Note 9 – Finance leases receivable

Mentor Partner I

Partner I entered into a Master Equipment Lease Agreement with G FarmaLabs Limited and G FarmaLabs DHS, LLC (the “G Farma Lease Entities”) with guarantees by GFBrands, Inc., formerly known as G FarmaBrands, Inc, Ata Gonzalez and Nicole Gonzalez (collectively, the “G Farma Lease Guarantors”) dated January 16, 2018, and amended March 7, April 4, June 20, and September 7, 2018, and March 4, 2019. Partner I acquired and delivered manufacturing equipment as selected by G Farma Lease Entities under sales-type finance leases. Partner I recorded equipment sales revenue of $0 and $1,157,166 for the years ended December 31, 2019 and 2018, respectively.

As discussed in Notes 1 and 8, on February 22, 2019, the City of Corona Building Department closed access to G Farma’s corporate location; the Company was not informed by G Farma of this incident until March 14, 2019. On April 24, 2019, the Company was informed that certain G Farma assets at its corporate location, including equipment valued at approximately $427,804 leased to the G Farma Lease Entities under the Master Equipment Lease Agreement, was impounded by the Corona Police. This event severely impacted G Farma’s ability to pay amounts due the Company in the future and the G Farma lease receivable was put on non-accrual status effective April 1, 2019 and is classified as non-performing on the consolidated balance sheets at December 31, 2019. Bad debt expense of $765,001, for the year ended December 31, 2019, is included in selling, general and administrative expenses in the consolidated income statement. 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 $765,001 to $786,681 at December 31, 2019. There was no reserve for bad debt on finance leases receivable at December 31, 2018. At G Farma’s direction, equipment valued at $66,374 was held by the distributor and, in October 2019, was returned by Partner I to the distributor for $15,000 less $5,000 for storage fees.

On May 28, 2019, Partner I and Mentor Capital, Inc. filed a complaint in the Superior Court of California in the County of Marin for, among other things, breach of contract against the G Farma Lease Entities and the G Farma Lease Guarantors. As of December 31, 2019, the G Farma Lease Entities had unauthorized possession of Mentor Partner I, LLC’s equipment valued at approximate $792,425 which was not seized by the Corona Police Department and are in default of their obligations under the Master Equipment Lease. The anticipated recovery value of the finance lease receivable represents managements’ estimate of sales proceeds, less estimated costs to sell, from auction or sale of the recovered equipment.

Subsequent to year-end, on January 22, 2020, the Court granted the Company’s motion for writ of possession and preliminary injunction prohibiting defendants from retaining control of or selling leased property and, on January 31, 2020, all remaining equipment leased to G Farma by Mentor Partner I which was not impounded by the Corona Police was repossessed by the Company and moved to storage under the Company’s control, see Note 25. Subsequent to year end, on March 5, 2020, the Company sold a portion of the recovered equipment, with an original cost of $495,967, for $240,000, see Note 25. Sale of remaining equipment is planned for second quarter of 2020. The Company will try to recover as much of its cost in the equipment as possible given that it has never been used.

Mentor Partner II

Partner II entered into a Master Equipment Lease Agreement with Pueblo West, dated February 11, 2018, 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 $74,889 and $460,225 for the years ended December 31, 2019 and 2018, respectively. At December 31, 2019, all Partner II leased equipment under finance leases receivable is located in Colorado.

We review the finance leases receivable 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 December 31, 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 years ended December 31, 2019 and 2018, was $23,811 and $43,247, respectively.

Interest income recognized from Partner II finance leases for the years ended December 31, 2019 and 2018 was $51,603 and $10,506, respectively.

At December 31, 2019, minimum future payments receivable under all finance leases receivable were as follows: