Medbox, Inc. (MDBX) Q2 2014 Results Earnings Conference Call August 18, 2014 4:15 PM ET
Stephen Hart - Hayden IR
Guy Marsala - Chairman and CEO
Thomas Iwanski - Chief Financial Officer
Good day ladies and gentlemen and welcome to the Medbox Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will answer questions from our call participants that were emailed prior to today's call. (Operator Instructions). As a reminder, today's call is being recorded.
I would now like to turn the conference over to host Stephen Hart. Sir, you may begin.
Thank you very much and welcome to our conference call to discuss Medbox's financial results for second quarter 2014. On the call we have Guy Marsala Medbox's Chairman and Chief Executive Officer; and Thomas Iwanski Medbox's Chief Financial Officer. Guy will review the company's business operations, strategic initiatives and future plans, Thomas will review the company's financials and immediately thereafter we answer questions were emailed to us from our participants on the call.
I'd like to take quick moment to read the Safe Harbor statement. During the course of the conference call we will make certain forward-looking statements, all statements that address expectations, opinions or predictions about the future are forward-looking statements. Although they reflect our current expectations and are based on our best view of the industry and of our business, we see them today they are not guarantees of future performance. The statements involve a number of risks and assumptions and [then so] elements can change we ask that you interpret them in that way. We urge you to review Medbox's Form 10 and other SEC filings for discussion of the principle risks and uncertainties that affect our performance and other factors that could cause our actual results to differ materially.
With that, I'd like to turn the call over to Guy Marsala.
Good afternoon. As some of you may be aware I joined the team of Medbox about a month ago. I am excited to be here and I want to take a minute and tell you why I joined and what I see in the future for our company.
First, let me say that this shareholders conference call marks the beginning of an exciting new chapter for Medbox one in which we'll communicate on a regular basis with our shareholders. We'll be transparent and encourage two way communication with you. As shareholders, you deserve nothing less. We have a lot of exciting news to share with you, and let me start by explaining a little bit about who I am; why I am here and what we’re building at Medbox?
After graduating from West Point, I spent six years as an officer in the Army. I had great training, great mentors and a lot of responsibility at a young age. I left the service as a Captain and spent the next 17 years with Fortune 500 companies like American Hospital Supply Corporation and PepsiCo, working my way out to senior management roles in sales, operations and general management.
I also served at Aramark, a $10 billion global leader in food and facility managed services. There, I managed all aspects of a $200 million stand-alone manufacturer and distributor with 1 million customers. During my tenure, we increased revenue by 13%, cash flow by 67% and profits by 12%. For most of the last 20 years, I focused my passion on working with smaller companies that could derive real value through implementing the best practices and leadership skills I learned earlier in my career. In these assignments, I was able to help companies transform their business model, accelerate their performance and drive shareholder value. It’s become my brand and I love doing it.
In 2010, for example, I was recruited by Goldman Sachs to become a CEO of EZ Lube, LLC. A quick lube retailer in Goldman Sachs private equity portfolio company, to re-launch and revitalize the company and position it for sale. In less than two years and ahead of schedule we more than doubled the value of the company and executed a successful sale to a strategic buyer.
Now, let me turn to why I joined Medbox as a CEO. I am very selective about the companies I work with and I did extensive due diligence on Medbox prior to signing on. I’ll be the first to tell you, I have a great deal to learn about the Canada’s business, but that’s always been the case as I moved from medical supplies to soft drinks to music and software distribution to office products to uniforms and so on. What I saw in Medbox was a company with a strong entrepreneurial spirit, a vision of how to build the successful company in the cannabis industry and a mandate to build the leading technology, IP portfolio in the industry focused on security, compliance and best practices.
Medbox’s success over the past several years working with investors and entrepreneurs to secure licenses and dispensary locations has given us unique perspective as to how to best position our company for growth going forward. This includes evolving our business model and building what we believe is the best management team and Board of Directors in the industry. Our pipeline of business activities is at its highest level and significantly ahead of this time last year.
I am proud to join a great team at Medbox that’s working hard to achieve our goals. I am thrilled to work with our independent Board of Directors Mitch Lowe, the Co-Founder of Netflix and the former President of Redbox and Ned Siegel, a former United States Ambassador and successful businessman, two gentlemen that bring great vision and expertise to our company.
We’re in active discussions now to add a third independent director, I owe a debt of gratitude to our founders, Vince Mehdizadeh and Dr. Bruce Bedrick who’d recognized that the time was right to turn the leadership of the company over to an executive with a track record of leadership and operational success.
As we discussed our second quarter, you will see a company with a business model that is evolving to take advantage of our vision for the future and best position Medbox for profitable predictable growth. We’re actively transitioning from a company that provided a Medbox dispenser and other services for a one-time fee to a company that generates recurring, ongoing fees by partnering with dispensary and cultivation operators who are committed to operating with the highest standards of safety, security and compliance.
And while the Medbox dispenser itself continues to be an important part of our technology portfolio, it has become only a small part of the comprehensive services we offer. Through Medbox Management Services, we’re helping entrepreneurs, operators with their license application, lease, build-out of their space and operating procedures. These operators know that by partnering with Medbox they have the greatest opportunity to be successful in this complicated and often confusing industry.
Implementing this new business model will take some time to generate and profit, as you can see in the second quarter results. The process and timeline for obtaining a license varies by state, it takes time and there are often stops and starts along the way. We're making great progress and our leading key performance indicators of leads and license applications are growing significantly.
Whereby as of the close of business today, we'll have over 25 active licensed applications that we're managing, this represents a significant increase in our opportunity pipeline compared to one year ago. We anticipate that these opportunities and as these opportunities roll forward, they will lead to growth in our revenues and cash flow. As of this fall, 23 states have now approved the use of medical marijuana, compared to 18 states of near-two years ago. And this initiative is pending legislation around the ballot for consideration in 4 additional states this fall.
In addition to continuing to build our infrastructure in Medbox management services, we are also rolling out a new Medbox Secure Safe as well as a new portable vaporizer to our wholly-owned subsidiary Vaporfection. We'll require capital to fund our growth and we continue to receive and review funding opportunities. We'll continue to seek the best partners and terms for the company and its shareholders.
At this time, I'd like to turn the call over to another proven executive Tom Iwanski, our CFO for a mention of his background and a discussion of our second quarter and year-to-date financial results.
Thank you, Guy. Hello, I'd like to start off introduce myself. I'm Tom Iwanski, the CFO of Medbox and also certified public [company]. I previously worked as a financial consultant for the company since mid April 2014 for a company as the direction of the founders where internal transitions of establishing process, developing a system of financial reporting transparency and accuracy. During my career to start almost 10 years of odd experience with a big firm of KPMG I worked at over 65 companies across a wide breadth of industry. Importantly I've been executive for over 24 years of which 18 of those years were spent working with eight public companies. I've executed six exit transactions pulling over $400 million and recently acted as a interim CFO and took a small private company (inaudible) with my team members a list in NASDAQ and finally a very successful, important IPO that raised $27 million this year.
This large experience provides an ideal roadmap to direct Medbox’s advancement and its well stated path of also listing stock on NASDAQ. I like to take this opportunity to now represent some of the key takeaways in the second quarter Form 10-Q which was released on June 14, 2014. These numbers illustrate the previous comments made by Guy. There are more detailed explanations for each item in the Form 10-Q.
First, let me talk about revenue. Gross revenue for three month period ended June 30, 2014 and 2013 was $0.4 million and $1.6 million respectively, a decrease of $1.2 million. Gross revenue for the six months period ended June 30, 2014 and 2013 was $1.7 million and $2.8 million respectively, a decrease of $1.1 million.
Net revenue which includes the reductions for the sales valuation adjustment for refund provision affecting prior San Diego contracted clients due to the change in the local rules and regulations in the San Diego area was for the three months period ended June 30, 2014 and 2013 $0.2 million and $1.6 million respectively, a decrease of $1.4 million.
Net revenue for the six months period ended June 30, 2014 and 2013 was $0.5 million and $2.8 million respectively, a decrease of $2.3 million. The decrease in gross revenue reflected the fine tuning of revenue mile as was previously pointed out by Guy and as the company is transitioning away from contractually providing one off license application services for a fee to and being done with the project. To build a perpetual revenue mile, we develop the assets with our entrepreneurial partners in order to participate in a number of revenue streams associated with each project once the project begins operation; the decrease in the net revenue a reflective of the above change in net revenue mile plus a negative revenue impact of recording sales allowances at refund provision as north above a $0.3 million for the current three month period and $1.2 million during the first six months of 2014.
It's very important to note that the company has reported in a subsequent (inaudible) note the latest issue financial statement has been very active in lapping up property for [most full] license applications [in] Nevada, Washington, Oregon and the San Diego, California market area. In addition layering the third quarter, we expect to be acquiring multiple applications in Illinois and very good quarter we expect to begin first sales of our wafer production subsidiary new portable vaporizer called the miVape.
Now I like to talk a little bit about operating expenses. Operating expenses for the three months ended June 30, 2014 and 2013 were $1.1 million and $0.8 million respectively, an increase of $0.3 million. Operating expenses for the six-month periods ended June 30, 2014 and 2013 were $1.9 million and $1.8 million respectively, an increase of $0.1 million.
Here is a little further insight to these components of operating expenses. The three months comparison ended June 30, there were increases in sales and marketing of $0.1 million due to the increased sales and marketing activity which corresponded with the opening up of new license opportunities in San Diego, California, Nevada, Oregon, Washington and Illinois. The three months comparison ending June 30, there were increases in research and development expenses of $0.1 million related to cost of development software and hardware enhancements for Medbox and some development work on new portable vaporizer, the cost associated with our Medbox development in prior periods was largely incurred by an affiliate company. However the company will bear-off future costs of intellectual property development. It’s important to note that in July 2014, all the patents and patent applications related to Medbox System were assigned to the company from the affiliate thereby ending our previous licensing arrangement with the affiliate. For the three months comparisons ended June 30, there were also increases of general and administrative expenses of $0.1 million due to largely to increased costs of being public, bad debt expense and higher insurance costs which were only partially offset by reduced legal costs and fund raising consultant costs.
For the six months comparison ended June 30, sales and marketing expenses were flat overall. However the mix of expenses change with increases resulting from our Vaporfection subsidiary, increases in lobbying cost associated with opening of new markets, higher manufacturing costs and higher headcount costs which were almost fully offset by reductions in cost of lead generation expenses in affiliate time clinics, reduced public relationship expenses and reduced purchase advertising expenses.
For the six months comparison for research and development are pretty much as previously explained. Six months comparison for general and administrative expenses, we put a slight decrease for the current six months with the changes in the components of expense similar to the changes as previously explained for the prior three months. Net income and loss for the three month period ended June 30, 2014 and 2013 was a net loss of 1.5 million or $0.05 per share and net income of 0.5 million or $0.02 a share respectively, a decrease in net income of $2 million.
Net income and loss for the six months period ended June 30, 2014 and 2013 with a net loss of 2.7 million or $0.09 per share and net income of 0.1 million or $0.00 per share respectively, a decrease in net income of 2.8 million. Our balance sheet had cash of $1 million at June 30, 2014.
During the three months ended June 30, 2014, we sold our interest in our previously entered into Bio-Tech Medical Software transaction and our interest in our MedVend Holding transaction to the affiliate of our co-founder for shares of common stock was approximately $1.2 million. The 50,000 shares of common stocks received are currently reflected as treasury stock.
The were no sales of equity during the second three months of 2014, however for the first half of the year the company has received net proceeds from common stock sales of 2.1 million.
This concludes my reporting of financial results of the company, I would like to hand this back over to Guy.
Thank you, Tom. We’ve received a number of questions via email and I would like to go through those with you now.
First was why profits eroded so much compared to prior year
So as Tom just pointed out, the decrease in our revenue reflects the transitioning of our business model away from providing one-off license application services for a set fee and being finished with a project to one-off building and perpetual revenue model where we develop the asset with our entrepreneurial partners and participate in a number of revenue streams associated with each project once the project begins operations.
While this new model will take time to fully deploy, our pipeline of business in Nevada, Washington, Oregon and the San Diego, California markets is robust. In addition, this quarter, we expect to be filing multiple applications in Illinois. During the third quarter, we also expect to begin to have our first sales of our Vaporfection subsidiaries, new portable vaporizer called the miVape. So, we’re quite positive about our revenue growth as these initiatives roll forward.
Next question, what’s happening to the stock price? Our stock price like those of the other publically traded companies in our space has been very variable. I can’t comment on the activity of our stock other than to say we’re focused on executing our growth plan, which we believe will build shareholder value over time.
Next question, why did we change the business model? Our management team and Board felt that the time was now to take the expertise our company has developed and leverage it into a higher revenue growth, more profitable recurring revenue model. This will lead to greater predictability and visibility of our growth and should translate into a higher market value for our company.
Why did the company replace the CEO? This strategy has been in place for quite some time and has been communicated previously. We’re leaders in this emerging industry and we wanted to put in place people that were successful in other public companies and hope Medbox take the next step in our growth process. Adding Mitch Lowe, Ambassador Siegel to the Board, Tom Iwanski as CFO, and now me as Chairman and CEO gives us a governance and management team that is unmatched in our industry.
Next question, will the company run out of money; what is the company doing to raise capital; and where do they stand on this? Medbox continues to receive multiple offers for funding. There is great interest in our industry from investors, both small and institutional. This is our job to choose the group or groups that believes in our strategy and is a good partner for the company.
Next question, can you give any details about recent financing, like who invested; and is there a forward price to the amortization part, if you elect to pay it in stock? All the details of our recent financing can be found in our second quarter 10-Q and Form 8-K. I will say that we’re very happy with our investors and they are big believers in our company.
And the last question, does the company intend to list on NASDAQ? As Tom mentioned, it’s the company’s intention to pursue an up listing to NASDAQ as soon as practicable. I can’t give details on the time line, but it is an important part of our corporate strategy going forward.
In summary, let me just say you can tell we have a lot going on at Medbox. We are making good progress and we are committed to remaining the leader in this industry. We'll continue to attract top quality directors, employees and partners who share our vision and our value system.
I appreciate you participating in this call today and I look forward to reporting our progress to you in another call after the third quarter. In the meantime, if you ever have any questions or need additional information, please let us hear from you. You can contact Stephen Hart in our Investor Relations department; his contact information is on our website, www.medbox.com.
Thank you for your continued support of the company.
This concludes the Medbox second quarter shareholder call. Thank you very much.
Thank you. This concludes today’s program. You may disconnect at anytime and have a great day.
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