Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 1 - Nature of operations
Corporate Structure Overview Since 1985
Mentor Capital, Inc. (Mentor or the Company), which reincorporated under the laws of the State of Delaware in late 2015, was founded as an investment partnership in Silicon Valley, California by the current CEO in 1985 and was originally incorporated under the laws of the State of California on July 29, 1994. On September 12, 1996, the Companys offering statement was qualified pursuant to Regulation A of the Securities Act, and the Company began to trade its shares publicly. On August 21, 1998, the Company filed for voluntary reorganization and, on January 11, 2000, the Company emerged from Chapter 11. The Company relocated to San Diego, California and contracted to provide financial assistance and investment into small businesses. On May 22, 2015, a corporation, named Mentor Capital, Inc. (Mentor Delaware) was incorporated under the laws of the State of Delaware. On June 30, 2015, a vote of the holders of a majority of outstanding shares entitled to vote approved an Agreement and Plan of Merger providing for the merger of Mentor with Mentor Delaware and in which Mentor Delaware was the surviving entity. The merger was approved by the California and Delaware Secretaries of State, and became effective September 24, 2015, thereby establishing Mentor as a Delaware corporation.
Current Business (2008 - 2016)
Since the August 2008, name change back to Mentor Capital, Inc., the Companys common stock has traded publicly under the trading symbol OTCQB: MNTR.
In 2009, the Company began focusing its investing activities in leading edge cancer companies. In 2012, in response to government limitations on reimbursement for highly technical and expensive cancer treatments and a resulting business decline in the cancer development sector, the Company decided to exit that space. In the summer of 2013 the Company was asked to consider investing in a medical marijuana related project with a cancer focus. On August 29, 2013, the Company made a decision to divest of its cancer assets and focus future investments in the cannabis and medical marijuana sector.
Mentor has a 51% interest in Waste Consolidators, Inc. (WCI). WCI was incorporated in Colorado in 1999 and operates in Arizona and Texas. It is a legacy investment which was acquired prior to the Companys current focus on the cannabis sector and is included in the consolidated financial statements presented.
On February 18, 2014, the Company signed an agreement to purchase a 51% interest in MicroCannaBiz, LLC (MCB), for $200,000, see Note 11. MCB is a Limited Liability Company organized in Florida in January 2014 which began operations in June 2014. MCB provides cannabis and marijuana related private companies, investors and microcap issuers with information resources including client company specific publications, directories, and continuing education courses. On April 27, 2015, Mentor converted its equity contribution of $74,000 to a ten year note receivable from MCB and MCBs remaining member as provided in the funding agreement, see Note 11. The Company was not successful in collecting on the note receivable and after consultation with collection attorneys, the note was impaired in its entirety in November 2015.
On February 28, 2014, the Company entered into an agreement to purchase 60% of the outstanding shares of Bhang Corporation, formerly known as Bhang Chocolate Company, Inc. (Bhang), which was ultimately rescinded. Following arbitration, on December 29, 2016, Mentor obtained a judgment against Bhang in the United States District Court for the Northern District of California. The judgment is comprised of $1,500,000 invested by Mentor into Bhang plus pre-judgment interest in the amount of $421,534.62. The judgment also accrues post-judgment interests at the rate of 10% from December 29, 2016 until such time as the judgment is paid in full. Amounts paid to Bhang is reported as Receivable from Bhang Chocolate Company in the consolidated balance sheets at December 31, 2016 and 2015. Interest receivable is fully reserved at December 31, 2016 and 2015 pending the outcome of the Companys collection process.
On April 20, 2015, the Company acquired 100% of a Georgia sole proprietorship, dba Investor Webcast (CAST) valued at $469,611 in exchange for 4,696 to-be-created Series B convertible preferred shares of Mentor. On May 7, 2015, Mentor formed
F-9
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 1 - Nature of operations (continued)
a Delaware limited liability company subsidiary, Investor Webcast, LLC, to hold the assets of CAST. CAST provides cannabis related private companies, investors and microcap issuers with investor information through webcasts, conferences, email and an evolving mix of media products, investment publications, industry financial research, and by other means. After one year, the to-be-created Series B convertible preferred shares could be converted, in steps or in whole, into shares of Mentor common stock. The to-be-created Series B convertible preferred shares were to convert to shares of Mentors common stock based on the conversion formula applied to operating results for the preceding four calendar quarters, as defined in the Purchase Agreement (as defined below). Due to low revenue and a net loss experienced by CAST in 2015, as well as revised cash projections for the future 5 years, the fair value of the convertible security liability at December 31, 2015 was $0.
On March 1, 2016, the Company entered into a Mutual Termination Agreement and General Release in which the certain Investor Webcast Mentor Capital Cannabis Owners Public Liquidity Agreement effective April 20, 2015 (the Purchase Agreement) and the Convertible Security Agreement between Mentor and the prior owner of CAST were cancelled and terminated, resulting in a disposition of CAST assets and liabilities by the Company. Pursuant to Section 3 of the Purchase Agreement, the CAST owner was to receive Mentor shares according to Mentors conversion formula specified in the agreement. However, the CAST business did not evolve as quickly as CAST owners expected and the result of the conversion formula was a negative number less than zero at the time of the termination. Therefore, the parties by mutual consent dissolved their relationship. The CAST prior owner received assets valued at $7,408, assumed liabilities of $17,587 and received $500 in cash. Mentor forgave an intercompany note receivable from CAST of $23,225, direct intercompany charges of $10,284, and $17,043 of intercompany overhead receivable from CAST. Two prior employees were also paid $50 each.
On June 25, 2015, the Company formed Canyon Crest Holdings, LLC (CCH), a Delaware limited liability company and a wholly owned subsidiary of Mentor. CCH was formed to provide management services to the rapidly evolving cannabis sector. Services to be provided may include but are not limited to: 1) Branding, marketing, administrative and consulting services; 2) Compliance and legal services; and 3) accounting and financial services. There have been no operations in CCH during 2016. Operations of CCH are included in consolidated financial statements from the date of inception (June 25, 2015) through December 31, 2015.
On August 21, 2015, Mentor entered into an agreement with an individual known to CCH operating management by which the individual purchased to-be-created Mentor Series C convertible preferred shares for $120,000. After one year, the to-be-created Series C convertible preferred shares could have been converted, in steps or in whole, into Mentor common shares. At the time of the agreement, Mentor was awaiting state approval of its reincorporation under the laws of the State of Delaware and the Series C convertible preferred shares had not yet been created. Therefore, upon Mentors receipt of the invested amount, a convertible security was issued to the purchaser which could be converted to Mentor Series C convertible preferred shares once the preferred shares were created. Mentor loaned the $120,000 to CCH for investment into another entity, however, due to internal disagreement between the startup entitys managers, the planned startup operation has been discontinued. Due to the fact that the planned operation has been discontinued, the fair value of the convertible security liability is $0 at both December 31, 2016 and 2015. In March 2016 the Company designated the individual investor as holder of 120,000 of Mentors unexercised Series D warrants, exercisable at $1.60 plus the $0.10 warrant fee.
Mentor IP, LLC (MCIP)
On April 18, 2016, the Company formed Mentor IP, LLC (MCIP), a South Dakota limited liability company and wholly owned subsidiary of Mentor. MCIP was formed to hold the patent rights obtained on April 4, 2016 when Mentor Capital, Inc. entered into that certain "Larson - Mentor Capital, Inc. Patent and License Fee Facility with Agreement Provisions for an -- 80% / 20% Domestic Economic Interest -- 50% / 50% Foreign Economic Interest" with R. L. Larson and Larson Capital, LLC (MCIP Agreement). Pursuant to the MCIP Agreement, MCIP obtained rights to an international patent application for foreign THC and CBD cannabis vape pens under the provisions of the Patent Cooperation Treaty of 1970, as amended. On approval of the United States patent application, MCIP intends to seek exclusive licensing rights in the United States for THC and CBD cannabis vape pens for various THC and CBD percentage ranges and concentrations.
F-10
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 2 - Summary of significant accounting policies
Basis of presentation
The Companys consolidated financial statements include majority owned subsidiaries of 51% or more. The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. All material intercompany balances and transactions have been eliminated in consolidation.
Concentrations of cash
The Company maintains its cash and cash equivalents in bank deposit accounts which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts nor does the Company believe it is exposed to any significant credit risk on cash and cash equivalents.
Cash and cash equivalents
The Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. The Company had no short-term debt securities as of December 31, 2016 and 2015.
Accounts receivable
Customer accounts receivable are classified as current assets and are carried at original invoice amounts less an estimate for doubtful receivables based on a review of all outstanding amounts on a monthly basis. The estimate of allowance for doubtful accounts is based on the Company's bad debt experience, market conditions, collateral available, and aging of accounts receivable, among other factors. If the financial condition of the Company's customers deteriorates resulting in the customer's inability to pay the Company's receivables as they come due, additional allowances for doubtful accounts will be required. At December 31, 2016 and 2015, the Company has recorded an allowance in the amount of $33,837 and $15,310, respectively.
Other current receivables
CCH loaned the funds received from Mentor to Market Trend Analytics, LLC (MTA), in anticipation of investing in a cannabis related operation that was never consummated, see Note 22. CCH had recorded receivables for amounts advanced to two managing members of MTA which did not bear interest and had current maturities at December 31, 2015. The Company is uncertain whether it will be able to collect the receivables from the two managing members and fully impaired the receivables in the second quarter of 2016. The total other current receivable was $0 and $19,459 at December 31, 2016 and 2015, respectively.
Convertible notes receivable
The Company has a convertible note receivable from Electrum Capital Partners, LLC that is recorded at the principal face amount of $100,000 plus accrued interest of $6,874 and $7,772 at December 31, 2016 and 2015, respectively. The note matures March 12, 2022 and bore interest at 5% per annum from March 12, 2014 to September 12, 2015, at which time the interest increased to 10% annual interest. The note calls for monthly interest payments of $898 through March 12, 2017 after which monthly payments of principal and interest will be $2,290 until the note matures. The conversion price is the note balance plus any accrued interest at conversion date. The conversion percentage is (conversion price divided by (conversion price plus $1.9 million)).
F-11
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 2 - Summary of significant accounting policies (continued)
Convertible notes receivable (continued)
The Company has a convertible note receivable from NeuCourt, Inc., which it entered into on November 8, 2016, that is recorded at the principal face amount of $25,000 plus accrued interest of $181 at December 31, 2016. The note bears 5% interest and matures on November 8, 2018. No payments are required prior to maturity. Principal and unpaid interest may be converted into a blend of shares of a to-be-created series of Preferred Stock, and common stock, of NeuCourt (defined as Conversion Shares) (i) on closing of a future financing round of at least $750,000, (ii) on the election of NeuCourt on maturity of the Note, or (iii) an election of Mentor following NeuCourts election to prepay the Note. The Conversion Price for the Note is the lower of (i) 75% of the price paid in the Next Equity Financing, or the price obtained by dividing a $3,000,000 valuation cap by the fully diluted number of shares. The number of Conversion Shares issued on conversion shall be the quotient obtained by dividing the outstanding principal and unpaid accrued interest on a Note to be converted on the date of conversion by the Conversion Price (the Total Number of Shares), The Total Number of Shares shall consist of Preferred Stock and Common Stock as follows: (i) That number of shares of Preferred Stock obtained by dividing (a) the principal amount of each Note and all accrued and unpaid interest thereunder by (b) the price per share paid by other purchasers of Preferred Stock in the Next Equity Financing (such number of shares, the "Number of Preferred Stock") and (ii) that number of shares of Common Stock equal to the Total Number of Shares minus the Number of Preferred Stock. Using the valuation cap of $3,000,000, the Note would today convert into 128,583 Conversion Shares. In the event of a Corporate Transaction prior to repayment or conversion of the Note, the Company shall receive back two times its investment, plus all accrued unpaid interest. NeuCourt is a Delaware corporation that is developing a technology that is expected to be useful in the cannabis space.
Long term investments
The Companys investments in entities where it is a minority owner and does not have the ability to exercise significant influence are recorded at fair value if readily determinable. If the fair market value is not readily determinable, the investment is recorded under the cost-method. Under this method, the Companys share of the earnings or losses of such investee company is not included in the Companys financial statements. The Company reviews the carrying value of its long term investments for impairment each reporting period.
Investment in account receivable, net of discount
The Company invested $90,000 for an account receivable and promissory note in the amount of $117,000 on July 8, 2014 which was due on or before January 15, 2015. The note was paid and extinguished in March 2015. On April 10, 2015, the Company entered into an exchange agreement whereby the Company received an investment in account receivable with installment payments of $117,000 per year through 2026 for an aggregate of $1,287,000 in exchange for 757,059 shares of Mentor Common Stock obtained through exercise of Series D warrants at $1.60 per share.
The investments were recorded at face value with an offsetting discount at the time of purchase or exchange. The discount is amortized to interest income over the term of the notes.
Note receivable MicroCannaBiz and member
Mentor converted all amounts previously invested in MCB to a note receivable on April 27, 2015, as provided in the funding agreement with MCB. At December 31, 2016 and 2015, the note has been entirely impaired.
Property, equipment and machinery
Property, equipment and machinery are recorded at cost. Depreciation is computed on the straight-line and declining balance methods over the estimated useful lives of various classes of property ranging from 3 to 7 years.
Database and website costs at December 31, 2015 related to development of CASTs website and webcast subscriber base and was being amortized over 2 years upon launch of the website.
F-12
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 2 - Summary of significant accounting policies (continued)
Property, equipment and machinery (continued)
Expenditures for renewals and betterments are capitalized and maintenance and repairs are charged to expense. Upon retirement or sale, the cost of assets disposed and the accumulated depreciation is removed from the accounts. The resulting gain or loss is credited or charged to income.
Goodwill
Goodwill of $1,324,142 was derived from consolidating WCI effective January 1, 2014, see Note 18, and $102,040 of goodwill related to the 1999 acquisition of a 50% interest in WCI. In addition, Goodwill of $466,765 was recorded on the April 20, 2015 acquisition of CAST, see Note 19. The Company accounts for its Goodwill in accordance with FASB Accounting Standards Codification 350, Intangibles Goodwill and Other, which requires the Company to test goodwill for impairment annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, rather than amortize. Goodwill impairment tests consist of a comparison of each reporting units fair value with its carrying value. Impairment exists when the carrying amount of goodwill exceeds the implied fair value for each reporting unit. To estimate the fair value, management used valuation techniques which included the discounted value of estimated future cash flows. The evaluation of impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and are subject to change as future events and circumstances change. Actual results may differ from assumed and estimated amounts. Management determined that no impairment write-downs were required as of December 31, 2016. Due to the fact that CAST operating results were less than anticipated from the acquisition date, April 20, 2015, through December 31, 2015, we evaluated the CAST goodwill for impairment. Based on 2015 operating results and our revised projection of discounted cash flow we impaired the CAST goodwill in its entirety at December 31, 2015, see Note 19. On March 1, 2016, the Company entered into a Mutual Termination Agreement and General Release in which the certain Investor Webcast Mentor Capital Cannabis Owners Public Liquidity Agreement effective April 20, 2015 (the Purchase Agreement) and the Convertible Security Agreement between Mentor and the prior owner of CAST were cancelled and terminated, resulting in a spinoff of CAST assets and liabilities to the prior CAST owner.
Revenue recognition
The Company recognizes revenue in accordance with ASC 605 Revenue Recognition. The Company records revenue under each contract once persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collectability is reasonably assured. Service fees are generated by WCI for monthly services performed to reduce customers trash related costs. Service fees are invoiced and recognized as revenue in the month services are performed. Revenue from consulting agreements is recognized at the time the related services are provided as specified in the related consulting agreements. Webcast revenue was generated by CAST in providing web-based presentations and was recognized at the time presentations were completed.
