Quarterly report pursuant to Section 13 or 15(d)

Note 9 - Note purchase agreement and consulting agreement with G FarmaLabs Limited

Note 9 - Note purchase agreement and consulting agreement with G FarmaLabs Limited
3 Months Ended
Mar. 31, 2019
Note 9 - Note purchase agreement and consulting agreement with G FarmaLabs Limited

Note 9 - 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, with operations in Washington and planned operations in California under two temporary licenses pending completion of its Desert Hot Springs, California, location. Under the Agreement the Company purchased two secured promissory notes from G Farma in an aggregate principal amount of $500,000, both of which bear interest at 7.42% per annum, with monthly payments beginning on April 15, 2017, and mature on April 15, 2022. The first promissory note in the amount of $120,000 is for the purchase of real estate, which was to be secured by a deed of trust on real property and requires monthly payments of $1,107 beginning April 15, 2017, with a balloon payment of approximately $94,164 at maturity. The agreement, as amended, provides for converting the real estate loan to a working capital loan should no property be selected to secure the real estate loan. No property has been selected at this time. The second promissory note in the amount of $380,000 was to be used for working capital and requires monthly payments of $3,505 with a balloon payment of approximately $298,185 at maturity. 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 two majority shareholders of G Farma. As of March 31, 2019, the Company and G Farma have executed seven 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.


Associated with the Notes Purchase Agreement, on March 17, 2017, the Company and G Farma entered into a Rights Agreement which provided that G Farma would not register its stock in a public offering unless it either (i) obtained the written consent of the Company, or (ii) without the Company’s written consent if G Farma issued to the Company shares of each class or series of G Farma stock then outstanding equal to 1.5% of each such number of shares, calculated on a full dilution full conversion basis. The stepped addition of each addendum, through Addendum VI, increased item (ii) resulting in a rate of 3.0% of outstanding shares. The Rights Agreement provided for equity rights that were contingent on G Farma registering its stock in a public offering. Mentor management estimated that registration was not likely, and the contingent rights were valued at $0.


On September 6, 2018, as a result of the Equity Purchase and Issuance Agreement, Mentor received equity interests equal to 3.75% of the entirety of G Farma and its affiliates’ (“G Farma Equity Entities”) interests in exchange for 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. In the event that it is illegal or inadvisable for the Company to own any of the equity in one or more G Farm Equity Entities, or the Company elects not to receive any of those shares, the G Farma Equity Entities granted the Company an irrevocable, fully paid, perpetual, right and option to (i) have the G Farma Equity Entities issue the shares and (ii) receive the shares, or any part thereof, at one or more Company elections on payment of $1. At December 31, 2019, Mentor had estimated the fair value of its 3.75% equity interest in the G Farma Equity Entities based on then licensed operations of the G Farma Equity Entities at $41,600 based on 3.75% of annualized revenue from licensed Washington sales during the first eight months of 2018. On March 4, 2019, Addendum VIII increased the working capital note by $31,000 and the Company obtained an immediate additional 0.093% interest in the G Farma Equity Enities, resulting in a total 3.843% interest in the G Farm Equity Entities. However, due to the uncertain financial position of the G Farma Entities, following the closure of its Corporate office and impoundment of certain G Farma assets described in Notes 1 and 10, the Company has fully impaired it’s equity interests in G Farma Equity Entities entirely by recording a loss on investments of $41,600 for the three months ended March 31, 2019.


In addition, on March 17, 2017, the Company entered into a Consulting Agreement with G Farma whereby the Company receives a monthly consulting fee in arrears of $1,400 per month beginning April 15, 2017 and continuing until the later of (i) 12 months, and (ii) the date on which G Farma has paid in full all obligations under the Notes Purchase Agreement, as amended. This monthly consulting fee increased proportionately with Addendum II and Addenda IV through VII resulting in a fee of $2,741 per month as of December 31, 2018. Addendum VIII increased the consulting fee to $2,828 per month effective March 15, 2019. For the three months ended March 31, 2019 and 2018, $8,310 and $7,000 of consulting fees from G Farma is included in revenue in the condensed consolidated income statement, respectively.


At March 31, 2019, 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, subsequent to quarter end, we were 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.


At March 31, 2019, G Farma was late on one finance lease receivable payment of $21,700, due March 10, 2019, and one notes receivable payment of $13,067, due March 15, 2019. Subsequent to quarter end, on April 18, 2019, Mentor agreed to repurchase 288,890 shares of Mentor common stock owned by G Farma, at the closing market price of $0.45 per share, for a $130,000 credit to be applied pro rata towards the finance lease receivable and notes receivable balances. Although this brings the lease payment and note payment current through part of June, 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, at March 31, 2019, have been fully impaired, other than a $49,268 credit allocated from the repurchase of Mentor common stock from G Farma. The impairment of $997,956 is included in loss on investments in the condensed consolidated statement of income for the three months ended March 31, 2019.


Notes receivable from G Farma consists of the following:




March 31, 2019


December 31, 2018

Real estate note





Working capital note





Impairment recorded





Note receivable discount





Accrued interest










Less current portion





Long term portion of notes receivable