* The company recorded an operating loss; therefore the diluted EPS will not be calculated as the diluted EPS effect is anti-dilutive.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 1 - Nature of operations
Corporate Structure Overview
Mentor Capital, Inc. (“Mentor” or “the Company”), reincorporated under the laws of the State of Delaware in September 2015.
The entity was originally founded as an investment partnership in Silicon Valley, California, by the current CEO in 1985 and subsequently incorporated under the laws of the State of California on July 29, 1994. On September 12, 1996, the Company’s 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 reorganization. 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. A shareholder-approved merger between Mentor and Mentor Delaware was approved by the California and Delaware Secretaries of State, and became effective September 24, 2015, thereby establishing Mentor as a Delaware corporation.
Beginning September 2008, after the name change back to Mentor Capital, Inc., the Company’s common stock traded publicly under the trading symbol OTC Markets: MNTR and after February 9, 2015, as OTCQB: MNTR and after August 6, 2018, under the trading symbol OTCQX: MNTR and after May 1, 2020 under the trading symbol OTCQB: MNTR. Due to market fluctuations, the Company’s market capitalization has been below $5 million for more than 30 consecutive calendar days and subsequent to quarter-end, on May 1, 2020, we began trading as 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 certain highly technical and expensive cancer treatments and a resulting business decline in the cancer immunotherapy sector, the Company decided to exit that space. In the summer of 2013, the Company was asked to consider investing in a cancer-related project with a medical marijuana focus. On August 29, 2013, the Company decided to divest of its cancer assets and focus its next round of investments in the medical marijuana and cannabis sector. In March 2018, the Company sold its equity interest in its final remaining cancer investment. In late 2019, the Company expanded its target industry focus to potentially include energy, mining and minerals, technology, consumer products, management services, and manufacturing sectors with the goal of ensuring investment diversification.
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 that was first invested into in 2003.
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 interests related to 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. R. L. Larson continues its efforts to obtain exclusive licensing rights in the United States for THC and CBD cannabis vape pens for various THC and CBD percentage ranges and concentrations. Patent application national phase maintenance fees were expensed when paid and there were no assets related to MCIP on the consolidated financial statements at March 31, 2020 and December 31, 2019. On January 21, 2020, the United States Patent and Trademark Office granted a Notice of Allowance for the United States patent application and subsequent to quarter-end, on May 5, 2020, the United States patent was issued, see Note 22. On March 23, 2020 MCIP applied for expedited prosecution with the Canadian Intellectual Property Office under the Patent Cooperation Treaty Patent Prosecution Highway Program based on the claims allowed in the corresponding United States patent application.
On April 13, 2017, Mentor entered into an agreement to provide $40,000 of funding to offset costs of the application of cannabis oil in a glaucoma study conducted by and otherwise paid for by Dr. Robert M. Mandelkorn, MD. Mentor, doing business as GlauCanna, will hold an 80% interest in any commercial opportunities that result from the study. Dr. Mandelkorn will hold the remaining 20%.
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Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 1 - Nature of operations (continued)
The Company has a membership equity interest in Electrum Partners, LLC (“Electrum”) which is carried at cost of $194,028 and $194,028 at March 31, 2020 and December 31, 2019. On January 28, 2019, as part of a Second Capital Agreement between Mentor and Electrum (described in Note 10), Mentor was granted an option to convert its 6,198 membership interests in Electrum into a cash payment of $194,028 plus an additional 19.4% of anything of value received by Electrum as a result of the pending litigation in British Columbia (see below).
On September 19, 2017, the Company formed Mentor Partner I, LLC (“Partner I”), a California limited liability company as a wholly owned subsidiary of Mentor. In 2018, Mentor contributed $996,000 of capital to Partner I to facilitate the purchase of manufacturing equipment to be leased from Partner I by G FarmaLabs Limited (“G Farma”) under a Master Equipment Lease Agreement dated January 16, 2018, as amended. Amendments expanded the Lessee under the agreement to include G FarmaLabs Limited, and G FarmaLabs DHS, LLC, (collectively referred to as “G Farma Lease Entities”). The finance leases resulting from this investment have been impaired by $771,970 and $765,001 at March 31, 2020 and December 31, 2019, respectively, due to circumstances further described in Note 9.
On February 1, 2018, the Company formed Mentor Partner II, LLC (“Partner II”), a California limited liability company as a wholly owned subsidiary of Mentor. On February 8, 2018, Mentor contributed $400,000 to Partner II to facilitate the purchase of manufacturing equipment to be leased from Partner II by Pueblo West Organics, LLC, a Colorado limited liability company (“Pueblo West”) under a Master Equipment Lease Agreement dated February 11, 2018. On March 12, 2019, Mentor agreed to use Partner II earnings of $61,368 to facilitate the purchase of additional manufacturing equipment to Pueblo West under a Second Amendment to the lease, see Note 9.
On February 20, 2018, the Company formed Mentor Partner III, LLC (“Partner III”), a California limited liability company, as a wholly owned subsidiary of Mentor for the purpose of acquisition and investing. Partner III has had no activity since its inception.
On February 28, 2018, the Company formed Mentor Partner IV, LLC (“Partner IV”), a California limited liability company, as a wholly owned subsidiary of Mentor for the purpose of acquisition and investing. Partner IV has had no activity since its inception.
On September 6, 2018, the Company entered into an Equity Purchase and Issuance Agreement with G FarmaLabs Limited, G FarmaLabs DHS, LLC, GFBrands, Inc., Finka Distribution, Inc., and G FarmaLabs, WA, LLC under which Mentor was supposed to receive equity interests in the G Farma Equity Entities and their affiliates (together the “G Farma Equity Entities”) equal to 3.75% of the G Farma Equity Entities interests (See Note 8). On March 4, 2019, Addendum VIII increased the G Farma Equity Entities’ equity interest to which Mentor is immediately entitled to 3.843%, and added Goya Ventures, LLC as a G Farma Equity Entity. We are now in litigation with these entities. See Note 20.
On October 30, 2018, the Company entered into a Recovery Purchase Agreement with Electrum. Electrum is the plaintiff in an ongoing legal action pending in the Supreme Court of British Columbia (“Litigation”). As described further in Note 10, Mentor provided capital for payment of Litigation costs in the amount of $196,912 and $146,195 as of March 31, 2020 and December 31, 2019, respectively. Subsequent to quarter-end, on April 30, 2020, $15,383 of Mentor’s funds were returned to Mentor from the attorney representing Electrum. After repayment to Mentor of all funds invested for payment of Litigation costs, Mentor will receive 18% of anything of value received by Electrum as a result of the Litigation (“Recovery”), after first receiving reimbursement of the Litigation costs. On October 31, 2018, Mentor entered into a secured Capital Agreement with Electrum and invested an additional $100,000 of capital in Electrum. Under the Capital Agreement, on the payment date, Electrum will pay to Mentor the sum of (i) $100,000, (ii) ten percent (10%) of the Recovery, and (iii) 0.083334% of the Recovery for each full month from October 31, 2018 to the payment date for each full month that $833 is not paid to Mentor. The payment date is the earlier of November 1, 2021, or the final resolution of the Litigation. On January 28, 2019, the Company entered into a second secured Capital Agreement with Electrum and invested an additional $100,000 of capital in Electrum with payment terms similar to the October 31, 2018 Capital Agreement. As part of the January 28, 2019 Capital Agreement Mentor was granted an option to convert its 6,198 membership interests in Electrum into a cash payment of $194,027 plus an additional 19.4% of the Recovery.
On December 21, 2018, Mentor paid $10,000 to purchase 500,000 shares of NeuCourt, Inc. common stock, representing approximately 6.2% of NeuCourt’s issued and outstanding common stock.
12
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 1 - Nature of operations (continued)
On March 14, 2019, the Company was notified by G Farma that, on February 22, 2019, the City of Corona Building Department closed access to G Farma’s corporate location and posted a notice preventing entry to the facility. The notice cited unpermitted modifications to electrical, mechanical and plumbing, including all undetermined building modifications, as the reason for closure.
On April 24, 2019, the Company was informed that certain G Farma assets at G Farma’s corporate location, including equipment leased to G Farma by Mentor Partner I valued at approximately $427,804, were impounded by the City of Corona on or around February 22, 2019. This event significantly impacted G Farma’s financial position and its ability to make payments under the finance leases receivable and notes receivable due the Company. See Notes 8, 9, and 10. In March 2020, we discovered that an additional component valued at $36,594 was missing from the equipment we recovered but we are uncertain whether this was taken by the Corona Police.
G Farma has not made scheduled payments on the finance lease receivable or the notes receivable since February 19, 2019 and Company management feels it is unlikely we will fully recover amounts due us. Based on our analysis of current conditions, we recorded a bad debt allowance of $765,001 on the finance lease receivable, as of December 31, 2019, and increased the allowance by $6,969 in the quarter ended March 31, 2020, see Note 9. In January 2020, the Company repossessed leased equipment under G Farma’s control and in March 2020, the Company sold equipment with a cost of $495,967 to the highest offeror for $240,000, however, because a component of the equipment was reported missing, the Company refunded $17,969 to the purchasing party. At March 31, 2020, remaining repossessed equipment is reported as equipment held for sale in the condensed consolidated balance at an estimated net realizable value of $40,000.
At December 31, 2019 we fully impaired G Farma notes receivable, and the contractual interest in G Farma’s legal recovery, see Note 8. At December 31, 2019, we fully impaired G Farma notes receivable of $1,045,051, accrued interest of $28,680, and our investment in the G Farma contractual interest in legal recovery of $600,002. The Company’s equity investment in G Farma Entities, previously valued at $41,600, has also been impaired and reduced to $0, at December 31, 2019, see Notes 8 and 10.
The Company’s sale of 288,890 shares of its Common Stock to G Farma in exchange for investment in the G Farma contractual interest in legal recovery was rescinded on October 3, 2019 due to a complete failure of consideration and the Company recorded this as cancellation of equity at December 31, 2019, returning the Company to its original position, as if the shares had not been issued. On March 6, 2020, the shares were cancelled and returned to unissued shares by the Company’s stock transfer agent.
On May 28, 2019, Mentor Capital, Inc. and Mentor Partner I, LLC filed a complaint against the G Farma Entities and three guarantors to the G Farma agreements, described herein and in Notes 8, 9, and 10, in the Superior Court of California in the County of Marin. The Company is primarily seeking monetary damages for breach of the G Farma agreements including promissory notes, leases, and other agreements, as well as actions for an injunction to recover leased property, to recover collateral under a security agreement, and to collect from guarantors on the agreements, among other things. Mentor intends to vigorously pursue this matter; however, collection is uncertain at this time. On January 22, 2020, the Court granted the Company’s motion for writ of possession and preliminary injunction prohibiting defendants from retaining control of or selling leased property. On January 31, 2020, all remaining equipment leased to G Farma by Mentor Partner I which was not impounded by the Corona Police was repossessed by the Company and moved to storage under the Company’s control and on March 5, 2020, the Company sold a portion of the recovered equipment, see Note 9. Sale of remaining equipment is planned for second quarter of 2020 and will be auctioned or sold to the highest bidder or offeror. The Company will try to recover as much of its cost in the equipment as possible given that it has never been used.
13
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 2 - Summary of significant accounting policies
Condensed consolidated financial statements
The unaudited condensed consolidated financial statements of the Company for the three month period ended March 31, 2020 and 2019 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-K. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the financial position and the results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The balance sheet information as of December 31, 2019 was derived from the audited financial statements included in the Company's financial statements as of and for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 25, 2020. These financial statements should be read in conjunction with that report.
Basis of presentation
The accompanying consolidated financial statements and related notes include the activity of subsidiaries in which a controlling financial interest is owned. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with current period presentation.
Impact Related to COVID-19 Pandemic
The effect of the novel coronavirus pandemic (“COVID-19”) has significantly impacted the United States and the global economy. The COVID-19 pandemic and the measures taken by many countries in response have adversely affected and could in the future materially adversely impact the Company’s business, results of operations, financial condition, and stock price. The ongoing worldwide economic situation, future weakness in the credit markets and significant liquidity problems for the financial services industry may impact our financial condition in a number of ways. For example, our current or potential customers, or the current or potential customers of our partners or affiliates, may delay or decrease spending with us, or may not pay us, or may delay paying us for previously purchased products and services. Also, we, or our partners or affiliates, may have difficulties in securing additional financing. Additionally, our legal recovery efforts may be hindered due to the closure of the courts in California and British Columbia, which may cause COVID-19-related scheduling delays, hindering our legal recovery from the G Farma entities and delaying the receipt of the Company’s interest in the Electrum Partners, LLC legal recovery, respectively.
Public health efforts to mitigate the impact of the pandemic include government actions such as travel restrictions, limitations on public gatherings, shelter in place orders and mandatory closures. These actions could impact WCI’s client businesses’ ability and speed of collecting their tenant rent payments. We do not expect this to significantly reduce demand for WCI services because WCI helps lower monthly service costs paid by its client properties. However, WCI’s clients will likely experience a delay in collecting rent from tenants, which in turn is expected to cause slower payments to WCI and possible discontinued service and uncollectible accounts receivable. WCI revenue in the first quarter of 2020 increased by 18.9%, as compared to the same period in 2019 and any impact of COVID-19 for the first quarter of 2020 is estimated to be immaterial. We will closely monitor our customer accounts and continue to assess the impact on collection of accounts receivable as we collect more information.
In compliance with California Governor Gavin Newsom’s Executive, Order N-33-20 dated March 19, 2020, Mentor required its employees to work remotely effective March 20, 2020. According to the Critical Infrastructure Standards released by the Cybersecurity and Infrastructure Security Agency on March 18, 2020, “Financial Services Sector” businesses, like Mentor, are considered “essential businesses.” The financial nature of Mentor’s operations, which consist of oversight of our portfolio companies, accounting, compliance, investor relations, and sales, Mentor’s day to day operations are not substantially hindered by telework. We anticipate that current cash resources will be sufficient for us to execute our business plan for the next 13 months. The ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time.
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Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 2 - Summary of significant accounting policies (continued)
Segment reporting
The Company has determined that there are two reportable segments: 1) the cannabis and medical marijuana segment, and 2) the Company’s legacy investment in WCI which works with business park owners, governmental centers, and apartment complexes to reduce their facility related operating costs. We also have a small investment in an aerospace and defense corporation that is included in our corporate operations.
Use of estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates, assumptions, and judgements that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amount of revenues and expenses during the reporting period.
Significant estimates relied upon in preparing these consolidated financial statements include revenue recognition, accounts and notes receivable reserves, expected future cash flows used to evaluate the recoverability of long-lived assets, estimated fair values of long-lived assets used to record impairment charges related to investments, goodwill, amortization periods, accrued expenses, and recoverability of the Company’s net deferred tax assets and any related valuation allowance.
Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if past experience or other assumptions do not turn out to be substantially accurate.
Recent Accounting Standards
From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standard Codifications (“ASCs”) are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our consolidated financial statements upon adoption.
Intangibles-Goodwill and Other – As of January 1, 2020, we adopted ASU No. 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies how an entity is required to test goodwill for impairment. ASU 2017-04 requires that a goodwill impairment be measured by the amount by which a reporting unit’s carrying value exceeds its fair value, with the amount of impairment not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, and must be adopted on a prospective basis. We adopted the new standard on January 1, 2020. The adoption of this ASU did not have an impact on our financial statements.
Fair Value Measurement – As of January 1, 2020, we adopted ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which eliminates, adds, and modifies certain disclosure requirements for fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. We adopted the new standard on January 1, 2020. The adoption of this ASU did not have an impact on our financial statements.
15
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 2 - Summary of significant accounting policies (continued)
Recent Accounting Standards (continued)
Newly Issued Not Yet Effective Accounting Standards
Credit Losses - Measurement of Credit Losses on Financial Instruments – Issued in June 2016, ASU 2016-13, “Financial Instruments - Credit Losses Measurement of Credit Losses on Financial Instruments,” replaces the current incurred loss impairment method with a method that reflects expected credit losses. We plan to adopt the new standard on its revised effective date for of our fiscal year beginning after December 15, 2022, by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of Retained earnings. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.
Simplifying the Accounting for Income Taxes – Issued in December 2019, ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is designed to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years; this ASU allows for early adoption in any interim period after issuance of the update. The company is currently assessing the impact this ASU will have on its consolidated financial statements.
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 March 31, 2020 and December 31, 2019.
Accounts receivable
Accounts receivable consist of trade accounts arising in the normal course of business and are classified as current assets and carried at original invoice amounts less an estimate for doubtful receivables based on a review of outstanding balances on a quarterly basis. The estimate of allowance for doubtful accounts is based on the Company's bad debt experience, market conditions, 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 March 31, 2020 and December 31, 2019, the Company has recorded an allowance in the amount of $50,353 and $38,984, respectively.
Investments in securities, at fair value
Investment in securities consists of debt and equity securities reported at fair value with any change in fair value reported in net income.
Long term investments
The Company’s 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 Company’s share of the earnings or losses of such investee company is not included in the Company’s financial statements. The Company reviews the carrying value of its long-term investments for impairment each reporting period.
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Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 2 - Summary of significant accounting policies (continued)
The Company has two convertible notes receivable from NeuCourt, Inc. which are recorded at the aggregate principal face amount of $75,000 plus accrued interest of $4,078 and $3,121 at March 31, 2020 and December 31, 2019, as presented in Note 7. The notes bear 5% interest. One $25,000 principal face amount note, which matured November 22, 2019, was extended to November 22, 2021. A second $50,000 principal face amount note matures on October 31, 2020. No payments are required prior to maturity, however, at the time the $25,000 note was extended, accrued interest through November 4, 2019 was paid to Mentor. 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 NeuCourt’s 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 Notes would convert into an aggregate of 292,746 and 289,207 Conversion Shares at March 31, 2020 and December 31, 2019, respectively. In the event of a Corporate Transaction prior to repayment or conversion of the Note, the Company shall receive back two times the outstanding principal of each note, plus all accrued unpaid interest. NeuCourt is a Delaware corporation that is developing a technology that is expected to be useful in the dispute resolution industry.