Basic and diluted income (loss) per common share
Basic net income (loss) per common share (EPS) is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS adjusts basic net income (loss) per common share, computed using the treasury stock method, for the effects of potentially dilutive common shares, if the effect is not antidilutive. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock warrants. Diluted EPS excludes all dilutive potential shares if their effect is antidilutive. Outstanding warrants that had no effect on the computation of dilutive weighted average number of shares outstanding as their effect would be antidilutive were approximately 8,900,000 and 13,400,000 as of December 31, 2016 and 2015, respectively. There were 4,500 and 4,500 potentially dilutive shares outstanding at December 31, 2016 and 2015, respectively.
F-13
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 2 - Summary of significant accounting policies (continued)
Income taxes
We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. A valuation is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Generally accepted accounting principles provide accounting and disclosure guidance about positions taken by an organization in its tax returns that might be uncertain. Management considers the likelihood of changes by taxing authorities in its filed income tax returns and recognizes a liability for or discloses potential changes that management believes are more likely than not to occur upon examination by tax authorities.
Management has not identified any uncertain tax positions in filed income tax returns that require recognition or disclosure in the accompanying financial statements. The Companys income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in interest expense.
Advertising and promotion
The Company expenses advertising and promotion costs as incurred. Advertising and promotion costs were $17,534 and $56,097 for the years ended December 31, 2016 and 2015, respectively.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Although these estimates are based on managements best knowledge of current events and actions the Company may undertake in the future, actual results ultimately may differ from these estimates.
Fair value measurements
The Fair Value Measurements and Disclosure Topic defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
The Fair Value Measurements and Disclosure Topic establish a fair value hierarchy, which prioritizes the valuation inputs into three broad levels. These three general valuation techniques that may be used to measure fair value are as follows: Market approach (Level 1) which uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other sources. Cost approach (Level 2) which is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost); and the Income approach (Level 3) which uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (including present value techniques, and option-pricing models). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate.
The carrying amounts of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, customer deposits and other accrued liabilities approximate their fair value due to the short-term nature of these instruments.
The fair value of notes receivable is based on the net present value of calculated interest and principle payments. The carrying value approximates fair value as interest rates charged are comparable to market rates for similar notes.
F-14
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 2 - Summary of significant accounting policies (continued)
Fair value measurements (continued)
The fair value of long-term notes payable is based on the net present value of calculated interest and principle payments. The carrying value of long-term debt approximates fair value due to the fact that the interest rate on the debt is based on market rates.
Recent Accounting Standards
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Note 3 Prepaid expenses and other assets
Prepaid expenses and other assets consist of the following at December 31, 2016 and 2015:
|
|
|
|
|
|
|
2016
|
|
2015
|
Prepaid insurance
|
$
|
3,784
|
$
|
3,555
|
Other prepaid costs
|
|
39,079
|
|
17,565
|
|
$
|
42,863
|
$
|
21,120
|
Note 4 Bhang Corporation (formerly known as Bhang Chocolate Company, Inc.) and Judgment
On January 17, 2014, the Company transitioned out of its cancer related trading dormancy by announcing its first cannabis sector letter of intent amidst significantly increased share volume and price. The Company entered into an agreement with Bhang Chocolate Company, Inc., the predecessor in interest to Bhang Corporation (together Bhang), effective February 28, 2014. As part of that agreement, which was ultimately rescinded, Mentor delivered $1,500,000 to Bhang which Bhang refused to return following rescission of the agreement. Following arbitration of the dispute, on December 29, 2016, Mentor obtained a judgment in the amount of $1,921,534 against Bhang Corporation and its predecessor in interest, Bhang Chocolate Company, Inc., in the United States District Court for the Northern District of California. The judgment accrues interest at the rate of 10% from December 29, 2016 until such time as the judgment is satisfied. See Notes 20 and 23. Accrued interest receivable is fully reserved at December 31, 2016 and 2015 and the Company is analyzing its ability to collect the interest on this award and subsequent judgement. Mentor intends to vigorously pursue collection of the entire $1,500,000 plus all accrued interest. The receivable and accrued interest consists of the following at December 31, 2016 and 2015:
|
|
|
|
|
|
|
2016
|
|
2015
|
Receivable from Bhang Chocolate Company
|
$
|
1,500,000
|
$
|
1,500,000
|
Accrued interest
|
|
422,588
|
|
263,890
|
Total
|
|
1,922,588
|
|
1,763,890
|
Reserve pending collection efforts
|
|
(422,588)
|
|
(263,890)
|
Receivable from Bhang Chocolate Company
|
$
|
1,500,000
|
$
|
1,500,000
|
As part of the judgment Bhang owners, Scott Van Rixel and Richard Sellers, who together purchased 117,000 shares pursuant to the Bhang Agreement have the option to return all or part of those shares in exchange for payment of the original purchase price of $1.95 per share plus a pro-rata amount of $58,568 in interest for such returned shares. Mentor will account for the return of the shares as a capital transaction if and when the shares are remitted back to the Company.
F-15
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 5 Investment in account receivable
On July 8, 2014, the Company invested $90,000 in an account receivable with a face value of $117,000 which was supported by a promissory note maturing January 15, 2015. The note was paid and extinguished in March 2015.
On April 10, 2015, the Company entered into an exchange agreement whereby the Company received an investment in an account receivable with installment payments of $117,000 per year for 11 years totaling $1,287,000 in exchange for 757,059 shares of Mentor Common Stock obtained through exercise of Series D warrants at $1.60 per share. The Counterparty to the exchange agreement may elect to partially rescind the exchange at any time after June 1, 2017 and ending on the earlier of (i) December 1, 2017, and (ii) two weeks following the date on which the Counterparty receives notice from Mentor that Mentors warrant holders have been notified that they have approximately 30 days left to exercise Mentor warrants. The partial rescission election may be exercised for all or part of 313,820 of the Mentor shares exchanged for all or part of the installment payments due in or around January of each of 2018, 2019, 2020 and 2021. At this time management cannot determine the likelihood of a partial rescission. No adjustment has been made to the estimated present value or shares for this contingency.
The Company valued the transaction based on the market value of Company common shares exchanged in the transaction, resulting in a 17.87% discount from the face value of the account receivable. The discount is being amortized monthly to interest over the 11 year term of the agreement.
The April 10, 2015 investment in account receivable is supported by an exchange agreement and consisted of the following at December 31, 2016 and 2015:
|
|
|
|
|
|
|
2016
|
|
2015
|
Face value
|
$
|
1,053,000
|
$
|
1,287,000
|
Unamortized discount
|
|
(571,013)
|
|
(674,427)
|
Net balance
|
|
481,987
|
|
612,573
|
Current portion *
|
|
-
|
|
(92,542)
|
Long term portion
|
$
|
481,987
|
$
|
520,031
|
* The 2016 installment receivable was exchanged with a third party as payment for service on December 13, 2016 and therefore there is no current balance due at December 31, 2016.
For the years ended December 31, 2016 and 2015, $103,413 and $67,470 of discount amortization is included in interest income.
Note 6 - Property and equipment
Property and equipment is comprised of the following at December 31, 2016 and 2015:
|
|
|
|
|
|
|
2016
|
|
2015
|
Computers
|
$
|
22,251
|
$
|
21,813
|
Furniture and fixtures
|
|
23,043
|
|
21,139
|
Machinery and vehicles
|
|
169,740
|
|
189,335
|
Capitalized website costs
|
|
-
|
|
1,166
|
Capitalized database costs
|
|
-
|
|
3,000
|
|
|
215,034
|
|
236,453
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
(178,482)
|
|
(189,713)
|
|
|
|
|
|
Net Property and equipment
|
$
|
36,552
|
$
|
46,740
|
Depreciation and amortization expense was $25,762 and $35,355 for the years ended December 31, 2016 and 2015, respectively.
F-16
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 7 Convertible notes receivable
Convertible notes receivable consists of the following at December 31, 2016 and 2015:
|
|
|
|
|
|
|
2016
|
|
2015
|
March 12, 2014 Electrum Partners, LLC convertible note receivable including accrued interest of $6,874 and $7,772, respectively. The note bore interest at 5% per annum, compounded monthly for the period from March 12, 2014 to September 12, 2015, at which point the interest increased to 10% annual interest, compounded monthly until maturity or until it is converted to shares of equity in Electrum. There were no payments required under the note for the period from March 12, 2014 to October 12, 2015; from October 12, 2015 to March 12, 2017 interest only payments are required; and from March 12, 2017 through March 12, 2022 payments of principal and interest in the amount of $2,289.83 are required. Mentor has the option to convert the note plus any accrued interest or fees into shares of equity in Electrum at any time prior to its maturity. *
|
$
|
106,874
|
$
|
107,772
|
|
|
|
|
|
NeuCourt, Inc. convertible note receivable including accrued interest of $182 at December 31, 2016. The note bears interest at 5% per annum and matures November 8, 2018. Principal and accrued interest are due at maturity. Principal and unpaid interest may be converted into shares of a to-be-created series of Preferred Stock of NeuCourt (i) on closing of a future financing round of at least $750,000, (ii) on the election of NeuCourt on maturity of the Note, or (iii) on election of Mentor following NeuCourts election to prepay the Note. **
|
|
25,181
|
|
-
|
Total convertible notes receivable
|
|
132,055
|
|
107,772
|
Less current portion
|
|
(12,951)
|
|
-
|
|
|
|
|
|
Long term portion
|
$
|
119,104
|
$
|
107,772
|
* The conversion price is the Electrum Partners, LLC note balance plus any accrued interest at conversion date. The conversion percentage is (conversion price divided by (conversion price plus $1.9 million)).
** The Conversion Price for the Note is the lower of (i) 75% of the price paid in the Next Equity Financing, or the price obtained by dividing a $3,000,000 valuation cap by the fully diluted number of shares. The number of Conversion Shares issued on conversion shall be the quotient obtained by dividing the outstanding principal and unpaid accrued interest on a Note to be converted on the date of conversion by the Conversion Price (the Total Number of Shares), The Total Number of Shares shall consist of Preferred Stock and Common Stock as follows: (i) That number of shares of Preferred Stock obtained by dividing (a) the principal amount of each Note and all accrued and unpaid interest thereunder by (b) the price per share paid by other purchasers of Preferred Stock in the Next Equity Financing (such number of shares, the "Number of Preferred Stock") and (ii) that number of shares of Common Stock equal to the Total Number of Shares minus the Number of Preferred Stock. Using the valuation cap of $3,000,000, the Note would today convert into 128,583 Conversion Shares. In the event of a Corporate Transaction prior to repayment or conversion of the Note, the Company shall receive back two times its investment, plus all accrued unpaid interest.
F-17
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 8 Investments and fair value
We account for our financial assets in accordance with ASC 820,
Fair Value Measurement
. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors: Level 1 represents assets valued at quoted prices in active markets using identical assets; Level 2 represents assets valued using significant other observable inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other observable inputs; and, Level 3 represents assets valued using significant unobservable inputs.
Level 1, Level 2 and Level 3 Assets are listed as following:
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
|
Unadjusted
Quoted Market
Prices
|
|
Quoted Prices
for Identical or
Similar Assets in
Active Markets
|
|
Significant
Unobservable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
(Level 3)
|
|
|
Equity
Securities
|
|
Other
investment
|
|
Equity
Options
|
|
Equity Funding
Agreements
|
Balance at December 31, 2014
|
$
|
5,832
|
$
|
10,260
|
$
|
-
|
$
|
55,943
|
Total gains or losses
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets)
|
|
(11,442)
|
|
(10,260)
|
|
(49,834)
|
|
-
|
Purchases, issuances, sales, and settlements
|
|
|
|
|
|
|
|
|
Purchases
|
|
1,061
|
|
-
|
|
-
|
|
-
|
Issuances
|
|
50,063
|
|
-
|
|
49,834
|
|
-
|
Sales
|
|
(8,013)
|
|
-
|
|
-
|
|
-
|
Settlements
|
|
-
|
|
-
|
|
-
|
|
-
|
Balance at December 31, 2015
|
|
37,500
|
|
-
|
|
-
|
|
55,943
|
Total gains or losses
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets)
|
|
(8,831)
|
|
-
|
|
-
|
|
(20,000)
|
Purchases, issuances, sales, and settlements
|
|
|
|
|
|
|
|
|
Purchases
|
|
-
|
|
-
|
|
-
|
|
-
|
Issuances
|
|
-
|
|
-
|
|
-
|
|
50,000
|
Sales
|
|
(28,669)
|
|
-
|
|
-
|
|
-
|
Settlements
|
|
-
|
|
-
|
|
-
|
|
(30,000)
|
Balance at December 31, 2016
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
55,943
|
Note 9 - Common stock warrants
The Company's Plan of Reorganization, which was approved by the United States Bankruptcy Court for the Northern District of California on January 11, 2000, provided for the creditors and claimants to receive new warrants in settlement of their claims. The warrants expire May 11, 2038.
F-18
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 9 - Common stock warrants (continued)
Each warrant is callable by the Company if the share price exceeds the exercise price by the lesser of $1 or 100%. The warrant holders have a minimum of 30 calendar days during which to exercise their warrants once they are called. The Company may lower the exercise price of all or part of a warrant series at any time. Similarly, the Company could, but does not anticipate, reverse splitting the stock to raise the stock price above the warrant exercise price. The warrants are specifically not affected and do not split with the shares in the event of a reverse split. If the called warrants are not exercised, the Company has the right to designate the warrants to a new holder in return for a $0.10 per share redemption fee payable to the original warrant holders as discussed further in Note 10. All such changes in the exercise price of warrants were provided for by the court in the Plan of Reorganization in order to provide a mechanism for all debtors to receive value even if they could not or did not exercise their warrant. Therefore, management believes that the act of lowering the exercise price is not a change from the original warrant grants and the Company has not recorded an accounting impact as the result of such change in exercise prices.
All Series A and Series C warrants were exercised by December 31, 2014. Exercise prices in effect at January 1, 2015 through December 31, 2016 for Series B warrants were $0.11 and Series D warrants were $1.60.
In 2009, the Company entered into an Investment Banking agreement with Network One Securities, LLC and a related Strategic Advisory Agreement with Lenox Hill Partners, LP with regard to a potential merger with a cancer development company. In conjunction with those related agreements, the Company issued 689,159 Series H ($7) Warrants, with a 30 year life. The warrants are subject to cashless exercise based upon the ten day trailing closing bid price preceding the exercise as interpreted by the Company.
As of December 31, 2016 and 2015 the weighted average contractual life for all Mentor warrants was 21.5 and 22.4 years, respectively, and the weighted average outstanding warrant exercise price was $2.02 and $1.88 per share, respectively.
During the years ended December 31, 2016 and 2015, a total of 4,503,346 and 1,795,030 warrants were exercised, respectively. There were no warrants issued during the years ended December 31, 2016 and 2015. The intrinsic value of outstanding warrants at December 31, 2016 and 2015 was $4,275 and $720, respectively.
The following table summarizes Series B and Series D Common Stock warrants as of each period:
|
|
|
|
|
|
|
|
|
Series B
|
|
Series D
|
|
B, D Total
Warrants
|
Outstanding at December 31, 2014
|
|
4,500
|
|
14,504,766
|
|
14,509,266
|
Issued
|
|
-
|
|
-
|
|
-
|
Exercised
|
|
-
|
|
(1,795,030)
|
|
(1,795,030)
|
Outstanding at December 31, 2015
|
|
4,500
|
|
12,709,736
|
|
12,714,236
|
Issued
|
|
-
|
|
-
|
|
-
|
Exercised
|
|
-
|
|
(4,503,346)
|
|
(4,503,346)
|
Outstanding at December 31, 2016
|
|
4,500
|
|
8,206,390
|
|
8,210,890
|
Series E, F, G and H warrants were issued for investment banking and advisory services during 2009. Series E, F and G warrants were exercised in 2014.
F-19
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 9 - Common stock warrants (continued)
The following table summarizes H warrants as of each period:
|
|
|
|
|
Series H
$7.00 exercise price
|
Outstanding at December 31, 2014
|
|
689,159
|
Issued
|
|
-
|
Exercised
|
|
-
|
Outstanding at December 31, 2015
|
|
689,159
|
Issued
|
|
-
|
Exercised
|
|
-
|
Outstanding at December 31, 2016
|
|
689,159
|
On February 9, 2015, in accordance with Section 1145 of the United States Bankruptcy Court and the Companys Plan of Reorganization, the Company announced a minimum 30 day partial redemption of up to 1% (approximately 120,000) of the already outstanding Series D warrants to provide for the court specified redemption mechanism for warrants not exercised timely by the original holder or their estates. Company designees that applied during the 30 days paid 10 cents per warrant to redeem the warrant and then exercised the Series D warrant to purchase a share at the court specified formula of not more than one-half of the closing bid price on the day preceding the 30 day exercise period. In successive months, the 1% partial redemption authorization has been recalculated and repeated according to the court formula at an average exercise price of $0.32 thru December 31, 2016. In the Companys October 7, 2016 press release, Mentor stated that the 1% redemptions which were formerly priced on a calendar month schedule would subsequently be initiated and be priced on a random date schedule after the prior 1% redemption is completed to prevent potential third party manipulation of share prices at month-end. The periodic partial redemptions will continue to be recalculated and repeated until such unexercised warrants are exhausted or the partial redemption is otherwise truncated by the Company.
Note 10 - Warrant redemption liability
The Plan of Reorganization provides the right for the Company to call, and the Company or its designee to redeem warrants that are not exercised timely, as specified in the Plan, by transferring a $0.10 redemption fee per warrant to the former holders. Certain individuals desiring to become a Company designee to redeem warrants have deposited redemption fees with the Company that, when warrants are redeemed, will be forwarded to the former warrant holders at their last known address 30 days after the last warrant of a class is exercised, or earlier at the discretion of the Company. The Company has arranged for a service to process the redemption fees in offset to an equal amount of liability. In prior years the Series A and Series C redemption fees have been distributed through DTCC into holders brokerage accounts or directly to the holders and are no longer outstanding. Once the Series B and D warrants have been fully redeemed the fees for each of these warrant series will likewise be distributed. The President and CEO, Chet Billingsley has agreed to assume personal liability for paying the redemption fees and therefore warrant redemption fees received are retained by the Company for operating costs. Should Mr. Billingsley be incapacitated or otherwise become unable to pay the warrant redemption fees, the Company will remit the warrant liability to former holders from amounts due him which are sufficient to cover the redemption fee at December 31, 2016 and 2015.
F-20
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 11 - Stockholders equity
Common Stock
The Company was incorporated in California in 1994 and had a total of 400,000,000 shares of Common Stock, no par value, authorized at December 31, 2014. Effective September 24, 2015, Mentor was redomiciled as a Delaware corporation. Prior to the effective date of the merger between Mentor and Mentor Delaware, Mentor Delaware reduced the number of its authorized shares of Common Stock from 400,000,000 to 75,000,000, at $0.0001 par value. There was no change to the number of outstanding shares or warrants from redomiciling in Delaware. The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of the stockholders.
At the time Mentor was redomiciled as a Delaware corporation, the Common Stock was adjusted to $0.0001 per share par value and $7,769,655 of the Common Stock previously reported at no par value was reclassified to additional paid in capital. Additional paid in capital is referred to as surplus under the Delaware General Corporation Law.
On August 8, 2014, the Company announced that it was initiating the repurchase of approximately 2% of the Companys common shares outstanding at that time. As of December 31, 2016 and 2015, 44,748 and 44,748 shares have been repurchased and retired, respectively.
Preferred Stock
The Company had 100,000,000, no par, preferred shares authorized at December 31, 2014. Following redomicile of Mentor as a corporation under the laws of the State of Delaware, Mentor has 5,000,000, $0.0001 par value, preferred shares authorized effective September 24, 2015. No preferred shared are issued or outstanding.
Note 12 - Funding agreement with MicroCannaBiz, LLC, conversion to note receivable and subsequent write-off
The Company entered into a co-operative funding agreement with MCB that closed on February 18, 2014, to purchase up to a 51% interest in MCB. MCB provides cannabis and marijuana related private companies, investors and microcap issuers with information resources including client company specific publications, directories, and continuing education courses. MCB was to receive up to $200,000 in funding as Mentor received proceeds from warrant exercises. Allocation of funding to MCB was discretionary and could be reduced to $100,000 with no change in Mentors ownership if Mentor was dissatisfied with MCB performance. On April 13, 2015 Mentor notified MCB that the funding would be reduced to $100,000. The Company had the right, in its sole discretion, to convert the paid portion of the $100,000 equity investment in MCB to a six percent (6%) ten-year note payable to Mentor by the remaining owner of MCB in 120 equal payments of principal and interest at any time. On April 27, 2015, Mentor notified MCB that $74,000 of funding previously paid to MCB would be converted to a ten year note receivable and further funding was truncated. This conversion resulted in a gain of $35,360 in the 2
nd
quarter of 2015. Subsequently, the Company evaluated the inability to collect the note receivable and, as a result, the $74,000 note was impaired in its entirety in the 4
th
quarter of 2015 along with $2,010 of accrued and unpaid interest on the note.
Upon conversion of the funding agreement to a note receivable the assets and liabilities of MCB were deconsolidated from December 31, 2015 consolidated financial statements as follows:
|
|
|
Accounts receivable
|
$
|
2,966
|
Fixed assets, net of $3,126 accumulated depreciation
|
|
21,881
|
Total assets
|
$
|
24,847
|
|
|
|
Accrued expenses
|
$
|
6,984
|
Non-controlling equity
|
|
(18,778)
|
Mentor equity
|
|
36,641
|
Total liabilities and equity
|
$
|
24,847
|
F-21
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 13 - Lease commitments
Operating Leases
Mentor currently rents approximately 2,000 square feet of office space under a one year lease in Ramona, California in San Diego County. Rent expense for the years ended December 31, 2016 and 2015 were $28,400 and $24,495, respectively.
WCI rents approximately 3,000 of office and warehouse space in Tempe, Arizona under an operating lease expiring in January 2018. Rent expense for the year ended December 31, 2016 and 2015 was $26,732 and $26,160, respectively.
WCI leases vehicles under a master fleet management agreement with initial terms of 4 years expiring through July 2020. Vehicle lease expense of $173,853 and $123,567 is included in cost of sales in the consolidated income statement for the years ended December 31, 2016 and 2015, respectively.
WCI has two small operating leases on office equipment entered into in 2015 with terms of 5 years expiring in 2020.
The approximate remaining annual minimum lease payments under the non-cancelable operating leases existing as of December 31, 2016 with original or remaining terms over one year were as follows:
|
|
|
Years ending
|
|
Rental
|
December 31,
|
|
expense
|
2017
|
$
|
161,019
|
2018
|
|
86,363
|
2019
|
|
58,260
|
2020
|
|
17,786
|
|
|
|
|
$
|
323,428
|
Note 14 - Deferred revenue
Deferred revenue represents revenue for which the Company has not yet performed services for but has received payment. At December 31, 2016 and 2015, the Company had unearned revenue of $0 and $866, respectively.
F-22
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 15 - Income tax
The Company and its subsidiary, WCI, are taxed as C-Corporations for federal income tax purposes. CAST, MCB and CCH were LLCs which were disregarded entities for income tax purposes, therefore, CASTs, MCBs and CCHs taxable income or loss is reported by their respective shareholders.
The provision (benefit) for income taxes for the years ended December 31, 2016 and 2015 consist of the following:
|
|
|
|
|
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
Federal
|
$
|
-
|
$
|
-
|
State
|
|
10,400
|
|
3,163
|
|
|
10,400
|
|
3,163
|
Deferred:
|
|
|
|
|
Federal
|
|
237,100
|
|
364,700
|
State
|
|
61,800
|
|
83,000
|
Change in valuation
|
|
(298,900)
|
|
(447,700)
|
Total provision (benefit)
|
$
|
10,400
|
$
|
3,163
|
The Company has net deferred tax assets resulting from a timing difference in recognition of deferred revenue and from net operating loss carryforwards.
At December 31, 2016, the Company had approximately $5,200,000 of federal net operating loss carryforwards that begin expiring in 2032, $3,900,000 of California net operating loss carryforwards that begin expiring in 2022, and $1,700,000 of Arizona net operating loss carryforwards that begin expiring in 2027.
The income tax provision (benefit) differs from the amount computed by applying the US federal income tax rate of 34% to net income (loss) before income taxes for the years ended December 31, 2016 and 2015 as a result of the following:
|
|
|
|
|
|
|
2016
|
|
2015
|
Net income (loss) before taxes
|
$
|
(802,341)
|
$
|
(761,632)
|
US federal income tax rate
|
|
34%
|
|
34%
|
|
|
|
|
|
Computed expected tax provision (benefit)
|
|
(272,796)
|
|
(258,955)
|
Permanent differences and other
|
|
35,696
|
|
(105,745)
|
Change in valuation
|
|
237,100
|
|
364,700
|
Federal income tax provision
|
$
|
-
|
$
|
-
|
The significant components of deferred income tax assets as of December 31, 2016 and 2015 after applying enacted corporate income tax rates are as follows:
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Net Operating Losses carried forward
|
$
|
2,249,800
|
$
|
1,967,000
|
Deferred officer bonus and other
|
|
204,800
|
|
118,700
|
Valuation allowance
|
|
(2,454,600)
|
|
(2,155,700)
|
|
$
|
-
|
$
|
-
|
F-23
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 16 - Long term debt and revolving line of credit
Long term debt
Long term debt at December 31, 2016 and 2015 consists of the following:
|
|
|
|
|
|
|
2016
|
|
2015
|
Commercial credit agreement with Bond Street Servicing, LLC at 11.6% interest per annum, semi-monthly payments of $1,648, maturing October 16, 2019. Net of $3,723 loan service fee.
|
$
|
91,488
|
$
|
-
|
|
|
|
|
|
Two auto loans through Compass bank, interest at 7.99% per annum, monthly principle and interest payments of $538, maturing February 2016.
|
|
-
|
|
1,069
|
|
|
|
|
|
Auto loan through Hyundai Motor Finance, interest at 2.99% per annum, monthly principle and interest payments of $878, maturing December 2018.
|
|
6,004
|
|
29,384
|
|
|
|
|
|
Total notes payable
|
|
97,492
|
|
30,453
|
|
|
|
|
|
Less: Current maturities
|
|
(28,226)
|
|
(10,841)
|
|
|
|
|
|
|
$
|
69,226
|
$
|
19,612
|
Commercial credit agreement with Bond Street Servicing, LLC
WCI entered into a commercial credit agreement with Bond Street Servicing, LLC for proceeds of $100,000 which were used to pay off WCIs revolving line of credit with Bank of America. WCI was charged a $4,000 loan service fee which is being amortized as additional interest over the life of the loan on a straight line basis. The unamortized loan service fee balance was $3,723 at December 31, 2016.
Revolving line of credit
WCI had a $75,000 unsecured revolving line of credit with Bank of America, with interest at the banks prime rate plus 3% due monthly. The line of credit matured on September 4, 2016 and was due November 4, 2016. At December 31, 2016 and 2015, the Company had $0 and $70,000, respectively, outstanding on the line of credit. The line was secured by a personal guarantee of WCIs president. Interest on the line of credit for the years ended December 31, 2016 and 2015 was $3,472 and $3,853, respectively. On October 14, 2016, WCI paid the revolving line of credit in full.
F-24
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 17 - Accrued salary, accrued retirement and related party incentive fee
As of December 31, 2016 and 2015, the Company had an outstanding liability to its Chief Executive Officer ("CEO") as follows:
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Accrued salaries and benefits
|
$
|
759,701
|
$
|
737,878
|
Accrued incentive fee and bonus
|
|
190,581
|
|
190,581
|
Accrued retirement and other benefits
|
|
457,079
|
|
448,415
|
Offset by shareholder advance
|
|
(368,983)
|
|
(892,502)
|
|
$
|
1,038,378
|
$
|
484,372
|
The Company agreed to advance the CEO $944,000 against the accrued liabilities due him, in January 2014, to exercise additional warrants into shares to be used as collateral for a potential loan to the Company. The warrant exercise was a cashless transaction made solely for the benefit of the Company in its efforts to obtain financing.
After the warrants were exercised, the CEO put 100% of his shares owned, 5,000,486 shares, in an escrow which was to guarantee the potential loan. The loan was mutually rescinded on June 12, 2014, and the shares remained in escrow until March 28, 2016, at which time the CEOs shares were removed from escrow and 135,000 shares were placed under a 10b5-1 Plan under third party control to preclude any directed share sales by him when non-public information is known. The CEOs remaining shares are held in certificate form and are not held in any brokerage account for resale.
As provided by Board of Director resolution in 1998, the CEO will be paid an incentive fee and a bonus which are payable in cash upon merger, resignation or termination or in installments at the CEOs option. The incentive fee is 1% of the increase in market capitalization based on the bid price of the Companys stock beyond the book value at confirmation of the bankruptcy, which was approximately $260,000. The bonus is 0.5% of the increase in market capitalization for each $1.00 increase in stock price up to a maximum of $8 per share (4%) based on the bid price of the stock beyond the book value at confirmation of the bankruptcy. The accrued incentive fee has not changed from the 2014 accrual of $190,581.
Note 18 Related Party Loans
The Company borrowed $15,000 from an employee in January of 2016 at 10% interest for three months. The loan balance and accrued interest of $1,500 was repaid in April 2016. In addition, the Companys CEO, Chet Billingsley loaned the Company $10,000 for three months with no interest. The loan from the Companys CEO was also repaid in April 2016.
Note 19 Patent and License Fee Facility with Larson
Effective April 4, 2016 Mentor Capital, Inc. entered into a certain "Larson - Mentor Capital, Inc. Patent and License Fee Facility with Agreement Provisions for an -- 80% / 20% Domestic Economic Interest -- 50% / 50% Foreign Economic Interest" agreement with R. L. Larson and Larson Capital, LLC (Larson). Under this agreement, Mentors subsidiary Mentor Capital IP, LLC (MCIP) obtained rights in an international patent application for foreign THC and CBD cannabis vape pens under the provisions of the Patent Cooperation Treaty of 1970, as amended. On approval of the United States patent application, MCIP intends to seek exclusive licensing rights in the United States for THC and CBD cannabis vape pens for various THC and CBD percentage ranges and concentrations. Per the agreement Mentor paid $25,000 in exchange for 15.7% of the domestic licensing rights and 41.4% of international licensing rights for the vape pens.
F-25
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 20 Consulting Agreement with Green Vision Systems, Corp.
