Quarterly Report — Form 10-Q — Sect. 13 / 15(d) – SEA’34 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 259K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 21K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 21K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 16K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 16K
33: R1 Document and Entity Information HTML 43K
17: R2 Condensed Balance Sheets HTML 87K
22: R3 Condensed Balance Sheets (Parenthetical) HTML 20K
43: R4 Condensed Statements of Operations HTML 74K
32: R5 Condensed Statement of Partners' Capital HTML 50K
16: R6 Condensed Statements of Cash Flow HTML 50K
21: R7 Business HTML 20K
44: R8 Summary of Significant Accounting Policies HTML 33K
31: R9 Information Technology, Medical Technology, HTML 31K
Telecommunications Technology, Inventory
Management Equipment ('Equipment')
41: R10 Investment in Cof 2 HTML 24K
38: R11 Related Party Transactions HTML 29K
14: R12 Notes Payable HTML 31K
30: R13 Supplemental Cash Flow Information HTML 23K
40: R14 Commitments and Contingencies HTML 28K
37: R15 Summary of Significant Accounting Policies HTML 45K
(Policies)
13: R16 Summary of Significant Accounting Policies HTML 18K
(Tables)
29: R17 Information Technology, Medical Technology, HTML 24K
Telecommunications Technology, Inventory
Management Equipment (Tables)
42: R18 Investment in Cof 2 (Tables) HTML 22K
36: R19 Related Party Transactions (Tables) HTML 28K
20: R20 Notes Payable (Tables) HTML 30K
25: R21 Supplemental Cash Flow Information (Tables) HTML 23K
46: R22 Business (Details Narrative) HTML 18K
35: R23 Summary of Significant Accounting Policies HTML 21K
(Details)
19: R24 Information Technology, Medical Technology, HTML 25K
Telecommunications Technology, Inventory
Management Equipment (Details)
24: R25 Information Technology, Medical Technology, HTML 25K
Telecommunications Technology, Inventory
Management Equipment (Details 1)
45: R26 Information Technology, Medical Technology, HTML 22K
Telecommunications Technology, Inventory
Management Equipment (Details Narrative)
34: R27 Investment in Cof 2 (Details) HTML 38K
18: R28 Related Party Transactions (Details) HTML 23K
26: R29 Notes Payable (Details) HTML 59K
28: R30 Supplemental Cash Flow Information (Details) HTML 17K
12: R31 Supplemental Cash Flow Information (Details 1) HTML 18K
39: R32 Supplemental Cash Flow Information (Details HTML 18K
Narrative)
27: XML IDEA XML File -- Filing Summary XML 77K
15: EXCEL IDEA Workbook of Financial Reports XLSX 39K
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(Registrant’s
telephone number including area code)
Indicate
by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (ii) has
been subject to such filing requirements for the past 90 days: YES
☒ NO ☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). YES ☒ NO
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of "accelerated filer,
“large accelerated filer" and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ☐
Accelerated filer
☐
Non-accelerated
filer ☐
Smaller
reporting company ☒
(Do not
check if a smaller reporting company.)
Emerging growth
company ☐
Indicate
by check mark whether the registrant is an emerging growth company
(as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO
☒
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES ☐ NO
☒
Equipment
acquisition costs and deferred expenses, net of accumulated
amortization of approximately $160,000 and $127,000 at
September 30, 2019 and December 31, 2018, respectively
97,354
159,497
Total
Assets
$5,202,347
$7,275,185
LIABILITIES
AND PARTNERS' CAPITAL
LIABILITIES
Accounts
payable
$281,668
$277,274
Accounts payable,
CIGF, Inc.