Investment in account receivable, net of discount
On April 10, 2015, the Company entered into an exchange agreement whereby the Company received an investment in account receivable with annual installment payments of $117,000 through 2026. The investment is stated at face value, net of unamortized purchase discount. The discount is amortized to interest income over the term of the exchange agreement.
Finance leases receivable
The Company, through its subsidiaries, is the lessor of manufacturing equipment subject to leases under master leasing agreements. The leases contain an element of dealer profit and lessee bargain purchase options at prices substantially below the subject assets’ estimated residual values at the exercise date for the options. Consequently, the Company classified the leases as sales-type leases (the “finance leases”) for financial accounting purposes. For such finance leases, the Company reports the discounted present value of (i) future minimum lease payments (including the bargain purchase option, if any) and (ii) any residual value not subject to a bargain purchase option as a finance lease receivable on its balance sheet and accrues interest on the balance of the finance lease receivable based on the interest rate inherent in the applicable lease over the term of the lease. For each finance lease, the Company recognized revenue in an amount equal to the net investment in the lease and cost of sales equal to the net book value of the equipment at the inception of the applicable lease.
A finance receivable is considered impaired, based on current information and events, if it is probable that we will be unable to collect all amounts due according to contractual terms. Impaired finance receivables include finance receivables that have been restructured and are troubled debt restructures. As discussed in Note 9, impairment of the finance lease receivable from G Farma was $793,649 and $786,680 at March 31, 2020 and December 31, 2019, respectively, based on Management’s estimate of amounts we expect to recover.
17
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 2 - Summary of significant accounting policies (continued)
Credit quality of notes receivable and finance leases receivable and credit loss reserve
As our notes receivable and finance leases receivable are limited in number, our management analyzes estimated credit loss reserves based on a detailed analysis of each receivable as opposed to using portfolio-based metrics. Our management does not use a system of assigning internal risk ratings to each of our receivables. Rather, each note receivable and finance lease receivable are analyzed quarterly and categorized as either performing or non-performing based on certain factors including, but not limited to, financial results, satisfying scheduled payments and compliance with financial covenants. A note receivable or finance lease receivable will be categorized as non-performing when a borrower experiences financial difficulty and has failed to make scheduled payments. As part of the monitoring process we may physically inspect the collateral or a borrower’s facility and meet with a borrower’s management to better understand such borrower’s financial performance and its future plans on an as-needed basis.
As described in Note 1, on March 14, 2019, the Company was notified by G Farma that the City of Corona Building Department closed access to G Farma’s corporate location and posted a notice preventing entry to the facility. The Building Department notice stated that G Farma had modified electric and gas lines. On April 24, 2019, the Company learned that certain G Farma assets at their corporate location, including equipment leased to G Farma by Mentor Partner I valued at approximately $427,804, had been impounded by the City of Corona. In March 2020, we discovered that an additional component valued at $36,594 was missing from the equipment we recovered. This event significantly impacted G Farma’s financial position and its ability to make payments under the finance lease receivable. G Farma has not made a lease payment since February 19, 2019.
On May 28, 2019, the Company and Mentor Partner I, LLC filed a complaint against the G Farma Entities and three guarantors to the G Farma agreements, described in Notes 1, 8, 9, and 10, in the California Superior Court in and for the County of Marin. The Company is primarily seeking monetary damages for breach of the G Farma agreements including promissory notes, leases, and other agreements, as well as actions for an injunction to recover leased property, to recover collateral under a security agreement, and to collect from guarantors on the agreements. Mentor intends to vigorously pursue this matter; however, collection is uncertain at this time, see Note 20. On January 22, 2020, the Court granted the Company’s motion for a writ of possession and preliminary injunction prohibiting defendants from retaining control of or selling leased equipment. On January 31, 2020, all remaining equipment leased by Mentor Partner I to G Farma, which was not impounded by the Corona Police, was repossessed by the Company and moved to storage under the Company’s control and, on March 5, 2020, a portion of the recovered equipment was sold, See Note 9.
Property and equipment
Property and equipment is recorded at cost less accumulated depreciation. Depreciation is computed on the declining balance method over the estimated useful lives of various classes of property. The estimated lives of the property and equipment are generally as follows: computer equipment, three to five years; furniture and equipment, seven years; and vehicles and trailers, four to five years. Depreciation on vehicles used by WCI to service its customers is included in cost of goods sold in the condensed consolidated income statements. All other depreciation is included in selling, general and administrative costs in the condensed consolidated income statements.
Expenditures for renewals and betterments are capitalized, and maintenance and repairs are charged to expense. Gains and losses from the retirement or disposition of property and equipment are included in operations in the period incurred.
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Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 2 - Summary of significant accounting policies (continued)
Lessee Leases
We determine whether an arrangement is a lease at inception. Lessee leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. Our operating leases are comprised of office space leases and office equipment. Fleet vehicle leases entered into prior to January 1, 2019, under ASC 840 guidelines, are classified as operating leases. Fleet vehicle leases entered into beginning January 1, 2019, under ASC 842 guidelines, are classified as finance leases. Finance leases may be extended on a month to month basis depending on vehicle mileage and condition of the vehicle. Estimates of extension periods are included in our analysis of lease terms at inception of the lease. Our leases have remaining lease terms, including estimated extensions, of 1 month to 58 months. Our fleet finance leases contain a residual value guarantee which, based on past lease experience, is unlikely to result in a liability at the end of the lease. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
Costs associated with operating lease assets are recognized on a straight-line basis, over the term of the lease, within cost of goods sold for vehicles used in direct servicing of WCI customers and in operating expenses for costs associated with all other operating leases. Finance lease assets are amortized within cost of goods sold for vehicles used in direct servicing of WCI customers and within operating expenses for all other finance lease assets, on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term, including estimated term extensions. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term. We have agreements that contain both lease and non-lease components. For vehicle fleet operating leases, we account for lease components together with non-lease components (e.g., maintenance fees).
Long-lived assets impairment assessment
In accordance with the FASB Accounting Standards Codification (“ASC”) 350, “Intangibles - Goodwill and Other,” we regularly review the carrying value of intangible and other long-lived assets for the existence of facts or circumstances, both internally and externally, that suggest impairment. The carrying value and ultimate realization of these assets is dependent upon our estimates of future earnings and benefits that we expect to generate from their use. If our expectations of future results and cash flows are significantly diminished, intangible assets and other long-lived assets may be impaired, and the resulting charge to operations may be material. When we determine that the carrying value of intangibles or other long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we use the projected undiscounted cash flow method to determine whether an impairment exists and then measure the impairment using discounted cash flows.
Goodwill
Goodwill of $1,324,142 was derived from consolidating WCI effective January 1, 2014, and $102,040 of goodwill resulted from the 2005 acquisition of a 50% interest in WCI. 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 unit’s 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 March 31, 2020 and December 31, 2019.
19
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 2 - Summary of significant accounting policies (continued)
Revenue recognition
The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers,” and FASB ASC Topic 842, “Leases.” Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to government authorities.
Service fees generated by WCI are for monthly services performed to reduce customer’s operating costs. Service fees are invoiced and recognized as revenue in the month services are performed.
For each finance lease receivable, the Company recognized as a gain or loss the amount equal to (i) the net investment in the finance lease less (ii) the net book value of the equipment at the inception of the applicable lease. At lease inception we capitalize the total minimum finance lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination, if any, and the initial direct costs related to the lease, less unearned income. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
Revenue from consulting agreements is recognized at the time the related services are provided as specified in the consulting agreements.
Basic and diluted income (loss) per common share
We compute net income (loss) per share in accordance with ASC 260, “Earnings Per Share”. Under the provisions of ASC 260, basic net loss per share includes no dilution and is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of Common Stock outstanding during the period. Diluted net income (loss) per share takes into consideration shares of Common Stock outstanding (computed under basic net loss per share) and potentially dilutive securities that are not anti-dilutive.
Outstanding warrants that had no effect on the computation of dilutive weighted average number of shares outstanding as their effect would be anti-dilutive were approximately 7,000,000 and 7,000,000 as of March 31, 2020 and December 31, 2019, respectively. There were 87,456 and 87,456 potentially dilutive shares outstanding at March 31, 2020 and December 31, 2019, respectively.
Conversion of Series Q Preferred Stock into Common Stock would be anti-dilutive for the three months ended March 31, 2020 and 2019 and is not included in calculating the diluted weighted average number of shares outstanding.
Income taxes
The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC 740, "Income Taxes," which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
The Company applies the provisions of ASC 740, “Accounting for Uncertainty in Income Taxes." The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest, and penalties, accounting in interim periods, disclosure and transition. The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies). The first step evaluates the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that we will sustain the position on audit, including resolution of related appeals or litigation processes. The second step measures the tax benefit as the largest amount of more than 50% likely of being realized upon ultimate settlement. The Company did not identify any material uncertain tax positions on returns that have been filed or that will be filed.
20
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 2 - Summary of significant accounting policies (continued)
Income taxes (continued)
The Company did not recognize any interest or penalties for unrecognized tax provisions during the three months ended March 31, 2020 and 2019, nor were any interest or penalties accrued as of March 31, 2020 and December 31, 2019. To the extent the Company may accrue interest and penalties, it elects to recognize accrued interest and penalties related to unrecognized tax provisions as a component of income tax expense.
Advertising and promotion
The Company expenses advertising and promotion costs as incurred. Advertising and promotion costs for the three months ended March 31, 2020 and 2019 were $1,673 and $3,035, respectively.
Fair value measurements
The Company applies ASC 820, “Fair Value Measurement,” which defines fair value as the exchange price that would be received to sell 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, cash in attorney trust account, 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 available-for-sale investment securities is based on quoted market prices in active markets.
The fair value of the investment in account receivable is based on the net present value of calculated interest and principal payments. The carrying value approximates fair value as interest rates charged are comparable to market rates for similar investments.
The fair value of notes receivable is based on the net present value of calculated interest and principal payments less impairment, if any. The carrying value approximates fair value as interest rates charged are comparable to market rates for similar notes.
The fair value of long-term notes payable is based on the net present value of calculated interest and principal 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.
21
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 3 - Prepaid expenses and other assets
Prepaid expenses and other assets consist of the following:
|
|
March 31,
2020
|
|
December 31,
2019
|
Prepaid health and vehicle insurance
|
$
|
17,089
|
$
|
5,867
|
Other prepaid costs
|
|
28,391
|
|
53,198
|
|
$
|
45,480
|
$
|
59,065
|
Note 4 – Investment in account receivable
On April 10, 2015, the Company entered into an exchange agreement whereby the Company received an investment in an account receivable with annual installment payments of $117,000 for 11 years, through 2026, totaling $1,287,000 in exchange for 757,059 shares of Mentor Common Stock obtained through exercise of 757,059 Series D warrants at $1.60 per share plus a $0.10 per warrant redemption price.
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 investment in account receivable is supported by an exchange agreement and consisted of the following:
|
|
March 31,
2020
|
|
December 31,
2019
|
Face value
|
$
|
702,000
|
$
|
706,000
|
Unamortized discount
|
|
(302,143)
|
|
(320,488)
|
Net balance
|
|
399,857
|
|
385,512
|
Current portion
|
|
(117,000)
|
|
(4,000)
|
Long term portion
|
$
|
282,857
|
$
|
381,512
|
For the three months ended March 31, 2020 and 2019, $18,345 and $19,999 of discount amortization is included in interest income, respectively.
Note 5 - Property and equipment
Property and equipment is comprised of the following:
|
|
March 31,
2020
|
|
December 31,
2019
|
Computers
|
$
|
37,271
|
$
|
37,271
|
Furniture and fixtures
|
|
22,075
|
|
22,075
|
Machinery and vehicles
|
|
97,146
|
|
93,817
|
|
|
156,492
|
|
153,163
|
Accumulated depreciation and amortization
|
|
(125,384)
|
|
(121,542)
|
|
|
|
|
|
Net Property and equipment
|
$
|
31,108
|
$
|
31,621
|
Depreciation and amortization expense was $3,842 and $5,428 for the three months ended March 31, 2020 and 2019, respectively. Depreciation on WCI vehicles used to service customer accounts is included in cost of goods sold and all other depreciation is included in selling, general and administrative expenses in the condensed consolidated income statements.
22
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 6 – Lessee Leases
Our operating leases are comprised of office space and office equipment leases. Fleet leases entered into prior to January 1, 2019, under ASC 840 guidelines, are classified as operating leases. Fleet leases entered into beginning January 1, 2019, under ASC 842 guidelines, are classified as finance leases.
Gross right of use assets recorded under finance leases related to WCI vehicle fleet leases were $296,716 and $206,332 as of March 31, 2020 and December 31, 2019, respectively. Accumulated amortization associated with finance leases was $50,633 and $36,640 as of March 31, 2020 and December 31, 2019, respectively.
Lease costs recognized in our consolidated statements of operations is summarized as follows:
|
|
Three Months Ended
|
|
|
March 31,
2020
|
|
March 31,
2019
|
Operating lease cost included in cost of goods
|
$
|
45,956
|
$
|
50,924
|
Operating lease cost included in operating costs
|
|
14,274
|
|
19,629
|
Total operating lease cost (1)
|
|
60,230
|
|
70,553
|
Finance lease cost, included in cost of goods:
|
|
|
|
|
Amortization of lease assets
|
|
13,993
|
|
5,367
|
Interest on lease liabilities
|
|
3,494
|
|
260
|
Total finance lease cost
|
|
17,487
|
|
5,627
|
Short-term lease cost
|
|
8,970
|
|
8,370
|
Total lease cost
|
$
|
86,687
|
$
|
84,550
|
(1)Right of use asset amortization under operating agreements was $45,896 and $42,216 for the three months ended March 31, 2020 and 2019, respectively.
Other information about lease amounts recognized in our condensed consolidated financial statements is summarized as follows:
|
March 31,
2020
|
|
December 31,
2019
|
Weighted-average remaining lease term – operating leases
|
1.34 years
|
|
1.73 years
|
Weighted-average remaining lease term – finance leases
|
3.61 years
|
|
3.25 years
|
Weighted-average discount rate – operating leases
|
10.3%
|
|
10.2%
|
Weighted-average discount rate – finance leases
|
8.6%
|
|
9.0%
|
Finance lease liabilities were as follows:
|
|
March 31,
2020
|
|
December 31,
2019
|
Gross finance lease liabilities
|
$
|
267,203
|
$
|
208,641
|
Less: imputed interest
|
|
(43,292)
|
|
(54,548)
|
Present value of finance lease liabilities
|
|
223,911
|
|
154,093
|
Less: current portion
|
|
(57,895)
|
|
(41,675)
|
Long-term finance lease liabilities
|
$
|
166,016
|
$
|
112,418
|
23
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 6 – Lessee Leases (continued)
Operating lease liabilities were as follows:
|
|
March 31,
2020
|
|
December 31,
2019
|
Gross operating lease liabilities
|
$
|
297,102
|
$
|
356,958
|
Less: imputed interest
|
|
(23,807)
|
|
(31,622)
|
Present value of operating lease liabilities
|
|
273,295
|
|
325,336
|
Less: current portion
|
|
(171,306)
|
|
(184,436)
|
Long-term operating lease liabilities
|
$
|
101,989
|
$
|
140,900
|
Note 7 – Convertible notes receivable
Convertible notes receivable consists of the following:
|
|
March 31,
2020
|
|
December
31, 2019
|
November 22, 2017, NeuCourt, Inc. convertible note receivable including accrued interest of $500 and $191 at March 31, 2020 and December 31, 2019, respectively. The note bears interest at 5% per annum, originally matured November 22, 2019, and was extended to mature November 22, 2021. Principal and accrued interest are due at maturity. At the time of extension, NeuCourt paid the Company $2,496 of interest accrued through November 4, 2019. 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 (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 NeuCourt’s election to prepay the Note. *
|
$
|
25,500
|
$
|
25,191
|
|
|
|
|
|
October 31, 2018, NeuCourt, Inc. convertible note receivable including accrued interest of $3,578 and $2,930 at March 31, 2020 and December 31, 2019, respectively. The note bears interest at 5% per annum and matures October 31, 2020. Principal and accrued interest are due at 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 (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 NeuCourt’s election to prepay the Note. *
|
|
53,578
|
|
52,930
|
|
|
|
|
|
Total convertible notes receivable
|
|
79,078
|
|
78,121
|
|
|
|
|
|
Less current portion
|
|
(53,578)
|
|
(52,930)
|
|
|
|
|
|
Long term portion
|
$
|
25,500
|
$
|
25,191
|
* The Conversion Price for each 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 November 22, 2017 Note would convert into 94,400 Conversion Shares and the October 31, 2018 Note would convert into 198,346 Conversion Shares at March 31, 2020. In the event of a Corporate Transaction prior to repayment or conversion of the Note, the Company shall receive back two times the outstanding principal on the Note, plus all accrued unpaid interest.
24
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 8 - Note purchase agreement and consulting agreement with G FarmaLabs Limited
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 purchased two secured promissory notes from G Farma in an aggregate principal amount of $500,000, both of which bore interest at 7.42% per annum, with monthly payments beginning on April 15, 2017, and maturity on April 15, 2022. The two G Farma notes, as amended by subsequent addenda, are secured by all property, real and personal, tangible or intangible of G Farma and are guaranteed by GF Brands, Inc. and two majority shareholders of G Farma. Effective as of March 4, 2019, the Company and G Farma had executed eight addenda subsequent to the original agreement.
