or its Representatives (whether or not due to negligence or misconduct) or out of Whole Hemps failure to perform any of its obligations under this Agreement; provided, however that such obligation to indemnify, defend and hold Notis, EWSD
and the Indemnified Parties harmless shall not be applicable to any Losses arising from the willful or grossly negligent acts of the applicable Indemnified Party. Notis agrees to give notice to Whole Hemp of any claims or alleged liabilities
received or incurred by Notis or EWSD that are subject to this indemnification. Notis or EWSD, as applicable, shall reasonably cooperate with Whole Hemp in defending or resisting such claims. Notwithstanding any other provision of this Agreement,
each of Notis and EWSD reserves its rights to assert, and does not release Whole Hemp from, any statutory or common law claims that Notis or EWSD may have against Whole Hemp for any Losses arising out of or in any way related to the Farming
Activities (excluding consequential or special damages and/or punitive damages). Whole Hemps obligations to the parties under this Section shall not be impaired by Notis or ESWDs assignment of its rights and/or delegation of its
duties, and such obligations to Notis and EWSD shall continue in full force and effect notwithstanding any such assignment or delegation. This Section shall survive the expiration or termination of this Agreement.
3. Revenue Share. As part of the consideration for the License, Whole Hemp will pay Notis the following shared revenues
(Shared Revenues):
(a) First Crop Season For Products from crops derived from the first Crop Season, Notis
shall receive [*] of Gross Sales (defined below) plus up to an additional [*] of Gross Sales for achievements vs. a mutually agreed to plan to be established by December 31, 2015. The plan will call for an agreed to amount of plants in ground
by the required planting date. Notis will receive [*] for every [*] of plants in ground vs. plan.
(b) Second Crop Season For all
Products from crops derived from the second Crop Season, Notis shall receive [*] of Gross Sales, provided that Notis shall have used commercially reasonable efforts to establish international sales channels for the sale of the Products and to
provide Whole Hemp with services at a reasonable, mutually agreed to cost, access to research applicable to the Products available to Notis (and not otherwise available to Whole Hemp), introductions to industry contacts, and support in developing a
seed program, which Notis will lead.
(c) Third and Subsequent Crop Seasons For all Products from crops derived from the third and
subsequent Crop Seasons, Notis shall receive [*] of Gross Sales, provided that Notis shall have used commercially reasonable efforts to establish international sales channels for the sale of the Products and to provide Whole Hemp with services at a
reasonable, mutually agreed to cost, access to research applicable to the Products available to Notis (and not otherwise available to Whole Hemp), introductions to industry contacts, and support in developing a seed program, which Notis will lead.
(d) Whole Hemp shall pay the Shared Revenues to Notis, without offset or deduction, by wire transfer of immediately available funds to an
account designated by Notis, in arrears on a monthly basis by the tenth day of the calendar month succeeding the calendar month to which such
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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Shared Revenues apply. For example, no later than February 10, 2017, Whole Hemp shall pay to Notis the Shared Revenues attributable to the calendar month of January 2017. Concurrent with
each such payment of Shared Revenues, Whole Hemp shall provide Notis an itemized and detailed written description and breakdown of all Gross Sales attributable to such Shared Revenues payment and such other information as Notis may reasonably
request. Whole Hemp will deliver to Notis by January 31 of each year of the Term an annual statement certified by a Certified Public Accountant or by a financial officer, owner or partner of Whole Hemp, of the Gross Sales made during the
preceding year. If the Term expires or is terminated on a date other than December 31, then a like statement for the partial calendar year in which expiration or termination occurs shall be delivered within 30 days after expiration or
termination.
(e) As used herein, Gross Sales means the entire amount of the sale price of all Products sold and the
charges for all services and all other receipts in connection with Products sold by Whole Hemp, its subsidiaries, other affiliates and/or joint venture partners, whether or not related to Products derived from the Whole Hemp Farmlands, the License
Areas or elsewhere (excluding, however. Products derived from the 10 Acres or the 40 Acres (defined below)), and irrespective of whether the agent for the sale is Whole Hemp, its subsidiary, affiliate, joint venture partner or Notis, whether (wholly
or partially) for cash or credit, and shall include charges for equipment leased and reimbursements actually received from third parties in respect of the foregoing.
(f) Records and Audit Rights. Whole Hemp agrees to accurately record all sales in accordance with generally accepted accounting
practices, and to maintain sufficient original records which accurately summarize all transactions relating to the Gross Sales (including the sales of subsidiaries, other affiliates and joint venture partners). Original records shall include but not
be limited to: sales documents, invoices, cash receipts, payroll journals, accounts receivable, disbursement journals, bank statements, deposit slips, inventory records, purchase orders, receiving records, sales journals or daily sales reports,
orders accepted by means of electronic, telephonic, video, computer or another electronic or other technology based system, state sales and use tax returns (and all documentation used to prepare the returns), and a complete general ledger. Records
shall be preserved (properly totaled) by Whole Hemp either (a) at the Whole Hemp Farmlands or (b) at the home or regional offices of Whole Hemp (provided Notis shall be notified in writing of the address at which the records are
maintained) and made available to Notis at such location upon demand, for a period of at least 3 years after the year in which the sales occurred (however, if any audit is begun by Notis or if there is a dispute regarding Gross Sales, Whole
Hemps records shall be retained by Whole Hemp until a final resolution of the audit or dispute). The receipt by Notis of a statement of Gross Sales shall not constitute an admission of its correctness. Notis shall be entitled, at Notiss
expense, to have at any time and from time to time an audit of the Gross Sales made during any period covered by the annual statement and account and to recalculate the rental payable for that period. If there is a deficiency in the payment of
Shared Revenues, the deficiency shall be immediately due and payable with interest at a rate equal to 3% in excess of the annual prime interest rate being charged at the time by JP Morgan Chase, or any successor thereto, accruing from the date when
the payments should have been made until paid. If there is an overpayment by Whole Hemp, it shall be credited against future Shared Revenue payments due. If Gross Sales have been understated by more than 2% or Whole Hemp fails to record, maintain or
make available the required sales supporting documentation. Whole Hemp shall be in default, and shall pay the cost of the audit and all other related costs and expenses. If Whole Hemp is late furnishing Notis any monthly Gross Sales statement, Notis
shall have the right, without notice, to conduct an audit at Whole Hemps sole cost. If Whole Hemp does not furnish the Gross Sales documentation referred to above or otherwise impedes Notiss audit of Gross Sales, Notis shall be entitled,
in addition to Notiss other rights and remedies, to estimate Whole Hemps annual Gross Sales as 125% of the Gross Sales for the preceding year, and bill Whole Hemp for any Shared Revenues which may be due based upon the estimated Gross
Sales.
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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4. Notis Sales of Products. Commencing with the second Crop Season, Notis may act as Whole
Hemps non-exclusive agent, and Whole Hemp hereby authorizes Notis to do so, for the purpose of marketing, arranging for sale and selling any and all Products produced from crops planted within the License Areas, which may include sales to
Notis or any of its affiliates (collectively, Notis Sales from License Areas). In consideration of such sales, Notis will receive [*] of gross sales received from the Notis Sales from License Areas, which Notis will deduct from
such sales amounts. To the extent the Base License Fee is not paid. Whole Hemp agrees to pay [*] of its net sales profits (net only of Whole Hemps actual out-of-pocket hard costs directly attributable to such Products, which hard costs shall
equal [*] per milligram of Product sold) derivative of Notis Sales from License Areas to pay the Base License Fee, which Notis will deduct from such sales amounts before remitting the remaining sales amounts to Whole Hemp.
5. Products from Whole Hemp Farmlands. On the terms set forth herein, Whole Hemp hereby authorizes Notis to act as Whole Hemps
sole and exclusive agent (Exclusive Agency) for the purpose of marketing, arranging for sale and selling any and all Products produced from crops planted within those certain 40 acres depicted on Exhibit B attached hereto,
and located on the Whole Hemp Farmlands (40 Acres). Whole Hemp will be responsible to directly or indirectly cause the Products from the 40 Acres to be prepared and will notify provide Notis with monthly production schedules for
the Products from the 40 Acres, which schedule will identify and provide sufficient details of each Product type and quantity, sufficient for Notis to perform its Exclusive Agency. In consideration of Notis performance of the Exclusive Agency,
Notis will receive 50% of gross profits (revenues minus direct costs) received from the sales of Products from the 40 Acres, which Whole Hemp will pay to Notis within 5 days of receipt of any such sales amounts. Notis and its representatives shall
have free access to the 40 Acres solely for the purpose monitoring Whole Hemps performance.
6. Term.
(a) This Agreement shall be effective on the date hereof, and shall continue for a term of 10 crop seasons (the Initial
Term, where each crop season is denoted as the period beginning on October 1 of each year, and ending on September 30 of the following year (each, a Crop Season). The first Crop Season commences on
October 1, 2016. Either Party may extend the Initial Term for another 5 Crop Seasons by written agreement to the other Party at least 180 days prior to the end of the Initial Term (First Extended Term), and either Party may
extend the First Extended Term for another 5 Crop Seasons by written agreement to the other Party at least 180 days prior to the end of the First Extend Term. The Initial Term, and any period that this Agreement shall continue following the Initial
Term, shall be collectively referred to as the Term. This Agreement may be terminated at any time: (i) by either Party, if the other Party is in material breach of any obligation under this Agreement, which breach is
continuing uncured for 30 days following written notice thereof; or (ii) by either Party, upon written notice to the other, if the activities under this Agreement shall be enjoined or be subject to materially adverse regulatory action.
