Form 10-K for MENTOR CAPITAL, INC.
31-Mar-2015
Annual Report
Overview
Since the August 2008, name change back to Mentor Capital, Inc., the Company’s common stock has traded publicly under the trading symbol OTC Markets: MNTR.
In 2009 the Company began focusing its investing activities in leading edge cancer companies. In response to government limitations on reimbursement for highly technical and expensive cancer treatments and a resulting business decline in the cancer development sector, the Company decided to exit that space. In the summer of 2013 the Company was asked to consider investing in a cancer related project with a medical marijuana focus. On August 29, 2013, the Company made a decision to begin to divest of its cancer assets and focus on becoming a pure play in the cannabis and medical marijuana sector.
Waste Consolidators, Inc. (WCI)
WCI is a legacy investment of which the Company owned 50% in 2013 and purchased an additional 1%, effective January 1, 2014, for a 51% interest. WCI is included in the consolidated financial statements for the year ended December 31, 2014.
MicroCannaBiz (MCB)
On February 18, 2014, the Company signed an agreement to purchase 51% of MCB.
MCB was formed in January 2014 and began operations in June 2014. From the date of formation through May 2014, MCB’s efforts were devoted to organization and development. MCB provides cannabis and marijuana related private companies, investors and microcap issuers with information resources including client company specific publications, directories, and continuing education courses.
Bhang Chocolate Company, Inc.
On February 28, 2014, the Company acquired a 60% ownership in Bhang Corporation, also known as Bhang Chocolate Company, Inc., (“Bhang”), see Item 3 “Legal Proceedings” regarding repudiation of all contract obligations by Bhang and subsequent Mentor lawsuit seeking rescission of the agreement and return of invested funds. Amounts invested in Bhang are reported as Receivable from Bhang Chocolate Company and its owners in the consolidated balance sheet at December 31, 2014.
Liquidity and Capital Resources
The Company’s future success is dependent upon its ability to make a return on our investments to generate positive cash flow and to obtain sufficient capital from non-portfolio-related sources. Management believes they can raise the appropriate funds needed to support their business plan and develop an operating, cash flow positive company.
Critical Accounting Policies
Basis of presentation
The Company’s consolidated financial statements include majority owned subsidiaries of 51% or more. The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles (GAAP). All material intercompany balances and transactions have been eliminated in consolidation.
As shown in the accompanying consolidated financial statements, the Company has a significant accumulated deficit of $3,652,101 as of December 31, 2014. The Company also continues to experience negative cash flows from operations. The Company will be required to raise additional capital to fund its operations, and will continue to attempt to raise capital resources from both related and unrelated parties until such time as the Company is able to generate revenues sufficient to maintain itself as a viable entity. These factors have raised substantial doubt about the Company’s ability to continue as a going concern. There can be no assurances that the Company will be able to raise additional capital or achieve profitability. However, the Company has 14.5 million warrants outstanding in which the Company can reset the exercise price substantially below the current market price. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
From January 1, 2015 through March 20, 2015, the Company raised approximately $91,673 from the exercise of warrants into common stock. In addition, the $117,000 face value of the investment in an account receivable matured and was collected March 6, 2015. The Company estimates it has adequate cash reserves to support six to eighteen months of operation. Management’s plans include increasing revenues through acquisition, investment, and organic growth. This is to be funded by raising additional capital through the sale of equity securities and debt.
Concentrations of cash
The Company maintains its cash and cash equivalents in bank deposit accounts which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts nor does the Company believe it is exposed to any significant credit risk on cash and cash equivalents.
Cash and cash equivalents
The Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. The Company had no short-term debt securities as of December 31, 2014 and 2013.
Accounts receivable
Customer accounts receivable are classified as current assets and are carried at original invoice amounts less an estimate for doubtful receivables based on a review of all outstanding amounts on a monthly basis. The estimate of allowance for doubtful accounts is based on the Company’s bad debt experience, market conditions, collateral available, and aging of accounts receivable, among other factors. If the financial condition of the Company’s customers deteriorates resulting in the customer’s inability to pay the Company’s receivables as they come due, additional allowances for doubtful accounts will be required. At December 31, 2014 and 2013, the Company has recorded an allowance in the amount of $8,700 and $0, respectively.
Investment in unconsolidated entity
Prior to acquiring a controlling interest in WCI on January 1, 2014, Mentor accounted for the investment in WCI using the equity method based on the ownership interest and the Company’s limited ability to exercise significant influence at December 31, 2013. Accordingly, the investment was initially recorded at cost with adjustments to the carrying amount of the investment to recognize our share of the earnings or losses of the investee each reporting period. Mentor ceased to recognize losses when our investment basis was zero.
At December 31, 2013, the WCI investment was $0. On January 1, 2014, the Company purchased an additional 1% interest in WCI increasing our interest in WCI to 51%.
Convertible note receivable
The 5% convertible note receivable from Electrum Capital Partners, LLC is recorded at the loan amount of $100,000 plus accrued interest of $4,942 at December 31, 2014.