The latest addendum, Addendum VIII, was effective as of March 4, 2019. Addendum II through Addendum VIII increased the aggregate principal face amount of the working capital note to $990,000 and increased the monthly payments on the working capital note to $10,239 per month beginning March 15, 2019. G Farma has not made scheduled payments on the notes receivable since February 19, 2019.
On September 6, 2018, as a result of an Equity Purchase and Issuance Agreement, certain entities were obligated to deliver to Mentor equity interests equal to 3.75% of G Farma and its affiliates’ (“G Farma Equity Entities”) in exchange for Mentor relinquishing its contingent equity rights under the Rights Agreement, increasing the working capital loan by $79,000, and leasing $171,000 of additional equipment to G Farma through Partner I. At December 31, 2018, Mentor had estimated the fair value of the 3.75% equity interest in the G Farma Equity Entities Mentor was supposed to receive, based on then licensed operations of the G Farma Equity Entities, at $41,600. On March 4, 2019, Addendum VIII increased the working capital note by $31,000 and the Company obtained from G Farma an obligation to issue an additional 0.093% interest in the G Farma Equity Entities, resulting in a total 3.843% equity interest in the G Farma Equity Entities and included the addition of Goya Ventures, LLC as a party to the Equity Purchase and Issuance Agreement. However, due to the uncertain financial position of the G Farma Entities, following the closure of its Corporate office and impoundment of certain Mentor assets leased to G Farma, described in Notes 1 and 10, the Company fully impaired its equity interests in G Farma Equity Entities and recorded a loss on investments of $41,600 in the quarter ended March 31, 2019.
In addition, on March 17, 2017, the Company entered into a Consulting Agreement with G Farma whereby the Company was to receive a monthly consulting fee in arrears of $1,400 per month. This monthly consulting fee was increased proportionately with Addendum II and Addenda IV through VII resulting in a required fee of $2,741 per month as of December 31, 2018. Addendum VIII increased the required consulting fee to $2,828, effective March 15, 2019; however consulting fees have not been remitted by G Farma since February 19, 2019 and recognition of consulting fee revenue was suspended, effective April 1, 2019. Consulting fee revenue was $0 and $8,310 for the three months ended March 31, 2020 and 2019, respectively.
As described in Note 1, on February 22, 2019, the City of Corona Building Department closed access to G Farma’s corporate location and posted a notice preventing entry to the facility; the Company was not informed by G Farma of this incident until March 14, 2019. The notice cited unpermitted modifications to electrical, mechanical and plumbing, including all undetermined building modifications, as the reason for closure. On April 24, 2019, the Company was notified that certain G Farma assets at the corporate location, including equipment leased to G Farma by Mentor Partner I valued at approximately $427,804, were impounded by the Corona Police. This event significantly impacted G Farma’s financial position and its ability to make future payments under the notes purchase agreements and the finance leases receivable, described in Note 9, due the Company. In March 2020, we discovered that an additional component valued at $36,594 was missing from the equipment we recovered but we are uncertain whether this was taken by the Corona Police.
G Farma has not made scheduled payments on the notes receivable or the G Farma finance lease receivable, described in Note 9, since February 19, 2019. All arrangements with G Farma, were placed on non-accrual basis effective April 1, 2019. Accrual of interest on notes receivable and finance leases, as well as consulting revenue, was suspended April 1, 2019.
25
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 8 - Note purchase agreement and consulting agreement with G FarmaLabs Limited (continued)
Our investments in G Farma notes receivable were fully impaired in the first quarter of 2019. The Company recorded an impairment loss on notes receivable of $1,045,051, in the three months ended March 31, 2019, which is included in loss on investments in the condensed consolidated statement of income. On May 28, 2019, Mentor Capital, Inc. filed a complaint in the Superior Court of California in the County of Marin for, among other things, breach of contract against G Farma, its affiliates, and the guarantors of the various G Farma agreements, see Note 20.
Notes receivable from G Farma consists of the following:
|
|
March 31,
2020
|
|
December 31,
2019
|
Real estate note
|
$
|
111,009
|
$
|
111,009
|
Working capital note
|
|
934,042
|
|
934,042
|
Impairment recorded
|
|
(1,045,051)
|
|
(1,045,051)
|
Accrued interest
|
|
-
|
|
-
|
|
$
|
-
|
$
|
-
|
|
|
|
|
|
Note 9 – Finance leases receivable
Mentor Partner I
Partner I entered into a Master Equipment Lease Agreement with G FarmaLabs Limited and G FarmaLabs DHS, LLC (the “G Farma Lease Entities”) with guarantees by GFBrands, Inc., formerly known as G FarmaBrands, Inc, Ata Gonzalez and Nicole Gonzalez (collectively, the “G Farma Lease Guarantors”) dated January 16, 2018, and amended March 7, April 4, June 20, and September 7, 2018, and March 4, 2019. Partner I acquired and delivered manufacturing equipment as selected by G Farma Lease Entities under sales-type finance leases. Partner I did not report equipment sales revenue for either of the three months ended March 31, 2020 and 2019.
As discussed in Notes 1 and 8, on February 22, 2019, the City of Corona Building Department closed access to G Farma’s corporate location; the Company was not informed by G Farma of this incident until March 14, 2019. On April 24, 2019, the Company was informed that certain G Farma assets at its corporate location, including equipment leased to G Farma by Mentor Partner I under the Master Equipment Lease Agreement valued at approximately $427,804, was impounded by the Corona Police. This event severely impacted G Farma’s ability to pay amounts due the Company in the future and the G Farma lease receivable was put on non-accrual status effective April 1, 2019 and is classified as non-performing on the consolidated balance sheets at March 31, 2020 and December 31, 2019. In March 2020, we discovered that an additional component valued at $36,594 was missing from the equipment recovered by Mentor. Bad debt expense of $6,969 and $668,958 for the three months ended March 31, 2020 and 2019, respectively, is included in selling, general and administrative expenses in the consolidated income statement.
On May 28, 2019, Partner I and Mentor Capital, Inc. filed a complaint in the Superior Court of California in the County of Marin for, among other things, breach of contract against the G Farma Lease Entities and the G Farma Lease Guarantors. As of December 31, 2019, the G Farma Lease Entities had unauthorized possession of Mentor Partner I, LLC’s equipment valued at approximate $792,425 which was not seized by the Corona Police Department and are in default of their obligations under the Master Equipment Lease.
On January 22, 2020, the Court granted the Company’s motion for writ of possession and preliminary injunction prohibiting defendants from retaining control of or selling leased property and, on January 31, 2020, all remaining equipment leased to G Farma by Mentor Partner I which was not impounded by the Corona Police was repossessed by the Company and moved to storage under the Company’s control. On March 5, 2020, the Company sold a portion of the recovered equipment, with an original cost of $495,967, for $240,000, however, because a component of the equipment was reported missing, the Company refunded $17,969 to the purchasing party. The net sale proceeds of $222,031 was credited against the gross lease receivable at March 31, 2020. The remainder of repossessed equipment is classified as held for sale equipment in the condensed consolidated balance sheet at March 31, 2020 at an estimated net realizable value of $40,000. Remaining net lease payments receivable of $793,649 are fully reserved for at March 31, 2020 and we will continue to pursue collection from the G Farma Lease Entities and G Farma Lease Guarantors for collection on all amounts due that have not been recovered through the sale of assets.
26
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 9 – Finance leases receivable (continued)
Net finance leases receivable, non-performing, consists of the following:
|
|
March 31,
2020
|
|
December 31,
2019
|
Gross minimum lease payments receivable
|
$
|
1,233,654
|
$
|
1,455,685
|
Less: unearned interest
|
|
(400,005)
|
|
(400,005)
|
Less: reserve for bad debt
|
|
(793,649)
|
|
(786,680)
|
Less: transfer to assets held for sale
|
|
(40,000)
|
|
-
|
Finance leases receivable
|
|
-
|
|
269,000
|
Less current portion
|
|
-
|
|
(269,000)
|
Long term portion
|
$
|
-
|
$
|
-
|
Mentor Partner II
Partner II entered into a Master Equipment Lease Agreement with Pueblo West, dated February 11, 2018 and amended November 28, 2018 and March 12, 2019. Partner II acquired and delivered manufacturing equipment as selected by Pueblo West under sales-type finance leases. Partner II recorded equipment sales revenue of $0 and $74,889 for the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020, all Partner II leased equipment under finance leases receivable is located in Colorado.
We review the finance leases receivables by individual account to determine expected collectability. The allowance for credit losses is an estimate of the losses inherent in our finance receivables taking into consideration past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of underlying collateral and current economic conditions.
The Company issues a payment schedule upon inception of the lease. Revenue is recognized at the time equipment is delivered. Principal on lease payments received prior to delivery of equipment is recorded as a decrease in the finance lease receivable and interest received in advance is recorded as a liability under deferred revenue.