On September 15, 2016, the Company entered into a consulting agreement with GVS, a Puerto Rico corporation. The Company received 500,000 to-be-registered shares of GVS Common Stock. The shares were recorded as an investment at cost based on the value of consulting services provided by the Company of $50,000. For the year ended December 31, 2016, the Company recognized $20,000 of consulting fees from this investment and deferred the remaining value against future consulting services. Mentor provided consulting services with regard to GVSs legal cultivation, manufacturing and transportation of medical cannabis products from GVSs planned state of the art facility in Puerto Rico, as well as associated hemp farming in this tropical setting. However, subsequent to year-end GVS management stated that they have another entity from which they will operate the Puerto Rico operations rather than GVS and they intend to register the shares from that entity rather than registering the GVS shares as agreed to in the Companys consulting agreement with GVS (See Note 26). The Company is uncertain whether it will receive benefit from its GVS shares and, due to this uncertainty, the GVS shares and related deferred revenue have been impaired in their entirety at December 31, 2016.
Note 21 Liquidity Agreement for Purchase of Investor Webcast and Subsequent Termination
On April 20, 2015, the Company entered into an agreement to acquire 100% of CAST valued at $469,611 in exchange for 4,696 to-be-created Series B convertible preferred shares of Mentor. The purchase price was based on projected future earnings of CAST and discounted at 17.87% (the discount rate used for the 2015 investment in installment receivable described in Note 5).
After one year, the to-be-created Series B convertible preferred shares could be converted, in steps or in whole, into Mentor common shares. Due to Mentors recent reincorporation in Delaware, the series B convertible preferred shares had not yet been created and therefore, a convertible security was issued to the prior owner of CAST which could be converted to Mentor Series B convertible preferred shares once they were created.
Purchase price allocation of CAST assets and liabilities:
|
|
|
CAST assets and liabilities:
|
|
|
Current assets
|
$
|
106,305
|
Property and equipment
|
|
4,378
|
Current liabilities
|
|
(107,837)
|
Net equity
|
|
2,846
|
Goodwill
|
|
466,765
|
Purchase valuation based on projected future earnings using 17.87% discount rate
|
$
|
469,611
|
Actual operating results of CAST in future periods and the share price of Mentor common shares at the date of conversion would determine the number of common shares issued upon conversion of the Series B convertible preferred shares, in whole or in part. The conversion formula was to be evaluated in subsequent periods to determine if actual CAST operations result in a contingent asset or liability relating to the Series B convertible preferred shares. The Company evaluated CAST revenue and income for the period from the purchase date, April 20, 2015, to December 31, 2015 along with revised projections. The revenue and net loss realized in 2015 and the lower revised projections resulted in a fair value of $0 for the convertible security at December 31, 2015.
On March 1, 2016, the Company entered into a Mutual Termination Agreement and General Release in which the certain Investor Webcast Mentor Capital Cannabis Owners Public Liquidity Agreement effective April 20, 2015 (the Purchase Agreement) and the Convertible Security Agreement between Mentor and the prior owner of CAST were cancelled and terminated, resulting in a disposition of CAST assets and liabilities by the Company. Pursuant to Section 3 of the Purchase Agreement, the CAST owner was to receive Mentor shares according to Mentors conversion formula specified in the Purchase Agreement. However, the CAST business has not evolved as quickly as CAST owners expected and the result of the conversion formula was a negative number less than zero at the time of the termination. Therefore, the parties by mutual consent dissolved their relationship.
F-26
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 21 Liquidity Agreement for Purchase of Investor Webcast, LLC and Subsequent Termination (continued)
The CAST prior owner received assets valued at $7,408, assumed liabilities of $7,063 as follows:
|
|
|
CAST assets and liabilities disposed:
|
|
|
Liabilities:
|
|
|
Accounts payable
|
$
|
5,427
|
Accrued expenses
|
|
420
|
Deferred revenue
|
|
1,216
|
Total liabilities transferred
|
|
7,063
|
Assets:
|
|
|
Prepaid expenses
|
|
2,885
|
Accounts receivable, net of $10,000 allowance
|
|
190
|
Employee advance
|
|
1,013
|
Fixed assets, net of accumulated depreciation
|
|
3,320
|
Total assets disposed
|
|
7,408
|
Loss on disposition of assets and liabilities
|
$
|
(345)
|
Mentor forgave an intercompany note receivable from CAST of $23,225, direct intercompany charges of $10,284, and $17,043 of intercompany overhead receivable from CAST. In addition, Mentor paid $500 to the prior owner and $50 each to two prior employees.
Note 22 Purchase Agreement for Preferred Security associated with Canyon Crest Holdings, LLC
On August 21, 2015, the Company entered into an agreement where it received $120,000 in exchange for 1,200 to-be-created Series C convertible preferred shares of Mentor. The proceeds were used in association with CCH.
After one year, the to-be-created Series C convertible preferred shares could have been converted, in steps or in whole, into Mentor common shares. The to-be-created Series C convertible preferred shares would have converted to common shares based on a formula related to recurring revenue and after tax profits. Due to Mentors recent reincorporation in Delaware, the series C convertible preferred shares had not yet been created, therefore, a convertible security was issued to the investors which would have been converted to Mentor Series C convertible preferred shares once they were created.
Actual operating results of CCH in future periods and the share price of Mentor common shares at the date of conversion would determine the number of common shares issued upon conversion of the Series C convertible preferred shares, in whole or in part. The conversion formula was to be evaluated in subsequent periods to determine if actual CCH operations result in a contingent asset or liability relating to the Series C convertible preferred shares. CCH invested the funds received from Mentor in a startup entity that ultimately failed and there was $0 value to the convertible security at both December 31, 2016 and 2015.
The Company recorded a $120,000 gain on the decrease in the fair value of the convertible securities liability and a loss in investment of $97,400 in the fourth quarter of 2015.
In March 2016, the investor was designated as the holder of 120,000 already outstanding unexercised Series D warrants. Under the Plan of Reorganization referred to in Note 10, the Company or its designee may redeem warrants that are not exercised timely. These warrants may be exercised at the $1.60 per warrant exercise price plus a $0.10 warrant redemption fee.
F-27
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 23 Commitments and contingencies
On December 29, 2016, Mentor obtained a judgment in the amount of $1,921,534.62 against Bhang Corporation and its predecessor in interest, Bhang Chocolate Company, Inc., in the United States District Court for the Northern District of California related to an action filed by Mentor on August 11, 2014 seeking rescission of the February 28, 2014 co-operative funding agreement with Bhang Corporation (Bhang Agreement) and return of the $1,500,000 paid by the Company to Bhang. The judgment accrues interest at the rate of 10% from December 29, 2016 until such time as the judgment is satisfied. Mentor intends to enforce this judgment. As part of the judgment Bhang owners, Scott Van Rixel and Richard Sellers, who together purchased 117,000 shares pursuant to the Bhang Agreement have the option to return all or part of those shares in exchange for payment of the original purchase price of $1.95 per share plus a pro-rata amount of $58,568.92 in interest for such returned shares. Mentor will account for the return of the shares as a capital transaction if and when the shares are remitted back to the Company. See Note 4 to consolidated financial statements.
In July 2015, Mentor was served with a complaint in an action in the United States District Court for the District of Utah initiated by the wife and daughter of Bhangs corporate counsel related to 75,000 shares of Mentors Common Stock purchased from Bhang Corporations CEO in a secondary sale. The shares purchased by plaintiffs are returnable to Mentor per the judgement awarded in the Bhang matter, above. Mentor was not a party to this transaction and intends to vigorously defend itself against all claims in this case. No trial date has currently been set in this action.
Mentor lawsuit seeking return of loan commitment fee
In March 2014, the Company paid $621,250, which represented 1.75% of a prospective loan amount, in refundable fees paid for credit default insurance to a third party as required by the lender on an international loan facility. The lender was unable to fund the loan and a cooperative exit from the loan commitment was agreed to by the parties on June 12, 2014. The lender released the requirement for credit default insurance and the insurance company and agreed to return the fee, however the refund was never received. On September 5, 2014, the Company filed suit in San Mateo County Superior Court against Wm. E. Fielding and Associates, Inc., the name of the account holder to whom the $621,250 was wired, for conversion and fraud seeking return of the $621,250 in credit insurance premiums that had been paid, had been promised to be returned, and which were not returned. Mentor obtained a judgment against Wm. E. Fielding and Associates, Inc. in the amount of $746,500 on March 1, 2016. The Company is assessing its ability to collect on the judgement and due to uncertainty surrounding collection, the Company has not reported a receivable on the balance sheets at December 31, 2016 and 2015. The $621,250 was expensed as loan costs in 2014.