(b) Upon end of the Term, Whole Hemp agrees to vacate and surrender the License Areas, including, without limitation, the Greenhouses and all
fixtures and improvements thereon, to Notis, in good operating condition and repair, reasonable wear and tear excepted. As part of vacating the License Areas, Whole Hemp shall remove all its equipment and personal property, and restore any damage
resulting from the removal thereof. Whole Hemp acknowledges that Whole Hemps failure to so vacate the License Areas and so remove its equipment and personal property on or prior to the end of the Term in such condition may subject Notis and/or
EWDS to significant costs and expenses arising from such failure. Accordingly, Whole Hemp agrees that it shall be wholly responsible for all costs and expenses incurred by Notis and/or EWDS arising from Whole Hemp s failure to do so. This Section
shall survive the expiration or termination of this Agreement.
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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7. Insurance Requirements.
(a) Policy Requirements. Upon Whole Hemps execution of this Agreement, and prior to Whole Hemp or its Representatives conducting
any Farming Activities, Whole Hemp shall furnish to Notis, at Whole Hemps expense, satisfactory certificates of insurance listing Notis as an additional insured on the policies listed below (with the exception of the Workers
Compensation/Employers Liability policy), evidencing that Whole Hemp (or its applicable Representatives, in the case the Farming Activities will all be conducted by Whole Hemps Representatives) have the following insurance in full force
and effect meeting the requirements set ford below:
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Type |
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Limits |
Workers Compensation/Employers Liability |
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Statutory/$500,000 |
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General Liability |
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$1,000,000/occurrence |
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$2,000,000/aggregate |
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Umbrella Liability |
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$9,000,000/occurrence |
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$9,000,000/aggregate |
(b) Maintenance of Coverage; Policy Types. Whole Hemp will ensure that all applicable Representatives
maintain the aforesaid coverages during the Term. Any insurance required hereby may be maintained under a blanket policy or an umbrella policy insuring other parties and other locations so long as such policy satisfies the foregoing requirements.
Any coverage written on a claims-made basis shall be kept in force, either by renewal or the purchase of an extended reporting period, for a minimum period of three (3) years following the termination or expiration of this
Agreement. Nothing in this Section shall in any way limit Whole Hemps liability under this Agreement or otherwise.
(c) This
Section 7 shall survive the expiration or termination of this Agreement.
8. Growing, Harvesting, Packing and Handling the
Crops.
(a) Performance. Whole Hemp agrees to perform, as an independent contractor, all the necessary services and efforts to
plant the crops and manufacture the Products and to bring the crops and Products to a position where they are ready for harvesting, packing, and selling. Whole Hemp agrees to grow the crops and manufacture the Products in accordance with all laws
and regulations governing agricultural processes and the best agricultural practices prevailing in the area of the Farmlands, and shall take all actions consistent with prudent farming and manufacture methods to accomplish the proper care, growth
and production of the same. Whole Hemp shall take all precautions necessary to ensure that all operations undertaken by Whole Hemp are sanitary for the purpose of preventing the crops or Products from being subject to contamination that could harm
the crops or Products or interfere with the marketability of all or any portion of the crops or Products. Whole Hemp warrants that the crops and Products will not be adulterated within the meaning of the Federal Food, Drug and Cosmetic Act, nor
subject to, nor contaminated with any chemicals, pesticides, fungicides and herbicides prohibited by
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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federal or state statutes or regulations. Whole Hemp agrees to maintain a listing of all chemicals, pesticides, fungicides and herbicides applied to the crops and/or Products. Whole Hemp shall
exercise due diligence in the planting, growing, harvesting, manufacturing and packing of the crops and Products.
(b) Growing
Expenses. Whole Hemp shall be responsible for the direct payment for all services, material, land, equipment, seed, nursery plants, herbicides, pesticides, other chemical products, labor, water, water sources, irrigation system, drip irrigation
pipe, mulch, supplies, and other items related to the planting, cultivating, irrigating, weeding, thinning, hoeing, dusting, spraying, fertilizing, and otherwise growing the crops to completion, and to the harvesting, manufacture packing, hauling,
and distributing of the Products (individually and collectively, and as supplemented below, the Growing Expense(s)). Growing Expenses include all rent and other payments owing by Whole Hemp, its subsidiaries, other affiliates and
joint venture partners in production of the Products.
(c) Chemical and Pesticide Residues. In connection with growing the crops.
