* 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
September 30, 2019 and 2018
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.
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 invest in intellectual property and specifically to hold the investment in patent interests obtained on April 4, 2016 when Mentor Capital, Inc. entered into an agreement with R. Larson and Larson Capital (“Larson”) to seek and secure the benefits of mutual effort directed toward the capture of license fees from domestic and foreign THC and CBD cannabis vape patents.
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%. This investment is carried at $0 and $0 at September 30, 2019 and December 31, 2018, respectively, on the condensed consolidated balance sheets.
The Company has a membership equity interest in Electrum Partners, LLC (“Electrum”) which is carried at cost of $194,028 at September 30, 2019 and December 31, 2018.
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 for the purpose of cannabis-focused investing. 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 were fully impaired at September 30, 2019, see Note 9.
11
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 1 - Nature of operations (continued)
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 for the purpose of cannabis-focused investing. 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 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 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 8.
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 11, Mentor provided capital for payment of Litigation costs in the amount of $110,500 and $100,000 as of September 30, 2019 and December 31, 2018, respectively. In exchange, Mentor will receive 11.00% 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 6.6% of NeuCourt’s issued and outstanding common stock
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 approximately $427,804 of equipment under lease to G Farma from Partner I, 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 11.
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 $752,148 on the finance lease receivable, see Note 9, and fully impaired G Farma notes receivable and the contractual interest in G Farma’s legal recovery, see Note 8, in the quarter ended June 30, 2019. This resulted in an impairment of $1,073,731 on G Farma notes receivable of $1,045,051 plus accrued interest of $28,680, and a full impairment of $600,002 for our investment in the G Farma contractual interest in legal recovery. The Company’s investment in G Farma Entities, previously valued at $41,600, has also been reduced to $0, see Notes 8 and 11.
12
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 1 - Nature of operations (continued)
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 11, 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 an action for an injunction to recover leased property, recover collateral under a security agreement, and collect from guarantors on the agreements, among other things. Mentor intends to vigorously pursue this matter, however, collection is uncertain at this time. See Note 21.
Note 2 - Summary of significant accounting policies
Condensed consolidated financial statements
The unaudited condensed consolidated financial statements of the Company for the nine month period ended September 30, 2019 and 2018 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, 2018 was derived from the audited financial statements included in the Company's financial statements as of and for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2019. 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.
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.
Use of estimates
The preparation of our 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 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.
13
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
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.
Revenue Recognition – As of January 1, 2018, we adopted ASU No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). Under the new guidance, an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. Leasing revenue recognition is specifically excluded and therefore the new standard is only applicable to service fee and consulting revenue. A five-step model has been introduced for an entity to apply when recognizing revenue. The new guidance also includes enhanced disclosure requirements. The guidance was effective January 1, 2018 and was applied on a modified retrospective basis. The adoption did not have an impact on our financial statements.
Financial Instruments - As of January 1, 2018, we adopted ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which requires us to prospectively record changes in the fair value of our equity investments, except for those accounted for under the equity method, in net income instead of in accumulated other comprehensive income. As of January 1, 2018, we recognized a decrease of $34,822 in retained deficit for the cumulative effect of the adoption of ASU 2016-01, with an offset to accumulated other comprehensive income (AOCI).
Lease Accounting – As of January 1, 2019, we adopted ASU No. 2016-02, “Leases,” or ASC 842, which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the balance sheet. As permitted by ASC 842, we elected the adoption date of January 1, 2019, which is the date of initial application. As a result, the consolidated balance sheet prior to January 1, 2019 is not comparative as it was not restated and continues to be reported under ASC Topic 840, Leases, or ASC 840, which did not require the recognition of operating lease liabilities on the balance sheet. Under ASC 842, all leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease charges are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of-use asset is recorded in operating expenses and an implied interest component is recorded in interest expense. The expense recognition for operating leases and finance leases under ASC 842 is substantially consistent with ASC 840. As a result, there is no significant difference in our results of operations presented in our consolidated income statement and consolidated statement of comprehensive income for each period presented. Under the new guidance, our lessor accounting is unchanged.
We adopted ASC 842 using a modified retrospective approach for all leases existing at January 1, 2019. The adoption of ASC 842 had a substantial impact on our balance sheet. The most significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases. The accounting for finance leases (capital leases) was substantially unchanged. Accordingly, upon adoption, leases that were classified as operating leases under ASC 840 were classified as operating leases under ASC 842, and we recorded an adjustment of $538,179 to operating lease right-of-use assets and the related lease liability. The lease liability is based on the present value of the remaining minimum lease payments, determined under ASC 840, discounted using our secured incremental borrowing rate at the effective date of the original lease date, using the original lease term as the tenor. As permitted under ASC 842, we elected several practical expedients that permit us to not reassess (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability.
14
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
Recent Accounting Standards (continued)
We also adopted the following standards on the applicable effective dates, none of which had a material impact on our financial statements or financial statement disclosures.
Standard
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Effective date
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2018-07
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Compensation – Stock Compensation: Improvements to Nonemployee Share-Based
Payment Accounting
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January 1, 2019
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2017-08
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Receivables - Nonrefundable Fees and Other Costs – Premium Amortization on Purchased Callable Debt Securities
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January 1, 2018
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2016-18
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Statement of Cash Flows – Restricted Cash
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January 1, 2018
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2016-16
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Income Taxes – Intra-Entity Transfers of Assets Other Than Inventory
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January 1, 2018
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2016-15
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Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments
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January 1, 2018
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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 of our fiscal year beginning after December 15, 2021, 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 that ASU 2016-13 will have on our consolidated financial statements and related disclosures.
