SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MEDBOX, INC.
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Nevada
(State or jurisdiction of Incorporation or organization)
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3585
(Primary Standard Industrial Classification Code Number)
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45-3992444
(I.R.S. Employer Identification No.)
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8439 West Sunset Blvd., Suite 101
West Hollywood, CA 90069
(800) 762-1452
(Address, including zip code, and telephone number, including area code,
of registrant’s principle executive offices)
____________________
Dr. Bruce Bedrick
Chief Executive Officer
8439 West Sunset Blvd., Suite 101
West Hollywood, CA 90069
(800) 762-1452
(Name, address, including zip code, and telephone number, including area code,
of agent for service
Copies to:
Penny Somer-Greif, Esq.
Ober, Kaler, Grimes & Shriver, a Professional Corporation
100 Light Street
Baltimore, MD 21202
(410) 685-1120
____________________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
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 Rule12b-2 of the Exchange Act.
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ] (Do not check if smaller reporting company)
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Smaller reporting company [
X
]
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Calculation of Registration Fee
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Title of each Class of Securities To be Registered
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Amount to be registered
(1)
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Proposed maximum Offering price per share
(2)
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Proposed maximum aggregate Offering price
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Amount of registration fee
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Common Stock, $0.001 par value per share, to be offered by the issuer
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3,000,000
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$30.00
(3)
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$90,000,000
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$12,276.00
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Common Stock, $0.001 par value per share, to be offered by the selling stockholders
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331,450
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$30.00
(4)
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$9,943,500
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$1,356.29
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Common Stock, $0.001 par value per share, underlying warrants, to be offered by the selling stockholders
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15,000
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$31.90
(5)
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$478,500
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$65.27
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Total
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3,346,450
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$30.00
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$98,922,000
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$13,492.96
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(1) In the event of a stock split, stock dividend or similar transaction involving our common stock, the number of shares registered shall automatically be increased to cover the additional shares of common stock issuable pursuant to Rule 416 under the Securities Act of 1933, as amended.
(2) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457 of the Securities Act.
(3) Offering price has been arbitrarily determined by the Board of Directors.
(4) The offering price has been estimated solely for the purpose of computing the amount of the registration fee in accordance with Rule 457(o).
(5) The offering price has been calculated as the exercise price solely for the purpose of computing the amount of the registration fee in accordance with Rule 457(g).
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
Prospectus
MEDBOX, INC.
Date of Prospectus: July 15, 2013 (Subject To Completion)
3,346,450 Shares of Common Stock
$______ per share
This is the initial public offering of our common stock,
par value $0.001 per share
. We are selling 3,000,000 shares of our common stock, and the selling stockholders identified in this prospectus are selling 346,450 shares of our common stock. We will not receive proceeds from the sale of shares by the selling stockholders, however, we could receive up to $478,500 in proceeds if all of the warrants described herein were exercised. There is no guarantee that any proceeds attributable to the warrants will be realized.
We currently expect the initial public offering price of the shares we are offering to be between $20.00 and $30.00 per share of our common stock
.
The shares of common stock being sold by the selling stockholders were issued in transactions made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended, which we refer to as the Securities Act, and Rule 506 promulgated thereunder. Our common stock is currently quoted on the OTC Market Groups quotation system under the ticker “MDBX.” The closing price of our common stock on the Pink tier of the OTC Markets Group quotation system on July 9
th
, 2013, was $27.00 per share.
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 5 for certain risks you should consider before purchasing any shares in this offering.
This prospectus is not an offer to sell these securities and it is not the solicitation of an offer to buy these securities in any state where the offer or sale is not permitted.
The offering is being conducted on a self-underwritten, best efforts basis, which means our management will attempt to sell the shares being offered hereby on behalf of the Company. There is no underwriter for this offering.
Completion of this offering is not subject to us raising a minimum offering amount. We do not have an arrangement to place the proceeds from this offering in an escrow, trust or similar account. Any funds raised from the offering will be immediately available to us for our immediate use.
Any purchaser of common stock in the offering may be the only purchaser, given the lack of a minimum offering amount.
This offering will terminate on the date which is 36 months from the effective date of this prospectus, although we may close the offering on any date prior if the offering is fully subscribed or upon the vote of our board of directors.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The Company does not plan to use this offering prospectus before the effective date.
Proceeds to Company in Offering
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Number
of
Shares
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Offering
Price
(1)
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Underwriting
Discounts
&
Commissions
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Gross
Proceeds
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Per Share
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1
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$25.00
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$0.00
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$ 25.00
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50% of Offering sold
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1,500,000
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$25.00
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$0.00
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$37,500,000
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Maximum Offering sold
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3,000,000
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$25.00
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$0.00
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$75,000,000
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(1) Assuming an initial public offering price of $25.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.
TABLE OF CONTENTS
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Page
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SUMMARY
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1
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THE OFFERING
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3
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RISK FACTORS
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5
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CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
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14
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USE OF PROCEEDS
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15
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DETERMINATION OF THE OFFERING PRICE
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15
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DILUTION
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17
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MARKET FOR COMMON STOCK, DIVIDEND POLICY AND RELATED STOCKHOLDER MATTERS
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17
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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17
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OUR BUSINESS
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27
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MANAGEMENT OF MEDBOX, INC.
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38
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PRINCIPAL AND SELLING STOCKHOLDERS
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42
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PLAN OF DISTRIBUTION
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43
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DESCRIPTION OF CAPITAL STOCK
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46
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EXPERTS
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50
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LEGAL MATTERS
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50
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WHERE YOU CAN FIND MORE INFORMATION
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50
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ABOUT THIS PROSPECTUS
In making your investment decision, you should only rely on the information contained in this prospectus. We have not authorized anyone to provide you with any other or different information. If anyone provides you with information that is different from, or inconsistent with, the information in this prospectus, you should not rely on it. We believe the information in this prospectus is materially complete and correct as of the date on the front cover. We cannot, however, guarantee that the information will remain correct after that date. For that reason, you should assume that the information in this prospectus is accurate only as of the date on the front cover and that it may not still be accurate on a later date. This document may only be used where it is legal to sell these securities. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sales of our shares of common stock.
Neither we, nor any of our officers, directors, agents or representatives, make any representation to you about the legality of an investment in our common stock. You should not interpret the contents of this prospectus to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in our common stock.
This prospectus does not offer to sell, or ask for offers to buy, any shares of our common stock in any state or other jurisdiction in which such offer or solicitation would be unlawful or where the person making the offer is not qualified to do so.
No action is being taken in any jurisdictions outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in those jurisdictions. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about, and to observe, any restrictions that apply in those jurisdictions to this offering or the distribution of this prospectus. In this prospectus, unless the context otherwise denotes, references to “we,” “us,” “our,” “Medbox” and the “Company” refer to Medbox, Inc.
SUMMARY
The following summary highlights material information in this prospectus. It may not contain all the information that is important to you. For additional information, you should read this entire prospectus carefully, including “Risk Factors” the financial statements and the notes to the financial statements.
Business Overview and Our Subsidiaries
Medbox, Inc. is a Nevada corporation. We currently operate through seven wholly-owned subsidiaries:
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Prescription Vending Machines, Inc., a California corporation, dba 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 pursuant to a recent acquisition;
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Medicine Dispensing Systems, Inc., an Arizona corporation, which provides our consulting services in Arizona;
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Mini-Storage Solutions, Inc., a California corporation that produces and will market our Safe Access Storage Locker product;
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Medbox Rx, Inc., a California corporation that produces and will market our Rx product line including Lockbox Rx and Sample-Safe;
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Medbox, Inc., a California corporation that is currently inactive and which has the same name as the Company; and
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Medbox Leasing, Inc., a California corporation that is currently inactive.
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MDS developed the Medbox patented biometric medicine dispensing machine designed to confirm patient identification through a biometric verification system prior to dispensing medicine to authorized patients. The Medbox machine also has a companion option for dispensing refrigerated products.
The Medbox features patented systems that dispense herbal and prescription medications to individuals based on biometric identification. This system allows pharmacies, assisted living facilities, prisons, hospitals, doctors’ offices, and alternative medicine clinics to help manage employee possession of sensitive drugs.
Through MDS we offer turn-key consulting services to the pharmaceutical industry. We also offer turnkey consulting services to individuals seeking to establish alternative medicine clinics, primarily in jurisdictions that have recently passed legislation concerning the availability of alternative medicines (principally, medical marijuana). These services include site selection, permitting, design, full build-out and licensing.
We recently acquired Vaporfection International, Inc., pursuant to which we offer a line of medical vaporizing products and accessories. We are also developing several new products, including:
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Safe Access Storage Lockers
, which is designed for use by medium to large mail-order chains for the retrieval of retail goods by their customers;
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Lockbox Rx
, a system designed to provide pharmacies with a mechanism to allow their customers to pick up their medications, quickly and conveniently, 24 hours a day; and
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Sample-Safe
, a wall-mounted unit intended for use in doctors’ offices, which offers strict inventory control of prescription medicine samples through the use of biometrics and an internal record keeping system designed to be unalterable by office staff.
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Where You Can Find Us
Our principal executive offices are located at:
Medbox, Inc.
8439 West Sunset Blvd., Suite 101
West Hollywood, CA 90069
Our telephone number at this address is:
(800) 762-1452
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Medbox, Inc.
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Common stock offered by us:
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3,000,000
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Common stock offered by the selling stockholders:
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346,450 shares, consisting of: (a) 331,450 shares of common stock currently issued and outstanding; and (b) 15,000 shares issuable upon full exercise of outstanding warrants.
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Common stock outstanding before the offering:
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14,333,375 Shares
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Common stock to be outstanding after the offering:
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17,333,375 Shares, assuming no exercise of the warrants registered for sale hereby, or 17,348,375 Shares assuming exercise of all such warrants.
1
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Use of proceeds:
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We expect to receive net proceeds from this offering of approximately $75 million, assuming an initial public offering price of $25.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, assuming all the shares offered hereby are sold and after deducting estimated offering expenses payable by us.
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We will not receive any proceeds from the sale of shares of our common stock in this offering by the selling stockholders, although we may receive proceeds of up to $478,500 if the warrants described herein are exercised.
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We intend to use the net proceeds of the offering: (i) to expand the marketing of our existing products and services; (ii) to expand our product lines, including further development and marketing of our new products, initially our Rx line of products and acquiring additional licenses to enhance our existing products or develop new products; (iii) for research and development, including the development of new products; and (iv) for working capital and other general corporate purposes, including purchasing inventory. See “Use of Proceeds.”
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Dividend policy:
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We currently intend to retain any future earnings to finance the development and expansion 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.
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OTC Markets Trading System:
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Our common stock trades on the OTC Markets Group quotation system under the ticker “MDBX.”
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Risk factors:
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Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 5 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
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(1) Does not include potential conversion of the 3,000,000 outstanding shares of Series A Preferred Stock into 15,000,000 shares of common stock
or the exercise of outstanding warrants to purchase up to 260,854 shares of common stock not registered for sale hereby.
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;
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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).
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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 auditor’s 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 such as the correlation between executive compensation and financial performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation, when such disclosure requirements are adopted; and
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present more than two years of audited financial statements and two years of selected financial data in this registration statement and future filings, instead of the customary three years for audited financial statements and five years for selected financial data.
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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.
Because the worldwide market value of our common stock held by non-affiliates, or public float, is below $75 million, we are also a “smaller reporting company” as defined under the Exchange Act. Some of the foregoing reduced disclosure and other requirements are also available to us because we are a smaller reporting company and may continue to be available to us even after we are no longer an emerging growth company under the JOBS Act but remain a smaller reporting company under the Exchange Act. As a smaller reporting company we are not 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 Act; and
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present more than two years of audited financial statements in our registration statements and annual reports on Form 10-K and present any selected financial data in such registration statements and annual reports.
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RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors and the other information in this registration statement before investing in our common stock. Our business and results of operations could be seriously harmed by any of the following risks. The risks set out below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the value and trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Company and Our Business
Our continued success is dependent on additional states legalizing medical marijuana and additional counties in California 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, on local governments authorizing a sufficient number of dispensaries. Any number of factors could slow or halt the progress. Further, 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 proposal, 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 products and negatively impact our business and revenues.
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. Further, the medical marijuana industry could face a material threat from the pharmaceutical industry should marijuana displace other drugs or simply encroach upon the pharmaceutical industry’s market share for compounds such as marijuana and its component parts. 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 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 trumps state laws that legalize its use for medicinal purposes. At present the states are standing tall against the federal government, 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. However, 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. While Medbox is not insulated from economic risk if such a change were to occur, we believe that by virtue of the fact that it does not market, sell, or produce marijuana or marijuana related products, the Company and its investors should be insulated from federal prosecution or harassment. However, the medical marijuana industry is our primary target market, and if this industry was 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.
Our clients 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 compelling argument that banks cannot accept for deposit funds from the drug trade and therefore cannot do business with our clients that traffic in marijuana, and clinic operators often have trouble finding a bank willing to accept their business. While 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, there can be no assurance his legislation will be successful, that banks will decide to do business with medical marijuana retailers, or that in the absence of 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 market to open accounts and otherwise use the service of banks may make it difficult for them to purchase our products and services.
We have a limited operating history and 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 manufacturing specialty products and the competitive and regulatory environment in which we operate. You should 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 successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it 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 may 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 may 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.
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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, if needed, 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. Further, if we raise capital by issuing stock, the holdings of our existing stockholders will be diluted.
If we raise capital by issuing debt securities, such debt securities would rank senior to our common stock upon our bankruptcy or liquidation. In addition, we may raise capital by issuing equity securities that 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 bankruptcy 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. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both.
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 out 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 product and service 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 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 machines by consumers. Although we believe that the use of dispensing machines 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.
Since we initiated product sales in 2010, our business has grown significantly. This growth has placed substantial strain on our management, operational, financial and other resources. If we are able to continue expanding our operations in the United States and in other countries where we believe our products will be successful, as planned, 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 train, motivate, and manage 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.
We primarily depend on a single product for our revenue.
Although we generate revenue through our consulting services and have acquired and developed new products that we intend to market going forward, currently we primarily rely on the sale of our Medbox machine and related consulting services for our revenue. We do not have a broad portfolio of other products that we could rely on to support our operations if we were to experience any difficulty with the manufacture, marketing, sale, or distribution of the Medbox machine.
Any future litigation could have a material adverse impact on our results of operations, financial condition and liquidity, particularly since we do not currently have director and officer insurance. Our lack of D&O insurance may also make it difficult for us to retain and attract talented and skilled directors and officers.
From time to time we may be subject to litigation, including potential 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. To date we have been unable to obtain directors and officers liability (“D&O”) insurance to cover such risk exposure for our directors and officers. 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. While we are attempting to obtain such insurance, there can be no assurance that we will be able to do so at reasonable rates or at all, or in amounts adequate to cover such expenses should such a lawsuit occur. 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 expect that we would do so to the extent permitted by Nevada law. Without 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. Further, our lack of 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.
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. The timing and amount of future revenues will depend almost entirely on our ability to sell our products and services to new customers. Our future operating results will depend upon many other factors, including:
- the level of product and price competition,
- our success in expanding our business network and managing our growth,
- our ability to develop and market product enhancements and new products,
- the timing of product enhancements, activities of and acquisitions by competitors,
- the ability to hire additional qualified employees, and
- the timing of such hiring and our ability to control costs.
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 currently have a license with respect to one U.S. patent, one related Canadian patents and four other patents pending relating to our retail medicine machine business. We also have an additional four issued patents and five patent applications owned by our recently acquired wholly-owned subsidiary Vaporfection International, Inc. 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.
We do not have and independent board of directors which could create a conflict of interests and pose a risk from a corporate governance perspective.
Our Board of Directors consists solely of current executive officers, which means that we do not have any outside or independent directors. The lack of independent directors may prevent the Board from being independent from management in its judgments and decisions and its ability to pursue the Board responsibilities without undue influence. For example, an independent Board can serve as a check on management, which can limit management taking unnecessary risks. Furthermore, the lack of independent directors creates the potential for conflicts between management and the diligent independent decision making process of the Board. In this regard, our lack of an independent compensation committee presents the risk that our executive officers on the Board may have influence over his/their personal compensation and benefits levels that may not be commensurate with our financial performance. Furthermore, our lack of outside directors deprives our company of the benefits of various viewpoints and experience when confronting challenges we face. With solely officers sitting on the Board of Directors, it will be difficult for the Board to fulfill its traditional role as overseeing management.
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, Dr. Bruce Bedrick, our Chief Executive Officer, and P. Vincent Mehdizadeh, our Chief Operating Officer and the founder of MDS and developer of the Medbox. We believe Dr. Bedrick and Mr. Mehdizadeh possess valuable knowledge about and experience in the alternative medicine market, as well as a history of success helping our clients through the licensing process, and that their knowledge and relationships would be difficult to replicate. We have not entered into an employment agreement with either Dr. Bedrick or Mr. Mehdizadeh and, although we are considering doing so, have not acquired key-person life insurance on either such executive officer. The unexpected loss of the services of Dr. Bedrick or Mr. Mehdizadeh could have a material adverse effect on our business, operations, financial condition and operating results, as well as the value of our common stock.
Requirements associated with being a reporting public company will require significant company resources and management attention.
Once the registration statement of which this prospectus is a part is declared effective by the SEC, we will be subject to the reporting requirements of the Exchange Act and the other rules and regulations of the SEC relating to public companies. We are working with independent legal, accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as an SEC reporting company. These areas include corporate governance, internal control, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas, including our internal control over financial reporting. However, we cannot assure you that these and other measures we may take will be sufficient to allow us to satisfy our obligations as an SEC reporting company on a timely basis.
In addition, compliance with reporting and other requirements applicable to SEC reporting companies will create additional costs for us, will require the time and attention of management and will require the
hiring of additional personnel and legal, audit and other professionals. We cannot predict or estimate the amount of the additional costs we may incur, the timing of such costs or the impact that our management’s attention to these matters will have on our business.
Various herbal drugs 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 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.
Our management controls a large block of our common stock that will allow them to control us.
As of the date of this prospectus, members of our management team and affiliates beneficially own approximately 91% of our outstanding common stock and all 3,000,000 outstanding shares of our preferred stock, each of which is convertible into five shares of common stock and votes with the common stock on an as-converted basis. As such, management owns approximately 92.2% of our voting power. As a result, management will have the ability to control substantially all matters submitted to our stockholders for approval including:
a) election of our board of directors;
b) removal of any of our directors;
c) amendment of our articles of incorporation or bylaws; and
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d)
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adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.
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In addition, management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
Any additional investors will own a minority percentage of our common stock and will have minority voting rights.
Risks Related to the Offering and Our Common Stock
Our stock price has been extremely volatile and our common stock is not listed on a stock exchange; as a result, stockholders may not be able to resell their shares at or above the price paid for them.
The market price of our common stock as has been extremely volatile and could be subject to significant fluctuations due to changes in sentiment in the market regarding our operations or business prospects, among other factors. Further, our common stock is not listed on a stock exchange, nor do we currently intend to list the common stock on a stock exchange. An active public market for our common stock currently exists but may not be sustained. Therefore, stockholders may not be able to sell their shares at or above the price they paid for them.
Among the factors that could affect our stock price are:
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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 investment community 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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litigation;
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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.
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The offering is not underwritten and there is no minimum offering requirement.
We are selling the shares of our common stock offered hereby directly on a best efforts basis and without the assistance of an underwriter. Because the offering is not underwritten by a broker-dealer on a firm commitment basis, there can be no assurance that all, or even a substantial number, of the shares of common stock we are offering hereby will be sold. If we do not sell all of the shares we are offering hereby, we could be required to raise additional capital earlier than we would if we did sell all of the shares we are so offering.
The offering price per share of our common stock offered under this prospectus may not be indicative of the value of future price of our common stock and, therefore, may not be realized upon any future disposition of your shares of our common stock.
Because there is currently no active trading market for our common stock, our board of directors established the offering price for the common stock based on factors it considered appropriate, including recent trading prices for the common stock and its analysis of the Company’s future prospects. See “Determination of the Offering Price.” The mid-point of the offering price range, $25.00 per-share, represents 122 times our reported tangible common book value per share at March 31, 2013 and may or may not be considered the fair value or intrinsic value of our common stock to be offered in the offering.
Also, as noted above there is no underwriter involved in the offering. When an underwriter is involved, the offering price in an offering typically reflects market forces at work because the underwriter works with the issuer to price the offering, based on factors that include demand for the shares from securities dealers and the underwriter’s analysis of the issuer’s financial performance. Although imperfect and expensive, this process provides some protection that the offering price is the market price.
If you purchase shares in the offering, you may not be able to sell them at or above the offering price. The trading price of the common stock will be determined by the marketplace, and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions, securities analyst research reports and general industry, geopolitical and economic conditions. Publicly traded often experience substantial market price volatility. These market fluctuations might not be related to the operating performance of particular companies whose shares are traded. Accordingly, we cannot assure you that if you purchase common stock in the offering you will later be able to sell it at or above the offering price.
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 at any time. While most of these shares are held by two of our principal stockholders, who are also executive officers, and we believe that such holders have no current intention to sell a significant number of shares of our stock, if either of these principal stockholders were to decide to sell large amounts of stock over a short period of time such sales could cause the market price of our common stock to drop significantly, even if our business is doing well.
Further, 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. Assuming all shares offered herby are sold, after the consummation of this offering we will have 32,549,229shares of common stock outstanding on a fully diluted basis (i.e. assuming conversion of all outstanding shares of Series A Preferred Stock and outstanding warrants to purchase up to an additional 275,854 shares. All shares of our common stock sold in this offering will be freely tradable without restriction under the Securities Act, except for any shares that are held or acquired by our affiliates, as that term is defined in the Securities Act.
Purchasing shares of our common stock through this offering will result in an immediate and substantial dilution of your investment.
The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. See “Dilution.”
In addition, in connection with our recent purchase of Vaporfection International, Inc. we are obligated to issue additional shares of common stock based on the operating results of this subsidiary and the closing trading prices of our common stock as of the calculation date; since there is no cap on the number of shares we may be required to issue the potential issuance is unlimited, although we don’t expect that we will be required to issue a material amount of shares pursuant to this obligation. See “Our Business—Recent Acquisition of Vaporfection International, Inc.” Furthermore, if we raise additional capital by issuing new convertible or equity securities at a lower price than the initial public offering price, your interest will be further diluted. This may result in the loss of all or a portion of your investment. If our future access to public markets is limited or our performance decreases, we may need to carry out a private placement or public offering of our common stock at a lower price than the initial public offering price. In addition, newer securities may have rights, preferences or privileges senior to those of securities held by you.
There is a limited trading market in our common stock, which will hinder your ability to sell our common stock and may lower the market price of the stock.
Our common stock is not listed on a stock exchange and is traded only sporadically. We do not intend to apply to list our shares of common stock on an exchange in connection with this offering or in the foreseeable future, although we may seek to work with a market maker to have our common stock listed on the Over-the-Counter Bulletin Board. An active trading market for shares of our common stock may never develop or be sustained following this offering. Persons purchasing shares in the offering may not be able to sell their shares when they desire if a liquid trading market does not develop or sell them at a price equal to or above the offering price even if a liquid trading market does develop. This limited trading market for our common stock also may reduce the market value of our common stock. Before purchasing you should consider the limited trading market for our shares and be financially prepared and able to hold your shares for an indefinite period. See “Market for Common Stock, Dividend Policy and Related Stockholder Matters.”
While we may attempt to have our common stock listed on the Over-the-Counter Bulletin Board, there is no assurance that we will be able to do so. Even if our common stock is listed on the Over-the-Counter Bulletin Board, the Bulletin Board, and the Pink tier of the OTC Markets Group quotation system where the common stock is currently traded, are markets with less liquidity and fewer buyers and sellers than stock exchanges such as The NASDAQ Stock Market LLC and the New York Stock Exchange. If an active trading market for our stock does not develop, you may not be able to sell your shares in an efficient manner and the sale of a large number of shares at one time could temporarily depress the market price. The limited trading market could also result in a wider spread between the “bid” and “ask” prices for the stock. When there is a wide spread between the bid and asked price, the price at which you may be able to sell our common stock may be significantly lower than the price at which you could buy it at that time. For these reasons, our common stock should not be viewed as a short-term investment.
Our preferred stock may have rights senior to those of our common stock which could adversely affect holders of 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 right of the holders of our common stock.
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, although some of these exemptions are available to us as a smaller reporting company (i.e. a company with less than $75 million of its voting equity held by affiliates). 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 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, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them.
We have broad discretion to use the net proceeds from the offering and our investment of those proceeds may not yield favorable returns.
We will have broad discretion over the use of the net proceeds of the offering and may apply the proceeds of this offering to uses that do not improve our operating results or increase the value of your investment.
Although this prospectus generally describes the use of the proceeds of the offering, we will have broad discretion in determining the specific timing and use of the offering proceeds. Until utilized, we anticipate that we will invest the net offering proceeds in liquid assets. We have not made a specific allocation for the use of the net proceeds. Therefore, we will have broad discretion as to the timing and specific application of the net proceeds, and investors may not have the opportunity to evaluate the economic, financial and other relevant information that we will use in applying the net proceeds, and we may spend the proceeds in a manner that stockholders do not deem desirable. Our application of the net proceeds of the offering may not ultimately improve our operating results or increase the value of your investment.
We can sell additional shares of common stock without consulting stockholders and without offering shares to existing stockholders, which would result in dilution of stockholders’ interests in Medbox and could depress our stock price.
Our articles of incorporation authorize 100,000,000 shares of common stock, of which 14,333,375 are currently outstanding, and 10,000,000 shares of preferred stock, of which 3,000,000 shares are currently outstanding, and our Board of Directors is authorized to issue additional shares of our common stock and preferred stock. 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.
Further, our shares do not have preemptive rights, which means we can sell shares of our common stock to other persons without offering purchasers in this offering the right to purchase their proportionate share of such offered shares. Therefore, any additional sales of stock by us could dilute your ownership interest in our company.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward- looking statements as defined by federal securities laws. For this purpose, forward- looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, “estimate”, “could”, “should”, “would”, “likely”, “may”, “will”, “plan”, “intend”, “believes”, “expects”, “anticipates”, “projected”, or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated by such statements. The forward looking information is based on various factors and was derived using numerous assumptions. For these statements, we claim the protection of the “bespeaks caution” doctrine. Such forward-looking statements include, but are not limited to:
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statements regarding our anticipated financial and operating results, including anticipated sources of revenues, how many machines we expect to sell during 2013, when we expect to begin to receive continuing maintenance revenues with respect to our in-service machines and anticipated filling of existing backlog orders during the balance 2013;
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statement regarding anticipated future sources of revenues;
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statement regarding management’s expectation with respect to our acquisition of Vaporfection International, Inc. producing more significant revenues during the third quarter of 2013;
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statements regarding our goals, intensions, plans and expectations, including the introduction of new products and services and markets and locations we may target in the future;
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statements regarding the anticipated timing and impact of our pending acquisitions;
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statement regarding our expectation with respect to the potential issuance of performance shares in connection with our acquisition of Vaporfection International, Inc.; and
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statement with respect to having adequate liquidity.
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The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
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negative changes in public sentiment towards acceptance of the use of alternative medicines, or community resistance to the establishment of alternative medicine clinics;
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changes in the pace of legislation legalizing the use of medical marijuana;
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other regulatory developments that could limit the market for our products and services;
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our ability to successfully integrate acquired entities;
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competitive developments, including the possibility of new entrants into our primary market with growing acceptance of the use of medical marijuana;
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the loss of key personnel; and
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other risks discussed in this document.
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All forward-looking statements in this document are based on information currently available to us as of the date of this prospectus, and we assume no obligation to update any forward-looking statements.
USE OF PROCEEDS
Because the offering is a best efforts offering, we are presenting this information assuming that we sell 10%, 50% and 100% of the shares offered hereby. We will not receive any proceeds from the sale of the
346,450
shares of common stock being offered for resale by the selling stockholders, however, if the warrants for which the common stock we are registering the resale of are exercised, of which there is no guarantee, we will receive gross proceeds of $478,500. For purposes of this table, we used $25.00, the midpoint of the range set forth on the cover page of this prospectus, as the per-share offering price.
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10%
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50%
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100%
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Gross offering proceeds
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$
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7,500,000
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$
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37,500,000
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$
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75,000,000
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Estimated expenses of the offering
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$
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$
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$
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Net proceeds from the offering,
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$
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$
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$
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We intend to use the net proceeds of the offering: (i) to expand the marketing of our existing products and services; (ii) to expand our product lines, including further development and marketing of our new products, initially our Rx line of products including Lockbox Rx and Sample-Safe, and acquiring additional licenses to enhance our existing products or develop new products; (iii) research and development, including the development of new products; and (iv) for working capital and other general corporate purposes, including purchasing inventory, general corporate purposes, retirement of debt, and possible new acquisitions.
We have not quantified plans for use of the offering proceeds for each of the foregoing purposes.
Our management will have broad discretion over the uses of the net proceeds from this offering. Pending these uses, we intend to invest the net proceeds from this offering in a variety of capital preservation investments, including short-term, interest-bearing investment grade securities, money market accounts, certificates of deposit and direct or guaranteed obligations of the U.S. government.
DETERMINATION OF THE OFFERING PRICE
We currently expect the offering price to be between $20.00 and $30.00 per share of our common stock for the shares of stock being offered by us pursuant to this prospectus
. The selling stockholders may sell the shares from time to time at the market price quoted on the OTC Market Groups Quotation System at the time of offer and sale, or at prices related to such prevailing market prices, in negotiated transactions or in a combination of such methods of sale directly or through brokers.
The offering price of the common stock has been arbitrarily determined by our board of directors and bears no relationship to any objective criterion of value. The price does not bear any relationship to the Company’s assets, book value, historical earnings or net worth. In determining the offering price, the board of directors considered such factors as recent trading prices of the common stock, the board’s perception of our future prospects, past and anticipated operating results, present financial resources and the likelihood of selling the shares of common stock offered hereby. Accordingly, the offering price should not be considered an indication of the actual value of the Company or the common stock.
The mid-point of the offering price range, or $25.00, represents 122 times our reported tangible common book value per share at March 31, 2013 and may or may not be considered the fair market value of our common stock on that date or any date relevant hereto. As noted above you should not consider the offering price as an indication of value of Medbox, Inc. or our common stock. You should not assume or expect that, after the offering, our shares of common stock will trade at or above the offering price in any given time period. The market price of our common stock may decline during or after the offering, and you may not be able to sell the underlying shares of our common stock purchased during the offering at a price equal to or greater than the offering price. You should obtain a current quote for our common stock before purchasing shares and make your own assessment of our business and financial condition, our prospects for the future, and the terms of the offering.
If you invest in our securities, your interest will be immediately and substantially diluted to the extent of the difference between the public offering price per share of our common stock and the net tangible book value per share of our common stock after giving effect to this offering.
Our net tangible book value as of March 31, 2013 was $3,029,489, or $0.205 per share based on 14,774,551 shares of our common stock outstanding as of that date. Historical net tangible book value per share is determined by dividing the number of outstanding shares of our common stock into our total tangible assets, or total assets less intangible assets, less our total liabilities. Investors participating in this offering will incur immediate, substantial dilution
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After giving effect to:
(i) the sale of the 3,000,000 shares in this offering at the assumed public offering price of $25.00 per share:
(ii) the issuance of 15,000 shares of common stock issuable upon full exercise of outstanding warrants held by the Selling Stockholders;
(iii) the issuance of 260,854 shares of common stock issuable upon full exercise of outstanding warrants held by security holders not listed as selling stockholders in this prospectus.
(iv) the conversion of 3,000,000 outstanding shares of Series A Preferred Stock into 15,000,000 shares of common stock;
And without taking into account any other changes in net tangible book value after March 31, 2013, our pro forma as adjusted net tangible book value at March 31, 2013 would have been approximately $78,508,250, or $2.375 per share. This represents an immediate increase in pro forma net tangible book value of approximately $2.17 per share to our existing stockholders, and an immediate dilution of $22.625 per share to investors purchasing shares in the offering.
Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the net tangible book value per share of our common stock immediately after this offering.
The following table illustrates the per share dilution to investors purchasing shares in the offering:
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Assumed public offering price per share
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$25.00
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Net tangible book value per share as of March 31, 2013
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$0.205
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Increase in net tangible book value per share attributable to this offering
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$2.170
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Pro Forma as adjusted net tangible book value per share after this offering
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$2.375
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Amount of dilution in pro forma net tangible book value per share to new investors in this offering
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$22.625
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We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders. See “Risk Factors—We may 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” and “—We can sell additional shares of common stock without consulting stockholders and without offering shares to existing stockholders, which would result in dilution of stockholders’ interests in Medbox and could depress our stock price.”
MARKET FOR COMMON STOCK, DIVIDEND POLICY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Pink tier of the OTC Markets Group quotation system (
www.otcmarkets.com
) under the trading ticker “MDBX.” The trading price of our common stock has been extremely volatile. Further, the stock market has from time to time experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These kinds of broad market fluctuations may adversely affect the market price of our common stock. For additional information, see “Risk Factors” above.
We have outstanding 3,000,000 shares of our Series A Preferred Stock, which are convertible into an aggregate of 15,000,000 shares of our common stock, and warrants to purchase up to 275,854 shares of our common stock. There are no other outstanding securities convertible into shares of our common stock, or warrants or options outstanding that are exercisable for shares of our common stock.
The following table sets forth the quarterly high and low sale prices of our common stock for the two most recent fiscal years and the quarters ended March 31, 2013 and June 30, 2013, as reported on the OTC Market Groups quotation system.
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High Sale
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Low Sale
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Fiscal Quarters
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Price
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Price
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First Quarter 2011
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$0.00
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$0.00
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Second Quarter 2011
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$1.50
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$0.75
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Third Quarter 2011
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$1.24
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$0.75
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Fourth Quarter 2011
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$1.24
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$1.24
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First Quarter 2012
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$3.00
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$1.24
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Second Quarter 2012
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$3.00
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$2.50
|
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Third Quarter 2012
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$3.00
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$0.03
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Fourth Quarter 2012
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$215.00
|
$2.75
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First Quarter 2013
Second Quarter 2013
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$98.00
$29.50
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$25.10
$25.50
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As of July 11, 2013, there are approximately 401 holders of record of our common stock.
We have never declared or paid cash dividends on our common stock. We anticipate that in the future we will retain any earnings for operation of our business. Accordingly, we do not anticipate declaring or paying any cash dividends in the foreseeable future.
We currently have no equity compensation plans. However, we may have to issue additional shares of common stock in the future in connection with our acquisition of Vaporfection International, Inc. based on the financial performance of this subsidiary through March 31, 2017. See “Our Business—Recent Acquisition of Vaporfection International, Inc.”
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared on the accrual basis in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. In addition, these accounting policies are described at relevant sections in this discussion and analysis and in the notes to the financial statements included in this prospectus.