Long term investments
The Company’s investments in entities where it is a minority owner and does not have the ability to exercise significant influence are recorded at fair value if readily determinable. If the fair market value is not readily determinable, the investment is recorded under the cost-method. Under this method, the Company’s share of the earnings or losses of such investee company is not included in the Company’s financial statements. The Company reviews the carrying value of its long term investments for impairment each reporting period.
Investment in account receivable, net of discount
The Company invested in an account receivable and promissory note on July 8, 2014 which was paid in full on March 6, 2015. The investment was recorded at face value with an offsetting discount at the time purchased. The discount was being amortized to interest income over the term of the note.
Property, equipment and machinery
Property, equipment and machinery are recorded at cost. Depreciation is computed on the straight-line and declining balance methods over the estimated useful lives of various classes of property ranging from 3 to 7 years.
Software development costs relate to development of MCB’s website and cannabis directory. Software research and development costs are expensed as incurred.
Software development costs are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release. The Company capitalized website software costs incurred during period from inception (January 27, 2014) through October 31, 2014. Upon the launch of the website and directory in October 2014, MCB began amortizing these costs on a straight line basis over 2 years.
Expenditures for renewals and betterments are capitalized and maintenance and repairs are charged to expense. Upon retirement or sale, the cost of assets disposed and the accumulated depreciation is removed from the accounts. The resulting gain or loss is credited or charged to income.
Goodwill
Goodwill of $1,324,143 was derived from consolidating WCI effective January 1, 2014. The remaining $102,040 of goodwill relates to the 1999 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 December 31, 2014 and 2013.
Revenue recognition
The Company recognizes revenue in accordance with ASC 605 “Revenue Recognition”. The Company records revenue under each contract once persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collectability is reasonably assured.
Basic and diluted income (loss) per common share
Basic net income (loss) per common share (EPS) is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS adjusts basic net income (loss) per common share, computed using the treasury stock method, for the effects of potentially dilutive common shares, if the effect is not antidilutive. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock warrants. Diluted EPS excludes all dilutive potential shares if their effect is antidilutive. Outstanding warrants that had no effect on the computation of dilutive weighted average number of shares outstanding as their effect would be antidilutive were approximately 15,200,000 and 23,220,000 as of December 31, 2014 and 2013, respectively. There were 4,500 and 6,650,070 potentially dilutive shares outstanding at December 31, 2014 and 2013, respectively.
Income taxes
We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. A valuation is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Generally accepted accounting principles provide accounting and disclosure guidance about positions taken by an organization in its tax returns that might be uncertain. Management considers the likelihood of changes by taxing authorities in its filed income tax returns and recognizes a liability for or discloses potential changes that management believes are more likely than not to occur upon examination by tax authorities.
Management has not identified any uncertain tax positions in filed income tax returns that require recognition or disclosure in the accompanying financial statements. The Company’s income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in interest expense.
Advertising and promotion
The Company expenses advertising and promotion costs as incurred. Advertising and promotion costs were $202,439 and $553 for the years ended December 31, 2014 and 2013, respectively.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results ultimately may differ from these estimates.
Fair value measurements
The Fair Value Measurements and Disclosure Topic defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
The Fair Value Measurements and Disclosure Topic establish a fair value hierarchy, which prioritizes the valuation inputs into three broad levels. These three general valuation techniques that may be used to measure fair value are as follows: Market approach (Level 1) – which uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other sources. Cost approach (Level 2) – which is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost); and the Income approach (Level
3) – which uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (including present value techniques, and option-pricing models). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate.
The carrying amounts of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, customer deposits and other accrued liabilities approximate their fair value due to the short-term nature of these instruments.
The fair value of the note receivable is based on the net present value of calculated interest and principle payments. The carrying value approximates fair value as interest rates charged are comparable to market rates for similar notes.
The fair value of long-term notes payable is based on the net present value of calculated interest and principle payments. The carrying value of long-term debt approximates fair value due to the fact that the interest rate on the debt is based on market rates.
Recent Accounting Standards
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations
Results of Operations for the year ended December 31, 2014 compared to the year ended December 31, 2013:
Note that during 2013, the Company did not have subsidiaries subject to consolidation. The Company accounted for the investment in WCI using the equity method based on the ownership interest. WCI was not consolidated in 2013 because the Company did not exercise significant influence over WCI during 2013.
Accordingly, the investment was initially recorded at cost with adjustments to the carrying amount of the investment to recognize our share of the earnings or losses of the investee each reporting period. Mentor ceased to recognize losses when our investment basis was zero. At December 31, 2013, the WCI investment was $0. On January 1, 2014, the Company purchased an additional 1% interest in WCI for a 51% interest.
Revenues
We had revenue of $2,149,726 and gross profit of $773,161 (36.0% gross profit) for the year ended December 31, 2014 versus revenue and gross profit of $32,000 during 2013. The revenue and gross profit in 2014 is the result of the Company consolidating WCI 2014 revenue of $2,144,176 and gross profit of $768,136 (35.8% gross profit) and MCB 2014 revenue of $5,390 and gross profit of $4,865 (90.3% gross profit). This is offset by eliminating $32,000 of intercompany revenue from WCI in 2014.