Intangibles - Goodwill and Others – Issued in January 2017, ASU 2017-04, “Intangibles - Goodwill and Other Simplifying the Test for Goodwill Impairment,” simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, including interim periods within those periods. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements and related disclosures.
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 September 30, 2019 and December 31, 2018.
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 September 30, 2019 and December 31, 2018, the Company has recorded an allowance in the amount of $44,084 and $18,907, respectively.
15
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
Investments in securities, at fair value
Investment in securities consists of debt and equity securities reported at fair value. The Company adopted ASU 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” effective January 1, 2018, which requires that any change in fair value is reported in net income. The adoption of the guidance resulted in the recognition of $34,822 of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that decreased our retained deficit as of January 1, 2018, and decreased AOCI by the same amount. The Company elected to report changes in the fair value of equity investment in realized investment gains (losses), net.
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.
Convertible notes receivable
The Company had a convertible note receivable from Electrum Partners, LLC (“Electrum”) under an Addendum to Convertible Note and Purchase Option Agreement (“Addendum”) dated April 28, 2017. Under the Addendum, the Company invested $100,000 in Electrum by the purchase of a second promissory note in the principal face amount of $100,000 (“Note II”) from Electrum, with interest at 10% per annum compounded monthly. Note II required monthly principal and interest payments of $2,290 to the Company beginning June 12, 2017. On May 31, 2018, the Company elected to convert the residual principal and accrued but unpaid interest totaling $86,256 into an additional equity investment in Electrum at $164 per unit for 526 membership interest units.
The Company has convertible notes receivable from NeuCourt, Inc. which are recorded at the aggregate principal face amount of $75,000 and $75,000 plus accrued interest of $4,651 and $1,801 at September 30, 2019 and December 31, 2018, respectively, as presented in Note 7. The notes bear 5% interest with one $25,000 principal face amount note maturing on November 22, 2019, and a second $50,000 principal face amount note maturing on October 31, 2020. No payments are required prior to maturity. Principal and unpaid interest may be converted into a blend of shares of a to-be-created series of Preferred Stock, and Common Stock, of NeuCourt (defined as “Conversion Shares”) (i) on closing of a future financing round of at least $750,000, (ii) on the election of NeuCourt on maturity of the Note, or (iii) an election of Mentor following 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 294,207 and 270,324 Conversion Shares at September 30, 2019 and December 31, 2018, respectively. In the event of a Corporate Transaction prior to repayment or conversion of the Note, the Company shall receive back two times its investment, plus all accrued unpaid interest.
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.
16
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
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 8, the Company recorded an impairment on the finance lease receivable from G Farma of $752,148 in the quarter ended June 30, 2019, based on Management’s estimate of amounts we expect to recover. The finance receivables were not impaired as of December 31, 2018.
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 is able to analyze 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 approximately $427,804 of Partner I equipment under lease to G Farma from Partner I, had been impounded by the City of Corona. 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 and has to date refused to return the remaining $792,425 of leased equipment. In addition, at G Farma’s direction, equipment valued at $66,374 was held at the distributor at September 30, 2019 and, subsequent to quarter-end, was returned by Partner I to the distributor for $15,000 less $5,000 for storage fees, see Note 24.
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 11, 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 an action for an injunction, to recover leased property, recover collateral under a security agreement, and collect from guarantors on the agreements. Mentor intends to vigorously pursue this matter; however, collection is uncertain at this time. See Note 21.
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.
17
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
Property and equipment (continued)
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.
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. Our leases have remaining lease terms of 1 month to 44 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. 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 September 30, 2019 and December 31, 2018.
18
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
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, 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 September 30, 2019 and December 31, 2018, respectively.
Conversion of Series Q Preferred Stock into Common Stock would be anti-dilutive for the three and nine months ended September 30, 2019 and 2018 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. The Company did not recognize any interest or penalties for unrecognized tax provisions during the three months ended September 30, 2019 and 2018, nor were any interest or penalties accrued as of September 30, 2019 and December 31, 2018. 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.
19
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 2 - Summary of significant accounting policies (continued)
Advertising and promotion
The Company expenses advertising and promotion costs as incurred. Advertising and promotion costs for the three months ended September 30, 2019 and 2018 were $815 and $20,780, respectively. Advertising and promotion costs for the nine months ended September 30, 2019 and 2018 were $7,701 and $46,229, respectively.
Fair value measurements
The Company adopted 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.
Note 3 - Prepaid expenses and other assets
Prepaid expenses and other assets consist of the following:
|
|
September 30,
2019
|
|
December 31,
2018
|
Prepaid health insurance
|
$
|
5,519
|
$
|
5,520
|
Prepaid lease expense
|
|
-
|
|
17,925
|
Other prepaid costs
|
|
48,704
|
|
54,189
|
|
$
|
54,223
|
$
|
77,634
|
20
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
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:
|
|
September 30,
2019
|
|
December 31,
2018
|
Face value
|
$
|
819,000
|
$
|
936,000
|
Unamortized discount
|
|
(340,487)
|
|
(400,482)
|
Net balance
|
|
478,513
|
|
535,518
|
Current portion
|
|
(117,000)
|
|
(117,000)
|
Long term portion
|
$
|
361,513
|
$
|
418,518
|
For the three months ended September 30, 2019 and 2018, $19,999 and $21,401 of discount amortization is included in interest income, respectively. For the nine months ended September 30, 2019 and 2018, $59,995 and $57,754 of discount amortization is included in interest income, respectively.
Note 5 - Property and equipment
Property and equipment is comprised of the following:
|
|
September 30,
2019
|
|
December 31,
2018
|
Computers
|
$
|
37,271
|
$
|
37,271
|
Furniture and fixtures
|
|
22,075
|
|
22,075
|
Machinery and vehicles
|
|
108,600
|
|
136,225
|
|
|
167,946
|
|
195,571
|
Accumulated depreciation and amortization
|
|
(133,574)
|
|
(152,602)
|
|
|
|
|
|
Net Property and equipment
|
$
|
34,372
|
$
|
42,969
|
Depreciation and amortization expense was $5,585 and $5,428 for the three months ended September 30, 2019 and 2018, respectively. Depreciation and amortization expense was $16,755 and $14,084 for the nine months ended September 30, 2019 and 2018, 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.
21
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
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 $179,933 and $0 as of September 30, 2019 and December 31, 2018, respectively. Accumulated amortization associated with finance leases was $23,583 and $0 as of September 30, 2019 and December 31, 2018, respectively.
Lease costs recognized in our consolidated statements of operations is summarized as follows:
|
|
Three Months
Ended
September 30,
2019
|
|
Nine Months
Ended
September 30,
2019
|
Operating lease cost included in cost of goods
|
$
|
51,440
|
$
|
142,535
|
Operating lease cost included in operating costs
|
|
14,410
|
|
42,698
|
Total operating lease cost (1)
|
|
65,850
|
|
185,233
|
Finance lease cost, included in cost of goods:
|
|
|
|
|
Amortization of lease assets
|
|
11,140
|
|
23,583
|
Interest on lease liabilities
|
|
3,061
|
|
5,211
|
Total finance lease cost
|
|
14,201
|
|
28,794
|
Short-term lease cost
|
|
8,570
|
|
25,310
|
Total lease cost
|
$
|
88,621
|
$
|
239,337
|
(1)Right of use asset amortization under operating agreements was $49,804 for the three months ended September 30, 2019 and $143,571 for the nine months ended September 30, 2019.
Other information about lease amounts recognized in our condensed consolidated financial statements is summarized as follows:
|
September 30, 2019
|
Weighted-average remaining lease term – operating leases
|
2.0 years
|
Weighted-average remaining lease term – finance leases
|
3.4 years
|
Weighted-average discount rate – operating leases
|
10.1%
|
Weighted-average discount rate – finance leases
|
9.0%
|
As of September 30, 2019, our lease liabilities were as follows:
|
|
Finance Leases
|
|
Operating Leases
|
|
Total
|
Gross lease liabilities
|
$
|
197,391
|
$
|
426,652
|
$
|
624,043
|
Less: imputed interest
|
|
(56,798)
|
|
(42,426)
|
|
(99,224)
|
Present value of lease liabilities
|
|
140,593
|
|
384,226
|
|
524,819
|
Less: current portion
|
|
(35,653)
|
|
(191,491)
|
|
(227,144)
|
Long-term lease liabilities
|
$
|
104,940
|
$
|
192,735
|
$
|
297,675
|
22
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 7 - Convertible notes receivable
Convertible notes receivable consists of the following:
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
|
|
|
November 22, 2017, NeuCourt, Inc. convertible note receivable including accrued interest of $2,368 and $1,384 at September 30, 2019 and December 31, 2018, respectively. The note bears interest at 5% per annum and matures October 25, 2019. 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. *
|
$
|
27,368
|
$
|
26,384
|
|
|
|
|
|
October 31, 2018, NeuCourt, Inc. convertible note receivable including accrued interest of $2,283 and $417 at September 30, 2019 and December 31, 2018, 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. *
|
|
52,283
|
|
50,417
|
|
|
|
|
|
Total convertible notes receivable
|
|
79,651
|
|
76,801
|
Less current portion
|
|
(27,368)
|
|
(26,384)
|
Long term portion
|
$
|
52,283
|
$
|
50,417
|
*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 101,089 Conversion Shares and the October 31, 2018 Note would convert into 193,118 Conversion Shares at September 30, 2019. In the event of a Corporate Transaction prior to repayment or conversion of the Note, the Company shall receive back two times its investment, plus all accrued unpaid interest.
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. The seven addenda, 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. The maturity date remained the same resulting in a total balloon payment on the working capital note of approximately $800,008 at maturity. G Farma has not made scheduled payments on the notes receivable since February 19, 2019.
23
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 8 - Note purchase agreement and consulting agreement with G FarmaLabs Limited (continued)
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 Enities, resulting in a total 3.843% interest in the G Farm Equity Entities and included the addition of Goya Ventures, LLC. 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 it’s 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. For the three months ended September 30, 2019 and 2018, $0 and $7,560 of consulting fees from G Farma is included in revenue in the condensed consolidated income statement, respectively. For the nine months ended September 30, 2019 and 2018, $8,310 and $22,120 of consulting fees from G Farma is included in revenue in the condensed consolidated income statement, respectively.