Fair Value of Financial Instruments
: Pursuant to ASC No. 825,
Financial Instruments
, we are required to estimate the fair value of all financial instruments included on our balance sheets. The carrying value of cash, accounts receivable, other receivables, inventory, accounts payable and accrued expenses approximate their fair value due to the short period to maturity of these instruments.
Cash and Cash Equivalents
: We consider all highly liquid investments with maturities of three months or less when purchased, to be cash equivalents.
Inventory
: Inventory is valued at the lower of cost or fair market and consists of finished goods. Inventory deposits are prepayments for the manufacture of dispensary machines.
Accounts Receivable and Doubtful Accounts
: We are subject to credit risk as we extend credit to our clients (customers). We extend credit to our customers, mostly on an unsecured basis after performing certain credit analysis. Our typical terms are net 30 days. We periodically review the creditworthiness of our customers and provides for probable uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based on our assessment of the current status of individual accounts. Accounts still outstanding after we have used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to accounts receivable.
Revenue Recognition
: We recognize revenue in accordance with ASC 605,
Revenue Recognition
. Revenue is recognized when all the criteria have been met:
• Persuasive evidence of an arrangement exists.
• The products and services have been provided to the customer.
• The fee is fixed or determinable.
• Collectability is reasonably assured.
Revenue is recognized for dispensary units at the time of shipment. Revenue for construction and consulting services is recognized as the Company completes the respective contracts. Our contracts are short-term, typically 60 to 90 days before completion. Provisions for discounts and rebates to customers, if any, and estimated returns and allowances are provided for in the same period the related revenue is recognized.
Cost of Revenues
: Our 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. server equipment, rent expense, energy and bandwidth costs, and support and maintenance costs.
Income Taxes
: We account for income taxes under the asset and liability method. We recognize 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 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.
Overview
We provide medicine dispensing technology to clients who are involved in dispensing alternative medicine and conventional pharmaceuticals to end-users. Our systems provide control, accountability, and security. Since inception we have focused primarily on the medical marijuana marketplace. Based upon unsolicited inquiries from interested institutional entities we came to understand our technology could be applied to the broader pharmaceutical marketplace. While most individuals associate drug dispensing with pharmacies, whether freestanding or within a hospital setting, numerous other environments dispense pharmaceuticals and these organization, from urgent care facilities to drug rehabilitation, to hospice, to physician offices, to assisted living centers, to prisons, must wrestle with ways to make drugs available but control their distribution. Certain common pharmaceuticals are frequent targets for theft and misuse. Our products and services are directed to help these facility operators gain greater control over these drugs while allowing dispensing in a more economical and controlled manner.
We primarily generate revenues from the sale of our medicine dispensing system and refrigerated add-on device and the initial consulting services we provide to startup alternative medical marijuana clinics. While monthly maintenance and recurring consulting fees have been waived to date for existing completed contracts, beginning in January 2014 we expect that we will earn fees from ongoing maintenance and consulting services provided to the purchasers of our machines. The continued success of our primary business depends on states continuing to legalize the use of marijuana for medical purposes and, equally importantly, such states and the individual localities in such states, to the extent required by the applicable state legislation, adopting a corresponding process to license alternative medicine clinics to dispense the medical marijuana, as well as continuation of the current federal policy of not enforcing the federal prohibition on the use of marijuana in states that have legalized it.
Our current revenue model consists of the following income streams:
1.
Gross profit margins on dispensary unit sales
. We realize a gross profit margin per Medbox machine sold. Medbox machines retail for $25,000 for each machine (including the POS system). To date all sales have been system sales that include a refrigerated unit that works with the Medbox which retails for $15,000.
2.
Consulting fee revenues
. This revenue stream accounts for a significant portion of our current and anticipated future revenues. In jurisdictions where there is intense competition for a limited number of licenses, we believe the Medbox model, with its incorporated security measures, promotes a distinct advantage in the application selection process in the states where an applicant is graded on the ability to demonstrate compliance.
3.
Continuing maintenance revenue.
Beginning in January 2014, we expect to begin billing for monthly ongoing support and equipment maintenance of varying amounts between $75 up to $495 per month
per location in which our machines are installed, based on geographic area. These services include consulting, marketing support, and equipment maintenance.
Results of Operations
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Financial Summary
Net income increased $224 thousand, or 215.7%, to $328 thousand during the year ended December 31, 2012, from $104 thousand during the year ended December 31, 2011, as a result of a decrease in cost of sales and interest expense and a slight increase in revenues, partially offset by higher general and administrative expenses and an increase in income taxes.
Our revenues increased a modest 2.4%, to $3.53 million, during the year ended December 31, 2012 compared to revenues of $3.44 million during the year ended December 31, 2011, but we experienced a strong increase in our backlog during 2012; the dollar amount of orders we believed to be firm as of December 31, 2011 and 2012 was $0 and $673 thousand, respectively; all backlog orders at December 31, 2012 were subsequently filled during 2013. The increase in backlog during 2012 contributed to a strong quarter ending March 31, 2013. We also experienced stronger margins and lower operating costs during the year ended December 31, 2012.
Revenue
Total revenue during 2012 and 2011 consisted of revenues from system sales and revenues from the provision of consulting services. As noted above, revenues for the year ended December 31, 2012 increased to $3.53 million, or 2.4% above revenues of $3.44 million for the year ended December 31, 2011. This increase is attributable to an increase in revenues from systems sales, partially offset by a decrease in consulting revenues. Revenues from system sales increased $240 thousand, or 15.8%, to $1.76 million during the year ended December 31, 2012 compared to systems sales revenues of $1.52 million during the year ended December 31, 2011. This was due to an increase in the number of Medbox machines (both base Medbox machines and the refrigerated add-on unit) sold - to 42, during the year ended December 31, 2012, up from 36 Medbox machines sold during the year ended December 31, 2011.
Consulting revenue decreased $114 thousand, or 6.1%, to $1.77 million during the year ended December 31, 2012 compared to consulting revenues of $1.89 million during the year ended December 31, 2011. As discussed further below, however, $673 thousand in consulting fees originated in 2012 were recognized as consulting revenue during the first quarter of 2013.
Revenues attributable to system sales accounted for 49.9% and 44.2% of total revenues, and consulting and dispensary location build-out revenues accounted for 50.1% and 55.8% of total revenues, during the years ended December 31, 2012 and 2011, respectively.
While revenues increased only modestly during the year ended December 31, 2012, revenue-generating activity expanded during 2012, the results of which we recognized during the first quarter of 2013. At December 31, 2011 we reported no deferred revenue. At December 31, 2012 we had signed contracts and commenced work for $673 thousand of consulting services, but did not reach the critical milestones to trigger the ability to classify the services as complete and recognize this revenue. We recognized this revenue in the first quarter 2013 when the milestones were reached. In addition, due to various market issues (primarily legislative delays) beyond our control, we provided $345,000 of voluntary discounts to certain clients during 2012. While these discounts had a negative impact on revenue during the year ended December 31, 2012, the impacted clients re-engaged us for additional services that generated revenues of approximately $340 thousand during the quarter ended March 31, 2013.
As discussed in “Our Business,” below, we require service contracts for our installed user base as an adjunct to our system sales. To date, our systems have experienced low service needs and therefore, should this continue, we would enjoy a strong profit margin on these subscription-type revenues, which are generally a function of the number of systems installed. As discussed above, we have chosen for a period of time to waive the service fees that would generate service revenues as a “good will” gesture to our customers while their new businesses begin operations. Our installed systems base increased from 52 machines (with each Medbox and the optional refrigerated unit counting as two machines) at December 31, 2011 to 106 machines in service at December 31, 2012. We expect to sell 75 Medbox machines during the year ended December 31, 2013. At December 31, 2012 we had 53 consulting clients under contract in the states of California, Arizona, Connecticut, Washington, Colorado, and Massachusetts. Twenty of these clients have been awarded licenses and 33 are in the pre-license application phase to establish alternative medicine clinics. All clients awarded a license are under contract to purchase a Medbox machine with refrigerated add-on and approximately 50% have contracted to have us facilitate the building of their dispensary, with the remainder having the option to do so.
A breakdown of the components of our total revenue during the years ended December 31, 2012 and 2011appears below:
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Year Ended December 31:
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2012
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2012
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2011
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2011
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Total Revenues
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$3,525,636
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100%
|
$3,441,870
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100%
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Attributable to Systems
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$1,760,000
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49.9%
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$1,520,000
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44.2%
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Attributable to Consulting and Dispensary Location Build-out
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$1,765,636
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50.1%
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$1,880,000
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55.8%
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Attributable to Maintenance
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$0
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0%
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$0
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0%
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Attributable to Other
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$0
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0%
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$0
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0%
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Cost of Sales
Our cost of sales includes systems costs for our systems sales and construction, build-out, licenses, and permits for our consulting activities. Our cost of sales decreased both in actual dollars to $1.3 million and as a percent of revenue to 37.3% during the year ended December 31, 2012 compared to 3.4 million and 52.6%, respectively, for the year ended December 31, 2011. This decrease was the result of
identifying lower priced vendors for third party services such as construction, zoning attorney assistance, and related services.
Operating Expenses
Selling, general and administrative expenses, which we refer to as “operating expenses,” consist of all other costs incurred during the year other than cost of sales as discussed above. Our operating costs increased $190 thousand, or 13.2%, from $1.4 million during the year ended December 31, 2011 (41.9% of revenue) to $1.6 million during the year ended December 31, 2012 (46.3% of revenue), primarily as a result of an increase in bad debt expense, as well as increases in various components of other general and administrative expenses, partially offset by decreases in the other components of operating expenses. Other areas where we experienced material changes in operating costs during 2012 are discussed below.
Selling and marketing expenses increased slightly, by $6 thousand, or 12.0%, to $63 thousand during the year ended December 31, 2012. Advertising costs decreased from $171 thousand during the year ended December 31, 2011, equivalent to 5.0% of revenue, to $77 thousand during the year ended December 31, 2012, equivalent to 1.7% of revenue. Advertising costs decreased during 2012 because we relied more on referrals and word-of-mouth advertising from our existing clientele. This decrease was offset by an increase in sales commissions to independent contractors. General and administrative expenses, the various components of which are discussed below, increased from $747 thousand (21.7% of revenue) during the year ended December 31, 2011 to $967 thousand (27.4% of revenue) during the year ended December 31, 2012.
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Equipment rental expense, which consists of banner stands and related materials we use for trade show displays, decreased from $60 thousand during the year ended December 31, 2011, equivalent to 1.7% of revenue, to $3 thousand during the year ended December 31, 2012, equivalent to 0.1% of revenue, as a result of Company representatives attending fewer trade shows in 2012 due to the fact that we had an established corporate presence in the market, rendering attendance at trade shows less necessary for our overall marketing strategy.
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·
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Legal and accounting expense increased from $95 thousand during the year ended December 31, 2011, equivalent to 2.7% of revenue, to $154 thousand during the year ended December 31, 2012, equivalent to 3.4% of revenue. This increase is primarily attributable to legal and accounting costs associated with preparing our Form 10 registration statement for filing with the SEC and other preparations to become an SEC reporting company. We expect these costs to remain elevated during 2013 as we continue this process, and to remain above 2011 levels going forward as a result of our anticipated status as an SEC reporting company.
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·
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Outside service expense increased from $61 thousand during the year ended December 31, 2011, equivalent to 1.8% of revenue, to $114 thousand during the year ended December 31, 2012, equivalent to 2.5% of revenue. This increase was attributable generally to application preparation, zoning permits and monies spent on securing and maintaining rental payments for Arizona clients while their facilities were being built-out.
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·
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Rent expense increased from $125 thousand during the year ended December 31, 2011, equivalent to 3.6% of revenue, to $223 thousand during the year ended December 31, 2012, equivalent to 4.9% of revenue. The increase was attributable to additional office space required to house increased marketing, sales, and management departments and multiple virtual (unmanned) offices nationally and internationally opened during 2011 and 2012.
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·
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Bad debt expense increased from zero during the year ended December 31, 2011 to $418 thousand during the year ended December 31, 2012. The 2012 bad debt expense was attributed to
contracts that were terminated due to state law being challenged in Arizona. The clients signed new contracts in the third quarter of 2012 when it was clear that state law would not prevent services from being rendered.
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Other Expenses Items
Professional fees, consisting of independent contractor salaries and bonuses to salespeople, decreased from $626 thousand during the year ended December 31, 2011, equivalent to 18.2% of revenue, to $573 thousand during the year ended December 31, 2012, equivalent to 16.3% of revenue. These fees decreased during 2012 because we reduced independent contractor salaries as a result of minimized hours while tasks were accomplished more efficiently, as well as decreases in salesperson bonuses. We expect these fees to increase in 2013 as a result of the filing of our registration statement of which this prospectus is a part.
Depreciation increased slightly from $13.6 thousand (0.4% of revenue) during the year ended December 31, 2011 to $29.9 thousand (0.8% of revenue) during the year ended December 31, 2012.
Taxes increased 453.8%, from $44 thousand (an effective 29.9% tax rate) during the year ended December 31, 2011 to $245 thousand (an effective 42.8% tax rate) during the year ended December 31, 2012. The increase in both the amount of taxes paid and effective tax rate is due to the Company entering a higher tax bracket and thereby having an increased tax liability due to increased net income.
Net Income
As a result of the above, factors, net income increased $224 thousand, or 215.7%, from $104 thousand (3.0% of revenue) during the year ended December 31, 2011 to $327 thousand (9.3% of revenue) during the year ended December 31, 2012.
Quarter Ended March 31, 2013 Compared to Quarter Ended March 31, 2012
Financial Summary
Revenue increased $1.24 million, or 246.1%, to $1.75 million during the quarter ended March 31, 2013, from $506 thousand during the quarter ended March 31, 2012, as a result of increased sales of both our Medbox machines and our consulting services.
Our net income increased to $272 thousand during the quarter ended March 31, 2013 from $100 thousand during the quarter ended March 31, 2012. This increase was primarily attributed to an increase revenues partially offset by increases in cost of revenues, operating expenses and income taxes.
We experienced a strong increase in our backlog at March 31, 2013 in the amount of $1.5 million, compared to $0 at March 31, 2012. We expect all of such backlog to be filled during 2013. We also had deferred revenue of $120 thousand due to contract milestones not being achieved within the reporting quarter and as a result the revenue was not recognized during the quarter ended March 31, 2013.
Revenue
Total revenues during the quarters ended March 31, 2013 and 2012 consisted of revenues from system sales and the provision of consulting services which are bundled together in a single offering to clients, as well as the recognition during the first quarter of 2013 of revenue deferred during the year ended December 31, 2012 in connection with reaching milestones as per agreements entered into during 2012, as discussed further above.
Cost of Sales
Cost of sales increased to $150 thousand during the quarter ended March 31, 2013 from $89 thousand during the quarter ended March 31, 2012, as a result of increased sales of our Medbox machines and the provision of additional services during the 2013 quarter, as discussed above. Cost of sales as a percentage of revenues decreased to 8.5% during the quarter ended March 31, 2013 from 17.5% during the quarter ended March 31, 2012, as a result of revenues from consulting services, which have a lower cost of sales than our machines, constituting a higher percentage of our total revenues during the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012.
Operating Expenses
Operating expenses increased $834 thousand, or 263.8%, to $1.2 million during the quarter ended March 31, 2013 from $316 thousand during the quarter ended March 31, 2012. Selling and marketing expenses increased $270,000 or 1,127.2%, to $294 thousand during the quarter ended March 31, 2013 compared to $24 thousand during the quarter ended March 31, 2014. This increase was primarily a result of increased staffing and office expansion expenses.
Legal and accounting expenses increased $187 thousand, or 58.9%, to $317 thousand during the quarter ended March 31, 2013 compared to $130 thousand during the comparable 2012 period, primarily as a result of increased accounting and legal expenses during the 2013 quarter as a result of the Company having its financial statements audited and legal expenses of counsel in connection with its preparation and filing a registration statement on Form 10 with the SEC in April 2013. Legal and accounting expenses were $317 thousand for the quarter ended March 31, 2013 as compared to $36 thousand for the quarter ended March 31, 2012.
General and administrative expenses, increased $92 thousand, or 36%, to $254 thousand during the quarter ended March 31, 2013, from $162 thousand during the quarter ended March 31, 2012.
Income Taxes
The provision for income taxes increased to $177 thousand during the quarter ended March 31, 2013 compared to $43 thousand during the quarter ended March 31, 2013, as a result of the increase in income before the provision for income taxes for the quarter ended March 31, 2013.
Balance Sheet Analysis
March 31, 2013 Compared to December 31, 2012
Assets
At March 31, 2013, our current assets exceed current liabilities by a ratio of 2.3:1 and with minimal long-term debt; our current assets exceed total liabilities by a 2.2:1 ratio. Our cash on hand and accounts receivable are sufficient to cover all of our current liabilities by a ratio of 1.8:1. As we enjoy strong margins on our consulting services, we have tended to generate substantial cash from operations and have not historically been growth inhibited due to operating capital constraints.
Our total assets increased 22.8%, to $4.3 million at March 31, 2013 from $3.5 million at December 31, 2012. This increase was attributable primarily to the following asset categories:
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Cash and cash equivalents increased by $17 thousand or 1.6%, remaining at $1.0 million at both March 31, 2013 and December 31, 2012, as of result of profitable operations which resulted in $544 thousand of cash provided by operations and continued cash raised from stock sales which provided an additional $1.3 million of cash during the quarter. These increases to cash and cash equivalents were partially offset by the use of $24 thousand to purchase furniture and fixtures for our West Hollywood, California headquarters location, $1.5 million for the use of cash advances toward investments in Vaporfection International, Inc., Bio-Tech Medical Software, Inc. and MedVend Holdings, LLC. and $415 thousand to pay off the note payable to Mr. Mehdizadeh.
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Accounts receivable decreased by $942 thousand, or 43.9%, to $1.1 million at March 31, 2013 from $2.1 million at December 31, 2012 as a result of collections of all of the December 31, 2012 accounts receivable and the collection of current quarter sales activity during the quarter. Our accounts receivable generally consists of payments owed by clients to whom we have provided services; payment is due for said services 30 days after completion. As of March 31, 2013, we have accounts receivable with approximately 17 clients, 11 of which originated during quarter ended March 31, 2013. The March 31, 2013 accounts receivable balance included 6 accounts that had balances aggregating $326,000. Of the $326,000 the Company collected $241,000 during Q2 related to these accounts and is working with the remaining 2 customers on payment of their remaining balances. There are no specific balances that are significantly more than others. Since the end of March 31, 2013 we have collected approximately $600,000 related to the March 31, 2013 accounts receivables with delays due primarily to local ordinance delays impacting the opening of facilities in the San Diego market, the slow payments from 2 customers that were carryovers from 2012 and a single customer that owes the Company approximately $95,000 that we are working with to get periodic payments. At present, we have no accounts receivables that we deem uncollectible.
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·
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Inventory includes actual physical inventory and deposits made with the supplier for inventory of which we have not yet taken possession. Inventory increased $89 thousand, or 23.7%, to $467 thousand at March 31, 2013 from $378 thousand at December 31, 2012 as additional deposits were made with the supplier and additional inventory units which we used for demonstrating to potential clients were deployed in our domestic locations
during the first quarter of 2013.
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·
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Advances on equity investments were $1.5 million at March 31, 2013 and zero at December 31, 2012. The equity investment figure at March 31, 2013 consisted of advance payments of (i) $500,000 pursuant to our investment in Bio-Tech Medical Software, Inc. (“Bio-Tech”), (ii) of $$375,850 pursuant to our investment in Vaporfection International, Inc. and (iii) $600,000 pursuant to our investment in MedVend Holdings, LLC. We subsequently completed the purchase of Vaporfection International, Inc. in April 2013. We have not closed the transactions with Bio-Tech and MedVend Holdings and are currently trying to terminate these transactions. See “Our Business—Recent Acquisition of Vaporfection International, Inc.” and “Our Business—Other Recent Acquisition Agreements.”
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Liabilities
Total liabilities decreased by $923 thousand, or 42.9%, to $1.2 million at March 31, 2013 from $2.2 million at December 31, 2012. The decrease is attributed to the changes in the following liability categories:
Accounts payable and accrued expenses decreased $105 thousand, or 32.2%, to $220 thousand at March 31, 2013 from $324 thousand at December 31, 2012. This reduction was primarily due to the increased payments to creditors as we had additional cash resources as a result of the collection of the existing accounts receivable and the additional stock sales during the quarter.
Income taxes payable and deferred income taxes payable had a combined increase of $168 thousand, or 68.2%, to $413 thousand at March 31, 2013 from $246 thousand at December 31, 2012. The increase is related to the payment of income taxes related to our profitable operations in 2012 and the first quarter of 2013.
Deferred revenue decreased $553 thousand, or 82.2%, to $120 thousand at March 31, 2013 from $673 thousand at December 31, 2012 due to the completion of the remaining revenue recognition elements of a few contracts as of the end of 2012. The deferred revenue of $120 thousand at March 31, 2013 relates to remaining work related to San Diego California area contracts.
Related party note payable decreased $429 thousand, or 49.4%, to $440 thousand at March 31, 2013 from $869 thousand at December 31, 2012. This decrease is due to payments made during the quarter as required by the loan agreement. The related party did not charge us any interest on the loan during its existence. The loan was fully paid in the second quarter of 2013.
December 31, 2012 Compared to December 31, 2011
Assets
Our total assets increased 598.0%, to $3.5 million at December 31, 2012 from $0.51 million at December 31, 2011. This increase was attributable primarily to the following asset categories:
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·
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An increase of $985 thousand in cash and cash equivalents, which were $1.02 million at December 31, 2012 compared to $42 thousand at December 31, 2011. 29.2% of our net assets at December 31, 2012, are in cash and cash equivalents. Cash and cash equivalents increased dramatically during 2012 as a result of our raising money through stock sales during the fourth quarter of 2012.
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$2.1 million of accounts receivable at December 31, 2012, compared to no accounts receivable at December 31, 2011). This asset represents 58.4% of total assets at December 31, 2012. The reason for the large accounts receivable balance at year-end was due to delays in implementing the Arizona law authorizing alternative medical clinics as it was challenged in court by its governor. We had done much of the work with clients to set up clinics prior to the challenge, but did not collect when due because of the pending challenge. After year-end the court dismissed the case and we received what we were owed in full during the first quarter of 2013.
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·
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Inventory, consisting primarily of systems on hand, increased from $100 thousand at December 31, 2011 to $377 thousand at December 31, 2012.
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Our accounts receivable generally consists of payments owed by clients to whom we have provided services; payment is due for said services 30 days after completion. At December 31, 2012, we had accounts receivable with approximately 17clients. At December 31, 2012, we had one client that had a balance of $500,000 and another with a balance of $315,000 that were subsequently collected. Other than these there were no specific balances that were significantly more than others. Currently, we have outstanding $85,000 in remaining unpaid receivables from December 31, 2012, relating to 2 clients. The Company is working with the respective clients to receive the remaining amounts outstanding. The Company believes all amounts are collectible and no valuation reserve is required.
At December 31, 2011, we had no accounts receivable. We attribute the increase in accounts receivable at December 31, 2012 to an increased amount of contracts that became due upon milestones being reached as opposed to 2011 where products and services were not provided until funds were received. As discussed, in 2012, litigation that we were not directly involved with but that was pertinent to us receiving funds on our contracts was successfully resolved. Specifically, delays in implementing the Arizona law authorizing alternative medical clinics was challenged in court by its governor. We had done much of the work with clients to set up clinics prior to the challenge, but did not collect when due because of the pending challenge. After year-end the court dismissed the case and we received what we were owed in full in connection with these contracts during the first quarter of 2013.
Liabilities
Total liabilities increased from $161 thousand at December 31, 2011 to $2.2 million at December 31, 2012, while current liabilities increased from $121 thousand at December 31, 2011 to $2.13 million at December 31, 2012. These increases are attributable to changes in the following liability categories.
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Accounts payable and accrued expenses increased to $324 thousand, equivalent to 9.2% of total assets, at December 31, 2012, compared to $46 thousand, equivalent to 9.1% of total assets, at December 31, 2011.
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Taxes payable (current and deferred) increased to $246 thousand, equivalent to 7.0% of total assets, at December 31, 2012, compared to $53 thousand, equivalent to 10.4% of total assets, at December 31, 2011.
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As discussed above, deferred revenue was $673 thousand, which was equivalent to 19.2% of total assets, at December 31, 2012. We had no deferred revenue at December 31, 2011.
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Related party notes payable at December 31, 2012 was $869 thousand, equivalent to 24.7% of total assets. We had no notes payable at December 31, 2011.
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Current portion of long-term debt decreased to $16 thousand, equivalent to 0.4% of total assets, at December 31, 2012, compared to $22 thousand, equivalent to 4.3% of total assets, at December 31, 2011.
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Our long term liabilities decreased to $25 thousand, equivalent to 0.7% of total assets, at December 31, 2012, compared to $40 thousand, equivalent to 7.8% of total assets, at December 31, 2011.
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Total liabilities of $2.15 million represent 61.3% of total assets at December 31, 2012.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and proceeds from stock sales. Our business model related to our existing consulting business relies significantly on the know-how of our management team and its staff to be successful in acquiring licenses and business locations for our clients. Since a majority of the revenue from this business is related to services we provide, the timing of receiving the cash as indicated in the individual contracts has a significant effect on our cash flows. In addition, our overall profitability is impacted by the number of consulting contracts we are able to secure as well as on the avoidance of significant legal and outside professional costs that can occur in the process of fulfilling our obligations under each consulting contract. In the case of our consulting business we make milestone payments to our Medbox machine supplier based on where the machines are in their procuring process. This arrangement requires periodic cash outlays but avoids large disbursements at any one time helping to smooth our cash outflows.
As a result of our acquisition of Vaporfection International, Inc., going forward we expect to incur additional up front inventory requirements in order to fulfill distribution channel order requirements. However, we expect to be able to ship product to most customers on terms that provide either payment in advance, cash on delivery or payment within 15 days of delivery. Management expects to begin to see a more significant level of revenue from this acquisition in the third quarter of 2013.
In addition to cash flows from operations, management intends to continue to raise additional capital through stock sales in order to provide additional working capital to expand the operations of our current businesses at an accelerated pace. If necessary, we also believe we could raise capital though debt offerings to fund our liquidity needs. We do not intend to use traditional bank financing to fund our liquidity needs.
We believe we have adequate sources of liquidity to fund our short-term and long-term needs.
See additional information on Long-term Debt and Related Party Transactions on Notes 4 and 5 of the Consolidated Financial Statements.
We have no material commitments for capital expenditures as of March 31, 2013.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
OUR BUSINESS
Business Overview and Subsidiaries
Medbox, Inc. is a Nevada corporation. We currently operate through seven wholly-owned subsidiaries:
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Prescription Vending Machines, Inc., a California corporation, dba Medicine Dispensing Systems in the State of California (“MDS”), which distributes our Medbox product and provides related consulting services discussed further below;
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Vaporfection International, Inc., a Florida corporation through which we distribute our medical vaporizing products and accessories pursuant to a recent acquisition;
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Medicine Dispensing Systems, Inc., an Arizona corporation, which provides our consulting services in Arizona;
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Mini-Storage Solutions, Inc., a California corporation that produces and will market our Safe Access Storage Locker product;
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Medbox Rx, Inc., a California corporation that produces and will market our Rx product line including Lockbox Rx and Sample-Safe;
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Medbox, Inc., a California corporation that is currently inactive and which has the same name as the Company; and
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Medbox Leasing, Inc., a California corporation that is currently inactive.
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MDS developed the Medbox™ patented biometric medicine dispensing machine designed to confirm patient identification through a biometric verification system prior to dispensing medicine to authorized patients. The Medbox also has an optional companion machine for dispensing refrigerated products.
Medbox features patented systems that dispense herbal and prescription medications to individuals based on biometric identification; while the related patent covers both fingerprint and retinal scan identification, the Medbox currently uses only fingerprint identification. This system allows pharmacies, assisted living facilities, prisons, hospitals, doctors’ offices, and alternative medicine clinics to help manage employee possession of sensitive drugs. In a retail environment typical in most alternative medicine clinics, the system also allows these clinics to document that the user is a registered patient and that the patient has a valid and unexpired authorization from a physician to possess and use the medicine dispensed. Each transaction is tracked internally for accounting and compliance purposes. Patient information is all kept securely onsite, and is not online as the software is completely self-supportive and does not require an Internet connection.
Medbox, through MDS, offers consulting services to the pharmaceutical industry. We also offer turnkey consulting services to individuals seeking to establish alternative medicine clinics. These services include site selection, permitting, design, full build-out, and licensing. Medbox does not engage in the production, sale, or marketing of any products dispensed through our machines. We provide systems and equipment to the final distribution point of consumer pharmaceuticals in addition to certain consulting services.
MDS provides consulting services primarily to individuals and groups seeking to establish new clinics, often in jurisdictions that have recently passed legislation concerning the availability of alternative medicines (principally, medical marijuana). In general, soon after legislation is introduced in a particular state the media provides extensive coverage, interested operators commence preliminary due diligence, consultants become familiar with the legislation and local (state) issues, and once the legislation is passed there is often a deluge of prospective clinic operators, consultants, and industry participants jockeying for position within the local market.
The public is often concerned about regulation and safety and the media normally focuses heavily on this issue. Medbox, Inc. often garners substantial media attention on this issue. We believe that this attention helps us establish our local credibility and that credibility helps our competitive position with respect to our lucrative consulting business. Consulting customers who establish clinics through Medbox are contractually obligated to purchase a Medbox dispensing system, consisting of a climate controlled medicine dispensing machine and a refrigerated secondary machine for storage of additional products, for their new clinic. Since introduction of the Medbox, MDS has provided consulting services to over 150 startup clinics, all of which have acquired Medbox machines and/or point of sale systems.
In 2010 and 2011, MDS sold POS systems separately from Medbox machines. As of January 2012, we have included the POS system with any machine sold and have discontinued selling the POS system separately.
Pursuant to the recent acquisition discussed below, we also sell a line of medical vaporizers.
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, 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. to better reflect our current business operations.
Pursuant to a Stock Purchase Agreement between Medbox, Inc. and PVM International, Inc. (“PVMI”) dated as of December 31, 2011, 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) 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 Company’s common stock and a $1 million promissory note. The promissory note has been paid in full.
PVMI is an entity wholly owned by P. Vincent Mehdizadeh. It is a separate entity from our subsidiary, MDS.
MDS is a for-profit corporation organized on February 15, 2008, under the laws of the state of California. Mr. Mehdizadeh, MDS’ founder, developed the Medbox. MDS has been a profitable and operating business both prior and subsequent to this transaction.
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 the time. As the controlling owner of the Company, Mr. Mehdizadeh replaced the Company’s management with current management as discussed elsewhere in this document. As of the date hereof, Vincent Chase, Inc., is beneficially owned by Mr. Mehdizadeh.
Recent Acquisition of Vaporfection International, Inc.
On March 22, 2013, we entered into a Securities Purchase Agreement with Vapor Systems International, LLC, to acquire from it 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 this 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 can be exercised at a later date at the election of Vapor Systems International, LLC. The agreement was amended on July 5, 2013.
The closing of this acquisition took place on April 1, 2013. Pursuant to this agreement, we issued Vapor Systems International warrants to purchase 260,864 shares of our common stock in exchange for the outstanding shares of Vaporfection International, Inc., which is now our wholly owned subsidiary. 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. The warrants are exercisable beginning on March 21, 2014 and are exercisable until April 1, 2018. Pursuant to this agreement we also agreed to fund Vaporfection International’s operations with up to $1.6 million, of which Medbox has funded approximately $500,000 to date, for ongoing working capital purposes (which funds will remain within our control as the parent of Vaporfection International) and cancel an outstanding $50,000 promissory note executed by Vapor Systems International to Medbox, Inc. as lender.
Vapor Systems International is limited in the amount of Medbox common stock it can sell during the 12-month period following the closing, or until April 1, 2014.
We also agreed to issue a number of “performance shares” of our common stock if the cumulative four-year EBITDA (earnings before interest, taxes, depreciation and amortization) of Vaporfection International, Inc. during the period March 23, 2013 to March 31, 2017 is at least 70% of $16,883,057. If so, then we will issue additional shares of our common stock in an amount equal to such EBTIDA amount minus $7,597,376, divided by the average closing price of the common stock over the ten trading days preceding the date of the calculation, which will be April 1, 2017. Therefore, there is no limit on the number of shares we may issue pursuant to the agreement as such number, assuming the EBTIDA figure is met, is based on trading prices and the final EBTIDA figure. However, the following table estimates the number of shares we would be required to issue at various assumed average ten-day closing prices assuming the minimum EBTIDA requirement ($11,818,139) was met:
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Average Ten-Day Closing Price
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Number of Shares to be Issued
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$25.00
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168,830
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$10.00
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422,076
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$5.00
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844,152
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$2.50
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1,688,305
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$1.00
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4,220,763
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$0.50
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8,441,526
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The EBITDA calculation will be made on an annual basis and, if the EBTIDA threshold is met or exceeded on any April 1
st
prior to April 1
st
, 2017, 25% of any shares due will be paid out that year, with the balance retained to serve as a carryover reserve provision for years with a shortfall in EBITDA earnings or fewer shares are due as a result in changes of the applicable closing price of the common stock. Of any performance shares distributed, 70% will be issued to Vapor Systems International, LLC, and 20% to the management of Vapor Systems International, Inc. and 10% to Postma Realty Investments Management, Inc., an independent contractor of Vaporfection International, Inc. The final amount of shares due to be issued will be calculated on April 1, 2017 using the final EBTIDA and ten-day closing price on such date, with any shares issued to date deducted from the final number of shares to be issued pursuant to the agreement.
Finally, Medbox, Inc. agreed to pay $175,000 in cash and issue a warrant to purchase 5,000 shares of Medbox common stock to Amir Yomtov, the inventor of certain patents used by Vapor Systems International, in order to settle ongoing litigation between Mr. Yomtov and Vapor Systems International. Mr. Yomtov is also restricted in the amount of shares he can re-sell during any monthly period as set forth in the agreement.
Through our new 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
Magazine’s
Cannabis Cup, Product of the Year – Best Vaporizer 2011 for the ViVape and Best Vaporizer, Kush Expo 2012, for the ViVape 2. The Kush Expo is hosted by Monster Events, Inc., who bills it as “the world’s biggest Medical Marijuana Show.”
Our purchase of Vaporfection International included an inventory of the Vaporfection vaporizer. Vaporfection’s 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. The process virtually eliminates impurities and carcinogens from the medicating process, creating a vapor of only the purest, efficient and virtually odorless medical ingredient directly into the patient’s respiratory system. This process allows for patients to ingest medicine in hospitals, treatment facilities, and even their homes, without disturbing others nearby.
Vaporfection currently has two flagship products, one of which is a handheld portable device called the MiVape that is undergoing product enhancements with a scheduled launch date of the latter part of 2013. Vaporfection’s only product in production at present is the ViVape 2 unit that is not handheld and is a more robust vaporizing system.
Other Recent Acquisition Agreements
We recently entered into agreements for two additional business partnerships which we anticipated would help us to develop a fuller range of products and services, however, we are attempting to rescind these agreements as discussed below.
Bio-Tech Medical Software, Inc.
On February 26, 2013, Medbox entered into (i) an Amended and Restated Stock Purchase Agreement (“Stock Purchase Agreement”), and (ii) an Amended and Restated Technology License Agreement, with Bio-Tech Medical Software, Inc. On June 26, 2013, we notified Bio-Tech that we were canceling these agreements with them due to a breach in a provision contained therein. We are currently in negotiations with Bio-Tech to separate from our proposed business partnerships amicably.
MedVend, LLC
On March 12, 2013, we entered into a Membership Interest Purchase Agreement with the holders (the “Sellers”) of 94.8% of the equity interests in MedVend Holdings, LLC, the holding company for MedVend, LLC (“MedVend”), a Michigan based 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 10
th
business day after the one-year anniversary of the closing (the “Subsequent Payment Date”),
As contemplated by the agreement, the parties agreed to form a new company, to be named MedVend, Inc., which will be owned 50% by Medbox, Inc. and 50% by the other holders of MedVend Holdings, and into which MedVend would transfer its assets and liabilities, and which will thereafter operate MedVend’s current business.
On May 7, 2013, we were served with a complaint entitled Envy Tech Fund, LLC vs. Darryl B. Kaplan, filed in the Michigan Circuit Court for the County of Oakland, Case #: 2013-133858-CKCK. The complaint alleges that the Sellers did not have authority to enter into the transaction with us because the consent of the minority stockholders was required. We have obtained a dismissal from the action and are currently working to rescind the Membership Interest Purchase Agreement based on the fact that the Sellers did not have the power and authority to enter into the agreement as they had represented therein
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Patents Related to our Business
Patent Number US 7,844,363 B1
There is one U.S. patent related to the Medbox system, Patent Number US 7,844,363 B1, which 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 all patient data is securely kept onsite, at the pharmacy location, via computer-based application. The patent, which expires in November 2028, is owned by PVMI and exclusively licensed to Medbox, Inc. for the duration of the patent, on a payment basis to PVMI of $1 per year.
The text for this patent is as follows:
“The present invention relates to the idea of enabling an individual to conveniently purchase herbal medications and prescription medicines from specialized machines. The system provides for the individual to be processed through a central database to be certain that the item being purchased has been legally authorized by an appropriate medical authority such as a licensed physician and has provided appropriate verification to confirm that the individual who is receiving the medication is the correct individual. The present invention enables the individual to conveniently purchase the medication from a machine.”
PVMI has four additional patents pending for our dispensing and storage systems for dispensaries, urgent care centers, pharmacies, assisted living centers, prisons, hospice care facilities, and doctors’ offices. One such patent is an application that seeks to expand on the existing issued patent discussed above. We have entered into an exclusive licensing agreement with PVMI with respect to these and any other patents issued in the future with respect to our products on a payment basis to PVMI of $1 per year for each issued and pending patent.
US Patent Number D677,774
Through Vaporfection International, Inc., we own both national and international patents on the Vaporfection vaporizers’ unique design and heating assembly.
New Products
We have developed the following new products which will expand our product line beyond the Medbox and the Vaporfection vaporizers. We expect these products to be manufactured by the same companies and under the same arrangements as our Medbox machine, as discussed below.
Safe Access Storage Lockers
These systems can be used by medium to large mail-order chains, which is our target market for this product, for the retrieval of retail goods by their customers. Similar storage systems have recently been implemented by large chains such as Amazon to improve shipping logistics to consumers. These storage lockers are placed in chain retail stores (supermarkets, mini-marts, etc.) and consumers are given the option of having their items shipped or picking their items up at a nearby location by inputting a secure pin-code at one of these storage systems. Our system can be accessed through the use of pin-code or fingerprint recognition.
Lockbox Rx (a/k/a Lockbox Express)
This system provides pharmacies, our target market for this product, with a mechanism to allow their customers to pick up their medications, quickly and conveniently, 24 hours a day. This system consists or a series of lockers hooked up to a central kiosk. In order to use this system, a pharmacy client simply pre-registers at the pharmacy, one time, to use the system in the future; when the customer subsequently visits that pharmacy, the Lockbox Rx storage system will recognize the customer through biometric recognition and an identification card that includes the customer’s credit card information. Thereafter, when the customer’s prescription order is ready, the customer will receive a text message that their order is ready, along with suggestions or coupons for complimentary products if appropriate, which the customer can add to their order using the pharmacy’s web site. Then, the customer visits the pharmacy at their convenience and proceeds directly to the Lockbox system. Once the system has verified the customer’s identity, a temporary use lockbox is unlocked and the customer’s medication, pre-loaded by the pharmacist, along with their additional order, if any, is ready for retrieval. The cost of the medicine and other products ordered is charged to the customer’s credit card that was put on file during the registration process. The Lockbox Rx can be used for any prescription medication as well as over-the-counter medicines and other pharmacy products.
Sample-Safe
Our target market for this wall-mounted unit is doctors’ offices, where, according to recent media reports, samples of prescription medications that have been provided to the office by pharmaceutical companies are often misappropriated by office staff. The unit offers strict inventory control through the use of biometrics and an internal record keeping system designed to be unalterable by office staff. The system also notifies the pharmaceutical companies when samples are in limited supply for restocking purposes. We intend to market this product to pharmaceutical companies as a cost-effective means to control inventory and communicate critical real-time data about restocking needs.
We are very excited about the introduction of these new products as additions to the Medbox family. We have developed a working prototype for each of these products and have commenced manufacturing of a limited number of these new products, which we will use for demonstration and initial sales. We are still developing the distribution channels for these new products.
Like the Medbox system, these new products will have an initial purchase price but the purchaser will also be required to purchase a maintenance contract from us. Because these products are for traditional medications, however, they will not include a legal consulting component and therefore the monthly fees will be lower than the monthly maintenance fees associated with the Medbox. We have not, however, set the prices of our new products or the companion maintenance agreements.
The Medicine Dispensing System: The Medbox
The founder of MDS conceived of the Medicine Dispensing System, which we call the Medbox, in 2007. In November 2007 he filed the patent application for the Medbox as discussed above, and finalized the current design of the Medbox in March 2010.
The Medbox machines are manufactured according to MDS’ patented design. We have contracted with a manufacturer based in Corona, California to manufacture the Medbox. The local manufacturer, AVT, Inc., which is controlled by Shannon Illingworth, one of our non-affiliate stockholders, has subcontracted the building of the physical machines to a manufacturer located in Spain. We do not have a contractual relationship with the Spanish manufacturer.
Although we do not have a minimum order requirement, MDS typically purchases machines in lots of 26 units shipping via an intermodal shipping container. The machines are shipped from the Spanish sub-contractor to the local manufacturer, which then installs the biometric and card reader equipment as well as the touch-screen interface. Shipping and related costs are undertaken by our Corona, California manufacture, who also arranges for shipping to the U.S. and to the location of the dispensary/purchaser upon our instructions.
The raw materials required for our machines are fungible and readily available from a multitude of sources. We also believe that we would be able to find a replacement or additional manufacturers if our current manufacturer was unable to continue to manufacture our products or keep up with demand.
Our agreement with the manufacturer prohibits the manufacturer from producing any machine competitive with the Medbox, and provides that the sub-contractor must be prohibited from manufacturing any competitive machine for the U.S. market. When MDS receives an order for a Medbox, it contacts the local manufacturer, who installs the customer-security related electronics (biometric and card reader) and then ships the machine to the end-user. Installation is completed by the local manufacturer according to MDS specifications. The lead time for ordering machines is three weeks (order to arrival of the shipping container). The lead time from sale of a machine to a customer until the machine is installed (installation of electronics, delivery to end-user, and set-up of machine) is usually six business days.
MDS has also developed more advanced electronic features for its Medbox family of products (security, control, and tracking). Because MDS adds these features upon sale of a machine, an enhanced design can be seamlessly incorporated into the existing hardware inventory without disrupting inventory. We believe this approach provides MDS with a distinct competitive advantage in its ability to remain on the leading edge of technology. This approach further allows MDS to design technological improvements that can easily be retrofitted to existing installed machines.
The Medbox is intended for herbal medications and prescription medications. As further discussed below, our primary target market for the Medbox system is alternative medicine (medical marijuana) clinics. Currently we market the Medbox for the control and dispensing of medical marijuana. We only market this product in states that have regulatory systems in place to license alternative medicine clinics; thus we do not market in states that have de-criminalized the possession of medical marijuana if they have not put a licensing mechanism in place for clinics. In such states we assist our consulting clients with procuring licenses and otherwise operating in compliance with the relevant regulations as well as outfitting their clinics with our Medbox technology. In the clinics in states with these regulations, the Medbox machines sit behind the counter and are at the control of the clinic employee as an inventory management and compliance tool. While the Medbox machine can be used to dispense medicines to individual patients on a self-service basis, based on practical considerations, such as public sentiment, we currently do not offer that configuration to our clients. We believe, however, that in the future as the public becomes more comfortable with herbal medications, such self-service use by consumers may become common.
While we have not actively marketed to other facilities, we have been contacted by the Washington State Department of Corrections and in response to their request have submitted a bid to place Medbox machines in their prisons state-wide to assist in the dispensing and control of traditional pharmaceuticals. Depending on the success of this bid we may consider more actively marketing to prison systems in the foreseeable future.
A conventional temperature-controlled Medbox machine retails for $25,000. Sales terms with customers are a 50% deposit with order and 50% upon delivery.
MDS offers a second machine as an add-on to the basic Medbox machine that can hold up to ten units of 35 different items, is refrigerated and is used for refrigerated medible products (i.e. food items that contain marijuana). This system sells for a retail price of $15,000. The 26 machine quantity per order discussed above can be a combination of both systems as MDS determines. Sales terms remain 50% up front and 50% upon installation. The additional refrigerated machine can only be used in conjunction with the main Medbox machine and not separately.
Purchasers of a Medbox are required to purchase a maintenance contract from MDS. Pursuant to the maintenance contract purchasers receive from MDS state and local licensing support and technical support for a monthly fee (we have waived such fees to date but these fees will cease to be waived beginning in January 2014). The monthly maintenance fee is $79 a month for customers who purchased a Medbox prior to July 1, 2011 and ranges from $295 to $495, depending on the purchaser’s geographic location, for all other customers. The terms of our standard maintenance contract provide that the contract remains in place as long as the clinic that purchased the Medbox remains open. If the clinic closes, MDS has the first right to repurchase the Medbox machine for a discounted price set forth in the contract that is based on how long the machine has been in service.
The Point-of-Sale System
We used to sell the point of sale system as an addition to the Medbox. The POS system consists of a monitor, keyboard, credit card reader, and computer with interface. Beginning January 1, 2012, this equipment comes standard with every Medbox machine purchased. The POS connects to the Medbox and dispenses medicine at the control of an operator. This eliminates handling of product and provides better inventory control and reduced product shrinkage.
These systems are manufactured according to MDS’ patented design, are far smaller and are not purchased in container lots but instead, in lots of ten systems. The cost to MDS is $1,000 per system. The retail price was formally $2,500 but as noted above the POS system is now included at no extra charge with each Medbox machine.
Consulting Services
Alternative Medicine Clinics
Through MDS and, in Arizona, Medicine Dispensing Systems, Inc., we offer consulting services to individuals in established alternative medicine territories as well as newly emerging states that have recently enacted legislation allowing the use of alternative medicine. Through our consulting services we assist clients in opening an alternative medicine clinic. We provide persons that want to open an alternative medicine clinic comprehensive assistance through the entire clinic opening process, including legal advice through an outside contracted legal services provider, licensing, permitting, zoning hearings, public relations and marketing, site selection, negotiation with landlords and designing and equipping the clinic.
In Arizona, for example, we generated over $1.2 million in consulting revenues in less than four months from January 2011 through April 2011. In August 2012, we realized an additional $1.3 million in receivables once the permitting process was finalized in Arizona and our clients were awarded licenses to operate alternative medicine clinics. This model is being duplicated in other states on a going forward basis.
On a turn-key clinic product, which we offer in states that have a state regulated permitting process, we collect $50,000 for our general consulting services, $40,000 for a set of machines (Medbox with POS and refrigerated add-on unit), and $60,000 for other store equipment, furniture, displays, and interior construction / leasehold improvements. In general, we typically realize a gross profit on these transactions of $72,500 from the consulting fees/build-out and $21,500 from the Medbox system sales.
Pharmaceutical Industry
Through Medbox Rx, Inc. we offer consulting services to entities in the pharmaceutical industry, principally chain pharmacies. Such services focus on alternative methods of storage of pharmaceutical products and networking with medical providers and pharmacies in order to increase distribution and sales.
Turn-Key Dispensing Facility
We charge a flat $150,000 fee for establishing an operating dispensary, broken down as follows:
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Price
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Package Price
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$150,000
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Consulting and Legal
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$50,000
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Build-out
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$60,000
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Medbox System, including optional Medible add-on and POS
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$40,000
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Regulatory Requirements
While we are not required to obtain governmental approval in connection with the manufacture and sale of our products, establishing an operating dispensary requires governmental approval, usually at the local and State level. This is obtained through a complex licensing process that is newly adopted by the states in almost all cases, which we navigate on behalf of our clients.
Sales Channels
As discussed above, our primary target market for the Medbox and our related products and services are alternative medicine clinics. MDS currently advertises its products and services via internet advertising to entrepreneurs seeking to establish a clinic. MDS’ advertisements can be found at our web site www.thedispensingsolution.com and in print magazine ads such as Entrepreneur Magazine and Culture Magazine. The information at our web site should not be considered a part of, and is not incorporated by reference into, this document.
MDS also promotes its machines to existing clinic operators via direct mail and advertising (both print and online).
After initial contact is made by a potential client, the Medbox sales team gives an orientation as to the different products and services we offer. Typically a meeting is scheduled for a live demonstration of our products at one of our offices.
Historic Sales Review
During the 36 months ended December 31, 2012, MDS sold over 98 Medbox machines, including both base machines and the optional refrigerated add-on unit. During that time we also sold 53 POS Systems, which we no longer sell separately.
The Prescription Dispensing Market
As further discussed above our secondary market is doctors’ offices, pharmacies, assisted living facilities, prisons, urgent care facilities and hospice care facilities that are interested in being able to dispense traditional prescription medications. For pharmacies this could be during off-hours or even during regular hours when the pharmacy wants to offer customers a self-service option, for example, to bypass a long line. As an example, our Lockbox Rx machine would allow a pharmacy customer to visit the store after the pharmacy counter is closed and, using an identification card and pre-established verification retrieve their medication from our Lockbox Rx system. A physician who prescribes a fair amount of a particular group of medications could have a Medbox machine on site that can dispense the medications to nurses or assistants to dispense to patients, right at his or her office. The same model could be utilized at an urgent care facility, where medication management and patient convenience is a top priority. This would eliminate the patient’s need to separately visit a pharmacy for their initial prescription and, therefore, provide greater convenience to the patient, while also generating a revenue stream for the healthcare service provider. We believe these markets also provide an opportunity for us to market the technology we will acquire in connection with our pending acquisitions.
The
Alternative Medicine Market
Our primary target market is alternative medicine (medical marijuana) clinics. In addition to our Medbox technology, these clients are often very good prospects for our consulting services.
The development of the alternative medicine market is a function of state legislation. As a result, while specific markets may not be currently available (a potential disadvantage), we can easily monitor the progress of legislation and know with some degree of certainty when new geographic markets will be coming on line. This allows us to target our limited sales and marketing resources to those new markets. In this way, we believe the current legislative environment works in our favor - if the whole country were currently a potential market our limited resources would result in an inability to effectively cover all potential market territories. With limited markets open we can better cover those available territories and have the advantage that our Medbox product is often featured in the media during the legislative process prior to the opening of a new market. We believe that this media coverage provides us with brand awareness and a certain level of credibility. If the market was wide open – in other words, if all or most states in the U.S. had already passed alternative medicine statutes, we would likely not benefit from the free media coverage we have recently enjoyed. Therefore, existing conditions of the slow roll-out of new states that become potential markets for our products favors our current position.
As noted above, we market the Medbox in states that have regulatory systems in place to license alternative medicine clinics. So far ten states have implemented such licensing systems. Of these states, we currently serve clients in Arizona, Connecticut, Massachusetts, California, Colorado, Nevada, Illinois, Oregon and Washington and consider these states our current primary target market. We consider Michigan to be a secondary target market that we plan to target once that state adopts a dispensary licensing process in the near future.
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 maintain physical offices in some of our target market states, most client matters are accomplished remotely.
In addition, based on the status of pending legislation in such states, we expect New York to pass such legislation in the next six months and become a primary market for us.
The Vaporfection Vaporizer Market
Our target market for our vaporizer products are 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 – Dispensing Systems
We have competition in each product / service line and discuss each that we are aware of in turn below. We start with our flagship product, the Medbox. Of course, we also compete with the traditional model for the dispensing of regulated medications, where a consumer purchases their medication at a pharmacy through a face-to-face transaction with pharmacy personnel.
The information in this section is based on publicly available information regarding the companies discussed.
InstyMeds Corporation
Minneapolis, Minnesota
InstyMeds offers the InstyMeds Prescription Medication Dispenser (“PMD”) and InstyMeds Prescription Writer. The PMD is an automated, ATM-style dispenser of acute prescription medications that dispenses directly to patients at the point of care. The system features a touch screen, credit card swipe, and a 24/7 patient assistant phone. According to InstyMeds, as of December 2012, the PMD is sold in 34 states and has safely dispensed over one million medications to patients. InstyMeds sells to conventional medical facilities including hospitals, clinics, surgery centers and urgent care facilities, and markets its system as a way for patients to quickly receive their initial prescription of acute care medications. The Prescription Writer interfaces to the PMD and medication is dispensed. We view this system as competitive with the Medbox in the physician market. To our knowledge, InstyMeds has not pursed the alternative medicine market and, because their product dispenses medicine directly to patients, we believe their technology is not compatible with that market in the manner in which we currently target it, that is, by dispension through an operator as opposed to directly to patients.
The PMD system does not possess biometric verification or a patient database as is proprietary through PVMI’s patent that we license for our products.
MedBox, LLC
Manchester, Missouri
MedBox, LLC was founded in July 2006 but remains in prototype development stage. The firm’s intended market is pharmacies, physicians, pharmaceutical manufacturers and health insurance companies. Similar to InstyMeds, MedBox, LLC seeks to provide immediate dispensing of prescriptions at the healthcare provider’s facility. A central video monitor allows the patient to connect to and communicate with the pharmacist. MDS has issued a cease and desist letter to MedBox, LLC, as to its usage of the term “Medbox” as Medbox is a registered trademark of MDS. To our knowledge, MedBox, LLC has not pursed the alternative medicine market and for reasons similar to that discussed above, we believe their technology is not currently compatible with that market.
The system does not possess biometric verification or a patient database as is proprietary through PVMI’s patent that we license for our products.
QuigMeds
TM
Malvern, Pennsylvania
QuigMeds
TM
, a division of Qmeds, Inc. and organized in late 2004, offers a vending machine for prescription medications. The system can hold over 700 unit-of-use packages, prints labels and patient information documentation, uses a touch-screen device and operates on a closed, fully secure wireless network. The system is designed for use by physicians and office staff and is not presently designed for direct patient use. The QuigMeds
TM
system has two components – a dispensing cabinet and a stand-alone touch screen where orders are entered. The firm’s target market appears to be medical practices and they focus on physician dispensing of prescription medications. To our knowledge, this company has not pursed the alternative medicine market.
This product does not possess biometric verification or a patient database as is proprietary through PVMI’s patent that we license for our products.
Dispense Labs
Aliso Viejo, California
Dispense Labs is a company established in 2012 that offers a marijuana vending machine called “Autospense” that is consumer accessed and can operate 24 hours per day. This company’s business model is different from ours in that it caters to dispensaries that need to provide 24-hour direct consumer access to product. Therefore, we do not believe that this company is a threat to our business. According to Dispense Labs, as of March 2013, the company has one machine currently operational.
Competition – Vaporfection Vaporizers-
While there are a myriad of vaporizing products currently available in the marketplace, we do not feel there is one that closely resembles our Vaporfection line of products in design and overall functionality. With our patent on our products in that space, we believe that we can assume profitable market penetration, and since our vaporizer product has a proprietary glass on glass heating assembly, we believe the product itself is unmatched in the industry. Therefore, we do not believe any of the existing vaporizing products currently available are direct competitors for our vaporizer products.
Competition – Safe Access
Similar storage systems have recently been implemented by large chains such as Amazon to improve shipping logistics to consumers. These storage lockers are placed in chain retail stores (supermarkets, mini-marts, etc.) and consumers are given the option of having their items shipped or picking their items up at a nearby location by inputting a secure pin-code at one of these storage systems. We believe that our systems are superior in design and also offer increased security through the use of biometrics to verify identity of the user
Future Goals
We believe that the Company is well positioned to be the leader in compliance and inventory control in many different industries. We believe that while alternative medicine is an industry that desperately needs regulation, the prescription dispensing market is also in need of a standardized monitoring system that can help limit abuse. We are committed to developing products that help limit abuse of pharmaceutical products across a multitude of industries while improving the standard of care for patients and consumers.
While we currently focus on sales in the United States, our long-range plans include marketing our products to other countries, principally Canada and Mexico.
Employees
We currently have six full time employees . We also use the services of fourteenindependent contractors.
Research and Development
We estimate that we spent about $100,000 during each of the years ended December 31, 2011 and 2012, on research and development activities.
Properties
At present, we do not own any property. We currently lease office space at:
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8439 West Sunset Blvd., Suite 100 & 101, West Hollywood, CA 90069 (4,000 square foot office);
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6700 Fallbrook Ave. Suite 289, West Hills, CA 91307 (1,500 square foot office);
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445 Park Ave., 9th Floor, New York City, New York 10022 (virtual);
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1 Dundas Street West, Suite 2500, Toronto M5G 1Z3, Canada (virtual);
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100 Pall Mall, St. James, London SW1Y 5NQ, UK (virtual);
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14F 1-2-1 Kinshi, Sumida-ku, 1300031 Tokyo, Japan (virtual);
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57 Pratt Street, Floor #3, Hartford, CT 06103 (1,000 square foot office); and
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7047 E Greenway Parkway, Suite 250, Scottsdale, AZ 85254 (1,000 square foot office).
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Virtual offices allow for reduced rent while still having meeting room capabilities within the office building. We may also receive mail at these addresses, but do not have a permanent staff at these locations.
Legal Proceedings
On May 22, 2013, Medbox initiated litigation in the Arizona District Federal Court against MedVend Holdings LLC, and its majority shareholders for fraud related to a contemplated transaction during the quarter ended March 31, 2013. The litigation is pending and Medbox has sought a cancellation of the agreement entered into for a 50% ownership stake in MedVend due to a fraudulent conveyance of the asset since, as discussed above, the shareholders did not have the power to sell their ownership stake in MedVend Holdings.
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. Other than described herein, we are not involved in, or the subject of, any pending legal proceedings or governmental actions the outcome of which, in management’s opinion, would be material to our financial condition or results of operations.
MANAGEMENT OF MEDBOX, INC.
Executive Officers and Directors
The following table sets forth, as of the date of this registration statement, the name, age and positions of our executive officers and directors.
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NAME
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AGE
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POSITION
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Dr. Bruce Bedrick
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44
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Chief Executive Officer and Director
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Leila Guieb
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33
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Acting Chief Financial Officer and Secretary
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P. Vincent Mehdizadeh
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34
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Chief Operating Officer and Chairman of the Board
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The business background and certain other information about our directors and executive officers, as well our key employee, is set forth below:
Dr. Bruce Bedrick – Chief Executive Officer, Director
Dr. Bruce Bedrick is a highly accomplished, versatile and respected Physician and business owner with over 15 years of diverse and innovative experience. As a dynamic leader, he consistently achieves outstanding results in challenging environments while building and maintaining strong, loyal relationships with both colleagues and community members. Dr. Bedrick offers the unique combination of hands-on administration that maximizes organizational effectiveness, operations-oriented leadership that ensures efficiency and people-oriented guidance that yields productivity. Prior to joining the Company, Dr. Bedrick opened a chiropractic practice in 2008,
which he
managed until the Fall of 2010 when he sold his practice to pursue other business endeavors.
Dr. Bedrick joined MDS in the Fall of 2010 as its Chief Operating Officer. He became CEO of Medbox, Inc. in December 2011 and has served as a Director since December 2011. As our CEO, Dr. Bedrick is responsible for managing our day-to-day operations, as well as overseeing our marketing and sales divisions. He provides leadership at Medbox in the planning and implementation of all new strategic initiatives. Dr. Bedrick has over 15 years experience in the healthcare field as a practitioner, consultant and executive. He has successfully developed and operated several healthcare practices during that time. A Philadelphia native, Dr. Bedrick earned his undergraduate degree from Ithaca College and his Doctorate from Western States Chiropractic College.
Our Board of Directors believes that Dr. Bedrick’s qualifications to serve as a Director of Medbox include his medical and business background, his development of healthcare practices in the past, as well as a wealth of knowledge about new business development gained as a result of
years of prior business experiences.
Leila Guieb – Acting Chief Financial Officer and Secretary
Leila Guieb joined MDS in November 2010 as its Chief Financial Officer. In December 2011 she became Chief Financial Officer and Secretary of Medbox, Inc.; she served as Director of Medbox from December 2011 until April 1, 2013.In April 2013 became “Acting” Chief Financial Officer in anticipation of her leaving Medbox to move abroad in September 2013. As our acting Chief Financial Officer, Ms. Guieb is responsible for all accounting functions including payroll, accounts payable, accounts receivables, and monitoring ongoing marketing expenses.
We employ Ms. Guieb on a part-time basis. Since December 2012 Ms. Guieb has also been employed as a Senior Treasury Cash Manager at Toyota Financial Services. In this role she performs ongoing daily cash transaction processing, position consolidation, file interfaces and reconciliation and reporting activities, monitors cash positions and transaction flows, and manages bank accounts and related services. From March 2011 through March 2012, in addition to her positions with Medbox, Inc. and MDS, she was a business analyst at BCBG Max Azaria. In this role she
managed
ongoing daily cash transaction processing, position consolidation, file interfaces and reconciliation and reporting activities, monitored cash positions and transaction flows, and manages bank accounts and related services.
Ms. Guieb began her career in 2001 at the Beverly Hills-based world headquarters of Hilton Hotels Corporation. Starting in the accounting department, she was promoted in December 2003 to Treasury Analyst to perform daily cash functions for the company and its joint ventures. She held this position through December 2009. In this position she supported the $6 billion acquisition of Hilton International, Inc. by managing investment activities to optimize cash flow and investment earnings. She also processed $1 billion rollover of existing debt, handling interest payments on debt and recording interest. Ms. Guieb was attending the University of Southern California for her Master’s degree from 2008 through 2010 and was not employed during the period December 2009 through November 2010, when she joined MDS.
We believe that Ms. Guieb’s background in treasury provides excellent skills to handle banking relationships and manage company payments.
A Los Angeles native, Ms. Guieb earned both a Bachelor of Science degree in Business Administration in 2001 and a Master of Business Administration degree in 2010 from the University of Southern California.
P. Vincent Mehdizadeh – Chief Operating Officer and Chairman of the Board
Mr. Mehdizadeh founded MDS in February 2008 and served as our senior consultant from December 2012 until May10, 2013, at which time he was appointed our Chief Operating Officer and Chairman of the Board. The company he controls, PVMI, holds the 2010 patent which is the underlying technology of the Medbox.
Mr. Mehdizadeh was responsible for assembling the talented management core of Medbox, developing the concept behind the business model driving the revenue for the company, and also assists with seminars, media interviews, and public speaking engagements on behalf of the company. Mr. Mehdizadeh’s role has evolved into an advisory role as he does not hold a board seat nor is he an officer of Medbox, Inc.
Prior to December 2012, Mr. Mehdizadeh was the CEO and Founder of MDS. Prior to founding MDS, Mr. Mehdizadeh was the Director of Client Relations for the following law offices at various times from 2003 through 2008: Law Office of Donald J. Townley; Law Offices of Frank E. Miller; Law Offices of Thomas R. Lee; Rexford Law Group; and the Moheban Law Firm.
Our Board of Directors believes that Mr. Mehdizadeh’s qualifications to serve as a Director of Medbox include his experience and knowledge of our main product as the founder of MDS and the creator of the Medbox as well as his knowledge of the alternative medicine market as a result of such experience.
In 2007, Mr. Mehdizadeh was involved in the sale of his automobile to a private party. The transaction terms were in dispute by the parties and Mr. Mehdizadeh pled no-contest to charging the vehicle purchaser’s credit card without express written consent. The matter was resolved with Mr. Mehdizadeh receiving and successfully completing probation. Mr. Mehdizadeh has applied for an expungement and understands that the record of the incident will be deleted within a few months.
There are no family relationships between any of our executive officers and Directors.
Key Employee
Thomas Iwanski – Accounting Consultant
Mr. Iwanski, age 55, joined Medbox on April 15, 2013 as the company’s accounting consultant. We expect that Mr. Iwanski will become our Chief Financial Officer upon Ms. Guieb’s scheduled departure on September 1, 2013. His duties include accounting oversight and consultation concerning SEC compliance. Mr. Iwanski has also been self-employed as a consultant specializing in corporate financing and operations improvement since September 2010. Prior to joining Medbox, since May 2007, Mr. Iwanski served as Director and Chief Executive Officer of Live-Vu Communications, Inc., a company that specializes in turnkey telemedicine and telehealth solutions for hospitals, clinics, long-term care facilities and homes incorporating proprietary video technology. From September 2006 through May 2007, Mr. Iwanski served as Chief Financial Officer of SyncVoice Communications, Inc. From April 2005 through July 2006, Mr. Iwanski served as Senior Vice President, Corporate Secretary and Chief Financial Officer of IP3 Networks, Inc. From February 2003 through April 2005 Mr. Iwanski served as a Special Advisor to the CEO of Procom Technology, Inc., where he played a prominent role in the development and implementation of business and financial strategies. Mr. Iwanski has also served in various other positions, including Vice President Finance, Chief Financial Officer, Director and Secretary for a number of companies, including Cognet, Inc., NetVantage, Inc., Kimalink, Inc., Xponent Photonics, Inc., Prolong, Inc. and Memlink, Inc. Mr. Iwanski also has approximately ten years of public accounting experience having worked for KPMG, LLP, as a Senior Audit Manager and a Certified Public Accountant. Mr. Iwanski received a Bachelor of Business Administration from the University of Wisconsin-Madison in 1980. Mr. Iwanski also currently serves on the board of directors of Pacific Health Care Organization, Inc., a specialty workers’ compensation managed care company providing a range of services for California employers and claims administrators.
Summary Compensation Table
The following sets forth the compensation paid by MDS during 2012 and 2011 to our Chief Executive Officer and any other executive officers whose total compensation exceeded $100,000 during the year ended December 31, 2012 (the “named executive officers”); as of January 1, 2013, such officers are compensated directly by Medbox, Inc
.
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Non-Equity
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Nonqualified
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All
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Name and
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Warrant /
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Incentive
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Deferred
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Other
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Principal
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Stock
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Option
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Plan
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Compensation
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Compen
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Position
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Year
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Salary
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Bonus
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Awards
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Awards
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Compensation
|
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Earnings
|
-sation
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Total
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Dr. Bruce Bedrick
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2012
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$65,000
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0
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0
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0
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0
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0
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0
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$65,000
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Chief Executive Officer and Director
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2011
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$65,000
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0
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0
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0
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0
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0
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0
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$65,000
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Leila Guieb
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2012
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$18,000
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0
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0
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0
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0
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0
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0
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$18,000
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Chief Financial
Officer, Secretary and
Director
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2011
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$18,000
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0
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0
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0
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0
|
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0
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0
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$18,000
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P. Vincent Mehdizadeh
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2012
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$180,000
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0
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0
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0
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0
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0
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0
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$180,000
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Senior Consultant
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2011
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$85,000
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0
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0
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0
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0
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0
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0
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$85,000
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Mr. Mehdizadeh received a substantial increase in his salary during 2012 as he voluntary accepted a lower salary during 2011 while continuing to get Medbox off the ground. Operations allowed for an increased salary during 2012.
None of our named executive officers held options or other unvested equity awards as of December 31, 2012.
Compensation of Directors
We currently do not compensate our directors for their service as directors. In the future, we may compensate our directors with cash compensation and for reasonable out-of-pocket expenses in attending board of directors meetings and for promoting our business.
Related Party Transactions
We previously had an outstanding note with PVMI, a California corporation wholly owned by Mr. Mehdizadeh, 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 voluntary extended by oral agreement of the parties to June 30, 2013 and has since been satisfied in full.
We use Vincent Chase Incorporated, a company that is wholly owned by Mr. Mehdizadeh, our Chief Operating Officer for management advisory and consulting services. During the years ended December 31, 2012 and 2011, we incurred $230,706 and $100,000 in fees, respectively, to Vincent Chase Incorporated for Mr. Mehdizadeh’s advisory services provided through Vincent Chase Incorporated. We incurred fees of $175,000 for these services to date during 2013. During the period April to May 2013, Vincent Chase Incorporated wholly owned by Dr. Bedrick, our President and Chief Executive Officer. Mr. Mehdizadeh transferred Vincent Chase Incorporated to Dr. Bedrick without consideration on a temporary basis as Mr. Mehdizadeh addressed some personal matters.
We use Kind Clinics, LLC, which is wholly owned by Dr. Bedrick, for marketing services. We do not pay Kind Clinics for these services. However, during the year ended December 31, 2012, we paid $34,720 in reimbursements for amounts paid by Kind Clinics on behalf of Medbox.
The Company uses AVT, Inc., a company wholly owned by Shannon Illingworth, a stockholder of the Company and former affiliate, for the manufacture and assembly of its dispensary units. Mr. Illingworth owned 90% of the Company until Mr. Mehdizadeh purchased his shares in August 2012. During the years ended December 31, 2012 and 2011, we incurred approximately $480,500 and $510,000, respectively
,
in manufacturing costs that were paid to AVT. To date in 2013 we have paid approximately $125,000 in manufacturing costs to AVT. In addition, our existing inventory of dispensary units is held at AVT, Inc.’s manufacturing facility in Corona, California. We believe that our transactions with AVT, Inc. are on terms as favorable to the Company as those that would be available on an arms-length basis.
Since our common stock is quoted on the OTC Market Groups quotation system, we are not subject to certain rules regarding the independence of directors applicable to companies traded on a national securities exchange. However, the Board of Directors has determined that neither of our directors are independent as defined in listing standards of the New York Stock Exchange and The Nasdaq Stock Market LLC, because they both serve as executive officers of Medbox and/or MDS.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock as of July 12, 2013, and immediately after the completion of this offering by (1) each person, or group of affiliated persons, known by us to be the beneficial owner of 5% or more of our outstanding common stock, (2) each of our directors, (3) each of our executive officers listed in the summary compensation table, below, (4) all of our directors and executive officers as a group and (5) each selling stockholder.
To our knowledge, each person named in the table has sole voting and investment power with respect to all of the securities shown as beneficially owned by such person, except as otherwise set forth in the notes to the table. The number of securities shown represents the number of securities the person “beneficially owns,” as determined by the rules of the SEC. The SEC has defined “beneficial” ownership of a security to mean the possession, directly or indirectly, of voting power and/or investment power. A security holder is also deemed to be, as of any date, the beneficial owner of all securities that such security holder has the right to acquire within 60 days after that date through (1) the exercise of any option, warrant or right, (2) the conversion of a security, (3) the power to revoke a trust, discretionary account or similar arrangement, or (4) the automatic termination of a trust, discretionary account or similar arrangement.
The percentages reflect beneficial ownership immediately prior to and immediately after the completion of this offering, assuming all the shares offered hereby are sold, as determined in accordance with Rule 13d-3 under the Exchange Act and are based on shares of our common stock outstanding as of July 12, 2013.
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Number and Percent of Class of Common Stock Owned
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Immediately Prior to
this Offering
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Immediately After
this Offering
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Name And Address
Of Beneficial Owner
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Shares
Owned
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Percentage
Of Class
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Shares
Offered
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Shares
Owned
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Percentage
Of Class
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Dr. Bruce Bedrick
(1)
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7,423,400
(2)
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27.8%
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0
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7,423,400
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27.8%
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P. Vincent Mehdizadeh
(3)
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19,207,390
(4)
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71.9%
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0
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19,207,390
(4)
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71.9%
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Leila Guieb
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5,000
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*
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0
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5,000
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*
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YP Holdings, LLC
(5)
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50,000
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*
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50,000
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0
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*
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FireRock Global Opportunities Fund, L.P.
(6)
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50,000
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*
|
50,000
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0
|
*
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Moody Capital Solutions, Inc.
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15,000
(7)
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*
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15,000
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0
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*
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Shareholders with Registration Rights ^
(8)
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231,450
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*
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231,450
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0
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*
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All Directors and Officers as a Group (3 Persons)
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26,635,790
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99.7%
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* Less than 1%
^ List to be added upon amendment
(1) The address for Mr. Bedrick is 8439 West Sunset Blvd., Suite 101, West Hollywood, CA 90069.
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(2)
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Includes 1,000,000 shares of our Series A Convertible Preferred Stock held by Dr. Bedrick. Each share of our Series A Convertible Preferred is convertible into five shares of our common stock.
|
(3) The address for Mr. Mehdizadeh
is 6700 Fallbrook Ave., Suite 289, West Hills, CA 91307.
|
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(4)
|
Includes 1,895,000 shares held by PVM International, Inc. and 7,312,390 shares held by Vincent Chase, Inc. Also includes and 2,000,000 shares of our Series A Convertible Preferred Stock held by Vincent Chase, Inc., each of which is convertible into five shares of common stock. Vincent Chase, Inc. and PVM International, Inc. are owned and controlled by Mr. Mehdizadeh.
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(5)
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Michael Yurkowsky is the natural person who exercises sole dispositive and voting power over these shares on behalf of YP Holdings, LLC.
|
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(6)
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Neil Rock and Seth Fire are the natural persons who exercise joint dispositive and voting power over these shares on behalf of FireRock Global Opportunities Fund, L.P.
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(7)
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This number represents 15,000 shares of common stock underlying warrants issued to the stockholder in connection with its services as finder in the private placement in which we sold shares of common stock to YP Holdings, LLC. Moody Capital Solutions, Inc. is a registered broker-dealer. The warrants are exercisable until June 2018 at an exercise price of $31.90 per share. Tim Moody is the natural person who exercises sole dispositive and voting power over these shares on behalf of Moody Capital Solutions, Inc.
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(8)
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Description to be updated upon amendment.
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PLAN OF DISTRIBUTION
Plan of Distribution for Medbox, Inc.’s Initial Public Offering of 3,000,000 Shares of Common Stock
This is a self-underwritten (“best-efforts”) offering. This prospectus is part of a registration statement that permits our officers and directors to sell the shares being offered by the Company directly to the public, with no commission or other remuneration payable to them for any shares they may sell. There are no plans or arrangements to enter into any contracts or agreements to sell the shares with a broker or dealer. Our officer and directors will sell the shares and we intend for them to offer such shares on our behalf directly to potential investors, which we expect will be primarily to institutional investors as well as friends, family members and business acquaintances of such officers and directors
.
We may also offer our shares of common stock through dealers or agents. We will offer the shares on a continuous basis for a period of up to three years.
In offering the securities on our behalf, our officers and directors will rely on the safe harbor from broker dealer registration set forth in Rule 3a4-1 under the Exchange Act. The officers and directors will not register as broker-dealers pursuant to Section 15 of the Exchange Act, in reliance upon Rule 3a4-1, which sets forth those conditions under which a person associated with an issuer may participate in the offering of the Issuer’s securities and not be deemed to be a broker-dealer. In that regard, we confirm that:
a. None of our officers or directors are subject to a statutory disqualification, as that term is defined in Section 3(a)(39) of the Exchange Act;
b. None of our officers or directors will be compensated in connection with their participation by the payment of commissions or other remuneration based either directly or indirectly on transactions in the common stock;
c. None of our officers or directors is or will be, at the time of his participation in the offering, an associated person of a broker-dealer; and
d. Our officers and directors meet the conditions of paragraph (a)(4)(ii) of Rule 3a4-1 of the Exchange Act, in that each (A) primarily perform substantial duties for or on our behalf, other than in connection with transactions in securities, and (B) is not a broker or dealer, or has been an associated person of a broker or dealer, within the preceding 12 months, and (C) has not participated in selling and offering securities for any issuer more than once every 12 months other than in reliance on Paragraphs (a)(4)(i) or (a)(4)(iii) of Rule 3a4-1.
None of our officers or directors, control persons or affiliates intend to purchase any shares in this offering.
Plan of Distribution for the Selling Stockholders
The selling stockholders of our common stock and any of their transferees, pledgees, assignees, donees, and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are then traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:
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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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privately negotiated transactions;
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market sales (both long and short to the extent permitted under the federal securities laws);
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at the market to or through market makers or into an existing market for the shares;
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through transactions in options, swaps or other derivatives (whether exchange listed or otherwise);
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a combination of such methods of sale; or
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any other method permitted by applicable law.
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The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
In the event of the transfer by a selling stockholder of its shares of common stock to any pledgee, donee or other transferee, we will amend this prospectus by filing of prospectus supplement in order to have the pledgee, donee or other transferee listed in place of the selling stockholder.
Broker-dealers engaged by the selling stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling stockholders do not expect these commissions and discounts relating to its sales of shares, to exceed what is customary in the types of transactions involved. Broker-dealers may agree with the selling stockholders to sell a specified number of the shares of common stock at a stipulated price per share. Such an agreement may also require the broker-dealer to purchase as principal any unsold shares of common stock at the price required to fulfill the broker-dealer commitment to the selling stockholder if such broker-dealer is unable to sell the shares on behalf of the selling stockholder. Broker-dealers who acquire shares of common stock as principal may thereafter resell the shares of common stock from time to time in transactions which may involve block transactions and sales to and through other broker-dealers, including transactions of the nature described above. Such sales by a broker-dealer could be at prices and on terms then prevailing at the time of sale, at prices related to the then-current market price or in negotiated transactions. In connection with such re-sales, the broker-dealer may pay to or receive from the purchasers of the shares commissions as described above. The selling stockholders and any broker-dealers or agents that participate with the selling stockholder in the sale of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act in connection with these sales. In that event, any commissions received by the broker-dealers or agents and any profit on the resale of the shares of common stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act, and the selling stockholders and/or broker-dealers will be subject to the prospectus delivery requirements of the Securities Act. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the selling stockholders.
From time to time, the selling stockholder may pledge shares of common stock pursuant to the margin provisions of customer agreements with brokers. Upon a default by the selling stockholder, their broker may offer and sell the pledged shares of common stock from time to time. Upon a sale of the shares of common stock, the selling stockholder intends to comply with the prospectus delivery requirements under the Securities Act by delivering a prospectus to each purchaser in the transaction. We intend to file any amendments or other necessary documents in compliance with the Securities Act that may be required by us in the event the selling stockholder defaults under any customer agreement with brokers.
To the extent required under the Securities Act, a post effective amendment to this registration statement will be filed disclosing the name of any broker-dealers, the number of shares of common stock involved, the price at which the shares of common stock is to be sold, the commissions paid or discounts or concessions allowed to such broker-dealers, where applicable, that such broker-dealers did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus and other facts material to the transaction.
We and the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations under it, including, without limitation, Rule 10b-5 and, insofar as the selling stockholder is a distribution participant and we, under certain circumstances, may be a distribution participant, under Regulation M as discussed below. All of the foregoing may affect the marketability of the shares of common stock.
We will bear all expenses of the registration statement of which this prospectus is a part including, but not limited to, legal, accounting and printing fees. Any commissions, discounts or other fees payable to brokers or dealers in connection with any sale of the shares of common stock will be borne by the selling stockholders, the purchasers participating in such transaction or both.
The selling stockholders are required to comply with: (i) the prospectus delivery requirements; and (ii) the applicable “blue sky” laws of the various states, in connection with the sale of its shares offered hereby. We will receive no proceeds from the sale of the selling stockholders’ shares pursuant to this prospectus.
The selling stockholders will act independently of Medbox, Inc. in making decisions with respect to the timing, manner and size of each sale or sale-related transfer.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to our common stock for a period of two business days prior to the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, as discussed below, which may limit the timing of purchases and sales of shares of our common stock by the selling stockholders or any other person. We will make copies of this prospectus available to the selling stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.
Regulation M
During such time as we may be engaged in a distribution of any of the shares we are registering by this registration statement, we are required to comply with Regulation M. In general, Regulation M precludes the selling security holder, any affiliated purchasers and any broker-dealer or other person who participates in a distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase, any security which is the subject of the distribution until the entire distribution is complete. Regulation M defines a “distribution” as an offering of securities that is distinguished from ordinary trading activities by the magnitude of the offering and the presence of special selling efforts and selling methods. Regulation M also defines a “distribution participant” as an underwriter, prospective underwriter, broker, dealer or other person who has agreed to participate or who is participating in a distribution.
Regulation M under the Exchange Act prohibits, with certain exceptions, participants in a distribution from bidding for or purchasing, for an account in which the participant has a beneficial interest, any of the securities that are the subject of the distribution. Regulation M also governs bids and purchases made in order to stabilize the price of a security in connection with a distribution of the security. We have informed the selling stockholders that the anti-manipulation provisions of Regulation M may apply to the sales of their shares offered by this prospectus.
DESCRIPTION OF CAPITAL STOCK
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, and by the applicable provisions of Nevada law.
Our authorized capital stock consists of 110,000,000 shares of stock consisting of (i) 100,000,000 shares of common stock, $0.001 par value per share, of which 14,333,375 shares are issued and outstanding as of the date hereof, and (ii) 10,000,000 shares of preferred stock, $0.001 par value per share, of which (a) 5,000,000 shares are designated as Series A Preferred Stock and 3,000,000 of which are issued and outstanding as of the date hereof.
Common Stock
The Board of Directors is authorized to issue, without stockholder approval, any authorized but unissued shares of our common stock. Our articles of incorporation authorize 100,000,000 shares of common stock, of which 14,333,375 shares are issued and outstanding as of the date hereof. 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.
The transfer agent for the common stock is Action Stock Transfer Corporation, Salt Lake City, Utah.
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. Our articles of incorporation authorize 10,000,000 shares of preferred stock, par value $0.001 per share, 5,000,000 of which are currently designated as Series A Preferred Stock. 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
Dividend Rights
.
Holders of the Series A Preferred Stock shall be 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 the Directors of the Corporation.
Conversion Rights
Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof and subject to notice requirements described herein, at any time, into five (5) shares of the Corporation’s Common Stock.
Liquidation Preference
.
The holders of the Series A Preferred Stock shall be 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 Corporation to the holders
of any other shares of stock of the corporation by reason of their ownership of such stock, an amount equal to $1.00 per share with respect to each share of Series A Preferred Stock, plus all declared but unpaid dividends with respect to such share.
Voting Rights
.
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 Corporation’s Series A Preferred Stock and Common Stock on a fully-diluted basis and (c) 0.00000025; and (ii) the holders of our common Stock shall have one vote per share of Common Stock held as of such date.
Covenants
.
Written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock, is required do any of the following: (i) take any action which would either alter, change or affect the rights, preferences, privileges or restrictions of the Series A Preferred Stock or increase the number of shares of such Series A Preferred Stock authorized hereby or designate any other series of Preferred Stock; (ii) increase the size of any equity incentive plan(s) or arrangements;(iii) make fundamental changes to the business of the Corporation; (iv) make any changes to the terms of the Series A Preferred Stock or to the Corporation’s Articles of Incorporation or Bylaws, including by designation of any stock;(v) create any 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 Corporation’s 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 the property or business of the Corporation or more than 50% of the stock of the Corporation 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 stock of the Corporation; (x) make any sale of additional Preferred Stock.
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 corporation’s 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 100,000,000 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, financings, acquisitions, stock dividends, stock splits and stock options or other stock-based compensation. 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
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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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Therefore, the provisions are not currently applicable to Medbox. However, 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
Nevada’s “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 the such person first becomes an “interested stockholder” unless (i) the corporation’s 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 corporation’s 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 that 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 and may not apply in the foreseeable future.
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 acquiror 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.
EXPERTS
The financial statements of Medbox, Inc. as of December 31, 2012 and 2011 and for each of the years in the two-year period ended December 31, 2012 included in this prospectus and in the registration statement have been so included in reliance upon the report of Q Accountancy Corporation, an independent registered public accounting firm, appearing elsewhere herein and in the registration statement, given on the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
Phillip Koehnke, Esq., Encinitas, CA, counsel to Medbox, Inc., will issue to Medbox, Inc. its opinion regarding the legality of the common stock being offered hereby. Phillip Koehnke has consented to the references in this prospectus to its opinion.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of our common stock being offered by this prospectus. This prospectus, which constitutes part of that registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are part of the registration statement. Some items included in the registration statement are omitted from the prospectus in accordance with the rules and regulations of the SEC. For further information with respect to us and the common stock offered in this prospectus, we refer you to the registration statement and the accompanying exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement.
A copy of the registration statement and the accompanying exhibits and any other document we file may be inspected without charge at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549 and copies of all or any part of the registration statement may be obtained from this office upon the payment of the fees prescribed by the SEC. The public may obtain information on the operation of the public reference facilities in Washington, D.C. by calling the SEC at 1-800-SEC-0330. Our filings with the SEC are available to the public from the SEC’s website at
www.sec.gov
.
Upon effectiveness of the registration statement of which this prospectus is a part, we will be subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, we will file periodic information and other information with the SEC. All documents filed with the SEC are available for inspection and copying at the public reference room and website of the SEC referred to above. We maintain a website at www.thedispensingsolution.com. You may access our reports and other information free of charge at this website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus.
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The Registrant estimates that expenses in connection with the distribution described in this Registration Statement will be as shown below. All expenses incurred with respect to the distribution will be paid by the Company.
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Expense
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Amount
$
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SEC Registration Fee:
*Blue Sky fees and expenses:
*Legal fees and expenses:
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*Accounting fees and expenses:
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*Printing expenses:
*Miscellaneous
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*Total:
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* To be provided by amendment
Item 14. Indemnification of Directors and Officers
Nevada Statutes
Section 78.7502 of the Nevada Revised Statutes, as amended, provides for the indemnification of the Company’s officers, directors, employees and agents under certain circumstances as follows:
“1. 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
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(b)
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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.
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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 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 had reasonable cause to believe that his conduct was unlawful.
2. 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
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(b)
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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.
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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.
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 against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with the defense.”
Section 78.751 of the Nevada Revised Statutes describes the authorization required for discretionary indemnification; advancement of expenses; limitation on indemnification and advancement of expenses as follows:
Any discretionary indemnification pursuant to
NRS 78.7502
, unless ordered by a court or advanced pursuant to subsection 2, may be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made:
(a) By the stockholders;
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(b)
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By the board of directors by majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding;
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(c)
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If a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding so orders, by independent legal counsel in a written opinion; or
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(d)
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If a quorum consisting of directors who were not parties to the action, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion.
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2. The articles of incorporation, the bylaws or an agreement made by the corporation may provide that the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. The provisions of this subsection do not affect any rights to advancement of expenses to which corporate personnel other than directors or officers may be entitled under any contract or otherwise by law.
3. The indemnification pursuant to
NRS 78.7502
and advancement of expenses authorized in or ordered by a court pursuant to this section:
(a) Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the articles of incorporation or any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court pursuant to
NRS 78.7502
or for the advancement of expenses made pursuant to subsection 2, may not be made to or on behalf of any director or officer if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action.”
Charter Provisions
Our Amended Articles of Incorporation provide for indemnification of our officers and directors as follows:
ARTICLE EIGHT
LIABILITY OF DIRECTORS AND OFFICERS
No Director, Officer or Agent, to include counsel, shall be personally liable to the Corporation or its Stockholder for monetary damage for any breach or alleged breach of fiduciary or professional duty by such person acting in such capacity. It shall be presumed that in accepting the position as an Officer, Direct, Agent or Counsel, said individual relied upon and acted in reliance upon the terms and protections provided for by this Article. Notwithstanding the foregoing sentences, a person specifically covered by this Article, shall be liable to the extent provided by applicable law, for acts or omission which involve intentional misconduct, fraud or a knowing violation of law, or for the payment of dividends in violation of NRS 78.300.
Bylaws
Our Amended and Restated Bylaws provide for the indemnification of our officers and directors as follows:
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
Section 1
ACTIONS OTHER THAN BY THE CORPORATION
. The 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 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, has 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 did not act 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 that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful.
Section 2
ACTIONS BY THE CORPORATION
. The 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 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 therefrom, 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.
Section 3
SUCCESSFUL DEFENSE
. To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2, or in defense of any claim, issue or matter therein, he must be indemnified by the corporation against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with the defense.
Section 4
REQUIRED APPROVAL
. Any indemnification under Sections 1 and 2, unless ordered by a court or advanced pursuant to Section 5, must be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made:
(a) By the stockholders;
(b) By the board of directors by majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding;
(c) If a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding so orders, by independent legal counsel in a written opinion; or
(d) If a quorum consisting of directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion.
Section 5
ADVANCE OF EXPENSES
. The articles of incorporation, the bylaws or an agreement made by the corporation may provide that the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. The provisions of this section do not affect any rights to advancement of expenses to which corporate personnel other than directors or officers may be entitled under any contract or otherwise by law.
Section 6
OTHER RIGHTS
. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this Article VI:
(a) Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the articles of incorporation or any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court pursuant to Section 2 or for the advancement of expenses made pursuant to Section 5, may not be made to or on behalf of any director or officer if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action.
(b) Continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person.
Section 7
INSURANCE
. The corporation may purchase and maintain insurance on behalf of any person who 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 for any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI.
Section 8
RELIANCE ON PROVISIONS
. Each person who shall act as an authorized representative of the corporation shall be deemed to be doing so in reliance upon the rights of indemnification provided by this Article.
Section 9
SEVERABILITY
. If any of the provisions of this Article are held to be invalid or unenforceable, this Article shall be construed as if it did not contain such invalid or unenforceable provision and the remaining provisions of this Article shall remain in full force and effect.
Section 10
RETROACTIVE EFFECT
. To the extent permitted by applicable law, the rights and powers granted pursuant to this Article VI shall apply to acts and actions occurring or in progress prior to its adoption by the board of directors.
Agreements
We intend to enter into compensation agreements with selected officers and directors, pursuant to which we will agree, to the maximum extent permitted by law, to defend, indemnify and hold harmless the officers and directors against any costs, losses, claims, suits, proceedings, damages or liabilities to which our officers and directors become subject to which arise out of or are based upon or relate to our officers and directors engagement by the Company.
Item 15.
Recent Sales of Unregistered Securities
The following information reflects all of the sales of our securities within the past three years.
On November 11, 2011, we issued an aggregate of 6,000,000 shares of our Series A Preferred Stock to P. Vincent Mehdizadeh and Shannon Illingworth in exchange for services rendered to the Company. 3,000,000 shares were subsequently cancelled and returned to treasury.
From January 1, 2012 through December 31, 2012, the Company sold a total of 1,798,733 shares of common stock to accredited investors for an average of $1.33 per share, or aggregate consideration of $2.4 million, including carry-over shares through the January of 2013, deemed by management to be materially part of the prior period.
From January 1 through July 11, 2013, 2013, the Company sold a total of 331,450 shares of common stock to accredited investors for $5 per share, or an aggregate of $1,407,250.
The issuances of the securities described above were exempt from registration under the Securities Act in reliance on Section 4(a)(2) thereof and Rule 506 of Regulation D as transactions by an issuer not involving any public offering and in which shares were purchased by accredited investors. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the certificates representing the stock issued in such transactions. The offer and sale of these securities were made without general solicitation or advertising.
In addition, Medbox, Inc. issued 2 million shares of its common stock to PVMI, Inc. on December 31, 2011 as part of the transaction in which it purchased from PVMI all of the shares of common stock that PVMI owned in the following companies: (i) MDS (9,000 shares); (ii) Medicine Dispensing Systems, Inc. (10,000 shares); and (iii) Medbox, Inc. (10,000 shares).
On April 1, 2013, Medbox, Inc. issued warrants to purchase 260,854 shares of our common stock for $.001 per share, subject to adjustment, to Vapor Systems International, Inc. in exchange for all of the outstanding shares of Vaporfection International, Inc. The warrants are exercisable at the option of the holder beginning March 21, 2014 and expire April 1, 2018.
Each of the above issuances were exempt from the registration provisions of the Securities Act pursuant to Section 4(a)(2) thereof as a transaction not involving any public offering.
There were no underwritten offerings employed in connection with any of the transactions set forth above.
Item 16. Exhibits And Financial Schedules
The exhibits and financial statement schedules filed as part of this registration statement are as follows
1. Audited Financial Statements and Notes for the years ended December 31, 2012 and December 31, 2011.
2. Financial Statements and Notes for the quarter ended March 31, 2013.
b. Exhibits
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3.1
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Articles of Incorporation filed with the Secretary of State on June 16, 1977*
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3.2
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Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on September 18, 1998*
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3.3
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Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on May 12, 2000*
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3.4
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Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on November 16, 2006*
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3.5
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Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on January 11, 2008*
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3.6
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Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on August 4, 2009*
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3.7
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Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on August 21, 2009*
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3.8
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Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on February 14, 2011*
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3.9
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Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on August 30, 2011*
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3.10
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Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on July 15, 2013
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3.11
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Amended and Restated Bylaws of Medbox, Inc. dated July 11, 2013
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4.1
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Form of Common Stock Certificate of Medbox, Inc. ^
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4.2
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Form of Certificate for the Series A Preferred Stock ^
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5.1
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Opinion of _____________________, regarding legality of securities being registered^
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10.1
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Stock Purchase Agreement, effective as of December 31, 2011, by and among Medbox, Inc. and PVM International, Inc. *
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10.2
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Amended and Restated Stock Purchase Agreement effective as of February 26, 2013, by and between Medbox, Inc. and Bio-Tech Medical Software, Inc.*
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10.3
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Amended and Restated Technology License Agreement, dated as of February 26, 2013, by and between Bio-Tech Medical Software, Inc. and Medbox, Inc.
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10.4
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Membership Interest Purchase Agreement dated as of March 12, 2013 between Medbox, Inc. and Darryl B. Kaplan, Claudio Tartaglia and Eric Kovan (MedVend Holdings)
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10.5
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Securities Purchase Agreement dated as of March 22, 2013, by and among Medbox, Inc. and Vapor Systems International, LLC*
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10.6
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Amendment Securities Purchase Agreement by and Medbox, Inc. and Vapor Systems International, LLC, dated July 5, 2013 and effective as of March 22, 2013
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10.7
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Description of Bruce Bedrick employment arrangement *+
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10.8
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Description of P. Vincent Mehdizadeh employment arrangement* +
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10.9
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Exclusive Trademark and Patent License Agreement Between PVM International, Inc. and Medbox, Inc., dated as of April 1, 2013 *
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10.10
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Promissory Note issued to PVMI dated December 31, 2011
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10.11
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Agreement between Prescription Vending Machines, Inc. and AVT, Inc. dated ________, 2010^
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21.1
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Subsidiaries of Medbox, Inc.
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23.1
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Consent of _____________ (contained in Opinion included as Exhibit 5.1)^
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23.2
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Consent of Q Accountancy Corporation
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24
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Power of Attorney (included on signature page) *
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* Previously filed, and incorporated by reference from, the Registrant’s Registration Statement on Form 10, as amended, file no. 000-54928, originally filed on April 10, 2013.
^ To be filed by amendment.
+ Management compensatory arrangement.
The undersigned Registrant hereby undertakes:
(1) 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;
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 a 20% 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.
(2) That, for the purpose of determining any liability under the Securities Act, 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) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) For determining liability of the undersigned registrant under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this Registration Statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
i. Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (Sec. 230-424);
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ii.
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Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the registrant;
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iii. The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
iv. Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(5) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(6) That for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus 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
(7) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions above, or otherwise, the 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 of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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 West Hollywood, State of California on July 15, 2013.
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MEDBOX, INC.
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/s/ Bruce Bedrick
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By: Bruce Bedrick
Its: Chief Executive Officer;
Director
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We, the undersigned directors and officers of Medbox, Inc. (the “Company”) hereby severally constitute and appoint Bruce Bedrick and P. Vincent Mehdizadeh, and each of them, as our true and lawful attorney and agent, to do any and all things in our names in the capacities indicated below which said Bruce Bedrick and P. Vincent Mehdizadeh may deem necessary or advisable to enable the Company to comply with the Securities Act of 1933, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form S-1 relating to the offering of the Company’s common stock, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby approve, ratify and confirm all that said Bruce Bedrick or P. Vincent Mehdizadeh shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following person in the capacities and on the dates indicated.
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Date: July 15, 2013
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/s/ Bruce Bedrick
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Bruce Bedrick
Chief Executive Officer,
Director (principal executive officer)
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Date: July 15, 2013
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/s/ P. Vincent Mehdizadeh
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P. Vincent Mehdizadeh
Chief Operating Officer, Director
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Date: July 15, 2013
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/s/ Leila Guieb
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Leila Guieb
Acting Chief Financial Officer,
Acting Secretary and Director
(principal financial and accounting officer)
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MEDBOX, INC.
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CONSOLIDATED BALANCE SHEETS
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MARCH 31,
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DECEMBER 31,
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2013
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2012
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(UNAUDITED)
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Assets
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Current assets:
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Cash and cash equivalents
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$ 1,043,671
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$ 1,026,902
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Accounts receivable
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1,109,600
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2,052,000
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Loan receivable
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70,000
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-
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Inventory
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467,327
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377,900
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Total current assets
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2,690,598
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3,456,802
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Property and equipment, net of accumulated depreciation of
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$49,192 and 43,491, respectively
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69,561
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51,018
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Advances on equity investments
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1,475,850
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-
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Deposits
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22,850
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4,850
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Total assets
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$ 4,258,858
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$ 3,512,670
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Liabilities and stockholders' equity
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Current liabilities:
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Accounts payable and accrued expenses
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$ 219,897
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$ 324,416
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Income taxes payable
|
404,340
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217,893
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Deferred income taxes payable
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8,989
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27,824
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Deferred revenue
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120,000
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673,250
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Related party notes payable
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439,894
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869,038
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Current portion of long-term debt
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15,880
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15,548
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Total current liabilities
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1,209,000
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2,127,969
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Long term-debt, less current portion
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20,369
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24,460
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Total liabilities
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1,229,369
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2,152,429
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Stockholders' equity
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Preferred stock, $0.001 par value: 10,000,000 authorized;
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3,000,000 issued and outstanding as of March 31, 2013 and December 31, 2012
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3,000
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3,000
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Common stock, $0.001 par value: 100,000,000 authorized,
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14,774,551 and 14,805,542 issued and outstanding as of March 31, 2013 and
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December 31, 2012, respectively
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14,703
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14,806
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Additional paid-in capital
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2,410,212
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1,166,130
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Common stock subscribed
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-
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(153,250)
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Retained earnings (accumulated deficit)
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601,574
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329,555
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Total stockholders' equity
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3,029,489
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1,360,241
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Total liabilities and stockholders' equity
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$ 4,258,858
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$ 3,512,670
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See notes to consolidated financial statements.
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|
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MEDBOX, INC.
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CONSOLIDATED STATEMENTS OF INCOME
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FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012
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(UNAUDITED)
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2013
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2012
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Revenues, net
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$ 1,749,555
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$ 505,532
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Cost of revenues
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149,977
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88,618
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Gross margin
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1,599,578
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416,914
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|
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Selling, general and administrative expenses
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Selling and marketing
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293,595
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23,923
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Depreciation and amortization
|
5,701
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-
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Professional fees
|
596,553
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130,366
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General and administrative
|
254,303
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161,893
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Total operating expenses
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1,150,152
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316,182
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Income from operations
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449,426
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100,733
|
|
|
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Interest income
|
120
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-
|
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Interest expense
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(848)
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(1,162)
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Income before provision for income taxes
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448,698
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99,571
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Provision for income taxes
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176,680
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|
42,656
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Net income
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$ 272,018
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|
$ 99,571
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Earnings per share attributable to common stockholders:
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Basic: 14,666,200 shares 2012 and 12,684,540 shares 2011 respectfully
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$ 0.02
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$ 0.01
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Diluted: 29,666,200 shares 2012 and 42,351,200 shares 2011 respectfully
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$ 0.01
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$ 0.01
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See notes to consolidated financial statements.
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MEDBOX, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012
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(UNAUDITED)
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|
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2013
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2012
|
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Cash flows from operating activities
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Net income
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$ 272,018
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|
$ 99,571
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Adjustments to reconcile net income to net cash
|
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provided by (used in) operating activities:
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Depreciation and amortization
|
5,701
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|
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Changes in operating assets and liabilities
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|
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-
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|
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Accounts receivable
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942,400
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|
|
|
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Loan receivable
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(70,000)
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|
-
|
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Inventory
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(89,427)
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|
-
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Deposits
|
(18,000)
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|
-
|
|
|
|
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Accounts payable and accrued expenses
|
(132,342)
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|
(11,127)
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|
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|
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Income taxes payable
|
186,447
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|
(9,763)
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Deferred revenue
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(553,250)
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|
-
|
|
|
|
|
|
Net cash provided by operating activities
|
543,547
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|
78,681
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|
|
|
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|
|
|
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Cash flows from investing activities
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|
|
|
|
|
Purchases of furniture & fixtures
|
(24,244)
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|
-
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|
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Advances for equity investments
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(1,475,850)
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|
-
|
|
|
|
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|
Net cash provided by investing activities
|
(1,500,094)
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|
-
|
|
|
|
|
|
|
|
|
|
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Cash flows from financing activities
|
|
|
|
|
|
Payments on notes payable
|
(423,914)
|
|
(3,443)
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|
|
Proceeds from issuance of common stock
|
1,243,980
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|
7,939
|
|
|
Subscription receivable
|
153,250
|
|
-
|
|
|
|
|
|
Net cash used by financing activities
|
973,316
|
|
4,496
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
16,769
|
|
83,177
|
|
Cash, beginning of period
|
1,026,902
|
|
42,356
|
|
Cash, end of period
|
$ 1,043,671
|
|
$ 125,533
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid during the three months ended for interest
|
$ 848
|
|
$ 1,162
|
|
|
Cash paid during the three months ended for income tax
|
$ 9,068
|
|
$ -
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
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|
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MEDBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2013
Note 1 – Nature of Business
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. The company is a leader in the development, sales and service of automated, biometrically controlled dispensing and storage systems for medicine and merchandise and is headquartered in West Hollywood, California. The Company provides their patented systems, software and consulting services to pharmacies, dispensaries, urgent care centers, drug rehab clinics, hospitals, prison systems, hospice facilities and medical groups worldwide.
The Company’s wholly owned subsidiaries, Prescription Vending Machines, Inc. (subsidiary) was incorporated in the state of California in 2008 and Medicine Dispensing Systems was incorporated in the state of Arizona in 2011.
Note 2 – Summary of Significant Accounting Policies
Use of Estimates
The presentation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Medbox, Inc. and its wholly owned subsidiaries, Prescription Vending Machines, Inc. and Medline Dispensing Systems Incorporated. All material intercompany transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits with banks, and all highly liquid investments with original maturities of three months or less.
Concentration of Credit Risk
The Company maintains cash balances at several financial institutions in the Los Angeles, California area. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. At March 31, 2013, the Company’s uninsured balances totaled approximately $727,783.
Marketing Costs
Marketing costs are expensed as incurred. Marketing expense for the period ending March 31, 2013 was $293,595.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, prepaid expenses and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments. The Company had no items that required fair value measurement on a recurring basis.
Revenue Recognition
The Company recognizes revenues in compliance with FASB ASC 605,
“Revenue Recognition”
. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company will allow customers to return merchandise under most circumstances. The reserve for returns will be included as are allowances in the Company’s balance sheet. The reserve is estimated based on the Company’s historical experience of returns made by customers. The Company will defer any revenue from sales in which payment has been received, but the earnings process has not been completed.
Allowance for Bad Debts
The Company evaluates the collectability of its receivables based on a combination of factors. Management periodically reviews the individual accounts receivable balances and determines which accounts to initiate collection procedures on. It is the practice of the Company to expense uncollectible accounts receivable only after exhausting all efforts to collect amounts due. Management believes that all amounts will be collected in full and no allowance for doubtful accounts has been established.
Inventory
Inventories are stated at the lower of cost or market and consist of finished good vending machines. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value.
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 other depreciation methods (generally accelerated) for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
Vehicles 5 years
Office equipment 5 years
Furniture and fixtures 5 years
Depreciation expense for the period ending March 31, 2013 was $5,701.
Income Taxes
The Company applies the provisions of FASB ASC 740, relating to uncertain income tax positions. These standards require management to perform an evaluation of all income tax positions taken or expected to be taken in the course of preparing the Company’s 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.
The Company is required to file federal and state income tax returns. Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions.
The Company has not yet undergone an examination by any taxing authorities. 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 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.
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. In addition, deferred income taxes are recognized for certain expense accruals, allowances and net operating loss carryforwards available to offset future taxable income, net of valuation allowances for potential expiration and other contingencies that could impact the Company’s ability to recognize the benefit.
The tax provision differs from the expense that would result from applying statutory rates to loss before income taxes because of permanent differences such as meals and entertainment that are not fully deductible for tax purposes.
Note 3 – Property and Equipment
Property and equipment at March 31, 2013 consist of:
|
|
|
2013
|
|
Depreciable assets:
|
|
|
|
|
|
|
|
Office equipment
|
$
|
2,509
|
|
Furniture and fixtures
|
|
24,244
|
|
Transportation equipment
|
|
92,000
|
|
|
|
|
|
Sub-total
|
$
|
118,753
|
|
|
|
|
|
Less accumulated depreciation
|
|
(49,753)
|
|
|
|
|
|
Total, property and equipment, net
|
$
|
69,561
|
Note 4 – Advances on Equity Investments
On March 22, 2013, the Company entered into an agreement to purchase 100% of the issued and outstanding shares (100,000 shares) of Vaporfection International Inc. owned by Vapor Systems International LLC for $7,597,376 and a five year warrant to purchase up to 260,854 shares of the Company’s common stock, among other considerations and contingencies.
Terms of the agreement include the Company providing up to $1,600,000 in working capital. In addition, as part of the $1,600,000 working capital is the cancellation and forgiveness of a $50,000 promissory note executed on February 28, 2013 by Vapor Systems International LLC as the borrower and Medbox, Inc. as the lender. Upon execution of the agreement, the first working capital in the amount of $325,850 was provided.
As of March 31, 2013 this purchase agreement has not been closed.
On February 8, 2013, the Company entered into an agreement to purchase 833,333 shares of Bio-Tech Medical Software, Inc. (Bio Tech) or 25% of Bio-Tech’s issued and outstanding shares of common stock for $1,500,000 and 700,000 shares of the Company’s common stock, among other consideration and contingencies.
Pursuant to the agreement, the Company advanced $500,000 upon execution of the agreement with the remaining balance of $1,000,000 due and payable in two (2) installments at various dates by August 25, 2013.
On March 12, 2013, the Company entered into membership interest purchase agreement with three members of Medvend Holdings, LLC whereby the Company would acquire 50% of their equity interest for $4,100,000 and other consideration and contingencies. Pursuant to the agreement, the Company paid $300,000 upon execution of the contract for the right to purchase.
Note 5 – Long-term Debt
Long-term debt at March 31, 2013 consists of:
|
|
|
2013
|
|
|
|
|
|
Term note to a bank, payable in monthly installments of $1,535.45 including interest at 8.8% through May 2015. The note is secured by a vehicle
|
$
|
36,249
|
|
|
|
|
|
Less current portion
|
|
(15,880)
|
|
|
|
|
|
Long-term portion
|
$
|
20,369
|
The following is a schedule of maturities for the next three years ending December 31 and thereafter:
|
2013
|
$
|
11,780
|
|
2014
|
|
16,954
|
|
2015
|
|
7,515
|
|
|
|
|
|
Total Maturities
|
$
|
36,249
|
|
|
|
|
|
Less current portion
|
|
(15,880)
|
|
|
|
|
|
Long-term debt, net
|
$
|
20,369
|
Note 6 – Related Party Transactions/Due From Related Companies/Parties
On January 1, 2012, the Company issued a note payable to PVM International Inc. (“PVMI”), a related party which is 100% owned by the Senior Consultant of the Company in the amount of $1,000,000 along with the issuance of 2,000,000 (two million) of restricted shares of the Company’s common stock for the use of its patent related to the Company’s dispensing systems and the Company also received 24,000 restricted shares of three subsidiaries that were controlled by PVM International, Inc. The three subsidiary companies were: Prescription Vending Machines, Inc., Medicine Dispensing Systems, Inc. and Medbox, Inc. (CA Corp that is not in use) (collectively “PVM Shares”) . The 24,000 shares represented 80% of PVMI’s outstanding stock in the three subsidiaries. By December 31, 2012, the Company received the other 6000 shares which completed the 100% transaction.
The note is payable upon demand at an interest of zero. The note is secured with 1,000,000 restricted shares of the Company or interest at 10% of the outstanding balance beginning January 1, 2013. The balance at March 31, 2013 was $440,038.
The Company utilizes Vincent Chase Incorporated, a related party and 100% owned by the Senior Consultant of the Company for management advisory and consulting services. During the period ended March 31, 2013, the Company incurred $75,000 in fees for these services.
The Company utilizes Kind Clinics, LLC, a related party, and 100% owned by an officer of the Company for marketing services. During the period ended March 31, 2013, the Company incurred $123,613 in direct reimbursement payments to third parties on behalf of the Company.
The Company utilizes AVT, Inc., a related party, and majority owned by a shareholder of the Company for the manufacture and assembly of its dispensary units. During the period ended March 31, 2013, the Company incurred approximately $88,165 in manufacturing costs. In addition, the Company’s existing inventory of dispensary units is held at AVT, Inc.’s manufacturing facility in Corona, California on behalf of the Company. The Company believes that its transactions with AVT, Inc. are completed on an arms-length basis.
Note 7 – Stockholder’s Equity
Common and Preferred Stock
In November 2011, the Company issued 6,000,000 of $.001 par value convertible restricted preferred stock to the founder of subsidiary Prescription Vending Machines, Inc. and also a shareholder of the Company. This preferred stock can be converted from 1 (one) restricted share to 5 (five) restricted shares of common stock. In October 2012, 3,000,000 preferred shares were returned to the Company and cancelled.
During the period ended March 31, 2013, the Company sold approximately 389,550 shares of common stock for proceeds of approximately $1,245,000.
During the period ended March 31, 2013, the Company cancelled approximately 650,000 shares of its previously issued common stock.
Note 8 – 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.
The consolidated provision for federal and state income taxes for the period ended March 31, 2013 is as follows:
|
|
|
March 31, 2013
|
|
|
|
|
|
Current (@ 34% for federal and 9% for state)
|
$
|
195,515
|
|
Deferred
|
|
(18,835)
|
|
|
|
|
|
Total provision for income taxes
|
$
|
176,680
|
The Company’s total deferred tax liabilities which have been presented on the financial statements as a current deferred tax (liability) at March 31, 2013 are as follows:
|
|
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
Total deferred tax (liability)
|
|
(8,989)
|
Note 9 – Commitment and Contingencies
Lease Obligations
The Company may rent property, equipment, transportation equipment, and various clinics on an as needed basis.
On August 1, 2011 and amended on February 11, 2013, the Company entered into a lease agreement for office space located in West Hollywood, California through June 30, 2017 at a monthly rate of $14,397.00. The payment is also charged to rent expense as incurred.
In addition, the Company leases various office facilities located at West Hills California, Scottsdale Arizona, Hartford Connecticut and Natick Massachusetts from unrelated third parties under a month to month operating lease at a total monthly rate of $4,300. The payment is charged to rent expense as incurred.
Total rent expense under operating leases for March 31, 2013 was $92,483.
The minimum future lease payments under operating leases at March 31, 2013 are as follows:
Note 9- Commitment and Contingencies
|
Year
Ending
|
Amount
|
|
|
|
|
2013
|
111,382
|
|
2014
|
172,759
|
|
2015
|
172,759
|
|
2016
|
172,759
|
|
2017
|
86,379
|
|
|
|
|
Total
|
$716,038
|
Note 10 – Subsequent Events
On January 16, 2013, a shareholder entered into a stock subscription agreement with the Company for the purchase of 71,429 shares of common stock at $70 per share. The Company issued the shares and the subscription was not paid for. Subsequently a settlement was reached within the quarter, with the stockholder which provided for the stock subscription agreement to be cancelled in exchange for the return of the issued stock and the stockholder purchasing from the Company at face value various outstanding accounts receivable owed to the company. The returned shares have been reflected as cancelled as of the date issued in computing the number of weighted average number of shares outstanding and outstanding stock issued as of March 31, 2013.
On May 13, 2013, the Company agreed to extend the closing date(s) of its purchase agreement with Bio-Tech to August 25, 2013 and paid Bio-Tech
an extension fee of $100,000 upon execution.
On May 22, 2013, the Company cancelled 630,000 shares of its previously issued common stock to the founder.
In May 2013, the three members of Medvend Holdings, LLC were named in a lawsuit by that entity’s minority members alleging improper conveyance of the three members’ ownership interest in Medvend Holdings, LLC to the Company as described in Note 4. Accordingly, the Company filed suit against Medvend Holdings, LLC and the three members of that entity involved in the transaction.
Subsequent to March 31. 2013, the Company has received proceeds aggregating $853,000 from the sale of 178,600 shares of registered common stock. In accordance with agreements with these parties the shares are anticipated to be registered in the Company's registration statement on Form S-1.
On June 11, 2013, a former officer and director of the Company made a demand for damages relating to a termination associated with his alleged employment contract with the Company. The individual and the Company have agreed to arbitration but no date has been set yet. The Company is vigorously defending this claim and believes it has meritorious defenses and will prevail. The Company does not believe that the results of this claim will have a material impact on the financial statements of the Company.
On June 26, 2013, the company notified Bio-Tech that it was canceling the agreements with them. The company is currently in negotiations with Bio-Tech to separate from their proposed business partnerships amicably.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Medbox, Inc.
We have audited the accompanying consolidated balance sheets of Medbox, Inc. as of December 31, 2012 and 2011 and the related statements of operations, changes in stockholder’s equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s 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 Company’s 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 financial statements referred to above present fairly, in all material respects, the financial position of Medbox, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Q Accountancy Corporation
/s/ Q Accountancy Corporation
Irvine, California
April 9, 2013
|
MEDBOX, INC.
|
|
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
DECEMBER 31, 2012 AND 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Successor)
|
|
(Predecessor)
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$ 1,026,902
|
|
$ 42,356
|
|
Accounts receivable, net
|
2,052,000
|
|
-
|
|
Loan receivable
|
-
|
|
104,650
|
|
Advances to officer
|
-
|
|
177,050
|
|
Inventory
|
377,900
|
|
100,000
|
|
Total current assets
|
3,456,802
|
|
424,056
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of
|
|
|
|
|
$43,491 and 13,569, respectively
|
51,018
|
|
80,940
|
|
Other assets
|
4,850
|
|
4,850
|
|
Total assets
|
$ 3,512,670
|
|
$ 509,846
|
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable and accrued expenses
|
$ 324,416
|
|
$ 46,155
|
|
Income taxes payable
|
217,893
|
|
52,817
|
|
Deferred income taxes payable
|
27,824
|
|
-
|
|
Deferred revenue
|
673,250
|
|
-
|
|
Related party notes payable
|
869,038
|
|
-
|
|
Current portion of long-term debt
|
15,548
|
|
21,928
|
|
Total current liabilities
|
2,127,969
|
|
120,900
|
|
|
|
|
|
|
Long term-debt, less current portion
|
24,460
|
|
40,008
|
|
Total liabilities
|
2,152,429
|
|
160,908
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
Preferred stock, $0.001 par value: 10,000,000 authorized,
|
|
|
|
|
3,000,000 issued and outstanding as of December 31, 2012 and
|
|
|
|
|
6,000,000 issued and outstanding as of December 31, 2011
|
3,000
|
|
6,000
|
|
Common stock, $0.001 par value: 100,000,000 authorized,
|
|
|
|
|
14,805,572 issued and outstanding as of December 31, 2012 and
|
|
|
|
|
11,006,839 issued and outstanding as of December 31, 2011
|
14,806
|
|
11,007
|
|
Additional paid-in capital
|
1,166,130
|
|
280,264
|
|
Common stock subscribed
|
(153,250)
|
|
-
|
|
Retained earnings (accumulated deficit)
|
329,555
|
|
51,668
|
|
Total stockholders' equity
|
1,360,241
|
|
348,938
|
|
Total liabilities and stockholders' equity
|
$ 3,512,670
|
|
$ 509,846
|
|
|
|
|
|
|
See notes to consolidated financial statements.
|
|
|
|
|
MEDBOX, INC.
|
|
|
|
|
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
Revenues, net
|
|
|
|
|
Dispensary systems
|
$ 1,760,000
|
|
$ 1,560,000
|
|
Dispensary site consulting
|
1,765,636
|
|
1,881,870
|
|
Total Revenues
|
3,525,636
|
|
3,441,870
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
|
|
Dispensary units
|
370,541
|
|
329,424
|
|
Dispensary site consulting
|
525,476
|
|
1,482,316
|
|
Total cost of revenues
|
896,017
|
|
1,811,740
|
|
|
|
|
|
|
Gross margin
|
2,211,524
|
|
1,630,130
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
|
|
Selling and marketing
|
62,517
|
|
55,818
|
|
Depreciation
|
29,922
|
|
13,569
|
|
Professional fees
|
573,265
|
|
626,108
|
|
General and administrative
|
967,275
|
|
746,857
|
|
Total costs and expenses
|
1,632,979
|
|
1,442,351
|
|
Income (loss) from operations
|
578,545
|
|
187,779
|
|
|
|
|
|
|
Interest expense
|
4,975
|
|
39,566
|
|
|
|
|
|
|
Income before provision for income taxes
|
573,570
|
|
148,213
|
|
|
|
|
|
|
Provision for income taxes
|
245,717
|
|
44,366
|
|
|
|
|
|
|
Net income
|
$ 327,853
|
|
$ 103,847
|
|
|
|
|
|
|
Earnings per share attributable to common stockholders:
|
|
|
|
|
Basic -
13,337,789
shares 2012 and 11,016,839 shares 2011 respectfully
|
$ 0.02
|
|
$ 0.01
|
|
Diluted - 39,587,789
shares 2012 and 13,416,039 shares 2011 respectfully
|
$ 0.01
|
|
$ 0.00
|
|
|
|
|
|
|
See notes to consolidated financial statements.
|
|
|
|
|
MEDBOX, INC.
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
Net income
|
$ 327,853
|
|
$ 103,847
|
|
Adjustments to reconcile net income to net cash used by
|
|
|
|
|
operating activities:
|
|
|
|
|
Depreciation and amortization
|
29,922
|
|
13,569
|
|
Decrease (increase) in:
|
|
|
|
|
Accounts receivable
|
(2,052,000)
|
|
-
|
|
Loan receivable
|
104,650
|
|
-
|
|
Advances to officer
|
177,050
|
|
(93,103)
|
|
Inventory
|
(277,900)
|
|
(100,000)
|
|
Increase (decrease) in:
|
|
|
|
|
Accounts payable and accrued expenses
|
267,041
|
|
28,081
|
|
Income taxes payable
|
165,076
|
|
40,051
|
|
Deferred income taxes payable
|
27,824
|
|
-
|
|
Deferred revenue
|
673,250
|
|
-
|
|
Net cash used by operating activities
|
(557,234)
|
|
(7,555)
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
Payments received on loan receivable
|
104,650
|
|
-
|
|
Net cash provided by investing activities
|
104,650
|
|
-
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
Payments received on advances to officer
|
177,050
|
|
-
|
|
Payments on related party notes payable
|
(31,000)
|
|
-
|
|
Payments on long-term debt
|
(21,928)
|
|
(7,752)
|
|
Dividends paid
|
(49,965)
|
|
-
|
|
Proceeds from issuance of common stock
|
1,362,974
|
|
-
|
|
Net cash provided by financing activities
|
1,437,131
|
|
(7,752)
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
984,547
|
|
(15,307)
|
|
Cash and cash equivalents at beginning of year
|
42,356
|
|
57,663
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
$ 1,026,902
|
|
$ 42,356
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
Interest
|
$ 4,975
|
|
$ 39,566
|
|
Income taxes
|
$ 59,141
|
|
$ 4,314
|
|
Non- cash transactions:
|
|
|
|
|
Note payable for acquisition of property and equipment
|
$ -
|
|
$ 92,000
|
|
Issuance of common stock for acquistion of subsidiary
|
$ -
|
|
$ 245,092
|
|
Issuance of related party notes payable for common stock
|
$ 125,000
|
|
$ -
|
|
Issuance of preferred stock
|
$ -
|
|
$ 6,000
|
|
|
|
|
|
|
See notes to consolidated financial statements.
|
|
|
|
|
MEDBOX, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Earnings
|
Total
|
|
|
|
Preferred Stock
|
Common Stock
|
Paid-In
|
Common Stock
|
(Accumulated)
|
Stockholders'
|
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Subscribed
|
(Deficit)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2011 (Predecessor)
|
-
|
|
$ -
|
|
11,016,839
|
|
$ 11,017
|
|
$ 41,172
|
|
$ -
|
|
$ (52,189)
|
|
$ -
|
|
Issuance of preferred stock
|
6,000,000
|
|
6,000
|
|
|
|
|
|
(6,000)
|
|
|
|
|
|
-
|
|
Cancellation of common stock
|
-
|
|
-
|
|
(10,000)
|
|
(10)
|
|
|
|
|
|
10
|
|
-
|
|
Acquisition of Prescription Vending Machines (subsidiary)
|
|
245,092
|
|
-
|
|
|
|
245,092
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
103,847
|
|
103,847
|
|
Balances at December 31, 2011
|
6,000,000
|
|
$ 6,000
|
|
11,006,839
|
|
$ 11,007
|
|
$ 280,264
|
|
$ -
|
|
$ 51,668
|
|
348,938
|
|
Cancellation of preferred stock
|
(3,000,000)
|
|
(3,000)
|
|
|
|
|
|
$ 3,000
|
|
|
|
|
|
-
|
|
Issuance of common stock, net of issuance costs
|
3,761,683
|
|
3,762
|
|
854,653
|
|
-
|
|
-
|
|
858,415
|
|
Subscriptions for common stock, net of issuance costs
|
37,050
|
|
37
|
|
153,213
|
|
(153,250)
|
|
-
|
|
-
|
|
Dividend paid
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,965)
|
|
(49,965)
|
|
Buyout of PVM shareholders
|
|
|
|
|
|
|
|
|
(125,000)
|
|
-
|
|
|
|
(125,000)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
327,853
|
|
327,853
|
|
Balance at Deecember 31, 2012 (Successor)
|
3,000,000
|
|
$ 3,000
|
|
14,805,572
|
|
$ 14,806
|
|
$ 1,166,130
|
|
$ (153,250)
|
|
$ 329,555
|
|
$ 1,360,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
MEDBOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Note 1 – Nature of Business
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., an again on August 30, 2011 to Medbox, Inc. The company is a leader in the development, sales and service of automated, biometrically controlled dispensing and storage systems for medicine and merchandise and is headquartered in West Hollywood California. The Company provides their patented systems, software and consulting services to pharmacies, dispensaries, urgent care centers, drug rehab clinics, hospitals, prison systems, hospice facilities and medical groups worldwide.
The Company’s subsidiaries, Prescription Vending Machines, Inc. was incorporated in the state of California in 2008 and Medicine Dispensing Systems was incorporated in the state of Arizona in 2011.
Note 2 – Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Medbox, Inc. and its wholly owned subsidiaries, Prescription Vending Machines, Inc. and Medicine Dispensing Systems Incorporated. All material intercompany transactions have been eliminated.
Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits with banks, and all highly liquid investments with original maturities of three months or less.
Concentrations of Credit Risk
The Company maintains cash balances at several financial institutions in the Los Angeles, California area. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. At December 31, 2012 and 2011, the Company’s uninsured balances totaled $719,788 and $-0-, respectively.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. Advertising and marketing expense for the years ending December 31, 2012 and 2011 was $139,411, and $227,208, respectively.
Fair Value of Financial Instruments
Pursuant to ASC No. 825,
Financial Instruments
, we are required to estimate the fair value of all financial instruments included on our balance sheets. The carrying value of cash, accounts receivable, other receivables, inventory, accounts payable and accrued expenses approximate their fair value due to the short period to maturity of these instruments. The Company had no items that required fair value measurement on a recurring basis.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 605,
Revenue Recognition
. Revenue is recognized when all the criteria have been met:
• Persuasive evidence of an arrangement exists.
• The products and services have been provided to the customer.
• The fee is fixed or determinable.
• Collectability is reasonably assured.
Revenue is recognized for dispensary systems at the time of shipment. Revenue for construction and consulting services is recognized as the Company completes the respective contracts. Our contracts are short-term, typically 60 to 90 days before completion. Provisions for discounts and rebates to customers, if any, and estimated returns and allowances are provided for in the same period the related revenue is recognized.
Cost of Revenues
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, server equipment, rent expense, energy and bandwidth costs, and support and maintenance costs.
Accounts Receivable and Allowance for Bad Debts
The Company is subject to credit risk as it extends credit to our customers. The Company extends credit to its customers, mostly on an unsecured basis after performing certain credit analysis. Our typical terms are net 30 days. The company’s management periodically reviews the creditworthiness of its customers and provides for probable uncollectible amounts through a charge to earnings and a credit to an 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 and a credit to accounts receivable.
As of December 31, 2012 and 2011, the Company’s management considered all accounts outstanding fully collectible.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value.
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 other depreciation methods (generally accelerated) for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
Vehicles
5 years
Office equipment
5 years
Depreciation expense for the years ending December 31, 2012 and 2011 was $29,922 and 11,060.
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 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 Company’s management performs an evaluation of all uncertain income tax positions taken or expected to be taken in the course of preparing the Company’s 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.
The Company is required to file federal and state income tax returns. Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions.
The Company has not yet undergone an examination by any taxing authorities. 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 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.
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 carryforwards available to offset future taxable income, net of valuation allowances for potential expiration and other contingencies that could impact the Company’s ability to recognize the benefit.
The tax provision differs from the expense that would result from applying statutory rates to income before income taxes because of permanent differences such as meals and entertainment that are not fully deductible for tax purposes.
Note 3 – Property and Equipment
Property and equipment at December 31, 2012 and 2011 consists of:
|
|
|
2012
|
|
2011
|
|
Office equipment
|
$
|
2,509
|
$
|
2,509
|
|
Transportation equipment
|
|
92,000
|
|
92,000
|
|
|
|
94,509
|
|
94,509
|
|
Less accumulated depreciation
|
|
(43,491)
|
|
(13,569)
|
|
Property and equipment, net
|
$
|
51,018
|
$
|
80,940
|
Note 4 – Long-term Debt
Long-term debt at December 31, 2012 and 2011 consists of:
|
|
|
2012
|
|
2011
|
|
Term note to a bank payable in monthly installments of $1,535 including interest at 8.8% through May 2015. The note is secured with an automobile.
|
$
|
40,008
|
$
|
54,248
|
|
Note payable to unrelated third party payable upon demand.
|
|
-
|
|
7,688
|
|
Total long-term debt
|
|
40,008
|
|
61,936
|
|
Less current portion
|
|
(15,548)
|
|
(21,928)
|
|
Long-term portion
|
$
|
24,460
|
$
|
40,008
|
Following is a schedule of maturities for years ending December 31:
|
2013
|
$
|
15,548
|
|
2014
|
$
|
16,944
|
|
2015
|
$
|
7,516
|
|
|
|
|
|
Total maturities
|
$
|
40,008
|
|
Less current portion
|
|
(15,548)
|
|
|
|
|
|
Long-term debt, net
|
$
|
24,460
|
Note 5 – Related Party Transactions
On April 10, 2012, the Company issued a note payable to a shareholder in the amount of $25,000 in exchange for the shareholder’s original investment in Prescription Vending Machines, Inc. common stock. The note bears no interest and is due on demand. As of December 31, 2012, the outstanding balance on this note was $12,000.
On May 5, 2012, the Company issued a note payable to a shareholder in the amount of $100,000 in exchange for the shareholder’s original investment in Prescription Vending Machines, Inc. common stock. The note bears no interest and is due on demand. As of December 31, 2012, the outstanding balance on this note was $82,000.
On January 1, 2012, the Company issued a note payable to PVM International Inc. (“PVMI”), a related party which is 100% owned by the Senior Consultant of the Company in the amount of $1,000,000 along with the issuance of 2,000,000 (two million) of restricted shares of the Company’s common stock for the use of its patent related to the Company’s dispensing systems and the Company also received 24,000 restricted shares of three subsidiaries that were controlled by PVM International, Inc. The three subsidiary companies were: Prescription Vending Machines, Inc., Medicine Dispensing Systems, Inc. and Medbox, Inc. (CA Corp that is not in use) (collectively “PVM Shares”) . The 24,000 shares represented 80% of PVMI’s outstanding stock in the three subsidiaries. By December 21, 2012, the Company received the other 6,000 shares which completed the 100% transaction.
The note is payable upon demand at an interest of zero. The note is secured with 1,000,000 restricted shares of the Company or interest at 10% of the outstanding balance beginning January 1, 2013. In December 2012, a payment of $250,000 was paid to PVMI which left the balance at December 31, 2012 at $775,000.
The Company utilizes Vincent Chase Incorporated, a related party and 100% owned by the Senior Consultant of the Company for management advisory and consulting services. During the years ended December 31, 2012 and 2011, the Company incurred $230,706 and $100,000 in fees, respectively, for these services.
The Company utilizes Kind Clinics, LLC, a related party, and 100% owned by an officer of the Company for management advisory and consulting services. During the year ended December 31, 2012, the Company incurred $34,720 in fees for these services.
The Company utilizes AVT, Inc., a related party, and majority owned by a shareholder of the Company for the manufacture and assembly of its dispensary units. During the year ended December 31, 2012, the Company incurred approximately $480,500 and $510,000 in manufacturing costs. In addition, the Company’s existing inventory of dispensary units is held at AVT, Inc.’s manufacturing facility in Corona, California on behalf of the Company. The Company believes that its transactions with AVT, Inc. are completed on an arms-length basis.
Note 7 – Stockholder’s Equity
Common and Preferred Stock
In November 2011, the Company issued 6,000,000 of zero par value convertible restricted preferred stock to the Senior Consultant and a shareholder of the Company. This preferred stock can be converted from 1 (one) restricted share to 5 (five) restricted shares of common stock. In November 2012, 3,000,000 shares were returned to the Company and cancelled.
During 2012, the Company sold approximately 1,800,000 shares of common stock for proceeds of approximately $2,400,000. The balance of $153,250 for the remaining 37,050 shares is to be received in 2013. In addition, the Company issued 2,000,000 shares in connection with the acquisition of the PVM Shares as previously described in Note 5.
Note 8 – 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.
The consolidated provision for federal and state income taxes for the year ended December 31, 2012 is as follows:
|
|
|
December 31, 2012
|
|
|
|
|
|
Current (34% and 8.9% for federal and state)
|
$
|
217,893
|
|
Deferred
|
|
27,824
|
|
|
|
|
|
Total provision for income taxes
|
$
|
245,717
|
The Company’s total deferred tax liabilities at December 31, 2012 are as follows:
|
|
|
December 31, 2012
|
|
|
|
|
|
|
$
|
217,893
|
|
|
|
27,824
|
|
|
|
|
|
Total deferred tax (liability)
|
$
|
(24,824)
|
Note 9 – Lease Obligations
The Company may rent property, equipment, transportation equipment, and various clinics on an as needed basis.
On August 1, 2011, the Company entered into a lease agreement for office space located in West Hollywood, California through July 31, 2014 at a monthly rate of $5,149. The payment is also charged to rent expense as incurred.
In addition, the Company leases office facilities located at West Hills, California from unrelated third parties under a month to month operating lease at a monthly rate of $1,300. The payment is charged to rent expense as incurred.
Total rent expense under operating leases for December 31, 2012 and 2011 was $222,886 and $124,727, respectively.
The minimum future lease payments under operating leases at December 31, 2012 were as follows:
|
Year Ending
|
Amount
|
|
|
|
|
2013
|
61,782
|
|
2014
|
36,040
|
|
|
|
|
Total
|
$ 97,822
|
Note 10 – Subsequent Events
During January 2013, the Company received a total of $71,520 as payment for the sale of 16,000 shares of common stock during that period.
On February 26, 2013, the Company entered into a Stock Purchase Agreement and Technology Licensing Agreement to acquire 25% or 833,333 shares of Bio Tech Medical Software, Inc. in exchange for $1,500,000 and 700,000 shares of the Company’s common stock.
On March 12, 2013, the Company entered into a Membership Interest Purchase Agreement to acquire 47.4% of MedVend Holdings, LLC in exchange for $300,000 and $3,800,000 on the 10
th
day following the first anniversary date which may be paid by the Company in cash or equivalent amount of shares of the Company’s common stock.
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 Vaporfection International, Inc. in exchange for warrants to purchase 260,864 shares of the Company’s common stock. In addition, the Company agreed to provide up to $1,600,000 in working capital to Vaporfection International, Inc. at the Company’s sole discretion and to pay $175,000 to the inventor of certain patents including a warrant to purchase 5,000 shares of the Company’s common stock.
AMENDED AND RESTATED BYLAWS
OF
MEDBOX, INC.
A Nevada Corporation
ARTICLE I
OFFICES
Section 1.
PRINCIPAL OFFICES
. The principal office shall be 8439 West Sunset Blvd., Suite 101, West Hollywood, CA 90069.
Section 2.
OTHER OFFICES
. The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1.
PLACE OF MEETINGS
. Meetings of stockholders shall be held at any place within or without the State of Nevada designated by the board of directors. In the absence of any such designation, stockholders’ meetings shall be held at the principal executive office of the corporation.
Section 2.
ANNUAL MEETINGS
. The annual meetings of stockholders shall be held at a date and time designated by the board of directors. (At such meetings, directors shall be elected and any other proper business may be transacted by a plurality vote of stockholders.)
Section 3.
SPECIAL MEETINGS
. A special meeting of the stockholders, for any purpose or purposes whatsoever, unless prescribed by statute or by the articles of incorporation, may be called at any time by the president and shall be called by the president or secretary at the request in writing of a majority of the board of directors, or at the request in writing of stockholders holding shares in the aggregate entitled to cast not less than a majority of the votes at any such meeting.
The request shall be in writing, specifying the time of such meeting, the place where it is to be held and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving such request forthwith shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Sections 4 and 5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 3 shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the board of directors may be held.
Section 4.
NOTICE OF STOCKHOLDERS’ MEETINGS
. All notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 5 of this Article II not less than ten (10) nor more than sixty (60) days before the date of the meeting being noticed. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting the general nature of the business to be transacted, or (ii) in the case of the annual meeting those matters which the board of directors, at the time of giving the notice, intends to present for action by the stockholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees which, at the time of the notice, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) contracts or transactions in which a director has a direct or indirect financial interest, (ii) an amendment to the articles of incorporation, (iii) a reorganization of the corporation, (iv) dissolution of the corporation, or (v) a distribution to preferred stockholders, the notice shall also state the general nature of such proposal.
Section 5.
MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
. Notice of any meeting of stockholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the stockholder at the address of such stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. If no such address appears on the corporation’s books or is given, notice shall be deemed to have been given if sent by mail or telegram to the corporation’s principal executive office, or if published at least once in a newspaper of general circulation in the county where this office is located. Personal delivery of any such notice to any officer of a corporation or association or to any member of a partnership shall constitute delivery of such notice to such corporation, association or partnership. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. In the event of the transfer of stock after delivery or mailing of the notice of and prior to the holding of the meeting, it shall not be necessary to deliver or mail notice of the meeting to the transferee.
If any notice addressed to a stockholder at the address of such stockholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the stockholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the stockholder upon written demand of the stockholder at the principal executive office of the corporation for a period of one year from the date of the giving of such notice.
An affidavit of the mailing or other means of giving any notice of any stockholders’ meeting shall be executed by the secretary, assistant secretary or any transfer agent of the corporation giving such notice, and shall be filed and maintained in the minute book of the corporation.
Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.
Section 6.
QUORUM
. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of stockholders shall constitute a quorum for the transaction of business, except as otherwise provided by statute or the articles of incorporation. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.
Section 7.
ADJOURNED MEETING AND NOTICE THEREOF
. Any stockholders’ meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at such meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at such meeting.
When any meeting of stockholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at a meeting at which the adjournment is taken. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting.
Section 8.
VOTING
. Unless a record date set for voting purposes be fixed as provided in Section 1 of Article VIII of these bylaws, only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the business day next preceding the day on which notice is given (or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held) shall be entitled to vote at such meeting. Any stockholder entitled to vote on any matter other than elections of directors or officers, may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the stockholder fails to specify the number of shares such stockholder is voting affirmatively, it will be conclusively presumed that the stockholder’s approving vote is with respect to all shares such stockholder is entitled to vote. Such vote may be by voice vote or by ballot; provided, however, that all elections for directors must be by ballot upon demand by a stockholder at any election and before the voting begins.
When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the articles of incorporation a different vote is required in which case such express provision shall govern and control the decision of such question. Every stockholder of record of the corporation shall be entitled at each meeting of stockholders to one vote for each share of stock standing in his name on the books of the corporation.
Section 9.
WAIVER OF NOTICE OR CONSENT BY ABSENT
STOCKHOLDERS
. The transactions at any meeting of stockholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any regular or special meeting of stockholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of such proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.
Attendance of a person at a meeting shall also constitute a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice if such objection is expressly made at the meeting.
Section 10.
STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
. Any action which may be taken at any annual or special meeting of stockholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. All such consents shall be filed with the secretary of the corporation and shall be maintained in the corporate records. Any stockholder giving a written consent, or the stockholder’s proxy holders, or a transferee of the shares of a personal representative of the stockholder of their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the secretary.
Section 11.
PROXIES
. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the stockholder’s name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder’s attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless revoked by the person executing it, prior to the vote pursuant thereto, by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by the person executing the proxy; provided, however, that no such proxy shall be valid after the expiration of six (6) months from the date of such proxy, unless coupled with an interest, or unless the person executing it specifies therein the length of time for which it is to continue in force, which in no case shall exceed seven (7) years from the date of its execution. Subject to the above and Nevada Law, any proxy duly executed is not revoked and continues in full force and effect until an instrument revoking it or a duly executed proxy bearing a later date is filed with the secretary of the corporation.
Section 12.
INSPECTORS OF ELECTION
. Before any meeting of stockholders, the board of directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are appointed, the chairman of the meeting may, and on the request of any stockholder or his proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more stockholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors before the meeting, or by the chairman at the meeting.
The duties of these inspectors shall be as follows:
(a)
Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies;
(b)
Receive votes, ballots, or consents;
(c)
Hear and determine all challenges and questions in any way arising in connection with the right to vote;
(d)
Count and tabulate all votes or consents;
(e)
Determine the election result; and
(f)
Do any other acts that may be proper to conduct the election or vote with fairness to all stockholders.
ARTICLE III
DIRECTORS
Section 1.
POWERS
. Subject to the provisions of Nevada Law and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors.
Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the directors shall have the power and authority to:
(a)
Select and remove all officers, agents, and employees of the corporation, prescribe such powers and duties for them as may not be inconsistent with law, with the articles of incorporation or these bylaws, fix their compensation, and require from them security for faithful service.
(b)
Change the principal executive office or the principal business office from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or foreign country and conduct business within or without the State; designate any place within or without the State for the holding of any stockholders’ meeting, or meetings, including annual meetings; adopt, make and use a corporate seal, and prescribe the forms of certificates of stock, and alter the form of such seal and of such certificates from time to time as in their judgment they may deem best, provided that such forms shall at all times comply with the provisions of law.
(c)
Authorize the issuance of shares of stock of the corporation from time to time, upon such terms as may be lawful, in consideration of money paid, labor done or services actually rendered, debts or securities cancelled, tangible or intangible property actually received.
(d)
Borrow money and incur indebtedness for the purpose of the corporation, and cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other evidences of debt and securities therefor.
Section 2.
NUMBER OF DIRECTORS
. The number of directors which shall constitute the whole board shall not be less than one (1) nor more than seven (7). The exact number of authorized directors shall be set by resolution of the board of directors, within the limits specified above. The maximum or minimum number of directors cannot be changed, nor can a fixed number be substituted for the maximum and minimum numbers, except by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw.
Section 3.
QUALIFICATION, ELECTION AND TERM OF OFFICE OF DIRECTORS
. Directors shall be elected at each annual meeting of the stockholders to hold office until the next annual meeting, but if any such annual meeting is not held or the directors are not elected at any annual meeting, the directors may be elected at any special meeting of stockholders held for that purpose, or at the next annual meeting of stockholders held thereafter. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified or until his earlier resignation or removal or his office has been declared vacant in the manner provided in these bylaws. Directors need not be stockholders.
Section 4.
RESIGNATION AND REMOVAL OF DIRECTORS
. Any director may resign effective upon giving written notice to the chairman of the board, the president, the secretary or the board of directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation, in which case such resignation shall be effective at the time specified. Unless such resignation specifies otherwise, its acceptance by the corporation shall not be necessary to make it effective. The board of directors may declare vacant the office of a director who has been declared of unsound mind by an order of a court or convicted of a felony. Any or all of the directors may be removed without cause of such removal is approved by the affirmative vote of a majority of the outstanding shares entitled to vote. No reduction of the authorized number of directors shall have the effect of removing any director before his term of office expires.
Section 5.
VACANCIES
. Vacancies in the board of directors, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director. Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified.
A vacancy in the board of directors exists as to any authorized position of directors which is not then filled by a duly elected director, whether caused by death, resignation, removal, increase in the authorized number of directors or otherwise.
The stockholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective.
If after the filling of any vacancy by the directors, the directors then in office who have been elected by the stockholders shall constitute less than a majority of the directors then in office, any holder or holders of an aggregate of five percent or more of the total number of shares at the time outstanding having the right to vote for such directors may call a special meeting of the stockholders to elect the entire board. The term of office of any director not elected by the stockholders shall terminate upon the election of a successor.
Section 6.
PLACE OF MEETINGS
. Regular meetings of the board of directors shall be held at any place within or without the State of Nevada that has been designated from time to time by resolution of the board. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board shall be held at any place within or without the State of Nevada that has been designated in the notice of the meeting or, if not stated in the notice or there is not notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in such meeting can hear one another, and all such directors shall be deemed to be present in person at such meeting.
Section 7.
ANNUAL MEETINGS
. Immediately following each annual meeting of stockholders, the board of directors shall hold a regular meeting for the purpose of transaction of other business. Notice of this meeting shall not be required.
Section 8.
OTHER REGULAR MEETINGS
. Other regular meetings of the board of directors shall be held without call at such time as shall from time to time be fixed by the board of directors. Such regular meetings may be held without notice, provided the notice of any change in the time of any such meetings shall be given to all of the directors. Notice of a change in the determination of the time shall be given to each director in the same manner as notice for special meetings of the board of directors.
Section 9.
SPECIAL MEETINGS
. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or the president or any vice president or the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at his or her address as it is shown upon the records of the corporation. In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours prior to the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated to either the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation.
Section 10.
QUORUM
. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting.
Section 11.
WAIVER OF NOTICE
. The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum be present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. The waiver of notice of consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director.
Section 12.
ADJOURNMENT
. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place.
Section 13.
NOTICE OF ADJOURNMENT
. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of such time and place shall be given prior to the time of the adjourned meeting, in the manner specified in Section 8 of this Article III, to the directors who were not present at the time of the adjournment.
Section 14.
ACTION WITHOUT MEETING
. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to such action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board.
Section 15.
FEES AND COMPENSATION OF DIRECTORS
. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for such services. Members of special or standing committees may be allowed like compensation for attending committee meetings.
Section 16.
DETERMINATION OF MAJORITY OF AUTHORIZED NUMBER OF DIRECTORS
. One (1) director shall constitute a majority of the authorized number of directors when the whole board of directors consists of one (1) director pursuant to Article III, Section 2. Two (2) directors shall constitute a majority of the authorized number of directors when the whole board of directors consists of two (2) directors pursuant to Article III, Section 2.
ARTICLE IV
COMMITTEES
Section 1.
COMMITTEES OF DIRECTORS
. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of one or more directors, to serve at the pleasure of the board. The board may designate one or more directors as alternate members of any committees, who may replace any absent member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with regard to:
(a)
the approval of any action which, under Nevada Law, also requires stockholders’ approval or approval of the outstanding shares;
(b)
the filing of vacancies on the board of directors or in any committees;
(c)
the fixing of compensation of the directors for serving on the board or on any committee;
(d)
the amendment or repeal of bylaws or the adoption of new bylaws;
(e)
the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable;
(f)
a distribution to the stockholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or
(g)
the appointment of any other committees of the board of directors or the members thereof.
Section 2.
MEETINGS AND ACTION BY COMMITTEES
. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Article III, Sections 6 (place of meetings), 8 (regular meetings), 9 (special meetings and notice), 10 (quorum), 11 (waiver of notice), 12 (adjournment), 13 (notice of adjournment) and 14 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members, except that the time or regular meetings of committees may be determined by resolutions of the board of directors and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. The committees shall keep regular minutes of their proceedings and report the same to the board when required.
ARTICLE V
OFFICERS
Section 1.
OFFICERS
. The officers of the corporation shall be a president, a secretary and a treasurer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article V. Any two or more offices may be held by the same person.
Section 2.
ELECTION OF OFFICERS
. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article V, shall be chosen by the board of directors, and each shall serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment. The board of directors at its first meeting after each annual meeting of stockholders shall choose a president, a vice president, a secretary and a treasurer, none of whom need be a member of the board. The salaries of all officers and agents of the corporation shall be fixed by the board of directors.
Section 3.
SUBORDINATE OFFICERS, ETC
. The board of directors may appoint, and may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the board of directors may from time to time determine.
Section 4.
REMOVAL AND RESIGNATION OF OFFICERS
. The officers of the corporation shall hold office until their successors are chosen and qualify. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors, at any regular or special meeting thereof, or, except in case of an officer chosen by the board of directors, by any officer upon whom such power or removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any such resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.
Section 5.
VACANCIES IN OFFICES
. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to such office.
Section 6.
CHAIRMAN OF THE BOARD
. The chairman of the board, if such an officer be elected, shall, if present, preside at all meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors or prescribed by the bylaws. If there is no president, the chairman of the board shall in addition be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article V.
Section 7.
PRESIDENT
. Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence of the chairman of the board, of if there be none, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or the bylaws. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation.
Section 8.
VICE PRESIDENTS
. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or the bylaws, the president or the chairman of the board.
Section 9.
SECRETARY
. The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and shall record, keep or cause to be kept, at the principal executive office or such other place as the board of directors may order, a book of minutes of all meetings of directors, committees of directors and stockholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors’ and committee meetings, the number of shares present or represented at stockholders’ meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation’s transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of stockholders and of the board of directors required by the bylaws or by law to be given, and he shall keep the seal of the corporation in safe custody, as may be prescribed by the board of directors or by the bylaws.
Section 10.
TREASURER
. The treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director.
The treasurer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as treasurer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or the bylaws.
If required by the board of directors, the treasurer shall give the corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS
Section 1.
ACTIONS OTHER THAN BY THE CORPORATION
. The 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 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, has 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 did not act 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 that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful.
Section 2.
ACTIONS BY THE CORPORATION
. The 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 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 therefrom, 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.
Section 3.
SUCCESSFUL DEFENSE
. To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2, or in defense of any claim, issue or matter therein, he must be indemnified by the corporation against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with the defense.
Section 4.
REQUIRED APPROVAL
. Any indemnification under Sections 1 and 2, unless ordered by a court or advanced pursuant to Section 5, must be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made:
(a)
By the stockholders;
(b)
By the board of directors by majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding;
(c)
If a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding so orders, by independent legal counsel in a written opinion; or
(d)
If a quorum consisting of directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion.
Section 5.
ADVANCE OF EXPENSES
. The articles of incorporation, the bylaws or an agreement made by the corporation may provide that the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. The provisions of this section do not affect any rights to advancement of expenses to which corporate personnel other than directors or officers may be entitled under any contract or otherwise by law.
Section 6.
OTHER RIGHTS
. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this Article VI:
(a)
Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the articles of incorporation or any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court pursuant to Section 2 or for the advancement of expenses made pursuant to Section 5, may not be made to or on behalf of any director or officer if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action.
(b)
Continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person.
Section 7.
INSURANCE
. The corporation may purchase and maintain insurance on behalf of any person who 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 for any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI.
Section 8.
RELIANCE ON PROVISIONS
. Each person who shall act as an authorized representative of the corporation shall be deemed to be doing so in reliance upon the rights of indemnification provided by this Article.
Section 9.
SEVERABILITY
. If any of the provisions of this Article are held to be invalid or unenforceable, this Article shall be construed as if it did not contain such invalid or unenforceable provision and the remaining provisions of this Article shall remain in full force and effect.
Section 10.
RETROACTIVE EFFECT
. To the extent permitted by applicable law, the rights and powers granted pursuant to this Article VI shall apply to acts and actions occurring or in progress prior to its adoption by the board of directors.
ARTICLE VII
RECORDS AND BOOKS
Section 1.
MAINTENANCE OF SHARE REGISTER
. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the board of directors, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of shares held by each stockholder.
Section 2.
MAINTENANCE OF BYLAWS
. The corporation shall keep at its principal executive office, or if its principal executive office is not in this State at its principal business office in this State, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the stockholders at all reasonable times during office hours. If the principal executive office of the corporation is outside this state and the corporation has no principal business office in this state, the secretary shall, upon the written request of any stockholder, furnish to such stockholder a copy of the bylaws as amended to date.
Section 3.
MAINTENANCE OF OTHER CORPORATE RECORDS
. The accounting books and records and minutes of proceedings of the stockholders and the board of directors and any committee or committees of the board of directors shall be kept at such place or places designated by the board of directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form.
Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of this corporation and any subsidiary of this corporation. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. The foregoing rights of inspection shall extend to the records of each subsidiary of the corporation.
Section 4.
ANNUAL REPORT TO STOCKHOLDERS
. Nothing herein shall be interpreted as prohibiting the board of directors from issuing annual or other periodic reports to the stockholders of the corporation as they deem appropriate.
Section 5.
FINANCIAL STATEMENTS
. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months.
Section 6.
ANNUAL LIST OF DIRECTORS, OFFICERS AND RESIDENT AGENTS
. The corporation shall file with the Secretary of State of the State of Nevada, on the prescribed form, a list of its officers and directors and a designation of its resident agent in Nevada.
ARTICLE VIII
GENERAL CORPORATE MATTERS
Section 1.
RECORD DATE
. For purposes of determining the stockholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days prior to the date of any such meeting nor more than sixty (60) days prior to any other action, and in such case only stockholders of record on the date so fixed are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date fixed as aforesaid, except as otherwise provided in Nevada Law.
If the board of directors does not so fix a record date:
(a)
The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held.
(b)
The record date for determining stockholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the board has been taken, shall be the day on which the first written consent is given.
(c)
The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later.
Section 2.
CLOSING OF TRANSFER BOOKS PROHIBITED
. In connection with the determination of stockholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any right in respect of any other lawful action, the board of directors shall not close the stock transfer books of the corporation for any reason but shall instead fix a record date for such determination in the manner provided in Section 1 of Article VIII of these bylaws.
Section 3.
REGISTERED STOCKHOLDERS
. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Nevada.
Section 4.
CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS
. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors.
Section 5.
CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED
. The board of directors, except as in the bylaws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within the agency power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount.
Section 6.
STOCK CERTIFICATES
. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each stockholder when any such shares are fully paid, and the board of directors may authorize the issuance of certificates or shares as partly paid provided that such certificates shall state the amount of the consideration to be paid therefor and the amount paid thereon. All certificates shall be signed in the name of the corporation by the president or vice president and by the treasurer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the stockholder. When the corporation is authorized to issue shares of more than one class or more than one series of any class, there shall be set forth upon the face or back of the certificate, or the certificate shall have a statement that the corporation will furnish to any stockholders upon request and without charge, a full or summary statement of the designations, preferences and relatives, participating, optional or other special rights of the various classes of stock or series thereof and the qualifications, limitations or restrictions of such rights, and, if the corporation shall be authorized to issue only special stock, such certificate must set forth in full or summarize the rights of the holders of such stock. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue.
No new certificate for shares shall be issued in place of any certificate theretofore issued unless the latter is surrendered and cancelled at the same time; provided, however, that a new certificate may be issued without the surrender and cancellation of the old certificate if the certificate thereto fore issued is alleged to have been lost, stolen or destroyed. In case of any such allegedly lost, stolen or destroyed certificate, the corporation may require the owner thereof or the legal representative of such owner to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.
Section 7.
DIVIDENDS
. Dividends upon the capital stock of the corporation, subject to the provisions of the articles of incorporation, if any, may be declared by the board of directors at any regular or special meeting pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the articles of incorporation.
Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserves in the manner in which it was created.
Section 8.
FISCAL YEAR
. The fiscal year of the corporation shall be fixed by resolution of the board of directors.
Section 9.
SEAL
. The corporate seal shall have inscribed thereon the name of the corporation, the year of its incorporation and the words “Corporate Seal, Nevada.”
Section 10.
REPRESENTATION OF SHARES OF OTHER CORPORATIONS
. The chairman of the board, the president, or any vice president, or any other person authorized by resolution of the board of directors by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority herein granted to said officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any such officer in person or by any person authorized to do so by proxy duly executed by said officer.
Section 11.
CONSTRUCTION AND DEFINITIONS
. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in Nevada Law shall govern the construction of the bylaws. Without limiting the generality of the foregoing, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
Section 1.
AMENDMENT BY STOCKHOLDERS
. New bylaws may be adopted or these bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote, or by the written assent of stockholders entitled to vote such shares, except as otherwise provided by law or by the articles of incorporation.
Section 2.
AMENDMENT BY DIRECTORS
. Subject to the rights of the stockholders as provided in Section 1 of this Article, bylaws may be adopted, amended or repealed by the board of directors.
C E R T I F I C A T E O F S E C R E T A R Y
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting secretary of Medbox, Inc., a Nevada corporation; and
2. That the foregoing Bylaws constitute the Bylaws of said corporation as duly adopted by the board of directors of said corporation by a Unanimous Written Consent dated as of July 11, 2013.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of said corporation this 11th day of July 2013.
/s/ Dr. Bruce Bedrick
Dr. Bruce Bedrick
Chief Executive Officer
AMENDED AND RESTATED
TECHNOLOGY LICENSE AGREEMENT
This Amended and Restated Technology License Agreement (the "
Agreement
") is entered into as of February 26, 2013
(the "Effective Date"), by and between Bio-Tech Medical Software, Inc., a Florida corporation with an address of 2805 E. Oakland Park Blvd., Suite 250, Fort Lauderdale, Florida, 33306 (“
Licensor
”) and Medbox, Inc., a Nevada corporation with an address at 8439 W. Sunset Blvd., West Hollywood, California, 90069, (“
Licensee
”). Licensor and Licensee are sometimes referred to herein collectively, as the “
Parties
” and individually, as a “
Party.
”
RECITALS
WHEREAS,
Licensee has developed and holds all Intellectual Property Rights in and to the Software; and
WHEREAS,
effective as of February 8, 2013, the Parties entered into a Stock Purchase Agreement (the “
Original SPA
”) and pursuant thereto, a Technology License Agreement with respect to the Software (the “
Original
License Agreement
”); and
WHEREAS,
effective as of February 26, 2013, the Parties have entered into an Amended and Restated Stock Purchase Agreement, which amended and restated the Original SPA in its entirety and pursuant to which the Parties are entering into this Agreement, which amends and restates the Original License Agreement in its entirety; and
WHEREAS,
pursuant to this Agreement, Licensor is granting to Licensee a non-exclusive royalty-free license to incorporate the Software in Licensee’s Production Hardware Environment in the Territory, subject to the terms and conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE,
in consideration of the mutual promises and covenants set forth in this Agreement, and intending to be legally bound, the Parties agree as follows:
In addition to capitalized terms defined elsewhere herein, the following capitalized terms will have the meanings set forth next to each:
1.1
“Affiliate”
means a person or entity which controls, is controlled by or is under common control with a Party or any other person or entity.
1.2
“Applicable Laws”
means all applicable laws, rules, and regulations, including any rules, regulations, guidelines, or other requirements of any regulatory authorities or other governmental authorities that may be in effect from time to time in any relevant legal jurisdiction in the Territory.
1.3
“Documentation”
means all user documentation provided by Licensor to Licensee or made generally available by Licensor, as well as any specifications for the Software provided by or agreed to by Licensee.
1.4
“Intellectual Property Rights”
means (a) all patents, patent rights, patent applications, and patent disclosures, (b) all inventions (whether or not patented, patentable or reduced to practice), and all modifications, derivative works and improvements thereto, (c) all trademarks, service marks, trade dress, logos, and trade names, (d) all copyrights, (e) all trade secrets and other protectable confidential information, and (f) all other proprietary rights relating to the Software which are owned by Licensor, including without limitation those set forth on
Exhibit A
hereto.
1.5
“Production Hardware Environment”
means Licensee’s biometric cannabis (marijuana) dispensing machines.
1.6
"Software"
means Licensor’s biometric cannabis (marijuana) inventory tracking software in the version in place as of the Effective Date and all updates and upgrades that are made generally available.
1.7
“Territory”
means the United States of America, its territories and possessions.
2.1
License Grant.
Subject to Licensee’s compliance with the terms and conditions set forth in this Agreement, Licensor grants to Licensee and its Affiliates a royalty-free, fully paid, non-exclusive, nontransferable, right and license to the Software in the Territory, solely for use in conjunction with and incorporated into Licensee’s Production Hardware Environment.
2.2
Sublicenses.
Licensee will not have the right to grant sublicenses under this Agreement in the Territory to third parties, who manufacture, license, market, sell, distribute, own and operate Licensee’s Production Hardware Environment.
2.3
Disclaimers.
THE SOFTWARE SHALL OPERATE AND FUNCTION IN ALL MATERIAL RESPECTS IN ACCORDANCE WITH THE DOCUMENTATION, WHICH DOCUMENTATION SHALL BE ACCURATE OR COMPLETE IN ALL MATERIAL RESPECTS. LICENSOR DOES NOT WARRANT THAT THE VALIDITY OF ANY OF THE INTELLECTUAL PROPERTY RIGHTS OR THAT PRACTICING THE INVENTIONS CLAIMED UNDER THE INTELLECTUAL PROPERTY RIGHTS WILL BE FREE OF INFRINGEMENT. EXCEPT AS EXPRESSLY SET FORTH IN THIS
SECTION 2.3
, LICENSEE ON BEHALF OF ITSELF AND ITS SUB-LICENSEES AGREES THAT THE SOFTWARE AND THE INTELLECTUAL PROPERTY RIGHTS ARE LICENSED “
AS IS
,” AND LICENSOR NEITHER MAKES NOR HAS MADE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE PERFORMANCE OF THE SOFTWARE INCLUDING ITS SAFETY, EFFECTIVENESS OR COMMERCIAL VIABILITY. EXCEPT AS SET FORTH IN THIS
SECTION 2.3
LICENSOR DISCLAIMS ALL WARRANTIES WITH REGARD TO THE SOFTWARE, INCLUDING ALL WARRANTIES, EXPRESS OR IMPLIED, OF WITH RESPECT TO FUNCTIONAL CONDITION PERFORMANCE OPERABILITY OR USE OF THE SOFTWARE ON ITS MERCHANTABILITY AND FITNESS FOR ANY PARTICULAR PURPOSE. LICENSEE ASSUMES ALL RESPONSIBILITY AND LIABILITY FOR LOSS OR DAMAGE CAUSE BY THE SOFTWARE, USED OR SOLD BY LICENSEE OR ITS SUB-LICENSEES.
3.1
Term.
This Agreement is effective as of the Effective Date, and will remain in full force and effect until expiration of the patents and know-how included in the Intellectual Property Rights, unless otherwise earlier terminated as provided in this
Section 3
.
3.2
Termination Rights and Events.
(a)
Mutual Agreement
. This Agreement will terminate upon the mutual written agreement of the Parties.
(b)
Failure to Meet Payment Obligations Under the SPA Agreement.
Licensor will have the right to terminate this Agreement upon fifteen (15) days’ written notice to Licensee if Licensee fails to make any payment of the Cash Purchase Price (as defined in the SPA) when due, unless such breach is cured with such fifteen (15) day period.
(c)
Other Breach by Licensee.
Licensor will have the right to terminate this Agreement upon fifteen (15) days’ written notice to Licensee, if Licensee is in breach of any other provision of this Agreement, unless such breach is cured within such fifteen (15) day period.
(d)
Contesting the Validity of the Licensed Patents.
In the event Licensee commences any action court or administrative action that challenges the validity of any or all of the patents included in the Intellectual Property Rights during the Term, this Agreement shall automatically terminate effective as of the date Licensee commences any action.
(e)
Financial Difficulties.
Either Party will have the right to terminate this Agreement immediately upon written notice to the other Party, if that other Party becomes involved in financial difficulties as evidenced:
(i) by its commencement of a voluntary case under any applicable bankruptcy code or statute, or by its authorizing, by appropriate proceedings, the commencement of such a voluntary case;
(ii) by its failing to receive dismissal of any involuntary case under any applicable bankruptcy code or statute within ninety (90) days after initiation of such action or petition;
(iii) by its seeking relief as a debtor under any applicable law of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors, or by consenting to or acquiescing in such relief;
(iv) by the entry of an order by a court of competent jurisdiction finding it to be bankrupt or insolvent, or ordering or approving its liquidation, reorganization, or any modification or alteration of the rights of its creditors or assuming custody of, or appointing a receiver or other custodian for, all or a substantial part of its property or assets; or
(v) by its making as assignment for the benefit of, or entering into a composition with, its creditors, or appointing or consenting to the appointment of a receiver or other custodian for all or a substantial part of its property.
The failure by a Party to exercise its right to terminate this Agreement pursuant to this
Section 3.2
in the event of any occurrence giving rise thereto will not constitute waiver of the rights in the event of any subsequent occurrence.
3.3
Effect of Termination.
(a) The provisions of
Sections 3.3, 4, 5, 6, 7
and
8
of this Agreement will survive any termination of this Agreement, except as otherwise provided herein.
(b) Upon termination of this Agreement, all rights, privileges and licenses granted by Licensor to Licensee will immediately terminate and revert to Licensor and Licensee will thereafter not make any use whatsoever of the Software.
4.
No Reverse Engineering; No Derivative Works; No Illegal Activities; Compliance with Applicable Laws.
Licensee agrees not to directly or indirectly modify, reverse engineer, adapt, disassemble or decompile the Software, or any portion thereof, or create derivative works based on the Software or any part thereof. Licensee shall not modify any intellectual property notices contained in the Software. License agrees to use the Software only to engage in legal activities and will use it only in compliance with Applicable Laws.
5.
Ownership
.
Licensee acknowledges that all copies of the Software in any form and the Intellectual Property Rights embodied therein are the sole property of Licensor. Licensee shall have no right, title or interest to any such Software, modifications or derivatives of the Software or copies thereof, except as provided in this Agreement. Licensor acknowledges that all use of the Software shall inure to the benefit of Licensor.
|
6.
|
Infringement of Intellectual Property Rights.
|
6.1
Notification.
Each Party will notify the other promptly in writing when any infringement of the Intellectual Property Rights by a third party is uncovered or suspected.
6.2
Licensor’s Enforcement Rights
. Licensor shall have the sole right to enforce the Intellectual Property Rights. Licensee will, at Licensor’s expense, reasonably cooperate with Licensor with respect to such enforcement.
|
7.
|
Confidential Information.
|
7.1
Confidential Information Defined.
The Parties recognize that each may have disclosed to and received from the other, and may disclose to and receive from each other prior to the Effective Date and from time to time during the Term, certain information, regardless of form, concerning the operation, business, financial affairs, products, customers, technical and business information, or other aspects of each other and their respective affiliates that may not be accessible or generally known to the public (“
Confidential Information
”).
7.2
Nondisclosure
. For the protection of Confidential Information, the Parties agree that Confidential Information acquired by any Party from the other Party will not be disclosed and will only be used as reasonably necessary for each Party to perform its obligations, or enjoy its rights, that are provided under this Agreement; provided, however, that the Confidential Information will not be published or disclosed by such Party to any other person or entity (except to legal counsel, in confidence), in any manner whatsoever, without the prior written approval of the other Party. Each Party shall, and shall cause its employees, agents, and every other person and entity it employs in connection with this Agreement, to protect and safeguard the Confidential Information by using the same degree of care, but no less than a reasonable degree of care, to prevent the unauthorized use, dissemination or publication of the Confidential Information as such Party uses to protect its own confidential or proprietary information of a like nature.
7.3
Disclosure in Judicial or Governmental Process.
In the event that either Party receives any demand from any third party for the disclosure of any Confidential Information, or is directed to disclose any portion of any Confidential Information received from the other Party in conjunction with a judicial or governmental proceeding or arbitration, then the Party requested or directed to make such disclosure shall immediately notify the other Party. Each Party agrees to provide the other Party with reasonable cooperation and assistance in securing a suitable protective order and in taking any other steps to preserve the confidentiality of such Confidential Information, but will not be in breach for complying with any legal obligation to disclose such Confidential Information.
7.4
Exceptions.
The Parties agree that “
Confidential Information
” received by a Party shall not include:
(a) information that was rightfully in the possession of the receiving Party prior to such disclosure of the otherwise Confidential Information of the other Party;
(b) any information that becomes rightfully known to the receiving Party, without confidential or proprietary restrictions, from a source independent of and not in privy with the other Party, and that is disclosed to the receiving Party without breach of any confidentiality obligations, such information no longer being Confidential Information at such time of becoming rightfully known to the receiving Party; or
(c) any information that, as evidenced by its ordinary business records, is developed independently by the receiving Party without use of or reference to any of the Confidential Information received by such Party and without violation of any confidentiality restriction, such information no longer being Confidential Information at such time of independent development by the receiving Party.
7.5
Injunctive Relief
. Each Party acknowledges that any unauthorized disclosure or use of the Confidential Information would cause the other Party imminent irreparable injury and that such Party shall be entitled to, in addition to any other remedies available at law or in equity, seek injunctive relief in the event the event of a breach or a threatened breach by the other Party or its obligations under this
Section 7
, without the necessity of posting a bond or other security.
8.1
Indemnification
. Licensee and its Sublicensees will defend, indemnify and hold harmless Licensor, its officers, directors, employees, agents, heirs, successors, assigns and representatives, (each an “
Indemnitee
”) from and against any and all losses, damages, judgments, settlements, costs and expenses (including reasonable attorneys’ fees) arising out of or incidental to any lawsuit, claim, demand or other action brought by or asserted by a third party resulting from or relating to any of the following (each an “
Indemnification Claim
”): (a) the negligence or willful misconduct of Licensee and/or its Sublicensees; (b) any material breach by Licensee of any obligation, representation, warranty, or covenant set forth in this Agreement; or (c) the failure to comply with Applicable Laws by Licensee or any of its Sublicensees; and/or (d) any allegation that personal injury or death, or any damage to any property, was caused or allegedly caused by a defect in the Software; and/or (e) any product liability claims related to the Software. Each Indemnitee is a third party beneficiary hereunder with respect to
Sections 8.1
and
8.2
.
8.2
Process for Indemnification
. If an Indemnitee asserts an Indemnification Claim under this Agreement, then Licensor (and/or another Indemnitee) will notify Licensee in writing promptly upon becoming aware of any claim that it believes to be an Indemnification Claim (it being understood and agreed, however, that the failure by an Indemnitee to give such notice will not relieve Licensee of its indemnification obligation under this Agreement except and only to the extent that Licensee is actually prejudiced as a result of such failure to give notice). Licensee will have the right to assume and control the defense of the Indemnification Claim at its own expense with counsel selected by Licensee and reasonably acceptable to Licensor; provided, however, that an Indemnitee will have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitee, if representation of such Indemnitee by the counsel retained by Licensee would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceedings. If Licensee does not assume the defense of the Indemnification Claim as described in this
Section 8.2
, the Indemnitee may defend the Indemnification Claim but will have no obligation to do so. The Indemnitee will not settle or compromise the Indemnification Claim without the prior written consent of Licensee, and Licensee will not settle or compromise the Indemnification Claim in any manner which would have an adverse effect on the Indemnitee’s interests, without the prior written consent of the Indemnitee, which consent, in each case, will not be unreasonably withheld, delayed, or conditioned. The Indemnitee will reasonably cooperate with Licensee at Licensee’s expense and will make available to Licensee all pertinent information under the control of the Indemnitee, which information will be considered Confidential Information hereunder.
9.
Updates
.
Licensor has the right, but no obligation, to periodically update the Software, at its complete discretion, without the consent or obligation to Licensee or any licensee or user. Licensor shall provide Licensee with any updates to the Software in accordance with the terms of this Agreement.
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10.
|
Custom Engineering and Additional Services
.
|
10.1
Custom Engineering
. Licensee may from time to time during the Term, request from Licensor changes, enhancements, improvements, additional features and or functionality be added to the Software. Licensor may, at its sole discretion agree to make such changes to the Software on such terms as may then be negotiated and agreed to by the Parties in an amendment to this Agreement or in a separate agreement. All such changes, enhancements, improvements or additional features and functionality to the Software created by Licensor shall remain the sole property of Licensor.
10.2
Additional Services
.
Licensee may, from time to time during the Term, request from Licensor, additional services to aid in the setup, installation and support of the Software on Licensee’s Product Hardware Environment. Licensor may, at its sole discretion, provide such additional services on such terms as may be then negotiated and agreed to by the Parties in an amendment to this Agreement or in a separate Agreement.
11.1
Waiver
. No provision of the Agreement may be waived except in writing by both Parties hereto. No failure or delay by either Party hereto in exercising any right or remedy hereunder or under applicable law will operate as a waiver thereof, or a waiver of that or any other right or remedy on any subsequent occasion.
11.2
Severability
.
Should one or more provisions of this Agreement be or become invalid or unenforceable, then the Parties hereto will attempt to agree upon valid and enforceable provisions in substitution for the invalid or unenforceable provisions, which in their economic effect come so close to the invalid or unenforceable provisions that it can be reasonably assumed that the Parties would have accepted this Agreement with those new provisions. If the Parties are unable to agree on such valid and enforceable provisions, the invalidity or unenforceability of such one or more provisions of this Agreement will nevertheless not affect the validity or enforceability of the Agreement as a whole, unless the invalid or unenforceable provisions are of such essential importance to this Agreement that it may be reasonably presumed that the Parties would not have entered into this Agreement without the invalid or unenforceable provisions.
11.3
Assignment; Successors and Assigns
.
(a)
This Agreement is personal to Licensee, and Licensee may not assign or otherwise transfer this agreement, whether by written assignment, merger, reorganization, by operation of law or otherwise, without the prior written consent of Licensor, within Licensor’s sole discretion. Any purported assignment or transfer of this Agreement without Licensor’s approval will be void and not merely voidable. This Agreement will terminate at Licensor’s election upon a Change of Control of Licensee, unless Licensor consents to this Agreement continuing in full force and effect upon such Change of Control. For purposes of the foregoing, a “
Change of Control
” of Licensee means: (i) an event or series of related events by which any natural person or business entity becomes the beneficial owner, directly, or indirectly through one or more intermediaries, of securities of Licensee representing fifty percent (50%) or more of (1) the outstanding common stock of Licensee or (2) the combined voting power of Licensee’s then outstanding voting stock (in either case, the “
Voting Stock
”); (ii) Licensee is party to a merger, acquisition, share purchase, joint venture, consolidation, reorganization, amalgamation, or other transaction having similar effect (each a “
Business Change
”) which results in the Voting Stock of Licensee outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving or another entity) at least fifty percent (50%) of the combined voting power of the Voting Stock of Licensee or such surviving or other entity outstanding immediately after such Business Change; or (iii) the sale or disposition of all or substantially all of Licensee’s assets (or consummation of any transaction having similar effect) related to the Licensed Product.
(b)
Licensor may assign this Agreement in whole or in part, within Licensor’s sole discretion. Licensor will notify Licensee of any assignment.
(c)
This Agreement will inure to the benefit of, and be binding upon and enforceable against, the permitted successors or assignees of each Party.
11.4
Counterparts
. This Agreement may be signed in any number of counterparts (including by facsimile or .pdf transmission) with the same effect as if the signatures to each counterpart were upon a single instrument, and all such counterparts together will constitute the same Agreement.
11.5
No
Agency
. Nothing herein contained will be deemed to create an agency, joint venture, amalgamation, partnership or similar relationship between Licensor and Licensee. Neither Party will at any time enter into, incur, or hold itself out to third parties as having authority to enter into or incur, on behalf of the other Party, any commitment, expense, or liability whatsoever, and all contracts, expenses and liabilities in connection with or relating to the obligations of each Party under this Agreement will be made, undertaken, incurred or paid exclusively by that Party on its own behalf, and not as an agent or representative of the other Party.
11.6
Notices
. All communications between the Parties with respect to any of the provisions of this Agreement will be sent to the addresses found on the first page of this Agreement, or to such other address as designated by one Party to the other by notice pursuant hereto. All such notices shall be sent by certified mail, return receipt requested or by documented overnight courier and shall be deemed given upon receipt.
11.7
Governing Law
. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Florida (without regard to conflicts of law principles thereof or of any other State).
11.8
Venue; Jurisdiction; Attorney’s Fees
. In the event of any suit, action or otherwise under this Agreement or otherwise each Party hereby irrevocably agrees only to bring a proceeding in a Federal or state court of competent jurisdiction sitting in Broward County, in the State of Florida. Each Party to this Agreement hereby irrevocably waives, to the fullest extent permitted by law, any objections which they may now have or hereafter have to the laying of any such proceeding brought in an inconvenient form. The prevailing Party in any action brought to interpret or enforce this Agreement shall be entitled to receive attorneys’ fees and costs at both the trial and appellate level.
11.9
Headings
. The article, section and paragraph headings are for convenience of reference only and will not be deemed to affect in any way the language of the provisions to which they refer.
11.10
Entire Agreement
. This Agreement and the Exhibit hereto contain the entire understanding of the Parties relating to the matters referred to herein, supersedes the Original Licensing Agreement and may only be amended by a written document executed on behalf of the respective Parties.
11.11
Rules of Construction
. The use in this Agreement of the terms “
include
” or “
including
” means “
include, without limitation
” or “
including
, respectively.
11.12
Preparation of Agreement
. Counsel for the Parties have participated in the preparation and review of this Agreement, and have negotiated it on behalf of their respective clients. For purposes of construction, this Agreement shall be deemed to have been drafted by all Parties, and no ambiguity shall be resolved against any party by virtue of his, her or its participation in the drafting of the Agreement.
IN WITNESS WHEREOF
, the parties have each executed this Agreement as of the Effective Date.
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LICENSOR:
BIO-TECH MEDICAL SOFTWARE, INC.
By: _____________________________
Name:
Title:
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LICENSEE:
MEDBOX, INC.
By: ____________________________
Name:
Title:
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EXHIBIT A
Intellectual Property Rights
U.S. Patent Number 8086470
U.S. Patent Number 8335697
Know-How related to the above Patents.
MEMBERSHIP INTEREST PURCHASE AGREEMENT
(this “
Agreement
”), dated as of March 12, 2013, between Medbox, Inc., a Nevada corporation (the “
Purchaser
”), and Darryl B. Kaplan (“
Kaplan
”), Claudio Tartaglia (“
Tartaglia
”) and Eric Kovan (“Kovan” together with Kaplan and Tartaglia, each individually a “
Seller
” and collectively the “
Sellers
”).
WHEREAS, the Sellers own 94.8% percent (the “Selers’ Ownership Interest”) of all the issued and outstanding equity interests (the “
Equity Interests
”) in Medvend Holdings, LLC, a Michigan limited liability company (“Medvend Holdings”);
WHEREAS, Medvend Holdings own all of the issued and outstanding equity of Medvend, LLC, a Michigan limited liability company (“
Medvend
”), Medmax, LLC, a Michigan limited liability company (“
Medmax
”) and Medvend Servicing, LLC, a Michigan limited liability company (“
Medvend Servicing
” and collectively with Medvend and Medmax, the “
Medvend Entities
”);
WHEREAS, the Medvend Entities are engaged in the business of the distribution of automated medication dispensaries (more commonly referred to and hereinafter as the “
AMD
”), and the placement and servicing of the AMD in urgent cares, physician offices, hospitals, and pharmacies at various locations in the United States (the “
Business
”); and
WHEREAS, contingent upon the terms and conditions hereof. the Sellers desire to sell to the Purchaser, and the Purchaser desires to purchase out of the Sellers’ Ownership Interest sufficient membership equity interest so that, on an after transaction basis, Purchaser owns 50% of the Equity Interests (the “Transferred Equity Interests”) and Sellers own 44.8% (the “Retained Equity Interests”), with the remaining 5.2% ownership interests in the Company to remain owned by other minority holders.
NOW, THEREFORE, in consideration of the promises and the mutual agreements and covenants hereinafter set forth, and intending to be legally bound, the Sellers and the Purchaser hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01.
Certain Defined Terms.
For purposes of this Agreement, terms not otherwise defined in the body of this Agreement shall have the following meaning:
“
Action
” means any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority.
“
Affiliate
” means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person.
“
Assets
” means the assets and properties of Medvend Holdings or the Medvend Entities.
“
Business Day
” means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by Law to be closed in the state of Delaware.
“
Change in Control
” shall be deemed to have occurred if after the Closing Date (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Act), other than Purchaser, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Act), directly or indirectly, of securities of the Purchaser or Medvend Holdings representing 50% or more of the combined voting power of the Purchaser’s or Medvend Holding’s then outstanding securities; (ii) the Purchaser or Medvend Holdings is a party to a merger, consolidation, sale of its assets, plan of liquidation or other reorganization; (iii) Kaplan or Tartaglia are removed, replaced or demoted from their positions as the principal officers responsible for the day-to-day operations of Medvend Holdings (or its successor entity); or (iv) during any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors of the Purchaser cease for any reason to constitute at least a majority of the board of directors.
“
Code
” means the Internal Revenue Code of 1986, as amended through the date hereof.
“
control
” (including the terms “
controlled by
” and “
under common control with
”), with respect to the relationship between or among two or more Persons, means the possession, directly or indirectly or as trustee, personal representative or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee, personal representative or executor, by contract, credit arrangement or otherwise.
“
Conveyance Taxes
” means sales, use, value added, transfer, stamp, stock transfer, real property transfer or gains and similar Taxes.
“
Disclosure Schedule
” means the Disclosure Schedule attached hereto, dated as of the date hereof and as amended or supplemented by Sellers pursuant to the terms hereof, delivered by the Sellers to the Purchaser in connection with this Agreement. Notwithstanding anything to the contrary contained in the Disclosure Schedule or in this Agreement, the information and disclosures contained in any section of the Disclosure Schedule shall be deemed to be disclosed and incorporated by reference in any other section of the Disclosure Schedule as though fully set forth in such other section for which the applicability of such information and disclosure is reasonably apparent on the face of such information or disclosure.
“
Earnout Year
” means the twelve month period ending on the date that is five (5) years from the Closing Date.
“
Employment Agreements
” means the Employment Agreements between the Purchaser and each of Kaplan and Tartaglia, attached hereto as Schedules 1.01(a) and 1.01(b), respectively.
“
GAAP
” means United States generally accepted accounting principles and practices in effect from time to time applied consistently throughout the periods involved.
“
Governmental Authority
” means any federal, national, supranational, state, provincial, local or other government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body.
“
Governmental Order
” means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.
“
IRS
” means the Internal Revenue Service of the United States.
“
Law
” means any federal, national, supranational, state, provincial, local or similar statute, law, ordinance, regulation, rule, code, order, requirement or rule of law (including common law).
“
Material Adverse Effect
” means any circumstance, change in or effect on Medvend Holdings or the Medvend Entities that is materially adverse to the results of operations or the financial condition of such entities, taken as a whole;
provided
,
however
, that none of the following, either alone or in combination, shall be considered in determining whether there has been a breach of a representation, warranty, covenant or agreement that is qualified by the term “Material Adverse Effect”: (a) events, circumstances, changes or effects that generally affect the industries in which these entities operate (including legal and regulatory changes), (b) general economic or political conditions or events, circumstances, changes or effects affecting the securities markets generally, (c) changes arising from the consummation of the transactions contemplated by, or the announcement of the execution of, this Agreement, including (i) any actions of competitors, (ii) any actions taken by or losses of employees or (iii) any delays or cancellations of orders for products or services, (d) any reduction in the price of services or products offered by such entities in response to the reduction in price of comparable services or products offered by a competitor, (e) any circumstance, change or effect that results from any action taken pursuant to or in accordance with this Agreement or at request of the Purchaser and (f) changes caused by a material worsening of current conditions caused by acts of terrorism or war (whether or not declared) occurring after the date hereof.
“
Moving Price
” means, on any particular date (a) the average value per share of the Purchaser common stock on such date on the OTC Markets, OTC Bulletin Board or another registered national stock exchange on which the stock is then listed, or if there is no such price on such date, then the moving price on such exchange or quotation system on the date nearest preceding such date, or (b) if the stock is not then reported by the OTC Markets, OTC Bulletin Board or the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “OTC Markets” quotes for the relevant period, as determined in good faith by the Purchaser and reasonably acceptable to the Sellers, or (c) if the stock is not then publicly traded the fair market value of a share of stock as determined by the Purchaser and reasonably acceptable to the Sellers.
“
Person
” means any individual, partnership, firm, corporation, limited liability company, association, trust, unincorporated organization or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
“
Regulations
” means the Treasury Regulations (including Temporary Regulations) promulgated by the United States Department of Treasury with respect to the Code or other federal tax statutes.
“
Securities Act
” means the Securities Act of 1933, as amended.
“
Sellers’ Accountants
” means Edwards, Ellis, Armstrong, & Company, P.C., independent accountants of the Sellers.
“
Straddle Period
” means any taxable period beginning on or before the date of the Closing and ending after the date of the Closing.
“
Tax
” or “
Taxes
” means any and all taxes of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any government or taxing authority.
“
Tax Returns
” means any and all returns, reports and forms (including elections, declarations, amendments, schedules, information returns or attachments thereto) required to be filed with a Governmental Authority with respect to Taxes.
“
Trading Day
” means (a) any day on which the Purchaser common stock is traded on the OTC Markets or OTC Bulletin Board, or (b) if the stock is not traded on the OTC Markets or OTC Bulletin Board, a day on which the stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices).
ARTICLE II
PURCHASE AND SALE OF EQUITY
SECTION 2.01.
Purchase and Sale of the Equity Interests
.
Upon the terms and subject to the conditions of this Agreement, at the Closing, the Sellers shall sell to the Purchaser the Transferred Equity Interests and the Sellers shall retain the Retained Equity Interests, and the Purchaser shall pay to the Sellers the consideration specified in
Section 2.02
for such Transferred Interest. For the sake of clarity, the Sellers shall each be responsible for the following portion of the Transferred Equity Interests: (i) Kaplan 33%, (ii) Claudio Tartaglia 12%, and (iii) Eric Kovan 5%.
SECTION 2.02.
Purchase Price
.
Subject to the adjustments set forth in this
Article II
, the purchase price for the Transferred Equity Interests shall be the aggregate sum of $4 Million One Hundred Thousand Dollars ($4,100,000) (the “Purchase Price”) which Purchase Price shall be paid as follows:
(a)
On the closing date:
Three Hundred Thousand Dollars ($300,000) to Sellers in accordance with
Schedule 2.02
(the ”
Closing Payment Schedule
”) in immediately available funds by wire transfer to an account designated by each Seller in the Closing Payment Schedule; and
(b) on the tenth (l0th) Business Day after the one year anniversary of the
Closing Date (the "Subsequent Payment Date"), Three Million Eight Hundred Thousand Dollars
($3,800,000) (the "Post-Closing Payment Amount"), to the Sellers in accordance with the
Closing Payment Schedule, which shall be paid pursuant to the terms and conditions of that
certain Secured Promissory Note in the form of Schedule 2.02(b) hereto (the "Promissory Note").
SECTION 2.03
Payment of Post-Closing Payment Amount and Leak-Out
Obligations of Seller.
(a) The Post-Closing Payment Amount shall be payable on the Subsequent
Payment Date to each Seller in the form of United States cash currency or publicly traded
common stock of Purchaser at the sole discretion of the Purchaser, unless otherwise provided in
this Agreement or the Note, as follows: (i) in United States cash currency by wire transfer of
immediately available funds to an account designated by each Seller, (ii) in that number of shares
of common stock of Purchaser equal to the Post-Closing Payment Amount divided by the
Moving Price for the ten (10) Trading Days ending on the date that is two Business Days prior to
the Subsequent Payment Date (the "Medbox Shares"), or (iii) in a combination of United States
cash currency and shares of common stock of Purchaser as provided in clauses (i) and (ii);
provided that if on the Subsequent Payment Date the common stock of Purchaser is not listed on
a national stock exchange or ceases to be "publicly traded" consistent with the manner in which
it is publicly traded as ofthe date hereof, then Purchaser must pay the Post-Closing Payment
Amount in United States cash currency. Notwithstanding any provision in this Agreement or in
the Note, if for any reason the Post-Closing Payment Amount is paid prior to the Subsequent
Payment Date, then the Post-Closing Payment Amount shall be paid in United States cash
currency.
(b) In the event that the Medbox Shares are delivered to the Sellers, as
provided in Section 2.03(a), in satisfaction of the Post-Closing Payment Amount, for a period
commencing on the Subsequent Payment Date, and ending on the date that is the two (2) year
anniversary ofthe Closing Date, the Medbox Shares may not be sold, assigned or transferred;
provided, however, that beginning on the Subsequent Payment Date, each Seller may sell, assign
or transfer five thousand (5,000) Medbox Shares and an additional five hundred (500) Medbox
Shares per Business Day thereafter, on a cumulative basis (the "Leak Out Shares"). By stating
that such right shall be on a "cumulative basis," this provision permits each Seller to sell, assign,
or transfer any or part of the Leak Out Shares from any prior Business Day that were not sold,
assigned or transferred to be sold, assigned or transferred at any time thereafter. For explanatory
purposes relating to the term "cumulative basis," if on the Subsequent Payment Date, Sellers
decided not to sell any Leak Out Shares, then on the next Business Day, Sellers would have the
right to sell Five Thousand Five Hundred (5,500) Leak Out Shares.
SECTION 2.04. Tax Put Right.
(a) In the event that Medbox Shares are delivered to the Sellers in satisfaction
of the Post-Closing Payment Amount or delivered as Lockup Adjustment Shares (each, a "Tax
Put Right Event"), then the Sellers shall have a right during the Tax Put Period (as defined
below) for each such Tax Put Right Event, to "put" a portion of the Medbox Shares to the Purchaser for a United States cash currency payment that equals the Seller Tax Liability (as
defined below) for each such Tax Put Right Event. The price per share for the shares of common
stock of Purchaser that is to be acquired by the Purchaser pursuant to this "put" right shall be the
higher of (i) the same price per share that was used to determine the payment of the Medbox. Shares for each such Tax Put Right Event, or (ii) the price per share of the common stock of
Purchaser as of the close of the market on the Business Day immediately prior to the sale to the
Purchaser of such shares pursuant to the "put".
(b) The "Seller Tax Liability" is the product of (i) the Sellers' gross income
with respect to the particular consideration (expressed in United States dollars) received by
Sellers as a result of the payment ofthe Medbox Shares for each such Tax Put Right Event, and
(ii) the highest possible tax rate for a Seller in the year that the date ofthe Closing occurs, such
tax rate shall be a combination ofthe highest individual rate of state and local income taxes
within the State of Michigan, the highest federal individual income tax rate, and the highest tax
rate set forth in Code Section 1411.
(c) The put right shall only be exercisable by written notice (the "Put Notice")
from the Sellers to the Purchaser within the Put Period. The "Put Period" shall commence on the
date that is thirty (30) Business Days after the Subsequent Payment Date, and after the payment
ofthe Lockup Adjustment Shares (as the case may be) and shall terminate on the date that is two
hundred forty (240) Business Days after the Subsequent Payment Date and after the payment of
the Lockup Adjustment Shares (as the case may be).
SECTION 2.05. Closing. Subject to the terms and conditions of this Agreement,
the sale and purchase of the Transferred Equity Interests contemplated by this Agreement shall
take place at a closing (the "Closing") to be held at the offices of Snell & Wilmer, L.L.P., 400 E.
Van Buren, Phoenix, Arizona, 85004 at 10:00 a.m. Phoenix time on the fifth Business Day
following the satisfaction or waiver of the conditions to the obligations ofthe parties hereto set
forth in Section 8.01(b) and Section 8.02(b) (the "Closing Date") or at such other place or at such
other time or on such other date as the Seller and the Purchaser may mutually agree upon in
writing,
SECTION 2.06. Adjustment of Me db ox Shares Due to Lockup. Upon the two
(2) year anniversary of the Closing Date (the "Anniversary Date"), if the value of Medbox
Shares (the "Shares Value") based on the Moving Price for the ten (10) trading days ending on
the date that is two Business Days prior to the Anniversary Date is less than Three Million Eight
Hundred Thousand Dollars ($3,800,000), then the Purchaser shall issue Sellers the number of
shares of publicly traded common stock of Purchaser equal to:
Three Million Eight Hundred Thousand Dollars ($3,800,000),
minus
the Shares Value and the cash amount received by the Sellers as a result of selling or
transferring any Leak Out Shares pursuant to Section 2.03(b) to a third-party,
divided by
the Moving Price for the ten (10) trading days ending on the date that is two Business
Days prior to the Anniversary Date.
Any such shares required to be issued under this section shall hereinafter be referred to as
"Lockup Adjustment Shares." Purchaser may elect to pay the value of the Lockup Adjustment
Shares in immediately available United States cash currency rather than issuing the Lockup
Adjustment Shares. The Sellers and the Purchaser agree that, at the Sellers' discretion, at any
time, Purchaser agrees to enter into a secured promissory note (with the Transferred Equity
Interests as collateral) in substantially similar form as the secured promissory note described in
Schedule 2.02(b) to secure the Purchaser's obligations under this Section 2.06.
SECTION 2.07. Closing Deliveries by the Seller. At the Closing, the Sellers
shall deliver or cause to be delivered to the Purchaser:
(a) at the request of Purchaser, membership interest certificates evidencing the
Transferred Equity Interests duly endorsed in blank, or accompanied by stock powers
duly executed in blank and with all required stock transfer tax stamps and legends
affixed;
(b) executed counterparts of each Employment Agreement to which the
Sellers are a party;
(c) a receipt for the Purchase Price;
(d) a true and complete copy, certified by the Secretary or an Assistant
Secretary of Medvend Holdings, of the resolutions duly and validly adopted by the
Managing Member of Medvend Holdings and the members of Medvend Holdings
evidencing their authorization of the execution and delivery of this Agreement and the
Employment Agreements and the consummation of the transactions contemplated hereby
and thereby;
(e) a certificate of the Secretary or an Assistant Secretary of Medvend
Holdings certifying the names and signatures of the officers of Medvend Holdings
authorized to sign this Agreement and the Employment Agreements and the other
documents to be delivered hereunder and thereunder; and
(f) a certificate of a duly authorized officer of Medvend Holdings certifying
as to the matters set forth in Section 7.02(a).
SECTION 2.08. Closing Deliveries by the Purchaser. At the Closing, the
Purchaser shall deliver to the Sellers:
(a) the Purchase Price amounts set forth in Section 2.02(a) in accordance with
Section 2.02(a);
(b) executed Promissory Note;
(c) executed counterparts of each Employment Agreement to which the
Purchaser is a party;
(d) a true and complete copy, certified by the Secretary or an Assistant
Secretary of the Purchaser, of the resolutions, duly and validly adopted by the Board of
Directors of the Purchaser evidencing its authorization of the execution and delivery of
this Agreement and the Employment Agreements and the consummation of the
transactions contemplated hereby and thereby;
(e) a certificate of the Secretary or an Assistant Secretary of the Purchaser
certifying the names and signatures of the officers of the Purchaser authorized to sign this
Agreement and the Employment Agreements and the other documents to be delivered
hereunder and thereunder; and
(f) a certificate of a duly authorized officer of the Purchaser certifying as to
the matters set forth in Section 7.0 1 (a).
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE SELLERS
Each of the Sellers, severally and not jointly, hereby represents and warrants to the Purchaser, as of the date hereof or, if a representation or warranty is made as of a specified date, as of such date, as follows:
SECTION 3.01.
Authority and Qualification of the Sellers
. The Sellers each has the legal capacity, power and authority to enter into, execute and deliver this Agreement and the Employment Agreements to which such Sellers are a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. Medvend Holding is a limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all necessary corporate power and authority to enter into this Agreement and to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. Medvend Holding is duly licensed or qualified to do business and is in good standing in each jurisdiction which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary, except to the extent that the failure to be so licensed, qualified or in good standing would not (a) adversely affect the ability of Medvend Holdings to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement and the Employment Agreements , or (b) otherwise have a Material Adverse Effect. This Agreement has been duly executed and delivered by the Sellers, and (assuming due authorization, execution and delivery by the Purchaser) this Agreement constitutes a legal, valid and binding obligation of the Sellers, enforceable against the Sellers in accordance with its respective terms.
SECTION 3.02.
Capitalization; Ownership of Equity Interests
. The total authorized, issued and outstanding Equity Interests are set forth on
Section 3.02
of the Disclosure Schedules. All of the issued and outstanding Equity Interests are owned by the Sellers. All outstanding Equity Interests have been duly authorized and validly issued and are fully paid and non-assessable, free and clear of any preemptive rights. There are no options, warrants, convertible securities or other rights, agreements, arrangements or commitments relating to the Equity Interests or obligating either the Sellers or the Medvend Entities to issue or sell any Equity Interests, or any other interest in, any Medvend Entity.
SECTION 3.03.
No Conflict
. The execution, delivery and performance by the Sellers of this Agreement do not and will not (a) violate, conflict with or result in the breach of any provision of the organizational documents of Medvend Holdings, (b) conflict with or violate any Law or Governmental Order applicable to Medvend Holdings or its respective Assets, properties or businesses or (c) conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which the Sellers or Medvend Holdings is a party, except, in the case of clauses (b) and (c), as would not materially and adversely affect the ability of the Sellers to carry out their obligations under, and to consummate the transactions contemplated by, this Agreement.
SECTION 3.04.
Governmental Consents and Approvals
. The execution, delivery and performance by the Sellers of this Agreement do not and will not require any consent, approval, authorization or other order of, action by, filing with, or notification to, any Governmental Authority, except where failure to obtain such consent, approval, authorization or action, or to make such filing or notification, would not prevent or materially delay the consummation by the Sellers of the transactions contemplated by this Agreement.
SECTION 3.05.
Litigation
. Other than as set forth in
Section 3.05
of the Disclosure Schedule, as of the date hereof, no Action by or against the Sellers is pending or, to the best knowledge of the Sellers, threatened, which could affect the legality, validity or enforceability of this Agreement the consummation of the transactions contemplated hereby.
SECTION 3.06.
Compliance with Laws
. Except as set forth in Section 3.06 of the Disclosure Schedule and as would not (a) adversely affect the ability of the Sellers to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement or (b) otherwise have a Material Adverse Effect, Medvend Holdings has conducted and continues to conduct its business in accordance with all Laws and Governmental Orders and the Sellers is not in violation of any such Law or Governmental Order.
SECTION 3.07.
Brokers
. Other than as set forth in
Section 3.07
of the Disclosure Schedule, no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Sellers.
SECTION 3.08.
Disclaimer of the Seller
. (A) EXCEPT AS SET FORTH IN THIS ARTICLE III, NONE OF THE SELLERS, THEIR AFFILIATES OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES OR REPRESENTATIVES MAKE OR HAVE MADE ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT LAW OR IN EQUITY, IN RESPECT OF THE MEDVEND ENTITIES, THE EQUITY INTERESTS OR ANY OF THE ASSETS, INCLUDING WITH RESPECT TO (I) MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE, (II) THE OPERATION OF THE BUSINESS BY THE PURCHASER AFTER THE CLOSING IN ANY MANNER OTHER THAN AS USED AND OPERATED BY THE SELLERS AND THE MEDVEND ENTITIES OR (III) THE PROBABLE SUCCESS OR PROFITABILITY OF THE BUSINESS AFTER THE CLOSING AND (B) NONE OF THE SELLERS, ITS AFFILIATES, OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES OR REPRESENTATIVES WILL HAVE OR BE SUBJECT TO ANY LIABILITY OR INDEMNIFICATION OBLIGATION TO THE PURCHASER OR TO ANY OTHER PERSON RESULTING FROM THE DISTRIBUTION TO THE PURCHASER, ITS AFFILIATES OR REPRESENTATIVES OF, OR THE PURCHASER’S USE OF, ANY INFORMATION RELATING TO THE BUSINESS AND ANY INFORMATION, DOCUMENTS OR MATERIAL MADE AVAILABLE TO THE PURCHASER, WHETHER ORALLY OR IN WRITING, IN CERTAIN “DATA ROOMS,” MANAGEMENT PRESENTATIONS, FUNCTIONAL “BREAK-OUT” DISCUSSIONS, RESPONSES TO QUESTIONS SUBMITTED ON BEHALF OF THE PURCHASER OR IN ANY OTHER FORM IN EXPECTATION OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. ANY SUCH OTHER REPRESENTATION OR WARRANTY IS HEREBY EXPRESSLY DISCLAIMED.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE PURCHASER
The Purchaser hereby represents and warrants to the Sellers as follows:
SECTION 4.01.
Organization and Authority of the Purchaser
. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all necessary corporate power and authority to enter into this Agreement and the Employment Agreements and to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The Purchaser is duly licensed or qualified to do business and is in good standing in each jurisdiction which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary, except to the extent that the failure to be so licensed, qualified or in good standing would not adversely affect the ability of Purchaser to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement and the Employment Agreements. The execution and delivery by the Purchaser of this Agreement and the Employment Agreements to which it is a party, the performance by the Purchaser of its obligations hereunder and thereunder and the consummation by the Purchaser of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action on the part of the Purchaser. This Agreement has been, and upon its execution of the Employment Agreements shall have been, duly executed and delivered by the Purchaser, and (assuming due authorization, execution and delivery by the Sellers) this Agreement constitutes, and upon its execution of the Employment Agreements shall constitute, legal, valid and binding obligations of the Purchaser, enforceable against the Purchaser in accordance with their respective terms.
SECTION 4.02.
No Conflict
. The execution, delivery and performance by the Purchaser of this Agreement and the Employment Agreements to which it is a party do not and will not (a) violate, conflict with or result in the breach of any provision of the certificate of incorporation or bylaws (or similar organizational documents) of the Purchaser, (b) conflict with or violate any Law or Governmental Order applicable to the Purchaser or its respective assets, properties or businesses or (c) conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which the Purchaser is a party, except, in the case of clauses (b) and (c), as would not materially and adversely affect the ability of the Purchaser to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement and the Employment Agreements.
SECTION 4.03.
Governmental Consents and Approvals
. The execution, delivery and performance by the Purchaser of this Agreement and each Employment Agreement to which the Purchaser is a party do not and will not require any consent, approval, authorization or other order of, action by, filing with, or notification to, any Governmental Authority, except where failure to obtain such consent, approval, authorization or action, or to make such filing or notification, would not prevent or materially delay the consummation by the Purchaser of the transactions contemplated by this Agreement and the Employment Agreements.
SECTION 4.04.
Investment Purpose
. The Purchaser is acquiring the Equity Interests solely for the purpose of investment and not with a view to, or for offer or sale in connection with, any distribution thereof other than in compliance with all applicable laws, including United States federal securities laws. The Purchaser agrees that the Equity Interests may not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of without registration under the Securities Act and any applicable state securities laws, except pursuant to an exemption from such registration under the Securities Act and such laws. The Purchaser is able to bear the economic risk of holding the Equity Interests for an indefinite period (including total loss of its investment), and (either alone or together with its advisors) has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risk of their investment.
SECTION 4.05.
Financing
. The Purchaser has sufficient immediately available funds to pay, in cash, the Purchase Price and all other amounts payable pursuant to this Agreement and the Employment Agreements or otherwise necessary to consummate all the transactions contemplated hereby and thereby. Upon the consummation of such transactions, (a) the Purchaser will not be insolvent, (b) the Purchaser will not be left with unreasonably small capital, (c) the Purchaser will not have incurred debts beyond its ability to pay such debts as they mature and (d) the capital of the Purchaser will not be impaired.
SECTION 4.06.
Litigation
. As of the date hereof, no Action by or against the Purchaser is pending or, to the best knowledge of the Purchaser, threatened, which could affect the legality, validity or enforceability of this Agreement, any Employment Agreement or the consummation of the transactions contemplated hereby or thereby.
SECTION 4.07.
Brokers
. No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Purchaser.
SECTION 4.08.
Valid Issuance
. The issuance of the shares of common stock of the Purchaser to be issued hereunder has been duly authorized by all necessary corporate action on the part of Purchaser, and such shares will, when issued as contemplated by this Agreement, be validly issued, fully paid and non-assessable.
SECTION 4.09.
Compliance with Laws
. Except as set forth in
Section 4.09
of the Disclosure Schedule and as would not (a) adversely affect the ability of the Purchaser to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement and the Employment Agreements or (b) otherwise have a Material Adverse Effect, the Purchaser has conducted and continues to conduct its business in accordance with all Laws and Governmental Orders and the Purchaser is not in violation of any such Law or Governmental Order.
SECTION 4.10.
Independent Investigation; Sellers’ Representations
. The Purchaser has conducted its own independent investigation, review and analysis of the business, operations, Assets, liabilities, results of operations, financial condition, software, technology and prospects of the Business, which investigation, review and analysis was done by the Purchaser and its Affiliates and representatives. The Purchaser acknowledges that it and its representatives have been provided adequate access to the personnel, properties, premises and records of the Business for such purpose. In entering into this Agreement, the Purchaser acknowledges that it has relied solely upon the aforementioned investigation, review and analysis and not on any factual representations or opinions of the Sellers or its representatives (except the specific representations and warranties of the Sellers set forth in Article III and the schedules thereto). The Purchaser hereby acknowledges and agrees that (a) other than the representations and warranties made in Article III, none of the Sellers, its Affiliates, or any of their respective officers, directors, employees or representatives make or have made any representation or warranty, express or implied, at law or in equity, with respect to the Medvend Entities, the Equity Interests or the Assets, including as to (i) merchantability or fitness for any particular use or purpose, (ii) the operation of the Business by the Purchaser after the Closing in any manner other than as used and operated by the Sellers and the Medvend Entities or (iii) the probable success or profitability of the Business after the Closing and (b) none of the Sellers, their Affiliates, or any of their respective officers, directors, employees or representatives will have or be subject to any liability or indemnification obligation to the Purchaser or to any other Person resulting from the distribution to the Purchaser, its Affiliates or representatives of, or the Purchaser’s use of, any information relating to the Business and any information, documents or material made available to the Purchaser, whether orally or in writing, in certain “data rooms,” management presentations, functional “break-out” discussions, responses to questions submitted on behalf of the Purchaser or in any other form in expectation of the transactions contemplated by this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01.
Regulatory and Other Authorizations; Notices and Consents.
(a)
The Purchaser shall use its best efforts to promptly obtain all authorizations, consents, orders and approvals of all Governmental Authorities and officials that may be or become necessary for its execution and delivery of, and the performance of its obligations pursuant to, this Agreement and the Employment Agreements and will cooperate fully with the Sellers in promptly seeking to obtain all such authorizations, consents, orders and approvals.
(b)
Each party to this Agreement shall promptly notify the other party of any communication it or any of its Affiliates receives from any Governmental Authority relating to the matters that are the subject of this Agreement and permit the other party to review in advance any proposed communication by such party to any Governmental Authority. Neither party to this Agreement shall agree to participate in any meeting with any Governmental Authority in respect of any filings, investigation or other inquiry unless it consults with the other party in advance and, to the extent permitted by such Governmental Authority, gives the other party the opportunity to attend and participate at such meeting. The parties to this Agreement will coordinate and cooperate fully with each other in exchanging such information and providing such assistance as the other party may reasonably request in connection with the foregoing and in seeking early termination of any applicable waiting periods. The parties to this Agreement will provide each other with copies of all correspondence, filings or communications between them or any of their representatives, on the one hand, and any Governmental Authority or members of its staff, on the other hand, with respect to this Agreement and the transactions contemplated by this Agreement.
SECTION 5.02.
Notifications; Update of Disclosure Schedule
. Until the Closing, each party hereto shall promptly notify the other party in writing of any fact, change, condition, circumstance or occurrence or nonoccurrence of any event of which it is aware that will or is reasonably likely to result in any of the conditions set forth in Article VII of this Agreement becoming incapable of being satisfied; provided, however, that the delivery of any notice pursuant to this Section 5.03 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. The Sellers may, from time to time, prior to or at the Closing, by notice given in accordance with this Agreement, supplement or amend the Disclosure Schedule to correct any matter that would otherwise constitute a breach of any representation, warranty, covenant or agreement contained herein. Notwithstanding any other provision hereof to the contrary, the Disclosure Schedule and the representations and warranties made by the Sellers shall be deemed for all purposes to include and reflect such supplements and amendments as of the date hereof and at all times thereafter, including as of the Closing.
SECTION 5.03.
Piggyback Registration
. If at any time after the Closing the Purchaser proposes to register for sale to the public under the Securities Act both (i) for its own account any other securities not already so registered and (ii) for the account of any stockholder of the Purchaser who is an officer or director of the Purchaser (an “
Insider
”) any securities of the Purchaser held by such Insider, each such time it will give written notice to the Sellers of its intention to do so. Upon the written request of the Sellers, (given within twenty (20) days after receipt by the Sellers of such notice) setting forth the names of the Sellers who wish to sell and the respective number of shares such Sellers wish to have registered, the Purchaser shall use its commercially reasonable efforts to cause such Closing Shares, to be registered therewith under the Securities Act and qualified for sale under any state securities or “blue sky” law on a pro rata basis based on the amount of securities proposed to be registered for the account of Insiders or in such other amount as the Sellers and the Purchaser mutually agree, all to the extent required to permit such sale or other disposition of such Closing Shares.
SECTION 5.04.
Tradability
. If at any time the common stock of the Purchaser becomes untradeable due to the actions or inactions of the Purchaser, including without limitation, (i) being suspend or removed for trading over-the-counter, an exchange, and/or any other publicly traded market; or (ii) the repurchase by the Purchaser and/or the majority shareholder of all or most of the outstanding shares in the Purchaser making them untradeable on the open market, Sellers, at their option, may force a buyback of all Sellers’ outstanding Closing Shares, Initial Earnout Shares and Additional Earnout Shares for Seventeen Million Dollars ($17,000,000) plus any Initial Earnout Payment plus any Additional Earnout Payment less the cash value received by the Sellers for previously sold Closing Shares, Initial Earnout Shares and Additional Earnout Shares.
SECTION 5.05.
Change of Control.
If a Change of Control Event occurs at any time prior to the Subsequent Payment Date, then at the election of Sellers’, the Sellers shall be immediately entitled to receive the Post-Closing Payment Amount in the form of a United States cash currency payment. In any such event, Purchaser shall make such payments to the Sellers prior to or at the time of closing the Change of Control Event.
SECTION 5.06
Formation of New Entity
. Following the Closing Date, Subject to mutual agreement by the parties hereof, the parties may form a mutually controlled entity ("Newco") to conduct a portion or all of the Business on the terms and conditions mutually agreed upon by the parties, whereas the Purchaser shall not own or control more than 50% of Newco.
SECTION 5.07
Working Capital Funding Obligations.
As consideration for Sellers to enter into this Agreement, but not as part of the purchase price, within five (5) days of the Closing, Purchaser shall pay, as a loan Three Hundred Thousand Dollars ($300,000) to Newco, Newco, ifformed and operating (or otherwise to Medvend Holdings), in immediately available funds by wire transfer to an account designated by Newco or Medvend Holdings, as appropriate, which funds shall remain with Newco or Medvend Holdings (or its successor, as appropriate), as appropriate, to fund working capital. In addition, for the next three (3) years, Purchaser shall make, within five (5) days of each fiscal year end, the following loans to Newco, informed and operating (or otherwise to Medvend Holdings), in immediately available funds by wire transfer to an account designated by Newco or Medvend Holdings, as appropriate, which funds shall remain with Newco or Medvend Holdings (or its successor, as appropriate), as appropriate, to fund working capital:
·
Fiscal 2013 $250,000
·
Fiscal 2014 $250,000
·
Fiscal 2015 $250,000
Each of the loans to be made pursuant to this Section 5.07 shall be interest free with a maturity
date of 10 years and a balloon payment due on maturity of the original principal amount. For
clarification purposes, the loans made pursuant to this Section 5.07 shall (i) not be issued in
exchange for an equity interest in any entity, (ii) shall not be deemed to be capital contributions
to either Medvend Holdings (or any other successor entity to Medvend Holdings) or Newco, (iii)
shall not increase Purchaser's fifty percent (50%) ownership percentage in Medvend Holdings
(or any other successor entity to Medvend Holdings) or its percentage of ownership interest in
Newco, and (iv) shall not in any way result in the dilution of Sellers Retained Equity Interests (or
the dilution of the ownership percentage of the other existing, minority equity holders of MedVend Holdings hereof).