111,943
343,446
Other accrued
expenses
11,626
77,426
Unearned lease
income
36,650
36,949
Notes
payable
1,686,776
2,715,429
Total
Liabilities
2,128,663
3,450,524
COMMITMENTS
AND CONTINGENCIES
PARTNERS'
CAPITAL
General
Partner
1,050
1,050
Limited
Partners
3,072,634
3,823,611
Total
Partners' Capital
3,073,684
3,824,661
Total
Liabilities and Partners' Capital
$5,202,347
$7,275,185
see
accompanying notes to condensed financial statements
Net
cash (used in) provided by operating activities
$(93,328)
$540,675
Cash
flows from investing activities
Capital
Expenditures
-
(195,897)
Payments
from finance leases
-
64,882
Equipment
acquisition fees paid to General Partner
-
(34,158)
Net
proceeds from the sale of equipment
55,409
191,496
Net cash provided by investing activities
$55,409
$26,323
Cash
flows from financing activities
Distributions
to partners
(308,644)
(232,139)
Redemption
(6,576)
(57,538)
Debt
placement fee paid to the General Partner
-
(6,581)
Net
cash used in financing activities
(315,220)
(296,258)
Net
(decrease)/increase in cash and cash equivalents
(353,139)
270,740
Cash
and cash equivalents, beginning of period
853,115
887,167
Cash
and cash equivalents, end of period
$499,976
$1,157,907
see
accompanying notes to condensed financial statements
6
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Business
Commonwealth
Income & Growth Fund VII, LP (the “Partnership”) is
a limited partnership organized in the Commonwealth of Pennsylvania
on November 14, 2008. The Partnership offered for sale up to
2,500,000 units of limited partnership interest at the purchase
price of $20 per unit (the “offering”). The Partnership
reached the minimum amount in escrow and commenced operations on
March 31, 2010. The offering terminated on November 22, 2011 with
1,572,900 units sold for a total of approximately $31,432,000 in
limited partner contributions.
The
Partnership uses the proceeds of the offering to acquire, own and
lease various types of computer information technology equipment
and other similar capital equipment, which is leased primarily to
U.S. corporations and institutions. Commonwealth Capital Corp.
(“CCC”), on behalf of the Partnership and other
affiliated partnerships, acquires computer equipment subject to
associated debt obligations and lease agreements and allocates a
participation in the cost, debt and lease revenue to the various
partnerships based on certain risk factors.
The
Partnership’s general partner is Commonwealth Income &
Growth Fund, Inc. (the “General Partner”), a
Pennsylvania corporation which is an indirect wholly-owned
subsidiary of CCC. CCC is a member of the Institute for Portfolio
Alternatives (“IPA”) and the Equipment Leasing and
Finance Association (“ELFA”). Approximately ten years
after the commencement of operations, the Partnership intends to
sell or otherwise dispose of all of its equipment, make final
distributions to partners, and to dissolve. Unless sooner
terminated or extended pursuant to the terms of its Limited
Partnership Agreement (the “Agreement”), the
Partnership will continue until December 31, 2021.
2. Summary of Significant Accounting Policies
Basis of Presentation
The
unaudited condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and
Exchange Commission. Financial information as of December 31, 2018
has been derived from the audited financial statements of the
Partnership, but does not include all disclosures required by
generally accepted accounting principles to be included in audited
financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial information for
the periods indicated, have been included. Operating results for
the nine months ended September 30, 2019 are not necessarily
indicative of financial results that may be expected for the full
year ended December 31, 2019.
Equity Method Investment
The
Partnership accounts for its investment in COF2 under the equity
method in accordance with Accounting Standards Codification
(“ASC”) 323. Under the equity method, the Partnership
records its proportionate share of the Fund’s net income
(loss). Capital contributions, distributions and net income (loss)
of such entities are recorded in accordance with the terms of the
governing documents. An allocation of net income (loss) may differ
from the stated ownership percentage interest in such entity as a
result of distributions and allocation formulas, if any, as
described in such governing documents.
Disclosure of Fair Value of Financial Instruments
Estimated
fair value was determined by management using available market
information and appropriate valuation methodologies. However,
judgment was necessary to interpret market data and develop
estimated fair value. Cash and cash equivalents, receivables,
accounts payable and accrued expenses and other liabilities are
carried at amounts which reasonably approximate their fair values
as of September 30, 2019 and December 31, 2018 due to the short
term nature of these financial instruments.
7
The
Partnership’s long-term debt consists of notes payable, which
are secured by specific equipment and are nonrecourse liabilities
of the Partnership. The estimated fair value of this debt at
September 30, 2019 and December 31, 2018 approximates the carrying
value of these instruments, due to the interest rates on the debt
approximating current market interest rates. The Partnership
classifies the fair value of its notes payable within Level 2 of
the valuation hierarchy based on the observable inputs used to
estimate fair value.
Cash and cash equivalents
We
consider cash equivalents to be highly liquid investments with the
original maturity dates of 90 days or less.
At
September 30, 2019, cash and cash equivalents was held in one bank
account maintained at one financial institution with an aggregate
balance of approximately $500,000. Bank accounts are federally
insured up to $250,000 by the FDIC. At September 30, 2019, the
total cash bank balance was as follows:
The
Partnership believes it mitigates the risk of holding uninsured
deposits by only depositing funds with major financial
institutions. The Partnership has not experienced any losses in our
accounts, and believes it is not exposed to any significant credit
risk. The amount in its accounts will fluctuate throughout 2019 due
to many factors, including cash receipts, equipment acquisitions,
interest rates and distributions to limited partners.
Recently Adopted Accounting Pronouncements
In
December 2018, the Financial Accounting Standard Board
(“FASB”) issued ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements
for Lessors, which is expected to reduce a lessor’s
implementation and ongoing costs associated with applying the new
leases standard. The ASU also clarifies a specific lessor
accounting requirement. Specifically, this ASU addresses
the following issues facing lessors when applying the leases
standard: Sales taxes and other similar taxes collected from
lessees, certain lessor costs paid directly by lessees and
recognition of variable payments for contracts with lease and
non-lease components. The Partnership concluded, upon adoption of
this update that there was no significant change to their
accounting.
In
March 2016, the FASB issued Accounting Standards Update No.
2016-02, Leases (Topic 842)
Section A—Leases: Amendments to the FASB Accounting Standards
Codification® Section B—Conforming Amendments Related to
Leases: Amendments to the FASB Accounting Standards
Codification® Section C—Background Information and Basis
for Conclusions- Effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal
years, for any of the following: A public business entity; A
not-for-profit entity that has issued, or is a conduit bond obligor
for, securities that are traded, listed, or quoted on an exchange
or an over-the-counter market; An employee benefit plan that files
financial statements with the U.S. Securities and Exchange
Commission (SEC). The new standard requires the recognition and
measurement of leases at the beginning of the earliest period
presented using a modified retrospective approach, which includes a
number of optional practical expedients that entities may elect to
apply. This guidance also expands the requirements for
lessees to record leases embedded in other arrangements and the
required quantitative and qualitative disclosures surrounding
leases. Additionally, our business involves lease agreements with
our customers whereby we are the lessor in the transaction.
Accounting guidance for lessors is largely unchanged. The
amendments are effective for fiscal years beginning after December15, 2018, and interim periods within those fiscal
years. We adopted Topic 842 at the required adoption
date of January 1, 2019. We used the package of practical
expedients permitted under the transition guidance that allowed us
not to reassess: (1) lease classification for expired or existing
leases and (2) initial direct costs for any expired or existing
leases. We did not recognize an adjustment to the opening balance
of partner’s capital upon adoption.
8
In
March 2019, the FASB issued Accounting Standards Update No.
2019-01, Leases (Topic 842)
Codification Improvements — Effective for fiscal years
beginning after December 15, 2019, including interim periods within
those fiscal years, for any of the following: A public business
entity; A not-for-profit entity that has issued, or is a conduit
bond obligor for, securities that are traded, listed, or quoted on
an exchange or an over-the-counter market; An employee benefit plan
that files financial statements with the U.S. Securities and
Exchange Commission (SEC). The amendments in this Update include
the following items brought to the Board’s attention through
those interactions with stakeholders:
●
Determining the
fair value of the underlying asset by lessors that are not
manufacturers or dealers (Issue 1).
●
Presentation on the
statement of cash flows—sales-type and direct financing
leases (Issue 2).
●
Transition
disclosures related to Topic 250, Accounting Changes and Error
Corrections (Issue 3).
We
adopted Topic 842 at the required adoption date of January 1, 2019.
The Partnership concluded that the sales taxes and other similar
taxes collected from the lessees are recorded in the current period
in the Condensed Statement of Operations as gross revenues and
expenses. As permitted by the guidance, we elected the practical
expedient that allows us not to restate comparative periods in the
financial statements. Upon adoption of this update, there was no
significant change to the Partnership accounting.
Recent Accounting Pronouncements Not Yet Adopted
FASB issued a new guidance, Accounting Standards Update No.
2016-13, Financial Instruments –
Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, as
clarified and amended by ASU 2018-19, Codification Improvements to
Topic 326, Financial Instruments – Credit Losses and
ASU 2019-05, Financial Instruments –
Credit Losses (Topic 326): Targeted Transition Relief.
The new guidance is effective for
fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. Thus, for a calendar-year
company, it would be effective January 1, 2020. The new guidance
requires an allowance for credit losses based on the expectation of
lifetime credit losses on financial receivables carried at
amortized cost, including, but not limited to, mortgage loans,
premium receivables, reinsurance receivables and certain leases.
The new current expected credit loss (“CECL”)
impairment model for financial assets reported at amortized cost
will be applicable to receivables associated with sales-type and
direct financing leases but not to operating lease receivables. The
Partnership continues to evaluate the impact of the new guidance on
its condensed financial statements.
3. Information Technology, Medical Technology, Telecommunications
Technology, Inventory Management and Other Business-Essential
Capital Equipment (“Equipment”)
The
Partnership is the lessor of equipment under operating leases with
periods that generally will range from 12 to 48 months. In general,
associated costs such as repairs and maintenance, insurance and
property taxes are paid by the lessee.
Remarketing
fees will be paid to the leasing companies from which the
Partnership purchases leases. These are fees that are earned by the
leasing companies when the initial terms of the lease have been
met. The General Partner believes that this strategy adds value
since it entices the leasing company to remain actively involved
with lessee and encourages potential extensions, remarketing or
sale of equipment. This strategy is designed to minimize any
conflicts the leasing company may have with a new lessee and may
assist in maximizing overall portfolio performance. The remarketing
fee is tied into lease performance thresholds and is a factor in
the negotiation of the fee. For the nine months ended September 30,2019 and 2018, there were no remarketing fees incurred, paid with
cash or netted against receivables due from such
parties.
CCC, on behalf of the Partnership and on behalf of other affiliated
companies and partnerships (“partnerships”), acquires
equipment subject to associated debt obligations and lease
agreements and allocates a participation in the cost, debt and
lease revenue to the various companies based on certain risk
factors.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at September 30, 2019 was
approximately $9,335,000 and is included in the Partnership’s
equipment on its balance sheet. The Partnership’s share of
the outstanding debt associated with this equipment at September30, 2019 was approximately $1,216,000 and is included in the
Partnership’s notes payable on its balance sheet. The total
cost of the equipment shared by the Partnership with other
partnerships at September 30, 2019 was approximately $21,376,000.
The total outstanding debt related to the equipment shared by the
Partnership at September 30, 2019 was approximately
$2,629,000.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2018 was
approximately $10,206,000 and is included in the
Partnership’s equipment on its balance sheet. The
Partnership’s share of the outstanding debt associated with
this equipment at December 31, 2018 was approximately $1,786,000
and is included in the Partnership’s notes payable on its
balance sheet. The total cost of the equipment shared by the
Partnership with other partnerships at December 31, 2018 was
approximately $23,912,000. The total outstanding debt related to
the equipment shared by the Partnership at December 31, 2018 was
approximately $3,875,000.
As the
Partnership and the other programs managed by the General Partner
increase their overall portfolio size, opportunities for shared
participation are expected to continue. Sharing in the acquisition
of a lease portfolio gives the fund an opportunity to acquire
additional assets and revenue streams, while allowing the fund to
remain diversified and reducing its overall risk with respect to
one portfolio. As additional investment opportunities arise during
2019, the Partnership expects total shared equipment and related
debt to trend higher as the Partnership builds its
portfolio.
9
The
following is a schedule of approximate future minimum rentals on
non-cancellable operating leases:
Estimated residual
value of leased equipment (unguaranteed)
-
3,000
Initial direct
costs finance leases
-
-
Less: unearned
income
-
-
Net investment in
finance leases
$-
$5,000
We
assess credit risk for all of our customers, including those that
lease under finance leases. This credit risk is assessed using an
internally developed model which incorporates credits scores from
third party providers and our own customer risk ratings and is
periodically reviewed. Our internal ratings are weighted based on
the industry that the customer operates in. When assessing risk,
factors taken into consideration include both general and industry
specific qualitative and quantitative metrics. We separately take
in to consideration payment history, open lawsuits, liens and
judgments. Typically, we will not extend credit to a company that
has been in business for less than 5 years or that has filed for
bankruptcy within the same period. Our internally based model may
classify a company as high risk based on our analysis of their
audited financial statements and their payment history. Additional
considerations of high risk may include history of late payments,
open lawsuits and liens or judgments. In an effort to mitigate
risk, we typically require deposits from those in this
category.
A
reserve for credit losses is deemed necessary when payment has not
been received for one or more months of receivables due on the
equipment held under finance leases. At the end of each period,
management evaluates the open receivables due on this equipment and
determines the need for a reserve based on payment history and any
current factors that would have an impact on payments.
As of
September 30, 2019 and December 31, 2018, we determined that we did
not have a need for an allowance for uncollectible accounts
associated with any of our finance leases, as the customer payment
histories with us, associated with these leases, has been
positive.
CCC, on behalf of the Partnership and on behalf of other affiliated
companies and partnerships (“partnerships”), acquires
equipment subject to associated debt obligations and lease
agreements and allocates a participation in the cost, debt and
lease revenue to the various companies based on certain risk
factors.