G Farma has not made scheduled payments on the finance lease receivable or the notes receivable since February 19, 2019, and the Company feels that it is unlikely it can recover the full amounts due. Because G Farma did not follow their obligations under the Master Equipment Lease and failed to operate in compliance with local and state cannabis laws, approximately $427,804 worth of Partner I equipment under lease to G Farma was impounded by the Corona Police on or around February 22, 2019. Additionally, G Farma continues to hold approximately $792,425 worth of Mentor Partner I, LLC’s remaining equipment in breach of the Master Equipment Lease which required the immediate return of Mentor Partner I, LLC’s equipment in the event of default. See also Notes, 9, 11, and 21 to the condensed consolidated financial statements. At G Farma’s direction, equipment valued at $66,374 was held by the distributor at September 30, 2019 and, subsequent to quarter-end, was returned to the distributor by Partner I for $15,000 less $5,000 for storage fees, see Note 24.
All arrangements with G Farma, have been placed on non-accrual basis. Accrual of interest on notes receivable and finance leases, as well as consulting revenue, has been suspended.
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 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 approximately $427,804 of equipment under lease to G Farma from Partner I, were impounded by the City of Corona. This event has significantly impacted G Farma’s financial position and its ability to make future payments under the finance leases receivable and notes receivable due the Company.
Company management is uncertain that G Farma will be able to perform under its obligations to the Company. Based on our analysis of current conditions, our investments in G Farma notes receivable were fully impaired in the first quarter of 2019. The Company recorded an impairment of loss on notes receivable of $0 and $1,045,051, for the three and nine months ended September 30, 2019, respectively, which is included in loss on investments in the condensed consolidated statement of income. Calculated interest receivable of approximately $48,225 has not been recognized in the financial statements due to uncertainty of collection. On May 28, 2019, Mentor Capital, Inc. filed a complaint in the Superior Court of California in the County of Marin for breach of contract against G Farma and the G Farma Note Guarantors, see Note 21.
24
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 8 - Note purchase agreement and consulting agreement with G FarmaLabs Limited (continued)
Notes receivable from G Farma consists of the following:
|
|
September 30,
2019
|
|
December 31,
2018
|
Real estate note
|
$
|
111,009
|
$
|
111,843
|
Working capital note
|
|
934,042
|
|
909,507
|
Impairment recorded
|
|
(1,045,051)
|
|
-
|
Note receivable discount
|
|
-
|
|
(7,591)
|
Accrued interest
|
|
-
|
|
3,067
|
|
|
-
|
|
1,016,826
|
Less current portion
|
|
-
|
|
(45,173)
|
Long term portion of notes receivable
|
$
|
-
|
$
|
971,653
|
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 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, September 7, 2018, and March 4, 2019. Partner I acquired and delivered manufacturing equipment as selected by G Farma Entities under sales-type finance leases. Partner I recorded equipment sales revenue of $0 and $79,770 for the three months ended September 30, 2019 and 2018, respectively. Partner I recorded equipment sales revenue of $0 and $549,854 for the nine months ended September 30, 2019 and 2018, respectively. On or around February 22, 2019, approximately $427,804 equipment under lease was impounded by the City of Corona. As of September 30, 2019, the G Farma Entities have unauthorized possession of Mentor Partner I, LLC’s remaining approximate $792,425 of equipment and are in default of their obligations under the Master Equipment Lease. At G Farma’s direction, equipment valued at $66,374 was held by the distributor at September 30, 2019 and, subsequent to quarter-end, was returned by Partner I to the distributor for $15,000 less $5,000 for storage fees, see Note 24.
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 breach of contract against the G Farma Lease Entities and the G Farma Lease Guarantors. At September 30, 2019 and December 31, 2018, it is believed that Partner I leased equipment under finance leases receivable are located in California.
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. On April 24, 2019, the Company was informed that certain G Farma assets at its corporate location, including approximately $427,804 of equipment under the Master Equipment Lease Agreement with G Farma Entities, was impounded by the City of Corona. This event has severely impacted G Farma’s ability to pay amounts due the Company in the future. Based on our estimate of what we expect to collect or recover on the G Farma leases receivable, we have recorded a bad debt expense of $1,084 and $730,469, for the three and nine months ended September 30, 2019, respectively, which is included in selling, general and administrative expenses in the condensed consolidated income statement. The G Farma lease receivable has been put on non-accrual status and is classified as non-performing on the condensed consolidated balance sheets at September 30, 2019. Additional lease costs of $21,680 to be invoiced in April 2019, did not meet our revenue recognition requirements and the increase in the lease receivable was offset directly to the reserve for bad debt, increasing the reserve for bad debt from $730,469 to $752,148 at September 30, 2019. There was no reserve for bad debt on finance leases receivable at December 31, 2018.
25
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 9 - Finance leases receivable (continued)
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 $0 for the three months ended September 30, 2019 and 2018, respectively. Partner II recorded equipment sales revenue of $74,889 and $0 for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019 and December 31, 2018, 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.
