Medbox: Dawn of the Marijuana Vending Machine

By Bryan Gruley on May 09, 2013

http://www.businessweek.com/articles/2013-05-09/medbox-dawn-of-the-marijuana-vending-machine

“We are in the right place at the right time,” says Bruce Bedrick, a 44-year-old chiropractor, occasional pot user, and chief executive officer of Medbox (MDBX), maker of one of the world’s first marijuana vending machines. “We are planning to literally dominate the industry.”

The two investors Bedrick is addressing at the offices of NewGate Capital Partners in Winter Park, Fla., smile politely. NewGate partner Joe Alvarez Jr. says he likes Medbox’s product but has concerns about the company’s roller coaster stock, which zoomed from about $3 a share to $215 in November and has recently bounced between $20 and $30. Alvarez doesn’t use the phrase “pump-and-dump,” but it hangs there like a cloud of smoke. Either way, Bedrick takes umbrage. “This is all crazy talk,” he nearly shouts. “Wall Street plays games with our stock all the time. We’re a retailer’s wet dream. We’re the leading player in an industry that’s ready to explode.” Alvarez says he meant no offense.

Gregg Segal for Bloomberg Businessweek

Medbox’s core product resembles a Redbox DVD dispenser, only it’s black, refrigerated, and armored. Bedrick avoids the term vending machine because you can’t just saunter up to a Medbox, put in a few bills, and walk away with a stash of weed. The devices sit behind sales counters at state-licensed marijuana dispensaries. Biometric technology identifies the fingerprints of patients carrying state-issued medical marijuana cards. Clerks hand over plastic vials of cannabis leaf or, depending on the machine, cannabis-infused brownies, lozenges, or other “medibles.” A database tracks everything so that patients can’t buy more than their legal allotment, clerks can’t pilfer the merch, and states can collect taxes.

It’s a conventional business model—which is the point. Medbox’s $50,000 machines are intended to allay fears that pot means “druggies standing on street corners and grabbing little kids and stuffing drugs down their throats,” Bedrick says. As he sees it, for marijuana to become as mainstream as Miller Lite it needs to endure the same PowerPoints and conference calls as other businesses. “If you’re going to allow people to have marijuana, then let’s organize it, regulate it, tax it,” Bedrick says. “It has to work for everybody.” He adds, “I’m a Libra—always seeking balance.”

After the meeting, he steers his rented Chrysler into downtown Winter Park for lunch. He parks curbside on busy Park Avenue and starts to strip off his charcoal suit, blue dress shirt, and banana-yellow tie. Shoppers strolling past don’t seem to notice the hairy-chested man in boxer shorts jabbering on his phone. Bedrick doesn’t care. He slips into jeans and a T-shirt. “I’m very thankful for everything that has happened to me,” he says, “but I never thought I’d be wearing a suit.”

  
Gregg Segal for Bloomberg BusinessweekBedrick and his 34-year-old partner, Medbox inventor P. Vincent Mehdizadeh, are two of many entrepreneurs seeking to cash in on the prospect of legalized marijuana. Eighteen states and Washington, D.C., have legalized the drug for medicinal purposes, and others are moving in that direction. Washington State is writing rules for recreational use; Colorado just passed legislation regulating retail sales. With a Pew Research Center poll finding broad support for legalization, entrepreneurs hope the feds will rescind, or at least not enforce, its decades-old ban on marijuana. The market is potentially huge: IBISWorld estimates legal sales this year will be $1.7 billion, rising to $5 billion by 2018. Then there are the picks and shovels of this gold rush: vaporizers to inhale marijuana, hydroponic gear to grow it, software to tally taxes, and so on.

Some new shops look as bland as doctors’ offices, with clerks in white smocks and labeled plastic containers like the ones behind the counter at CVS (CVS). Leafly, a sort of Yelp (YELP) for dope, wants “no puns, no pictures of pot leaves or giant joints, none of the negative stereotypes,” says Brendan Kennedy, co-founder and CEO of Privateer Holdings, a private equity firm that owns Leafly. Only medibles are visible in Medboxes, not the weed; “You don’t see pharmacies with Vicodin on display,” Mehdizadeh says. He has no title at Medbox but helps Bedrick run the business as a consultant.