F-28
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 24 Segment Information
The Company is operating an acquisition and investment business. Majority owned subsidiaries of 51% or more are consolidated. The Company has determined that there are two reportable segments; 1) the cannabis and medical marijuana segment which includes the receivable from Bhang of $1,500,000, the convertible notes receivable and accrued interest from Electrum and NeuCourt, and the operation of subsidiaries in the Cannabis and medical marijuana sector, and 2) the Companys legacy investment in WCI which works with business park owners, governmental centers, and apartment complexes to reduce their trash related operating costs. The Company also has certain small cancer related legacy investments and an investment in note receivable from a non-affiliated party that is included in the Corporate and Eliminations section below:
|
|
|
|
|
|
|
|
|
|
|
Cannabis and
Medical
Marijuana
Segment
|
|
Trash
Management
|
|
Corporate
and
Eliminations
|
|
Consolidated
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
-
|
$
|
2,740,187
|
$
|
21,058
|
$
|
2,761,245
|
Operating income (loss)
|
|
(50,043)
|
|
34,485
|
|
(880,416)
|
|
(895,974)
|
Interest income
|
|
10,958
|
|
1
|
|
103,877
|
|
114,836
|
Interest expense
|
|
-
|
|
17,275
|
|
23,350
|
|
40,625
|
Total assets
|
|
1,632,055
|
|
1,119,407
|
|
2,627,137
|
|
5,378,599
|
Property additions
|
|
-
|
|
29,210
|
|
1,029
|
|
30,239
|
Depreciation and amortization
|
|
295
|
|
21,752
|
|
3,715
|
|
25,762
|
2015
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
98,533
|
$
|
2,463,225
|
$
|
-
|
$
|
2,561,758
|
Operating income (loss)
|
|
(5,373)
|
|
122,488
|
|
(889,328)
|
|
(772,213)
|
Interest income
|
|
9,318
|
|
-
|
|
65,732
|
|
75,050
|
Interest expense
|
|
-
|
|
18,910
|
|
(3,278)
|
|
15,632
|
Total assets
|
|
1,673,616
|
|
1,131,481
|
|
1,469,964
|
|
4,275,061
|
Property additions
|
|
2,026
|
|
9,959
|
|
6,036
|
|
18,021
|
Depreciation and amortization
|
|
1,568
|
|
30,004
|
|
3,783
|
|
35,355
|
The following table reconciles operating segments and corporate-unallocated operating income (loss) to consolidated income before income taxes for the years ended December 31, 2016 and 2015, as presented in the consolidated income statements:
|
|
|
|
|
|
|
2016
|
|
2015
|
Operating loss
|
$
|
(895,974)
|
$
|
(772,213)
|
Interest income
|
|
114,836
|
|
75,050
|
Interest expense
|
|
(40,625)
|
|
(15,632)
|
Decrease in fair value of convertible securities liability
|
|
-
|
|
589,611
|
Goodwill impairment
|
|
-
|
|
(466,765)
|
Gain on conversion of investment in MicroCannaBiz to note receivable
|
|
-
|
|
35,360
|
Loss on impairment of MicroCannaBiz note
|
|
|
|
|
receivable and accrued interest
|
|
-
|
|
(76,010)
|
Realized gain (loss) on investments
|
|
(42,289)
|
|
(131,458)
|
Gain (loss) on equipment disposals
|
|
11,568
|
|
-
|
Other income
|
|
9,143
|
|
425
|
Income before income taxes
|
$
|
(843,341)
|
$
|
(761,632)
|
F-29
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 25 Accumulated other comprehensive income (loss)
The changes in the balances for accumulated other comprehensive income (loss) (AOCI) for the years ended December 31 were as follows:
|
|
|
|
|
|
|
2016
|
|
2015
|
Marketable securities
|
|
|
|
|
Beginning balance
|
$
|
(12,563)
|
$
|
-
|
|
|
|
|
|
Gains (losses) on available for sale securities
|
|
-
|
|
(12,563)
|
Less: Tax (tax benefit)
|
|
-
|
|
-
|
Net gains (losses) on available for sale securities
|
|
-
|
|
(12,563)
|
|
|
|
|
|
(Gains) Losses reclassified from AOCI to net income
|
|
12,563
|
|
-
|
Less: Tax (tax benefit)
|
|
-
|
|
-
|
Net gains (losses) reclassified from AOCI to net income
|
|
12,563
|
|
-
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
12,563
|
|
(12,563)
|
|
|
|
|
|
Ending balance
|
$
|
-
|
$
|
(12,563)
|
Note 26 - Subsequent events
From January 1, 2017 through the March 22, 2017, the Company raised $1,765,733 from the exercise of warrants into Common Stock and $56,490 from warrant redemption fees at $0.10 per warrant from designees redeeming unexercised warrants that have been called but were not exercised timely.
In February 2017, the management of GVS stated that they have another entity from which they plan to operate their Puerto Rico operations and they intend to register shares from that entity rather than register the GVS shares they agreed to per the Companys consulting agreement with GVS. The Company holds 500,000 shares in GVS, originally valued at $50,000, which have been fully impaired at December 31, 2016.
In March 2017, the Company invested $1,049,086 in GW Pharmaceuticals PLC Common Stock.
On March 17, 2017, the Company entered into a Notes Purchase Agreement with G Farmalabs Limited (G Farma), a Nevada corporation. Under the Agreement the Company loaned G Farma an aggregate principal amount of $500,000 under two secured promissory notes, both of which bear interest at 7.42% per annum, with monthly payments beginning on April 15, 2017, and mature on April 15, 2022. The first promissory note in the amount of $120,000 is for the purchase of real estate, which is secured by a deed of trust on real property, and requires monthly payments of $1,107 beginning April 15, 2017 with a balloon payment of approximately $93,585 at maturity. The second promissory note in the amount of $380,000 is a working capital loan secured by all assets of G Farma and guaranteed by two owners of G Farma, which requires monthly payments of $3,505 with a balloon payment of approximately $296,352 at maturity.
F-30
Mentor Capital, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
______________________________________________________________________________________________________
Note 26 - Subsequent events (continued)
Associated with the Notes Purchase Agreement, on March 17, 2017, the Company and G Farma entered into a Rights Agreement which provides that G Farma will not register its stock in a public offering unless it obtains either (i) the written consent of the Company, or (ii) without written consent if G Farma issues to the Company shares of each class or series of G Farma stock then outstanding equal to 1.5% of each such number of shares, calculated on a full dilution full conversion basis.
In addition, on March 17, 1017, the Company entered into a Consulting Agreement with G Farma whereby the Company will receive a monthly consulting fee in arears of $1,400 per month beginning April 15, 2017 and continuing until the later of (i) 12 months, and (ii) the date on which G Farma has paid in full all obligations under the Notes Purchase Agreement.
On March 17, 2017, G Farma purchased 222,223 restricted shares of the Companys Common Stock in a private placement at a price of $2.25 per share, for an aggregate purchase price of $500,002 to be paid as follows: (i) Assignment to the Company of an interest, equal to the amount of the purchase price, in any and all civil forfeiture or similar recoveries received by, or due to, G Farma, or (ii) at any time before payment of the full purchase price from recovery, the Company may elect to have G Farma pay all or some of the purchase price on the date of the maturity of the promissory notes, described above under the Notes Purchase Agreement, or (iii) The Company may elect to have G Farma pay all or some of the purchase price by issuance to the Company of G Farma securities in aggregate amount equal to the purchase price as are offered to any other person (other than stock options offered to employees).
F-31