Net investment in finance leases
The net investment included in finance leases at September 30, 2019 are as follows:
|
|
Partner I
Non-performing
|
|
Partner II
Performing
|
|
Total
|
Gross minimum lease payments receivable
|
$
|
1,455,685
|
$
|
615,399
|
$
|
2,071,084
|
Accrued interest
|
|
-
|
|
2 417
|
|
2,417
|
Less: unearned interest
|
|
(400,005)
|
|
(156,850)
|
|
(556,855)
|
Less: reserve for bad debt
|
|
(752,148)
|
|
-
|
|
(752,148)
|
Finance leases receivable
|
|
303,532
|
|
460,966
|
|
764,498
|
Less current portion
|
|
(303,532)
|
|
(60,529)
|
|
(364,061)
|
Long term portion
|
$
|
-
|
$
|
400,437
|
$
|
400,437
|
The net investment included in finance leases at December 31, 2018, all of which were classified as performing, are as follows:
|
|
Partner I
|
|
Partner II
|
|
Total
|
Gross minimum lease payments receivable
|
$
|
1,516,985
|
$
|
581,000
|
$
|
2,097,985
|
Accrued interest
|
|
5,312
|
|
2,752
|
|
8,064
|
Less: unearned interest
|
|
(410,837)
|
|
(157,931)
|
|
(568,768)
|
Finance leases receivable
|
|
1,111,460
|
|
425,821
|
|
1,537,281
|
Less current portion
|
|
(127,644)
|
|
(48,083)
|
|
(175,727)
|
Long term portion
|
$
|
983,816
|
$
|
377,738
|
$
|
1,361,554
|
Interest income recognized from Partner I finance leases for the three months ended September 30, 2019 and 2018, was $0 and $14,078, respectively. Interest income recognized from Partner I finance leases for the nine months ended September 30, 2019 and 2018, was $23,811 and $26,565, respectively.
On May 28, 2019, the Company filed a complaint to recover our leased equipment from G Farma, see Notes 1 and 21. The estimated value of the equipment is expected to be recovered within twelve months and therefore the lease receivable balance is presented as a current maturity at estimated resale value less estimated costs to sell.
Interest income recognized from Partner II finance leases for the three months ended September 30, 2019 and 2018 was $13,312 and $0, respectively. Interest income recognized from Partner II finance leases for the nine months ended September 30, 2019 and 2018 was $38,554 and $0, respectively.
26
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 9 - Finance leases receivable (continued)
At September 30, 2019, minimum future payments receivable under all finance leases receivable were as follows:
12 months ending September 30,
|
|
Non-performing
(Partner I)
|
|
Performing
(Partner II)
|
|
Total
|
2020
|
$
|
303,532
|
$
|
60,529
|
$
|
364,061
|
2021
|
|
-
|
|
67,257
|
|
67,257
|
2022
|
|
-
|
|
74,732
|
|
74,732
|
2023
|
|
-
|
|
83,038
|
|
83,038
|
2024
|
|
-
|
|
92,268
|
|
92,268
|
Thereafter
|
|
-
|
|
83,142
|
|
83,142
|
|
$
|
303,532
|
$
|
460,966
|
$
|
764,498
|
Note 10 - Deposits on manufacturing equipment purchases
At December 31, 2018, Partner I had deposits with manufacturing equipment suppliers in the amount of $43,384 for equipment to be leased by the G Farma entities in California once the equipment was delivered. In the first quarter of 2019, the deposit increased to $45,384. At September 30, 2019, the deposit is reported at the net realizable value of $15,000, after vendor restocking fees, and the Company has accrued $5,000 in other current liabilities for accrued vendor storage fees. Restocking fees of $30,384, to sell the equipment back to the distributor, are included in cost of goods sold for the quarter ended September 30, 2019.
Note 11 - 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 paid in exchange for the following: (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 was dismissed on April 12, 2018 and has no value. At September 30, 2019, the $600,002 contractual interest in G Farma’s legal recovery has been 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 City of Corona impounded certain G Farma assets. These events have significantly impacted G Farma’s financial position and its ability to make payments under the notes receivable which negatively impacts option (ii). Currently G Farma does not have an agreement to offer G Farma securities to other persons under option (iii) and any such securities would, at this point, likely have no value.
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”) in which Electrum may recover approximately $1,900,000. On October 23, 2018, Mentor entered into a Joint Prosecution Agreement among Mentor, Mentor’s corporate legal counsel, Electrum, and Electrum’s legal counsel.
27
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 11 - Contractual interests in legal recoveries (continued)
Interest in Electrum Partners, LLC legal recovery (continued)
On October 30, 2018, Mentor entered into a Recovery Purchase Agreement (“Recovery Agreement”) with Electrum under which the 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. In the quarter ended September 30, 2019, Mentor invested an additional $10,500 of capital in Electrum for payment of legal fees in consideration for an additional one percent (1%) of the Recovery. At September 30, 2019 and December 31, 2018, the Recovery Agreement investment is reported in the consolidated balance sheets at our cost of $110,500 and $100,000, respectively, and the remaining commitment to pay legal costs of $47 and $84,059, respectively, is included in accrued liabilities. 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 September 30, 2019 and December 31, 2018.
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 its $100,000 cost as part of Contractual interests in legal recoveries on the condensed consolidated balance sheets at September 30, 2019 and December 31, 2018.
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. In addition, 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. 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 September 30, 2019.
Note 12 - 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. At September 30, 2019, after the bad debt reserve described in Note 9 and the asset impairments described in Notes 8, 9, and 11, these assets represent 6% of the consolidated total assets of the Company. At December 31, 2018, these assets represented 27% of the consolidated total assets of the Company.
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 11, led the Company to record a bad debt reserve against finance leases receivable of $752,148 at September 30, 2019. For the three and nine month periods ended September 30, 2019, $1,084 and $730,469, respectively of bad debt expense related to the finance leases receivable, is included in selling, general and administrative expenses in the condensed consolidated income statements. Included in the receivable and bad debt reserve is an additional $21,679 which is unlikely of collections and therefore was not recognized as revenue or as bad debt expense.
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. Total impairments related to the G Farma investments, recorded at September 30, 2019, are $1,688,825 of which $0 and $1,688,825, respectively, are included in Gain (loss) in investments in the condensed consolidated income statements for the three months and nine ended September 30, 2019. No impairments or reserves were recorded at December 31, 2018.
28
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 13 - 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.
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
|
Balance at December 31, 2017
|
$
|
188,635
|
$
|
-
|
$
|
600,002
|
$
|
-
|
$
|
163,714
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets)
|
|
(62,322)
|
|
-
|
|
-
|
|
-
|
|
86,306
|
Purchases, issuances, sales, and settlements
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
236,272
|
|
-
|
|
200,000
|
|
5,669
|
|
96,256
|
Issuances
|
|
-
|
|
-
|
|
-
|
|
-
|
|
8,351
|
Sales
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(108,999)
|
Settlements
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Balance at December 31, 2018
|
|
362,585
|
|
-
|
|
800,002
|
|
5,669
|
|
245,628
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets)
|
|
(56,528)
|
|
-
|
|
(600,002)
|
|
-
|
|
(41,600)
|
Purchases, issuances, sales, and settlements
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
-
|
|
-
|
|
110,500
|
|
-
|
|
-
|
Issuances
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Sales
|
|
(249,222)
|
|
-
|
|
-
|
|
-
|
|
-
|
Settlements
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Balance at September 30, 2019
|
$
|
56,835
|
$
|
-
|
$
|
310,500
|
$
|
5,669
|
$
|
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 September 30, 2019 consists of the following:
Type
|
|
Amortized
Costs
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Values
|
NASDAQ listed company stock
|
$
|
13,100
|
$
|
-
|
$
|
(1,597)
|
$
|
11,503
|
OTCQB listed company stock
|
|
197,166
|
|
-
|
|
(151,834)
|
|
45,332
|
|
$
|
210,266
|
$
|
-
|
$
|
(153,431)
|
$
|
56,835
|
29
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 13 - 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
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net gains and losses recognized during the period on equity securities
|
$
|
(45,638)
|
$
|
204,408
|
$
|
(56,528)
|
$
|
269,548
|
|
|
|
|
|
|
|
|
|
Less: Net gains (losses) recognized during the period on equity securities sold during the period
|
|
-
|
|
-
|
|
50,521
|
|
-
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses recognized during the reporting period on equity securities still held at the reporting date
|
$
|
(45,638)
|
$
|
204,408
|
$
|
(107,049)
|
$
|
269,548
|
Note 14 - 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 September 30, 2019 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 September 30, 2019 and December 31, 2018 the weighted average contractual life for all Mentor warrants was 18.8 years and 19.5 years, respectively, and the weighted average outstanding warrant exercise price was $2.11 and $2.11 per share, respectively.
During the nine months ended September 30, 2019 and 2018, a total of 0 and 379,436 warrants were exercised, respectively. There were no warrants issued during the periods ended September 30, 2019 and 2018. In January 2018, the 2014 exercise of 87,456 Series B warrants and 29,544 Series D warrants by two Bhang shareholders under an agreement that was ultimately rescinded, were reversed and reinstated. The intrinsic value of outstanding warrants at September 30, 2019 and December 31, 2018 was $5,247 and $20,115, respectively.
30
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 14 - Common stock warrants (continued)
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, 2017
|
-
|
|
6,666,007
|
|
6,666,007
|
Reinstated
|
87,456
|
|
29,544
|
|
117,000
|
Issued
|
-
|
|
-
|
|
-
|
Exercised
|
-
|
|
(442,597)
|
|
(442,597)
|
Outstanding at December 31, 2018
|
87,456
|
|
6,252,954
|
|
6,340,410
|
Issued
|
-
|
|
-
|
|
-
|
Exercised
|
-
|
|
-
|
|
-
|
Outstanding at September 30, 2019
|
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, 2017
|
|
689,159
|
Issued
|
|
-
|
Exercised
|
|
-
|
Outstanding at December 31, 2018
|
|
689,159
|
Issued
|
|
-
|
Exercised
|
|
-
|
Outstanding at September 30, 2019
|
|
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 nine months ended September 30, 2019, no warrants were redeemed. In 2018, the Company allowed for a partial redemption of 63,161 Series D warrants at an exercise price per warrant of $0.35 plus a $0.10 warrant redemption fee per warrant and an additional 379,436 Series D Warrants were exercised at their full exercise price of $1.60 plus the $0.10 warrant redemption fee per warrant. The regular warrant exercises and 1% partial redemption authorization, which were recalculated and repeated according to the court formula, resulted in a combined average exercise price of $1.42 per share for the year ended December 31, 2018.
Note 15 - 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.
31
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 15 - Warrant redemption liability (Continued)
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 September 30, 2019 and December 31, 2018.
Note 16 - 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 September 30, 2019 and December 31, 2018, 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.
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.
32
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 16 - Stockholders’ equity (continued)
Preferred Stock (continued)
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 September 30, 2019 and December 31, 2018 include this interest. The Core Q Holdings Asset Value at September 30, 2019 and December 31, 2018 was $14,224 and $12,844 per share, respectively. There is no contingent liability for the Series Q Preferred Stock conversion at September 30, 2019 and December 31, 2018. At September 30, 2019 and December 31, 2018, the Series Q Preferred Stock could have been converted at the Conversion Price of $0.17 and $0.36, respectively, into an aggregate of 869,249 and 392,447 shares of the Company’s Common Stock, respectively. Because there were net losses for the three and nine month periods ended September 30, 2019 and for the nine month period ended September 30, 2018, these shares were anti-dilutive and therefore are not included in the weighted average share calculation for these periods, see Note 23.
Note 17 - 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
September 30,
|
|
Finance leases
|
|
Operating leases
|
2020
|
$
|
35,653
|
$
|
191,491
|
2021
|
|
38,997
|
|
158,789
|
2022
|
|
42,655
|
|
33,946
|
2023
|
|
23,288
|
|
-
|
Total
|
|
140,593
|
|
384,226
|
Less: Current maturities
|
|
35,653
|
|
191,491
|
Long-term liability
|
$
|
104,940
|
$
|
192,735
|
Note 18 - Long term debt
Long term debt
Long term debt at September 30, 2019 and December 31, 2018 consists of the following:
|
|
September 30,
2019
|
|
December 31,
2018
|
Commercial credit agreement with Bond Street Servicing, LLC at 11.6% interest per annum, semi-monthly payments of $1,648, maturing October 16, 2019. Net of $59 and $1,059 loan service fee.
|
$
|
3,037
|
$
|
30,131
|
|
|
|
|
|
Loan through American Express National Bank, AENB, interest at 8.99% per annum, monthly principal and interest payments of $2,284, maturing December 2020.
|
|
30,238
|
|
48,090
|
|
|
|
|
|
Total notes payable
|
|
33,275
|
|
78,221
|
|
|
|
|
|
Less: Current maturities
|
|
28,776
|
|
53,166
|
|
|
|
|
|
Long-term debt
|
$
|
4,499
|
$
|
25,055
|
33
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 18 - Long term debt (continued)
Commercial credit agreement with Bond Street Servicing, LLC
WCI entered into a commercial credit agreement with Bond Street Servicing, LLC and was charged a $4,000 loan service fee which is being amortized as additional interest over the life of the loan on a straight line basis. The unamortized loan service fee balance was $59 and $1,059 at September 30, 2019 and December 31, 2018, respectively.
Note 19 - Accrued salary, accrued retirement and incentive fee - related party
As of September 30, 2019 and December 31, 2018, the Company had an outstanding liability to its CEO as follows:
|
|
September 30,
2019
|
|
December 31,
2018
|
Accrued salaries and benefits
|
$
|
817,895
|
$
|
802,775
|
Accrued retirement and other benefits
|
|
521,961
|
|
485,996
|
Offset by shareholder advance
|
|
(261,653)
|
|
(261,653)
|
|
$
|
1,078,203
|
$
|
1,027,118
|
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 September 30, 2019 and 2018, the incentive fee expense was $0 and $0, respectively. For the nine months ended September 30, 2019 and 2018, the incentive fee expense was $0 and $0, respectively.
Note 20 - Related party transactions
WCI received a short term, non-interest bearing loan, from an officer of WCI in December 2018. The loan balance reported on the condensed consolidated balance sheet as a related party payable, at September 30, 2019 and December 31, 2018, was $31,687 and $40,000, respectively.
Note 21 - 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 11, 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 an action for an injunction, to recover leased property, recover collateral under a security agreement, and 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 11.
34
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 22 - 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 fair value of securities investments in GW Pharmaceuticals Plc. (GWPH), KushCo. Holdings, Inc. (KSHB), previously Kush Bottles, Inc., Generation Alpha, Inc. (GNAL), previously Solis Tek, Inc., and GB Sciences, Inc. (GBLX) stock, 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, and the operation of subsidiaries in the cannabis and medical marijuana sector, 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 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 September 30, 2019
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
13,312
|
$
|
1,058,025
|
$
|
-
|
$
|
1,071,337
|
Operating income (loss)
|
|
(38,426)
|
|
9,276
|
|
(280,397)
|
|
(309,547)
|
Interest income
|
|
996
|
|
4
|
|
20,541
|
|
21,541
|
Interest expense
|
|
-
|
|
7,214
|
|
(1,134)
|
|
6,080
|
Property additions
|
|
-
|
|
-
|
|
-
|
|
-
|
Depreciation and amortization
|
|
-
|
|
2,653
|
|
2,932
|
|
5,585
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
101,408
|
$
|
930,214
|
$
|
-
|
$
|
1,031,622
|
Operating income (loss)
|
|
32,257
|
|
3,173
|
|
(238,527)
|
|
(203,097)
|
Interest income
|
|
18,850
|
|
1
|
|
22,727
|
|
41,578
|
Interest expense
|
|
-
|
|
4,713
|
|
(1,125)
|
|
3,588
|
Property additions
|
|
-
|
|
13,484
|
|
1,658
|
|
15,142
|
Depreciation and amortization
|
|
-
|
|
3,369
|
|
2,059
|
|
5,428
|
|
|
Cannabis and
Medical
Marijuana
Segment
|
|
Facility
Operations
Related
|
|