10
4. Investment in COF 2
On
August 13, 2015, the Partnership purchased 1,648 units for
$1,500,000, of Commonwealth Opportunity Fund 2 (“COF
2”), an affiliate fund of the General Partner. In accordance
with the Partnership Agreement, the Partnership is permitted to
invest in equipment Programs formed by the General Partner or its
affiliates. COF 2 is an affiliate program that broke escrow on
August 13, 2015. The General Partner believes this action is in the
best interests of all the Programs. The Partnership accounts for
its investment in COF 2 under the equity method in accordance with
ASC 323. The Partnership’s net
investment in COF 2 at September 30, 2019 and December 31, 2018 was
approximately $650,000 and $790,000, respectively (see COF 2
Financial Summary below). During the nine months ended
September 30, 2019, COF 2 declared distributions to the Partnership
of approximately $16,000.
September, 30
December
31,
COF 2 Summarized Financial Information
2019
2018
Assets
$2,308,000
$3,214,000
Liabilities
$463,000
$960,000
Partners'
capital
$1,845,000
$2,254,000
Revenue
$855,000
$1,319,000
Expenses
$1,216,000
$1,677,000
Net
loss
$(361,000)
$(358,000)
11
5. Related Party Transactions
Receivables/Payables
As of
September 30, 2019 and December 31, 2018, the Partnership’s
related party receivables and payables are short term, unsecured,
and non-interest bearing.
The General Partner and its affiliates are entitled to
reimbursement by the Partnership for the cost of goods, supplies or
services obtained and used by the General Partner in connection
with the administration and operation of the Partnership from third
parties unaffiliated with the General Partner. In addition, the
General Partner and its affiliates are entitled to reimbursement of
certain expenses incurred by the General Partner and its affiliates
in connection with the administration and operation of the
Partnership. For the nine months ended September 30, 2019 and 2018,
the Partnership was charged approximately $376,000 and $481,000 in
other LP expense, respectively .
$599,000
$804,000
Equipment Acquisition Fee
The General Partner
earned an equipment acquisition fee of 4% of the purchase price of
each item of equipment purchased as compensation for the
negotiation of the acquisition of the equipment and lease thereof
or sale under a conditional sales contract. For the nine
months ended September 30, 2019 and 2018, the General Partner
earned acquisition fees from operating and finance leases of
approximately $0 and $34,000, respectively. At September 30,2019, the remaining balance of prepaid acquisition fees was
$0.
$-
$34,000
Debt Placement Fee
As compensation for
arranging term debt to finance our acquisition of equipment, we
will pay the general partner a fee equal to one percent of such
indebtedness; provided, however, that such fee shall be reduced to
the extent we incur such fees to third parties unaffiliated with
the general partner or the lender with respect to such
indebtedness. No such fee will be paid with respect to borrowings
from the general partner or its affiliates. We intend to initially
acquire leases on an all cash basis with the proceeds of this
offering, but may borrow funds after the offering proceeds have
been invested. The amount we borrow, and therefore the amount of
the fee, will depend upon interest rates at the time of a loan, and
the amount of leverage we determine is appropriate at the time.
Fees will increase as the amount of leverage we use increases, and
as turnover in the portfolio increases and additional equipment is
purchased using leverage
$-
$7,000
Equipment Management Fee
We pay our general
partner a monthly fee equal to the lesser of (a) the fees which
would be charged by an independent third party in the same
geographic market for similar services and equipment or (b) the sum
of (i) two percent of gross lease revenues attributable to
equipment subject to full payout net leases which contain net lease
provisions and (ii) five percent of the gross lease revenues
attributable to equipment subject to operating leases. Our general
partner, based on its experience in the equipment leasing industry
and current dealings with others in the industry, will use its
business judgment to determine if a given fee is competitive,
reasonable and customary. The amount of the fee will depend upon
the amount of equipment we manage, which in turn will depend upon
the amount we raise in this offering. Reductions in market rates
for similar services would also reduce the amount of this fee we
will receive.
$76,000
$95,000
Equipment Liquidation Fee
Also referred to as
a "resale fee." With respect to each item of equipment sold by the
general partner, we will pay a fee equal to the lesser of (i) 50%
of the competitive equipment sale commission or (ii) three percent
of the sales price of the equipment. The payment of this fee is
subordinated to the receipt by the limited partners of (i) a return
of their capital contributions and a 10% per annum cumulative
return, compounded daily, on adjusted capital contributions and
(ii) the net disposition proceedsfrom such sale in accordance with
the partnership agreement. Our general partner, based on its
experience in the equipment leasing industry and current dealings
with others in the industry, uses its business judgment to
determine if a given sales commission is competitive, reasonable
and customary. Such fee will be reduced to the extent any
liquidation or resale fees are paid to unaffiliated parties. The
amount of such fees will depend upon the sale price of equipment
sold. Sale prices will vary depending upon the type, age and
condition of equipment sold. The shorter the terms of our leases,
the more often we may sell equipment, which will increase
liquidation fees we receive.