SECTION 5.08.
Employment Agreements
. At Closing, Purchaser shall enter into employment agreements with Kaplan and Tartaglia upon the terms and conditions acceptable to Kaplan and Tartaglia.
SECTION 5.09. Tax Treatment.
The Purchaser and the Sellers agree that the Sellers shall determine the allocation of the Purchase Price within their sole discretion, and provide the Purchaser with a schedule of such allocation no later than 30 days before the Purchaser's federal income Tax Return is due with respect to such allocation. The schedule shall set forth the allocation of the consideration of the Purchase Price (and including any additional consideration and any adjustments to the Purchase Price) to each of the Sellers, the allocation of such consideration with respect to the specific assets held directly and indirectly by the Medvend Entities and Medvend Holdings, and an allocation of each component of such consideration to specific assets held directly or indirectly by the Medvend Entities and Medvend Holdings. The Purchaser and the Sellers agree to report the transactions described in this Agreement in accordance with such schedule which includes but is not limited to filing all income tax returns and related documents consistent with such schedule and to cooperate with each other as requested to achieve such result. A failure to report the transactions consistent with the schedule may result in damages to the Sellers and the Purchaser agrees that it shall be liable to the Sellers for any damages whatsoever including expenses, including professionals' fees, tax, interest, penalties, or litigation costs, that may arise as a consequence of such inconsistency.
SECTION 5.10. Conduct of Business. Following the Closing Date and until One
Hundred Eighty (180) days following the three (3) year anniversary of the Closing Date, once
Newco is organized, Purchaser agrees to use its commercially reasonable efforts to accomplish
the following with respect to Newco (and any other successor entity, if applicable):
(a) maintain separate books and records for the consolidated revenues of
Newco (and their successor entities, if applicable);
(b) cause Newco to operate consistent with past practices and budgets of
Medvend Holdings and the Medvend Entities;
(c) maintain Kaplan and Tartaglia as the principal officers responsible for the
day-to-day operations of Newco; provided that Purchaser may appoint a Chief Operating Officer
to be part of the management team of the Business with approval by Kaplan and Tartaglia, such
approval to not be unreasonably withheld;
(d) unless otherwise consented to by Kaplan and Tartaglia, cause Newco to
preserve its relationships with respect to customers, suppliers, contractors, employees and others
having business dealings with Medvend Holdings and the Medvend Entities as of the date
hereof;
(e) not increase the level of general and administrative expenses of New co
(and their successor entities, if applicable), except as mutually agreed upon Kaplan and
Tartaglia;
(f) maintain the same the principal place of business of New co (consistent
with Medvend Holdings' past practice), unless otherwise consented to by Kaplan and Tartaglia;
(g) not unreasonably interfere with Kaplan's and Tartaglia's management
responsibilities of the Business and Newco in a manner that is reasonably likely to have an
adverse impact on the financial condition or results of operations of the Business or Newco; and
(h) not cause, make, or enter into any license, sublicense, or sale of the
intellectual property of the Business or Newco, unless mutually agreed to by Kaplan and
Tartaglia.
SECTION 5.11. Assignment of Patent. Upon the formation and organization (or
designation) of New co pursuant to the terms and conditions of Section 5.07 hereof, Medvend
Holdings shall ensure that Newco shall have any and all exclusive legal and beneficial rights to
Patent # US7689318B2 as it relates to manufacturing and distribution purposes of the Business
(the "Assignment of Patent"). The parties intend that the Assignment of Patent shall be made in
a tax-free manner to the Sellers and other equity holders of Medvend Holdings.
SECTION 5.12. Further Action. The parties hereto shall use all reasonable
efforts to take, or cause to be taken, all appropriate action, to do or cause to be done all things
necessary, proper or advisable under applicable Law, and to execute and deliver such documents
and other papers, as may be required to carry out the provisions of this Agreement and consummate and make effective the transactions contemplated by this Agreement.
ARTICLE VI
TAX MATTERS
SECTION 6.01.
Tax Refunds and Tax Benefits.
Any Tax refund, credit or similar benefit (including any interest paid or credited with respect thereto) relating to taxable periods (or portions of taxable period) ending on or before the date of the Closing shall be the property of the Sellers, and if received by the Purchaser, the Medvend Entities, Medvend Holdings, and any Affiliate of both, shall be paid over promptly to the Sellers. The Purchaser shall, if the Sellers so request and at the Sellers’ expense, cause any of the Medvend Entities, Medvend Holdings, or other relevant entity to file for and use its reasonable best efforts to obtain and expedite the receipt of any refund to which the Sellers are entitled under this Section 6.02. The Purchaser shall permit the Sellers to participate in (at the Sellers’ expense) the prosecution of any such refund claim.
SECTION 6.02.
Contests.
(a)
In the case of a Tax audit or administrative or judicial proceeding (a “
Contest
”) that relates to any of the Medvend Entities, or Medvend Holdings, the Sellers shall have the sole right, at its expense, to control the conduct of such Contest. If the Sellers elect to direct a Contest, the Sellers shall within 90 days of receipt of the notice of asserted Tax liability notify the Purchaser of its intent to do so, and the Purchaser shall cooperate and shall cause any of the Medvend Entities, and Medvend Holdings to fully cooperate, at the Sellers’ expense, in each phase of such Contest. If the Sellers elect not to direct the Contest, the Purchaser, the Medvend Entities, or Medvend Holdings may assume control of such Contest (at the Purchaser’s expense). However, in such case, none of the Purchaser, any Affiliate of the Purchaser, any of the Medvend Entities, or Medvend Holdings may settle or compromise any asserted liability without prior written consent of the Sellers;
provided
,
however
, that consent to settlement or compromise shall not be unreasonably withheld. In any event, the Sellers may participate, at its own expense, in the Contest.
(b)
The Purchaser and the Sellers agree to cooperate in the defense against or compromise of any claim in any Contest.
SECTION 6.03.
Preparation of Tax Returns.
(a) The Sellers shall supervise and oversee the preparation of all of the Tax
Returns, and shall have the authority to file such Tax Returns relating to any of the Medvend
Entities, Medvend Holdings, and any of their successors. Such Tax Returns shall be prepared by
Sellers' Accountant, on a basis consistent with those prepared for prior taxable periods unless a
different treatment of any item is required by an intervening change in Law. With respect to the
taxable period that includes the date of the Closing, it shall be within the discretion of the Sellers
to allocate tax related items under any method permissible by Law including the closing of the
books method.
(b) With respect to any Tax Return required to be filed with respect to the any
of the Medvend Entities, or Medvend Holdings, for taxable periods that commence after the date
of the Closing, the Sellers shall provide the Purchaser and its authorized representative with a
copy of such completed Tax Return (and supporting schedules and information) at least 30 days
prior to the due date (including any extension thereof) for filing of such Tax Return, and the
Purchaser and its authorized representative shall have the right to review and comment on such
Tax Return and statement prior to the filing of such Tax Return. The Sellers and the Purchaser
agree to consult and to attempt in good faith to resolve any issues arising as a result of the review
of such Tax Return and statement by the Purchaser or its authorized representative.Return and statement by the Sellers or its authorized representative.
SECTION 6.04.
Tax Cooperation and Exchange of Information.
The Sellers and the Purchaser shall provide each other with such cooperation and information as either of them reasonably may request of the other (and the Purchaser shall cause the Medvend Entities, and Medvend Holdings to provide such cooperation and information) in filing any Tax Return, amended Tax Return or claim for refund, determining a liability for Taxes or a right to a refund of Taxes or participating in or conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies of relevant Tax Returns or portions thereof, together with related work papers and documents relating to rulings or other determinations by taxing authorities. The Sellers and the Purchaser shall make themselves (and their respective employees) reasonably available on a mutually convenient basis to provide explanations of any documents or information provided under this Section 6.04. Notwithstanding anything to the contrary in this Agreement, each of the Sellers and the Purchaser shall retain all Tax Returns, work papers and all material records or other documents in its possession (or in the possession of its Affiliates) relating to Tax matters of any of the Medvend Entities, or Medvend Holdings for any taxable period that includes the date of the Closing and for all prior taxable periods until the later of (i) the expiration of the statute of limitations of the taxable periods to which such Tax Returns and other documents relate, without regard to extensions or (ii) six years following the due date (without extension) for such Tax Returns. After such time, before the Sellers or the Purchaser shall dispose of any such documents in its possession (or in the possession of its Affiliates), the other party shall be given an opportunity, after 90 days prior written notice, to remove and retain all or any part of such documents as such other party may select (at such other party’s expense). Any information obtained under this Section 6.04 shall be kept confidential, except as may be otherwise necessary in connection with the filing of Tax Returns or claims for refund or in conducting an audit or other proceeding.
Conveyance Taxes. The Sellers and the Purchaser shall provide each other with such cooperation and information as either of them reasonably may request of the other (and each shall, to the extent possible, cause the Medvend Entities, Medvend Holdings, and any of their successors, to provide such cooperation and information) in filing any Tax Return, amended Tax Return or claim for refund, determining a
liability for Taxes or a right to a refund of Taxes or participating in or conducting any audit or
other proceeding in respect of Taxes. Such cooperation and information shall include providing
copies of relevant Tax Returns or portions thereof, together with related work papers and
documents relating to rulings or other determinations by taxing authorities. The Sellers and the
Purchaser shall make themselves (and their respective employees) reasonably available on a
mutually convenient basis to provide explanations of any documents or information provided
under this Section 6.04. Any information obtained under this Section 6.04 shall be kept
confidential, except as may be otherwise necessary in connection with the filing of Tax Returns
or claims for refund or in conducting an audit or other proceeding.
SECTION 6.05. Conveyance Taxes. The Purchaser shall be liable for, shall hold
the Sellers, and their Affiliates harmless against, and agrees to pay any and all Conveyance
Taxes that may be imposed upon, or payable or collectible or incurred in connection with this
Agreement and the transactions contemplated hereby. The Purchaser and the Sellers agree to
cooperate in the execution and delivery of all instruments and certificates necessary to enable the
Purchaser to comply with any pre Closing filing requirements.
SECTION 6.06. Tax Covenants.
(a) Neither the Purchaser nor any Affiliate of the Purchaser shall take, or
cause or permit any of the Medvend Entities, or Medvend Holdings to take, any action or omit to
take any action which could increase the Sellers' or any of its Affiliates' liability for Taxes.
(b) Neither the Purchaser nor any Affiliate of the Purchaser shall amend, refile
or otherwise modify, or cause or permit any of the Medvend Entities, or Medvend Holdings to
amend, refile or otherwise modify, any Tax election or Tax Return with respect to any taxable
period (or portion of any taxable period), ending on or before the date of the Closing without the
prior written consent of the Sellers.
SECTION 6.07. Miscellaneous.
(a) For purposes of this Article VI, all references to the Purchaser, the Sellers,
Affiliates, any of the Medvend Entities, and Medvend Holdings include successors.
(b) Notwithstanding any provision in this Agreement to the contrary, the
covenants and agreements of the parties hereto contained in this Article VI shall survive the
Closing and shall remain in full force until the expiration of the applicable statutes of limitations
for the Taxes in question (taking into account any extensions or waivers thereof).
ARTICLE VII
CONDITIONS TO CLOSING
SECTION 7.01.
Conditions to Obligations of the Seller.
The obligations of the Sellers to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or written waiver, at or prior to the Closing, of each of the following conditions:
(a)
Representations, Warranties and Covenants
. (i) the representations and warranties of the Purchaser contained in this Agreement (A) that are not qualified as to “materiality” shall be true and correct in all material respects as of the Closing and (B) that are qualified as to “materiality” shall be true and correct as of the Closing, except to the extent such representations and warranties are made as of another date, in which case such representations and warranties shall be true and correct in all material respects or true and correct, as the case may be, as of such other date, and (ii) the covenants and agreements contained in this Agreement to be complied with by the Purchaser on or before the Closing shall have been complied with in all material respects;
(b)
No Order
. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any Law or Governmental Order (whether temporary, preliminary or permanent) that has the effect of making the transactions contemplated by this Agreement or the Employment Agreements illegal or otherwise restraining or prohibiting the consummation of such transactions; and
(c)
Third Party Consents
. The Purchaser and the Sellers shall have received the third party consents and estoppel certificates set forth in Section 7.01(c) of the Disclosure Schedule.
SECTION 7.02.
Conditions to Obligations of the Purchaser
. The obligations of the Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or written waiver, at or prior to the Closing, of each of the following conditions:
(a)
Representations, Warranties and Covenants
. (i) The representations and warranties of the Sellers contained in this Agreement (A) that are not qualified as to “materiality” or “Material Adverse Effect” shall be true and correct in all material respects as of the Closing and (B) that are qualified as to “materiality” or “Material Adverse Effect” shall be true and correct as of the Closing, other than such representations and warranties that are made as of another date, in which case such representations and warranties shall be true and correct in all material respects or true and correct, as the case may be, as of such other date, and (ii) the covenants and agreements contained in this Agreement to be complied with by the Sellers at or before the Closing shall have been complied with in all material respects;
(b)
No Order
. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any Law or Governmental Order (whether temporary, preliminary or permanent) that has the effect of making the transactions contemplated by this Agreement or the Employment Agreements illegal or otherwise restraining or prohibiting the consummation of such transactions; and
(c)
Third Party Consents
. The Purchaser and the Sellers shall have received the third party consents and estoppel certificates set forth in Section 7.02(c) of the Disclosure Schedule.
ARTICLE VIII
[ARTICLE VIII INTENTIONAL LEFT BLANK]
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.01.
Termination.
This Agreement may be terminated at any time prior to the Closing:
(a)
by either the Sellers or the Purchaser if the Closing shall not have occurred by [__________, 20__];
provided
,
however
, that the right to terminate this Agreement under this Section 9.01(a) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date;
(b)
by the Sellers if the Purchaser shall have breached any of its representations, warranties, covenants or agreements contained in this Agreement which would give rise to the failure of a condition set forth in Article VII, which breach cannot be or has not been cured within 30 days after the giving of written notice by the Sellers to the Purchaser specifying such breach;
(c)
by the Purchaser if the Sellers shall have breached any of its representations, warranties, covenants or agreements contained in this Agreement which would give rise to the failure of a condition set forth in Article VII, which breach cannot be or has not been cured within 30 days after the giving of written notice by the Purchaser to the Sellers specifying such breach; or
(d)
by the mutual written consent of the Sellers and the Purchaser.
SECTION 9.02.
Effect of Termination.
In the event of termination of this Agreement as provided in Section 9.01, this Agreement shall forthwith become void and there shall be no liability on the part of either party hereto except (a) as set forth in Article X and (b) that nothing herein shall relieve either party from liability for any breach of this Agreement occurring prior to such termination.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01.
Expenses.
Except as otherwise specified in this Agreement, all costs and expenses, including, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be borne by the party incurring such costs and expenses, whether or not the Closing shall have occurred.
SECTION 10.02.
Notices.
All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by an internationally recognized overnight courier service, by facsimile or registered or certified mail (postage prepaid, return receipt requested) to the respective parties hereto at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 10.02):
(a)
if to the Sellers:
Telecopy:
Attention:
with a copy to:
Snell & Wilmer L.L.P.
400 E. Van Buren
Phoenix, AZ 85004
Telecopy: (602) 382-6070
Attention: Marc Schultz
(b)
if to the Purchaser:
(c)
Telecopy:
Attention:
with a copy to:
Telecopy:
Attention:
SECTION 10.03.
Public Announcements.
Neither party to this Agreement shall make, or cause to be made, any press release or public announcement in respect of this Agreement or the transactions contemplated by this Agreement or otherwise communicate with any news media without the prior written consent of the other party unless otherwise required by Law or applicable stock exchange regulation, and the parties to this Agreement shall cooperate as to the timing and contents of any such press release, public announcement or communication.
SECTION 10.04.
Severability.
If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any Law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect for so long as the economic or legal substance of the transactions contemplated by this Agreement is not affected in any manner materially adverse to either party hereto. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated by this Agreement are consummated as originally contemplated to the greatest extent possible.
SECTION 10.05.
Entire Agreement.
This Agreement and the Employment Agreements constitute the entire agreement of the parties hereto with respect to the subject matter hereof and thereof and supersede all prior agreements and undertakings, both written and oral, between the Sellers and the Purchaser with respect to the subject matter hereof and thereof.
SECTION 10.06.
Assignment.
This Agreement may not be assigned by operation of law or otherwise without the express written consent of the Sellers and the Purchaser (which consent may be granted or withheld in the sole discretion of the Sellers or the Purchaser), as the case may be.
SECTION 10.07.
Amendment.
This Agreement may not be amended or modified except (a) by an instrument in writing signed by, or on behalf of, the Sellers and the Purchaser or (b) by a waiver in accordance with Section 10.08.
SECTION 10.08.
Waiver.
Either party to this Agreement may (a) extend the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered by the other party pursuant hereto or (c) waive compliance with any of the agreements of the other party or conditions to such party’s obligations contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party to be bound thereby. Any waiver of any term or condition shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition, or a waiver of any other term or condition of this Agreement. The failure of either party hereto to assert any of its rights hereunder shall not constitute a waiver of any of such rights.
SECTION 10.09.
No Third Party Beneficiaries.
This Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person any legal or equitable right, benefit or remedy of any nature whatsoever, including any rights of employment for any specified period, under or by reason of this Agreement.
SECTION 10.10.
Currency.
Unless otherwise specified in this Agreement, all references to currency, monetary values and dollars set forth herein shall mean United States (U.S.) dollars and all payments hereunder shall be made in United States dollars.
SECTION 10.11.
Governing Law.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware.
SECTION 10.12.
Waiver of Jury Trial.
EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH OF THE PARTIES HERETO HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.12.
SECTION 10.13.
Counterparts.
This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the Sellers and the Purchaser have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized.
SELLERS:
MEDVEND HOLDINGS, LLC
/S/ Darryl B. Kaplan
DARRYL B. KAPLAN
/S/Claudio Tartaglia
CLAUDIO TARTAGLIA
[INSERT INDIVIDUALS SET FORTH ON SCHEDULE A]
PURCHASER:
MEDBOX, INC.
/s/ William R. Smith, III
Name: William R. Smith III
Title: VP / Director
THIS NOTE, AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.
MEDBOX, INC.
$1,000,000
2012 Convertible Promissory Note
Zero % Interest
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Note Number……………
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2012 #: 001
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Note Issue Date…………
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January 1, 2012
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Maturity Date……………
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December 31, 2012
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Name of Note Holder…..
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PVM International, Inc.
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Total Amount of Note….
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$1,000,000
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For value received, Medbox, Inc., a Nevada corporation (the “
Maker
”), hereby promises to pay to the order of the “Holder” identified above, (together with its successors, representatives, and permitted assigns, the “
Holder
”), in accordance with the terms hereinafter provided, the principal amount set forth above, together with interest thereon (the “Note”).
All payments under or pursuant to this Note shall be made in United States Dollars in immediately available funds to the Holder at the address of the Holder as set forth in the Subscription Agreement or at such other place as the Holder may designate from time to time in writing to the Maker. The outstanding principal balance of this Note shall be due and payable on the “
Maturity Date
” set forth above or at such earlier time as provided herein, unless converted prior to the Maturity Date, as described herein.
ARTICLE I
AGREEMENT AND PAYMENTS
Section 1.1
Agreement
. This Note has been executed and delivered pursuant to an Agreement among the Maker and Holder.
Section 1.2
Payment of Interest
. This Note shall bear zero percent (0%) interest.
Section 1.3
Payment of Principal
. Subject to the conditions set forth in this Section 1.3, commencing on Maturity Date, Maker shall pay an amount to the Holder equal to 100% of the original principal amount of this Note.
(a) As a condition precedent to the payment of principal on the Maturity Date, Holder shall have caused Maker to earn total revenues, as defined by Generally Accepted Accounting Principles, (“
GAAP
”), in an amount which equals or exceeds three million dollars ($3,000,000) no later than the Maturity Date (the “Performance Criteria”).
(b) In the event that the Performance Criteria described in Section 1.3(a)
is not
satisfied by the Maturity Date, this Note shall automatically convert in its entirety into restricted shares of Maker’s common stock. Holder shall have the following conversion options in the event of mandatory conversion under this Section 1.3(b):
i. One million (1,000,000) restricted shares;
or
ii. Conversion in accordance with Section 3.2(a) below.
(c) In the event that the Performance Criteria described in Section 1.3(a) is satisfied by the Maturity Date, and Maker has insufficient funds (as defined by GAAP) to pay to Holder an amount equal to 100% of the of the original principal amount of this Note, this Note shall remain due and outstanding until such time as Maker has sufficient funds to pay an amount to the Holder equal to 100% of the original principal amount of this Note. In the event that the Note remains outstanding pursuant to this Section 1.3(c), the Note shall bear simple interest at a rate of ten percent (10%) per annum from the Maturity Date until the date that this Note is paid in full.
Section 1.4
No Transfer
. This Note may not be transferred, sold, pledged, hypothecated or otherwise granted as security by the Holder.
Section 1.5
Replacement
. Upon receipt of a duly executed, notarized and unsecured written statement from the Holder with respect to the loss, theft or destruction of this Note (or any replacement hereof) and a standard indemnity, or, in the case of a mutilation of this Note, upon surrender and cancellation of such Note, the Maker shall issue a new Note, of like tenor and amount, in lieu of such lost, stolen, destroyed or mutilated Note.
Section 1.6
Security Interest
. So long as this Note remains due and payable, the Maker hereby grants Holder a security interest in Maker’s assets not to exceed the unpaid principal and interest on the Note.
ARTICLE II
EVENTS OF DEFAULT; REMEDIES
Section 2.1
Events of Default
. The occurrence of any of the following events shall be an “
Event of Default
” under this Note:
(a)
the Maker shall fail to: make the principal payment on the Maturity Date.
(b)
the Maker’s notice to the Holder, including by way of public announcement, at any time, of its inability to comply or its intention not to comply with proper requests for conversion of this Note into shares of Common Stock;
(c)
the Maker shall fail to (i) timely deliver the shares of Common Stock upon conversion of the Note;
(d)
the Maker shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or assets, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic), (iv) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or other similar law affecting the enforcement of creditors’ rights generally, (v) acquiesce in writing to any petition filed against it in an involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic), (vi) issue a notice of bankruptcy or winding down of its operations or issue a press release regarding same, or (vii) take any action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing; or
(e)
a proceeding or case shall be commenced in respect of the Maker, without its application or consent, in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets in connection with the liquidation or dissolution of the Maker or (iii) similar relief in respect of it under any law providing for the relief of debtors, and such proceeding or case described in clause (i), (ii) or (iii) shall continue undismissed, or unstayed and in effect, for a period of thirty (30) days or any order for relief shall be entered in an involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic) against the Maker or action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing shall be taken with respect to the Maker and shall continue undismissed, or unstayed and in effect for a period of thirty (30) days; or
Section 2.2
Remedies Upon An Event of Default
. If an Event of Default shall have occurred and shall be continuing for more than 30 days after Maker’s receipt of written notice from Holder, the Holder of this Note may at any time at Holder’s option, (a) declare in writing, the entire unpaid principal balance of this Note, together with all interest accrued hereon, due and payable.
ARTICLE III
CONVERSION; ANTI-DILUTION; PREPAYMENT
Section 3.1
Conversion Rate
. At any time on or after the Issuance Date, this Note shall be convertible (in whole or in part), at such “Conversion Rate” as discussed in this Article III.
Section 3.2
Conversion Option
. At any time on or after the Issuance Date, at the sole cost of Holder, this Note shall be convertible (in whole or in part), at the option of the Holder into such number of fully paid and non-assessable shares of Maker’s Common Stock as is determined as follows:
(a) In the event that the Maker receives a Conversion Notice duly executed, to the Maker at the Fax number provided in the Conversion Notice attached hereto as Exhibit A at any time from the Issuance Date until a date which is up to 12 months from the Issuance Date, this Note shall be convertible (in whole or in part), at the option of the Holder into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (x) that portion of the outstanding principal balance plus any accrued but unpaid interest under this Note as of such date that the Holder elects to convert by (y) a number which is 75% of the average Closing Price for the immediate preceding 10 Trading Days. The term “
Trading Day
” means (a) a day on which the Common Stock is traded on the Pink Sheets, OTC Bulletin Board, or (b) if the Common Stock is not traded on the Pink Sheets or OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices). The term “
Closing Price
” shall mean, on any particular date (i) the last trading price per share of the Common Stock on such date on the Pink Sheets, OTC Bulletin Board or another registered national stock exchange on which the Common Stock is then listed, or if there is no such price on such date, then the last trading price on such exchange or quotation system on the date nearest preceding such date, or (ii) if the Common Stock is not then reported by the Pink Sheets, OTC Bulletin Board or the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for the relevant conversion period, as determined in good faith by the Holder, or (iii) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock as determined by the Holder and reasonably acceptable to the Maker; or
(b) In the event that the Maker receives a Conversion Notice duly executed, to the Maker at the Fax number provided in the Conversion Notice attached hereto as Exhibit A at any time from a date which is after 12 months from the Issuance Date up to a date which is 24 months from the Issuance date, this Note shall be convertible (in whole or in part), at the option of the Holder into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (x) that portion of the outstanding principal balance plus any accrued but unpaid interest under this Note as of such date that the Holder elects to convert by (y) a number which is 85% of the average Closing Price for the immediate preceding 10 Trading Days; or
(c) In the event that the Maker receives a Conversion Notice duly executed, to the Maker at the Fax number provided in the Conversion Notice attached hereto as Exhibit A at any time from a date which is after 24 months from the Issuance Date up to the Maturity Date, this Note shall be convertible (in whole or in part), at the option of the Holder into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (x) that portion of the outstanding principal balance plus any accrued but unpaid interest under this Note as of such date that the Holder elects to convert by (y) a number which is 90% of the average Closing Price for the immediate preceding 10 Trading Days;
Section 3.3. Adjustment of Conversion Rate. The Conversion Rate shall be subject to adjustment from time to time as follows:
(a)
Adjustments for Stock Splits and Combinations
. If the Maker shall at any time or from time to time after the Issuance Date, effect a stock split of the outstanding Common Stock, the applicable Conversion Rate in effect immediately prior to the stock split shall be proportionately decreased. If the Maker shall at any time or from time to time after the Issuance Date, combine the outstanding shares of Common Stock, the applicable Conversion Rate in effect immediately prior to the combination shall be proportionately increased. Any adjustments under this Section shall be effective at the close of business on the date the stock split or combination occurs.
(b)
Adjustments for Reclassification, Exchange or Substitution
. If the Common Stock issuable upon conversion of this Note at any time or from time to time after the Issuance Date shall be changed to the same or different number of shares of any class or classes of stock, whether by reclassification, exchange, substitution or otherwise (other than by way of a stock split or combination of shares or stock dividends), or a reorganization, merger, or consolidation, then, and in each event, an appropriate revision to the conversion price shall be made and provisions shall be made (by adjustments of the conversion price or otherwise) so that the Holder shall have the right thereafter to convert this Note into the kind and amount of shares of stock and other securities receivable upon reclassification, exchange, substitution or other change, by holders of the number of shares of Common Stock into which such Note might have been converted immediately prior to such reclassification, exchange, substitution or other change, all subject to further adjustment as provided herein.
(c)
Adjustments for Reorganization, Merger, Consolidation or Sales of
Assets
. If at any time or from time to time after the Issuance Date there shall be a capital reorganization of the Maker (other than by way of a stock split or combination of shares or stock dividends or distributions) or a reclassification, exchange or substitution of shares, or a merger or consolidation of the Maker with or into another corporation where the holders of outstanding voting securities prior to such merger or consolidation do not own over fifty percent (50%) of the outstanding voting securities of the merged or consolidated entity, immediately after such merger or consolidation, or the sale of all or substantially all of the Maker’s properties or assets to any other person (an “
Organic Change
”), then as a part of such Organic Change, (A) if the surviving entity in any such Organic Change is a public company that is registered pursuant to the Securities Exchange Act of 1934, as amended, and its common stock is listed or quoted on a national exchange or the Pink Sheets or OTC Bulletin Board, an appropriate revision to the Conversion Price shall be made and provision shall be made (by adjustments of the Conversion Price or otherwise) so that the Holder shall have the right thereafter to convert such Note into the kind and amount of shares of stock and other securities or property of the Maker or any successor corporation resulting from Organic Change, and (B) if the surviving entity in any such Organic Change is not a public company that is registered pursuant to the Securities Exchange Act of 1934, as amended, or its common stock is not listed or quoted on a national exchange or the Pink Sheets or OTC Bulletin Board, the Holder shall have the right to demand prepayment of this Note. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section with respect to the rights of the Holder after the Organic Change to the end that the provisions of this Section (including any adjustment in the applicable Conversion Price then in effect and the number of shares of stock or other securities deliverable upon conversion of this Note) shall be applied after that event in as nearly an equivalent manner as may be practicable.
(d)
Certificates as to Adjustments
. Upon occurrence of each adjustment or readjustment of the conversion price or number of shares of Common Stock issuable upon conversion of this Note pursuant to this section, the Maker at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a certificate setting forth such adjustment and readjustment, showing in detail the facts upon which such adjustment or readjustment is based. The Maker shall, upon written request of the Holder, at any time, furnish or cause to be furnished to the Holder a like certificate setting forth such adjustments and readjustments, the applicable conversion price in effect at the time, and the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon the conversion of this Note. Notwithstanding the foregoing, the Maker shall not be obligated to deliver a certificate unless such certificate would reflect an increase or decrease of at least one percent (1%) of such adjusted amount.
(e)
Fractional Shares
. No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of any fractional shares to which the Holder would otherwise be entitled, the Maker shall round up to the next share.
(f)
Reservation of Common Stock
. The Maker shall at all times when this Note shall be outstanding, reserve and keep available out of its authorized but unissued Common Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of this Note and all interest accrued thereon.
ARTICLE IV
MISCELLANEOUS
Section 4.1
Notices
. Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective upon hand delivery, telecopy or facsimile at the address or number designated in the Subscription Agreement.
Section 4.2
Governing Law
. This Note shall be governed by and construed in accordance with the internal laws of the State of California, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of another jurisdiction. This Note shall not be interpreted or construed with any presumption against the party causing this Note to be drafted.
Section 4.3
Consent to Jurisdiction
. Each of the Maker and the Holder (i) hereby irrevocably submits to the exclusive jurisdiction of the Superior Court of the State of California in the County of Riverside California, for the purposes of any suit, action or proceeding arising out of or relating to this Note and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of the Maker and the Holder consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under the Subscription Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.
Section 4.4
Headings
. Article and section headings in this Note are included herein for purposes of convenience of reference only and shall not constitute a part of this Note for any other purpose.
Section 4.5
Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief
. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note, at law or in equity (including, without limitation, a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a holder’s right to pursue actual damages for any failure by the Maker to comply with the terms of this Note. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the holder thereof and shall not, except as expressly provided herein, be subject to any other obligation of the Maker (or the performance thereof). The Maker acknowledges that a breach by it of its obligations hereunder will cause irreparable and material harm to the Holder and that the remedy at law for any such breach may be inadequate. Therefore the Maker agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available rights and remedies, at law or in equity, to seek and obtain such equitable relief, including but not limited to an injunction restraining any such breach or threatened breach, without the necessity of showing economic loss and without any bond or other security being required.
Section 4.6
Binding Effect.
The obligations of the Maker and the Holder set forth herein shall be binding upon the successors and assigns of each such party, whether or not such successors or assigns are permitted by the terms hereof.
Section 4.7
Amendments
. This Note may not be modified or amended in any manner except in writing executed by the Maker and the Holder.
Section 4.8
Compliance with Securities Laws.
The Holder of this Note acknowledges that this Note is being acquired solely for the Holder’s own account and not as a nominee for any other party, and for investment, and that the Holder shall not offer, sell or otherwise dispose of this Note. This Note and any Note issued in substitution or replacement therefor shall be stamped or imprinted with a legend in substantially the following form:
“THIS NOTE, AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE MAY BE SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.”
Section 4.9
Parties in Interest.
This Note shall be binding upon, inure to the benefit of and be enforceable by the Maker, the Holder and their respective successors and permitted assigns.
Section 4.10
No Rights as Shareholder
. Nothing contained in this Note shall be construed as conferring upon the Holder, prior to the conversion of this Note, the right to vote or to receive dividends or to consent or to receive notice as a shareholder in respect of any meeting of shareholders for the election of directors of the Maker or of any other matter, or any other rights as a shareholder of the Maker.
Section 4.11
Accredited Investors Only
. Holder understands and agrees that this Note may only be held by “Accredited Investors” as such term is defined by Rule 501 of Regulation D of the Securities Act of 1933. Holder represents and warrants that Holder is an Accredited Investor and has such knowledge, skill and experience in business, financial and investment matters that Holder is capable of evaluating the merits and risks of an investment in the Note. To the extent necessary, Holder has retained, at the expense of Holder, and relied upon, appropriate professional advice regarding the investment, tax and legal merits and consequences of the purchase and ownership of the Note.
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“Maker”
MEDBOX, INC.
/S/ Leila Guieb
_______________________________________________
By: Leila Guieb
Its: Treasurer
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“Holder”
PVM INTERNATIONAL, INC.
/S/ Vincent Mehdizadeh
________________________________________________
By: Vincent Mehdizadeh
Its: CEO
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Convertible Promissory Note
Page of [INSERT PAGE NUMBER]
EXHIBIT A
FORM OF NOTICE OF CONVERSION
(To be Executed by the Holder in order to Convert the Note)
The undersigned hereby irrevocably elects to convert $ ____________________
of the principal amount of undersigned’s 2012 Convertible Note into restricted shares of Common Stock of Medbox, Inc. (the “Maker”) according to the conditions of the 2012 Convertible Note, as of the date written below.
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Date of Conversion:
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Applicable Conversion Price:
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Signature: ___________________________________________________________
Print Name: ___________________________________________________________
Tax ID / SSN: _________________________________________________________
Phone Number: _____________________________________________________
Address: ___________________________________________________________
___________________________________________________________
Convertible Promissory Note
Page of [INSERT PAGE NUMBER]