Corporate
and
Eliminations
|
|
Consolidated
|
Nine months ended September 30, 2019
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
145,564
|
$
|
3,031,519
|
$
|
-
|
$
|
3,177,083
|
Operating income (loss)
|
|
(734,818)
|
|
67,162
|
|
(784,471)
|
|
(1,452,127)
|
Interest income
|
|
22,594
|
|
10
|
|
64,402
|
|
87,006
|
Interest expense
|
|
-
|
|
19,857
|
|
(3,402)
|
|
16,455
|
Property additions
|
|
-
|
|
8,159
|
|
-
|
|
8,158
|
Depreciation and amortization
|
|
-
|
|
7,959
|
|
8,796
|
|
16,755
|
Total assets
|
|
2,751,078
|
|
1,662,764
|
|
855,438
|
|
5,269,279
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
598,539
|
$
|
2,680,541
|
$
|
-
|
$
|
3,279,080
|
Operating income (loss)
|
|
151,566
|
|
2,382
|
|
(761,932)
|
|
(607,984)
|
Interest income
|
|
62,759
|
|
2
|
|
61,403
|
|
124,164
|
Interest expense
|
|
181
|
|
14,704
|
|
(3,298)
|
|
11,587
|
Property additions
|
|
-
|
|
13,484
|
|
4,057
|
|
17,541
|
Depreciation and amortization
|
|
-
|
|
8,554
|
|
5,530
|
|
14,084
|
Total assets
|
|
4,270,527
|
|
1,150,657
|
|
2,736,576
|
|
8,157,760
|
35
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 22 - 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
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Operating loss
|
$
|
(309,547)
|
$
|
(203,097)
|
$
|
(1,452,127)
|
$
|
(607,984)
|
Gain (loss) on investments
|
|
(45,638)
|
|
237,657
|
|
(1,747,608)
|
|
355,854
|
Interest income
|
|
21,541
|
|
41,578
|
|
87,006
|
|
124,164
|
Interest expense
|
|
(6,080)
|
|
(3,588)
|
|
(16,455)
|
|
(11,587)
|
Gain on equipment disposals
|
|
-
|
|
-
|
|
1,500
|
|
-
|
Other income
|
|
-
|
|
-
|
|
11,340
|
|
2,380
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
$
|
(339,724)
|
$
|
72,550
|
$
|
(3,116,344)
|
$
|
(137,173)
|
Note 23 - Earnings Per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock; however, potential common equivalent shares are excluded if their effect is anti-dilutive.
The following table sets forth the reconciliation of basic and diluted net income per share for the three and nine months ended September 30, 2019 and 2018:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator
|
|
|
|
|
|
|
|
|
Net income attributable to Mentor common stockholders
|
$
|
(336,816)
|
$
|
77,224
|
$
|
(3,151,686)
|
$
|
(149,087)
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted-average shares used in per share computation -
|
|
|
|
|
|
|
|
|
Basic
|
|
23,139,837
|
|
23,092,466
|
|
23,139,837
|
|
23,056,753
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Series B Warrants
|
|
-
|
|
43,728
|
|
-
|
|
-
|
Weighted-average shares used in per share computation –
diluted
|
|
23,139,837
|
|
23,136,194
|
|
23,139,837
|
|
23,056,753
|
Net income per share attributable to CAI common
|
|
|
|
|
|
|
|
|
stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.015)
|
$
|
0.003
|
$
|
(0.136)
|
$
|
(0.006)
|
Diluted
|
$
|
(0.015)
|
$
|
0.003
|
$
|
(0.136)
|
$
|
(0.006)
|
The calculation of diluted earnings per share for the three months ended September 30, 2019 and 2018, excluded from the denominator 7,029,569 and 6,942,133 shares, respectively, of common stock warrants because their effect would have been anti-dilutive. The calculation of diluted earnings per share for the nine months ended September 30, 2019 and 2018, excluded from the denominator 7,029,569 and 7,029,569 shares, respectively, of common stock warrants because their effect would have been anti-dilutive.
The assumed conversion of Series Q Preferred Stock into Common Stock will always be anti-dilutive based on the conversion rate of 1.05% of the Mentor share price. Therefore, the calculation of diluted earnings per share for the three months ended September 30, 2019 and 2018, excluded from the denominator 869,249 and 142,859, respectively, of Series Q Preferred Stock because the conversion value would have been anti-dilutive. The calculation of diluted earnings per share for the nine months ended September 30, 2019 and 2018, excluded from the denominator 869,249 and 142,859 shares, respectively, of common stock warrants because their effect would have been anti-dilutive.
36
Mentor Capital, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2019 and 2018
Note 24 - Subsequent event
Subsequent to September 30, 2019, on October 3, 2019, the Company rescinded the sale and issuance of an aggregate of 288,890 shares of its Common Stock to G Farma, at an aggregate purchase price of $600,002, due to a complete failure of consideration. As described in Note 11, the 288,890 shares of Common Stock were issued in exchange for assignment of an interest in a civil action. Under the agreement to invest in the civil action, the Company could elect to have G Farma pay all or some of the purchase price for the 288,890 shares of Common Stock on the date of the maturity of the G Farma promissory notes, described in Note 8 to the financial statements. G Farma’s civil forfeiture case in the Federal District Court for the Eastern District of California was dismissed on April 12, 2018 and has no value. G Farma has defaulted on payment of the promissory notes leaving the Company with no means of collecting on this alternative source of payment for the consideration.
On October 25, 2019, the Company returned equipment valued at $66,374 under the G Farma lease, which was held at the vendor at the direction of G Farma. The Company received $15,000 less $5,000 of storage fees for this equipment.
37