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.

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:

The net investment included in finance leases at December 31, 2018, all of which were classified as performing, are as follows:

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.

At September 30, 2019, minimum future payments receivable under all finance leases receivable were as follows: