Table of Contents

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 2015

REGISTRATION NO. 333-203299

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

MEDBOX, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		3585		45-3992444
(State or jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

600 Wilshire Blvd., Ste. 1500

Los Angeles, CA 90069

800-762-1452

(Address and telephone number of principal executive offices)

 

 

Guy Marsala

Chief Executive Officer

Medbox, Inc.

600 Wilshire Blvd. Ste. 1500

Los Angeles, CA 90069

800-762-1452

(Name, address and telephone number of agent for service)

 

 

Copies to:

Blase P. Dillingham, Esq.

Scott A. Schwartz, Esq.

Manatt, Phelps & Phillips, LLP

11355 West Olympic Boulevard

Los Angeles, CA 90064

(310) 312-4000

(310) 312-4224 Facsimile

 

 

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨				Accelerated filer		¨
Non-accelerated filer		x				Smaller reporting company		¨

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Class of Securities to be Registered		Amount To be Registered		Proposed Maximum Aggregate Price Per Share (4)		Proposed Maximum Aggregate Offering Price		Amount of Registration Fee
Common Stock, $0.001 par value per share		40,638,630 (1)(2)		$0.61 (3)		$24,789,564		$2,880.55 (4)

(1)

27,766,106 of such shares are issuable upon the conversion of convertible debentures. 3,444,541 of such shares are issuable upon the conversion of accrued interest under convertible debentures. 9,427,983 of such shares are issuable upon the exercise of warrants to purchase common stock. The shares registered are offered for resale by the selling stockholders named in the prospectus.

(2)

Pursuant to Rule 416 under the Securities Act of 1933, as amended, there is also being registered hereby such indeterminate number of additional shares of common stock of the registrant as may be issued or issuable in respect of the registered shares to prevent dilution resulting from stock splits, stock dividends, stock distributions and similar transactions.

(3)	Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933 and based on the average of the high and the low prices of the Registrant’s common stock on May 7, 2015 as reported by the OTCQB.

(4)

The registrant previously paid $2,900.67 in connection with its Registration Statement on Form S-1 (File No. 333-199873) filed with the Securities and Exchange Commission on November 5, 2014, pursuant to which no securities were issued and all were deregistered. Pursuant to Rule 457(p) of the Securities Act, the previously paid fee amount is offset against the currently due filing fee. As a result, no fee is due in connection with this filing.

 

 

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 this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

---

Table of Contents

The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities under this prospectus until the registration statement of which it is a part and filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED MAY 11, 2015

MEDBOX, INC.

40,638,630 Shares of Common Stock

 

 

This prospectus relates to the public offering of up to 40,638,630 shares of common stock of Medbox, Inc. by the selling stockholders, including 27,766,106 shares issuable upon conversion of convertible debentures, 3,444,541 shares issuable as interest on convertible debentures, and 9,427,983 shares issuable upon the exercise of warrants.

The selling stockholders may sell common stock from time to time in the principal market on which the common stock is traded at the prevailing market price or in negotiated transactions.

We will not receive any of the proceeds from the sale of common stock by the selling stockholders. We will, however, receive the exercise price of any warrants exercised for cash. We will pay the expenses of registering these shares.

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and are subject to reduced public company reporting requirements.

 

 

Investing in our common stock involves a high degree of risk. You should consider carefully the risk factors beginning on page 9 of this prospectus before purchasing any of the shares offered by this prospectus.

Our common stock is quoted on the OTCQB and trades under the symbol “MDBX”. The last reported sale price of our common stock on the OTCQB on May 6, 2015, was $0.71 per share.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is            , 2015.

---

Table of Contents

TABLE OF CONTENTS

 

		Page
Prospectus Summary			1
Risk Factors			9
Forward-Looking Statements			20
Use of Proceeds			21
Selling Stockholders			22
Plan of Distribution			25
Description of Securities to be Registered			27
Description of Business			32
Description of Property			41
Legal Proceedings			42
Selected Consolidated Financial Data			45
Management’s Discussion and Analysis of Financial Condition and Results of Operations			47
Market Price of and Dividends on Registrant’s Common Equity and Related Stockholder Matters			61
Changes in Accountants			61
Directors and Executive Officers			62
Executive Compensation			65
Security Ownership of Certain Beneficial Owners and Management			70
Certain Relationships and Related Transactions, and Director Independence			72
Additional Information			75
Indemnification for Securities Act Liabilities			76
Legal Matters			78
Experts			79
Financial Statements			F-i

You may only rely on the information contained in this prospectus or that we have referred you to. We have not authorized anyone to provide you with different information. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the common stock offered by this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any common stock in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this prospectus nor any sale made in connection with this prospectus shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this prospectus or that the information contained by reference to this prospectus is correct as of any time after its date.

---

Table of Contents

 

1

---

Table of Contents

 

2

---

Table of Contents

 

3

---

Table of Contents

 

4

---

Table of Contents

 

5

---

Table of Contents

 

6

---

Table of Contents

 

7

---

Table of Contents

 

8

---

Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. Current investors and potential investors should consider carefully the risks and uncertainties described below together with all other information contained in this prospectus before making investment decisions with respect to our common stock. The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. If any of the following risks actually occur, our business, financial condition, results of operations and our future growth prospects would be materially and adversely affected. Under these circumstances, the trading price and value of our common stock could decline, resulting in a loss of all or part of your investment. The risks and uncertainties described in this prospectus are not the only ones facing us. Additional risks and uncertainties of which we are not presently aware, or that we currently consider immaterial, may also affect our business operations.

Past financial performance should not be considered to be a reliable indicator of future performance, and current and potential investors should not use historical trends to anticipate results or trends in future periods.

Risks Related to Our Business

Our continued success is dependent on additional states legalizing medical marijuana and additional localities in California and other states passing legislation to allow dispensaries.

Continued development of the medical marijuana market is dependent upon continued legislative authorization of marijuana at the state level for medical purposes and, in certain states, including California, based on the specifics of the legislation passed in that state, and on local governments authorizing a sufficient number of dispensaries. Any number of factors could slow or halt the progress. Furthermore, progress, while encouraging, is not assured, and the process normally encounters set-backs before achieving success. While there may be ample public support for legislative proposals, key support must be created in the legislative committee or a bill may never advance to a vote. Numerous factors impact the legislative process. Any one of these factors could slow or halt the progress and adoption of marijuana for medical purposes, which would limit the market for our services and products and negatively impact our business and revenues.

There is no track record for companies pursuing our strategy and if our strategy is unsuccessful, we will not be profitable and our stockholders could lose their investments.

There is no track record for companies pursuing our business strategy, and there is no guarantee that our business strategy will be successful or profitable. If our strategy is unsuccessful, we may fail to meet our objectives and not realize anticipated revenues or profits from the business we pursue, which may cause the value of the Company to decrease, thereby potentially causing our stockholders to lose their investments. The success of our strategy will depend on numerous factors including:

 

•

the success of dispensary and cultivation operations at locations where we may enter into contracts to oversee the management of the location;

 

•

our ability to work with suitable business owners to serve each dispensary or cultivation center and our ability to arrange and oversee license applications;

 

•

our ability to find parties that agree to purchase the real estate for which we enter into purchase agreements, so that we will not be required to purchase the property ourselves or forfeit our earnest money deposits;

 

•

our ability to find landlords that charge reasonable rent for each property used for the submission of a license application; and

 

•

our ability to obtain adequate financing to market and produce our portable vaporizer products.

 

9

---

Table of Contents

We may not succeed in entering into management rights agreements with licensees, or finding suitable parties to whom to assign such management rights.

We enter into real estate purchase agreement contracts and arrange for business owners to apply for a license for a marijuana retail, dispensary or cultivation center at such location. Prior to or following the entity’s receipt of the license, we then seek to enter into a management rights agreement for such location with such entity, pursuant to which the entity grants us the exclusive, assignable right and obligation to manage the operations for such location in exchange for a percentage of the income generated by such operations. Under such an arrangement, we do not intend to manage such operations ourselves, but to assign our rights under the management rights agreement to an unaffiliated parties, in exchange for upfront and monthly fees, and to enter into additional contracts with such parties for the management oversight of such individual licensed dispensary, retail, or cultivation centers in exchange for additional compensation. We do not have any formal contractual relationship or control over the dispensaries or cultivation centers that we assist in obtaining licenses, and there is no assurance these entities will grant us exclusive management rights for the centers. Further, there is no assurance we will be able to find suitable parties to whom to assign such management rights. If we fail to enter into management rights agreements, or to assign such management rights as planned, our business will suffer.

The alternative medicine industry faces strong opposition.

It is believed by many that well-funded, significant businesses may have a strong economic opposition to the medical marijuana industry as currently formed. We believe that the pharmaceutical industry clearly does not want to cede control of any compound that could become a strong selling drug. For example, medical marijuana will likely adversely impact the existing market for Marinol, the current “marijuana pill” sold by mainstream pharmaceutical companies. The pharmaceutical industry is well funded with a strong and experienced lobby that eclipses the funding of the medical marijuana movement. Any inroads the pharmaceutical industry makes in halting or rolling back the medical marijuana movement could have a detrimental impact on the market for our services and products and thus on our business, operations and financial condition.

Marijuana remains illegal under federal law.

Marijuana remains illegal under federal law. It is a schedule-I controlled substance. Even in those jurisdictions in which the use of medical marijuana has been legalized at the state level, its prescription is a violation of federal law. The United States Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop. and Gonzales v. Raich that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes. Therefore, federal law criminalizing the use of marijuana preempts state laws that legalize its use for medicinal purposes. Presently, despite federal law, many states are maintaining existing laws and passing new ones in this area. This may be because the Obama Administration has made a policy decision to allow states to implement these laws and not prosecute anyone operating in accordance with applicable state law.

Regardless of the Obama Administration’s policy decision, the federal government may at any time choose to enforce the federal law, and, in the past, it has investigated medical marijuana businesses in the various states in which we do business. Moreover, we face another presidential election cycle in 2016, and a new administration could introduce a less favorable policy. A change in the federal attitude towards enforcement could cripple the industry.

Although we do not market, sell, or produce marijuana or marijuana related products, there is a risk that we could be deemed to facilitate the selling or distribution of marijuana in violation of the federal Controlled Substances Act, or be deemed to be aiding or abetting, or being an accessory to, a violation of the Controlled Substances Act. Additionally, even if the Federal government does not prove a violation of the Controlled Substances Act, the federal government may seize, through civil asset forfeiture proceedings, certain Company assets, such as equipment, real estate, moneys and proceeds if the government can prove a substantial connection between these assets and marijuana distribution or cultivation.

 

10

---

Table of Contents

Adverse actions taken by the federal government may lead to delays of our business operations, disruptions to our revenue streams, losses of substantial assets, and substantial litigation expenses. Furthermore, the medical marijuana industry is our primary target market, and if this industry were unable to operate, we would lose the majority of our potential clients, which would have a negative impact on our business, operations and financial condition.

We and people and businesses that we do business with may have difficulty accessing the service of banks, which may make it difficult for them to purchase our products and services.

As discussed above, the use of marijuana is illegal under federal law. Therefore, there is a strong argument that banks cannot accept for deposit funds from the drug trade and therefore cannot do business with our clients that traffic in marijuana, and clinic operators often have trouble finding a bank willing to accept their business. On February 14, 2014, the U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) released guidance to banks “clarifying Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to provide services to marijuana-related businesses.” In addition, U.S. Rep. Jared Polis (D-CO) has stated he will seek an amendment to banking regulations and laws in order to allow banks to transact business with state-authorized medical marijuana businesses. While these are positive developments, there can be no assurance this legislation will be successful, or that, even with the FinCEN guidance, banks will decide to do business with medical marijuana retailers, or that, in the absence of actual legislation, state and federal banking regulators will not strictly enforce current prohibitions on banks handling funds generated from an activity that is illegal under federal law. The inability of potential clients in our target markets to open accounts and otherwise use the services of banks may make it difficult for such potential clients to purchase our products and services and could materially harm our business.

We may have difficulty accessing bankruptcy courts.

As discussed above, the use of marijuana is illegal under federal law. Therefore, there is a strong argument that the federal bankruptcy courts cannot provide relief for parties who engage in marijuana or marijuana-related businesses. Recent bankruptcy rulings have denied bankruptcies for dispensaries upon the justification that businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity and upon the justification that courts cannot ask a bankruptcy trustee to take possession of, and distribute marijuana assets as such action would violate the Controlled Substances Act. Therefore, we may not be able to seek the protection of the bankruptcy courts and this could materially affect our business or our ability to obtain credit.

State and municipal governments in which we do business or seek to do business may have, or may adopt laws that adversely affect our ability to do business.

While the federal government has the right to regulate and criminalize marijuana, which it has in fact done, state and municipal governments may adopt additional laws and regulations that further criminalize or negatively affect marijuana businesses. States that currently have laws that decriminalize or legalize certain aspects of marijuana, such as medical marijuana, could in the future, reverse course and adopt new laws that further criminalize or negatively affect marijuana businesses. Additionally, municipal governments in these states may have laws that adversely affect marijuana businesses, even though there are no such laws at the state level. For example, municipal governments may have zoning laws that restrict where marijuana operations can be located and the manner and size of which they can expand and operate. These municipal laws, like the federal laws, may adversely affect our ability to do business, and adverse enforcement actions under these laws may lead to costly litigation and a closure of the businesses with which we have contracts or royalty-fee structures in place, in turn, affecting our own business. Moreover, if additional states do not adopt laws that legalize certain aspects of the marijuana industry, we may not be able to expand our business in the manner in which we prefer.

Also, given the complexity and rapid change of the federal, state and local laws pertaining to marijuana, the Company may incur substantial legal costs associated with complying with these laws and in acquiring the

 

11

---

Table of Contents

necessary state and local licenses required by our business endeavors. For example, some states permit entities to enter into joint venture relationships with individual license holders that provide for revenue sharing arrangements. In other states, revenue sharing is not permitted, and we will accept fee-for-service arrangement on a cost-plus basis for our services. State and municipal governments may also limit the number of specialized licenses available or apply stringent compliance requirements necessary to maintain the license. These developments may limit our ability to expand our negatively affect our business model.

Our manufacturing partner may cease doing business, and we may not be able to find another manufacturer to supply inventory on the same terms to us, or at all.

On May 4, 2015, AVT, Inc., the manufacturing partner of the Company announced that they had commenced a voluntary filing for restructuring and court protection under Chapter 11 of the United States Bankruptcy Code. AVT expects that the court will authorize them to conduct business as usual while developing a reorganization plan and believes that the company’s core vending and automated retailing business remains strong, and that the filing is related to past attempts at diversification into unrelated businesses. The Company has evaluated the bankruptcy filing and concluded it should not have any impact on the Company’s operations.

We have a limited operating history and operate in a new industry, and we may not succeed.

We have a limited operating history and may not succeed. We are subject to all risks inherent in a developing business enterprise. Our likelihood of continued success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with manufacturing specialty products and the competitive and regulatory environment in which we operate. For example, the medical marijuana industry is a new industry that, as a whole, may not succeed, particularly if the Federal government changes course and decides to prosecute those dealing in medical marijuana under Federal law. If that happens, there may not be an adequate market for our services or products. As a new industry, there are not established players whose business models we can follow or build upon. Similarly, there is limited information about comparable companies available for potential investors to review in making a decision about whether to invest in Medbox. Furthermore, as the medical marijuana industry is a new market, it is ripe for technological advancements that could limit or eliminate the need for our products.

You should further consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages. For example, unanticipated expenses, problems, and technical difficulties may occur and they may result in material delays in the operation of our business, in particular with respect to our new products. We may not be able to successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, such failure could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment.

We will require additional capital to finance our operations in the future, but that capital may not be available when it is needed and could be dilutive to existing stockholders.

We will require additional capital for future operations. We plan to finance anticipated ongoing expenses and capital requirements with funds generated from the following sources:

 

•

cash provided by operating activities;

 

•

available cash and cash investments; and

 

•

capital raised through debt and equity offerings.

Current conditions in the capital markets are such that traditional sources of capital may not be available to us when needed or may be available only on unfavorable terms. Our ability to raise additional capital will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure you that we will be able to successfully raise additional capital at all or on terms that are acceptable to us. If we cannot raise additional

 

12

---

Table of Contents

capital when needed, it may have a material adverse effect on our liquidity, financial condition, results of operations and prospects. Furthermore, if we raise capital by issuing stock, the holdings of our existing stockholders will be diluted and the market price of our common stock could decline.

If we raise capital by issuing debt securities, such debt securities would rank senior to our common stock upon our bankruptcy or liquidation. If we raise capital by issuing equity securities, they may be senior to our common stock for the purposes of dividend and liquidating distributions, which may adversely affect the market price of our common stock. Finally, upon dissolution or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock.

We may incur substantial costs as a result of our agreement to purchase stock of MedVend, Inc.

In March 2013, we entered into a Membership Interest Purchase Agreement with the holders (the “MedVend Sellers”) of 94.8% of the equity interests in MedVend Holdings, LLC, the holding company for MedVend, LLC (“MedVend”), a bio-tech company that features a patented automated medicine dispensing machine used for traditional prescription pharmaceutical dispensing, and several related entities. Pursuant to the agreement, we agreed to acquire 50% of the equity interests in MedVend Holdings in exchange for $4.1 million to be paid $300,000 in cash at closing and $3.8 million to be paid in either cash or our common stock on the 10th business day after the one-year anniversary of the closing. As noted below, we were subsequently served with a complaint alleging that the Sellers did not have authority to enter into the transaction with us because the consent of the minority stockholders was required. We are in litigation with the MedVend Sellers to rescind the Membership Interest Purchase Agreement. If we are unable to rescind this agreement, we will owe the $300,000 in cash and $3.8 million in cash or shares of our common stock to the Sellers.

Our financial statements may not be comparable to those of other companies.

Pursuant to Section 107(b) of the JOBS Act, we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of The JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates, and our stockholders and potential investors may have difficulty in analyzing our operating results if comparing us to such companies.

The success of our new and existing products and services is uncertain.

We have committed, and expect to continue to commit, significant resources and capital to develop and market existing products and services enhancements and new products and services. These products and services are relatively untested, and we cannot assure you that we will achieve market acceptance for these products and services, or other new products and services that we may offer in the future. Moreover, these and other new products and services may be subject to significant competition with offerings by new and existing competitors in the business of dispensing regulated pharmaceutical products. In addition, new products, services and enhancements may pose a variety of technical challenges and require us to attract additional qualified employees. The failure to successfully develop and market these new products, services or enhancements or to hire qualified employees could seriously harm our business, financial condition and results of operations.

Our business is dependent upon continued market acceptance by consumers.

We are substantially dependent on continued market acceptance of our Medbox machines and our vaporizer products by consumers. Although we believe that the use of dispensing machines and vaporizers in the United States is gaining better consumer acceptance, we cannot predict the future growth rate and size of this market.

 

13

---

Table of Contents

If we are able to expand our operations, we may be unable to successfully manage our future growth.

If we are able to expand our operations in the United States and in other countries where we believe our services and products will be successful, we may experience periods of rapid growth, which will require additional resources. Any such growth could place increased strain on our management, operational, financial and other resources, and we will need to hire, train, motivate, and manage additional employees, as well as attract management, sales, finance and accounting, international, technical, and other professionals. In addition, we will need to expand the scope of our infrastructure and our physical resources. Any failure to expand these areas and implement appropriate procedures and controls in an efficient manner and at a pace consistent with our business objectives could have a material adverse effect on our business and results of operations.

Our business may expose us to product liability claims for damages resulting from the design or manufacture of our products. Product liability claims, whether or not we are ultimately held liable for them, could have a material adverse effect on our business and results of operations.

We may be subject to product liability claims if any of our products are alleged to be defective or cause harmful effects. Product liability claims or other claims related to our products, regardless of their outcome, could require us to spend significant time and money in litigation, divert management time and attention, require us to pay significant damages, harm our reputation or hinder acceptance of our products. Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable or reasonable terms. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our products.

Our prior operating results may not be indicative of our future results.

You should not consider prior operating results with respect to revenues, net income or any other measure to be indicative of our future operating results. We are presently transitioning to a new business model. The timing and amount of future revenues will depend almost entirely the success of our new model and our ability to provide services to new customers. Our future operating results will depend upon many other factors, including:

 

•

state and local regulation,

 

•

our ability to successfully implement our new business model, including developing properties and selling management rights associated with monitoring security and compliance attributes for such properties,

 

•

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.

The restatement of the financial information in our Form 10 Registration Statement and Quarterly Reports on Form 10-Q for the first three quarters of 2014 and related investigations are and will continue to be time consuming and expensive and have had, and could continue to have, a material adverse effect on our financial condition, results of operations or cash flows.

We devoted substantial resources to the completion of the restatement of Financial Statements in our Form 10 Registration Statement and Quarterly Reports on Form 10-Q for the first three quarters of 2014 (the “Restatements”) and to compliance with the SEC’s investigation of our financial reporting and revenue recognition methodologies as well as internal control failures that precipitated the Restatements. As a result of these efforts, we have incurred significant fees and expenses, primarily for additional audit, financial, legal and related costs for the Restatements. We expect to continue to incur additional fees and expenses in connection with complying with the SEC’s investigation, applicable SEC reporting requirements, and the operation of some

 

14

---

Table of Contents

of our processes and internal controls. These costs, as well as the substantial management time devoted to address these issues, has had, and could continue to have, a material adverse effect on our financial condition, results of operations or cash flows.

We are the subject of litigation relating to the Restatements and the SEC investigation, which could adversely affect our business, results of operations or cash flows.

As previously reported, the Company is presently the subject of a non-public investigation by the SEC related to the Company’s revenue recognition methodologies that led to the Restatements among other matters.

The Company is presently subject to litigation, described under the heading “Legal Proceedings” in this prospectus, and in the future could be subject to other proceedings or actions arising in relation to the Restatements or the SEC investigation or related matters. This litigation and any other regulatory proceedings or actions may be time consuming, expensive and distracting from the conduct of our business. In the event that there is an adverse ruling in any legal or regulatory proceeding or action, we may be required to make payments to third parties that could have a material adverse effect on our business, financial condition, results of operations or cash flows. Furthermore, regardless of the merits of any claim, legal proceedings may result in substantial legal expense and also result in the diversion of time and attention by our management.

Our insurance coverage may not cover any costs and expenses related to this or any future litigation. In addition, we have paid and continue to pay legal counsel fees incurred by our present and former directors, officers and employees who are involved with the SEC inquiry, the Restatements, and the related review by the Board of Directors. Furthermore, Restatements and the SEC investigations and related litigation could impair our reputation, could cause our customers and partners to lose confidence in us, and could make it more difficult to attract new customers and entities to enter into real estate purchase agreements with or to act as assignees of management rights agreements, allowing us to operate our business or to retain qualified individuals to serve on the board of directors or as executive officers.

Our lack of adequate D&O insurance may also make it difficult for us to retain and attract talented and skilled directors and officers.

We are and may in the future be subject to additional litigation, including potential class action and stockholder derivative actions. Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can remain unknown for significant periods of time. Although we have obtained directors and officers liability (“D&O”) insurance to cover such risk exposure for our directors and officers, the amount of D&O insurance we have obtained is lower than customary for public companies. Such insurance generally pays the expenses (including amounts paid to plaintiffs, fines, and expenses including attorneys’ fees) of officers and directors who are the subject of a lawsuit as a result of their service to the Company. The amount of D&O insurance we have obtained may not be adequate to cover such expenses should such a lawsuit occur, and our deductibles are higher than we may be able to pay. While neither Nevada law nor our Articles of Incorporation or bylaws require us to indemnify or advance expenses to our officers and directors involved in such a legal action, we have entered into an indemnification agreement with our Chief Executive Officer, Chief Financial Officer and independent directors and intend to enter into similar agreements with other officers and directors in the future. Without adequate D&O insurance, the amounts we would pay to indemnify our officers and directors should they be subject to legal action based on their service to the Company could have a material adverse effect on our financial condition, results of operations and liquidity. Furthermore, our lack of adequate D&O insurance may make it difficult for us to retain and attract talented and skilled directors and officers, which could adversely affect our business.

If we are unable to maintain effective internal control over our financial reporting, the reputational effects could materially adversely affect our business.

Under the provisions of Section 404(a) of the Sarbanes-Oxley Act of 2002, as amended by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted rules requiring public companies to

 

15

---

Table of Contents

perform an evaluation of Internal Control over Financial Reporting (Internal Controls) and to report on our evaluation in our Annual Report on Form 10-K. Our Internal Controls constitute a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. However, as discussed in greater detail in Item 9A of this Form 10-K, the Company identified material weaknesses in its Internal Controls resulting in restatement of its consolidated financial statements. If our remediation of such reported material weakness is ineffective, or if in the future we are unable to maintain effective Internal Controls, additional resulting material restatements could occur, regulatory actions could be taken, and a resulting loss of investor confidence in the reliability of our financial statements could materially adversely affect the value of our common stock. We may be required to expend substantial funds and resources in order to rectify any deficiencies in our Internal Controls. Further, if lenders lose confidence in the reliability of our financial statements it could have a material adverse effect on our ability to fund our operations.

The integration of the Vaporfection acquisition may be more costly and time consuming than we initially expected and the acquired product line may not be able to be sold at sufficient gross margin and volume levels in order to support the operations or justify the recorded values for intangible assets or goodwill.

The acquisition of Vaporfection International, Inc. in April 2013 included a requirement that we invest approximately $1,600,000 over time for various past obligations and future operations. Among the assets we acquired were an existing product line and a developmental product. With the popularity of vaporizer products increasing, many competitors have entered the market, some of whom are very well capitalized. In addition, the market leader has significant early advantages over our product and we expect to have to significantly reduce our production costs for our products to be competitive in the market. Furthermore, significant advertising is needed to generate demand for the products in an overcrowded vaporizer environment. With the existing cost structure of the acquired product and the high cost of entering the market, we may not be able to generate sufficient gross product margin on sales to support the operations of this subsidiary.

We may be unable to adequately protect or enforce our patents and proprietary rights.

Our continuing success depends, in part, on our ability to protect our intellectual property and maintain the proprietary nature of our technology through a combination of patents, licenses and other intellectual property arrangements, without infringing the proprietary rights of third parties. We cannot assure you that these patents will be held valid if challenged, or that other parties will not claim rights in or ownership of our patent and other proprietary rights. We also cannot assure you that our pending patents will be issued. Moreover, patents issued to us or those we license patents from may be circumvented or fail to provide adequate protection.

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, Guy Marsala, our Chief Executive Officer, and C. Douglas Mitchell, our Chief Financial Officer. The unexpected loss of the services of Mr. Marsala, or Mr. Mitchell could have a material adverse effect on our business, operations, financial condition and operating results, as well as the value of our common stock.

Marijuana dispensed by our products are subject to numerous governmental regulations and it can be costly to comply with these regulations and to develop compliant products and processes.

Various herbal medicines dispensed by our products are subject to rigorous regulation by the U.S. Food and Drug Administration, and numerous international, supranational, federal, and state authorities. The process of obtaining regulatory approvals to market a drug or medical device can be costly and time-consuming, and approvals might not be granted for future products, or additional indications or uses of existing products, on a timely basis, if at all. Delays in the receipt of, or failure to obtain approvals for, future products, or new indications and uses, could result in delayed realization of product revenues, reduction in revenues, and in substantial additional costs. In addition, no assurance can be given that we will remain in compliance with applicable FDA and other regulatory requirements once clearance or approval has been obtained for a product.

 

16

---

Table of Contents

These requirements include, among other things, regulations regarding manufacturing practices, product labeling, and advertising.

Laws and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our business, and we cannot predict the impact that future regulations may have on us.

Local, state and federal medical marijuana laws and regulations are broad in scope and they are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our sales or marketing practices. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our revenues, profitability, and financial condition.

In addition, it is possible that regulations may be enacted in the future that will be directly applicable to Medbox and our services and products. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business. These potential effects could include, however, requirements for the revisions to our products to meet new standards, the recall or discontinuance of certain products, or additional record keeping and reporting requirements. Any or all of these requirements could have a material adverse effect on our business, financial condition, and results of operations.

Risks Related to the Company’s Common Stock

Our stock price has been extremely volatile.

The market price of our common stock has been extremely volatile and could be subject to further significant fluctuations due to changes in sentiment in the market regarding our operations or business prospects, among other factors.

Among the factors that could affect our stock price are:

 

•

our announcements regarding our Restatements and the status of the ongoing SEC investigation and related stockholder litigation;

 

•

industry trends and the business success of our vendors;

 

•

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;

 

•

our failure to meet the expectations of the investment community and changes in the investment community

 

•

recommendations or estimates of our future operating results;

 

•

announcements of strategic developments, acquisitions, dispositions, financings, product developments and other materials events by us or our competitors;

 

•

regulatory and legislative developments;

 

•

litigation;

 

•

general market conditions;

 

•

other domestic and international macroeconomic factors unrelated to our performance; and

 

•

additions or departures of key personnel.

Because our common stock is not listed on any national securities exchange, investors may find it difficult to buy and sell our shares.

Our common stock is not listed on any national securities exchange. Accordingly, investors may find it more difficult to buy and sell our shares than if our common stock was traded on an exchange. Although our

 

17

---

Table of Contents

common stock is traded on the OTCQB, it is an unorganized, inter-dealer, over-the-counter market which provides significantly less liquidity than the NASDAQ Capital Market or other national securities exchanges. These factors may have an adverse impact on the trading and price of our common stock.

Sales by our stockholders of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock.

A substantial portion of our total outstanding shares of common stock may be sold into the market under Rule 144 promulgated under the Securities Act. Such sales could cause the market price of our common stock to drop, even if our business is doing well. Such sales may include sales by officers and directors of the Company, who have entered into pre-arranged stock trading plans to sell shares of the Company’s common stock beneficially owned by them, established under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

Furthermore, the market price of our common stock could decline as a result of the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate.

Beneficial ownership of our common stock is highly concentrated.

As of December 31, 2014, our officers, directors and principal stockholders (those holding 5% or more of outstanding shares) beneficially own approximately 85% of our outstanding common stock, including approximately 62% of our outstanding shares which are beneficially owned by Vincent Mehdizadeh, our largest stockholder. As a result, management and our principal stockholders 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

 

d)

adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.

In addition, the concentration of our 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.

Our preferred stock may have rights senior to those of our common stock which could adversely affect holders of our common stock.

Our Articles of Incorporation give our Board of Directors the authority to issue additional series of preferred stock without a vote or action by our stockholders. The Board also has the authority to determine the terms of preferred stock, including price, preferences and voting rights. The rights granted to holders of preferred stock in the future may adversely affect the rights of holders of our common stock. Any such authorized class of preferred stock may have a liquidation preference – a pre-set distribution in the event of a liquidation – that would reduce the amount available for distribution to holders of common stock or superior dividend rights that would reduce the amount of dividends that could be distributed to common stockholders. In addition, an authorized class of preferred stock may have voting rights that are superior to the voting rights of the holders of our common stock. For a description of the voting and conversion rights relating to the Company’s 3,000,000 shares of Series A Preferred Stock presently outstanding see the Note 17 to our consolidated financial statements for the year ended December 31, 2014 included herein.

 

18

---

Table of Contents

We are an emerging growth company and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies, but not to emerging growth companies, including, but not limited to, a requirement to present only two years of audited financial statements, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, reduced disclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies and no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements. We have elected to adopt these reduced disclosure requirements. We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile.

We do not expect to pay any cash dividends in the foreseeable future.

We intend to retain our future earnings, if any, in order to reinvest in the development and growth of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, and such other factors as our Board of Directors deems relevant. Accordingly, investors may need to sell their shares of our common stock to realize a return on their investment, and they may not be able to sell such shares at or above the price paid for them.

We can sell additional shares of common stock without consulting stockholders and without offering shares to existing stockholders, which would result in dilution of existing stockholders’ interests in Medbox and could depress our stock price.

Our Articles of Incorporation authorize 100,000,000 shares of common stock, of which 34,784,434 shares of common stock are issued and outstanding as of May 1, 2015, and 10,000,000 shares of preferred stock, of which 3,000,000 shares are outstanding as of May 1, 2015, and our Board of Directors is authorized to issue additional shares of our common stock and preferred stock, including up to 2,000,000 shares of common stock authorized under our 2014 Equity Incentive Plan. Although our Board of Directors intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to our then existing stockholders in connection with any future issuance of our capital stock, the future issuance of additional shares of our common stock or preferred stock convertible into common stock would cause immediate, and potentially substantial, dilution to our existing stockholders, which could also have a material effect on the market value of the shares.

 

19

---

Table of Contents

FORWARD-LOOKING STATEMENTS

Information in this prospectus contains forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different than the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “future,” “plan,” or “project” or the negative of these words or other variations on these words or comparable terminology.

Examples of forward-looking statements include, but are not limited to, statements regarding our proposed services and products, market opportunities and acceptance, expectations for revenues, cash flows and financial performance, and intentions for the future. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” in this prospectus. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this prospectus will in fact be accurate. Further, we do not undertake any obligation to publicly update any forward-looking statements, except as may be required under applicable securities laws. As a result, you should not place undue reliance on these forward-looking statements.

Additional risks and uncertainties resulting from our restatement of our consolidated financial statements in the our Form 10 Registration Statement and in our Quarterly Reports on Form 10-Q for the first three quarters of 2014, among others, could, (i) cause us to incur substantial additional legal, accounting and other expenses, (ii) result in additional shareholder, governmental or other actions, or adverse consequences from class action or derivative suits from stockholders or the formal investigation being conducted by the Securities and Exchange Commission (“SEC”), (iii) cause our customers and contract partners to lose confidence in us; (iv) result in removal of the Company’s stock from the over-the-counter bulletin board quotation system (the “OTCBB”), or (v) result in additional failures of the Company’s internal controls if the Company’s remediation efforts are not effective. Any one or more of such risks and uncertainties could have a material adverse effect on us or the value of our common stock.

 

20

---

Table of Contents

USE OF PROCEEDS

We are filing the registration statement of which this prospectus is a part to permit the holder of the shares of our common stock described in the section entitled “Selling Stockholders” to resell such shares. We will receive no proceeds from the sale of shares of common stock offered by the selling stockholders. We will, however, receive the exercise price of the warrants, if exercised. To the extent that we receive cash upon exercise of any warrants, we expect to use that cash for working capital and general purposes, including business expenses, advisor fees, and marketing. The warrants have net exercise provisions and could result in fewer shares underlying the warrants than are being registered hereunder, if the selling stockholders elect to exercise their warrants pursuant to the net exercise provisions.

 

21

---

Table of Contents

SELLING STOCKHOLDERS

This prospectus relates to the public offering of up to 40,638,630 shares of common stock of Medbox, Inc. by the selling stockholders, including 27,766,106 shares issuable upon conversion of convertible debentures, 3,444,541 shares issuable as interest on convertible debentures, and 9,427,983 shares issuable upon the exercise of warrants.

The following table sets forth, based on information provided to us by the selling stockholders or known to us, the name of each selling stockholder, the nature of any position, office or other material relationship, if any, which the selling stockholder has had, within the past three years, with us or with any of our predecessors or affiliates, and the number of shares of our common stock beneficially owned by the stockholder before this offering. The number of shares owned are those beneficially owned, as determined pursuant to Exchange Act Rule 13d-3, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares of common stock as to which a person has sole or shared voting power or investment power and any shares of common stock which the person has the right to acquire within 60 days through the exercise of any option, warrant or right, through conversion of any security or pursuant to the automatic termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement. None of the selling stockholders is a broker-dealer or an affiliate of a broker-dealer.

Under the terms of the Purchase Agreement Debentures and Modified Debentures, the Company shall not effect any conversion of principal and/or interest of the debenture (or exercise of warrants) to the extent that, after giving effect to the conversion the selling stockholder would, together with its affiliates, beneficially own in excess of 4.99% of the common stock of the Company (excluding stock underlying debt or unexercised warrants or other securities). The number of shares in the table below do not reflect this limitation. The selling stockholders may sell all, some or none of their shares in this offering. See “Plan of Distribution.”

We have assumed all shares of common stock reflected on the table will be sold from time to time in the offering covered by this prospectus. Because the selling stockholders may offer all or any portions of the shares of common stock listed in the table below, no estimate can be given as to the amount of those shares of common stock covered by this prospectus that will be held by the selling stockholders upon the termination of the offering.

 

Selling Stockholder		Number of Shares Beneficially Owned Before Offering				Number of Shares Offered				Number of Shares Beneficially Owned After Offering				Percentage of Common Stock Beneficially Owned After Offering (1)
Redwood Management LLC (2)			9,500,784	(3)			27,437,523	(4)			4,443,561	(5)			12.2	%
YA Global Master SPV, Ltd. (8)			2,547,837	(9)			11,189,684	(10)			685,000	(11)			2.0	%
Ned L. Siegel (12)			260,140	(13)			279,412	(14)			126,562	(15)			*
J. Mitchell Lowe (16)			213,915	(17)			139,706	(18)			145,312	(19)			*
RDW Capital, LLC (20)			9,500,784	(21)			1,005,714	(22)			4,443,561	(23)			12.2	%
Old Main Capital			0				586,593				0				*

 

(1)	Based on 34,784,434 shares of common stock issued and outstanding as of May 1, 2015.

(2)

Figures in columns 2 and 4 include shares of common stock beneficially owned by Redwood Fund II LLC (“Redwood II”), Redwood Fund III, Ltd. (“Redwood III”), and RDW Capital, LLC (“RDW”) each of which is an affiliate of Redwood Management LLC (“Redwood Management”). Gary Rogers has voting and dispositive power over the securities of the Company held by the selling stockholder, as well as Redwood II, Redwood III and RDW. Neither Redwood II nor Redwood III are selling stockholders.

(3)	Represents (i) shares of common stock held by selling stockholder and its affiliates as of May 1, 2015 plus (ii) shares of common stock issuable to selling stockholder or its affiliates upon conversion of the

 

22

---

Table of Contents

outstanding July 2014 Purchase Agreement Debentures and July 2014 Modified Debentures that have closed prior to the effectiveness of the offering (including accrued interest thereunder), based on a conversion price of 51% of the lowest volume weighted average price for the 40 consecutive trading days prior to May 1, 2015 plus (iii) shares of common stock issuable to selling stockholder or its affiliates upon exercise of July 2014 Warrants that have been issued prior to the offering.

(4)

Represents 200% of (i) 9,133,780 shares issuable upon conversion of July 2014 Purchase Agreement Debentures, and (ii) 1,413,296 shares issuable as interest on July 2014 Purchase Agreement Debentures and July 2014 Modified Debentures, and (iii) 3,171,685 shares issuable upon exercise of the July 2014 Warrants.

(5)

Represents (i) shares of common stock held by selling stockholder and its affiliates as of May 1, 2015 that are not included in the offering plus (ii) shares of common stock issuable to selling stockholder and its affiliates upon conversion of the July 2014 Purchase Agreement Debentures that are not included in offering, as if such debentures were converted on May 1, 2015.

(8)	Mark Angelo has voting and dispositive power over the securities of the Company held by the selling stockholder.

(9)

Represents (i) shares of common stock held by selling stockholder as of May 1, 2015 plus (ii) shares of common stock issuable upon conversion of the outstanding September 2014 Purchase Agreement Debentures and September 2014 Modified Debenture that have closed prior to the effectiveness of the offering (including accrued interest thereunder), based on a conversion price of 51% of the lowest volume weighted average price for the 40 consecutive trading days prior to May 1, 2015 plus (iii) shares of common stock issuable upon exercise of September 2014 Warrants that have been issued prior to the offering.

(10)

Represents 200% of (i) 3,971,209 shares issuable upon conversion of September 2014 Purchase Agreement Debentures and September 2014 Modified Debentures, and (ii) 234,319 shares issuable as interest on September 2014 Purchase Agreement Debentures and September 2014 Modified Debentures, and (iii) 1,389,314 shares issuable upon exercise of the September 2014 Warrants.

(11)

Represents (i) shares of common stock held by selling stockholder as of May 1, 2015 that are not included in the offering plus (ii) shares of common stock issuable upon conversion of the September 2014 Purchase Agreement Debentures that are not included in offering, as if such debentures were converted on May 1, 2015.

(12)	Ned L. Siegel is the Chairman of the Board of the Company.

(13)

Represents (i) shares of common stock held by selling stockholder as of May 1, 2015 plus (ii) shares of common stock issuable upon conversion of the Siegel Notes (including accrued interest thereunder), based on a conversion price that is 85% of the 30-day volume weighted average closing price of the Company’s common stock over the 30 trading days prior to May 1, 2015 plus (iii) shares of common stock issuable upon exercise of the Siegel Warrants based on 50% of the principal sum of the Siegel Notes, at an exercise price equal to 85% of the 30-day volume weighted average closing price of the Company’s common stock over the 30 trading days prior to May 1, 2015.

(14)	Represents 200% of (i) 105,042 shares issuable upon conversion of the Siegel Notes, and (ii) 8,403 shares issuable as interest on the Siegel Notes, and (iii) 26,261 shares issuable upon exercise of the Siegel Warrants.

(15)	Represents shares of common stock held by selling stockholder as of May 1, 2015 that are not included in the offering.

(16)	J. Mitchell Lowe is a director of the Company.

(17)

Represents (i) shares of common stock held by selling stockholder as of May 1, 2015 plus (ii) shares of common stock issuable upon conversion of the Lowe Note (including accrued interest thereunder), based on a conversion price that is 85% of the 30-day volume weighted average closing price of the Company’s common stock over the 30 trading days prior to March 30, 2015 plus (iii) shares of common stock issuable upon exercise of the Lowe Warrant based on 50% of the principal sum of the Lowe Note, at an exercise price equal to 85% of the 30-day volume weighted average closing price of the Company’s common stock over the 30 trading days prior to May 1, 2015.

(18)	Represents 200% of (i) 52,521 shares issuable upon conversion of the Lowe Note, and (ii) 4,202 shares issuable as interest on the Lowe Note, and (iii) 13,130 shares issuable upon exercise of the Lowe Warrant.

 

23

---

Table of Contents

(19)	Represents shares of common stock held by selling stockholder as of May 1, 2015 that are not included in the offering.

(20)

Figures in columns 2 and 4 include shares of common stock beneficially owned by Redwood II, Redwood III, and Redwood Management, each of which is an affiliate of RDW. Gary Rogers has voting and dispositive power over the securities of the Company held by the selling stockholder, as well as Redwood II, Redwood III and Redwood Management. Neither Redwood II nor Redwood III are selling stockholders.

(21)

Represents (i) shares of common stock held by selling stockholder and its affiliates as of May 1, 2015 plus (ii) shares of common stock issuable to selling stockholder or its affiliates upon conversion of the outstanding July 2014 Purchase Agreement Debentures and July 2014 Modified Debentures that have closed prior to the effectiveness of the offering (including accrued interest thereunder), based on a conversion price of 51% of the lowest volume weighted average price for the 40 consecutive trading days prior to May 1, 2015 plus (iii) shares of common stock issuable to selling stockholder or its affiliates upon exercise of July 2014 Warrants that have been issued prior to the offering.

(22)

Represents 200% of (i) 372,301 shares issuable upon conversion of July 2014 Purchase Agreement Debentures, and (ii) 37,230 shares issuable as interest on July 2014 Purchase Agreement Debentures and July 2014 Modified Debentures, and (iii) 93,326 shares issuable upon exercise of the July 2014 Warrants.

(23)

Represents (i) shares of common stock held by selling stockholder and its affiliates as of May 1, 2015 that are not included in the offering plus (ii) shares of common stock issuable to selling stockholder and its affiliates upon conversion of the July 2014 Purchase Agreement Debentures that are not included in offering, as if such debentures were converted on May 1, 2015.

(24)	Mark Rozeboom has voting and dispositive power over the securities of the Company held by the selling stockholder.

*	Less than 1%

 

24

---

Table of Contents

PLAN OF DISTRIBUTION

The selling stockholders, as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of common stock or interests in shares of common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.

The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein:

 

•

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

•

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;

 

•

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

•

an exchange distribution in accordance with the rules of the applicable exchange;

 

•

privately negotiated transactions;

 

•

short sales effected after the date the registration statement of which this prospectus is a part is declared effective by the SEC;

 

•

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

 

•

broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

 

•

a combination of any such methods of sale; and

 

•

any other method permitted by applicable law.

The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling

 

25

---

Table of Contents

stockholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from this offering. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants and we intend to use such proceeds, if any, for working capital and general purposes, including business expenses, advisor fees, and marketing.

The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), provided that they meet the criteria and conform to the requirements of that rule.

The selling stockholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein may be “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling stockholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.

To the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.

In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In addition, to the extent applicable we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.

We have agreed to indemnify the selling stockholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus.

We have agreed with the selling stockholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or (2) the date on which all of the shares may be sold without restriction pursuant to Rule 144 of the Securities Act.

 

26

---

Table of Contents

DESCRIPTION OF SECURITIES TO BE REGISTERED

The following description of our capital stock is a summary of the material terms of our capital stock. This summary is subject to and qualified in its entirety by our Articles of Incorporation and bylaws.

Our authorized capital stock consists of 110,000,000 shares of stock consisting of (i) 100,000,000 shares of common stock, $0.001 par value per share and (ii) 10,000,000 shares of preferred stock, $0.001 par value per share.

Common Stock

The Board of Directors is authorized to issue, without stockholder approval, any authorized but unissued shares of our common stock. Each share of our common stock is entitled to share pro rata in dividends and distributions with respect to our common stock when, as and if declared by the Board of Directors from funds legally available therefore. No holder of any shares of common stock has any preemptive right to subscribe for any of our securities. Upon our dissolution, liquidation or winding up, the assets will be divided pro rata on a share-for-share basis among holders of the shares of common stock after any required distribution to the holders of preferred stock, if any. All shares of common stock outstanding are fully paid and non-assessable.

Voting Rights

Holders of common stock are entitled to one vote per share on all matters voted on generally by the stockholders, including the election of directors, and, except as otherwise required by law or except as provided with respect to any series of preferred stock, the holders of the shares possess all voting power. The holders of shares of our common stock do not have cumulative voting rights in connection with the election of the Board of Directors, which means that the holders of more than 50% of such outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose, and, in such event, the holders of the remaining shares will not be able to elect any of our directors.

Liquidation Rights

Subject to any preferential rights of any series of preferred stock, holders of shares of common stock are entitled to share ratably in our assets legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up.

Absence of Other Rights

Holders of common stock have no preferential, preemptive, conversion or exchange rights.

Preferred Stock

The Board of Directors is authorized, without further stockholder approval, to issue from time to time any of our authorized but unissued shares of preferred stock. The preferred stock may be issued in one or more series and the Board of Directors may fix the rights, preferences and designations thereof. Holders of our preferred stock are not entitled to any preemptive or preferential rights to subscribe for additional shares of our capital stock.

The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding voting stock.

 

27

---

Table of Contents

Series A Preferred Stock

5,000,000 shares of Preferred Stock have been designated Series A Preferred Stock, of which 3,000,000 shares are issued and outstanding as of the date of this prospectus.

Dividend Rights

Holders of the Series A Preferred Stock are entitled to receive dividends or other distributions with the holders of the common stock on an as converted basis when, as and if declared by our Board of Directors.

Conversion Rights

Each share of Series A Preferred Stock is convertible, at the option of the holder thereof and subject to notice requirements described in our Articles of Incorporation, at any time, into five shares of our common stock.

Liquidation Preference

In the event of our liquidation, dissolution or winding up, holders of Series A Preferred Stock are entitled to receive, prior to the holders of the other series of preferred stock and prior and in preference to any distribution of the assets or surplus funds of the Company to the holders of any other shares of our stock, an amount equal to $1.00 per share of Series A Preferred Stock held, plus all declared but unpaid dividends thereon. A liquidation includes the acquisition of the Company by another entity or the sale of all or substantially all of our assets, unless the holders of a majority of the Series A Preferred Stock agree otherwise.

Voting Rights

The holders of Series A Preferred Stock vote as a single class with the holders of our common stock. Holders of Series A Preferred Stock have such number of votes as is determined by multiplying (a) the number of shares of Series A Preferred Stock held by such holder, (b) the number of issued and outstanding shares of the Series A Preferred Stock and common stock on a fully-diluted basis and (c) 0.00000025.

Additional Voting Rights

The consent of the holders of a majority of the outstanding shares of Series A Preferred Stock is required for us to do any of the following: (i) take any action that would alter, change or affect the rights, preferences, privileges or restrictions of the Series A Preferred Stock, increase the authorized number of shares of the Series A Preferred Stock or designate any other series of Preferred Stock; (ii) increase the size of any of our equity incentive plans or arrangements; (iii) make fundamental changes to our business; (iv) make any changes to the terms of the Series A Preferred Stock or to our Articles of Incorporation or bylaws, including by designation of any stock; (v) create a new class of shares having preferences over or being on a parity with the Series A Preferred Stock as to dividends or assets, unless the purpose of creation of such class is, and the proceeds to be derived from the sale and issuance thereof are to be used for, the retirement of all Series A Preferred Stock then outstanding; (vi) make any change in the size or number of authorized Directors; (vii) repurchase any of the our common stock; (viii) sell, convey or otherwise dispose of, or create or incur any mortgage, lien, charge or encumbrance on or security interest in or pledge of, or sell and leaseback, all or substantially all of our property or business or more than 50% of our stock in a single transaction; (ix) make any payment of dividends or other distributions or any redemption or repurchase of stock or options or warrants to purchase our stock; or (x) sell any additional shares of preferred stock.

Voting Agreement

On January 21, 2015, the Company, Mr. Mehdizadeh, PVM, and Vincent Chase, Incorporated, (collectively, the “VM Parties”) entered into an agreement pursuant to which, among other things, the parties agreed to not

 

28

---

Table of Contents

increase the size of the Board and to vote in favor of and to not remove directors Siegel, Lowe, Love and Marsala for a period of 12 months (the “Voting Agreement”). Each of the directors of the Company is also a party to the Voting Agreement. The Voting Agreement prevents the shareholders of the Company from electing new directors to the Board for a period of 12 months from January 21, 2015. This could discourage potential investors from buying our stock.

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:

 

•

one-fifth or more but less than one-third;

 

•

one-third or more but less than a majority; or

 

•

a majority or more.

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

 

29

---

Table of Contents

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:

 

•

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

 

•

does business in Nevada directly or through an affiliated corporation.

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 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 has least 2,000 holders and a market value of at least $20 million exclusive of insider holdings, and that the provisions do not apply to any person who became an interested stockholder before such time. Therefore, these provisions do not currently apply to the Company.

Subject to certain timing requirements set forth in the statutes, a corporation may elect not to be governed by these statutes. We have not included any such provision in our Articles of Incorporation.

The effect of these statutes may be to potentially discourage parties interested in taking control of the Company from doing so if it cannot obtain the approval of our Board of Directors.

Summary of Anti-Takeover Provisions

The foregoing provisions of our Articles of Incorporation and bylaws and Nevada law could have the effect of discouraging an acquisition of Medbox or stock purchases in furtherance of an acquisition, and could accordingly, under certain circumstances, discourage transactions that might otherwise have a favorable effect on the price of our common stock. In addition, such provisions may make Medbox less attractive to a potential 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

 

30

---

Table of Contents

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.

 

31

---

Table of Contents

DESCRIPTION OF BUSINESS

Our business involves contracting with business owners for our services and the sale of marijuana-related products such as our Medbox dispensing system and our line of tabletop medical vaporizers. We expect to transition to the sale of a portable line of vaporizers in the second quarter of 2015.

We began our business model with entering into one-time consulting agreements to help our clients obtain a license to sell or cultivate marijuana and to assist them with the build out of a location for their business, including the sale to the client of a Medbox dispensing system, pursuant to a consulting agreement that we refer to as our “Turn-Key Business Establishment Agreement”. We are now transitioning to a recurring revenue model, whereby we will continue to enter into Turn-Key Business Establishment Agreements, together with additional revenue generating agreements for providing ongoing consulting to the established business in the areas of regulatory compliance, security, operations and other matters that leverage our expertise and knowledge in this industry. We also plan to retain the rights to manage business locations on a day-to-day basis and to assign such rights to third parties, in return for recoupment of a percentage of the management fee to operate the business. Our clients plan to establish dispensaries for the sale of marijuana for medical use or retail operations for the sale of marijuana for recreational use or cultivation centers for the cultivation of marijuana.

In 2014, we arranged for the submission of 36 license applications in five states on behalf of clients, and, as of February 13, 2015, we have entered into five letters of intent or real estate purchase contracts and two leases for locations with third parties seeking to open dispensary locations or cultivation centers. Five license applications for clients are currently pending, and 12 licenses or registrations in the States of Oregon, Illinois, Nevada and Washington have been approved for our clients. We intend to retain the management rights for these locations and then will seek to assign the rights to third parties. Most of the current dispensary and cultivation sites are expected to begin conducting business in 2015 and 2016.

We intend to develop a consistent, predictable and valuable revenue model based upon our knowledge and expertise in the regulation of the marijuana industry and by helping our clients obtain the proper technology and compliance protocols to function efficiently. State laws regarding dispensary, retail and cultivation of marijuana vary. In states where revenue sharing is permissible, our Turn-Key Business Establishment Agreement will provide for a model pursuant to which we receive a percentage of the revenue generated from the business, in lieu of a fixed fee. In states where revenue sharing is not permissible, the agreement will provide for a fee-for-service arrangements on a “cost-plus” basis.

The varying aspects of our involvement which will be documented by our Turn-Key Business Establishment Agreement involve the following:

 

•

Real Estate Acquisition and Leasing. We assist the client by acquiring necessary real estate, either by purchase or lease, for the business premises. We manage the build-out of the location, including acquisition of a Medbox dispensing system for safe and secure dispensing of the marijuana product. Medbox dispensing systems are a unique part of our security and compliance program that we build into the dispensary location. The build out process also entails the purchase and installation of other various tenant improvements in order to meet specific use requirements.

 

•

Licensing. We arrange for and help procure the necessary state and/or local licenses required to conduct business, including assisting with completion of the application and engaging with local authorities.

 

•

Management and Operation. Through Medbox Management Services, Inc., we intend to contract with an unaffiliated third-party operator to manage the day-to-day operations of the business and assign to them the right to manage and operate the dispensary on behalf of the business owner in exchange for a percentage of the management fees.

 

•

Financing. We help the business owner arrange the financing to acquire or lease the real estate and for the build out and acquisition of the Medbox dispensary system, and to cover the cost of obtaining the license and the applicable zoning permits and certifications.

 

32

---

Table of Contents

•

Compliance. For an additional fee, we intend to help business managers solve issues they face in the highly regulated marijuana dispensary, cultivation and retail markets. We plan to assist and advise the client in the compliance of applicable state and local laws through periodic audits of the business’s operating procedures vetted against applicable regulations and best practices. Many states and municipalities require documented compliance with state and local regulations and ordinances. We also intend to work with the business owner to professionally manage their cultivation and dispensing facilities, establish operating policies and procedures, and to document adherence to their state’s laws, as required.

The success of our business will depend on states continuing to legalize the use of marijuana for medical purposes and, through applicable state legislation, adopting at the state and local level a corresponding process for licensing alternative medicine clinics that dispense medical marijuana and for licensing cultivation facilities required to grow the plants.

Medbox does not engage in the production, sale, or marketing of any marijuana products dispensed through our Medbox dispensing systems or otherwise. We do not presently and do not intend to acquire licenses to cultivate, process, or dispense marijuana. However, we continue to monitor the liberalization of applicable state laws and may seek licenses in the future.

Corporate History

We were originally incorporated on June 16, 1977 in the State of Nevada as Rabatco, Inc. In May 2000, we changed our name to MindfulEye, Inc. At that time, MindfulEye was in the business of operating self-serve kiosks where consumers could download movies onto a flash drive. Although MindfulEye had continuous operations and non-cash assets, revenues through the operation of the kiosks were minimal. That business has since been discontinued. On November 25, 2011, P. Vincent Mehdizadeh, the founder of MDS and creator of the Medbox dispensing system, purchased 5,421,500 shares of common stock of the Company, after which he owned 50% of the outstanding shares of common stock of the Company. On August 30, 2011, in anticipation of the transaction discussed below, we changed our name to Medbox, Inc.

Pursuant to a Stock Purchase Agreement between Medbox, Inc. and PVM International, Inc. (“PVMI”) dated as of December 31, 2011, pursuant to which two separate closings occurred on January 1, 2012 and December 31, 2012, the Company acquired from PVMI all of the outstanding shares of common stock in (i) MDS, (ii) Medicine Dispensing Systems, Inc. (our Arizona subsidiary), and (iii) Medbox, Inc. (our California subsidiary that is currently inactive), in exchange for two million shares of the Company’s common stock and a $1 million promissory note. The promissory note was repaid in full on April 16, 2013.

PVMI is an entity wholly-owned by P. Vincent Mehdizadeh. It is a separate entity from our subsidiary, MDS.

Prescription Vending Machines, Inc. a California corporation, d/b/a Medicine Dispensing Systems (“MDS”) is a for-profit corporation organized on February 15, 2008, under the laws of the State of California. Mr. Mehdizadeh, MDS’s founder, developed the Medbox.

In August 2012, Mr. Mehdizadeh purchased the remainder of the outstanding shares of the Company in a private transaction and transferred such shares to a holding company named Vincent Chase, Inc., controlled by Mr. Mehdizadeh at that time. As the controlling owner of the Company, Mr. Mehdizadeh replaced the Company’s management with new management. As of the date hereof, Vincent Chase, Inc., remains beneficially owned and controlled by Mr. Mehdizadeh.

 

33

---

Table of Contents

Key Legal Entities

Medbox, Inc., a Nevada corporation, operates the business directly and through the utilization of 6 operating subsidiaries, as follows:

 

•

MDS, which distributes our Medbox™ product and provides related consulting services described further below.

 

•

Vaporfection International, Inc., a Florida corporation through which we distribute our medical vaporizing products and accessories.

 

•

Medbox Property Investments, Inc., a California corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers.

 

•

MJ Property Investments, Inc., a Washington corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers in the state of Washington.

 

•

Medbox Management Services, Inc., a California corporation specializing in providing management oversight and compliance services to state-licensed dispensaries for cultivation, dispensing, and marijuana infused products.

 

•

Medicine Dispensing Systems, Inc., an Arizona corporation, which distributes our Medbox dispensing system and provides related consulting services in the State of Arizona.

Sales Channels

We currently advertise via the Internet to entrepreneurs seeking to establish a dispensary or other business. Our advertisements can be found at our web site www.thedispensingsolution.com and in print magazine ads. The information at our web site should not be considered a part of, and is not incorporated by reference into, this prospectus.

After initial contact is made by a potential client, the Medbox sales team gives an orientation as to the process for licensing, building and operating a dispensary clinic.

Regulatory Requirements for Procurement of Licenses

While we are not required to obtain governmental approval in connection with providing the services we offer or for manufacturing the products we sell, establishing an operating dispensary requires governmental approval, usually at the local and state level. Such approval is obtained through a complex licensing process that is newly adopted by the states in almost all cases, which we monitor on behalf of our clients. The regulatory framework includes a rule-making procedure with a period for public comment. This is traditionally followed by draft rules posted by the department of health for the state or other consumer affairs department charged by the state to facilitate the impending dispensary program. Thereafter, final rules are posted. The entire post legislative process can take six months to one year to fully implement. Licenses are typically granted within three to six months of final rules being adopted and implemented.

Our Products and Services

Acquisition of Vaporfection International, Inc.

On March 22, 2013, we entered into a Securities Purchase Agreement with Vapor Systems International, LLC, to acquire all of the outstanding shares of common stock of Vaporfection International, Inc., a wholly-owned subsidiary of Vapor Systems International, LLC formed in contemplation of the transaction and to which Vapor Systems International, LLC subsequently transferred all its operations and assets in exchange for warrants to purchase shares of Medbox, Inc. common stock, which warrants could be exercised at a later date at the election of Vapor Systems International, LLC. The closing of this acquisition took place on April 1, 2013.

 

34

---

Table of Contents

Through our subsidiary Vaporfection International, Inc., we distribute of a line of medical vaporizing products including award-winning Vaporfection vaporizers. Awards won by the Vaporfection vaporizers include the High Times Magazine’s Cannabis Cup, Product of the Year – Best Vaporizer 2011 for the viVape and Best Vaporizer, Kush Expo 2012, for the viVape 2.

Our purchase of Vaporfection International included its inventory of Vaporfection vaporizers. 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. This process allows 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 has received its first sample production run units in August 2014, with a scheduled launch date in the second quarter of 2015. Vaporfection’s other product is the viVape 2 unit that is a tabletop vaporizing unit.

The Medbox

The Medbox dispensing system is intended for the control and dispensing of medical marijuana, and is a component of the build out services that we provide for dispensaries. The Medbox can also be sold separately, but only in states that have regulatory systems in place to license alternative medicine clinics. We do not market or sell Medboxes in states that have de-criminalized the possession of medical marijuana if they have not put a licensing mechanism in place for clinics. However, in such states, we still assist with procuring licenses and entering to licensing arrangements for the ownership and operation services (as described above) for retail and cultivation locations.

The Medbox dispensing systems are manufactured according to MDS’s 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 in Spain. We do not have a contractual relationship with the Spanish manufacturer.

The dispensing systems 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 manufacturer, who also arranges shipping to the U.S. and to the location of the dispensary/purchaser upon our instructions. We make payments on these containers, which vary by contract but range from 10% to 25% of total order value upon placing the order; an additional amount to reach 50% of the total order value deposited when the dispensing system is ready to ship to the United States; and the remainder of the order as each dispensing system is shipped to our directed location.

The raw materials required for our dispensing systems 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.

Installation is completed by the local manufacturer according to MDS specifications. The lead time for ordering a Medbox dispensing system is three weeks (order to arrival of the shipping container). The lead time for installation is usually six business days.

MDS has also developed additional advanced electronic features for its Medbox family of products (security, control, and tracking). Because MDS adds these features upon sale of a dispensing system, an enhanced design can be seamlessly incorporated into the existing hardware inventory without disrupting inventory. This approach further allows MDS to design technological improvements that can easily be retrofitted to existing installed Medbox dispensing systems.

 

35

---

Table of Contents

In the first quarter of 2014, the Company introduced an upgraded version of the Medbox, called the “Secure Safe”. The Secure Safe is designed to securely store and dispense marijuana via an attached Point-of-Sale terminal at the control of dispensary operators and includes the following features:

 

•

Designed to meet or exceed any state or country’s requirements for secure storage and dispensing of marijuana;

 

•

Re-enforced steel plate structure & steel bolted inner access door;

 

•

Double walled and insulated sides and top for fire and thermal protection;

 

•

Inner door secured by multi-point interior locking system;

 

•

Fully electric operated and controlled locking system;

 

•

Fully programmable pass codes and fingerprint recognition for multi-level operator access;

 

•

Intrusion alert feature via SMS or email message after 5 unsuccessful access attempts or upon interior motion sensor activation.

The Company believes, based on market research, that there is no other company that markets an Underwriters Laboratories (or UL) rated Safe that also dispenses medicine at the control of a computer terminal connected to the machine. The Secure Safe utilized a granted patent (Patent Number US 7,844,363 B1, discussed above) and we have filed additional patent applications relating to this product.

A conventional temperature-controlled Medbox Secure Safe machine retails for $50,000. Sales terms with customers are a 50% deposit with order and 50% upon delivery.

Patents, Trademarks and Intellectual Property

The Company has a number of patents and filed patent applications relating to its Medbox technology and its Vaporfection product technology. One such patent is related to the Medbox medicine dispensing system and a second is related to the Seed to Sale technology. An additional 8 issued patents relate to both designs and heating element technology of our vaporizers. We own 6 additional filed patent applications related to the Medbox machine technology and have 3 patent applications related to the vaporizer technology. Finally, the company owns the following registered trademarks for our vaporizer line of products covering the names “miVape”, “vivape,” “vaporfection”, “aqua vape”, “vaporsense” and “vaporglass”.

More detailed information regarding our issued patent related to the Medbox dispensary system is as follows.

Patent Number US 7,844,363 B1

Patent Number US 7,844,363 B1, is for a medicine dispensing system that allows for safe and secure access for patients that require medicine, while still giving clinic operators a powerful tool to help with inventory control and medication management. The machine limits abuse and insures that patient data is securely kept onsite, at the pharmacy location, via computer-based application. The patent, which expires in November 2028, is owned by the Company.

The Alternative Medicine Market

We market our services and products to the alternative medicine (medical marijuana) marketplace.

As the development of the alternative medicine market is partially a function of state legislation, there are some states in which we cannot operate, but that we monitor in case they change or adopt favorable marijuana legislation. We are able to target our limited sales and marketing resources to the few new markets that are

 

36

---

Table of Contents

introduced each year, if any. This way, we can cover the available territories and feature our service offerings in the media during the legislative process prior to the opening of a new market. We believe that this media coverage cultivates brand awareness and a certain level of credibility.

As noted above, we market our service offerings in states that have regulatory systems in place to license alternative medicine clinics. Of these states, we currently consider Arizona, California, Nevada, Illinois, Oregon and Washington to be our primary target market. We provide licensing and application support in states outside of California through phone, email, in-person client meetings when necessary, and also through the use of video-conferencing. While we have contractors located in some of our target market states, most client matters are accomplished remotely.

The Vaporfection Vaporizer Market

Our target market for our vaporizer products is patients who use inhaled medications. We market our vaporizer products to distributors and customers alike through the use of social media, print ads, and online marketing channels. We also market our vaporizer products directly to state licensed dispensaries for sale to their registered patients.

Competition

Competition – Dispensary Retail Location Advisory and Consulting Services

Novus Acquisition & Development

Novus focuses on offering consulting services to the medical marijuana market in states where medical marijuana is legalized. Novus also offers healthcare coverage for marijuana-related products that are not covered by standard healthcare programs.

American Cannabis Company

American Cannabis Company, offers consulting services as well as products, and helps plan for a project’s business model, including development of its operations and management practices. It also assists with application for licenses at the local and state level.

AmeriCann, Inc.

AmeriCann develops cannabis cultivation facilities and provides capital for cannabis entrepreneurs in the State of Illinois. It also provides capital for the acquisition of land, working capital and construction for facilities.

United Cannabis Company

UCANN manages and invests in a group that has obtained provisional licenses for cultivation, production and processing of cannabis in Las Vegas, Nevada. UCANN has not yet begun operations, and is working on building a headquarter facility in Nevada. It intends to offer products and services to dispensaries in the Las Vegas market.

Competition – Dispensing Systems

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,

 

37

---

Table of Contents

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 pursued 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 dispensing 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 our patent.

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. To our knowledge, MedBox, LLC has not pursued 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 acquired. Medbox, LLC has no relationship with the Company.

QuigMedsTM

Malvern, Pennsylvania

QuigMedsTM, 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 QuigMedsTM 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, focusing 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 information previously provided to us by Dispense Labs, the company had one machine operational as of March 2013; we have no way of verifying additional sales of their units.

Competition – Vaporfection Vaporizers

There are a myriad of vaporizing products currently available in the marketplace. We believe our proprietary glass on glass technology and attractive packaging allows for users to experience the cleanest and healthiest vapor in the industry. We plan to focus, beginning in the second quarter of 2015 on the portable vaporizer market through the development of our new product.

Competition in the portable vaporizer markets is led by a product called Pax manufactured by a company called Ploom. A summary list of a representative selection of competitors to our miVape product, based on publicly available information about these products, is below.

 

38

---

Table of Contents

Vaporizer Comparison-Portable Models

 

Brand

Vaporfection

Ploom

Organicix

Organicix

Arizer

Firefly

Model

miVape

PAX

DaVinci Vaporizer

DaVinci Ascent (Pre-Order)

Solo

Firefly

Style

Portable

Portable

Portable

Portable

Portable Diffuser

Portable

Vaporization Method

Convection

Conduction (Oven)

Conduction

Passive Convection

Conduction

Convection - Instant Heat

Materials to Vaporize

Herb, concentrates

Herbs only

Herbs, Oils (with oil tank – optional), Waxes

Herbs, Oils, Waxes

Herbs

Herbs

Heating Element

Quartz heating element

Stainless Steel air chamber

Stainless Steel

Glass lined ceramic, all glass vapor path

Ceramic

Borosilicate Glass Heating Chamber, Element is proprietary Super Alloy

Power Source

Replaceable Litium Ion

Lithium Ion

Lithium-Ion

Lithium-ion

Lithium-Ion

Rechargable/Replaceable Lithium-Ion

Battery Life

TBD

2 hours continuous use

~ 45 min to 1 hour

3 hours +

1-2 hours continuous use

1 Hour or so, 45 min to charge

Heat Up Time

1 minute (to 350 F)

at least 30 seconds (lowest setting)

1 min 30 seconds

~ 55 seconds

15 seconds-2 min 30 seconds

Varies on how long you hold heat button

Temperature Settings

0 – 450 F

Low (370), Medium (390), High (410)

100 – 430 F

up to 430F

Levels 1-7 (122F - 410F)

Max 400 F

Exterior

High Temp Plastic

Anodized Aluminum

High Temp Plastic

Brushed Aluminum Cast with various finishes

Alumninum

Vapor Path: Stainless Steel Plating; Chassis: Aircraft Aluminum; Window: Quartz Crystal

Number of Cycles per charge

~ 7

5

3-5

Unknown

5-7

Varies on use, probably about 10 - 15 inhalations based on reviews

Size

4.175” x 2.3” x 1.1”

4.13” x 1.4” x 7/8”

4” x 2.3” x 1”

4.47” x 2.24” x 1.03”

4.5” x 1.75” x 1.75”

5 3/8” x 2” x 7/8”

Weight

.5 lbs

.8 lbs

.35 lbs

.425 lbs

.52 lbs

.61 lbs

Warranty

3 years

10 years

2 years

2 years

2 year manufacturer, 1 year on battery, lifetime on element

5 year limited warranty

MSRP

~$249

250

199

$249

224

$269.95

 

39

---

Table of Contents

Future Goals

While we currently focus on sales in the United States, in December 2013, we entered into an agreement with a Canadian company to sell our Medbox dispensing systems in the Canadian market and to provide the Canadian company consulting services. Our long-range plans include expanding the marketing of our products in Canada, as well as to other countries that legalize marijuana.

Employees and Independent Contractors

As of December 31, 2014, we had five full time employees and we also use the services of three independent contractors. These independent contractors perform the services of sales, business development, and real estate procurement, in addition to project manager duties in various localities outside of California.

Implications of Emerging Growth Company Status

As a company with less than $1 billion in revenue in our last fiscal year, we are defined as an “emerging growth company” under the Jumpstart Our Business Startups (“JOBS”) Act. We will retain “emerging growth company” status until the earliest of:

 

•

The last day of the fiscal year during which our annual revenues are equal to or exceed $1 billion;

 

•

The last day of the fiscal year following the fifth anniversary of our first sale of common stock pursuant to a registration statement filed under the Securities Act of 1933, as amended, which we refer to in this document as the Securities Act;

 

•

The date on which we have issued more than $1 billion in nonconvertible debt in a previous three-year period; or

 

•

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).

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:

 

•

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;

 

•

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);

 

•

submit certain executive compensation matters to stockholder non-binding advisory votes;

 

•

submit for stockholder approval golden parachute payments not previously approved;

 

•

disclose certain executive compensation related items, as we will be subject to the scaled disclosure requirements of a smaller reporting company with respect to executive compensation disclosure; and

 

•

present more than two years of audited financial statements and two years of selected financial data in a registration statement for our initial public offering of our securities.

Pursuant to Section 107(b) of the JOBS Act, we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of The JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates. Section 107 of the JOBS Act provides that our decision to opt into the extended transition period for complying with new or revised accounting standards is irrevocable.

 

40

---

Table of Contents

DESCRIPTION OF PROPERTY

At present, we do not own any real property other than a 2,400 square foot retail space at 17905 Highway 536, Mount Vernon, WA 98273. We currently lease office space at 8439 West Sunset Blvd., Suite 100 & 101, West Hollywood, CA 90069 (4,000 square foot office).

The Company entered into a new lease for new offices in Los Angeles, CA on April 7, 2015, which terminates on September 29, 2016. The sublease on the new office has a term of 18 months and with monthly rent of approximately $7,500. The Company plans to sublease the office in West Hollywood, CA.

 

41

---

Table of Contents

LEGAL PROCEEDINGS

On May 22, 2013, Medbox initiated litigation in the United States District Court in the District of Arizona against three shareholders of MedVend Holdings LLC (“Medvend”) in connection with a contemplated transaction that Medbox entered into for the purchase of an approximate 50% ownership stake in Medvend for $4.1 million. The lawsuit alleges fraud and related claims arising out of the contemplated transaction during the quarter ended March 31, 2013. The litigation is pending and Medbox has sought cancellation due to a fraudulent sale of the stock because the selling shareholders lacked the power or authority to sell their ownership stake in MedVend, and their actions were a breach of representations made by them in the agreement. On November 19, 2013 the litigation was transferred to United States District Court for the Eastern District of Michigan. MedVend recently joined the suit pursuant to a consolidation order executed by a new judge assigned to the matter. In the litigation, the selling shareholder defendants seek alternatively to have the transaction performed, or to have it unwound and be awarded damages and allege breach of the agreement by Medbox and that $600,000 was wrongfully retained by the Company. Medbox has denied liability with respect to any and all such counterclaims. A new litigation schedule was recently issued setting trial for September 2015. On June 5, 2014, the Company entered into a purchase and sale agreement (the “Medvend PSA”) with PVM International, Inc. (“PVMI”) concerning this matter. Pursuant to the Medvend PSA, the Company sold to PVMI the Company’s rights and claims attributable to or controlled by the Company against those three certain stockholders of Medvend, known as Kaplan, Tartaglia and Kovan (the “Medvend Rights and Claims”), in exchange for the return by PVMI to the Company of 30,000 shares of the Company’s common stock. PVMI is owned by Vincent Mehdizadeh, the Company’s largest stockholder. The Company will have the right, under the Medvend PSA, to purchase from PVMI, at any time, the Medvend Rights and Claims, for the consideration provided by PVMI, plus the sum of any of PVMI’s reasonable expenditures incurred in pursuit of the Medvend Rights and Claims. The court has not yet ruled on the substitution of PVMI as plaintiff in this matter. If necessary, the Company plans to vigorously defend against this matter. The case is in the discovery stage, and, at this time, the Company cannot determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can they reasonably estimate a range of potential loss, should the outcome be unfavorable.

On or about September 17, 2014, some but not all of the holders of certain warrants for the Company’s common stock issued in connection with the Company’s 2013 purchase of Vaporfection International, Inc. (“VII”) filed suit against the Company in Circuit Court in Palm Beach County, Florida. There was a dispute as to the adjustment of the exercise price, and the suit was resolved in a settlement agreement dated December 29, 2014, which maintained the anti-dilution adjustment as well as an additional 50,000 warrants being issued to certain of the former VII shareholders. The additional warrants were valued at approximately $280,000. As of December 31, 2014, 252,812 of the warrants were exercised by the former owners of VII.

On February 20, 2015 Michael A. Glinter, derivatively and on behalf of nominal defendant Medbox, Inc. the Board of Directors and certain executive officers (Pejman Medizadeh, Matthew Feinstein, Bruce Bedrick, Thomas Iwanskai, Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer Love, and C. Douglas Mitchell) filed a suit in the Superior Court of the State of California for the County of Los Angeles. The suit alleges breach of fiduciary duties and abuse of control by the defendants. Relief is sought awarding damages resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. The Company intends to vigorously defend against this suit. Due to the early stages of this suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.

On January 21, 2015 Josh Crystal on behalf of himself and of all others similarly situated filed a class action lawsuit in the U.S. District Court for Central District of California against Medbox, Inc., and certain past and present members of the Board of Directors (Pejman Medizadeh, Bruce Bedrick, Thomas Iwanskai, Guy Marsala, and Douglas Mitchell). The suit alleges that the Company issued materially false and misleading statements regarding its financial results for the fiscal year ended December 31, 2013 and each of the interim financial periods that year. The plaintiff seeks relief of compensatory damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On April 23, 2015, the Court issued an Order consolidating the three related cases in this matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox, Inc., and Donnino v. Medbox,

 

42

---

Table of Contents

Inc., and appointing a lead plaintiff. On May 6, 2015, the Court issued an Order directing Plaintiffs to file a consolidated class action complaint in the matter by no later than May 27, 2015. The Order also requires that the Company file a responsive pleading by no later than June 22, 2015. The Company intends to vigorously defend against these suits. Due to the early stages of the suits the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.

On January 18, 2015, Ervin Gutierrez filed a class action lawsuit in the U.S. District Court for the Central District of California. The Company has not yet been served with this complaint. The suit alleges violations of federal securities laws through public announcements and filings that were materially false and misleading when made because they misrepresented and failed to disclose that the Company was recognizing revenue in a manner that violated US Generally Accepted Accounting Principles (GAAP). The plaintiff seeks relief for compensatory damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On April 23, 2015, the Court issued an Order consolidating the three related cases in this matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox, Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff. On May 6, 2015, the Court issued an Order directing Plaintiffs to file a consolidated class action complaint in the matter by no later than May 27, 2015. The Order also requires that the Company file a responsive pleading by no later than June 22, 2015. The Company intends to vigorously defend against this suit. Due to the early stages of the suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.

On January 29, 2015, Matthew Donnino filed a class action lawsuit in the U.S. District Court for Central District of California. The Company has not yet been served with this compliant. The suit alleges that the Company issued materially false and misleading statements regarding its financial results for the fiscal year ended December 31, 2013 and each of the interim financial periods that year. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On April 23, 2015, the Court issued an Order consolidating the three related cases in this matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox, Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff. On May 6, 2015, the Court issued an Order directing Plaintiffs to file a consolidated class action complaint in the matter by no later than May 27, 2015. The Order also requires that the Company file a responsive pleading by no later than June 22, 2015. The Company intends to vigorously defend against this suit. Due to the early stages of the suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.

On February 12, 2015, Jennifer Scheffer, derivatively on behalf of Medbox, Guy Marsala, Ned Siegel, Mitchell Lowe and Douglas Mitchell filed a lawsuit in the Eighth Judicial District Court of Nevada seeking damages for breaches of fiduciary duty regarding the issuance and dissemination of false and misleading statements and regarding allegedly improper and unfair related party transactions, unjust enrichment and waste of corporate assets. On April 17, 2015, Ned Siegel and Mitchell Lowe filed a Motion to Dismiss. On April 20, 2015, the Company filed a Joinder in the Motion to Dismiss.The Company intends to vigorously defend against this suit. Due to the early stages of the suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.

On March 10, 2015 Robert J. Calabrese, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the United States District Court for the District of Nevada against certain Company officers and/or directors (Ned L. Siegel, Guy Marsala, J. Mitchell Lowe, Pejman Vincent Mehdizadeh, Bruce Bedrick, and Jennifer S. Love). The suit alleges breach of fiduciary duties and gross mismanagement by issuing materially false and misleading statements regarding the Company’s financial results for the fiscal year ended December 31, 2013 and each of the interim financial periods. Specifically the suit alleges that defendants caused the Company to overstate the Company’s revenues by recognizing revenue on customer contracts before it had been earned. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. The Company intends to vigorously defend against this suit. Due to the early stages of the suit the Company is unable to determine whether the likelihood of an unfavorable outcome of

 

43

---

Table of Contents

the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.

On March 27, 2015 Tyler Gray, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the United States District Court for the District of Nevada against the Company’s Board of Directors and certain executive officers (Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, Thomas Iwanski, Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer S. Love, and C. Douglas Mitchell). The suit alleges breach of fiduciary duties and abuse of control. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally the plaintiff seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate representative of the Company, and that the defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable law. The Company intends to vigorously defend against this suit. Due to the early stages of this suit the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.

On December 26, 2014, Medicine Dispensing Systems, a wholly-owned subsidiary of Medbox, filed a suit against Kind Meds, Inc. to collect fees of approximately $550,000 arising under a contract to establish a dispensary. Kind Meds, Inc. filed a cross complaint against Medicine Dispensing Systems for breach of contract and breach of implied covenant of good faith and fair dealing, claiming damages of not less than $500,000. We believe that the cross complaint is without merit. We will continue to pursue this Kind Meds suit for the amounts owed under the contract and will vigorously defend ourselves against the cross complaint. At this time the Company in unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.

The Company commenced arbitration proceedings against a former employee on June 13, 2013 related to employment claims asserted by the employee. Thereafter, the employee filed a suit in Los Angeles County Superior Court. The suit was stayed pending the outcome of the arbitration and thereafter dismissed without prejudice. The Company obtained a favorable arbitration award. The Company then filed an Application to Confirm the Arbitration Award in Arizona Superior Court, Maricopa County. After being unable to serve the employee, the Company performed service by publication and filed proofs of publication for service on the employee on February 27, 2015 and March 2, 2015. If the arbitration award is not enforced, the employee’s claim can be re-filed in California.

In October 2014, the Board of Directors of the Company appointed a special board committee (the “Special Committee”) to investigate a federal grand jury subpoena pertaining to the Company’s financial reporting which was served upon the Company’s accountants as well as certain alleged wrongdoing raised by a former employee of the Company. The Company was subsequently served with two SEC subpoenas in early November 2014. The Company is fully cooperating with the grand jury and the SEC. In connection with its investigation of these matters, the Special Committee in conjunction with the Audit Committee initiated an internal review by management and by an outside professional advisor of certain prior period financial reporting of the Company. The outside professional advisor reviewed the Company’s revenue recognition methodology for certain contracts for the third and fourth quarters of 2013. As a result of certain errors discovered in connection with the review by management and its professional advisor, the Audit Committee, upon management’s recommendation, concluded on December 24, 2014 that the consolidated financial statements for the year ended December 31, 2013 and for the third and fourth quarters therein, as well as for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014, should no longer be relied upon and would be restated to correct the errors. On March 6, 2015 the audit committee determined that the consolidated financial statements for the year ended December 31, 2012, together with all three, six and nine month financial information contained therein, and the quarterly information for the first two quarters of the 2013 fiscal year should also be restated. On March 11, 2015, the Company filed its restated Form 10 Registration Statement with the SEC with restated financial information for the years ended December 31, 2012 and December 31, 2013, and on March 16, 2015, the Company filed amended and restated quarterly reports on Form 10-Q, with restated financial information for the periods ended March 31, June 30 and September 30, 2014, respectively.

 

44

---

Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

We have derived the following selected historical financial information from the consolidated audited financial statements as of and for the years ended December 31, 2014, 2013 and 2012 appearing elsewhere in this prospectus and in the Company’s Form 10/A filed with the SEC on March 11, 2015. Historical results are not necessarily indicative of the results that may be expected in the future. The selected consolidated financial data set forth below should be read together with the consolidated financial statements and the related notes appearing elsewhere in this prospectus, as well as the sections of this prospectus captioned “Prospectus Summary – Summary Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data in this section are not intended to replace the financial statements and are qualified in their entirety by the financial statements and related notes included elsewhere in this prospectus.

 

		For the year ended December 31,
		2014				2013				2012
Consolidated Statements of Operations Data:
Net revenue		$	629,132			$	2,062,083			$	1,176,829
Cost of revenues			3,796,651				2,660,749				1,051,135
Gross profit/(loss)			(3,167,519	)			(598,666	)			125,694
Total operating expenses			10,285,064				3,195,679				1,878,983
Loss from operations			(13,452,583	)			(3,794,345	)			(1,753,289	)
Other income (expense)
Interest income (expense), net			(1,282,761	)			6,905				(4,948	)
Change in fair value of derivative liabilities			(1,805,990	)			—				—
Total other income (expense)			(3,088,751	)			6,905				(4,948	)
Loss from continuing operations		$	(16,541,334	)		$	(3,787,440	)		$	(1,758,237	)
Loss per common share – Basic and Diluted		$	(0.55	)		$	(0.13	)		$	(0.07	)
Consolidated Balance Sheet Data as of period end:
Total Assets		$	4,264,492			$	4,741,615			$	2,541,024
Convertible notes payable, net			2,524,427				—				—
Derivative Liability			3,691,853				—				—
Total current liabilities			11,583,551				2,104,590				2,652,233
Total long term liabilities			728,515				—				42,420
Accumulated deficit			(22,078,193	)			(5,536,859	)			(1,745,419	)
Total stockholders’ equity/(deficit)		$	(8,047,574	)		$	2,637,025			$	(153,629	)

 

45

---

Table of Contents

SUMMARY FINANCIAL INFORMATION

The following table sets forth our unaudited quarterly statements of operations data for the last eight fiscal quarters. The information for each of these quarters has been prepared on the same basis as the audited annual financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, which includes only normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.

 

		Three months ended
		December 31, 2014				September 30, 2014				June 30, 2014				March 31, 2014				December 31, 2013				September 30, 2013				June 30, 2013				March 31, 2013
Revenues		$	87,024			$	173,076			$	360,105			$	51,011			$	217,706			$	1,314,178			$	261,603			$	268,596
Revenues, related parties			25,191				—				—				—				—				—				—				—
Less: allowances and refunds			(7,275	)			—				—				(60,000	)			—				—				—				—
Net revenue			104,940				173,076				360,105				(8,989	)			217,706				1,314,178				261,603				268,596
Cost of revenues			304,546				1,813,562				728,669				949,874				402,622				1,807,030				181,037				270,060
Gross profit/(loss)			(199,606	)			(1,640,486	)			(368,564	)			(958,863	)			(184,916	)			(492,852	)			80,566				(1,464	)
Operating expenses
Selling and marketing			184,415				319,204				286,784				141,554				157,990				91,136				161,005				254,252
Research and development			105,576				61,623				67,033				8,000				28,128				28,233				10,000				8,500
General and administrative			5,925,823				1,984,303				663,415				563,370				579,930				522,372				661,451				692,682
Total operating expenses			6,215,814				2,365,130				1,017,232				712,924				766,048				641,741				832,456				955,434
Loss from operations			(6,415,420	)			(4,005,616	)			(1,385,796	)			(1,671,787	)			(950,964	)			(1,134,593	)			(751,890	)			(956,898	)
Interest income (expense), net			(968,683	)			(339,231	)			38,012				13,652				8,789				4,311				(5,787	)			(408	)
Change in fair value of derivative liabilities			(2,354,305	)			548,315				—				—				—				—				—				—
Total other income (expense)			(3,322,988	)			209,084				38,012				13,652				8,789				4,311				(5,787	)			(408	)
Loss before provision for income taxes			(9,738,408	)			(3,796,532	)			(1,347,784	)			(1,658,135	)			(942,175	)			(1,130,282	)			(757,677	)			(957,306	)
Provision for income taxes			—				—				—				—				33,220				(119,280	)			90,060				—
Net loss		$	(9,738,408	)		$	(3,796,532	)		$	(1,347,784	)		$	(1,658,135	)		$	(975,394	)		$	(1,011,002	)		$	(847,737	)		$	(957,306	)
Loss per share attributable to common stockholders
Basic and diluted		$	(0.33	)		$	(0.13	)		$	(0.04	)		$	(0.05	)		$	(0.03	)		$	(0.03	)		$	(0.03	)		$	(0.03	)
Weighted average shares outstanding
Basic and diluted			29,565,502				30,371,299				30,531,365				30,516,271				28,815,270				29,298,284				28,705,243				27,957,406

 

46

---

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of financial condition and results of operations in conjunction with the financial statements and related notes appearing elsewhere in this prospectus.

Overview

Our business involves contracting with business owners for our services and the sale of marijuana-related products such as our Medbox dispensing system and our line of tabletop medical vaporizers. We expect to transition to the sale of a portable line of vaporizers in the second quarter of 2015.

We began our business model with entering into one-time consulting agreements to help our clients obtain a license to sell or cultivate marijuana and to assist them with the build out of a location for their business, including the sale to the client of a Medbox dispensing system, pursuant to a consulting agreement that we refer to as our “Turn-Key Business Establishment Agreement”. We are now transitioning to a recurring revenue model, whereby we will continue to enter into Turn-Key Business Establishment Agreements, together with additional revenue generating agreements for providing ongoing consulting to the established business in the areas of regulatory compliance, security, operations and other matters that leverage our expertise and knowledge in this industry. We also intend to retain the rights to manage business locations on a day-to-day basis and then seek to assign such rights to third parties, in return for recoupment of a percentage of the management fee to operate the business. Our clients establish dispensaries for the sale of marijuana for medical use or retail operations for the sale of marijuana for recreational use or cultivation centers for the cultivation of marijuana. Historically, we have generated revenue from various sources on a “one-time basis” for services that we provide to clients in helping them create, license, build out and open dispensaries and cultivation centers. Our discussion of our results of operations is based on our prior business model.

The following discussion should be read in conjunction with the consolidated financial statements and related notes provided in this prospectus.

Comparison of the years ended December 31, 2014 and 2013

Overview of Results

The Company reported a consolidated net loss of $16,541,334 for the year ended December 31, 2014, an increase of $12,749,894 compared to a loss of $3,791,440 for the same period of 2013. This was primarily due to a few key factors related to a reduction in revenue, an increase in non-cash stock based compensation, an increase in interest expenses due to use of convertible debentures carrying a high financing cost, an increase in expenses related to being a public company and costs associated with the SEC investigation and the grand jury investigation of the Company’s financial reporting, increased costs related to pursuing new licenses in new markets, costs of re-valuing slow moving inventory of the old style vaporizers and a slight increase in sales and marketing expenses.

During 2014, the Company hired a new CEO and CFO and reconstituted its Board of Directors. In an effort to attract new talent to management and the Board of Directors, the Company introduced a new stock compensation plan that added $4.4 million to operating costs.

Additionally, the Company’s revenue model was significantly different in 2014 as compared to 2013. This difference was mainly due to the fact that the Company was moving away from the business model of obtaining licenses for clients for a one-time, upfront fee. The Company is in the process of modifying its business model to provide ongoing management and support services for clients so that consulting contracts would continue over a longer period. During our transition period to a new business model, expenses to secure new contracts and licenses are incurred and revenue is deferred principally until new licenses are obtained and new dispensaries and cultivation centers begin operating.

 

47

---

Table of Contents

The Company’s subsidiary VII was acquired on April 1, 2013. Accordingly, VII expenses did not exist for the first quarter of 2013, but were included in total amounts for the year of 2014. For purposes of comparison, the VII expenses are presented as a separate line item in the management discussion and analysis section.

Revenue

Revenue consisted of Medbox system sales, location build-outs fees, referral fees and consulting service fees, which are often bundled together in a single offering to clients and revenue from sales of vaporizers and accessories from VII. For the year ended December 31, 2014 consolidated net revenues decreased by $1,432,951 compared to the same period of 2013 mostly due to a reduction in consulting and build outs revenue by $1,610,444 as offset by an increase in referral fees revenue by $203,165.

 

Revenue Description		For the year ended December 31, 2014				For the year ended December 31, 2013				Increase (Decrease)
Consulting and Build-outs		$	157,200			$	1,767,644			$	(1,610,444	)
Sale of locations and management rights, unrelated parties			175,000				150,000				25,000
Sale of territory rights, related party			75,301								75,301
VII-Product sales			85,741				144,439				(58,698	)
Referral fees			203,165				—				203,165
Gross revenues			696,407				2,062,083				(1,365,676	)
Allowances and refunds			(67,275	)			—				(67,275	)
Net revenues		$	629,132			$	2,062,083			$	(1,432,951	)

Consulting Revenue

The consulting and build out revenue for the year 2013 was due mostly to achievement of milestones and delivery of facilities in Arizona to our clients. The consulting revenue for the year ended December 31, 2014 decreased by $1,610,444 compared to the same period of 2013, due principally to a large decline in build outs in 2014. This change in revenue was due mainly to delays in adopting final governmental regulations and the timing of application submittals for other states and, therefore, revenue was not fully recognized during this period for many of our clients. The Company could not fulfill its contractual obligations and record revenue for its San Diego clients due to broad changes in regulation leading to a decrease in the number of available licenses from 130 to 32 in San Diego County. Due to the reduction of licenses being offered in San Diego, we had to cancel and/or refund payments to many of our clients. The initial San Diego contracts and the cancelation were all recorded in 2013 in the restated financial statements, the refunds were made during the year 2014. Also during the third quarter of 2014, the Company applied for licenses on behalf of its clients in the States of Nevada and Illinois, and was able to obtain eight provisional cultivation licenses in Nevada and one dispensary authorization license in Illinois on for its clients. The Company is also pursuing two recreational retail licenses and one “Tier 2” production/processor license in the State of Washington which are currently in the process of being reviewed and approved.

As of December 31, 2014, the Company obtained a provisional license in the State of Oregon and fully built out the location and the dispensary location there. The dispensary is expected to open in the second quarter of 2015.

Sale of locations and management rights

Revenue from the sale of locations and management rights to operate locations increased by $25,000 during the year ended December 31, 2014 as compared to the year ended December 31, 2013. This increase is due mostly to the sale of management rights in an Arizona location for $175,000. The revenue from sale of the locations for the year ended December 31, 2013 consisted of the sale of one location in Arizona for $150,000.

 

48

---

Table of Contents

Sale of territories, related party

On March 28, 2014, the Company entered into a sale for exclusive rights with a related party to place the Medbox patented dispensing systems in Denver, Colorado for $500,000. This $500,000 is being recognized ratably over the five year term of the agreement, with $75,301 recognized as revenue in the twelve months ended December 31, 2014.

There was no similar revenue in the comparable period of 2013.

Referral fee

During the year ended December 31, 2014, the Company entered into an agreement with MJ Holdings, Inc., (the “Referral Agreement”) a publicly traded company that provides real estate financing and related solutions to licensed marijuana operators. Medbox will market MJ Holdings’ real estate financial products and offerings to its consulting clients and will refer all incoming real estate financing related opportunities to MJ Holdings (See Note 10 – Marketable securities to the Notes to our Consolidated Financial Statements in this Report for more information). Pursuant to the Referral Agreement, MJ Holdings, Inc. agreed to issue to the Company, 33,333 warrants to purchase common stock of MJ Holdings, Inc. on each month’s anniversary during the six month term of the contract. The revenue recognized for the year ended December 31, 2014 from the Referral Agreement was $203,165. There was no comparable revenue during 2013.

VII-Product sales

During the year ended December 31, 2014, the Company generated $85,741 from the sale of vaporizer products and accessories through VII. VII was acquired on April 2, 2013 and, therefore, there was no income for a comparable annual period for vaporizer sales in 2013. We plan to release our new portable vaporizer product to the general public during the second quarter of 2015. We expect the new vaporizer product to restore sales volume for our subsidiary VII.

Cost of revenue

Cost of revenue includes costs incurred to obtain permits and licenses before the license is granted and the location is secured as well as costs for our dispensing systems’ manufacturing and sales, location build-out, repurchases of licenses or rights from former clients that can be resold to new clients and the costs associated with operating VII which include the cost of producing vaporizers and accessories, adjustments for valuations of inventory, fulfilment activities associated with sales orders and operation of the Company’s inventory management department.

 

Costs of Revenue		For the year ended December 31, 2014				For the year ended December 31, 2013				Increase (Decrease)
Cost of inventory and build-outs		$	884,958			$	2,161,909			$	(1,276,951	)
New markets development costs			1,990,815				276,468				1,714,347
Write off of vaporizer inventory			329,154				—				329,154
Charge for abandoned site			140,000				—				140,000
Charges from escrow deposits			235,757				—				235,757
VII-Product cost			215,967				222,372				(6,405	)
Total costs of revenue		$	3,796,651			$	2,660,749			$	1,135,902

Cost of inventory and build-outs

Total costs of inventory and build-outs decreased by $1,276,951 during the year ended December 31, 2014 as compared to the same period of 2013. The decrease was due mainly to the completion of numerous projects in Arizona during 2013. We did not have comparable project completions in 2014.

 

49

---

Table of Contents

New markets development costs

The decrease in cost of inventory and build outs from 2013 to 2014 was totally offset by an increase of $1,714,347 in costs associated with the pursuit of licenses in the States of Washington, Nevada and Illinois as a result of new legislation changes there. After obtaining final approvals, the Company will have to invest additional funds to bring locations in those states to the level of compliance required by the applicable state and/or city and to perform the interior build-out.

VII-Product cost

The Company incurred costs of $215,967 for the year ended December 31, 2014 associated with VII which included the cost of producing vaporizers and accessories, fulfilment activities associated with sales orders, and the operation of the Company’s purchasing department. As previously described, this amount cannot be directly compared to the year ended December 31, 2013 due to the fact that VII was acquired on April 2, 2013.

Write off of vaporizer inventory

During the third quarter of 2014, the Company wrote down slow moving, older models of its vaporizer inventory with a charge to cost of revenue of $329,154.

Charge for abandoned site

During the year ended December 31, 2014, due to unfavorable terms demanded by the sellers to extend the escrow and closing date, the Company allowed the escrows to expire on three agreements with an aggregate purchase price of $3,195,000 and had to forfeit $140,000 in earnest money.

Charges from escrow deposits

During 2014, the Company entered into numerous real estate contracts to secure locations during the licensing process. The contracts allow the Company to demonstrate to licensing authorities that the locations are available for use as a dispensary or cultivation location. The contracts are generally structured with an escrow deposit, a deferred closing until a license is granted and periodic withdrawals from the deposit to compensate the seller for holding the property off the market in escrow during the pendency of the license application. The periodic transfers out of escrow to the seller are in some cases creditable towards the purchase price but in most cases represent charges in lieu of rent. The charges in lieu of rent and other non-refundable charges paid to property sellers have been recorded as expense of $235,757 for the year ended December 31, 2014, in the statement of operations. There were no similar transactions during 2013.

Operating Expenses

Operating expenses consist of all other costs incurred during the period other than cost of revenue. Operating expenses increased by $7,089,385 during year ended December 31, 2014 as compared to the year ended December 31, 2013. This was primarily due to an increase of $6,652,770 in general and administrative costs, further described below.

Sales and Marketing expenses

Sales and marketing expenses include public relations and promotion, lobbying, purchased advertising, travel and entertainment and outside consulting services for sales and marketing and sales lead generation. Sales and marketing expenses increased by $269,244 during the year ended December 31, 2014 compared to the year ended December 31, 2013 principally due to an increase in VII sales and marketing expenses related to product promotions and lobbying in order to promote the Company in the states/markets of interest.

 

50

---

Table of Contents

Research and development

Research and development consists of engineering work done on the software enhancements of the Medbox, additional research on vaporizers, and patent-related expenses. Our research and development expenses for the year ended December 31, 2014 increased by $167,371 as compared to the year ended December 31, 2013. The increase is due to the Company’s investments in developing the new vaporizer, additional investment in development of new tracking technologies for cultivation facilities that we intend to sell to our clients as a package with their consulting agreements, upgrading the point-of-sale system and software for new generations of the dispensing machines, as well as for patent attorneys fees to manage and apply for patents to protect the Company’s intellectual property.

General and administrative

General and administrative expenses include costs of being a public company, legal, lobbying, accounting, payroll, consulting, rent and other costs. The Company’s general and administrative expenses increased by $6,652,770 for the year ended December 31, 2014 as compared to year ended December 31, 2013.

The increase is primarily due to the introduction in 2014 of the Company’s new stock-based compensation plan for executive officers and directors with the related cost of $4,415,799. Additional reasons for the increase include higher costs associated with being a public company, which totaled $517,653 for the year ended December 31, 2014, an increase of $1,020,124 in legal costs due to the SEC and Department of Justice investigation into the Company’s financial reporting, related party transactions and other matters (see Note 19 to the Notes to our Consolidated Financial Statements in this Report for more information) and an increase in employee and independent contractors costs of $426,920 as the Company added staff to build infrastructure and support future growth, as well as additional expenses of $278,952 related to warrants settlement with various previous owners of VII.

Other Income (Expense)

Other income (expense) swung from income of $6,905 to expense of $3,088,751 for the year ending December 31, 2014, an increase of $3,095,656. This is primarily due to expense caused by a change in fair value of derivative liabilities of $1,805,990 related to the new convertible notes and the interest charge from the convertible notes payable in the amount of $1,282,761. The convertible notes payable funded in the third quarter of 2014 and, accordingly, there are no corresponding charges in 2013.

Net Loss

As a result of the factors set forth above, our net loss increased by $12,749,894 to $16,541,334 for the year ended December 31, 2014 compared to $3,791,440 for the year ended December 31, 2013.

Comparison of the years ended December 31, 2013 and 2012

Overview of Results

Revenue increased $885,254 or 75.2%, to $2,062,083 for the year ended December 31, 2013, from $1,176,829 for the year ended December 31, 2012, primarily as a result of the completion of contracts for our Arizona customers. The increase was caused principally by recognition of revenue in 2013 that was deferred in 2012 for our Arizona contracts. Openings of Alternative Medicine Clinics (“AMC”) in Arizona were delayed by court action that was not resolved until 2013. During 2012, we were unable to recognize revenues from our Arizona clients due to year-end litigation in the Arizona courts after Arizona passed a medical marijuana law that provided for the permitting and operation of AMCs, which was then challenged in the courts by Arizona’s governor. This litigation froze our ability to complete our construction build outs and deliver Medbox machines to our clients in Arizona, and, as a result, we deferred recognition of revenue already received from these Arizona clients while the case was pending and the dispensary licensing program was on hold.

 

51

---

Table of Contents

Our Vaporfection International, Inc. (“VII”) subsidiary contributed $144,439 of revenues during the twelve months ended December 31, 2013; there was no similar revenue in 2012.

The Company had a negative gross margin of $598,666 during 2013, operational costs of $3,195,679 eroded the result, to a pretax loss of $3,787,440, which is $2,209,203 greater than the previous year pretax loss of $1,758,237. Our gross profit decreased from $125,694 to a gross loss of $598,666 principally due to the cost of build outs for Arizona dispensaries that totaled $1.2 million that was expensed in 2013.

Our operating expenses increased from $1.9 million in 2012 to $3.2 million in 2013. Our operating expense increase for 2013 was primarily attributed to higher general and administrative expenses related to raising capital and regulatory compliance in connection with the filing of our Registration Statement on Form S-1, subsequently withdrawn, and the filing of our Form 10 registration statement in order to register our common stock under and become subject to the periodic reporting requirements of the Exchange Act. In addition, we incurred significant legal costs as we litigated on behalf of our Arizona clients to allow them to move forward with the dispensary licenses that the state of Arizona had awarded them. Additionally, our newly acquired subsidiary reported a net loss of $316,928 during the nine-month period from our acquisition of it on April 1, 2013 through December 31, 2013. All of the above factors contributed to an increase in the net loss from $1,758,237 in 2012 to $3,791,440 in 2013.

Revenue

Total revenues for the years ending December 31, 2013 and 2012 consisted of revenues from Medbox system sales, location build out fees and consulting fees. The increase of $900,000 from 2012 to 2013 was caused principally from the recognition of $1.3 million in revenue in 2013 that was deferred from 2012 for our Arizona contracts. As noted above, openings of AMCs in Arizona were delayed by court action that was not resolved until 2013. During 2012, we were unable to recognize revenues from our Arizona clients due to litigation in the Arizona courts after Arizona passed a medical marijuana law that provided for the permitting and operation of AMCs, which was then challenged in the courts by Arizona’s governor. This litigation froze our ability to complete our construction build outs and deliver Medbox machines to our clients in Arizona, and, as a result, we deferred recognition of revenue already received from these Arizona clients while the case was pending and the dispensary licensing program was on hold. In addition, sales from our new VII subsidiary contributed $144,439 to total revenue during 2013; this business was acquired on April 1, 2013 and, as such, there were no similar revenues during 2012.

Cost of Revenues

Our cost of revenues includes systems costs for our systems sales and construction, build-out, license and permit fees on behalf of our clients for our consulting activities. Cost of revenues increased $1,609,614, or 153.1%, to $2,660,749 for the year ended December 31, 2013 from $1,051,135 during the year ended December 31, 2012, as a result of increased costs related to the build-out of locations for our clients due to delays in implementing the Arizona program discussed above and costs related to zoning and site acquisition during 2013. Costs of $260,000, accumulated for an unsuccessful effort to develop the market in Massachusetts, were included in cost of revenue for 2013.

Also, our newly acquired VII subsidiary contributed $222,372 to the total of costs of revenue during 2013. Cost of revenues as a percentage of revenues increased to 129.0% during the year ended December 31, 2013 from 89.3% during the year ended December 31, 2012, as a result of revenue generating construction costs incurred during the year ended December 31, 2013 related to the Arizona location build-outs and additional zoning and legal costs associated with new client consulting and location sourcing.

 

52

---

Table of Contents

Operating Expenses

Selling, general and administrative expenses, which we refer to as “operating expenses,” consist of all costs incurred during the year other than cost of revenues. Operating expenses increased $1,316,696 or 70.1% to $3,195,680 for the year ending December 31, 2013 compared to $1,878,983 for the same period in 2012. The Company’s 2013 operational expenses consist of:

 

		2013																2012
2013 Operating Expenses		Consolidated				MDS				Medbox				VII				Consolidated
Selling and marketing		$	664,383				625,776				5,500				33,107				806,221
Research & development		$	74,861				74,861				0				0				176,964
General and administrative		$	2,456,435				1,099,162				1,178,802				178,472				895,798
Total Operating Expenses		$	3,195,679				1,799,799				1,184,302				211,579				1,878,983

The largest component of the increase in operating expenses during 2013 compared to 2012 was the increase in general and administrative expenses, which increased $1,383,673 or 129.0%, to $2,456,435 The reasons for this increase are analyzed below under “General and administrative.”

Selling and marketing expenses totaled $664,383 for the year ended December 31, 2013. In order to strengthen the MDS competitive advantage in the consulting market within the industry the Company had been developing a new tracking technology, for bio-metric chain of custody seed-to-sale tracking, for cultivation facilities. During 2013, the Company incurred $74,861 for the research and development of the tracking technology. There were no similar expenses in 2012. Management expected that selling and marketing expenses would grow significantly in 2014 as it expected significant expansion of business opportunities for MDS in 2014 due to favorable changes in the industry, including expansion of medical and recreational marijuana into new U.S. jurisdictions.

Overall selling and marketing expenses include professional public relations and promotion, purchased advertising, travel and entertainment and outside services for sales and marketing consultants and sales lead generation. The breakdown of sales and marketing expenses is presented in the table below:

 

		Consolidated				MDS				Medbox				VII
Public Relations		$	69,691				69,691
Consulting/Outside Services		$	407,341				383,114								24,227
Advertising		$	146,998				135,925				5,500				5,573
Other		$	40,353				37,046								3,307
Total Sales & Marketing		$	664,383				625,776				5,500				33,107

The Sales and Marketing decrease of $141,838 is partially due to recruitment of qualified and experienced consultants that account for $407,341 (or 61.3%) out of the total sales and marketing expense who did a better job of managing costs. Advertising expense for the year was due to promotional campaigns in specialized magazines and publications. Another factor in reduction of advertising costs were referrals and word-of-mouth advertising from our existing and growing clientele base.

Research and development consists of engineering work done on software enhancements of the Medbox technology along with development of new products at VII. In 2013, we invested in developing new tracking technologies for cultivation facilities that we intend to sell to clients as a package with their consulting agreement. In addition we believe that this software will give our clients a competitive advantage in the process of applying for licenses for cultivation facilities due to increased oversight and inventory tracking in all phases of management and operation of the facility through a biometric chain of custody of all cultivated products. Management expects that these costs will continue to increase during 2014 as we develop our new products, as discussed in “Item 1. Business.”

 

53

---

Table of Contents

General and administrative expenses are those related to day-to-day activity and management. These expenses include legal, lobbying, accounting, payroll, consulting and other costs. General and administrative expenses increased $1,383,673 or 154.46 % for the year ending December 31, 2013 to $2,456,435 compared to $895,798 during the year ended December 31, 2012. The significant increase in these costs during 2013 compared to 2012 is primarily related to significant legal and accounting expense incurred in preparing our Form S-1 and Form 10 registration statements. During the year we incurred approximately $91,000 in legal fees in connection with the preparation and filing of our Form S-1 and Form 10 registration statements; there were no such expenses in 2012. In order to comply with financial and reporting, corporate governance and internal control requirements for SEC reporting companies we incurred expenses for professional accounting services in the amount of $202,310 for the year ending December 31, 2013. This represents an increase of $25,346 or 14.32% from the $176,964 for the year ended December 31, 2012.

Due to the Company’s growth and development and the development of the industry itself, we hired 5 additional new experienced consultants during 2013. Employee costs, which includes compensation and benefit expenses, increased $172,907, or 96.1%, to $352,907 for the year ending December 31, 2013 compared to $180,000 during 2012.

During 2013 we incurred significant legal fees in connection with assisting our clients in Arizona in order to allow them to utilize the dispensary licenses that they were granted by the state following a legal challenge by the governor. We also incurred significant legal and accounting expenses during 2013 in connection with the preparation of our Form 10 and a registration statement on Form S-1 that was withdrawn. In addition, we also incurred expenses of $184,167 to financial advisors.

We expected that general and administrative expenses would continue to increase during 2014 as we built out our infrastructure to comply with Exchange Act and SEC reporting rules and regulations.

Income Taxes

Because the company incurred a significant loss we did not record any tax provision for federal tax for the year 2013. We accrued $4,000 for the minimum state income tax.

Net Loss

As a result of the above factors, our net loss increased $2,033,203, or 115.6%, to $3,791,440 during the year ended December 31, 2013 from a net loss of $1,758,237 during the year ended December 31, 2012.

Liquidity and Capital Resources

As of December 31, 2014, the Company had cash on hand decrease by $66,821 to $101,182 as compared to cash on hand of $168,003 on December 31, 2013. This was due to the net loss and cash used in operating activities of $6,319,400 which was financed by stock sale proceeds of $2,442,859 and net proceeds from issuance of convertible notes payable of $3,475,000.

Cash Flow

During the year ended December 31, 2014 cash was primarily used to fund operations and in the process of pursuing license applications. See below for additional discussion and analysis regarding cash flow.

 

		For the year ended December 31,
Cash flow		2014				2013
Net cash used in operating activities		$	(6,319,400	)		$	(3,743,397	)
Net cash used in investing activities			(418,797	)			(1,499,451	)
Net cash provided by financing activities			6,671,376				4,383,949
Net increase (decrease) in cash		$	(66,821	)		$	(858,899	)

 

54

---

Table of Contents

Cash Flows – Operating Activities

The cash flows used in operating activities increased by $2,576,003 for the year ended December 31, 2014 as compared to the year ended December 31, 2013. This was primarily due to the increase in net loss of $12,749,894 offset by the non-cash charge of $4,415,799 for the Company’s stock-based compensation awards, non-cash change in fair value of derivative liability of $1,805,990 and amortization of the debt discount related to convertible debentures of $935,290, an increase in accounts payable of $2,117,217, an increase in deferred revenue of $805,394, and cash provided by customer deposits of $248,985.

Cash Flows – Investing Activities

The cash flows used in investing activities decreased by $1,080,654 for the year ended December 31, 2014 compared to the year ended December 31, 2013. This was due primarily to advances on investments of $1,250,000 during 2013, for which there were no corresponding advances during 2014. On February 8, 2013, the Company entered into an agreement with Bio-Tech Medical Software, Inc. (“Bio-Tech”) which would allow the Company to purchase 833,333 shares of common stock of Bio-Tech, representing 25% of Bio-Tech’s total issued and outstanding shares of common stock, for $1,500,000. The Company advanced $600,000 of such amount upon execution of the Bio-Tech agreement with the remaining balance of $900,000 due and payable in installments at various dates by August 25, 2013. On March 12, 2013, the Company entered into an agreement with three members of MedVend Holdings LLC (“MedVend”) whereby the Company would acquire 50% of their equity interest in MedVend. The purchase price of the equity interest was $4,100,000. The Company paid an advance of $300,000 upon execution of the contract for the right to purchase and another $300,000 was disbursed as an additional investment to MedVend. In addition, during 2014, the Company received proceeds from repayment of a note receivable in the amount of $115,000, issued in 2013.

Additionally, the Company used cash for the purchase of property held for resale in 2014 for $399,594.

Cash Flows – Financing Activities

The cash flows provided from financing activities increased by $2,287,427 for the year ended December 31, 2014 compared to the year ended December 31, 2013. During 2014 we raised approximately $6,671,376 including $3,475,000 from new issuances of convertible debentures net of issuance costs and $2,442,859 from the issuance of the Company’s common stock and $828,517 from the issuance of notes payable as compared to $4,383,949 raised during 2013 including $4,486,541 from the issuance of the Company’s common stock and $810,000 in capital contributed by related parties less payments of $896,285 as payments on notes payable.

Future Liquidity and Cash Flows

Management believes that the Company’s cash balances on hand, cash flows expected to be generated from operations, proceeds from current and future expected debt issuances and proceeds from future share capital issuances will be sufficient to fund the Company’s net cash requirements through March, 2016. However, in order to execute the Company’s long-term growth strategy, which may include selected acquisitions of businesses that may bolster the expansion of the Company’s management services business, and purchases of real estate which would be used as a basis for opening and expanding retail dispensary and cultivation facilities in regulated markets, the Company will need to raise additional funds through public or private equity offerings, debt financings, or other means.

Our financial statements were prepared on a going concern basis. The going concern basis assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. During the year ended December 31, 2014, the Company had a net loss of approximately $16.5 million, negative cash flow from operations of $6.3 million and negative working capital of $10.0 million. The Company will need to raise capital in order to fund its operations. These factors,

 

55

---

Table of Contents

among others, raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement a business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

During 2014, the Company closed two convertible notes payable agreements with accredited investors which yielded $3.75 million in funding for the Company. In accordance with the same convertible notes payable agreements, we anticipate receiving an additional $3.0 million from the same accredited investors in the first half of 2015, subject to this Registration Statement becoming effective.

Furthermore, we have closed each of the July 2014 Modified Debentures, the September 2014 Debentures and the Director Notes as disclosed in the Prospectus Summary set forth at the beginning of this Registration Statement.

Our license backlog includes 12 provisional licenses subject to final approval by governmental authorities which may or may not lead to the release of new licenses in accordance with the authorities’ stated timelines. If final licenses are granted, we will receive additional funding from customers in 2015 as a result of sales of the licenses, entering into consulting arrangements, entering into and assigning management agreement rights and from the sale of real property relating to the opening of new dispensary and cultivation locations.

After this Registration Statement is declared effective, the Company is planning to conduct a road show to raise additional equity capital. The Company will continue to execute on its business model by attempting to raise additional capital through the sales of debt or equity securities or other means, however there is no guarantee that such financing will be available on terms acceptable to the Company, or at all. If the Company is unable to obtain adequate debt or equity financing, it may be forced to slow or reduce the scope of operations and expansion, and its business would be materially affected.

A change in the regulatory requirements in some states for acquiring retail dispensary and cultivation licenses has made it important for us or our clients to acquire real estate either through lease arrangements or purchase in order to secure a license. This has required the Company to spend cash for earnest deposits on various real estate location opportunities during 2014 and thereafter. The Company intends to find a partner for the acquisition of the various locations so that the Company can apply for more licenses, however, the timing of those partnerships may require the Company to acquire ownership of the underlining real estate for a period of time. This process requires significant cash outlay for the earnest money that has ranged from $10,000 to $100,000 per property.

A summary of our active real estate purchase transactions as of March 31, 2015 is as follows:

 

Property		Purchase price				Closing date				Net escrow balance				Date escrow opened				Additional rents/fees paid to extend closing date
1		$	820,000				3/31/2015				55,000				06/28/2014			$	9,808
2			—								265,400				07/21/2014				—
Total		$	820,000							$	310,400							$	9,808

Line 3 represents the advance on July 21, 2014 of $75,000 to PVMI, a related party, as a partial payment for advances made by PVMI for escrow deposits used to secure properties for possible license acquisition in the San Diego market area and $190,400 from the assignment agreement. On October 17, 2014, the Company entered into an assignment agreement with PVMI through which PVMI assigned all rights and titles for any opened escrow on real estate purchase agreements in San Diego in exchange for a related party notes payable from the Company. As of the signing date the agreement was valued at $190,400 which represented the value of escrow deposits paid by PVMI for eight different real estate agreements. Also, on the date of the assignment agreement

 

56

---

Table of Contents

the Company paid $50,000 into an escrow account (line item 2 from the table above) for PVMI. The escrow was related to one of the eight real estate purchase agreements that were part of the assignment.

During the year ended December 31, 2014, the Company paid $930,000 either by deposit into fifteen escrow accounts or direct payments to sellers, to secure the purchase and/or extend the closing dates on real estate to be used for future retail/cultivation facilities with an aggregate purchase price of $26,830,000. During 2014, the Company allowed the escrows to expire on three agreements with an aggregate purchase price of $3,195,000 and forfeited $140,000 in earnest money due to unfavorable terms demanded by the sellers to extend the escrow and closing date. The Company was also not successful in obtaining licenses for another ten locations with an aggregated sale price of $21,515,000 and deposits in escrow totaling $685,000. As a result, all escrow accounts were closed and $235,757 was forfeited and $419,167 was refunded to the Company.

During July 2014, one of the real estate properties on which the Company opened escrow was foreclosed upon and the agreement was canceled and the escrowed money in the amount of $10,000 was reimbursed to the Company on July 28, 2014.

In addition, our VII subsidiary has cash demands for the completion of its portable vaporizer product and the follow-on production costs for the new product which we expect to release during the second quarter of 2015. These additional investments along with continued investment into the operating cost of this business will continue to require significant amounts of cash until the launch of the new portable vaporizer.

Off Balance Sheet Transactions

We do not have any off-balance sheet credit exposure.

Contractual Obligations

 

		Payments Due by Period
		Total				Less than one year				1-3 Years				4-5 Years				More than 5 Years
Contractual obligations:
Convertible notes payable (1)		$	3,750,000			$	3,750,000			$	—			$	—			$	—
Notes payable (2)			261,434				261,434				—				—				—
Related party notes payable (3)			678,877				678,877				—				—				—
Operating lease obligations			829,640				266,736				533,304				29,600				—
Total		$	5,519,951			$	4,957,047			$	533,304			$	29,600			$	—

 

(1)	Represents the $2,750,000 principle balance owed under the July 2014 Purchase Agreement debentures and the $1,000,000 principle balance owed under the September 2014 Purchase Agreement debentures. See Note 13

(2)	Substantially all of this balance relates to a note payable for the purchase of real estate. See Note 12

(3)	Represents amounts loaned to several companies owned by the majority shareholder of the Company. See Note 16

Critical Accounting Policies and Estimates

Our significant accounting policies are summarized in Note 2 to the Consolidated Financial Statements. The additional discussion below addresses only our most significant judgments:

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the

 

57

---

Table of Contents

consolidated financial statements as well as the reported expenses during the reporting periods. The Company’s significant estimates and assumptions include the valuation of the Company’s common stock used in the valuation of goodwill, accounts receivable and note receivable collectability, inventory, the valuation of restricted stock and warrants received from customers, the amortization and recoverability of capitalized patent costs and useful lives of long-lived assets, the derivative liability, and income tax expense. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results could differ from these estimates.

Fair Value of Financial Instruments

Pursuant to ASC No. 825, Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets. The carrying value of cash, accounts receivable, other receivables, inventory, accounts payable and accrued expenses and notes payable, related party notes payable, customer deposits, provision for customer refunds and short term loans payable approximate their fair value due to the short period to maturity of these instruments. The Company’s marketable securities and related customer deposits require fair value measurement on a recurring basis as the Company has received advance payment of restricted stock in a publicly traded company for contracted services and received warrants for service provided to an unrelated third party. The Company has no exposure to gain or loss on the increase or decrease in the value of the marketable securities received as a payment from customer as any shortfall in the ultimate liquidated value of the securities will be supplemented by additional restricted stock from the customer and any liquidation in excess of the Company’s billings will be returned to the customer. The securities received as a payment for services provided will be exposed to gains or losses following their initial evaluation as of the date the revenue was earned.

Warrants and other financial assets received as a payment for the services provided are recorded as “Marketable securities”. The Company uses the Black-Scholes model to measure the value of the warrants. At each reporting date the Company reevaluates the value of marketable securities and recognizes any changes in value to other comprehensive income (loss) under “Unrealized gain or losses from marketable securities”.

Embedded derivative – The Company’s convertible notes payable include embedded features that require bifurcation due to a reset provision and are accounted for as a separate embedded derivative (see Note 13). The Company has estimated the fair market value of the embedded derivative of the Notes based on a weighted probability model. The key valuation assumptions used consist of the price of the Company’s stock, a risk free interest rate based on the average yield of a 26 or 52 week Treasury note and expected volatility of the Company’s common stock all as of the measurement dates, and various estimated reset exercise prices allocated by probability. The Company considers these inputs Level 3 assumptions, based on the application of the estimated probability rate being considered an unobservable input.

The assets or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of the relevant assets and liabilities that are measured at fair value on a recurring basis.

 

		Total				Quoted Prices in Active Markets for Identical Assets  or Liabilities (Level 1)				Quoted Prices for Similar Assets or Liabilities  in Active Markets (Level 2)				Significant Unobservable Inputs (Level 3)
December 31, 2014
Marketable securities		$	94,776			$	—			$	—			$	94,776
Derivative liability			3,691,853				—				—				3,691,853
Total		$	3,786,629			$	—			$	—			$	3,786,629

 

58

---

Table of Contents

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:

 

		For the year ended December 31, 2014
		Total
Beginning balance		$	—
Initial recognition of conversion feature			1,885,863
Change in fair value of conversion feature			1,805,990
Ending balance		$	3,691,853

Revenue Recognition

The Company applies the revenue recognition provisions pursuant to ASC No. 605, Revenue Recognition, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The guidance outlines the basic criteria that must be met to recognize the revenue and provides guidance for disclosure related to revenue recognition policies.

Revenue is only recognized when the following four criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales price is fixed and determinable and 4) collectability is reasonable assured. For multi-year contracts with upfront payments made by customers, the upfront payments are recognized over the longer of the contract period or the customer relationship.

For contracts that include multiple deliverables such as the build out of customer facilities, the Company recognizes revenue when a milestone is reached in the contract such as securing the location, delivery of dispensing machines or completion of the facility. The contract terms are broken down in specific milestones with specific attributable revenue to be earned upon successful completion of the milestone terms. (i.e. if a milestone is completing construction on a client dispensary, the condition for the revenue to be recorded is after issuance of a certificate of occupancy for the newly completed facility. The Company will record a specified amount of revenue attributable to this milestone based on the contract).

Equipment sales not associated with a consulting contract are recognized as the product is shipped and title passes. Advance payments from clients in advance of work performed are recorded as customer deposits on the balance sheet. An allowance for bad debt is established for any customer when their balance is deemed as possibly uncollectible.

Provisions for estimated returns and allowances, and other adjustments are usually provided in the same period the related sales are recorded.

The Company will at times allow customers to receive full refunds should regulatory events prevent the customer from being able to operate his contracted location. The provision for returns as well as an allowance for doubtful accounts will be included in the Company’s balance sheet as determined by management.

Cost of Revenue

Cost of revenue consists primarily of expenses associated with the delivery and distribution of our products and services. These include expenses related to the manufacture of our dispensary units, construction expense related to the customer dispensary, site selection and establishment of licensing requirements, and consulting expense for the continued management of the dispensary unit build out, server and security equipment, rent expense, energy and bandwidth costs, and support and maintenance costs prior to when the client moves in. We only begin capitalizing costs when we have obtained a license and a site for operation of a customer dispensary

 

59

---

Table of Contents

or cultivation center. The previously capitalized costs are charged to cost of revenue in the same period that the associated revenue is earned. In the case where it is determined that previously inventoried costs are in excess of the projected net realizable value of the sale of the licenses then the excess cost above net realizable value is written off to cost of revenues. In addition, cost of revenue related to our vaporizer line of products consists of direct procurement cost of the products along with costs associated with order fulfilment, shipping, inventory storage and inventory management costs.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective. The new standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The new standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

 

60

---

Table of Contents

MARKET PRICE OF AND DIVIDENDS ON REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market for Securities

The Company’s common stock is quoted on the OTCQB under the symbol “MDBX”.

The following table sets forth, for the periods indicated, the range of high and low intraday closing bid information per share of our common stock.

 

Fiscal Quarters		High Sale Price				Low Sale Price
First Quarter 2013		$	98.00			$	25.10
Second Quarter 2013		$	29.50			$	25.50
Third Quarter 2013		$	39.00			$	23.5
Fourth Quarter 2013		$	27.49			$	8.11
First Quarter 2014		$	93.50			$	20.98
Second Quarter 2014		$	30.00			$	13.25
Third Quarter 2014		$	18.54			$	7.90
Fourth Quarter 2014		$	13.96			$	4.70
First Quarter 2015		$	6.95			$	1.38

The above prices reflect representative inter-dealer quotations, without retail markup, markdown or other fees or commissions, and may not represent actual transactions.

As of May 1, 2015, there were approximately 1,361 holders of record of the Company’s common stock. Between January 1, 2015 and May 1, 2015 the high and low reported sales price of our common stock was $6.95 and $0.76, respectively, and on May 1, 2015 the closing price of our common stock was $0.80.

Dividends

The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain future earnings, if any, to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future. Any determination of our Board to declare dividends is subject to approval by the holders of a majority of the outstanding shares of our Series A Preferred Stock.

Securities Authorized for Issuance Under Equity Compensation Plans

The Company had no equity compensation plans as of December 31, 2013.

In August 2014, the Company adopted the Medbox, Inc. 2014 Equity Incentive Plan, under which up to 2,000,000 shares of common stock are authorized for issuance to directors, officers, employees and consultants of the Company.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

61

---

Table of Contents

DIRECTORS AND EXECUTIVE OFFICERS

Below are the names and certain information regarding the Company’s executive officers and directors.

 

NAME		AGE				POSITION
Guy Marsala			64			Chief Executive Officer, President and Director
C. Douglas Mitchell			64			Chief Financial Officer
J. Mitchell Lowe			62			Director
Ned L. Siegel			63			Director
Jennifer Love			52			Director

The business background and certain other information about our directors and executive officers is set forth below:

Guy Marsala

Mr. Marsala has served as our Chief Executive Officer and President since July 2014. Mr. Marsala has built a successful career bringing leadership skills learned as a West Point-trained Army officer and Fortune 500 executive to early stage and middle market companies. He has a track record of driving exceptional results in both public and private companies and has successfully led numerous business transformation initiatives across a number of industries. Mr. Marsala has been President of Go2Guy4Results, Inc. since 2012. From January 2013 to June 2013 Mr. Marsala was Chief Administrative Officer of American Career College, West Coast University. From April 2010 to March 2012 Mr. Marsala was President, Chief Executive Officer and board member of EZ Lube, LLC. From September 2008 to September 2009 Mr. Marsala was Executive Vice President of Operations of Hollywood Video/Movie Gallery, Inc. Earlier in his career, he served as a Captain in the US Army, and later progressed through a series of positions of increased responsibility with American Hospital Supply Corporation and PepsiCo. Mr. Marsala graduated from the United States Military Academy at West Point with a Bachelor of Science degree, and received his MBA from the University of Dallas. Mr. Marsala’s senior executive experience qualifies him to serve on the Company’s Board of Directors.

C. Douglas Mitchell

Mr. Mitchell has served as our Chief Financial Officer since October 2014. Mr. Mitchell is a Partner with Hardesty, LLC (“Hardesty”) an executive services and consulting firm. He has been a Partner with Hardesty since August of 2011. Mr. Mitchell intends to remain a Hardesty Partner while he serves as Chief Financial Officer of the Company.

Mr. Mitchell’s prior experience includes serving from December of 2013 to July of 2014 as a Consultant to Commerce Casino, the largest card club in California; from April 2013 to November 2013 as Interim Chief Financial Officer at Performance Team Freight Systems, Inc., a logistics and transportation company; from August 2012 to December 2012 as a Consultant to Boot Barn, a footwear and apparel retailer; from April 2012 to June 2012 as a Consultant and Provisional Director for the Orange County Superior Court of California in a pending civil lawsuit and from August 2011 to February 2012 as the interim Chief Financial Officer for Street Surfing, LLC, an international manufacturer and distributor of wheeled recreational goods.

From April of 2004 to August of 2011, Mr. Mitchell was a Partner at Tatum, LLC, also an executive services and consulting firm. Mr. Mitchell’s prior experience during his last three years at Tatum, LLC includes serving from November of 2009 to August of 2011 as a Consultant to Stearns Lending, Inc., a mortgage broker, and from January 2008 to August of 2009 as Interim Chief Financial Officer and Chief Financial Officer for Commerce Energy Group, Inc., a publicly-held independent marketer of retail electricity and natural gas to residential, commercial, industrial and institutional end-use customers. Mr. Mitchell also served as Chief Financial Officer for Chicago Pizza & Brewery, Inc. (now renamed BJ’s Restaurants, Inc.), a multi-location restaurant chain listed on NASDAQ from 2002 to 2004 and as Vice President and Corporate Controller for Del

 

62

---

Table of Contents

Taco, Inc. a privately held multi location restaurant chain and franchisor from 1994 to 2002. Earlier in his career, Mr. Mitchell served as Senior Audit Manager at Coopers & Lybrand (now part of PricewaterhouseCoopers). Mr. Mitchell earned a Bachelor of Science degree in Business Administration from the University of Southern California. He received his CPA certificate in California.

During an engagement with Hardesty, Mr. Mitchell served as Interim Chief Financial Officer for a distressed company, Street Surfing, LLC. After a detailed analysis in January 2012, the Board of Directors determined the best course for the Company’s shareholders was to file an assignment for the benefit of creditors in the California courts and sell the assets of the estate to an investment fund.

J. Mitchell Lowe

The Company has elected J. Mitchell Lowe, co-founder of Netflix and former Redbox president, to its Board of Directors, effective March 3, 2014. Mr. Lowe was our first independent director and based on his diverse background and wide-ranging expertise, we expect that he will assist us with various aspects of our business, including strategy development and implementation, executive recruiting and corporate governance matters. Mr. Lowe has been a groundbreaking leader in the home entertainment and tech industries since the 1980s, when he started Video Droid, a rental movie vending machine and store. After starting Video Droid and spending years crafting websites for video stores, Mr. Lowe was asked to help in the formation of Netflix in partnership with Marc Randolph and Reed Hasting. He served as Vice President of Business Development and strategic alliances for Netflix from 1998 to 2003, departing just after their initial public offering to join a small team from McDonald’s to form what became Redbox DVD Rental Kiosks. At Redbox, Mr. Lowe began as Chief Operating Officer, becoming President in early 2009, and playing a pivotal role in scaling Redbox from a handful of rental kiosks to nearly 32,000 kiosks and over $1.5 billion in annual revenue. Since leaving Redbox in 2011, he has served as an independent consultant for entrepreneurs and startups. He was CEO of a company called Quarterly Co., which is a mail subscription service, from September 2012 to July 2014.

Our Board of Directors believes that Mr. Lowe’s qualifications to serve as a Director of Medbox include his extensive experience in the retail kiosk industry and with startup companies generally, his strategic expertise, his business and managerial experience as discussed above and his long-term relationships. While Medbox offers solutions that are not comparable to kiosks per se, the fact that he has successfully directed large companies rollout of cutting-edge technology adds immense value to our company. We will also take advantage of his corporate governance experience as we grow and evolve as a public company.

Jennifer Love

Jennifer Love has served as a director of the Company since October 22, 2014. Ms. Love has been Senior Vice President and Chief Security Officer of Cablevision Services Corporation since August 2012. Previously, from 1987 to 2012, Ms. Love was with the Federal Bureau of Investigation, including as Assistant Director of the Security Division from July 2011 to June 2012. Ms. Love received a Bachelor of Science in Accounting from Jackson State University. Ms. Love’s managerial and risk management experience qualify her to serve on the Company’s board of directors.

Ned L. Siegel

Ambassador Siegel has served on our Board of Directors since April 2014 and was appointed as Chairman of the Board on December 17, 2014. Ambassador Siegel has served as President of The Siegel Group, Inc. a real estate development, management services and consulting company since September 1977. From October 2007 until January 2009, he served as the United States Ambassador to the Commonwealth of The Bahamas. He received a BA from the University of Connecticut in 1973 and JD from the Dickinson School of Law in 1976. Ambassador Siegel also serves on the Board of Directors of PositiveID Corp., HealthWarehouse.com, Inc., Viscount Systems, Inc. and Veriteq Corporation. Ambassador Siegel’s managerial experience and contacts with government agencies qualifies him to serve on the Company’s Board of Directors.

 

63

---

Table of Contents

There are no family relationships between any of our executive officers and directors.

Board Leadership Structure and Role in Risk Oversight

Mr. Siegel, an independent Director, serves as the Chairman of our Board of Directors. Mr. Marsala serves as Chief Executive Officer and President of the Company.

Our Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The Board of Directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensures that risks undertaken by our Company are consistent with the board’s appetite for risk. While the board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.

Terms of Office

The Company’s directors are elected at the annual meeting of shareholders to hold office until the annual meeting of shareholders for the ensuing year or until their successors have been duly elected and qualified.

The Company’s officers are appointed by the Company’s Board of Directors and hold office until removed by the Board.

Involvement in Certain Legal Proceedings

To our knowledge, except as set forth above, our directors and executive officers have not been involved in any of the following events during the past ten years:

 

1.

any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

 

2.

any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

3.

being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities;

 

4.

being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

 

5.

being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

6.

being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

64

---

Table of Contents

EXECUTIVE COMPENSATION

Summary Compensation Table

The following sets forth the compensation paid by Medbox during 2014 and 2013 to our Chief Executive Officer, our Chief Financial Officer, and three other individuals who formerly served as our Chief Executive Officer, our Chief Operating Officer and Principal Financial Officer, and our Chief Financial Officer, respectively, during 2014 (the “named executive officers”):

 

Name and Principal Position		Year				Salary				Bonus				Stock Awards (9)				All other Compensation				Total
Guy Marsala (1)(8)			2014			$	146,485			$	31,250			$	969,747			$	13,125	(5)		$	1,160,607
Chief Executive Officer and President
C. Douglas Mitchell (11)			2014			$	39,583											$	28,305	(7)		$	67,888
Chief Financial Officer
Dr. Bruce Bedrick (2)			2014			$	86,085											$	25,000	(6)		$	111,085
Former Chief Executive Officer and Director			2013			$	133,991											$	—			$	133,991
Vincent Mehdizadeh (3)			2014			$	—											$	168,625	(4)		$	168,625
Former Chief Operating Officer, Chairman of the Board, Principal Financial Officer			2013			$	—											$	262,500	(4)		$	262,500
Thomas Iwanski (10)			2014			$	88,108							$	875,000							$	963,108
Former Chief Financial Officer			2013			$	66,208															$	66,208

 

(1)	Mr. Marsala was appointed as Chairman, President and Chief Executive Officer on July 23, 2014. In December 2014, Mr. Siegel was appointed Chairman and Mr. Marsala continues as Chief Executive Officer and President.

(2)

Dr. Bedrick resigned as Chief Executive Officer on July 23, 2014 and as a director on August 18, 2014. The compensation set forth for Dr. Bedrick does not include fees of $0 and $113,613 respectively during the years ended December 31, 2014 and 2013, that the Company paid to Kind Clinics, LLC, a company owned by Dr. Bedrick, for marketing support services.

(3)

Mr. Mehdizadeh resigned as Chief Operating Officer and director of the Company and was appointed as Senior Strategist and Founder of the Company on April 10, 2014. Mr. Mehdizadeh resigned as an officer of the Company on October 13, 2014 and served as a consultant to the Company until December 8, 2014.

(4)	Consists of payments to Vincent Chase, Incorporated, wholly owned by Mr. Mehdizadeh except for the period of April to May 2013, for Mr. Mehdizadeh’s services to the Company.

(5)	Consists of a housing allowance of $13,125.

(6)	Consists of consulting fees paid to Dr. Bedrick.

(7)	Consists of $7,500 of housing allowance and $20,805 earned as consulting fees paid to Hardesty LLC before Mr. Mitchell was appointed Chief Financial Officer.

(8)

On October 24, 2014, Mr. Marsala was awarded 50,000 restricted stock units, with a fair market value of $711,500, that immediately vested into shares of common stock. On October 24, 2014, Mr. Marsala was awarded an additional 22,753 restricted stock units, with a fair market value of $258,247, that immediately vested into shares of common stock.

(9)	The amount listed in the Stock Awards column reflects the fair value of the stock awards granted in accordance with FASB ASC Topic 718, which calls for the stock or restricted stock units to be valued based on the market price of the Company’s common stock on the grant date.

(10)	Mr. Iwanski resigned on October 16, 2014, and received 100,000 restricted stock units for his service to the Company that vested between October 21, 2014 and January 5, 2015.

(11)	Mr. Mitchell was appointed as Chief Financial Officer on October 16, 2014.

 

65

---

Table of Contents

Prior to his resignation on July 23, 2014, Dr. Bedrick was employed as our Chief Executive Officer on an at-will basis at an annual salary of $120,000.

On August 18, 2014 Dr. Bedrick resigned from all remaining officer and directorship positions in all of the Company’s subsidiaries and he entered into a consulting agreement with the Company to perform general advisory services to the CEO and the Company. We paid Dr. Bedrick $12,500 per month for his services. This contract was terminated effective October 31, 2014. We paid Dr. Bedrick a total of $25,000 in consulting fees in 2014.

Mr. Mehdizadeh previously served as our Chief Operating Officer, and subsequently as our Founder and Senior Strategist. As noted above, on October 13, 2014, Mr. Mehdizadeh resigned as an officer of the Company and then served as a consultant. Pursuant to our consulting agreement with Mr. Mehdizadeh, we paid Mr. Mehdizadeh a monthly fee of $25,000, which was reduced to $12,500 per month if Mr. Mehdizadeh is engaged in trading any of the Company’s securities at any time within the preceding 30 day period. Mr. Mehdizadeh’s consulting agreement was terminated on December 8, 2014. We paid Mr. Mehdizadeh a total of $168,625 in fees in 2014.

In connection with Mr. Marsala’s election as President, Chief Executive Officer and Chairman, on July 23, 2014, the Company entered into an employment agreement with Mr. Marsala (the “Marsala Employment Agreement”). Pursuant to the Marsala Employment Agreement, the Company agreed to engage Mr. Marsala, and Mr. Marsala agreed to serve as the Company’s President, Chief Executive Officer and Chairman, for a two-year term, which term will automatically be extended for successive additional one-year terms, unless either party provides written notice to the other 90 days prior to the expiration of the initial term or any successive term, that Mr. Marsala’s engagement will not be extended. The Company agreed to pay Mr. Marsala a salary of $330,000 per year and to pay Mr. Marsala $2,500 per month for living expenses in the West Hollywood, California area. Mr. Marsala will also be entitled to an annual bonus of up to $250,000, including up to $125,000 in cash and up to $125,000 in equity of the Company, subject to performance criteria and objectives to be established by mutual agreement of the Board of Directors and Mr. Marsala within 90 days of the effective date of the Marsala Employment Agreement, and thereafter from time to time by the Board of Directors in consultation with Mr. Marsala. Mr. Marsala will also be entitled to an award of restricted stock units, to be issued within 90 days of the effective date of the Marsala Employment Agreement, under an equity incentive plan to be adopted by the Company, in the amount of the greater (by value) of 50,000 shares of common stock or $500,000 of common stock based on the volume weighted average price for the 30 day period prior to the date of the grant. The 2014 Medbox Equity Incentive Plan was adopted on August 28, 2014. In October 2014, Mr. Marsala was granted 50,000 shares under his employment agreement, another 20,000 shares for his performance in the third quarter of 2014 and 2,753 shares as part of his third quarter bonus. The Company also agreed to make an equal stock award to Mr. Marsala on each anniversary date of the Employment Agreement.

The Company may terminate the Marsala Employment Agreement with or without Cause (as defined in the Marsala Employment Agreement) upon written notice to Mr. Marsala. In the event the Company terminates the Marsala Employment Agreement without Cause, Mr. Marsala terminates the Marsala Employment Agreement with Good Reason (as defined in the Marsala Employment Agreement), or the Marsala Employment Agreement is not renewed as a result of notice to Mr. Marsala provided 90 days prior to expiration of the initial or a renewal term, Mr. Marsala will be entitled to payment of 1.5 times his annual salary and payment of all remaining lease payments or lease breakage fees on living quarters in the West Hollywood area up to the sum of $2,500 per month, unless the Company takes over the lease, and provided that the Company’s Chief Financial Officer has had a reasonable opportunity to review and approve in writing any such lease or extension thereof or amendment or modification thereto in advance of Mr. Marsala binding himself thereto. Termination by the Company within 365 days of a Change of Control (as defined in the Marsala Employment Agreement) in the absence of Cause will conclusively be deemed a termination by the Company without Cause.

In connection with Mr. Mitchell’s election as Chief Financial Officer, on October 16, 2014, the Company entered into an employment agreement with Mr. Mitchell (the “Mitchell Employment Agreement”). Pursuant to

 

66

---

Table of Contents

the Mitchell Employment Agreement, the Company agreed to engage Mr. Mitchell, and Mr. Mitchell agreed to serve as the Company’s Chief Financial Officer, for a two-year term, which term will automatically be extended for successive additional one-year terms, unless either party provides written notice to the other 90 days prior to the expiration of the initial term or any successive term, that the Mitchell Employment Agreement will not be renewed. The Company agreed to pay Mr. Mitchell a salary of $190,000 per year and to pay Mr. Mitchell $2,500 per month for living expenses in the West Hollywood, California area. Mr. Mitchell will also be entitled to an annual bonus of up to 35% of his salary, payable up to 50% in cash and the balance payable in equity of the Company, subject to performance criteria and objectives to be established by mutual agreement of the CEO of the Company and Mr. Mitchell within 90 days of the effective date of the Mitchell Employment Agreement, and thereafter from time to time by the CEO in consultation with Mr. Mitchell. Mr. Mitchell will also be entitled to an award of restricted stock units, to be issued within 90 days of the effective date of the Mitchell Employment Agreement, under the Company’s Equity Incentive Plan, in the amount of 7,500 shares of common stock each calendar quarter Mr. Mitchell serves as Chief Financial Officer of the Company. Mr. Mitchell’s grant of 7,500 shares for his first quarter of employment as our Chief Financial Officer was approved on February 10, 2015.

The Company may terminate the Mitchell Employment Agreement with or without Cause (as defined in the Mitchell Employment Agreement) upon written notice to Mr. Mitchell. In the event the Company terminates the Mitchell Employment Agreement without Cause, Mr. Mitchell terminates the Mitchell Employment Agreement with Good Reason (as defined in the Mitchell Employment Agreement), or the Mitchell Employment Agreement is not renewed as a result of notice to Mr. Mitchell provided 90 days prior to expiration of the initial or a renewal term, Mr. Mitchell will be entitled to payment of one-half his annual salary. Termination by the Company within 365 days of a Change of Control (as defined in the Mitchell Employment Agreement) in the absence of Cause will conclusively be deemed a termination by the Company without Cause.

Mr. Marsala’s Restricted Stock Unit grants vested as follows: 50,000 shares on August 6, 2014 and 22,753 shares on October 24, 2014. Mr. Mitchell’s grant of 7,500 shares for his first quarter of employment as our Chief Financial Officer was approved on February 10, 2015 and vested on the same date.

On December 16, 2014, the Company entered into an Amendment to Employment Agreement with our Chief Executive Officer, Guy Marsala (the “Marsala Amendment”). Pursuant to the Marsala Amendment, in the event that either Mr. Marsala is terminated without cause or resigns from the Company for good reason, as such terms are defined in his Employment Agreement, then he shall receive an award of either 50,000 shares of Company common stock or $500,000 worth of Company common stock based on the volume-weighted average price for the thirty-day period prior to the date of the grant, whichever is higher and an award of shares of Company common stock equal to the number of shares that is two times the full amount of the award of Company common stock comprising Mr. Marsala’s Annual Bonus (as such term is defined in Mr. Marsala’s employment agreement) for the present year, as determined by the Board of Directors provided that such stock award shall be reduced by all shares already awarded to Mr. Marsala as a part of his Annual Bonus prior to the date of termination.

On December 16, 2014, the Company entered into an Amendment to Employment Agreement with our Chief Financial Officer, C. Douglas Mitchell (the “Mitchell Amendment”). Pursuant to the Mitchell Amendment, in the event that Mr. Mitchell is terminated without cause or resigns from the Company for good reason, as such terms are defined in Mr. Mitchell’s Employment Agreement, then Mr. Mitchell shall receive an award of 60,000 shares of the Company’s common stock reduced by the number of shares of the Company’s common stock issued (or issuable) pursuant to any RSUs granted prior to the date of such termination in respect of any calendar quarter for the 12 month period for the present year and an award of shares of the Company’s common stock equal to the number of shares that is two times the full amount of the award of Company common stock comprising Mr. Mitchell’s Annual Bonus (as such term is defined in Mr. Mitchell’s employment agreement) for the present year, as determined by the Board of Directors, provided that such stock award shall be reduced by all shares already awarded to Mr. Mitchell as a part of his Annual Bonus prior to the date of termination.

 

67

---

Table of Contents

Compensation of Directors

We currently do not compensate our employee directors for their service as directors.

Mr. Lowe entered into a Director Retention Agreement with the Company and its majority shareholder on March 3, 2014. The term expires on March 31, 2016, unless Mr. Lowe is elected to a subsequent term, which would cause the term of the agreement to extent until March 31, 2017. Pursuant to the agreement, Mr. Lowe receives a fee of $4,000 per month during the term, which may be adjusted to $5,000 per month as determined by the CEO of the Company and Mr. Lowe. Mr. Lowe received the following award under the Medbox 2014 Equity Incentive Plan pursuant to the agreement: during the first year of the agreement, the Company issued 178,125 shares of Restricted Stock, vesting over roughly a six month period beginning September 1, 2014, and 65,625 Restricted Stock Units, vesting over a six month period beginning September 1, 2014. For each of his second and third year of service (if elected for a third year), Mr. Lowe will receive 100,000 shares of stock, comprising 75,000 shares of restricted stock vesting quarterly over a 12 month period, and 25,000 Restricted Stock Units vesting quarterly over a 12 month period.

Ambassador Siegel entered into a Director Retention Agreement with the Company and its majority shareholder on April 1, 2014. The term expires on March 31, 2016, unless Ambassador Siegel is elected to a subsequent term, which would cause the term of the agreement to extend until March 31, 2017. Pursuant to the agreement, Ambassador Siegel receives a fee of $4,000 per month during the term, which may be adjusted to $5,000 per month as determined by the CEO of the Company and Ambassador Siegel. Ambassador Siegel received the following award under the Medbox 2014 Equity Incentive Plan pursuant to the agreement: during the first year, Ambassador Siegel received 168,750 shares of restricted stock vested over a six month period beginning September 1, 2014 and 56,250 Restricted Stock Units which vested over a six month period beginning September 1, 2014. For each of his second and third year of service (if elected for a third year), Ambassador Siegel will receive 100,000 shares of stock, comprising 75,000 shares of restricted stock vesting quarterly over a 12 month period, and 25,000 Restricted Stock Units vesting quarterly over a 12 month period.

Ms. Love entered into a Director Retention Agreement with the Company and its majority shareholder on October 22, 2014. The term expires on March 31, 2016, unless Ms. Love is elected to a subsequent term, which would cause the term of the agreement to extent until March 31, 2017. Pursuant to the agreement, Ms. Love receives a fee of $4,000 per month during the term , which may be adjusted to $5,000 per month as determined by the CEO of the Company and Ms. Love. Ms. Love received the following stock award under the Medbox 2014 Equity Incentive Plan pursuant to the agreement: For her service from the date of the agreement through December 31, 2014, Ms. Love received 19,452 restricted stock units which vested immediately. For subsequent years through the end of the term of the agreement, Ms. Love will receive 100,000 shares of stock, comprised of 100,000 shares of restricted stock units which vest quarterly over a 12 month period.

On December 16, 2015, each of the Company’s non-employee directors entered into an amendment to their retention agreement (the “Retention Agreement Amendment”). Pursuant to the Retention Agreement Amendment, in the event that the director is removed from the Board for any reason on or prior to March 31, 2016, all of the director’s unvested shares of restricted stock and unvested restricted stock units granted under the restricted stock award agreements and the restricted stock unit award agreements between such director and the Company shall immediately vest on the date of such removal, and all of the director’s vested restricted stock units shall be paid out on the date of such removal, except for the directors’ vested restricted stock units granted pursuant to the First Year Inducement Grant (as such term is defined in the director retention agreement), which shall be paid out in accordance with the original schedule set forth in the director retention agreement, and the aggregate amount of all director fees the director would have earned for the remainder of the term of the director retention agreement and the additional term of the director retention agreement beginning April 1, 2015 and ending March 31, 2017 if the director had not been removed from the Board shall be paid to the director in one lump-sum payment on the date of such removal.

 

68

---

Table of Contents

2014 Director Compensation Table
		Fees earned				Restricted Stock Awards				Restricted Stock Units Awards				All Other Compensation				Total
Ned L. Siegel		$	33,000			$	1,755,000	(1)		$	585,000	(2)			—			$	2,373,000
J. Mitchell Lowe		$	43,000			$	1,852,500	(3)		$	682,500	(4)			—			$	2,578,000
Jennifer Love		$	9,419			$	—			$	1,313,972	(5)			—			$	1,323,391
Matthew Feinstein			—				—				—				—				—

 

(1)	Includes 84,375 shares vesting in 2014 and 84,375 vesting in 2015

(2)	Includes 28,125 RSUs vesting in 2014 and 28,125 vesting in 2015

(3)	Includes 93,750 shares vesting in 2014 and 84,375 vesting in 2015

(4)	Includes 37,500 RSUs vesting in 2014 and 28,125 vesting in 2015

(5)	Includes 19,452 RSUs vesting in 2014 and 100,000 vesting in 2015

(6)

The amounts listed in the Restricted Stock Awards and Restricted Stock Unit Awards column reflect the fair value of the stock awards granted in accordance with FASB ASC Topic 718, which calls for the restricted stock or restricted stock units to be valued based on the market price of the Company’s common stock based on the grant date.

Equity Compensation Plan Information

In August 2014, the Company adopted the Medbox, Inc. 2014 Equity Incentive Plan, under which up to 2,000,000 shares of common stock are authorized for issuance to directors, officers, employees and consultants of the Company.

 

69

---

Table of Contents

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of May 1, 2015 with respect to the beneficial ownership of the outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii) the Company’s directors and executive officers as a group. Except as otherwise indicated, to our knowledge each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.

The percentage of class beneficially owned is based on 34,784,434 shares of common stock issued and outstanding as of May 1, 2015. Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Pursuant to the rules of the SEC, shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants or the conversion of convertible securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be beneficially owned and outstanding for the purpose of computing the percentage ownership of any other person shown in the table.

 

Name		Number of Shares Beneficially Owned				Percentage of Outstanding Shares Beneficially Owned
Dr. Bruce Bedrick			8,017,117	(1)			20.2	%
Guy Marsala			72,753				*
Vincent Mehdizadeh			24,976,186	(2)			55.77	%
C. Douglas Mitchell (7)			16,367				*
Jennifer Love (7)			19,452				*
J. Mitchell Lowe			213,915	(8)			*
Ned L. Siegel			260,140	(3)			*
PVM International, Inc. (4)			2,880,053				8.3	%
Vincent Chase, Incorporated (5)			22,096,133	(6)			49.33	%
All officers and directors as a group (5 persons)			554,711				1.6	%

 

*	Less than 1%.

(1)	Includes 5,000,000 shares issuable upon conversion of 1,000,000 shares of Series A Preferred Stock.

(2)	Includes 22,096,133 shares beneficially owned by Vincent Chase, Incorporated (which includes 10,000,000 shares issuable upon conversion of 2,000,000 shares of Series A Preferred Stock) and 2,880,053 shares held by PVM International, Inc.

(3)

Includes shares of common stock issuable upon conversion of the Siegel Notes (including accrued interest thereunder), based on a conversion price that is 85% of the 30-day volume weighted average closing price of the Company’s common stock over the 30 trading days prior to May 1, 2015 plus (iii) shares of common stock issuable upon exercise of the Siegel Warrants based on 50% of the principal sum of the Siegel Notes, at an exercise price equal to 85% of the 30-day volume weighted average closing price of the Company’s common stock over the 30 trading days prior to May 1, 2015.

(4)	Vincent Mehdizadeh has voting and dispositive power over the securities held by PVM International, Inc.

(5)	Vincent Mehdizadeh has voting and dispositive power over the securities held by Vincent Chase, Incorporated.

(6)	Includes 10,000,000 shares issuable upon conversion of 2,000,000 shares of Series A Preferred Stock.

(7)	Restricted Stock Units exercisable into shares at the election of the holder.

(8)

Includes shares of common stock issuable upon conversion of the Lowe Note (including accrued interest thereunder), based on a conversion price that is 85% of the 30-day volume weighted average closing price of the Company’s common stock over the 30 trading days prior to May 1, 2015 plus (iii) shares of common

 

70

---

Table of Contents

stock issuable upon exercise of the Lowe Warrant based on 50% of the principal sum of the Lowe Note, at an exercise price equal to 85% of the 30-day volume weighted average closing price of the Company’s common stock over the 30 trading days prior to May 1, 2015.

 

71

---

Table of Contents

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain Relationships and Related Transactions

We previously had an outstanding note with PVM International, Inc. (“PVMI”), a California corporation wholly owned by Mr. Mehdizadeh, previously our Chief Operating Officer and one of our directors (and currently our largest stockholder), in connection with the sale of MDS to Medbox, Inc. The note was issued on January 1, 2012 for an original amount of $1 million and began paying interest of 10% on January 1, 2013. The note contained a maturity date of December 31, 2012, which was voluntary extended by oral agreement of the parties to June 30, 2013 and has since been satisfied in full. In addition, on January 1, 2012, we issued to PVMI 2,000,000 shares of the Company’s common stock for the use of the PVMI patent related to our dispensing systems. The note was repaid in full and terminated on April 16, 2013.

We use Vincent Chase, Incorporated, a company that is wholly owned by Mr. Mehdizadeh for management advisory and consulting services. We incurred fees of $168,625 and $262,500, respectively, during the years ended December 31, 2014 and 2013, to Vincent Chase, Incorporated for Mr. Mehdizadeh’s advisory services provided through Vincent Chase, Incorporated. Mr. Mehdizadeh received no other compensation from Medbox during these periods other than the fees paid to Vincent Chase, Incorporated. During the period April to May 2013, Vincent Chase, Incorporated was wholly owned by Dr. Bruce Bedrick, our-then Chief Executive Officer and a director. Mr. Mehdizadeh transferred Vincent Chase Incorporated to Dr. Bedrick without consideration on a temporary basis as Mr. Mehdizadeh addressed some personal matters.

We use Kind Clinics, LLC a company owned by Dr. Bedrick, previously our Chief Executive Officer and a director, for marketing support services, including developing leads (including through the Kind Clinics website) interested in alternative medicine consulting services. We incurred fees of $0 and $113,613 respectively during the years ended December 31, 2014 and 2013.

On June 5, 2014, the Company entered into and closed a purchase and sale agreement (the “Bio Tech PSA”) with PVMI. Pursuant to the Bio Tech PSA, the Company sold to PVMI the Company’s rights and claims attributable to or controlled by the Company as a result of the Company’s transactions with Bio Tech Medical Software, Inc. (the “Bio Tech Rights and Claims”), in exchange for the return by PVMI to the Company of 30,000 shares of the Company’s common stock. The amount of consideration paid by PVMI was determined based on the book value of the Bio Tech Rights and Claims and the closing price of the Company’s common stock on June 5, 2014. The Company will have the right, under the Bio Tech PSA, to purchase from PVMI, the Bio Tech Rights and Claims, at any time, for the consideration provided by PVMI, plus the sum of any of PVMI’s reasonable expenditures incurred in pursuit of the Bio Tech Rights and Claims. The reason the Company entered into the Bio Tech PSA was that the Company, after negotiating a settlement with Bio-Tech (see “Legal Proceedings”), realized that it would not have sufficient resources to fully develop its business relationship with Bio Tech in light of other core business opportunities that the Company was intending to develop.

On June 5, 2014, the Company entered into and closed a purchase and sale agreement (the “Medvend PSA”) with PVMI. Pursuant to the Medvend PSA, the Company sold to PVMI the Company’s rights and claims attributable to or controlled by the Company as a result of the Company’s transactions with those three certain stockholders of Medvend, Inc. known as Kaplan, Tartaglia and Kovan (the “Medvend Rights and Claims”), in exchange for the return by PVMI to the Company of 30,000 shares of the Company’s common stock. The amount of consideration paid by PVMI was determined based on the book value of the Medvend Rights and Claims and the closing price of the Company’s common stock on June 5, 2014. The Company will have the right, under the Medvend PSA, to purchase from PVMI, at any time, the Medvend Rights and Claims, for the consideration provided by PVMI, plus the sum of any of PVMI’s reasonable expenditures incurred in pursuit of the Medvend Rights and Claims. The reason the Company entered into the Medvend PSA was as follows. The initial transaction with the Medvend stockholders is the subject of litigation (see “Legal Proceedings”). In light of this litigation and the additional legal costs that are expected to be incurred relating to this litigation, PVMI

 

72

---

Table of Contents

offered to purchase the Medvend Rights and Claims, as a result of which the Company will not incur the costs and uncertainty of such litigation. As a result, the Company determined that removing this asset from the balance sheet for stock valued at $600,000 was in the best interests of the shareholders.

During the year ended December 31, 2014, the Company issued four notes payable to PVM International Inc. (“PVMI”), a related party which is 100% owned by a co-founder of the Company, Mr. Mehdizadeh, in the amounts of $250,000, $100,000, $500,000, and $375,000. These notes were subsequently partially repaid leaving $388,477 outstanding as of December 31, 2014. On October 17, 2014 the company entered into an assignment agreement with PVMI through which PVMI assigned all rights and titles for any opened escrow on real estate purchase agreements in San Diego in exchange for a related party notes payable from the Company. As of the signing date the agreement was valued at $190,400 which represented the value of escrow deposits paid by PVMI for eight different real estate agreements. On August 15, 2014, the Company issued a note payable to Vincent Chase, Inc., in the amount of $100,000. The notes bear no interest and are payable on demand. The aggregate amount of outstanding payables to related parties as of December 31, 2014 was $678,877.

On July 23, 2014, PVMI assigned to the Company, for no consideration, the patent, patent applications, trademarks and related intellectual property for Medbox products, which the Company had licensed from PVMI for $1.

On July 21, 2014 the Company paid PVMI $75,000 for money paid by PVMI into escrow for real estate purchases in the San Diego, California area to be used for retail dispensary center license applications.

Upon Dr. Bedrick’s resignation as a director on August 18, 2014, the Company entered into a consulting agreement with Dr. Bedrick, pursuant to which the Company agreed to pay Dr. Bedrick a monthly fee of $12,500 for consulting services to be performed by Dr. Bedrick. The consulting agreement was terminated October 31, 2014.

On October 13, 2014, in connection with Vincent Mehdizadeh’s resignation as an officer of the Company, the Company entered into a consulting agreement with Mr. Mehdizadeh, pursuant to which the Company agreed to pay Mr. Mehdizadeh a monthly fee of $25,000 for consulting services, which will be reduced to $12,500 per month if Mr. Mehdizadeh is engaged in trading any of the Company’s securities at any time within the preceding 30 day period. Mr. Mehdizadeh’s consulting agreement was terminated on December 8, 2014 and a total of $12,375 was paid to Mr. Mehdizadeh under this agreement.

In connection with the Closing of the Purchase Agreement Amendments for financings entered into by the Company in July 2014 and September 2014, Mr. Ned L. Siegel, the chairman of the Company’s Board, entered into two separate subordinated convertible promissory notes with the Company on January 5, 2015 and January 30, 2015, respectively, each in the principal amount of $50,000 and having a three year term and an interest rate of 8% per annum (the “Siegel Notes”). In addition, Mr. Mitchell Lowe, a member of the Board, entered into one subordinated convertible promissory note with the Company on February 2, 2015 in the principal amount of $50,000 and having a three year term and an interest rate of 8% per annum (the “Lowe Note”).

In connection therewith, Mr. Siegel and Mr. Lowe each received a warrant, exercisable for a period of five (5) years from the date of grant, to purchase an amount of Company Common Stock equal to 50% of the principal sum under each of the Siegel Notes and the Lowe Note, respectively, at an exercise price equal to 200% of the applicable Conversion Price (the “Warrants”). The Conversion Price of the Warrants is either (i) 85% of the volume-weighted average price of the Common Stock for the thirty trading days prior to notice of Conversion or (ii) 85% of the per share price of the Company’s next common stock offering of not less than $2 million. Mr. Siegel and Mr. Lowe also received registration rights for the shares underlying the Siegel Notes and the Lowe Notes, respectively.

On January 21, 2015, the Company, Mr. Mehdizadeh, PVM, and Vincent Chase, Incorporated, (collectively, the “VM Parties”) entered into an agreement pursuant to which, among other things, the parties agreed to not increase the size of the Board and to vote in favor of and to not remove directors Siegel, Lowe, Love and Marsala

 

73

---

Table of Contents

for a period of 12 months (the “Voting Agreement”). Each of the directors of the Company is also a party to the Voting Agreement. The Voting Agreement prevents the stockholders of the Company from electing new directors to the Board for a period of 12 months from January 21, 2015. This could discourage potential investors from buying our stock.

New Age Investment Consulting, Inc. (“New Age”) contributed $810,000 and $561,000 in 2013 and 2012, respectively, to provide funding for growth for the Company. Yocelin Legaspi, the owner of New Age was in a relationship and lived with our controlling shareholder, Vincent Mehdizadeh, and New Age is a stockholder of the Company. During the first quarter of 2014, the Company completed a contract with New Age in the amount of $400,000 which was recognized as a Customer deposit on the Company’s balance sheet. In addition, New Age paid the Company $150,000 for an amount owed to the Company by an unrelated third party to facilitate development at an existing dispensary where the unrelated party purchased an interest during the period. Furthermore, on March 28, 2014, the Company entered into an agreement with New Age for territory rights in Colorado for $500,000. The agreement has a term of five years and, in accordance with the Company’s revenue policy, the revenue will be recognized over the five year term.

Director Independence

J. Mitchell Lowe, Ned L. Siegel and Jennifer Love are independent as that term is defined under Nasdaq Marketplace Rules.

 

74

---

Table of Contents

ADDITIONAL INFORMATION

Federal securities laws require us to file information with the SEC concerning our business and operations. Accordingly, we file annual, quarterly, and current reports, and other information with the SEC. You can inspect and copy this information at the public reference facility maintained by the SEC at 100 F Street, NE, Washington, D.C. 20549.

You can get additional information about the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site (http://www.sec.gov) at which you can read or download our reports and other information.

We have filed with the SEC a registration statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the common stock being offered hereby. As permitted by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to Medbox, Inc. and the common stock offered hereby, reference is made to the registration statement, and such exhibits and schedules. A copy of the registration statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the SEC at the addresses set forth above, and copies of all or any part of the registration statement may be obtained from such offices upon payment of the fees prescribed by the SEC. In addition, the registration statement may be accessed at the SEC’s web site.

 

75

---

Table of Contents

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Neither our Articles of Incorporation nor bylaws prevent us from indemnifying our officers, directors and agents to the extent permitted under the Nevada Revised Statute (“NRS”). NRS Section 78.7502 provides that a corporation shall indemnify any director, officer, employee or agent of a corporation against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with any defense to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to Section 78.7502(1) or 78.7502(2), or in defense of any claim, issue or matter therein.

NRS 78.7502(1) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person is liable pursuant to NRS 78.138 or did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, or that, with respect to any criminal action or proceeding, he or she had reasonable cause to believe that the conduct was unlawful.

NRS Section 78.7502(2) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.

NRS Section 78.7502(3) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections 1 and 2, or in defense of any claim, issue or matter therein, the corporation shall indemnify him or her against expenses, including attorneys’ fees, actually and reasonably incurred by him or her in connection with the defense.

NRS Section 78.747(1) provides that except as otherwise provided by specific statute, no director or officer of a corporation is individually liable for a debt or liability of the corporation, unless the director or officer acts as the alter ego of the corporation. The court as a matter of law must determine the question of whether a director or officer acts as the alter ego of a corporation. (2) A stockholder, director or officer acts as the alter ego of a

 

76

---

Table of Contents

corporation if: (a) The corporation is influenced and governed by the stockholder, director or officer; (b) There is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other; and (c) Adherence to the corporate fiction of a separate entity would sanction fraud or promote a manifest injustice. (3) The question of whether a stockholder, director or officer acts as the alter ego of a corporation must be determined by the court as a matter of law.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.

 

77

---

Table of Contents

LEGAL MATTERS

The validity of the shares offered hereby will be passed upon for us by Fennemore Craig, P.C., Las Vegas, Nevada.

 

78

---

Table of Contents

EXPERTS

The audited consolidated financial statements of Medbox, Inc. as of December 31, 2014 and for the year then ended, appearing in this prospectus and registration statement have been audited by Marcum LLP, an independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein and in the registration statement, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The audited consolidated financial statements of Medbox, Inc. as of December 31, 2013 and for the two years then ended, appearing in this prospectus and registration statement have been audited by Q Accountancy, an independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein and in the registration statement, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

 

79

---

Table of Contents

Index to Consolidated Financial Statements

 

		Page
Reports of Independent Registered Public Accounting Firms		F-1 - F-2
Consolidated Balance Sheets at December 31, 2014 and 2013		F-3
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2014, 2013 and 2012		F-4
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2014, 2013 and 2012		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012		F-6
Notes to Consolidated Financial Statements		F-7 - F-36

 

F-i

---

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the

Board of Directors and Shareholders of Medbox, Inc.

We have audited the accompanying consolidated balance sheet of Medbox, Inc. (the “Company”) as of December 31, 2014, and the related consolidated statements of comprehensive loss, changes in stockholders’ equity/(deficit) and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medbox, Inc., as of December 31, 2014, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has a significant working capital deficit and an accumulated deficit as of December 31, 2014, and has incurred a significant net loss and negative cash flows from operations for the year then ended. The foregoing matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. These consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

/s/ Marcum LLP

Los Angeles, CA

March 26, 2015

 

F-1

---

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Medbox, Inc.

We have audited the accompanying consolidated balance sheet of Medbox, Inc. as of December 31, 2013 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the two years then ended. These financial statements are the responsibility of the 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Medbox, Inc. as of December 31, 2013, and the results of its operations and its cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.

Q Accountancy Corporation

Irvine, California

March 28, 2014, except for the effects of the restatement as discussed in Note 15 to the consolidated financial statements (not presented herein) appearing under Item 15 of the Company’s Amended Registration Statement on Form 10, as to which the date is March 6, 2015.

 

F-2

---

Table of Contents

MEDBOX, INC.

CONSOLIDATED BALANCE SHEETS

 

		December 31, 2014				December 31, 2013
Assets
Current assets
Cash and cash equivalents		$	101,182			$	168,003
Marketable securities			94,776				184,800
Accounts receivable			8,774				339,735
Notes receivable			—				115,000
Inventory			961,236				632,986
Deposits in escrow			400,476				—
Prepaid expenses and other current assets			66,220				89,241
Total current assets			1,632,664				1,529,765
Property and equipment, net of accumulated depreciation of $50,192 and $21,123, respectively			158,318				140,658
Assets held for resale			399,594				—
Investments, at cost			—				1,200,000
Intangible assets, net of accumulated amortization of $83,500 and $32,750 respectively			709,153				682,429
Goodwill			1,260,037				1,090,037
Deposits and other assets			104,726				98,726
Total assets		$	4,264,492			$	4,741,615
Liabilities and Stockholders’ Equity/(Deficit)
Current liabilities
Accounts payable		$	1,713,627			$	305,934
Accrued interest payable			372,990				—
Accrued expenses			610,444				142,380
Deferred revenue, current			204,091				683,621
Notes payable			261,434				75,000
Related party notes payable			678,877				111,794
Convertible notes payable, net of discount of $1,225,573			2,524,427				—
Derivative Liability			3,691,853				—
Customer deposits			1,525,808				785,861
Total current liabilities			11,583,551				2,104,590
Deferred revenue, less current portion			568,515				—
Deferred tax liability			160,000				—
Total liabilities			12,312,066				2,104,590
Commitments and Contingencies (Note 19)
Stockholders’ Equity/(Deficit)
Preferred stock, $0.001 par value: 10,000,000 authorized; 3,000,000 and 3,000,000 issued and outstanding as of December 31, 2014 and 2013, respectively			3,000				3,000
Common stock, $0.001 par value: 100,000,000 authorized, 30,496,909 and 29,525,750 issued and outstanding as of December 31, 2014 and 2013, respectively			30,497				29,526
Additional paid-in capital			15,315,110				8,156,358
Common stock subscribed			—				(15,000	)
Treasury stock			(1,209,600	)			—
Accumulated deficit			(22,078,193	)			(5,536,859	)
Accumulated other comprehensive loss			(108,388	)			—
Total stockholders’ equity/(deficit)			(8,047,574	)			2,637,025
Total liabilities and stockholders’ equity/(deficit)		$	4,264,492			$	4,741,615

See notes to consolidated financial statements

 

F-3

---

Table of Contents

MEDBOX, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

		For the year ended December 31,
		2014				2013				2012
Revenue		$	621,106			$	2,062,083			$	1,176,829
Revenue from related party			75,301				—				—
Less: allowances and refunds			(67,275	)			—				—
Net revenue			629,132				2,062,083				1,176,829
Cost of revenues			3,796,651				2,660,749				1,051,135
Gross profit/(loss)			(3,167,519	)			(598,666	)			125,694
Operating expenses
Selling and marketing			933,627				664,383				806,221
Research and development			242,232				74,861				176,964
General and administrative			9,109,205				2,456,435				895,798
Total operating expenses			10,285,064				3,195,679				1,878,983
Loss from operations			(13,452,583	)			(3,794,345	)			(1,753,289	)
Other income (expense)
Interest income (expense), net			(1,282,761	)			6,905				(4,948	)
Change in fair value of derivative liabilities			(1,805,990	)			—				—
Total other income (expense)			(3,088,751	)			6,905				(4,948	)
Loss before provision for income taxes			(16,541,334	)			(3,787,440	)			(1,758,237	)
Provision for income taxes			—				4,000				—
Net loss		$	(16,541,334	)		$	(3,791,440	)		$	(1,758,237	)
Loss per share attributable to common stockholders
Basic		$	(0.55	)		$	(0.13	)		$	(0.07	)
Diluted		$	(0.55	)		$	(0.13	)		$	(0.07	)
Weighted average shares outstanding
Basic			30,067,693				28,971,983				25,119,175
Diluted			30,067,693				28,971,983				25,119,175
Other Comprehensive loss
Net loss		$	(16,541,334	)		$	(3,791,440	)		$	(1,758,237	)
Unrealized loss from marketable securities			(108,388	)			—				—
Comprehensive loss		$	(16,649,722	)		$	(3,791,440	)		$	(1,758,237	)

See notes to consolidated financial statements

 

F-4

---

Table of Contents

MEDBOX, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY/(DEFICIT)

 

		Preferred Stock								Common Stock								Common Stock Subscribed				Treasury Stock								Additional Paid-In Capital				Retained Earnings (Accumulated) (Deficit)				Accumulated Other Comprehensive Loss				Total Stockholders’ Equity
		Shares				Amount				Shares				Amount								Shares				Amount
Balances at January 1, 2012			6,000,000			$	6,000				20,829,678			$	20,830			$	—				0			$	—			$	270,545			$	12,818			$	—			$	310,193
Issuance of common stock for acquisition PVMI			—				—				4,000,000				4,000				—				—				—				(4,000	)			—				—				—
Buyout of PVMI shareholders			—				—				—				—				—				—				—				(125,000	)			—				—				(125,000	)
Issuance of common stock, net of issuance costs			—				—				2,463,366				2,463				—				—				—				855,952				—				—				858,415
Subscriptions for common stock, net of issuance costs			—				—				74,100				74				(153,250	)			—				—				153,176				—				—				—
Capital contributions, related parties			—				—																								561,000				—				—				561,000
Net loss			—				—				—				—				—				—				—				—				(1,758,237	)			—				(1,758,237	)
Balances at December 31, 2012			6,000,000				6,000				27,367,144				27,367				(153,250	)			—				—				1,711,673				(1,745,419	)			—				(153,629	)
Issuance of common stock, net of issuance costs			—				—				2,115,100				2,115				—				—				—				4,484,426				—				—				4,486,541
Cancellation of preferred stock			(3,000,000	)			(3,000	)			—				—				—				—				—				3,000				—								—
Proceeds of common stock subscribed			—				—				—				—				138,250				—				—				(138,250	)			—								—
Issuance of warrants for acquisition of Vaporfection			—				—				—				—				—				—				—				1,166,000				—								1,166,000
Issuance of common stock for accounts payable			—				—				43,506				44				—				—				—				119,509				—								119,553
Capital contributions, related parties			—				—				—				—				—				—				—				810,000				—								810,000
Net loss			—				—				—				—				—				—				—				—				(3,791,440	)							(3,791,440	)
Balances at December 31, 2013			3,000,000				3,000				29,525,750				29,526				(15,000	)			—				—				8,156,358				(5,536,859	)			—				2,637,025
Issuance of common stock, net of issuance costs			—				—				485,830				486				—				—				—				2,427,373				—								2,427,859
Stock-based compensation			—				—				178,125				178				—				—				—				4,415,621				—								4,415,799
Exercise of warrants			—				—				252,812				253				—				—				—				(253	)			—								—
Issuance of shares to settle accounts payable			—				—				54,392				54				—				—				—				316,011				—								316,065
Proceeds from common stock subscribed			—				—				—				—				15,000				—				—				—				—								15,000
Treasury stock			—				—				—				—				—				(60,000	)			(1,209,600	)			—												(1,209,600	)
Unrealized loss from marketable securities			—				—				—				—				—				—				—				—				—				(108,388	)			(108,388	)
Net loss			—				—				—				—				—				—				—				—				(16,541,334	)							(16,541,334	)
																																											—
Balances at December 31, 2014			3,000,000			$	3,000				30,496,909			$	30,497			$	—				(60,000	)		$	(1,209,600	)		$	15,315,110			$	(22,078,193	)		$	(108,388	)		$	(8,047,574	)

See notes to consolidated financial statements.

 

F-5

---

Table of Contents

MEDBOX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Year ended December 31,
		2014				2013				2012
Cash flows from operating activities
Net income loss		$	(16,541,334	)		$	(3,791,440	)		$	(1,758,237	)
Adjustments to reconcile net income loss to net cash:
Depreciation and amortization			79,819				69,564				29,922
Gain on the sale of property and equipment			—				(20,682	)			—
Provisions and allowances			67,275				—				—
Gain on sale of investments and property and equipment			(9,600	)			—				—
Market value of securities received for services			(203,165	)			—				—
Change in fair value of derivative liability			1,805,990				—				—
Amortization of debt discount			935,290				—				—
Stock based compensation			4,415,799				—				—
Changes in operating assets and liabilities
Accounts receivable			263,686				518,171				(1,042,000	)
Inventory			(328,250	)			(48,180	)			(316,254	)
Deposits in escrow			(400,476	)			—				—
Prepaid expenses and other assets			17,021				(36,725	)			—
Accounts payables			1,723,759				(393,458	)			190,668
Accrued interest payable			372,990				—				—
Accrued expenses			468,064				—				—
Customer deposits			924,747				675,762				—
Deferred revenue			88,985				(716,409	)			1,451,030
Net cash used in operating activities			(6,319,400	)			(3,743,397	)			(1,444,871	)
Cash flows from investing activities
Issuance of note receivable			—				(115,000	)			—
Receipts on notes receivable, net			115,000				—				104,650
Purchase of property and equipment, net			(46,729	)			(134,451	)			—
Purchase of real estate			(399,594	)			—				—
Purchase of intangible assets, net			(87,474	)			—				—
Advances for investments			—				(1,250,000	)			—
Net cash used in (provided by) investing activities			(418,797	)			(1,499,451	)			104,650
Cash flows from financing activities
Receipts on advances to officer			—				—				177,050
Contribution from related parties			—				810,000				561,000
Payments on a long term debt			—				(16,307	)			(15,771	)
Payments on (proceeds from) notes payable			(75,000	)			(150,000	)			50,000
Dividends paid to subsidary’s shareholders			—				—				(49,965	)
Proceeds from (payments on) Related parties notes payable			567,083				(746,285	)			744,038
Proceeds from issuance of notes payable			261,434				—				—
Proceeds from issuance of common stock, net			2,442,859				4,486,541				858,415
Proceeds from issuance of convertible notes payable, net			3,475,000				—				—
Net cash provided by financing activities			6,671,376				4,383,949				2,324,767
Net decrease (increase) in cash			(66,821	)			(858,899	)			984,546
Cash, beginning of period			168,003				1,026,902				42,356
Cash, end of period		$	101,182			$	168,003			$	1,026,902
Supplemental disclosures of cash flow information:
Cash paid for interest		$	2,834			$	2,106			$	4,975
Cash paid for taxes		$	—			$	10,851			$	59,141
Non-cash investing and financing activities:
Marketable securities received for accounts receivable		$	(184,000	)		$	184,800			$	125,000
Liabilities assumed for Vaporfection		$	—			$	73,739			$	—
Common shares issued as repayment of debt		$	—			$	53,500			$	—
Cancellation of preferred stock		$	—			$	3,000			$	—
Common stock issued for accounts payable		$	316,065			$	119,536			$	—
Treasury stock received for sale of advances on investments		$	1,200,000							$	—
Common stock warrants issued for Vaporfection		$	—			$	1,166,000			$	—
Common stock issued for related party notes payable		$	—			$	—			$	125,000
Common stock issued for PVMI		$	—			$	—			$	2,000

 

F-6

---

Table of Contents

MEDBOX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BUSINESS ORGANIZATION, NATURE OF OPERATIONS

Business Description

Medbox, Inc. (the “Company”) was incorporated in the state of Nevada on June 16, 1977, originally as Rabatco, Inc., subsequently changing its name on May 12, 2000 to MindfulEye, Inc., and again on August 30, 2011 to Medbox, Inc. Medbox, Inc. provides specialized consulting services to the marijuana industry and sells associated patented products, including its Medbox medical dispensing system and medical vaporization devices. The Company works with clients who seek to enter the medical and cultivation marijuana markets in those states where approved. Medbox offers turnkey solutions that assist with licensing and compliance, site selection, design and permitting, safety and security, along with full build-out and operational oversight. Medbox’s consulting solutions and technology create structure and process for clients and their respective businesses in this rapidly emerging sector. In addition, through its wholly owned subsidiary, Vaporfection International, Inc. (“VII”), the Company sells a line of vaporizer and accessory products online and through distribution partners. The Company is headquartered in West Hollywood, California.

On December 31, 2011, Medbox, Inc. entered into a Stock Purchase Agreement with PVM International, Inc. (“PVMI”). Pursuant to two separate closings held on January 1, 2012 and December 31, 2012, the Company acquired from PVMI all of the outstanding shares of common stock in (i) Prescription Vending Machines, Inc.,(PVM) (ii) Medicine Dispensing Systems, Inc. (“MDS, Inc.”) (its Arizona subsidiary), and (iii) Medbox, Inc. (its California subsidiary that is currently inactive) (these three listed subsidiaries are hereafter referred to as the “PVMI Named Subsidiaries”), in exchange for two million shares of the Company’s common stock and a $1 million promissory note.

The transaction between Medbox, Inc. and PVMI was accounted for as a reverse acquisition, where Medbox, Inc. (the legal acquirer) is considered the accounting acquiree and the PVMI Named Subsidiaries (the legal acquiree) are considered the accounting acquirer. The assets and liabilities are transferred at their historical cost with the capital structure of Medbox, Inc. Medbox, Inc. is deemed a continuation of the business of PVMI Named Subsidiaries and the historical financial statements of PVMI Named Subsidiaries are the historical financial statements of Medbox, Inc.

The Company’s PVM subsidiary was incorporated in the state of California in 2008 and its subsidiary, MDS, Inc. was incorporated in the state of Arizona in 2011.

On March 22, 2013, the Company entered into a Securities Purchase Agreement with Vapor Systems International, LLC to acquire 100% of the outstanding common stock of VII in exchange for warrants to purchase 260,854 shares of the Company’s common stock. In addition, the Company agreed to provide up to $1,600,000 in working capital to VII at the Company’s sole discretion which included $175,000 paid to the inventor of certain patents including a warrant to purchase 5,000 shares of the Company’s common stock. This transaction was closed in April 2013.

Medbox, Inc., a Nevada corporation, operates the business directly and through the utilization of 6 operating subsidiaries, as follows:

 

•

Prescription Vending Machines, Inc., a California corporation, d/b/a Medicine Dispensing Systems in the State of California (“MDS”), which distributes our Medbox™ product and provides related consulting services described further below.

 

•

Vaporfection International, Inc., a Florida corporation through which we distribute our medical vaporizing products and accessories.

 

F-7

---

Table of Contents

•

Medbox Property Investments, Inc., a California corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers.

 

•

MJ Property Investments, Inc., a Washington corporation specializing in real property acquisitions and leases for dispensaries and cultivation centers in the state of Washington.

 

•

Medbox Management Services, Inc., a California corporation specializing in providing management oversight and compliance services to state-licensed dispensaries for cultivation, dispensing, and marijuana infused products (MIPS).

 

•

Medicine Dispensing Systems, Inc., an Arizona corporation, which distributes our Medbox dispensing system and provides related consulting services in the State of Arizona.

In order to obtain the license for one of the Company’s clients the Company registered an affiliated nonprofit corporation Allied Patient Care, Inc. in the state of Oregon.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Medbox, Inc. and its wholly owned subsidiaries, as named in Note 1 above. All intercompany transactions have been eliminated.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements as well as the reported expenses during the reporting periods. The Company’s significant estimates and assumptions include the valuation of the Company’s common stock used in the valuation of goodwill, accounts receivable and note receivable collectability, inventory, advances on investments, the valuation of restricted stock and warrants received from customers, the amortization and recoverability of capitalized patent costs and useful lives of long-lived assets the derivative liability, and income tax expense. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results could differ from these estimates.

Concentrations of Credit Risk

The Company maintains cash balances at several financial institutions in the Portland, Oregon, Los Angeles, California area and Florida. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible.

Three customers, one of which is a related party through the entity’s stock ownership in the Company (customer C) represented 65.1% of the total revenue of $696,407 for the year ended December 31, 2014.

 

Customer		December 31, 2014								January - December 2014								December 31, 2013								January - December 2013
		Accounts Receivable								Revenue								Accounts Receivable								Revenue
		Amount, $				%				Amount, $				%				Amount, $				%				Amount, $				%
A		$	—				—	%		$	203,165				29.2	%		$	150,000				44.20	%		$	325,000				15.8	%
B			—				—				175,000				25.1				115,200				33.9				—				—
C			—				—				75,301				10.8				—				—				—				—
Subtotal			—				0.0				453,466				65.1				265,200				78.1			$	325,000				15.8	%
Total		$	8,774				100	%		$	629,132				100.00	%		$	339,735				100	%		$	2,062,083				100.00	%

 

F-8

---

Table of Contents

Advertising and Marketing Costs

Advertising and marketing costs are expensed as incurred. The Company incurred advertising and marketing costs of $933,627, $644,383 and $806,221 for the years ended December 31, 2014, 2013 and 2012, respectively.

Research and Development

Research and development expenses are charged to operations as incurred. The Company incurred research and development costs of $242,232, $74,861 and $176,964 for the years ended December 31, 2014 2013 and 2012, respectively.

Fair Value of Financial Instruments

Pursuant to ASC No. 825, Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets. The carrying value of cash, accounts receivable, other receivables, inventory, accounts payable and accrued expenses and notes payable, related party notes payable, customer deposits, provision for customer refunds and short term loans payable approximate their fair value due to the short period to maturity of these instruments. The Company’s marketable securities and related customer deposits require fair value measurement on a recurring basis as the Company has received advance payment of restricted stock in a publicly traded company for contracted services and received warrants for service provided to unrelated third party. The Company has no exposure to gain or loss on the increase or decrease in the value of the marketable securities received as a payment from customer as any shortfall in the ultimate liquidated value of the securities will be supplemented by additional restricted stock from the customer and any liquidation in excess above the Company’s billings will be returned to the customer. The securities received as a payment for services provided will be exposed to gains or losses following their initial evaluation as of the date the revenue was earned.

Warrants and other financial assets received as a payment for the services provided are recorded as “Marketable securities” under the current assets if they are expected to be realized within 12 months. The Company uses the Black-Scholes model to measure the value of the warrants. At each reporting date the Company will reevaluate the value of marketable securities and record any changes in value to other comprehensive income (loss) under “Unrealized gain or losses from marketable securities”.

Unrealized gain or loss from marketable securities occurs in the process of the reevaluation of the warrants or other financial assets after their initial recognition valuation. At each reporting date the Company reevaluates the value of marketable securities and reflects the change in the statement of changes in equity under other comprehensive income (loss).

Embedded derivative – The Company’s convertible notes payable include embedded features that require bifurcation due to a reset provision and are accounted for as a separate embedded derivative (see Note 13). The Company has estimated the fair market value of the embedded derivative of the Notes based on a weighted probability model. The key valuation assumptions used consist of the price of the Company’s stock, a risk free interest rate based on the average yield of a one year Treasury note and expected volatility of the Company’s common stock all as of the measurement dates, and various estimated reset exercise prices allocated by probability. The Company considers these inputs Level 3 assumptions, based on the application of the estimated probability rate being considered an unobservable input.

A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:

 

Level 1

Quoted prices in active markets for identical assets or liabilities.

 

Level 2

Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.

 

Level 3

Significant unobservable inputs that cannot be corroborated by market data.

 

F-9

---

Table of Contents

The assets or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of the relevant assets and liabilities that are measured at fair value on a recurring basis.

 

		Total				Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)				Quoted Prices for Similar Assets or Liabilities in Active Markets (Level 2)				Significant Unobservable Inputs (Level 3)
December 31, 2014
Marketable securities		$	94,776			$				$				$	94,776
Derivative liability			3,691,853				—				—				3,691,853
Total		$	3,786,629			$				$	—			$	3,786,629
		Total				Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)				Quoted Prices for Similar Assets or Liabilities in Active Markets (Level 2)				Significant Unobservable Inputs (Level 3)
December 31, 2013
Marketable securities		$	184,800			$	184,800			$	—			$	—
Total		$	184,800			$	184,800			$	—			$	—

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:

 

		For the year ended December 31, 2014
		Total
Beginning balance		$	—
Initial recognition of conversion feature			1,885,863
Change in fair value of conversion feature			1,805,990
Ending balance		$	3,691,853

Revenue Recognition

Our current revenue model consists of the following income streams:

Consulting fee revenues.

Consulting fee revenues. This revenue stream is a consistent component of our current and anticipated future revenues and is negotiated at the time we enter into a contract. In jurisdictions where there is intense competition for a limited number of dispensing or cultivating licenses, we believe the Medbox model, with its incorporated security measures, promotes a distinct advantage in the application selection process for such licenses, especially in the states where an applicant is graded on the ability to demonstrate compliance with applicable law.

Consulting fee revenue is only recognized when the following four criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales price is fixed and determinable and 4) collectability is reasonable assured. For multi-year contracts with upfront payments made by customers, the upfront payments are recognized over the longer of the contract period or the customer relationship. For contracts that include multiple deliverables such as the build out of customer facilities, the Company recognizes revenue when a milestone is reached in the contract such as securing the location, delivery of dispensing machines or completion of the facility.

 

F-10

---

Table of Contents

Revenues on dispensary unit and vaporizer sales. Medbox machines retail for approximately $50,000 for each machine set (including the POS system). In addition, many consulting contracts bundle the sale of the dispensary units within the scope of deliverables to be provided that might also include location build out costs. Bundling through consulting packages is the most common way that we sell and distribute Medboxes. Gross margins on our tabletop vaporizer sales and accessories are expected to initially average out to a net loss position due to initial higher manufacturing costs prior to implementation of the cost reduction process that we have undertaken. The introduction of our portable miVape product in the second quarter of 2015 is expected to provide a cost effective product with industry standard margins while providing significant value to the customer.

Revenue on dispensary unit sales is only recognized when the following four criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales price is fixed and determinable and 4) collectability is reasonable assured. For contracts that include multiple deliverables such as the build out of customer facilities, the Company recognizes revenue when a milestone is reached in the contract such as securing the location, delivery of dispensing machines or completion of the facility. The contract terms are broken down in specific milestones with specific attributable revenue to be earned upon successful completion of the milestone terms. (i.e. if a milestone is completing construction on a client dispensary, the condition for the revenue to be recorded is after issuance of a certificate of occupancy for the newly completed facility. The Company will record a specified amount of revenue attributable to this milestone based on the contract). Equipment sales not associated with a consulting contract are recognized as the product is shipped and title passes. Vaporizer sales are recognized as the product is shipped.

Other revenue includes sales of territory rights, sales/leases of management rights of newly awarded dispensary licenses, and sales/leases of management rights of newly acquired dispensary licenses and physical locations. We enter into transactions with clients who are interested in being granted the right to have us engage exclusively with them in certain territories (which we describe as territory rights), operating existing dispensary locations and buying previously issued dispensary licenses. Terms for each deal are varied and the sales arrangements typically include the delivery of our dispensing technology and dispensary location build-out. We will also seek to enter into contracts to assign exclusive management rights we have been granted by licensees under management rights agreements for retail, dispensary, or cultivation centers for which we have facilitated the granting of licenses.

Other revenue is only recognized when the following four criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales price is fixed and determinable and 4) collectability is reasonable assured. For multi-year contracts with upfront payments made by customers, the upfront payments are recognized over the longer of the contract period or the customer relationship. For contracts that include multiple deliverables such as the build out of customer facilities, the Company recognizes revenue when a milestone is reached in the contract such as securing the location, delivery of dispensing machines or completion of the facility. The contract terms are broken down in specific milestones with specific attributable revenue to be earned upon successful completion of the milestone terms. (i.e. if a milestone is completing construction on a client dispensary, the condition for the revenue to be recorded is after issuance of a certificate of occupancy for the newly completed facility. The Company will record a specified amount of revenue attributable to this milestone based on the contract. Advance payments from clients in advance of work performed are recorded as customer deposits on the balance sheet.

Revenue from referral fees and revenue sharing from real estate transactions with partners. The Company expects to generate revenue from matching its clients with a real estate financing partner to facilitate property purchases and subsequent leasebacks to our clients at a premium to market rates due to the sensitive use (in particular, marijuana retail (sale for recreational purposes)), dispensary (sale for medical purposes) and cultivation (marijuana growth and production of marijuana edibles)

Referral fee and revenue sharing revenue is only recognized when the following four criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales

 

F-11

---

Table of Contents

price is fixed and determinable and 4) collectability is reasonable assured. For multi-year contracts with upfront payments made by customers, the upfront payments are recognized over the longer of the contract period or the customer relationship. If all required deliverables are complete, the referral fee will be recognized when the customer closes on the subject transaction.

Revenue from providing monthly compliance and accountability support to dispensary operators. The Company expects to generate revenue from providing monthly compliance and accountability support to dispensary operators. Such services will entail bi-weekly onsite reviews of client dispensaries to ensure regulatory compliance, transaction and taxation reporting transparency, and adherence to state licensing guidelines for licensing renewal purposes. Fees will vary in each market area. The Company expects to provide such services based upon internal standards we have established which we believe, if properly followed, will greatly aid the location licensee in its compliance with state and local laws concerning operations of the location.

Monthly compliance and accountability support revenue is only recognized when the following four criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) sales price is fixed and determinable and 4) collectability is reasonable assured. Revenue is recognized monthly as the services are delivered to clients.

Cost of Revenue

Cost of revenue consists primarily of expenses associated with the delivery and distribution of our products and services. These include expenses related to the manufacture of our dispensary units, construction expense related to the customer dispensary, site selection and establishment of licensing requirements, and consulting expense for the continued management of the dispensary unit build out, server and security equipment, rent expense, energy and bandwidth costs, and support and maintenance costs prior to when the client moves in. We only begin capitalizing costs when we have obtained a license and a site for operation of a customer dispensary or cultivation center. The previously capitalized costs are charged to cost of revenue in the same period that the associated revenue is earned. In the case where it is determined that previously inventoried costs are in excess of the projected net realizable value of the sale of the licenses then the excess cost above net realizable value is written off to cost of revenues. In addition, cost of revenue related to our vaporizer line of products consists of direct procurement cost of the products along with costs associated with order fulfilment, shipping, inventory storage and inventory management costs.

Inventory

Inventory is stated at the lower of cost or market value. Cost is determined on a cost basis that approximates the first-in, first-out (FIFO) method.

Work in process and related capitalized costs includes costs to build out a dispensary in Portland Oregon that is expected to open in the second quarter of 2015. Costs include tenant improvements to the facility, furniture, fixtures and Medbox dispensary units to be used by the licensed operator. It is anticipated this dispensary will be operated by a Medbox licensed operator and revenue and related cost of revenue will be recorded in the statement of operations in the second quarter of 2015.

Basic and Diluted Net Loss Per Share

Basic net income/loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share include the effects of any outstanding options, warrants and other potentially dilutive securities. The Company did not consider any potential common shares in the computation of diluted loss per share for the periods ending December 31, 2014, 2013 and 2012, due to the net loss, as they would have an anti-dilutive effect on EPS.

 

F-12

---

Table of Contents

As of December 31, 2014 and 2013, the Company has 3,000,000 shares of Series A preferred stock outstanding with par value of $0.001 that could be converted into 15,000,000 shares of the Company’s common stock. As of December 31, 2012 there were 6,000,000 shares of Series A preferred stock outstanding, which could be converted into 30,000,000 shares. Additionally the Company has 206,480 warrants to purchase common stock outstanding as of December 31, 2014. The Company also has $3,750,000 in convertible debentures outstanding at December 31, 2014, whose underlying shares were not included as they are convertible at the holders’ option at an initial fixed conversion price of $11.75.

Accounts Receivable and Allowance for Bad Debts

The Company is subject to credit risk as it extends credit to our customers for work performed as specified in individual contracts. The Company extends credit to its customers, mostly on an unsecured basis after performing certain credit analysis. Our typical terms require the customer to pay a portion of the contract price up front and the rest upon certain agreed milestones. The Company’s management periodically reviews the creditworthiness of its customers and provides for probable uncollectible amounts through a charge to operations 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. As of December 31, 2014 and December 31, 2013, the Company’s management considered all accounts outstanding fully collectible.

Property and Equipment

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses accelerated depreciation methods for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:

 

Vehicles			5 years
Furniture and Fixtures			5 years
Office equipment			3 years

Assets Held for Resale

During 2014, the Company has entered into various real estate purchase agreements to support the filing of retail dispensary or cultivation facility licenses in certain states and localities. The cost of the acquired real estate is included in Assets Held for Resale on the consolidated balance sheet. The Company intends to sell the real estate to a long term investor after the license is granted. The Company does not depreciate assets held for resale.

Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with ASC 740. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

 

F-13

---

Table of Contents

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.

Commitments and Contingencies

Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.

The Company accrues all legal costs expected to be incurred per event, up to the amount of their deductible.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective. The new standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The new standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

Management’s Evaluation of Subsequent Events

The Company evaluates events that have occurred after the balance sheet date of December 31, 2014, through the date which the consolidated financial statements were issued. Based upon the review, other than described in Note 20 – Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

Going Concern

The Company recently revised its business model and completed a restatement of its financial statements. The revision to the business model which plans for long term contracts to manage dispensaries or cultivation centers tends to defer revenue and cash flow while expensing the costs to develop markets currently. The recently

 

F-14

---

Table of Contents

completed restatements and the on-going investigations by the SEC and the Department of Justice have added general and administrative expenses. The Company also operates in a new, emerging industry where business models are still developing and finalizing new deals can take longer than in more mature industries.

The financial statements were prepared on a going concern basis. The going concern basis assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. During the year ended December 31, 2014, the Company had a net loss of approximately $16.5 million, negative cash flow from operations of $6.3 million and negative working capital of $10.0 million. The Company will need to raise capital in order to fund its operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement a business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

As disclosed in our Form 8-K dated January 28, 2015, our lenders have committed to an additional $3.3 million in funding as our annual SEC filings are completed and the Form S-1 filed with the SEC. Due diligence is in process between an investor and our majority shareholder to sell his majority position which would also yield $5 million in new equity capital for the Company over the next 18 months (see Note 20). Management is committed to conducting a road show after the Form S-1 is declared effective to raise additional equity capital in 2015. The Company expects that these plans will provide it the necessary liquidity through the first quarter of 2016.

To address its financing requirements, the Company will seek financing through debt and equity financings. It is uncertain the Company can obtain financing to fund operating deficits until profitability is achieved. This need may be adversely impacted by: uncertain market conditions, approval of sites and licenses by regulatory bodies and adverse operating results. The outcome of these matters cannot be predicted at this time.

NOTE 3 – ACQUISITION

On March 22, 2013, the Company entered into a purchase agreement for 100% of the issued and outstanding common stock of Vaporfection International Inc. (“VII”) owned by Vapor Systems International LLC (“VSI”). The Company closed the transaction on April 1, 2013. The Company issued 260,854 warrants to shareholders of VII allowing them to purchase one (1) share of Medbox common stock at $.001 per share beginning April 1, 2014. These warrants were valued for the Company’s accounting purposes at $4.47 per warrant, determined by the Company’s independent appraiser. In addition, the Company assumed certain liabilities and a 10% convertible note of VII in the aggregate amount of approximately $470,000. The total value of the acquisition was approximately $1,635,000 and the purchase price has been allocated as per the Company’s independent valuation as follows:

 

Machinery and equipment		$	70,000
IP and related technology			287,000
Amortizable intangible assets:
Customer contracts and related relationships			314,000
Trade name, trademark, and domain name			46,000
Non-compete covenants			23,000
Goodwill			895,000
Total assets acquired			1,635,000
Fair value of liabilities assumed			(469,000	)
Net fair value		$	1,166,000

The amortizable intangible assets have useful lives not exceeding ten years. No amounts have been allocated to in-process research and development and $895,000 was originally allocated to Goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired.

 

F-15

---

Table of Contents

From the date of acquisition through March 31, 2014, the purchase price allocation period, the liabilities assumed have been increased by approximately $205,000, as they have been accrued or settled. Accordingly, an additional $10,000 and $195,000 was allocated to Goodwill in the years ended December 31, 2014 and 2013, respectively.

The warrants included a standard anti-dilution provision, which was triggered by the stock dividend declared on December 18, 2013. On or about September 17, 2014, some but not all of the holders of certain warrants for the Company’s common stock issued in connection with the Company’s 2013 purchase of Vaporfection International, Inc. filed suit against the Company in Circuit Court in Palm Beach County, Florida. There was a dispute as to the adjustment of the exercise price, and the suit was resolved in a settlement agreement dated December 29, 2014, which maintained the anti-dilution adjustment as well as an additional 50,000 warrants being issued to certain of the former VII shareholders. The additional warrants were valued at approximately $280,000, which has been recognized as legal expense in the accompanying consolidated financial statements. The expense was determined using the Black Scholes Merton model, with key valuation assumptions used that consist of the price of the Company’s stock at settlement date, a risk free interest rate based on the average yield of a 3 year Treasury note and expected volatility of the Company’s common stock all as of the measurement date. As of December 31, 2014, 252,812 of the warrants were exercised by the former owners of VII.

In addition to the above warrants, the purchase agreement and associated consulting contract with the prior management company of the business unit calls for additional shares of common stock to be issued in the event that the performance of the business unit exceeds $11,818,140 of accumulated EBITDA over the subsequent 4 year operating period. The performance payout is contingent upon future events and accordingly the Company has treated the obtainment of that performance provision as being remote and consequently has not assigned any future value to the purchase price.

The amortizable intangible assets, based on their non-deductibility for tax purposes, gave rise to a deferred tax liability in the amount of $160,000. Goodwill was increased accordingly, the balance after the purchase price allocation adjustments disclosed previously is $1,260,037 at December 31, 2015.

The Company evaluated Goodwill at year end, and as the Company determined that based on qualitative factors it was not more likely than not that there was not any impairment, they performed Step 1 of the Goodwill impairment test. Since the fair value, based on undiscounted expected future cash flows, was in excess of the units carrying value, the Company concluded no impairment was necessary to recognize as of December 31, 2014.

The Company evaluated the Intangible assets with definite lives for any indications of impairment and determined that the same cash projections used for the Goodwill impairment test resulted in a conclusion that no impairment of Intangible assets was necessary.

NOTE 4 – INVESTMENTS

On February 8, 2013, the Company entered into an agreement with Bio-Tech Medical Software, Inc. (“Bio-Tech”) which would allow the Company to purchase 833,333 shares of common stock, which represented 25% of Bio-Tech’s issued and outstanding shares of common stock, for $1,500,000. The Company advanced $600,000 upon execution of this agreement for the right to purchase with the remaining balance of $900,000 due and payable in installments at various dates by August 25, 2013. On June 26, 2013, the Company notified Bio-Tech that it was canceling the agreement.

On February 27, 2014, the Company signed a settlement agreement, and in connection therewith, a second amended and restated technology license agreement with Bio-Tech. Pursuant to the second amended and restated technology license agreement, the Company received full licensed right to biometric inventory tracking technology for the term of five years with no additional monies due. All stock transfer between companies was canceled and rescinded.

 

F-16

---

Table of Contents

On June 5, 2014 the Company entered into a sale agreement with an affiliate company owned by the co-founder of the Company for the sale of all Bio-Tech rights and claims and a contribution for legal costs of $4,800 in exchange for the return of 30,000 shares of the Company’s common stock with a fair value of $604,800, valued at the market price of the Company’s common shares on the date of the agreement. These shares are treated as treasury stock and can be reissued.

On March 12, 2013, the Company entered into an agreement with three members of MedVend Holdings LLC (“MedVend”) whereby the Company would acquire 50% of their equity interest in MedVend. The purchase price of the equity interest was $4,100,000. The Company paid an advance of $300,000 upon execution of the contract for the right to purchase and another $300,000 was disbursed as an additional investment to MedVend. In May 2013, the three members of MedVend were named in a lawsuit by that entity’s minority shareholders alleging improper conveyance of the three members’ ownership interest in MedVend to the Company. Accordingly, also in May 2013, Medbox filed suit against MedVend and the three members of that entity that were involved in the transaction (Note 19).

The shares of common stock received for the Bio-Tech and MedVend sales to the affiliate company are recorded as treasury stock at cost of $1,209,600 for 60,000 shares.

NOTE 5 – INVENTORY

Inventory at December 31, 2014 and 2013 consists of the following:

 

		December 31, 2014				December 31, 2013
Work in process and related capitalized costs		$	308,867			$	242,488
Deposits on dispensing machines			325,973				138,423
Vaporizers and accessories			154,930				193,575
Dispensing machines			171,466				58,500
Total inventory, net		$	961,236			$	632,986

Work in process and related capitalized costs includes costs to build out a dispensary in Portland Oregon that is expected to open in the second quarter of 2015. Costs include tenant improvements to the facility, furniture, fixtures and Medbox dispensary units to be used by the licensed operator. It is anticipated this dispensary will be operated by a Medbox licensed operator and revenue and related cost of revenue will be recorded in the statement of operations in the second quarter of 2015.

During the year ended December, 31, 2014, the Company wrote down slow moving, older models of vaporizer inventory with a charge to cost of revenue of $329,154. The Company determined there was no obsolete or slow moving inventory as of December 31, 2013 and 2012.

NOTE 6 – PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2014 and 2013 consists of:

 

Property and Equipment		December 31, 2014				December 31, 2013
Office equipment		$	22,421			$	17,192
Furniture and fixtures			74,404				73,567
Website development			46,922				46,922
Product tooling			64,763				24,100
			208,510				161,781
Less accumulated depreciation			(50,192	)			(21,123	)
Property and equipment, net		$	158,318			$	140,658

 

F-17

---

Table of Contents

Product tooling costs are related to the tooling of a new product by VII. These tooling costs are accumulated and capitalized until launch date of the new product which is expected to commence in the second quarter of 2015.

Depreciation expense for the years ending December 31, 2014, 2013 and 2012 was approximately $29,000, $37,000 and $30,000, respectively.

NOTE 7 – ASSETS HELD FOR RESALE

In the course of seeking licenses for new locations, the Company has to enter into real estate purchase agreements in order to secure the sites to be developed for clients’ dispensaries and cultivation centers. The Company intends to close on the real estate where purchase agreements have been signed, or to seek partners to replace the Company on each property purchased. During the second quarter of 2014 one of the Company’s subsidiaries entered into a real estate purchase agreement for a Washington state property. The purchase transaction was closed during the third quarter for a total purchase price of $399,594 partially financed by a promissory note for $249,000. The note bears an interest rate of 12% per year and matures on January 30, 2015. The balance of Assets held for resale as of December 31, 2014 is $399,594. There were no such assets as of December 31, 2013.

NOTE 8 – INTANGIBLE ASSETS

The Company acquired certain intangible assets with its purchase of 100% of the outstanding common stock of VII on April 1, 2013. The Company accounts for intangible assets acquired in a business combination, if any, under the purchase method of accounting at their estimated fair values at the date of acquisition. Intangibles are either amortized over their estimated lives, if a definite life is determined, or are not amortized if their life is considered indefinite.

 

Intangible assets		December 31, 2014				December 31, 2013
Distributor relationship		$	314,000			$	314,000
IP/technology/patents			324,653				332,179
Domain names			131,000				46,000
Non-compete covenants			23,000				23,000
Subtotal			792,653				715,179
Less accumulated amortization			(83,500	)			(32,750	)
Intangible assets, net		$	709,153			$	682,429

The estimated useful lives for significant intangible assets are as follows:

 

Distributor Relationship			10 years
Domain Names			10 years
IP/Technology/Patents			10 years
Non-Compete covenants			3 years

The Company’s management has evaluated the intangible assets and does not believe any impairment of intangible assets has occurred as of December 31, 2014 and 2013.

NOTE 9 – ACCOUNTS AND NOTES RECEIVABLE

Accounts receivables

Periodically the Company assesses and reviews the receivables for collectability. As of December 31, 2014 and 2013, the Company’s management considered all outstanding accounts receivables fully collectible.

 

F-18

---

Table of Contents

During the year ended December 31, 2014, the Company identified $132,640 of accounts receivable and $75,000 in Notes Receivable where management determined that collection was not likely and therefore the Company recognized bad debt expense of $207,640. The Company will continue to make efforts to collect the full value of the various receivables.

Notes Receivable current

During December 2013, the Company entered into a multiple advance secured promissory note for $1,000,000 with a Canadian partner. This note is due and payable, together with interest at 5% per annum, on December 10, 2018. As of December 31, 2013 the outstanding balance of this note receivable was $115,000. During 2014 the Company advanced to the Canadian partner an additional $40,000, bringing the total outstanding to $155,000. On October 20, 2014, the note receivable was cancelled and repaid in full, including accrued interest of $6,424.

During the third quarter of 2014 one of the Company’s clients signed a Note Receivable for $75,000 as a payment on accounts receivable, with a maturity date of December 31, 2014. However, at December 31, 2014 management determined that collection was not likely, and recognized bad debt expense of $75,000 in connection with the Note Receivable.

Periodically the Company assesses and reviews the Notes Receivable for collectability. As of December 31, 2013, the Company’s management considered all remaining accounts outstanding fully collectible.

NOTE 10 – MARKETABLE SECURITIES

Marketable securities of the Company represent the shares received as a payment from clients for services provided.

 

Marketable securities		Value as of December 31, 2014				Value as of December 31, 2013
Shares received as a payment from client		$	—			$	184,800
Securities from MJ Holdings, Inc.			94,776				—
Total marketable securities		$	94,776			$	184,800

On September 5, 2014 the Company received as a deposit 7,000,000 restricted shares in a publicly traded entity, currently called Endocan, as payment for $300,000 in accounts receivable billed to a customer. The restriction on the shares lapsed in 2014. The value of these unliquidated shares was held as collateral against the outstanding amounts owed to the Company up to $300,000 (the value of receivable of the client) until such time that the shares are liquidated and only at the time that the cash proceeds are used to pay off the receivable will any excess cash received be returned to the client in accordance with the contract. The fair value of the shares as of December 31, 2013 (with 12% restricted stock discount as of December 31, 2013) was $184,800. At December 31, 2014 the Company evaluated the shares for impairment, and noted that Endocan is not currently making material information publicly available, is delinquent on their SEC filings, and is thinly traded on the OTC pink sheets. Furthermore, the last filed financial statements show minimal assets and liabilities of over $1,000,000. Management concluded these factors were indications of impairment, and determined the shares were fully impaired, with the decline being other-than-temporary. As the shares were being held as a deposit against the receivable balance, the fair value was also recognized as a customer deposit, and the impairment will therefore fully reduce the related customer deposit, and not be recognized as an impairment expense.

On May 19, 2014 the Company entered into an agreement with MJ Holdings, Inc., a publicly traded company that provides real estate financing and related solutions to licensed marijuana operators. The Company will market MJ Holdings’ real estate financial products and offerings to its consulting clients and will direct all incoming real estate related opportunities to MJ Holdings. Under the agreement, the Company will receive 50% of management fees and profits realized from the real estate opportunities it presents, in addition to warrants to

 

F-19

---

Table of Contents

purchase shares in MJ Holdings. The initial term of the agreement was six months which could have been extended on a month to month basis, but the agreement was terminated at the end of the six month term. MJ Holdings, Inc. agreed to issue to the Company, for this six month term of the contract, 33,333 warrants to purchase common stock on each month’s anniversary of the contract. As of December 31, 2014 the Company received six tranches of warrants for the services provided under the agreement. The following table represents the initial recognition value and subsequent adjustment as of reporting date:

 

Warrants		Initial Fair Value				Fair Value at Conversion				Gain or (Loss)				Fair Value as of December 31, 2014
Warrant #1		$	95,866			$	(94,719	)		$	(1,147	)		$	—
Warrant #2			2,666								5,513				8,179
Warrant #3			53,867								(44,947	)			8,920
Warrant #4			30,600								(20,282	)			10,318
Warrant #5			7,133								12,920				20,053
Warrant #6			13,033								12,623				25,656
Total		$	203,165			$	(94,719	)		$	(35,320	)		$	73,126

At initial recognition the value of warrants is recorded as “Marketable securities” and “Revenue” for services provided. Subsequent to initial recognition all valuation adjustments are reflected through other comprehensive income (loss) as “Unrealized gain or losses from marketable securities”. In June 2014, Warrant #1 was converted to 10,825 shares of MJ Holdings common stock through the cashless exercise option. The fair value of the shares as of December 31, 2014 was $21,650, which represents a $73,069 unrealized loss on marketable securities. The Company uses the published closing price of the stock to value the stock held by the Company.

The Company uses a Black-Scholes model to measure the value of the warrants. The following assumptions were used by the Company for the Black-Scholes model valuation of the warrants as of their initial valuation:

 

Black-Scholes Calculator Data		Initial Valuation and Recognition
		#1				#2				#3				#4				#5				#6
Warrant
Stock price, $			8.69				4.00				8.00				6.15				2.01				2.02
Exercise price, $			6.42				8.45				7.87				6.95				3.53				2.56
Time to maturity, Years			0.5				0.5				0.5				0.5				1.0				1.0
Annual risk-free rate, %			0.05				0.05				0.05				0.05				0.04				0.11
Annualized volatility, %			70.0				70.0				70.0				70.0				70.0				70.0
Black-Scholes Value per warrant, $			2.876				0.080				1.616				0.918				0.214				0.391
Number of warrants/shares			33,333				33,333				33,333				33,333				33,333				33,333
Total value of warrants/shares, $			95,866				2,666				53,867				30,600				7,133				13,033

The following data were used by the Company for the Black-Scholes model valuation of the warrants as of December 31, 2014:

 

Fair Value of Warrants		As of December 31, 2014
		#2				#3				#4				#5				#6
Warrant
Stock price, $			2.00				2.00				2.00				2.00				2.00
Exercise price, $			8.45				7.87				6.95				3.53				2.56
Time to maturity, Years			1.0				1.0				1.0				1.0				1.0
Annual risk-free rate, %			0.22				0.22				0.22				0.22				0.22
Annualized volatility, %			120.0				120.0				120.0				120.0				120.0
Black-Scholes Value per warrant, $			0.25				0.27				0.31				0.60				0.77
Number of warrants/shares			33,333				33,333				33,333				33,333				33,333
Total value of warrants/shares, $			8,179				8,920				10,318				20,053				25,656

 

F-20

---

Table of Contents

NOTE 11 – CUSTOMER DEPOSITS

Advance payments from customers are recorded as customer deposits on the consolidated balance sheet.

 

Customer deposits		December 31, 2014				December 31, 2013
Advance payments from customers		$	1,450,770			$	710,225
Advance payments for vaporizers			75,038				75,636
Total customer deposits		$	1,525,808			$	785,861

NOTE 12 – SHORT-TERM DEBT

On July 28, 2014 one of the Company’s subsidiaries executed a promissory note for $249,000 for the purchase of real estate (also see Note 7). The note matures on January 30, 2015 and bears 12.0% interest annually. The interest is payable monthly starting August 1, 2014 with a final, sixth payment on January 1, 2015. In the event of a default, as defined, the interest rate increases to 18%, there is a one time 5% late charge on the principal balance, and the note can be accelerated. Subsequent to December 31, 2014, the Company was in default of the repayment terms, and the note terms were modified. (see Note 20).

The other portion of the notes payable balance represents the outstanding balance in the amount of $12,434 for product liability insurance. The financing of product liability insurance bears 5.99% interest and is payable in monthly payments of $2,524 for nine months with the first payment due on September 5, 2014 and the last payment due on May 5, 2015.

The notes payable to related parties bear no interest.

The December 31, 2013 balance of the $75,000 note payable to an unrelated third party was paid in full during 2014.

NOTE 13 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY

On July 21, 2014, as amended on September 19, 2014 and October 20, 2014, the Company entered into a Securities Purchase Agreement whereby the Company agreed to issue convertible debentures (“July 2014 Purchase Agreement Debentures”) in the aggregate principal amount of $3,500,000, in five tranches. The initial closing in the aggregate principal amount of $1,000,000 occurred on July 21, 2014. The second closing in the amount of $1,000,000 occurred on August 26, 2014; the third of $500,000 on September 26, 2014; and the fourth of $250,000 on November 24, 2014. The fifth closing was modified in January, 2015 (See Note 20). The July 2014 Purchase Agreement Debentures bear interest at the rate of 10% per year. The debt is due July 21, 2015, with repayment, including accrued principal and accrued interest, beginning on the eleventh day of the fourth month after issuance and will continue on the eleventh day of each following 8 successive months thereafter.

Also on September 19, 2014, as amended on October 20, 2014, the Company entered into a securities purchase agreement pursuant to which it agreed to issue convertible debentures (“September 2014 Purchase Agreement Debentures”) (collectively the “Notes”) in the aggregate principal amount of $2,500,000, in two tranches. The initial closing in the principal amount of $1,000,000 occurred on September 19, 2014. The second closing, of $1,500,000, is to occur within 2 days of the effective date of the registration statement filed by the Company for the resale of the shares of common stock issuable upon conversion of the September 2014 Purchase Agreement Debentures. The September 2014 Purchase Agreement Debentures bear interest at the rate of 5% per year. The debt is due September 19, 2015, with repayment, including accrued principal and accrued interest, due in nine monthly installments, commencing the fourth month after issuance.

 

F-21

---

Table of Contents

Both the July 2014 Purchase Agreement Debentures and September 2014 Purchase Agreement Debentures, share the following significant terms:

Conversion – All amounts are convertible at any time, in whole or in part, at the option of the holders into shares of the Company’s common stock at a conversion price, or Fixed Conversion Price, which is subject to adjustment as described below.

The Notes are initially convertible into shares of the Company’s common stock at the initial Fixed Conversion Price of $11.75 per share. The Fixed Conversion Price is subject to adjustment for stock splits, combinations or similar events. If the Company makes any subsequent equity sales (subject to certain exceptions), under which an effective price per share that is lower than the Fixed Conversion Price, then the conversion price will be reduced to equal such price. The July 2014 Securities Purchase Agreement exempts any sales pursuant to the September 2014 Purchase Agreement Debentures from the July 2014 Purchase Agreement Debentures conversion price adjustments.

Beginning four months (as subsequently amended) after the initial closing, the Company will begin making amortization payments on the debt in cash, prompting a 30% premium or, at their option and subject to certain conditions, in shares of common stock valued at 70% of the lowest volume weighted average price of the common stock for the 20 prior trading days. However, in the event the registration statement filed by the Company in connection with the respective purchase agreements is not effective within 120 days of the initial closing date under the July 2014 Purchase Agreement and 120 days of the initial closing date under the September 2014 Purchase Agreement, the July 2014 Purchase Agreement Debentures’ and the September 2014 Purchase Agreement Debentures’, respectively, conversion rate will be, during the period commencing 120 days after the initial closing date until the registration statement is effective, equal to 63% of the lowest volume weighted average price of the common stock for the 20 prior trading days. If the aforementioned registration statement is not effective within 160 days of the initial closing date, each of the debentures’ conversion rate will be, during the period commencing 160 days after the initial closing date until the registration statement is effective, equal to 60% of the lowest volume weighted average price of the common stock for the 20 prior trading days.

In connection with each of the purchase agreements, the Company entered into a registration rights agreement with the respective investors, pursuant to which the Company agreed to file a registration statement for the resale of the shares of common stock issuable upon conversion of, or payable as principal and interest on, the respective debentures, within 45 days of the initial closing date under each agreement, and to have such registration statements declared effective within 120 days of the initial closing dates of each purchase agreement. The registration statement was not declared effective within 120 days, and the amortization payment conversion rate was adjusted accordingly.

The $3,750,000 million principal amount of the Notes were issued net of $275,000 debt discount. The conversion feature of the notes meets the definition of a derivative under ASC 815 and due to the reset provision upon subsequent sales of securities at a price lower than the fixed conversion price, requires bifurcation and is accounted for as a derivative liability. The derivative was initially recognized at its estimated fair value of $1.885 million and created a discount on the Notes that will be amortized over the life of the Notes using the effective interest rate method. The fair value of the embedded derivative will be measured and recorded at fair value each subsequent reporting period and changes in fair value will be recognized in the statement of operations as a gain or loss on derivative. For the year ended December 31, 2014 the Company recognized a loss on the change in fair value of derivative liabilities of $1,805,990. See Note 2 Fair value measure for additional information on the fair value and gains or losses on the embedded derivative.

As a result of a new convertible debentures loan agreements entered into in January 2015 (Note 20), which include a conversion rate equal to the lower of (a) $5.00 or (b) 51% of the lowest VWAP for the 20 consecutive Trading Days ending on the Trading Day that is immediately prior to the applicable Conversion Date, the reset provision terms of the July 2014 and September 2014 convertible debentures were triggered and the original fixed conversion price were adjusted accordingly.

 

F-22

---

Table of Contents

NOTE 14 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other currents assets consisted of:

 

		December 31, 2014				December 31, 2013
Rent		$	—			$	3,962
Directors & officers insurance			31,491				—
Professional fees			10,000				52,739
Other vendors			24,729				32,540
Prepaid expenses and other current assets		$	66,220			$	89,241

Deposits in escrow

Deposits in escrow consist of amounts paid to open escrow accounts for the purchase of multiple properties to be used to develop retail dispensary or product cultivation facilities.

NOTE 15 – RESTRICTED STOCK AND RESTRICTED STOCK UNITS (“RSUs”)

On July 23, 2014, in connection with the election of a new Chairman, President and CEO, the Company entered into a two year employment contract with the new CEO. Under the employment contract, the CEO received an award of RSU’s, to be issued within 90 days of the effective date of the Employment Agreement, under the Equity Incentive Plan adopted by the Company, in the amount of the greater (by value) of 50,000 shares of common stock or $500,000 of common stock based on the volume weighted average price for the 30 day period prior to the date of the grant. In October the Company granted 50,000 RSUs in accordance with the employee contract. The Company also agreed to make an equal stock award to the CEO on each anniversary date of the employment agreement. The RSU’s vest immediately during each year of the employment contract. During the third quarter of 2014, 20,000 additional shares were approved to increase the CEO’s first year RSU grant from 50,000 RSU’s to 70,000 RSU’s (see Note 16 for a more detailed discussion of the additional grant). As of December 31, 2014, the fair value of the grant was approximately $970,000 which is being amortized over the CEO’s one year service period.

On August 21, 2014, the Compensation Committee of the Board of Directors granted Restricted Stock and RSU’s to two Board members who were elected to the Board on April 9, 2014. Under the award, the Directors received 346,875 shares of restricted stock and 121,875 RSU’s under which the holders have the right to receive 121,875 shares of common stock. The grant date fair value of the restricted stock was $3,607,500 and the grant date fair value of the RSU’s was $1,267,500. The restricted Stock and RSU’s vest over the remaining first year of the new Board members’ term ending on March 31, 2015. The fair value of the grant is being amortized over the period from the date of grant, August 21, 2014 to the end of the first year of the Board members’ term, March 31, 2015. Under the Board members’ contracts, additional grants will be made for the second year of the contract.

During October 2014 the Compensation Committee of the Board of Directors granted 19,452 RSU’s to a new Board member who was elected to the Board on October 22, 2014. The Board member’s contract calls for grants of 100,000 RSU’s for each succeeding year of service beginning on April 1, 2015, which vest quarterly.

 

F-23

---

Table of Contents

A summary of the activity related to restricted stock and RSUs for the year ended December 31, 2014 is presented below:

 

Restricted stock		Total shares				Grant date fair value
Restricted stock non-vested at January 1, 2014			—			$	—
Restricted stock granted			346,875				10.40
Restricted stock vested			(178,125	)			10.40
Restricted stock forfeited			—				—
Restricted stock non-vested at December 31, 2014			168,750			$	10.40
Restricted stock units (RSU’s)		Total shares				Grant date fair value
Restricted stock non-vested at January 1, 2014			—			$	—
Restricted stock granted			422,980				10.84
Restricted stock vested			(223,396	)			11.19
Restricted stock forfeited			—				—
Restricted stock non-vested at December 31, 2014			199,584			$	10.70

A summary of the expense related to restricted stock and RSUs for the year ended December 31, 2014 is presented below:

 

Summary of the expense related to Restricted Stock and RSUs		Year ended December 31, 2014
Restricted Stock		$	663,262
RSU’s			3,752,537
		$	4,415,799

There were not any restricted stock or RSU activity in the year ended December 31, 2013.

NOTE 16 – RELATED PARTY TRANSACTIONS

The aggregate amount of outstanding payables to related parties as of December 31, 2014 and 2013 was $678,877 and $111,794, respectively.

During 2012, the Company issued notes payable to a shareholder in the aggregate amount of $125,000 in exchange for the shareholder’s original investment in PVM common stock. The notes bear no interest and are due on demand. As of December 31, 2012, the outstanding balance on the notes was $94,000 and as of December 31, 2013, the notes were paid in full.

On January 1, 2012, the Company issued a note payable to PVMI which is 100% owned by the founder of the Company in the amount of $1,000,000 along with the issuance of 4,000,000 shares of the Company’s common stock for 100% of PVMI Named Subsidiaries and for the exclusive use of patents related to PVMI’s dispensing systems. The note was secured with 1,000,000 shares of the Company’s common stock. The note was due on demand and bore interest at 10% of the outstanding balance beginning January 1, 2013. The balance at December 31, 2012 was $775,038 and as of December 31, 2013, the note was paid in full.

The Company utilizes Kind Clinics, LLC, which is 100% owned by the former Chief Executive Officer of the Company, Dr, Bruce Bedrick, for management advisory and consulting services. During the year ended December 31, 2012, the Company incurred $113,613 in fees for these services.

 

F-24

---

Table of Contents

For the year ended December 31, 2012 the Company utilized AVT, Inc., for the procurement, manufacture and assembly of its dispensary units. During 2012, the Company incurred approximately $480,000 and $510,000 in manufacturing costs. In addition, the Company’s existing inventory of dispensary units was held at AVT, Inc.’s manufacturing facility in Corona, California on behalf of the Company. The Company believes that its transactions with AVT, Inc. during 2012 were completed on an arms-length basis.

The Company utilizes Vincent Chase Inc., which is a related party and 100% owned by a co-founder of the Company for management advisory and consulting services. During the years ended December 31, 2014, 2013 and 2012, the Company incurred fees of $168,625, $262,500 and $230,706, respectively, for these services. The contract for the aforementioned services was terminated on December 8, 2014.

During 2013, the Company issued two promissory notes payable to Vincent Chase Inc., on September 20, 2013, in the amount of $150,000 and on October 28, 2013 in the amount of $100,000. At December 31, 2013, the outstanding amount for the combined notes was $111,794. These notes were repaid in full during 2014.

During the year ended December 31, 2014, the Company issued four notes payable to PVM International Inc. (“PVMI”), a related party which is 100% owned by a co-founder of the Company, in the amounts of $250,000, $100,000, $500,000, and $375,000. These notes were subsequently partially repaid leaving $388,477 outstanding as of December 31, 2014. On October 17, 2014 the Company entered into an assignment agreement with PVMI through which PVMI assigned all rights and titles for any opened escrow on real estate purchase agreements in San Diego in exchange for a related party notes payable from the Company. As of the signing date the agreement was valued at $190,400 which represented the value of escrow deposits paid by PVMI for eight different real estate agreements.

On July 21, 2014, the Company also paid $75,000 to PVMI as a partial payment for advances made by PVMI for escrow deposits used to secure properties for possible license acquisition in the San Diego market area.

On August 15, 2014, the Company issued a note payable to Vincent Chase, Inc., in the amount of $100,000.

The notes bear no interest and are payable on demand.

The Company utilized Dr. Bruce Consulting which is a related party and 100% owned by one of Company’s major shareholders and former Chief Executive Officer for management consulting and advisory service. During the year ended December 31, 2014, the Company incurred expenses in the amount of $43,750 for consulting and advisory services to Dr. Bruce Consulting. For the year ending December 31, 2013, the Company paid salary to Dr. Bruce Bedrick, the former Chief Executive Officer in the gross amount of $133,991.

During the application process for dispensaries and cultivation centers in Illinois, which took place in September, 2014, Dr. Bruce Bedrick, a major shareholder, provided funding to the applicant entity in the amount of $500,000. This amount was returned by the applicant entity to Dr. Bruce Bedrick by September 30, 2014.

During the third quarter of 2014, the CEO of the Company and the Chairman of the Board, Mr. Guy Marsala received 20,000 shares from the founder and major shareholder of the Company out of his personal holdings to compensate for his superior performance. On October 24, 2014 the Compensation Committee of the Board of Directors recommended that shares be returned to the founder and issued by the Company as part of the yearly RSU grant. In November 2014, Mr. Marsala returned 20,000 shares to founder and major shareholder and 20,000 additional shares were approved to increase Mr. Marsala’s first year RSU grant from 50,000 RSU’s to 70,000 RSU’s.

Related parties contributed $810,000 and $561,000 in 2013 and 2012, respectively, to provide funding for growth for the Company. During the first quarter of 2014, the Company completed a contract with a related party and, a shareholder in the amount of $400,000 which was recognized as a Customer deposit in the Company’s balance

sheet. In addition, the same related party paid the Company $150,000 for an amount owed to the Company by an

 

F-25

---

Table of Contents

unrelated third party to facilitate development at an existing dispensary where the unrelated party purchased an interest during the period. In addition on March 28, 2014 the Company entered into an agreement with a related party for territory rights in Colorado for $500,000. The agreement has a term of five years and in accordance with the Company’s revenue policy, the revenue will be recognized over the five year term.

During the third quarter of 2014, the Company created the following affiliated entities in connection with license applications: A. Hanna Growers, Inc., Herbal Choice of Illinois, Inc., Nature’s Treatment of Illinois, Inc., Green Blossom of Illinois, Inc., Midwestern Compassionate Care of Illinois, Inc., Midwestern Wellness Group of Illinois, Inc., Green Blossom, Inc., Nature’s Treatment, Inc. and Herbal Choice, Inc.

NOTE 17 – STOCKHOLDER’S EQUITY

Preferred Stock

In November 2011, the Company issued 6,000,000 shares of $0.001 par value Series A convertible preferred stock to the founder and a shareholder of the Company. This preferred stock can be converted to common stock at a ratio of 1 (one) share of Series A Preferred Stock to 5 (five) shares of common stock. In October 2012, 3,000,000 shares of Series A Preferred Stock were returned to the Company by the shareholder and reissued to the founder. In January 2013, the founder returned to the Company the 3,000,000 shares of Series A Preferred Stock and they were immediately cancelled. As of September 30, 2014, there are 3,000,000 shares of Series A Preferred Stock outstanding.

The Series A Preferred Stock has special voting rights when voting as a class with the Common Stock as follows: (i) the holders of Series A Preferred Stock shall have such number of votes as is determined by multiplying (a) the number of shares of Series A Preferred Stock held by such holder, (b) the number of issued and outstanding shares of the Corporation’s Series A Preferred Stock and Common Stock (collectively, the “Common Stock”) on a Fully-Diluted Basis (as hereinafter defined), as of the record date for the vote, or, if no such record date is established, as of the date such vote is taken or any written consent of stockholders is solicited, and (c) 0.00000025; and (ii) the holders of Common Stock shall have one vote per share of Common Stock held as of such date. “Fully-Diluted Basis” mean that the total number of issued and outstanding shares of the Company’s Common Stock shall be calculated to include (a) the shares of Common Stock issuable upon exercise and/or conversion of all of the following securities (collectively, “Common Stock Equivalents”): all outstanding (a) securities convertible into or exchangeable for Common Stock, whether or not then convertible or exchangeable (collectively, “Convertible Securities”), (b) subscriptions, rights, options and warrants to purchase shares of Common Stock, whether or not then exercisable (collectively, “Options”), and (c) securities convertible into or exchangeable or exercisable for Options or Convertible Securities and any such underlying Options and/or Convertible Securities.

Common Stock

On June 5, 2014 the Company entered into two separate sales agreements with an affiliate company owned by the co-founder of the Company. The first was for the sale of all of the Company’s Bio-Tech rights and claims, as consideration for which the Company received 30,000 shares of the Company’s common stock with a fair value of $604,800, as based on the market price of the common stock. The second was for the sale of all the MedVend rights and claims in exchange for 30,000 shares of the Company’s common stock, with a fair value of $604,800 as based on the market price of the common stock. These 60,000 shares of common stock received back by the Company are treated as treasury stock and can be reissued.

During January, 2014, the Company issued 485,830 shares of its common stock at the price of $5.00 per share, resulting in net cash proceeds of $2,427,859.

On December 18, 2013 the Company declared a two-for-one (2:1) forward stock split on its outstanding common stock, effectuated in the form of a common stock dividend. The stock dividend, aggregating in 14,762,875

 

F-26

---

Table of Contents

common shares, was issued on and announced by the Financial Industry Regulatory Authority (FINRA) on February 3, 2014. Accordingly, the Company’s consolidated financial statements have been retroactively stated for all periods presented to reflect the 2:1 forward stock split.

On September 8, 2014 the Company issued 93,751 shares of common stock to two board members from a total grant of 346,875 awarded by the Compensation Committee to board members. On October 7, 2014 additional 84,374 shares were issued to the same board members.

During the fourth quarter of 2014 the Company issued 52,892 shares of its common stock, valued at $316,065 as based on the market price of the common stock, as a payment of certain accounts payables.

During 2013, the Company issued 2,115,100 shares of common stock at an average price $2.23, resulting in net cash proceeds of $4,486,541. In addition, during 2013, the Company had non-cash additions to equity from the issuances of warrants and common stock in connection with the VII acquisition of $1,285,553.

During 2012, the Company sold approximately 2,463,000 shares of common stock for proceeds of approximately $858,000. The balance of $153,250 for the remaining 74,100 shares is to be received in 2013.

On January 1, 2012, the Company issued 4,000,000 shares of the Company’s common stock as consideration for 100% of certain named subsidiaries PVMI, a related party, and for the exclusive use of patents related to PVMI’s dispensing systems. (see Note 16)

NOTE 18 – INCOME TAXES

The Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides that deferred tax assets and liabilities are recorded based on the differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences.

Deferred income taxes are provided for temporary differences arising from using the straight-line depreciation method for financial statement purposes and accelerated methods of depreciation for income taxes, including differences between book and tax for amortizing organization expenses. In addition, deferred income taxes are recognized for certain expense accruals, allowances and net operating loss carry forwards available to offset future taxable income, net of valuation allowances for potential expiration and other contingencies that could impact the Company’s ability to recognize the benefit.

The Company is required to file federal and state income tax returns. Various taxing authorities may periodically audit the Company’s income tax returns. These audits would 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 is in the process of an examination by the Internal Revenue Service of the year ended December 31, 2011.

Management has performed its evaluation of all other income tax positions taken on all open income tax returns and has determined that there were no positions taken that do not meet the “more likely than not” standard. Accordingly, there are no provisions for income taxes, penalties or interest receivable or payable relating to uncertain income tax provisions in the accompanying consolidated financial statements.

From time to time, the Company may be subject to interest and penalties assessed by various taxing authorities. These amounts have historically been insignificant and are classified as other expenses when they occur.

 

F-27

---

Table of Contents

Deferred tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31:

 

		2014				2013
Deferred tax assets:
Customer deposits		$	295,000			$	293,000
Deferred revenue			35,000
Share based compensation			1,760,000
NOL carryforward			5,400,000				2,377,000
Total deferred tax asset			7,490,000				2,670,000
Deferred tax liabilities:
Deferred revenue			—				285,000
Intangible asset amortization			20,000
			20,000				285,000
			7,470,000				2,385,000
Less: Valuation allowance			(7,470,000	)			(2,385,000	)
		$	—			$	—

A valuation allowance has been recorded against the realizability of the net deferred tax asset such that no value is recorded for the asset in the accompanying consolidated financial statements. The valuation allowance increased $5,085,000 between the year ended December 31, 2014 and 2013.

The Company has net operating loss carryforwards available for federal and state tax purposes of approximately $13,510,000, at December 31, 2014, which expire in varying amounts through 2034.

For the years ended December 31, 2014, 2013 and 2012, a reconciliation of the statutory rate and effective rate for the provisions for income taxes consists of the following:

 

		2014				2013				2012
Federal Tax statutory rate			34.00	%			34.00	%			34.00	%
State tax statutory rate			6.00	%			8.84	%			8.84	%
Permanent differences			(6.72	)%			—	%
Valuation allowance			(33.28	)%			(42.84	)%			(42.84	)%
Effective rate			0.00	%			0.00	%			0.00	%

NOTE 19 – COMMITMENTS AND CONTINGENCIES

The Company leases property for its day to day operations and has recently begun leasing facilities for possible retail dispensary locations and cultivation locations as part of the process of applying for retail dispensary and cultivation licenses.

Office Leases

On August 1, 2011, the Company entered into a lease agreement for office space located in West Hollywood, California through June 30, 2017 at a monthly rate of $14,397. Starting July 1, 2014, the monthly rent increased by 3% to $14,828 per month.

In addition, the Company leased office facilities located at West Hills, California and Scottsdale, Arizona from unrelated third parties at a monthly rate of $1,300 and $1,420. The West Hills lease was on a month to month basis. The Arizona lease was a non-auto renewing lease with the most current agreement covering the period from May 1, 2014 to October 31, 2014. The Arizona lease term expired on October 31, 2014. The Company terminated the West Hills and Scottsdale leases effective November 1, 2014.

 

F-28

---

Table of Contents

On December 17, 2013 the Company’s subsidiary Vaporfection International Inc. entered into a 1 year non-cancelable office lease in Deerfield Beach, Florida. The lease started on January 1, 2014 at a monthly rate of $1,981. As of December 31, 2014 this lease was terminated.

The Company rents virtual offices/meeting spaces in Seattle and Illinois on a month to month basis for an aggregate of approximately $705 per month. The payment is charged to rent expense as incurred.

Total rent expense under operating leases for the year ended December 31, 2014, 2013 and 2012, was $ 204,726, $139,330 and $124,727, respectively

Retail/Cultivation facility leases

The Company’s business model of acquiring retail dispensary and cultivation licenses has made it important to acquire real estate either through lease arrangements or through purchase agreements in order to secure a possible license. On May 8, 2014, the Company entered into a lease agreement for five years with a monthly payment of $7,400 in order to apply for a license and build-out of a location for a client. Also, on July 22, 2014 one of the Company’s subsidiaries Medbox Property Investments, Inc., entered into a new lease for a facility which will be used in the application process for both a dispensary and cultivation facility. The Company paid an initial security deposit of $30,000 and the lease is payable monthly at a rate of $20,000 per month. The lease has a five year term, but is contingent upon license approval which allows for early termination of the lease after January 1, 2015 if the license is not granted. Due to the fact that the Company was unsuccessful in obtaining the license related to the mentioned facility the lease agreement was terminated in November 2014.

The following table is a summary of our material contractual lease commitments as of December 31, 2014:

 

Year Ending		Office Rent				Retail/Cultivation Facility Lease
2015		$	177,936			$	88,800
2016			177,936				88,800
2017			88,968				88,800
2018			—				88,800
2019			—				29,600
Total		$	444,840			$	384,800

Real Estate Commitments

As part of the changes in the Company’s business model, the Company entered in various real estate purchase agreements at various times in order to allow the filing of retail dispensary or cultivation facility licenses in certain states and localities. These purchase agreements generally provide for a period of due diligence and a termination clause in the event that the Company is unable to obtain a license for its client. The agreements generally also provide for some monthly payment from escrow in order to compensate the real estate owner for the passage of time until the sale transaction is complete. Most of these payment releases from escrow are nonrefundable but applicable towards the purchase price if the Company decides to proceed with the purchase. Subject to approval of the license for a dispensary or cultivation center, the Company intends to close on the real estate where purchase agreements have been signed, or to seek partners to replace the Company on each property purchased.

During the year ended December 31, 2014, the Company paid $930,000, either by deposit into fifteen escrow accounts or direct payments to sellers, to secure the purchase and/or extend the closing dates on real estate to be used for future retail/cultivation facilities with an aggregate purchase price of $26,830,000. During the same period, the Company allowed the escrows to expire on three agreements with an aggregate purchase price of $3,195,000 and forfeited $140,000 in earnest money due to unfavorable terms demanded by the sellers to extend the escrow and closing date.

 

F-29

---

Table of Contents

The Company was not successful in obtaining licenses for another ten locations with an aggregated sales price of $21,515,000 and deposits in escrow totaling $685,000. As a result all escrow accounts were closed with $235,757 forfeited and $419,167 refunded to the Company in 2014, with an additional $30,076 of escrow deposits to be refunded in January 2015.

The remaining two real estate purchase agreements have closing dates of March 31, 2015.

During July, 2014, one of the real estate properties on which the Company opened escrow was foreclosed upon and the agreement was canceled and the escrow in the amount of $10,000 was reimbursed to the Company on July 28, 2014.

During the second quarter of 2014 one of the Company’s subsidiaries entered into a real estate purchase agreement in Washington state. The purchase transaction was closed during the third quarter for a total purchase price of $399,594 partially financed by a promissory note for $249,000.

A summary of open real estate purchase transactions as of December 31, 2014 is represented in the table below:

 

Property		Purchase price				Closing date				Net escrow balance				Date escrow opened				Additional rents/fees paid to extend closing date
1		$	820,000				03/31/2015				55,000				06/28/2014			$	9,808
2			1,300,000				03/30/2015				50,000				10/17/2014
3			—								265,400				07/21/2014				—
Escrow deposits to be refunded											30,076
Total		$	2,120,000							$	400,476							$	9,808

Line 3 represents the advance on July 21, 2014 of $75,000 to PVMI, a related party, as a partial payment for advances made by PVMI for escrow deposits used to secure properties for possible license acquisition in the San Diego market area and $190,400 from the assignment agreement.

On October 17, 2014, the Company entered into an assignment agreement with PVMI through which PVMI assigned all rights and titles for any opened escrow on real estate purchase agreements in San Diego in exchange for a related party notes payable from the Company. As of the signing date the agreement was valued at $190,400 which represented the value of escrow deposits paid by PVMI for eight different real estate agreements. Also on the date of the assignment agreement the Company paid $50,000 into an escrow account (line item 2 from the table above) for PVMI. The escrow was related to one of the eight real estate purchase agreements that were part of the assignment.

Board of Directors and Officers

On October 13, 2014, Mr. Vincent Mehdizadeh resigned as an officer of the Company. Mr. Mehdizadeh continued to serve as a consultant to the Company. In his new role, Mr. Mehdizadeh provided consulting services under the title of Founder and Senior Advisor. In connection therewith, on October 13, 2014, the Company entered into a consulting agreement with Mr. Mehdizadeh, pursuant to which the Company agreed to pay Mr. Mehdizadeh a monthly fee of $25,000 for consulting services to be performed by Mr. Mehdizadeh. The monthly consulting fee was reduced to $12,500 per month if Mr. Mehdizadeh is engaged in trading any of the Company’s securities at any time within the preceding 30 day period. The consulting agreement had a two-year term., and a total of $12,375 was paid to Mr. Mehdizadeh under this agreement. Mr. Mehdizadeh’s consulting agreement was terminated on December 8, 2014.

On October 16, 2014, Thomas Iwanski resigned as Chief Financial Officer, and C. Douglas (“Doug”) Mitchell was elected as Chief Financial Officer of the Company and Corporate Secretary.

 

F-30

---

Table of Contents

Mr. Iwanski agreed to serve as a consultant to the Company for a transition period. The Company agreed to pay Mr. Iwanski $10,000 for services provided during the month of October 2014 and $200 per hour for consulting services rendered after October 31, 2014. The Company also agreed to issue Mr. Iwanski 100,000 Restricted Stock Units (“RSU’s”) for his service to the Company.

In connection with Mr. Doug Mitchell’s election as Chief Financial Officer, on October 16, 2014, the Company entered into an employment agreement with Mr. Mitchell (the “Employment Agreement”). Pursuant to the Employment Agreement, the Company agreed to engage Mr. Mitchell, and Mr. Mitchell agreed to serve as the Company’s Chief Financial Officer, for a two-year term, which term will automatically be extended for successive additional one-year terms, unless either party provides written notice to the other 90 days prior to the expiration of the initial term or any successive term, that the Employment Agreement will not be renewed. The Company agreed to pay Mr. Mitchell a salary of $190,000 per year and to pay Mr. Mitchell $2,500 per month for living expenses in the West Hollywood, California area. Mr. Mitchell will also be entitled to an annual bonus of up to 35% of his salary, payable of up to 50% in cash and the balance payable in equity of the Company, subject to performance criteria and objectives to be established by mutual agreement of the CEO of the Company and Mr. Mitchell within 90 days of the effective date of the Employment Agreement, and thereafter from time to time by the CEO in consultation with Mr. Mitchell. Mr. Mitchell will also be entitled to an award of restricted stock units, to be issued within 90 days of the effective date of the Employment Agreement, under the Company’s Equity Incentive Plan, in the amount of 7,500 shares of common stock each calendar quarter Mr. Mitchell serves as Chief Financial Officer of the Company.

The Company may terminate the Employment Agreement with or without Cause (as defined in the Employment Agreement) upon written notice to Mr. Mitchell. In the event the Company terminates the Employment Agreement without Cause, Mr. Mitchell terminates the Employment Agreement with Good Reason (as defined in the Employment Agreement), or the Employment Agreement is not renewed as a result of notice to Mr. Mitchell provided 90 days prior to expiration of the initial or a renewal term, Mr. Mitchell will be entitled to payment of one-half his annual salary. Termination by the Company within 365 days of a Change of Control (as defined in the Employment Agreement) in the absence of Cause will conclusively be deemed a termination by the Company without Cause.

On October 22, 2014, Jennifer S. Love was elected to the board of directors of the Company. Ms. Love was also elected to serve as Chairperson of the Audit Committee. Jennifer Love was granted 19,452 RSU’s for 2014. Her contract calls for grants of 100,000 RSU’s for each succeeding year of service beginning on April 1, 2015.

Contingencies – SEC investigation

In October 2014 the Board of Directors of the Company appointed a special board committee (the “Special Committee”) to investigate a federal grand jury subpoena pertaining to the Company’s financial reporting which was served upon the Company’s then independent public accounting firm, as well as certain alleged wrongdoing raised by a former employee of the Company. Thereafter the Company was served with two subpoenas from the Securities and Exchange Commission in early November 2014. In connection with its investigation of these matters, the Special Committee in conjunction with the Audit Committee initiated an internal review by management and by an outside professional advisor of certain prior period financial reporting of the Company. As a result of this review, the Company determined there were errors in properly recording the revenue on certain customer contracts, capital contributions from related parties and improper capitalization of inventory costs. As a result, the Company restated the Company’s consolidated financial statements for the years ended December 31, 2012 and 2013 reported in the Company’s General Form of Registration of Securities on Form 10/A and the condensed consolidated financial statements as of and for the quarterly periods ended March 31, June 30, and September 30, 2014 and 2013.

The SEC is trying to determine whether there have been any violations of the Federal Securities Laws. It said further that the fact of the investigation does not mean that it has concluded that the Company or anyone else has broken the law or that it has a negative opinion of any person, entity or security. The Company is cooperating with the SEC in the investigation.

 

F-31

---

Table of Contents

Registration Statement

The registration rights agreement entered into in connection with the July and September 2014 purchase agreements required the Company to have a Form S-1 declared effective on or before November 18, 2014. Due to the restatement discussed above, the registration statement has been delayed. As a result of the withdraw of the Form S-1, in January 2015 the Company agreed with the lenders to adjust the conversion rate for the amortization payments and reduced the volume weighted average price for 20 days prior to the issuance to 51%. See Note 20 Subsequent Events for purchase agreement modifications finalized in January 2015.

Litigation

On May 22, 2013, Medbox initiated litigation in the United States District Court in the District of Arizona against three shareholders of MedVend Holdings LLC (“Medvend”) in connection with a contemplated transaction pursuant to which Medbox entered into for the purchase of an approximate 50% ownership stake in MedVend for $4,100,000. The Company paid an advance of $300,000 upon execution of the contract, and another $300,000 was disbursed as an additional investment to MedVend. The lawsuit alleges fraud and related claims arising out of the contemplated transaction during the quarter ended March 31, 2013. The litigation is pending and Medbox has sought cancellation of the agreement due to a fraudulent sale of the stock because the selling shareholders lacked power or authority to sell their ownership stake in MedVend, and their actions were a breach of representations made by them in the agreement. On November 19, 2013 the litigation was transferred to United States District Court for the Eastern District of Michigan. MedVend recently joined the suit pursuant to a consolidation order executed by a new judge assigned to the matter. In the litigation, the selling shareholder defendants seek alternatively to have the transaction performed, or to have it unwound and seek damages. Medbox has denied liability with respect to any and all such counterclaims. A new litigation schedule was recently issued setting trial for September 2015. On June 5, 2014, the Company entered into a purchase and sale agreement (the “Medvend PSA”) with PVM International, Inc. (“PVMI”) concerning this matter. Pursuant to the Medvend PSA, the Company assigned to PVMI the Company’s rights and claims attributable to or controlled by the Company against those three certain selling stockholders of Medvend, known as Kaplan, Tartaglia and Kovan, (the “Medvend Rights and Claims”) in exchange for the return by PVMI to the Company of 30,000 shares of the Company’s common stock. PVMI is owned by Vincent Mehdizadeh, the Company’s largest stockholder. The Company will have the right, under the Medvend PSA, to purchase from PVMI, at any time, the Medvend Rights and Claims, for the consideration provided by PVMI, plus the sum of any of PVMI’s reasonable expenditures incurred in pursuit of the Medvend Rights and Claims. The Court has not yet ruled on the substitution of PVMI as plaintiff in this matter. If necessary, the Company plans to vigorously defend against this matter. The case is in the discovery stage, and, at this time, the Company cannot determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can they reasonably estimate a range of potential loss, should the outcome be unfavorable.

In January 2015, three separate class action suits were been filed against the Company, certain past and present members of management, and the Company’s Board of Directors. These suits allege that the Company violated federal securities laws by allegedly making materially false and misleading statements regarding the Company’s financial results. The Company has only been served with a complaint on one of these cases, Crystal v. Medbox, Inc., Mehdizadeh, Bedrick, Iwanski, Marasala, and Mitchell. On February 12, 2015, the Court issued an Order Extending Time to Respond to Complaint until such time “any related actions are consolidated, a lead plaintiff and lead counsel are appointed by the Court, the lead plaintiff serves an operative complaint,” and certain other events. The Company intends to vigorously defend itself against these suits. Due to the early stages of the suits, the Company is unable to determine whether the likelihood of an unfavorable outcome of these suits is probable or remote, nor can it reasonably estimate a range of potential loss, including coverage by the Company’s insurance carrier, should the outcome be unfavorable.

On February 20, 2015, a derivative claim was filed, entitled Glitner v. Medbox, wherein the Company was named as both a nominal plaintiff and a defendant and all members of the Company’s Board of Directors were

 

F-32

---

Table of Contents

named as individual defendants. The lawsuit seeks damages for breach of fiduciary duties and abuse of control. The Company intends to vigorously defend itself against these suits. Due to the early stages of the suits, the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.

The Company has accrued an additional $500,000 in legal fees to represent amounts they are expecting to pay in excess of the defense costs paid by their insurance Company.

The Company also is the plaintiff in a legal action with a customer to collect past due balances in the amount of approximately $550,000 from the customer. The customer filed a cross complaint for breach of contract and breach of implied covenant of good faith and fair dealing in which the customer claims damages of not less than $500,000. The Company does not believe the cross complaint is meritorious and intends to continue to pursue the amounts due from the customer, and to vigorously defend itself against the claim. At this time, the Company is unable to determine whether the likelihood of an unfavorable outcome of the dispute is probable or remote, nor can it reasonably estimate a range of potential loss, should the outcome be unfavorable.

NOTE 20 – SUBSEQUENT EVENTS

Litigation

On or about January 9, 2015, PVM International, Inc., Vincent Chase, Inc., and Vincent Mehdizadeh, in his individual capacity, (collectively the “VM Parties”) jointly executed that certain “Action by Written Consent of the Stockholders of Medbox, Inc.” (the “Written Consent”) seeking to appoint four successor directors the Company’s board of directors (the “Board”) as of January 29, 2015.

On January 16, 2015, the Company filed a complaint in Los Angeles Superior Court disputing the legal effectiveness of the Written Consent (the “Complaint”).

On January 21, 2015, the Company, P. Vincent Mehdizadeh, PVM International, Inc., (“PVM”), and Vincent Chase, Incorporated, (“VC”) entered into an agreement pursuant to which (1) the VM Parties acknowledged that the Written Consent was cancelled and withdrawn, (2) the parties agreed to enter into a Voting Agreement to vote in favor of and to not remove directors Ned L. Siegel (“Siegel”), Mitch Lowe (“Lowe”), Jennifer Love (“Love”) and Guy Marsala (“Marsala”) for a period of 12 months (the “Voting Agreement”), (3) the Company would dismiss the Complaint with prejudice, (4) the Board would meet with Mr. Mehdizadeh on specified dates during the term of the agreement to discuss and to hear matters of interest or concern of Mr. Mehdizadeh, as a stockholder of the Company (the “Agreement”). Each of the directors of the Company are also parties to the Voting Agreement.

Pursuant to the terms of the Agreement, the VM Parties may on or before January 25, 2015, present a term sheet to the Company from an accredited investor to invest in not less than $1,000,000 in restricted common stock of the Company on terms as reasonably agreed to by the Board (the “Private Placement”). In addition, either as part of the closing of the Private Placement or otherwise at the request of Mr. Mehdizadeh, Mr. Mehdizadeh shall have the right to appoint a person nominated by Mr. Mehdizadeh with industry experience and reasonably acceptable to the Board as the fifth director of the Company.

Amendment and Modification of the July 2014 Financing

On July 21, 2014, Medbox, Inc. (the “Company”) entered into a securities purchase agreement (the “Purchase Agreement”) with accredited investors (the “Investors”) pursuant to which the Company agreed to sell, and the Investors agreed to purchase, convertible debentures (the “Debentures”) in the aggregate principal amount of $3,000,000, in three tranches, each in the amount of $1,000,000. The initial closing under the Purchase Agreement, for Debentures in the aggregate principal amount of $1,000,000 occurred on July 21, 2014. See the

 

F-33

---

Table of Contents

Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on July 25, 2014. The Investors subscribed for an additional $1,000,000 on August 25, 2014, an additional $500,000 on September 24, 2014, and an additional $250,000 on November 24, 2014 (collectively, with the July 21 Debenture, the “Original Debentures”).

On January 30, 2015, the Company and the Investors entered into an Amendment, Modification and Supplement to the Purchase Agreement (the “Purchase Agreement Amendment”) pursuant to which the Investors will purchase an additional $1,800,000 in seven Modified Closings: (1) $200,000 was funded at the Closing of the Purchase Agreement Amendment; (2) $100,000 will be funded within thirty (30) days of the Closing; (3) $100,000 will be funded within two days following the filing of a registration statement with the SEC to register the shares underlying the Debentures (the “Registration Statement”) and of the Company having filed with the SEC a restatement of the Company’s consolidated financial statements as described in the Company’s Current Report on Form 8-K filed with the SEC on December 22, 2014; (4) $100,000 will be funded within two days of receipt of the first comment letter from the SEC with regard to the Registration Statement; (5) $500,000 will be funded within two days of the date that the Registration Statement is declared effective by the SEC; (6) $500,000 will be funded within five days of the date that the Registration Statement is declared effective by the SEC; and (7) $100,000 will be funded within each of 90, 120, 150, and 180 days from the Closing of the Purchase Agreement Amendment. The Parties entered into a Modified Debenture Agreement for the $200,000 that was funded at the Closing and agreed to use the same form of Modified Debenture for each of the other foregoing Modified Closings (collectively, the “Modified Debentures”). The parties also entered into a warrant instrument granting the Investor the right to purchase shares of common stock of the Company equal to the principal amount of the applicable Modified Debenture divided by a price (the “Reference Price”) equal to 120% of the last reported closing price of the Common stock on the applicable closing date of the Modified Debenture, at an exercise price equal to the Reference Price, with a three year term. The Company also entered into a Debenture Amendment Agreement and an Amended and Restated Debenture for the amount outstanding under the original Debenture, (1) reflecting the terms set forth above, (2) providing for accrued and unpaid interest to be payable upon conversion or maturity rather than on specified payment dates and (3) amending the conversion price of the Debenture to be equal to the lower of $5.00 or 51% of the lowest volume weighted average price for the 20 consecutive trading days prior to the applicable conversion date. In connection with the Purchase Agreement Amendment, the Company is also required to open a new dispensary in Portland, Oregon during the first calendar quarter of 2015, as a condition to closing the fourth, fifth and sixth Modified Closings set forth above. With respect to each of the Modified Closings, the Company will pay a fee to the Investors in the amount equal to 5% of the Subscription Amount of the applicable Modified Closing. The Company must also file the Registration Statement by April 30, 2015 (as amended), and it must be declared effective by June 15, 2015 in order to avoid default and acceleration under the Amended and Restated Debenture.

On March 13, 2015 the Company and the Investors entered into a further amendment (“March 2015 Amendment”) to the July 21, 2014, 10% Convertible debentures, as amended January 30, 2015, whereby the fixed conversion rate was lowered to $1.83, and the anti-dilution reset provision on all previous debentures was triggered. In addition, the March 2015 Amendment modified the filling date requirement for the Registration Statement to be April 30, 2015.

Amendment and Modification of September 2014 Financing

On September 19, 2014, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an accredited investor (the “Investor”) pursuant to which the Company agreed to sell, and the Investor agreed to purchase, convertible debentures (the “Debentures”) in the aggregate principal amount of $2,500,000, in two tranches, the first in the amount of $1,000,000, and the second in the amount of $1,500,000. The initial closing under the Purchase Agreement, for a Debenture in the principal amount of $1,000,000, occurred on September 19, 2014. See the Company’s Current Report on Form 8-K filed with the SEC on September 24, 2014.

On January 28, 2015, the Company and the Investors entered into an Amendment, Modification and Supplement to the September 19, 2014 Purchase Agreement (Note (the “Purchase Agreement Amendment”) pursuant to

 

F-34

---

Table of Contents

which the remaining $1,500,000 will be funded in four Modified Closings: (1) $100,000 was funded at the Closing of the Purchase Agreement Amendment; (2) $100,000 will be funded within two days following the filing of a registration statement with the SEC to register the shares underlying the Debentures (the “Registration Statement”) and of the Company having filed with the SEC a restatement of the Company’s consolidated financial statements as described in the Company’s Current Report on Form 8-K filed with the SEC on December 22, 2014; (3) $100,000 will be funded within two days of receipt of the first comment letter from the SEC with regard to the Registration Statement; and (4) $1,200,000 will be funded within two days of the date that the Registration Statement is declared effective by the SEC. The Parties entered into a Modified Debenture Agreement for the $100,000 that was funded at the Closing and agreed to use the same form of Modified Debenture for each of the other foregoing Modified Closings (collectively, the “Modified Debentures”). The parties also entered into a warrant instrument granting the Investor the right to purchase shares of common stock of the Company equal to the principal amount of the applicable Modified Debenture divided by a price (the “Reference Price”) equal to 120% of the last reported closing price of the Common stock on the applicable closing date of the Modified Debenture, at an exercise price equal to the Reference Price, with a three year term. The Company also entered into a Debenture Amendment Agreement and an Amended and Restated Debenture for the amount outstanding under the original Debenture, (1) reflecting the terms set forth above, (2) providing for accrued and unpaid interest to be payable upon conversion or maturity rather than on specified payment dates and (3) amending the conversion price of the Debenture to be equal to the lower of $5.00 or 51% of the lowest volume weighted average price for the 20 consecutive trading days prior to the applicable conversion date. In connection with the Purchase Agreement Amendment, the Company is also required to open a new dispensary in Portland, Oregon during the first calendar quarter of 2015, as a condition to closing the second, third and fourth Modified Closings set forth above. With respect to each of the Modified Closings, the Company will pay a fee to the Investors in the amount equal to 5% of the Subscription Amount of the applicable Modified Closing. The Company must also file the Registration Statement by April 30, 2015 (as amended), and it must be declared effective by June 15, 2015 in order to avoid default and acceleration under the Amended and Restated Debenture.

In connection with the Closing of the Purchase Agreement Amendments for the July 2014 Financing and the September 2014 Financing, Mr. Ned L. Siegel, the chairman of the Company’s Board, entered into two separate subordinated convertible promissory notes with the Company on January 5, 2015 and January 30, 2015, respectively, each in the principal amount of $50,000 and having a three year term and an interest rate of 8% per annum (the “Siegel Notes”). In addition, Mr. Mitchell Lowe, a member of the Board, entered into one subordinated convertible promissory note with the Company on February 2, 2015 in the principal amount of $50,000 and having a three year term and an interest rate of 8% per annum (the “Lowe Note”).

Mr. Siegel and Mr. Lowe are entitled to receive a warrant, exercisable for a period of five (5) years from the date of grant, to purchase an amount of Company Common Stock equal to 50% of the principal sum under each of the Siegel Notes and the Lowe Note, respectively, at an exercise price equal to 200% of the applicable Conversion Price (the “Warrants”). The Conversion Price of the Warrants is either (i) 85% of the volume-weighted average price of the Common Stock for the thirty trading days prior to notice of Conversion or (ii) 85% of the per share price of the Company’s next common stock offering of not less than $2 million. Mr. Siegel and Mr. Lowe also received registration rights for the shares underlying the Siegel Notes and the Lowe Notes, respectively.

Notes payable

During February 2015 the Company entered into a modified loan agreement with the holder of a $249,000 note payable when they were unable to repay the note on its maturity date. Under the revised loan agreement, the Company agreed with the lender to an extension of the maturity date to July 1, 2015, and increased the interest rate to 18% plus a late charge in the amount of 5% of the principal balance of the note.

Shares issued

On January 15, 2015 the Company issued 206,480 shares to satisfy the conversion of remaining warrants related to the settlement with various previous owners of Vapor Systems International, LLC.

 

F-35

---

Table of Contents

Share purchase and transfer

On March 5, 2015 Mr. Mehdizadeh announced that an agreement has been executed with Lizada Capital LLC, an investor in the field of legal cannabis products, that would result in the transfer of the majority of Mr. Mehdizadeh’s shares of the Company to that firm. Under the agreement, Lizada would purchase 22,160,000 shares, representing 2,000,000 preferred shares and 12,160,000 common shares of Medbox for consideration of approximately $15 million. A total of $5 million of the funds have been designated for purchase of restricted shares of the Company’s common stock, directly from the Company, at $2 per share in the name of Mr. Mehdizadeh’s holding company, PVM International, Inc.

The transaction has 6 separate closings over the course of 18 months, with each of the first five closings being in the amount of $2 million dollars to be paid to Mehdizadeh’s holding company and Medbox equally, or $1 million to each party, to satisfy the $5 million dollar direct investment component of the transaction. The 6th and final closing has a performance contingency and is in the amount of $5 million dollars paid directly to Mehdizadeh’s holding company.

A representative of Lizada will join Medbox’s Board of Directors within the next 90 days, after the first closing is set to occur.

 

F-36

---

Table of Contents

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13.

Other Expenses of Issuance and Distribution.

We will pay all expenses in connection with the registration and sale of the common stock by the selling shareholders. The estimated expenses of issuance and distribution are set forth below.

 

SEC filing fee		$	250
Legal expenses		$	100,000	*
Accounting expenses		$	25,000	*
Miscellaneous		$	10,000	*
Total		$	135,250	*

 

*

Estimate

 

Item 14.

Indemnification of Directors and Officers.

Neither our Articles of Incorporation nor Bylaws prevent us from indemnifying our officers, directors and agents to the extent permitted under the Nevada Revised Statute (“NRS”). NRS Section 78.7502 provides that a corporation shall indemnify any director, officer, employee or agent of a corporation against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with any the defense to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to Section 78.7502(1) or 78.7502(2), or in defense of any claim, issue or matter therein.

NRS 78.7502(1) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person is liable pursuant to NRS 78.138 or did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, or that, with respect to any criminal action or proceeding, he or she had reasonable cause to believe that the conduct was unlawful.

NRS Section 78.7502(2) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in

---

Table of Contents

which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.

NRS Section 78.7502(3) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections 1 and 2, or in defense of any claim, issue or matter therein, the corporation shall indemnify him or her against expenses, including attorneys’ fees, actually and reasonably incurred by him or her in connection with the defense.

NRS Section 78.747(1) provides that except as otherwise provided by specific statute, no director or officer of a corporation is individually liable for a debt or liability of the corporation, unless the director or officer acts as the alter ego of the corporation. The court as a matter of law must determine the question of whether a director or officer acts as the alter ego of a corporation. (2) A stockholder, director or officer acts as the alter ego of a corporation if: (a) The corporation is influenced and governed by the stockholder, director or officer; (b) There is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other; and (c) Adherence to the corporate fiction of a separate entity would sanction fraud or promote a manifest injustice. (3) The question of whether a stockholder, director or officer acts as the alter ego of a corporation must be determined by the court as a matter of law.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.

 

Item 15.

Recent Sales of Unregistered Securities.

On November 11, 2011, we issued an aggregate of 6,000,000 shares of our Series A Preferred Stock to Vincent Mehdizadeh and Shannon Illingworth in exchange for services rendered to the Company. 3,000,000 shares were subsequently cancelled and returned to treasury.

On June 13, 2013, we issued to Moody’s Capital Solutions, Inc. warrants to purchase 15,000 shares of our common stock at an exercise price of $31 as consideration for their services as finder in identifying an accredited investor who participated in our private offering. The warrants expire June 13, 2018.

From January 1, 2012 through December 31, 2012, the Company sold 1,168,733 shares of common stock to accredited investors for an average of $1.15 per share, or aggregate proceeds of $1,359,050, including carry-over shares through January of 2013, deemed by management to be materially part of the prior period.

On April 1, 2013, we issued warrants to purchase 260,864 shares of our common stock to Vapor Systems International in exchange for the outstanding shares of Vaporfection International, Inc., which is now our wholly owned subsidiary, which were subsequently split up and reissued to the individual owners of Vapor Systems International, LLC. The warrants have an exercise price of $.001 per share, subject to adjustment for stock dividends, subdivisions or combinations of the common stock, reclassifications and similar transactions, and are exercisable beginning on March 21, 2014 until April 1, 2018.

During the year ending December 31, 2013 we issued 1,079,303 shares of common stock to various accredited investors and received aggregate gross proceeds in the amount of $5,772,094 (of which $4,486,541 was cash and $1,285,553 non-cash).

---

Table of Contents

From January to March 31, 2014 the Company issued 485,830 shares of common stock to accredited investors at a price of $5.00 per share raising proceeds of $2,429,150.

The Company issued 6,540 shares to its attorneys for legal fees on November 12, 2014 at a price of $6.59 per share and 46,352 shares to its attorneys for legal fees on December 31, 2014 at $5.11 per share. The Company also issued 252,812 shares to former shareholders of Vaporfection as part of a settlement agreement to resolve a litigation dispute.

The July 2014 Financing and the September 2014 Financing, including amendments and modifications are described in the prospectus to this registration statement under the heading “Recent Developments” and are incorporated into this Item 15 by reference.

In connection with the foregoing, we relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering.

 

Item 16.

Exhibits.

 

Exhibit Number		Description
a. Financial Statements
We have included the following financial statements and notes with this registration statement:
1. Audited Consolidated Financial Statements and Notes to the Consolidated Financial Statements as of December 31, 2014 and 2013 and for the years ended December 31, 2014, December 31, 2013 and December 31, 2012.
b. Exhibits
3.1		Articles of Incorporation filed with the Secretary of State on June 16, 1977 (1)
3.2		Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on September 18, 1998 (1)
3.3		Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on May 12, 2000 (1)
3.4		Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on November 16, 2006 (1)
3.5		Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on January 11, 2008 (1)
3.6		Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on August 4, 2009 (1)
3.7		Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on August 21, 2009 (1)
3.8		Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on February 14, 2011 (1)
3.9		Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on August 30, 2011 (1)
3.10		Certificate of Amendment of Articles of Incorporation filed with the Secretary of State on July 15, 2013 (2)
3.11		Amended and Restated Bylaws of Medbox, Inc. dated July 11, 2013 (2)

---

Table of Contents

Exhibit Number		Description
3.12		Amendment No. 1 to Restated Bylaws of Medbox, Inc. dated December 16, 2014 (10)
3.13		Amendment No. 2 to Amended and Restated Bylaws of Medbox Inc. dated 22, 2014 (11)
4.1		Form of Common Stock Certificate of Medbox, Inc. (2)
4.2		Form of Certificate for the Series A Preferred Stock (2)
5.1		Opinion of Fennemore Craig, P.C.*
10.1		Stock Purchase Agreement, effective as of December 31, 2011, by and among Medbox, Inc. and PVM International, Inc. (1)
10.2		Amended and Restated Stock Purchase Agreement effective as of February 26, 2013, by and between Medbox, Inc. and Bio-Tech Medical Software, Inc. (1)
10.3		Amended and Restated Technology License Agreement, dated as of February 26, 2013, by and between Bio-Tech Medical Software, Inc. and Medbox, Inc. (2)
10.4		Membership Interest Purchase Agreement dated as of March 12, 2013 between Medbox, Inc. and Darryl B. Kaplan, Claudio Tartaglia and Eric Kovan (MedVend Holdings) (2)
10.5		Securities Purchase Agreement dated as of March 22, 2013, by and among Medbox, Inc. and Vapor Systems International, LLC (1)
10.6		Amendment Securities Purchase Agreement by and Medbox, Inc. and Vapor Systems International, LLC, dated July 5, 2013 and effective as of March 22, 2013 (2)
10.7		Bio-Tech Purchase and Sale Agreement (4)
10.8		Med Vend Purchase and Sale Agreement (4)
10.9		Form of Securities Purchase Agreement (5)
10.10		Form of Registration Rights Agreement (6)
10.11		Form of Debenture (5)
10.12		Employment Agreement for Guy Marsala (7)
10.13		Consulting Agreement with Bruce Bedrick (8)
10.14		Securities Purchased Agreement (9)
10.15		Registration Rights Agreement (9)
10.16		Form of Debenture (9)
10.17		Amendment No. 1 to Securities Purchase Agreement (9)
10.18		Agreement, dated January 21, 2015, by and among the Company, P. Vincent Mehdizadeh and PVM International, Inc., and Invent Chase, Incorporated (12)
10.19		Voting Agreement, dated January 21, 2015, by and among the Company, P. Vincent Mehdizadeh, PVM International, Inc. and Vincent Chase, Incorporated (12)
10.20		Form of Purchase Agreement Amendment – July Financing (13)
10.21		Form of Amended and Restated Debenture – July Financing (13)
10.22		Form of Modified Debenture – July Financing (13)
10.23		Form of Debenture Agreement Amendment – July Financing (13)
10.24		Form of Warrant – July Financing (13)

---

Table of Contents

Exhibit Number		Description
10.25		Form of Purchase Agreement Amendment – September Financing (13)
10.26		Form of Amended and Restated Debenture – September Financing (13)
10.27		Form of Modified Debenture – September Financing (13)
10.28		Form of Debenture Agreement Amendment – September Financing (13)
10.29		Form of Warrant – September Financing (13)
10.30		Form of Subordinated Convertible Siegel and Lowe Note (13)
10.31		Medbox, Inc. 2014 Equity Incentive Plan (15)
10.32		Lowe Director Retention Agreement (18)+
10.33		Siegel Director Retention Agreement (19)+
10.34		Love Director Retention Agreement (16)+
10.35		Form of Amendment to Director Retention Agreement (21)+
10.36		C. Douglas Mitchell Employment Agreement, dated October 16, 2014 (17)+
10.37		Amendment to Marsala Employment Agreement, dated December 16, 2014 (21)+
10.38		Amendment to Mitchell Employment Agreement, dated December 16, 2014 (21)+
10.39		Exclusive Trademark and Patent License Agreement Between PVM International, Inc. and Medbox, Inc., dated as of April 1, 2013 (1)
10.40		Promissory Note issued to PVMI dated January 1, 2012 (2)
10.41		Agreement between Prescription Vending Machines, Inc. and AVT, Inc. dated February 10, 2010 (1)
10.42		Settlement Agreement by and between Medbox, Inc. and Bio-Tech Medical Software, Inc. dated as of February 27, 2014 (14)
10.43		Second Amended and Restated Technology License Agreement, dated February 27, 2014, between Bio-Tech Medical Software, Inc. and Medbox, Inc. (3)
10.44		Amendment to Purchase Agreement Amendment (22)
10.45		Written Waiver Agreement (22)
10.46		Debenture Amendment Agreement (22)
10.47		Amendment to Amendment Modification and Supplement to Securities Purchase Agreement, dated April 8, 2015 (23)
10.48		Second Amendment to Amendment Modification and Supplement to Securities Purchase Agreement, dated April 24, 2015 (23)
10.49		Second Written Waiver Agreement, dated April 24, 2015 (23)
16.1		Letter from Q Accountancy Corporation to the Security and Exchange Commission dated February 5, 2015 (20)
21.1		Subsidiaries of Medbox, Inc. (21)
23.1		Consent of Marcum LLP *
23.2		Consent of Q Accountancy Corporation *
23.3		Consent of Fennemore Craig, P.C. (contained in their opinion included under Exhibit 5.1) *

---

Table of Contents

Exhibit Number		Description

 

(1)	Incorporated by reference from the Registrant’s Registration Statement on Form 10 file no. 000-54928, originally filed on April 10, 2013.

(2)	Incorporated by reference from the Registrant’s Registration Statement on Form S-1, as amended, file no. 333-189993, originally filed on July 17, 2013.

(3)	Incorporated by reference from Amendment No. 1 to the Registrant’s Registration Statement on Form 10 file no. 000-54928, originally filed on May 13, 2014.

(4)	Incorporated by reference from Registrant’s Current Report on Form 8-K (File 000-54928), originally filed on June 10, 2014.

(5)	Incorporated by reference from Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on July 25, 2014.

(6)	Incorporated by reference from the Registrant’s Amendment to Current Report on Form 8-K/A (File No. 000-54928) filed with the Commission on July 29, 2014.

(7)	Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on July 29, 2014.

(8)	Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on August 22, 2014.

(9)	Incorporated by reference the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on September 24, 2014.

(10)	Incorporated by reference the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on December 22, 2014.

(11)	Incorporated by reference the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on December 30, 2014.

(12)	Incorporated by reference the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on January 26, 2015.

(13)	Incorporated by reference the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on February 2, 2015.

(14)	Incorporated by reference to the Amendment No. 1 to the Registrant’s Registration Statement on Form 10 File No. 000-54928, filed with the Commission on March 31, 2014.

(15)	Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 333-198441), filed with the Commission on August 28, 2014.

(16)	Incorporated by reference to Amendment No. 1 to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on March 25, 2015.

(17)	Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on October 21, 2015.

(18)	Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on March 25, 2015.

(19)	Incorporated by reference to Amendment No. 2 to the Registrant’s Current Report on Form 8-K (File No. 000-54928), filed with the Commission on March 25, 2015.

(20)	Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on February 6, 2015.

(21)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-54928) filed with the Commission on March 26, 2015.

---

Table of Contents

(22)	Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on April 3, 2015.

(23)	Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-54928) filed with the Commission on April 24, 2015.

+	Management compensatory arrangement

*	Filed herewith

 

Item 17.

Undertakings.

1. The undersigned registrant hereby undertakes to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933.

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

Provided, however, that paragraphs (B)(1)(i) and (B)(1)(ii) of this section do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the registration statement.

2. The undersigned registrant hereby undertakes that, for the purpose of determining any liability under the Securities Act of 1933, as amended, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

3. The undersigned registrant hereby undertakes to remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering.

4. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

5. The undersigned registrant hereby undertakes that, for the purposes of determining liability to any purchaser:

If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a

---

Table of Contents

registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

6. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the undersigned registrant according the foregoing provisions, or otherwise, the undersigned registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue.

---

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of West Hollywood, State of California, on May 11, 2015.

 

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.

 

/s/ Guy Marsala		May 11, 2015
Guy Marsala
Chief Executive Officer, President and Director (principal executive officer)
/s/ C. Douglas Mitchell		May 11, 2015
C. Douglas Mitchell
Chief Financial Officer (principal financial and accounting officer)
*		May 11, 2015
Jennifer Love
Director
*		May 11, 2015
J. Mitchell Lowe
Director
*		May 11, 2015
Ned L. Siegel
Director

 

*By:		C. Douglas Mitchell
		C. Douglas Mitchell
		Attorney-in-fact