Performing net finance leases receivable consists of the following:
|
|
March 31,
2020
|
|
December 31,
2019
|
Gross minimum lease payments receivable
|
$
|
560,311
|
$
|
587,854
|
Accrued interest
|
|
2,385
|
|
2,463
|
Less: unearned interest
|
|
(134,435)
|
|
(145,445)
|
Finance leases receivable
|
|
428,261
|
|
444,872
|
Less current portion
|
|
(63,804)
|
|
(62,145)
|
Long term portion
|
$
|
364,457
|
$
|
382,727
|
Interest income recognized from Partner I finance leases for the three months ended March 31, 2020 and 2019, was $0 and $23,811, respectively.
Interest income recognized from Partner II finance leases for the three months ended March 31, 2020 and 2019, was $12,539 and $13,079, respectively.
27
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 9 – Finance leases receivable (continued)
At March 31, 2020, minimum future payments receivable for performing finance leases receivable were as follows:
12 months ending March 31,
|
|
Total
|
2021
|
$
|
63,804
|
2022
|
|
70,896
|
2023
|
|
78,776
|
2024
|
|
87,532
|
2025
|
|
97,161
|
Thereafter
|
|
30,092
|
|
$
|
428,261
|
Note 10 - Contractual interests in legal recoveries
Interest in G FarmaLabs Limited legal recovery
On March 22, 2017, G Farma purchased 222,223 restricted shares of the Company’s Common Stock in a private placement at a price of $2.25 per share, for an aggregate purchase price of $500,002. Pursuant to Addendum II entered into on April 28, 2017, G Farma purchased an additional 66,667 shares of the Company’s Common Stock at $1.50 per share for an aggregate purchase price of $100,000. The combined total purchase of $600,002 was 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 including a $10 million claim filed March 29, 2017, against the County of Calaveras, 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).
G Farma’s civil forfeiture case in the Federal District Court for the Eastern District of California, a portion of which was one of the three ways in which the purchase price could be paid for the purchase of shares of Mentor Common Stock, was dismissed on April 12, 2018 and has no value. In the quarter ended March 31, 2019, the $600,002 contractual interest in G Farma’s legal recovery intended as consideration for payment of the shares of Company’s Common Stock was fully impaired due to the events discussed in Notes 1, 8, and 9, where the City of Corona Building Department closed access to G Farma’s corporate location and the Corona Police impounded certain G Farma assets. These events significantly impacted G Farma’s financial position and its ability to make payments under the notes receivable which negatively impacts option (ii) for the payment of the purchase price for the shares of Company’s Common Stock. Currently G Farma does not have an agreement to offer G Farma securities to other persons under purchase price payment option (iii), and any such securities would, at this point, likely have no value. G Farma defaulted on payment of the promissory notes leaving the Company with no means of collecting on the final alternative source of payment for the shares of common stock. On October 3, 2019, the Company rescinded the sale of an aggregate of 288,890 shares of its Common Stock to G Farma, issued at an aggregate purchase price of $600,002, due to a complete failure of consideration. The Company recognized the rescission of the Common Stock at par value on December 31, 2019. On March 6, 2020, the 288,890 shares of Common Stock were cancelled and returned to unissued shares by the Company’s stock transfer agent.
28
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 10 - Contractual interests in legal recoveries (continued)
Interest in Electrum Partners, LLC legal recovery
Electrum is the plaintiff in that certain legal action captioned Electrum Partners, LLC, Plaintiff, and Aurora Cannabis Inc., Defendant, pending in the Supreme Court of British Columbia (“Litigation”). On October 23, 2018, Mentor entered into a Joint Prosecution Agreement among Mentor, Mentor’s corporate legal counsel, Electrum, and Electrum’s legal counsel.
On October 30, 2018, Mentor entered into a Recovery Purchase Agreement (“Recovery Agreement”) with Electrum under which Mentor purchased a portion of Electrum’s potential recovery in the Litigation. Mentor agreed to pay $100,000 of costs incurred in the Litigation, in consideration for ten percent (10%) of anything of value received by Electrum as a result of the Litigation (“Recovery”) in addition to repayment of its initial investment. As of March 31, 2020 and December 31, 2019, Mentor invested an additional $96,716 and $46,195, respectively, of capital in Electrum for payment of legal retainers and fees in consideration for an additional nine percent (9%) and four percent (4%), respectively, of the Recovery. At March 31, 2020 and December 31, 2019, the Recovery Agreement investment is reported in the condensed consolidated balance sheets at our cost of $196,912 and $146,195, respectively. This investment is subject to loss should Electrum not prevail in the Litigation. However Company management estimates that recovery is more likely than not, and no impairment has been recorded at March 31, 2020 and December 31, 2019. Subsequent to quarter-end, on April 30, 2020, $15,383 of Mentor’s funds were returned to the Company which decreased the additional consideration to $81,547 and decreased the amount of the Recovery to which Mentor is entitled to eighteen percent (18%), see Note 22.
On October 31, 2018, Mentor also entered into a secured Capital Agreement with Electrum under which Mentor invested an additional $100,000 of capital in Electrum. In consideration for Mentor’s investment, Electrum shall pay to Mentor, on the payment date, the sum of (i) $100,000, (ii) ten percent of the Recovery, and (iii) 0.083334% of the Recovery for each full month from October 31, 2018 to the payment date for each full month that $833 is not paid to Mentor. The payment date under the October 31, 2018 Capital Agreement is the earlier of November 1, 2021, or the final resolution of the Litigation. Payment is secured by all assets of Electrum. This investment is included at cost of $100,000 in Contractual interests in legal recoveries on the condensed consolidated balance sheets at March 31, 2020 and December 31, 2019.
On January 28, 2019, Mentor entered into a second secured Capital Agreement with Electrum. Under the second Capital Agreement, Mentor invested an additional $100,000 of capital in Electrum. In consideration for Mentor’s investment, Electrum shall pay to Mentor on the payment date the sum of (i) $100,000, (ii) ten percent (10%) of the Recovery, and (iii) the greater of (A) 0.083334% of the Recovery for each full month from the date hereof until the payment date if the Recovery occurs prior to the payment date, and (B) $833.34 for each full month from the date hereof until the payment date. The payment date is the earlier of November 1, 2021, and the final resolution of the Litigation. This investment is included at its $100,000 cost as part of the Contractual interests in legal recoveries on the condensed consolidated balance sheets at March 31, 2020 and December 31, 2019. In addition, the second Capital Agreement provides that Mentor may, at any time up to and including 90 days following the payment date, elect to convert its 6,198 membership interests in Electrum into a cash payment of $194,028 plus an additional 19.4% of the Recovery.
29
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 11 - Concentration of credit risk
The Company had a significant portion of its assets invested in G Farma entities, which assets have now been impaired. These investments included the notes receivable and the intended 3.843% equity in G Farma Equity Entities described in Note 8, and the finance leases receivable described in Note 9. After the bad debt reserve described in Note 9 and the asset impairments described in Notes 8, 9, and 10, these assets represent 0% and 5% of the consolidated total assets of the Company at March 31, 2020 and December 31, 2019, respectively.
The Company closely monitors each investment based on known and inherent risks in our investments which include financial results, satisfying scheduled payments and compliance with financial covenants, adverse situations that may affect the borrower’s ability to repay, estimated value of underlying collateral and current economic conditions.
The events described in Notes 1, 8, 9, and 10, led the Company to record a bad debt reserve against finance leases receivable of $793,649 and $786,680 at March 31, 2020 and December 31, 2019, respectively. Bad debt expense related to the finance leases receivable of $6,969 and $668,958, respectively, is included in selling, general and administrative expenses in the condensed consolidated income statements for the three months ended March 31, 2020 and 2019, respectively.
These same events, led the Company to fully impair G Farma notes receivable of $1,045,051, fully impair the $600,002 contractual interest in G Farma’s legal recovery, and fully impair the Company’s 3.843% equity interest in G Farma Equity Entities, formerly valued at $41,600 as of March 31, 2020 and December 31, 2019. On October 3, 2019, the Company rescinded the sale of an aggregate of 288,890 shares of its Common Stock to G Farma, due to complete failure of consideration, see Note 10. Impairments related to the G Farma investments of $0 and $1,639,558 are included in Gain (loss) in investments in the condensed consolidated income statements for the three month periods ended March 31, 2020 and 2019, respectively.
For G Farma notes receivable, we will continue to pursue collection from G Farma, its affiliates, and the guarantors of the various G Farma note purchase agreements, see Note 8. We will continue to pursue collection for lease payments remaining, after applying proceeds from the sale of recovered assets, from the G Farma Lease Entities and G Farma Lease Guarantors, see Note 9.
Note 12 – 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.