Whole Hemp shall take all commercially reasonable actions possible to ensure full compliance with all federal, state and local regulations and procedures concerning chemical usage and any other matters related to its business. Whole Hemp
acknowledges that it will comply with the good agricultural and manufacturing practices for growing, harvesting, manufacturing and food safety requirements. If Whole Hemp becomes aware of any factor(s) which may negatively affect the crops, the
Products, their quality, and/or their marketability, Whole Hemp shall promptly provide written notice to Notis of the same. Whole Hemp agrees not to introduce any substance (including, without limitation, chemicals, pesticides or growth regulators)
on the crops. Products or on the Farmlands, which will be in violation of established toxic tolerance levels, or any other federal, state or local law, rule, regulation or ordinance, which would cause the crop or Products to be adulterated or
misbranded in accordance with applicable laws, or which are not authorized by Notis or EWSD for the crops being grown or Products being manufactured. Whole Hemp further warrants that it will do nothing to cause or permit the crops or Products to
contain any chemical residues prohibited by, or in excess of the tolerances established by, all applicable laws. Upon request, Whole Hemp will provide Notis with reports of both current and past chemical use and crop history for the Farmlands and
lands on which the crops that are used in connection with the Products are to be grown. Such reports shall include all chemicals used, crops planted, and information on crops surrounding the current planted crops. Whole Hemp agrees that if any
chemical residues on the crops or Products exceed tolerances permitted by applicable law, the parties shall meet and discuss the cause, solution and best course of action to deal with the situation.
(d) Labor. All persons working in Whole Hemps business operations are employees or independent contractors of Whole Hemp and are
under Whole Hemps sole direction and control. Whole Hemp shall have exclusive responsibility for ensuring that its employees and independent contractors handle and use herbicides, pesticides, and other chemical products in accordance with
federal, state, and local laws and regulations, and label requirements. Whole Hemp shall have exclusive responsibility for ensuring that its employees and independent contractors comply with any and all federal, state, and local immigration laws and
regulations. Whole Hemp shall have exclusive control over its employees and independent contractors hours and manner of work, compensation, and housing and over any labor negotiations. Neither Notis nor EWSD shall have no right
whatsoever to direct or control any of Whole Hemps employees and independent contractors. Whole Hemp shall comply with any and all federal, state, and local income and payroll tax withholding requirements and shall carry all necessary
liability insurance and Workers Compensation insurance for its employees. By this paragraph. Whole Hemp is not assuming any liability for actions of its independent contractors it would not otherwise have, but it shall be responsible to Notis
and EWSD for all of its obligations hereunder, whether performed by Whole Hemp or its independent contractors, and shall hold Notis and EWSD harmless from any liability that Whole Hemp, Notis or EWSD might otherwise bear related to nonperformance of
an obligation by an independent contractor of Whole Hemp.
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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9. Risk of Loss. Whole Hemp shall have and retain title to and bear all market risks and
risks of loss to the crops and Products from initial planting until title passes to the customer.
10. Warrants and Option.
(a) Notis hereby warrants to Whole Hemp 4,000,000 unrestricted shares of Notis stock, which may be assigned by Whole Hemp at its
discretion, at an exercise price of $0.50 per share, which Whole Hemp may exercise upon written notice to Notis at any time within 5 years from the date hereof. The warrants shall terminate if Whole Hemp fails to exercise and pay for such warrants
within 5 years from the date hereof.
11. Unable to Perform. Neither Party hereunder shall be required to perform or be liable for
loss or damage suffered by the other Party if caused by unavailability of labor, strikes, or lockouts; shortages of equipment, materials, supplies, transportation or water; the elements; adverse weather conditions; unavoidable casualties; war;
hostilities; governmental action or order; delays caused by governmental authorities or the inability to obtain required governmental approvals; mechanical breakdown, power failures; civil disorder; acts of God; or other events beyond the
Partys reasonable control, and the date of completion for such obligation shall be extended (but not excused) by the period of time taken by any such delay. However in the event that either Party shall be unable to perform any part of its
obligations and duties hereunder, it shall promptly advise the other party of the extent of its inability to perform. Both Parties agree that the course of action will be mutually agreed upon and will further determine if the aforementioned event is
temporary or permanent. Notwithstanding the foregoing, the Parties shall remain obligated to pay any sums of money owed by either of them to the other pursuant to this Agreement.
12. Good Faith Judgment. The Parties shall not be liable to each other for errors in judgment in exercising their rights or discharging
their obligations under this Agreement. Nothing in this Agreement limits or abrogates each Partys covenant to act in good faith and to deal fairly with the other Party.
13. Parties Review of Performance. The Parties and their representatives shall regularly meet and/or discuss all operations under
this Agreement. Such meeting or discussion topics shall include, but not be limited to, Farming Activities, market and quality conditions, movement of Products, shipping schedules, distribution of crops, adjustments and any circumstances affecting
operations hereunder. Any agreements made on required courses of action shall be documented in writing.
14. Indemnification.
Subject to Sections 11 and 12 above, each Party agrees to indemnify and hold the other and its past, present, and future employees, agents, representatives, officers, directors, partners, stockholders, parent companies, subsidiary companies,
corporate affiliates, successors, and assigns, harmless from and against any and all loss, liability, damages, costs, and expenses, including without limitation, reasonable attorneys fees for an attorney chosen by the indemnifying party, on
account of property damage or personal injury (including death resulting therefrom) or any other damages arising, directly or indirectly, out of the willful misconduct or intentional failure to act by the indemnifying Party, its servants, agents,
employees, or contractors.
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
9
15. Defaults. A Party shall be in default of this Agreement if it shall fail to observe or
perform any of the material covenants, conditions or provisions of this Agreement to be observed or performed by such Party, and such failure shall continue for a period of fifteen (15) days after written notice thereof from the other Party;
provided, however that if the nature of the Partys default is such that more than fifteen (15) days are reasonably required for its cure, then such Party shall not be deemed to be in default if it commenced such cure within said fifteen
(15) day period and thereafter diligently prosecutes such cure to completion. Upon a default, the non-defaulting Party shall be entitled to: (a) terminate this Agreement upon written notice to the defaulting Party, (b) obtain
equitable remedies that include, but are not limited to, specific performance, (c) obtain damages, excluding consequential, extraordinary or punitive damages, all of which are hereby waived, and (d) cure such breach (for which purpose
Notis is granted a license to enter onto the Farmlands) and charge defaulting party for the costs of such cure.
16.
Confidentiality. The Parties agree to maintain in confidence all information with regard to all matters, and/or activities, covered by, relating or undertaken pursuant to this Agreement. This provision shall survive and shall remain in full
force and effect and be binding upon the Parties for three (3) years after the termination of this Agreement.
17.
Miscellaneous.
(a) Entire Agreement. There are no oral agreements or representations between the Parties not contained
herein. This Agreement may only be altered or changed by agreement in writing signed by the Parties.
(b) Assignment. This
agreement shall be binding on and inure to the benefit of the heirs, executors, administrators, successors and assigns of the signatories hereto. Notwithstanding the foregoing, neither Party shall have the right to assign this Agreement without the
prior written consent of the other Party.
(c) Dispute Resolution. If the parties are unable to resolve any dispute(s), brought to
enforce the terms of this agreement, both parties agree to submit to binding arbitration in Denver, Colorado before the Judicial Arbitration and Mediation Service (JAMS). In any legal action or arbitration affecting or based upon the enforcement or
interpretation of this Agreement or any of the rights derived under this Agreement, the successful party shall be entitled to receive, in addition to all other sums, reasonable attorneys fees and court costs. This Agreement shall be governed
by the internal laws of the State of Colorado.
(d) Notice. Any notices required by this Agreement shall be deemed given
forty-eight (48) hours after the posting thereof in the United States mail, first class, certified, postage prepaid, return receipt requested, properly addressed to the party to be served at the address of such party as follows or at the time
of the personal service of such notice. Either party may change its address for notices by notice to the other party
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Whole Hemp: |
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Notis or EWSD: |
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828 Wooten Road
Colorado Springs, CO 80915
Attn: President |
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600 Wilshire Blvd Suite 1500
Los Angeles, CA 90017 Attn: President |
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
10
(e) No Partnership. Notis and Whole Hemp shall each operate as independent businesses,
each acting for its own individual account and profit and not for any joint business of the Parties. The Parties do not intend to create and are not creating a partnership, joint venture, syndicate, group, pool, or other unincorporated organization
for the purpose of carrying on any joint business or financial operation. Neither Party shall by this Agreement obtain any rights to the operational control or other proprietary interests of the other Partys business, and each Party intends to
enter and is entering into this Agreement as a separate business and as an independent contractor. Neither Party shall be responsible for the actions or agreements of the other Party, nor shall either Party have any authority to create any
obligation of the other. Neither Party shall be responsible for any expenses or losses had by the other Party except as may be specifically set forth herein.
(f) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed original, but all of which
taken together shall constitute one and the same instrument.
(g) Attorneys Fees. In the event of any claim, dispute or
controversy arising out of or relating to this Agreement, including an arbitration or an action for declaratory relief, the prevailing party, after all appeal rights have been exhausted, shall be entitled to recover its court costs and reasonable
out-of-pocket expenses, including, but not limited to, phone calls, photocopies, expert witnesses, travel, etc., and reasonable attorneys fees to be fixed by the arbitrator or court. Such recovery shall include court costs, out-of-pocket
expenses and attorneys fees on appeal, if any. The arbitrator or court shall determine who is the prevailing party, but only if the dispute or controversy represents a final judgment.
(h) Enforceability. If any provision of this Agreement, or its application to any circumstance, is held by a court of competent
jurisdiction to be invalid or unenforceable, then all other provisions of this Agreement will continue in full force and effect and a suitable and equitable provision will be substituted for the invalid or unenforceable provision in order to carry
out, so far as may be practical and permitted under applicable law, the purpose of this Agreement.
(i) Integrated Document. This
Agreement and the Sales Agreement embody the entire understanding of the Parties and shall supersede all previous communications, representations or undertakings, either verbal or written, between the Parties relating to the subject matter hereof.
This Agreement may only be amended by a written instrument signed by both Parties hereto.
(j) Interpretation. Headings in this
Agreement are for the convenience of the Parties and do not affect the meaning of this Agreement. Exhibits referred to in this Agreement are incorporated herein, whether or not attached. This Agreement has been negotiated by the Parties and shall be
interpreted in a fair and reasonable manner, and not for or against either Party based on which drafted this Agreement or any provision hereof. The word including means including without limitation.
[Remainder of page left blank]
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
11
In witness whereof, the Parties have executed this Agreement as of the date first above written.
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NOTIS: |
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Medbox, Inc. |
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By: |
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/s/ Jeffrey Goh |
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Name: |
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Jeffrey Goh |
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Its: |
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Chief Executive Officer |
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EWSD: |
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EWSD I, LLC, |
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By: |
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/s/ Jeffrey Goh |
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Name: |
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Jeffrey Goh |
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Its: |
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President |
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WHOLE HEMP: |
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Whole Hemp Company, LLC: |
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By: |
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/s/ Kashif Shan |
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Name: |
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Kashif Shan |
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Its: |
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Chief Executive Officer |
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
12
EXHIBIT A
10 ACRES OF NOTIS FARMLANDS
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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EXHIBIT B
40 ACRES OF WHOLE HEMP FARMLANDS
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
14
CONFIDENTIAL TREATMENT REQUESTED
GROWERS AGENT AGREEMENT
THIS GROWERS AGENT AGREEMENT (the Agreement) is made and entered into as of the 18th day of December, 2015 by and between
Medbox, Inc., a Nevada corporation, doing business as Notis Global (Notis) and Whole Hemp Company, LLC, a Colorado limited liability company (Whole Hemp) (Notis and Whole Hemp are referred to herein collectively as the
Parties and individually as a Party), with reference to the following facts:
RECITALS
A. Whole Hemp, directly or through affiliates, grows hemp and cannabis crops for processing into cannabidiol oil (CBD Oil).
B. Whole Hemp is also entering into a Farming Joint Venture Agreement (Farming Agreement) with an affiliate of Notis for purposes
of growing certain hemp crops.
C. Whole Hemp desires and Notis agrees to act on behalf of Whole Hemp in the marketing, negotiation and
sale of CBD Oil (the Product), as such services are further described below in this Agreement.
NOW, THEREFORE, the Parties
agree as follows:
1. AUTHORITY GRANTED. On the terms and conditions contained in this
Agreement, Whole Hemp hereby authorizes Notis to act as Whole Hemps agent for the purpose of marketing, arranging for sale and selling the Product, in accordance with the terms of this Agreement.
1.1 Initial Authorization. Notis is authorized, for the period commencing on the date of this Agreement and ending on December 31,
2015, to act as Whole Hemps agent for the sale of up to twenty five (25) kilograms of the Product for an aggregate price of [*] (Initial Authorization). Upon the sale of the foregoing Product, Notis shall have the right to
retain from the proceeds a fee of $600,000, payable upon receipt of the sale proceeds.
1.2 Authorization for the Balance of the
Term. Notis is further authorized, for the balance of the Term, to act as Whole hemps agent to sell Product at a minimum price of [*] per milligram of Product (Minimum Price), on the terms and conditions set forth herein. The
Parties mutually agree on a sales target of [*] of Product per month, but that Notis shall have the right to sell more or less than the targeted quantity. If Whole Hemps costs of goods sold declines by at least twenty percent (20%) during
any Crop Season, then the Minimum Price shall be reduced, effective for the immediately following Crop Season, by a percentage equal to the average percentage decline in costs of goods sold for the prior Crop Season. The Parties will meet and confer
within forty five (45) days following each Crop Season to confirm the amount of the adjustment, if any. Prior to the meeting, Whole Hemp shall provide to Notis financial statements, or other financial information reasonably acceptable to Notis,
for purpose of determining the adjustment to the Minimum Price, if any.
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
1
1.3 Limited Exclusivity. Notis authority to act as an agent under this Agreement
shall be on a non-exclusive basis; provided, however, Notis shall have during the Term the exclusive right to market and sell to the customers or potential customers listed on Exhibit A hereto, including as that Exhibit may be amended by the
mutual agreement of the Parties from time to time.
1.4 Meet or Release. Except as set forth in this Section 1.4, Notis may
not sell Product of or for any grower, distributor or manufacturer of Product other than Whole Hemp. If Notis identifies a potential purchaser of Product that is willing to purchase Product at less than the Minimum Price, Notis must inform Whole
Hemp of said potential purchaser, the proposed sale price, and the volume of Product the potential purchaser desires to purchase and, within three business days of such notice, if Whole Hemp has not authorized Notis to sell Product to the potential
purchaser at the proposed price, then Notis shall have the right to procure Product from someone other than Whole Hemp to sell to the potential purchaser the requested amount of Product at the proposed price. Authorization by Whole Hemp to sell a
certain volume of Product of another grower, distributor or manufacturer to a particular potential purchaser at a particular price will not be deemed authorization to sell any additional Product of another grower, distributor or manufacturer to the
same or any other potential purchaser.
2. TERM. This Agreement shall be effective on the date
hereof, and shall continue for a term of ten (10) crop seasons (the Initial Term, where each crop season is denoted as the period beginning on October 1, and ending on September 30 of each year (each, a Crop
Season). The first Crop Season commenced on October 1, 2015. After the expiration of the tenth Crop Season, this Agreement may be terminated by either Party upon not less than one hundred eighty (180) days prior written notice
thereof. The Initial Term, and any period that this Agreement shall continue following the Initial Term, shall be collectively referred to as the Term. This Agreement may be terminated at any time: (i) by either Party, if the other
Party is in material breach of any obligation under this Agreement, which breach is continuing uncured for thirty (30) days following written notice thereof; (ii) by Notis upon written notice to Whole Hemp, if the Farming Agreement
terminates for any reason, or (iii) by either party, upon written notice to the other, if the activities under this Agreement shall be enjoined or be subject to materially adverse regulatory action.
3. WHOLE HEMPS AGREEMENTS.
(a) Whole Hemp shall retain title to the Product until sold by Notis, and all sales shall be conducted by Notis on a consignment basis.
Accordingly, Whole Hemp shall bear all market risk with respect to the Product, and the full risk of loss of or damage to the Product until such sale by Notis has been consummated.
(b) Whole Hemp, at its sole cost, shall maintain in full force an insurance policy or policies with a company A-rated or better for protection
against liability to the public as an incident to product grown by Whole Hemp. The limits of product liability under this insurance shall not be less $2,000,000.00. Whole Hemp agrees to name Notis as additional insured.
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
2
(c) The Product will be packed in containers designated and chosen by Whole Hemp, using Whole
Hemps or a third partys label. Whole Hemp shall obtain packaging supplies from packaging manufacturers of its choice. The cost of packaging shall be borne solely by Whole Hemp.
4. NOTIS AGREEMENTS.
(a) Notis agrees to receive and market all of the Product, on a best efforts basis to obtain the highest possible price for the Product,
provided that Notis is not prevented from doing so by strikes, epidemic, lockouts, shortage of transportation facilities, governmental action or other acts beyond the control of Notis.
(b) Notis shall have full control of the times when, the place where, the parties to whom, and the prices for which the Product shall be sold
(subject to the Minimum Price), and means of transportation. As agent of Whole Hemp, Notis is hereby authorized by Whole Hemp to (i) make price adjustments, (ii) to grant allowances, and (iii) to take such other actions as may be
reasonably necessary in order to consummate sales of Product.
(c) Notis may employ the services of a broker, jobber, or other
subcontractor and may consign or otherwise sell the Product or any part thereof, when in Notis judgment the best interest of Whole Hemp will thereby be served.
(d) Notis, at its sole cost, shall maintain in full force an insurance policy or policies with a company A-rated or better for protection
against liability to the public as an incident to work performed by Notis. The limits of product liability under this insurance shall not be less $2,000,000.00. Notis agrees to name Whole Hemp as an additional insured.
5. SALE PROCEEDS. Notis shall be accountable to Whole Hemp for the proceeds arising from
the sale of the Product covered by this Agreement. Notis is responsible for collecting payment for the Product and is liable to Whole Hemp for any failure to collect said sale proceeds. From the gross proceeds, Notis shall have the right to deduct
all compensation and expenses due Notis as provided in this Agreement.
6. TRANSPORTATION AND
SALES EXPENSES. The Product will be shipped to purchasers FOB Whole Hemps facilities. Notis will be responsible for collecting shipping costs directly from purchasers.
7. REPORTING. Notis shall provide Whole Hemp with a monthly report of its sales activities with respect
to the Product, including, but not limited to, the price and quantity of the Product sold during the prior month, and an accounting of the costs incurred chargeable to Whole Hemp under this Agreement.
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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8. COMPENSATION. From the sale proceeds for any sales of
Products, other than pursuant to the Initial Authorization and other than Product from the 10 Acres and 40 Acres (which terms are defined in the Farming Agreement), Notis will charge and collect a commission equal to [*] of the excess of the sales
proceeds over the Minimum Price applicable for the Crop Year for Product sold under this Agreement.
9.
MISCELLANEOUS.
9.1 Entire Agreement. There are no oral agreements or representations between the
parties not contained herein. This Agreement may only be altered or changed by agreement in writing signed by the parties.
9.2
Assignment. This agreement shall be binding on and inure to the benefit of the heirs, executors, administrators, successors and assigns of the signatories hereto. Notwithstanding the foregoing, neither Party shall have the right to assign
this Agreement without the prior written consent of the other Party.
9.3 Dispute Resolution. If the parties are unable to resolve
any dispute(s), brought to enforce the terms of this agreement, both parties agree to submit to binding arbitration in Denver, Colorado before the Judicial Arbitration and Mediation Service (JAMS). In any legal action or arbitration affecting or
based upon the enforcement or interpretation of this Agreement or any of the rights derived under this Agreement, the successful party shall be entitled to receive, in addition to all other sums, reasonable attorneys fees and court costs. This
Agreement shall be governed by the internal laws of the State of Colorado.
9.4 Notice. Any noticed required by this Agreement
shall be deemed given forty- eight (48) hours after the posting thereof in the United States mail, first class, certified, postage prepaid, return receipt requested, properly addressed to the party to be served at the address of such party as
follows or at the time of the personal service of such notice. Either party may change its address for notices by notice to the other party
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Whole Hemp: |
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Notis: |
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828 Wooten Road
Colorado Springs, CO 80915
Attn: President |
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600 Wilshire Blvd Suite 1500
Los Angeles, CA 90017 Attn: President |
9.5 No Partnership. It is understood, agreed and intended by the parties to this Agreement that in
performing this Agreement the parties are each separately and independently carrying out their respective businesses, that this Agreement does not and shall not create or constitute a partnership or joint venture between them, and that each Party is
and shall be an independent contractor.
9.6 Counterparts. This instruments may be executed in two or more counterparts, each of
which shall be deemed original, but all of which taken together shall constitute one and the same instrument.
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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10. INDEMNIFICATION.
10.1 By Notis. Notis will be entirely and solely responsible for its actions and the actions of its agents, employees and subcontractors, if
any, while providing services under this Agreement. Notis shall indemnify and hold harmless Whole Hemp and its customers against all claims, losses, liabilities, demands, suits, awards, and judgments, made or recovered by any person or agencies due
to (i) the actions of Notis or its employees, agents or subcontractors during performance of its obligations under this Agreement or (ii) any breach of the terms of this Agreement by Notis or its employees, agents or subcontractors.
10.2 By Whole Hemp. Whole Hemp shall indemnify and hold harmless Notis and its customers against all claims, losses, liabilities, demands,
suits, awards, and judgments, made or recovered by any person or agencies due to (i) the actions of Whole Hemp or its employees, agents or subcontractors during performance of its obligations under this Agreement or (ii) any breach of the
terms of this Agreement by Whole Hemp or its employees, agents or subcontractors.
In Witness Whereof, the parties have executed this
Agreement on the date first herein above stated.
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Whole Hemp Company, LLC: |
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Medbox, Inc.: |
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By: |
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/s/ Kashif Shan |
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By: |
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/s/ Jeffrey Goh |
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
5
EXHIBIT
EXCLUSIVE CUSTOMERS
None
[*] CERTAIN INFORMATION HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
6
Exhibit 23.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS CONSENT
We consent to the inclusion in this Registration Statement of Medbox, Inc. on Post-Effective Amendment No. 1 to
Form S-1 (File No. 333-207464) of our report dated March 26, 2015, which report includes an explanatory paragraph that raises substantial doubt about the Companys ability to continue as a
going concern, with respect to our audit of the consolidated financial statements of Medbox, Inc. as of December 31, 2014 and for the year then ended, which report appears in the Prospectus, which is part of this Registration Statement. We also
consent to the reference to our Firm under the heading Experts in such Prospectus.
/s/ Marcum LLP
Los Angeles, CA
January 20, 2016
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the reference to our firm in this Registration Statement on Post-Effective Amendment No. 1 to
Form S-1 (No. 333-207464) of Medbox, Inc. for the registration of 142,000,000 shares of its common stock and to the incorporation therein of our report dated March 28, 2014, except for Note 15 which
appears in the Amended Registration Statement on Form 10, as to which the date is March 6, 2015, relating to the consolidated financial statements of Medbox, Inc., and to the reference to our firm under the caption Experts in the
Prospectus.
Q Accountancy Corporation
/s/ Q
Accountancy
San Juan Capistrano, California
January 20, 2016