$2,000
$6,000
12
6. Notes Payable
Notes
payable consisted of the following approximate
amounts:
Installment
note payable to bank; interest at 1.80% due in monthly installments
of $2,533, including interest; with final payment in April
2019
-
10,000
Installment
note payable to bank; interest at 1.80% due in monthly installments
of $8,677, including interest; with final payment in May
2019
-
43,000
Installment
notes payable to bank; interest at 6.00% due in monthly
installments ranging from $101 to $831, including interest, with
final payment in July 2019
-
2,000
Installment
note payable to bank; interest at 4.98% due in monthly installments
of $2,807, including interest, with final payment in September
2019
-
25,000
Installment
note payable to bank; interest at 5.49% due in monthly installments
of $4,177, including interest, with final payment in January
2020
16,000
53,000
Installment
note payable to bank; interest at 5.93% due in monthly installments
of $3,324, including interest, with final payment in February
2020
16,000
45,000
Installment
note payable to bank; interest at 5.25% due in quarterly
installments of $3,836, including interest, with final payment in
March 2020
8,000
18,000
Installment
note payable to bank; interest at 5.25% due in quarterly
installments of $25,557, including interest, with final payment in
April 2020
75,000
146,000
Installment
note payable to bank; interest at 4.37% due in monthly installments
of $16,273, including interest, with final payment in April
2020
48,000
94,000
Installment
note payable to bank; interest at 4.88% due in monthly installments
of $1,363, including interest, with final payment in May
2020
11,000
22,000
Installment
note payable to bank; interest at 5.62% due in quarterly
installments of $2,897, including interest, with final payment in
July 2020
11,000
19,000
Installment
note payable to bank; interest at 4.55% due in monthly installments
ranging from $1,723 to $14,777, including interest, with final
payment in August 2020
177,000
317,000
Installment
note payable to bank; interest at 5.66% due in quarterly
installments of $29,292, including interest, with final payment in
October 2020
140,000
220,000
Installment
note payable to bank; interest at 5.25% due in monthly installments
of $2,463, including interest, with final payment in October
2020
31,000
52,000
Installment
note payable to bank; interest at 5.31% due in monthly installments
of $52,336, including interest, with final payment in January
2021
300,000
441,000
Installment
note payable to bank; interest at 6.00% due in quarterly
installments of $74,533, including interest, with final payment in
January 2021
425,000
623,000
Installment
notes payable to bank; interest at 5.33% due in monthly
installments ranging from $4,312 to $15,329, including interest,
with final payment in August 2021
429,000
585,000
$1,687,000
$2,715,000
13
The
notes are secured by specific equipment with a carrying value of
approximately $2,693,000 and are nonrecourse liabilities of the
Partnership. As such, the notes do not contain any financial debt
covenants with which we must comply on either an annual or
quarterly basis. Aggregate maturities of notes payable for each of
the periods subsequent to September 30, 2019 are as
follows:
During
2015, the General Partner executed a collateralized debt financing
agreement on behalf of certain affiliates for a total shared loan
amount of approximately $847,000, of which the Partnership’s
share was approximately $290,000. The Partnership’s portion
of the current loan amount at September 30, 2019 and December 31,2018 was approximately $0 and $2,000, respectively, and is secured
by specific equipment under both operating and finance leases. The
carrying value of the secured equipment under operating leases at
both September 30, 2019 and December 31, 2018 is $0. The carrying
value of the secured equipment under finance leases at September30, 2019 and December 31, 2018 is approximately $0 and $5,000,
respectively.
7. Supplemental Cash Flow Information
No
interest or principal on notes payable was paid by the Partnership
during 2019 and 2018 because direct payment was made by lessee to
the bank in lieu of collection of lease income and payment of
interest and principal by the Partnership.
Other
noncash activities included in the determination of net loss are as
follows:
Accrual for
distributions to partners paid in October (included in other
accrued expenses)
$76,000
$77,000
Accrued expenses
incurred in connection with the purchase of technology
equipment
$-
$894,000
During
the nine months ended September 30, 2019 and 2018, the Partnership
wrote-off fully amortized acquisition and finance fees of
approximately $29,000 and $23,000, respectively.
During
both the nine months ended September 30, 2019 and 2018, the
Partnership wrote-off fully depreciated equipment of approximately
$0.