Bedrick, Mehdizadeh, and other aspiring marijuana moguls are urging states to levy taxes, set hefty registration fees, and establish detailed regulations such as mandates for fungus testing. Washington State estimates marijuana taxes and fees could generate $2 billion in revenue over five years. “What state … forget it, what country can afford not to give that a serious look?” says Tripp Keber, managing director of Dixie Elixirs & Edibles, which sells marijuana-infused sodas, candies, bath salts, and tinctures.

For now, the feds still loom. Banks shun marijuana businesses. Cities worried about crime are erecting legal obstacles. Most of the dozen or so public pot companies, including Cannabis Science and Medical Marijuana, remain pink sheet stocks, which don’t have to report financials as fully as companies on major exchanges. Medbox, based in West Hollywood, Calif., saw its market cap soar to more than $2 billion in November after the votes in Colorado and Washington. On Nov. 15 the stock closed at $205 a share; the next day it fell to $20 after Medbox said the price spike was “not based upon present business economics.” It blamed the increase on a tiny “float”—publicly available shares—that meant trades of a few thousand shares could push the price way up or down. “The key to these investments?” Jay Leno quipped on The Tonight Show. “Buy low, sell really, really high.”

The company posted 2012 net income of $327,853 on revenue of $3.5 million. It filed with the Securities and Exchange Commission to become a company that fully reports its financials, which Bedrick says will attract blue chip money. “We have the largest market cap because we have the most professional organization,” he says. “Whether it ends up that way—well, I’m doing my best.”


Dr. Bruce, as Bedrick calls himself, was a 10-year-old in suburban Philadelphia when his mother died of breast cancer. “I remember hearing her screaming at night for her own mother,” he says. If she’d had marijuana, he says, “her life would have been different. At least she would have had an appetite.”

Gregg Segal for Bloomberg Businessweek

At Ithaca College, Bedrick worked for a chiropractor who inspired him to help people like his mom. He graduated from a chiropractic school in Oregon and opened a wellness center catering to patients with chronic and degenerative conditions. He says he couldn’t stomach losing patients or taking money from the dying. He closed the center and in 2004 opened a clinic where he put athletes through soft-tissue workouts and advised them on diet and exercise. Again he had trouble collecting money, this time from health insurers. “I had to make a change,” he says. “I asked the muse, ‘Please, please send me somebody.’ ”

A patient told him about marijuana vending machines, which led him to Mehdizadeh, who managed law firms in Los Angeles and partied with the Hollywood set. Mehdizadeh opened two L.A. medical marijuana outlets in 2007, one a 24-hour store equipped with an early version of what would become the Medbox machine. It was neither clerk-operated nor behind-the-counter; customers swiped a card, matched a fingerprint, and—voilà!—product. It got him more press than he’d hoped for: In March 2008 federal agents confiscated the machine. The feds eventually returned it, but Mehdizadeh sold his pot shops. An Internal Revenue Service audit concluded he owed about $1 million in back taxes, interest, and penalties. In 2010 he filed for bankruptcy. “I wanted a fresh start,” he says.

By then, he’d won a patent for a vending machine that would confirm a person could legally purchase pot. In Arizona, voters were about to legalize medical marijuana. Bedrick, who lives in Scottsdale, approached Mehdizadeh. They hit it off and formed Medbox. When the company went public in 2011, Bedrick became its CEO. Mehdizadeh says his IRS problems are almost resolved. An IRS spokesman says the agency can’t comment on individuals. Mehdizadeh says he learned from his first foray into the pot industry: “Like in any business, you have to figure out where society is and craft your project accordingly. Society’s not ready for 24-hour machines.”


Bedrick makes that point repeatedly at a free seminar in a Boston hotel. Jimmy Cliff thrums from a sound system as about 90 would-be pot retailers, some in suits, some in jeans and sneakers, take seats. The reggae fades out. Bedrick fires up his PowerPoint. “Is everybody here excited?!” he shouts. “Yes,” comes the halting reply. Audience members are wary of being interviewed. One man asks, “You don’t work for a federal agency, do you?”

Photograph by Leonard Greco for Bloomberg BusinessweekMedbox CEO Bedrick pitching his dispensing system in Boston

For 90 minutes, Bedrick expounds on Massachusetts’s proposed medical marijuana regulations. If you want a license to sell reefer, you can’t have a felony in your past. You need a detailed business plan. You must show you have $500,000 in cash. State officials will “look up your tush with a magnifying glass,” he says.

Bouncing around the room, Bedrick looks a little like Jerry Seinfeld but sounds at times like Rodney Dangerfield. He points at one of two Medbox units sitting side by side at the front of the room and solemnly declares, “This is not a vending machine.” The unit next to it is set up to dispense medibles. Bedrick’s assistant hits a button to vend a fake sample but the little white bag gets stuck inside. “It’s rare that that happens,” he says, as the assistant fishes the bag out.

Bedrick finally comes around to the session’s real purpose: winning over clients for Medbox. For about $200,000, he says, customers can get all the Medbox equipment, plus help with writing business plans, finding locations, and acquiring licenses and permits. Clients don’t have to buy the boxes, but Bedrick argues that regulators will look more kindly on license applications relying on Medbox gear because it’s designed specifically to demonstrate compliance with state rules and help governments figure out how much they’re owed in taxes.

Medbox has sold more than 100 machines to shops owned by physicians, attorneys, and pharmacists, Bedrick says. It’s also helped businesses in Arizona win 20 licenses, and it’s working with clients in Connecticut, Massachusetts, and elsewhere. Other companies offer similar consulting services, and still others make vending machines for federally approved drugs. So Medbox has been acquiring and investing in companies that would help it sell its products to pharmacies, hospitals, prisons, and nursing homes. It recently bought a stake in a Michigan company that sells a dispenser for doctors’ offices. “We’ve always thought somebody’s going to buy us out or we’re going to have to be No. 1,” Bedrick says.


Bedrick is the only guy in a tie sitting around a big table at a meeting in Boca Raton, Fla. To his right is Herb Postma, a 67-year-old entrepreneur with reading glasses perched on his bald head. Postma once ran successful yacht dealerships in Fort Lauderdale. “I used to sell $7 million to $20 million yachts, on spec,” he says. Now he runs Vaporfection International, which Medbox is angling to buy.

Photograph by Gregg Segal for Bloomberg Businessweek

Postma says he smoked dope in college but raised his kids as an “anti-pot-smoking father.” He retired in 2001, got bored with golf, and was looking for new opportunities when his 29-year-old son Jonathan gingerly broached the idea of marijuana. Soon Dad was all in.

Postma holds up a boxy white device that resembles an oversize iPod. The viVape 2 vaporizes marijuana so it can be inhaled as warm, odorless air instead of smoke. Postma tells Bedrick that the $399 device is perfect for cancer sufferers who’d benefit from marijuana but have respiratory or digestive problems that keep them from smoking or ingesting it. He demonstrates how to inhale from a hose attached to a hole in one end of the vaporizer. Then he inflates a clear vinyl bag that can supply vapor to patients who can’t easily draw air on their own. “We’re the new demographic for alternative medicine,” he says. Only 1 percent of marijuana users use a vaporizer, he tells Bedrick, and every additional percentage point could be worth $500 million.

As with bongs, vaporizers don’t run afoul of federal law as long as they’re not explicitly marketed for marijuana. Fine print on Vaporfection’s website says its products are “not intended for medical purposes or illegal use.” Postma tells Bedrick the pinch of marijuana used in a single viVape 2 dose “represents 25 percent to 30 percent of the material in a typical joint. But it gets the same effect of a full joint, so you’re saving on your material costs as well.” His son chimes in, saying the device can get people “where they want to be” in 30 seconds or less. His dad pulls out a prototype of a pocket-size model called a miVape. “This is my martini,” he says, grinning.

“I’m lovestruck,” Bedrick says. But he has questions: Is Vaporfection locked into its distribution contracts? Who’s pitching vaporizers to assisted-living facilities? Is someone analyzing customer demographics? One of Postma’s staffers says 1,000 customers responded to an online survey. “Awesome,” Bedrick says. “That speaks to a tech-savvy user, not your average stoner.” He leaves Postma with Medbox’s acquisitions chief to close the deal.

The next day, Bedrick is looking forward to a workout and an hour or two at the beach. But the Vaporfection negotiations hit snags, not over millions of dollars but tens of thousands. Bedrick decides he has to be there. He climbs into yet another suit and tie. “Bummer,” he says. “Gotta go to work.”