Selling, general and administrative expenses
Our selling, general and administrative expenses for the year ended December 31, 2014 was $1,859,359 compared to $292,899 for the year ended December 31, 2013, an increase of $1,566,470. Of the increase, $667,934 related to consolidating WCI in 2014 and $74,197 was generated by MCB in 2014. In addition, legal fees increased by $111,194 due to litigation initiated by the Company, audit fees increased by $40,000, advertising costs increased by $195,877 (of which $140,000 was non-cash expense of prepaid advertising received in prior periods., an increase in salary and related costs of $160,405, a non-cash increase in officer’s performance incentive and bonus of $190,581, an increase in costs relating to shareholder services of $66,864, and an increase in other general and administrative expenses of $66,418.
Other income and expense
Other income and expense, net, totaled $621,072 for the year ended December 31, 2014 compared to $2,915 for the year ended December 31, 2013, an increase of $618,157. The effect of consolidating WCI in 2014 was to decrease other income and expense, net, by ($22,135). In addition, when the Company acquired an additional 1% in WCI on January 1, 2014, the entire investment was adjusted to fair value resulting in a non-cash gain on investment of $1,250,000. The Company experienced an increase in interest income of $32,373, and a decrease in interest expense of $1,081. This is offset by loss on investments of ($7,181) and loan guarantee costs associated with a potential loan of ($635,851) and other decreases of ($130).
Net results
The net result for the year ended December 31, 2014 was a loss of $472,922 or $0.042 per common share compared to a loss of $258,784 or $0.045 for the year ended December 31, 2013. Management will continue to make an effort to lower operating expenses and increase revenue and gross margin. The Company will continue to look for acquisition opportunities to expand its portfolio in the cannabis industry in companies that are positive for operating revenue or have the potential to become positive for operating revenue.
Since our reorganization, we have raised capital through shareholder exercise of warrants in exchange for common stock.
Changes in cash flows
At December 31, 2014, we had cash of $326,228 and a working capital of $494,993.
Operating cash outflows during 2014 were ($1,380,732), outflows from investing activities were ($1,764,892), and net inflows from financing activities were $3,431,667. We are evaluating various options to raise additional funds, including loans.
Liquidity and Capital Resources
Since our reorganization, we have raised capital through warrant holder exercise of warrants for common stock. At December 31, 2014, we had cash of $326,228 and a working capital of $494,993. Operating cash outflows in the year ended During 2014 were ($1,380,732), including ($472,922) of net loss less ($1,250,000) of non-cash gain recognized on the adjustment to fair value of the investment in WCI from the additional 1% interest acquired, offset by use of prepaid expenses and other current assets of $289,141 and changes in other operating assets of $53,049. Cash outflows in 2014 of ($1,764,892) from investing activities were ($1,500,000) paid for investment in receivable from Bhang Chocolate Company shareholders, ($100,000) invested in convertible note receivable, ($90,000) investment in receivable, purchase of additional interest in WCI of ($25,000), effect of consolidating WCI on January 1, 2014 of ($45,921), net investment in securities of $16,791 and other investment activities of ($20,762). Net inflows from financing activities in 2014 of $3,431,667 of which $3,426,243 were the net proceeds received from exercise of warrants. We will be required to raise additional funds through financing, additional collaborative relationships or other arrangements until we are able to raise revenues to a point of positive cash flow. We believe our existing available resources will be sufficient to satisfy our funding requirements through September 2015.
In addition, On February 9, 2015, in accordance with the authorizing section 1145 reorganization court order, the Company announced a 30 day partial redemption of up to 1% (approximately 140,000) 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 apply during the 30 days must pay 10 cents to redeem the warrant and then exercise the series D warrant to purchase a share at $0.435, which follows the court specified formula of one-half of the closing bid price on the day preceding the 30 days, plus the 10 cent fee. The Company announcement stated that in successive months, the 1% partial redemption authorization will be recalculated and repeated according to the court formula until such unexercised warrants are exhausted or the partial redemption is otherwise truncated by the Company. During the February 2015 30 day period shareholders requested to participate in the partial redemption as designees and exercised 145,047 outstanding Series D warrants for an aggregate exercise price of $50,942 plus warrant fees of $14,505. In March 2015, the Company’s partial redemption of 1% (approximately 140,000) of outstanding D warrants will be at an exercise price of $0.45 plus the 10 cents redemption fee. We believe the 30 day partial redemptions will provide monthly cash in excess of what is required for monthly operations for an extending period of time while we are exploring other major sources of funding for further acquisitions.
Disclosure About Off-Balance Sheet Arrangements
We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.
MAPH Enterprises, LLC | (305) 414-0128 | 1501 Venera Ave, Coral Gables, FL 33146 | new@marijuanastocks.com