14
8. Commitments and Contingencies
Medshare
In
January 2015, CCC, on behalf of the Funds, entered into a Purchase
Agreement (“Purchase Agreement”) for the sale of the
equipment to Medshare Technologies (“Medshare”) for
approximately $3,400,000. The Partnership’s share of
the sale proceeds was approximately $1,033,000. As of
November 14, 2019, the Partnership had received approximately
$728,000 of the approximate $1,033,000 sale proceeds and has
recorded a reserve of $243,000 against the outstanding
receivables. On April 3, 2015 Medshare was obligated to make
payment in full and failed to do so. As a result, Medshare
defaulted on its purchase agreement with CCC and was issued a
demand letter for full payment of the equipment. On June 25,2015, Medshare filed a lawsuit in Texas state court for breach of
contract (“State Suit”). On June 26, 2015,
Commonwealth filed a lawsuit in the Northern District of Texas
against Medshare seeking payment in full and/or return of the
Equipment and damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2,2016, the Defendants made payment to CCC of an initial $200,000 to
be followed by 24 structured monthly payments of approximately
$50,000 per month to begin no later than September 15, 2016.
The Partnership’s share of the Settlement Agreement is
approximately $453,000 and is to be applied against the net
Medshare receivable of approximately $350,000 as of the settlement
date. The remaining $103,000 will be applied against the $243,000
reserve and recorded as a bad debt recovery. As of November13, 2019, the Partnership received approximately $182,000 of the
approximate $453,000 settlement agreement which was applied against
the net Medshare receivable of approximately $350,000 as of the
settlement date. As Defendant defaulted on settlement
agreement, CCC sought and obtained consent judgment from U.S.
District Court for Northern District of Texas, Dallas Division on
July 27, 2017 in the amount of $1.5 million, less $450,000
previously paid plus $6,757 in attorney fees, both the Defendant
and Cleary being jointly and severally liable for the judgment
amount. The court also vacated the September 21, 2016
settlement dismissal.
On July27, 2017 Defendant filed Chapter 11 in Northern District of Texas
Dallas Division. On July 26, 2017 Legacy Texas Bank, a
secured creditor of the Defendant filed for a TRO in the U.S.
District Court of the Northern District of Texas, Dallas Division.
Included with the TRO filing was a request for appointment of
trustee for operation of Defendant, which was granted and the case
converted to Chapter 7. On December 18, 2018 the Bankruptcy Court
entered final order and issued its last payment to CCC in March
2019 of approximately $43,000, of which the Partnership’s
share was approximately $14,000. The Medshare Bankruptcy
matter is now closed. Although the trustee’s final
distribution to Commonwealth did not fully satisfy the
judgment, recovery may still be pursued directly against Cleary. As
such, management believes that the foregoing will not result
in any adverse financial impact on the Funds, but no assurance can
be provided until the proceedings are resolved.
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at
issue include amounts that were proper and that were properly
allocated to Funds, and also identified a smaller number of
expenses that had been allocated in error, but were adjusted and
repaid to the affected Funds when they were identified in
2012. During the period in question, Commonwealth Capital
Corp. (“CCC”) and Ms. Springsteen-Abbott provided
important financial support to the Funds, voluntarily absorbed
expenses and voluntarily waived fees in amounts aggregating in
excess of any questioned allocations. A Hearing Panel ruled
on March 30, 2015, that Ms. Springsteen-Abbott should be barred
from the securities industry because the Panel concluded that she
allegedly misallocated approximately $208,000 of expenses involving
certain Funds over the course of three years. As such,
management had allocated approximately $87,000 of the $208,000 in
allegedly misallocated expenses back to the affected funds as a
contingency accrual in CCC’s financial statements and a good
faith payment for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed
to FINRA's National Adjudicatory Council (the “NAC”)
pursuant to FINRA Rule 9311. The NAC issued a decision that
upheld the lower panel’s ruling and the bar took effect on
August 23, 2016. Ms. Springsteen-Abbott appealed the
NAC’s decision to the U.S. Securities and Exchange Commission
(the “SEC”). On March 31, 2017, the SEC
criticized that decision as so flawed that the SEC could not even
review it, and remanded the matter back to FINRA for further
consideration consistent with the SEC’s remand, but did not
suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling
$208,000 to a remaining list of 84 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. That appeal is
pending as of November 13, 2019. All requested or allowed
briefs have been filed with the SEC. Management believes that
whatever final resolution of this may be, it will not result in any
material adverse financial impact on the Funds, although, a final
assurance cannot be provided until the legal matter is
resolved.