30
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 12 – Investments and fair value (continued)
The hierarchy of 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
|
|
Significant
Unobservable
Inputs
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
(Level 3)
|
|
(Level 3)
|
|
|
Investment in
Securities
|
|
|
|
Contractual interest
Legal Recovery
|
|
Investment in
Common Stock
Warrants
|
|
Other Equity
Investments
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets)
|
|
(76,395)
|
|
-
|
|
(600,002)
|
|
-
|
|
(41,600)
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales, and settlements
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
-
|
|
-
|
|
146,195
|
|
-
|
|
-
|
Issuances
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Sales
|
|
(286,190)
|
|
-
|
|
-
|
|
-
|
|
-
|
Settlements
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Balance at December 31, 2019
|
|
-
|
|
-
|
|
346,195
|
|
5,669
|
|
204,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets)
|
|
(5,037)
|
|
-
|
|
-
|
|
(5,169)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales, and settlements
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
38,115
|
|
-
|
|
50,717
|
|
-
|
|
-
|
Issuances
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Sales
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Settlements
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Balance at March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,078
|
$
|
-
|
$
|
396,912
|
$
|
500
|
$
|
204,028
|
|
|
|
|
|
|
|
|
|
|
|
The amortized costs, gross unrealized holding gains and losses, and fair values of the Company’s investment securities classified as equity securities, at fair value, at March 31, 2020 consists of the following:
Type
|
|
Amortized
Costs
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Values
|
NYSE listed company stock
|
$
|
38,115
|
$
|
-
|
$
|
(5,037)
|
$
|
33,078
|
31
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 12 – Investments and fair value (continued)
The portion of unrealized gains and losses for the period related to equity securities still held at the reporting date is calculated as follows:
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019
|
Net gains and losses recognized during the period on equity securities
|
$
|
(5,037)
|
$
|
71,930
|
|
|
|
|
|
Less: Net gains (losses) recognized during the period on equity securities sold during the period
|
|
-
|
|
69,403
|
|
|
|
|
|
Unrealized gains and losses recognized during the reporting period on equity securities still held at the reporting date
|
$
|
(5,037)
|
$
|
2,527
|
Note 13 - 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.
All Series A, B, C and D warrants have been called, and all Series A and C warrants have been exercised. All Series B warrants had been exercised at December 31, 2017 however, on January 23, 2018, 117,000 shares of Mentor’s Common Stock purchased in 2014 through warrant exercises by two Bhang shareholders under an agreement that was ultimately rescinded, were returned to the Company and the associated exercise of warrants was reversed with 87,456 Series B warrants and 29,544 Series D warrants reinstated. The Company intends to allow warrant holders or Company designees, in place of original holders, additional time as needed to exercise the remaining series B and D warrants. The Company may lower the exercise price of all or part of a warrant series at any time. Similarly, the Company could reverse split 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 15. All such changes in the exercise price of warrants were provided for by the court in the Plan of Reorganization 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 did not record 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 March 31, 2020 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 1 Financial Securities, Inc. and a related Strategic Advisory Agreement with Lenox Hill Partners, LLC 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 March 31, 2020 and December 31, 2019, the weighted average contractual life for all Mentor warrants was 18.3 years and 18.5 years, respectively, and the weighted average outstanding warrant exercise price was $2.11 and $2.11 per share, respectively.
32
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 13 - Common stock warrants (continued)
During the three months ended March 31, 2020 and 2019, there were no warrants exercised and there were no warrants issued. The intrinsic value of outstanding warrants at March 31, 2020 and December 31, 2019 was $0 and $875, respectively.
The following table summarizes Series B and Series D common stock warrants as of each period:
|
|
Series B
|
|
Series D
|
|
B and D Total
|
Outstanding at December 31, 2018
|
|
87,456
|
|
6,252,954
|
|
6,340,410
|
Issued
|
|
-
|
|
-
|
|
-
|
Exercised
|
|
-
|
|
-
|
|
-
|
Outstanding at December 31, 2019
|
|
87,456
|
|
6,252,954
|
|
6,340,410
|
Issued
|
|
-
|
|
-
|
|
-
|
Exercised
|
|
-
|
|
-
|
|
-
|
Outstanding at March 31, 2020
|
|
87,456
|
|
6,252,954
|
|
6,340,410
|
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. The following table summarizes Series H ($7) warrants as of each period:
|
|
Series H $7.00
exercise price
|
Outstanding at December 31, 2018
|
|
689,159
|
Issued
|
|
-
|
Exercised
|
|
-
|
Outstanding at December 31, 2019
|
|
689,159
|
Issued
|
|
-
|
Exercised
|
|
-
|
Outstanding at March 31, 2020
|
|
689,159
|
On February 9, 2015, in accordance with Section 1145 of the United States Bankruptcy Code and the Company’s Plan of Reorganization, the Company announced a minimum 30-day partial redemption of up to 1% (approximately 90,000) 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 the Company’s 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 periodically recalculated and repeated until such unexercised warrants are exhausted, or the partial redemption is otherwise paused, suspended or truncated by the Company. For the three months ended March 31, 2020 and 2019, no warrants were redeemed.
33
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 14 - 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 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 through DTCC or 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, Series B and Series C redemption fees have been distributed through DTCC into holder’s brokerage accounts or directly to the holders. All Series A and Series C warrants have been exercised and are no longer outstanding. There are 87,456 Series B warrants outstanding which are held by Chet Billingsley, the Company’s Chief Executive Officer (“CEO”).
Once the Series D warrants have been fully redeemed and exercised the fees for the Series D warrant series will likewise be distributed. Mr. Billingsley has agreed to assume liability for paying these 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 redemption fees to former holders from amounts due to Mr. Billingsley from the Company, which are sufficient to cover the redemption fees at March 31, 2020 and December 31, 2019.
Note 15 - Stockholders’ equity
Common Stock
The Company was incorporated in California in 1994 and was redomiciled as a Delaware corporation, effective September 24, 2015. There are 75,000,000 authorized shares of Common Stock at $0.0001 par value. The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of the stockholders.
On August 8, 2014, the Company announced that it was initiating the repurchase of 300,000 shares of its Common Stock (approximately 2% of the Company’s common shares outstanding at that time). As of March 31, 2020 and December 31, 2019, 44,748 and 44,748 shares have been repurchased and retired, respectively.
Preferred Stock
Mentor has 5,000,000, $0.0001 par value, preferred shares authorized.
On July 13, 2017, the Company filed a Certificate of Designation of Rights, Preferences, Privileges and Restrictions of Series Q Preferred Stock (“Certificate of Designation”) with the Delaware Secretary of State to designate 200,000 preferred shares as Series Q Preferred Stock, such series having a par value of $0.0001 per share. Series Q Preferred Stock is convertible into Common Stock, at the option of the holder, at any time after the date of issuance of such share and prior to notice of redemption of such share of Series Q Preferred Stock by the Company, into such number of fully paid and nonassessable shares of Common Stock as determined by dividing the Series Q Conversion Value by the Conversion Price at the time in effect for such share.
The per share “Series Q Conversion Value”, as defined in the Certificate of Designation, shall be calculated by the Company at least once each calendar quarter as follows: The per share Series Q Conversion Value shall be equal the quotient of the “Core Q Holdings Asset Value” divided by the number of issued and outstanding shares of Series Q Preferred Stock. The “Core Q Holdings Asset Value” shall equal the value, as calculated and published by the Company, of all assets that constitute Core Q Holdings which shall include such considerations as the Company designates and need not accord with any established or commonly employed valuation method or considerations. “Core Q Holdings” consists of all proceeds received by the Company on the sale of shares of Series Q Preferred Stock and all securities, acquisitions, and business acquired from such proceeds by the Company. The Company shall periodically, but at least once each calendar quarter, identify, update, account for and value, the assets that comprise the Core Q Holdings.
34
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 15 - Stockholders’ equity (continued)
Preferred Stock (continued)
The “Conversion Price” of the Series Q Preferred Stock shall be at the product of 105% and the closing price of the Company’s Common Stock on a date designated and published by the Company. The Series Q Preferred Stock is intended to allow for a pure play investment in cannabis companies that have the potential to go public. The Series Q Preferred Stock will be available only to accredited, institutional or qualified investors.
The Company sold and issued 11 shares of Series Q Preferred Stock on May 30, 2018, at a price of $10,000 per share, for an aggregate purchase price of $110,000 (“Series Q Purchase Price”). The Company invested the Series Q Purchase Price as capital in Partner II to purchase equipment to be leased to Pueblo West. Therefore, the Core Q Holdings at March 31, 2020 and December 31, 2019 include this interest. The Core Q Holdings Asset Value at March 31, 2020 and December 31, 2019 was $14,977 and $14,621 per share, respectively. There is no contingent liability for the Series Q Preferred Stock conversion at March 31, 2020 and December 31, 2019. At March 31, 2020 and December 31, 2019, the Series Q Preferred Stock could have been converted at the Conversion Price of $0.095 and $0.13, respectively, into an aggregate of 1,734,247 and 1,237,166 shares of the Company’s Common Stock, respectively. Because there were net losses for the three month periods ended March 31, 2020 and 2019, these shares were anti-dilutive and therefore are not included in the weighted average share calculation for these periods.
Note 16 – Lease commitments
We have entered into non-cancellable operating and finance leases for office and warehouse space, computers, furniture, fixtures, machinery and vehicles, see Note 6. The following summarizes our lease liability maturities for operating and finance leases:
Maturity of lease liabilities
|
|
|
|
|
12 months ending March 31,
|
|
Finance leases
|
|
Operating leases
|
2021
|
$
|
57,895
|
$
|
171,306
|
2022
|
|
62,893
|
|
96,028
|
2023
|
|
66,125
|
|
5,961
|
2024
|
|
25,030
|
|
-
|
2025
|
|
11,968
|
|
-
|
Total
|
|
223,911
|
|
273,295
|
Less: Current maturities
|
|
57,895
|
|
171,306
|
Long-term liability
|
$
|
166,016
|
$
|
101,989
|
35
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 17 - Long term debt
Long term debt
Long term debt at March 31, 2020 and December 31, 2019 consists of the following:
|
|
March 31,
2020
|
|
December 31,
2019
|
|
|
|
|
|
Loan through American Express National Bank, AENB, interest at 8.99% per annum, monthly principal and interest payments of $2,284, maturing December 2020.
|
$
|
17,656
|
$
|
24,017
|
|
|
|
|
|
Total notes payable
|
|
17,656
|
|
24,017
|
|
|
|
|
|
Less: Current maturities
|
|
17,656
|
|
24,017
|
|
|
|
|
|
Long-term debt
|
$
|
-
|
$
|
-
|
Note 18 - Accrued salary, accrued retirement and incentive fee - related party
As of March 31, 2020 and December 31, 2019, the Company had an outstanding liability to its CEO as follows:
|
|
March 31,
2020
|
|
December 31,
2019
|
Accrued salaries and benefits
|
$
|
834,129
|
$
|
829,231
|
Accrued retirement and other benefits
|
|
543,026
|
|
540,860
|
Offset by shareholder advance
|
|
(261,653)
|
|
(261,653)
|
|
$
|
1,115,502
|
$
|
1,108,438
|
As approved by resolution of the Board of Directors in 1998, the CEO will be paid an incentive fee and a bonus which are payable in installments at the CEO’s option. The incentive fee is 1% of the increase in market capitalization based on the bid price of the Company’s 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 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. For the three months ended March 31, 2020 and 2019, the incentive fee expense was $0 and $0, respectively.
Note 19 – Related party transactions
WCI received a short term loan from an officer of WCI in December 2018. The loan did not originally bear interest and the balance reported on the condensed consolidated balance sheet as a related party payable, at March 31, 2020 and December 31, 2019, was $0 and $27,472, respectively. Due to the length of time the loan was outstanding, interest of $2,065 (6%) was paid with the final balance due on January 23, 2020.
36
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 20 – Commitments and contingencies
On May 28, 2019, the Company and Mentor Partner I, LLC filed suit against the G Farma Entities and three guarantors to the G Farma agreements, described in Notes 1, 8, 9, and 10, in the California Superior Court in and for the County of Marin. The Company is primarily seeking monetary damages for breach of the G Farma agreements including promissory notes, leases, and other agreements, as well as actions for an injunction to recover leased property, to recover collateral under a security agreement, and to collect from guarantors on the agreements. Mentor intends to vigorously pursue this matter; however, collection is uncertain at this time. Due to uncertainty of collection, the Company has recorded reserves against the finance leases receivable described in Note 9 and has fully impaired all other notes receivables and investments in G Farma described in Notes 8, 9 and 10.
On January 31, 2020, all remaining equipment leased to G Farma by Mentor Partner I which was not impounded by the Corona Police was repossessed by the Company and moved to storage under the Company’s control. On March 5, 2020, the Company sold a portion of the recovered equipment, with an original cost of $495,967, for $240,000, however, because a component of the equipment was reported missing by the purchaser, the Company refunded $17,969 to the purchasing party. The net sale proceeds of $222,031 was credited against the gross lease receivable at March 31, 2020. The remainder of repossessed equipment is classified as held for sale equipment in the condensed consolidated balance sheet at March 31, 2020 at an estimated net realizable value of $40,000.
For G Farma notes receivable we will continue to pursue collection from G Farma, its affiliates, and the guarantors of the various G Farma note purchase agreements, see Note 8. We will continue to pursue collection for lease payments remaining, after applying proceeds from the sale of recovered assets, from the G Farma Lease Entities and G Farma Lease Guarantors, see Note 9.
On November 13, 2019, G Farma filed a Cross-Complaint for declaratory relief and breach of contract relating to the consulting agreement between Mentor and G Farma. The Company filed an answer on December 6, 2019 denying each and every allegation of the Cross-Complaint and intends to vigorously defend itself in this matter.
Note 21 – Segment Information
The Company is an operating, acquisition, and investment business. Subsidiaries in which the Company has a controlling financial interest are consolidated. The Company has determined that there are two reportable segments; 1) the cannabis and medical marijuana segment which includes the cost basis of membership interests of Electrum, the contractual interest in the Electrum legal recovery, the fair value of convertible notes receivable and accrued interest from NeuCourt, the notes receivable from G Farma, the contractual interest in the G Farma legal recovery, the equity in G Farma Equity Entities, finance leases to G Farma and finance leases to Pueblo West, the operation of subsidiaries in the cannabis and medical marijuana sector, and in 2019, included the fair value of cannabis stock securities investments, and 2) the Company’s legacy investment in WCI which works with business park owners, governmental centers, and apartment complexes to reduce their facility related operating costs. The Company also had a certain small cancer-related legacy investment until March 2018, a small investment in General Dynamics Corp. (NYSE: GD), an aerospace and defense corporation, 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
|
|
Facility
Operations
Related
|
|
Corporate
and
Eliminations
|
|
Consolidated
|
Three months ended March 31, 2020
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
12,538
|
$
|
1,136,924
|
$
|
-
|
$
|
1,149,462
|
Operating income (loss)
|
|
(8,905)
|
|
34,176
|
|
(261,994)
|
|
(236,723)
|
Interest income
|
|
980
|
|
-
|
|
18,423
|
|
19,403
|
Interest expense
|
|
-
|
|
8,471
|
|
(1,134)
|
|
7,337
|
Property additions
|
|
-
|
|
3,329
|
|
-
|
|
3,329
|
Depreciation and amortization
|
|
-
|
|
2,640
|
|
1,202
|
|
3,842
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
120,089
|
$
|
955,906
|
$
|
-
|
$
|
1,075,995
|
Operating income (loss)
|
|
(606,697)
|
|
17,179
|
|
(266,726)
|
|
(856,244)
|
Interest income
|
|
20,679
|
|
3
|
|
21,898
|
|
42,580
|
Interest expense
|
|
-
|
|
5,657
|
|
(1,134)
|
|
4,523
|
Property additions
|
|
-
|
|
8,159
|
|
-
|
|
8,159
|
Depreciation and amortization
|
|
-
|
|
2,653
|
|
2,932
|
|
5,585
|
37
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020 and 2019
Note 21 – Segment Information (continued)
The following table reconciles operating segments and corporate-unallocated operating income (loss) to consolidated income before income taxes, as presented in the unaudited condensed consolidated income statements:
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019
|
Operating loss
|
$
|
(236,723)
|
$
|
(856,244)
|
Interest income
|
|
19,403
|
|
42,580
|
Gain (loss) on investments
|
|
(10,206)
|
|
(1,569,881)
|
Interest expense
|
|
(7,337)
|
|
(4,523)
|
Other income
|
|
12,084
|
|
-
|
|
|
|
|
|
Income (loss) before income taxes
|
$
|
(222,779)
|
$
|
(2,388,068)
|
Note 22 – Subsequent events
On April 23, 2020, Mentor received a Paycheck Protection Program loan of $76,500 from the U.S. Small Business Administration (“SBA”) which matures April 22, 2022. Mentor may apply to the SBA for forgiveness of the amount due on the loan in an amount equal to the sum of the following costs incurred by Mentor during the 8-week period beginning on the date of first disbursement of the loan, April 24, 2020: a) payroll costs; b) any payment of interest on a covered mortgage obligation; c) any payment on a covered rent obligation; and d) any covered utility payment. The amount of loan forgiveness shall be calculated in accordance with the requirements of the Paycheck Protection Program, including the provisions of Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act. Not more than 25% of the amount forgiven can be attributable to non-payroll costs. Loan interest is one percent (1%) per annum, with monthly principal and interest payments of $4,305 beginning November 1, 2020.
On April 30, 2020, $15,383 of Mentor’s funds invested in Electrum Partners, LLC, used a legal retainer in its ongoing litigation, described in Note 10, was returned which decreased Mentor’s additional investment in the legal recovery to $81,547.
On May 5, 2020, the United States patent was issued for MCIP’s interest in the patent application for THC and CBD vape pens for various THC and CBD percentage ranges and concentrations, as discussed in Note 1.
On May 6, 2020, WCI received a Paycheck Protection Program loan of $383,342 from the SBA which matures May 5, 2022. WCI may apply to the SBA for forgiveness of the amount for costs incurred by WCI during the 8-week period beginning on the date of first disbursement of the loan, May 7, 2020. Loan interest is one percent (1%) per annum, with monthly principal and interest payments of $21,579 beginning December 1, 2020.
38