Leased Equipment
The General Partner is in the process of negotiations with a lessee
to “Buy-out” certain equipment currently under lease
contract. If a “Buy-out” agreement is not
reached, the lessee will continue to lease the equipment as written
under the original lease contract. The equipment to be
included in the “Buy-out” represents approximately 2.1%
of the Partnership’s total equipment at cost as of September30, 2019.
15
Item 2: Management’s Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD LOOKING STATEMENTS
This
section, as well as other portions of this document, includes
certain forward-looking statements about our business and our
prospects, tax treatment of certain transactions and accounting
matters, sales of securities, expenses, cash flows, distributions,
investments and operating and capital requirements. Such
forward-looking statements include, but are not limited to:
acquisition policies of our general partner; the nature of present
and future leases; provisions for uncollectible accounts; the
strength and sustainability of the U.S. economy; the continued
difficulties in the credit markets and their impact on the economy
in general; and the level of future cash flow, debt levels,
revenues, operating expenses, amortization and depreciation
expenses. You can identify those statements by the use of words
such as “could,”“should,”“would,”“may,”“will,”“project,”“believe,”“anticipate,”“expect,”“plan,”“estimate,”“forecast,”“potential,”“intend,”“continue” and “contemplate,” as well as
similar words and expressions.
Actual
results may differ materially from those in any forward-looking
statements because any such statements involve risks and
uncertainties and are subject to change based upon various
important factors, including, but not limited to, nationwide
economic, financial, political and regulatory conditions; the
health of debt and equity markets, including interest rates and
credit quality; the level and nature of spending in the
information, medical and telecommunications technologies markets;
and the effect of competitive financing alternatives and lease
pricing.
Readers
are also directed to other risks and uncertainties discussed in
other documents we file with the SEC, including, without
limitation, those discussed in Item 1A. “Risk Factors”
of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2018 filed with the SEC. We undertake no obligation to
update or revise any forward-looking information, whether as a
result of new information, future developments or
otherwise.
INDUSTRY OVERVIEW
The Equipment
Leasing and Finance Association’s (ELFA) Monthly
Leasing and Finance Index (MLFI-25), which reports economic
activity from 25 companies representing a cross section of the $1
trillion equipment finance sector, showed their overall new
business volume for September was $10 billion, up
18 %
year-over-year from new business volume in September 2018. Volume
was up 9 % month-to-month from $9.2 billion in August. Year to
date, cumulative new business volume was up 5 % compared to 2018.
Receivables over 30 days were 1.70 %, down from 2.0 % the previous
month and up from 1.60 % the same period in 2018. Charge-offs was
0.40 %, down from 0.42 % the previous month, and unchanged from the
year-earlier period. Credit approvals totaled 76.3 %, down from
76.6 % in August. Total headcount for equipment finance companies
was down 2.1 % year-over-year. Separately, the Equipment Leasing
& Finance Foundation’s Monthly Confidence Index (MCI-EFI)
in October is 51.4, down from the September index of
54.7.
16
CRITICAL ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of
operations are based upon our financial statements which have been
prepared in accordance with generally accepted accounting
principles in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses.
We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
We
believe that our critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
financial statements. See Note 2 to our condensed financial
statements included herein for a discussion related to recent
accounting pronouncements.
EQUITY METHOD INVESTMENT
The
Partnership accounts for its investment in COF2 under the equity
method in accordance with Accounting Standards Codification
(“ASC”) 323. Under the equity method, the
Partnership records its proportionate share of the Fund’s net
income (loss). Capital contributions, distributions and net
income (loss) of such entities are recorded in accordance with the
terms of the governing documents. An allocation of net income
(loss) may differ from the stated ownership percentage interest in
such entity as a result of distributions and allocation formulas,
if any, as described in such governing documents.
LEASE INCOME RECEIVABLE
Lease
income receivable includes current lease income receivable net of
allowances for uncollectible amounts, if any. The Partnership
monitors lease income receivable to ensure timely and accurate
payment by lessees. The Partnership’s Lease Relations
department is responsible for monitoring lease income receivable
and, as necessary, resolving outstanding invoices.
The
Partnership reviews a customer’s credit history before
extending credit. When the analysis indicates that the probability
of full collection is unlikely, the Partnership may establish an
allowance for uncollectible lease income receivable based upon the
credit risk of specific customers, historical trends and other
information. The Partnership writes off its lease income receivable
when it determines that it is uncollectible and all economically
sensible means of recovery have been exhausted.
17
REVENUE RECOGNITION
Through
September 30, 2019, the Partnership’s lease portfolio
consisted of operating leases and finance leases. For operating
leases, lease revenue is recognized on a straight-line basis in
accordance with the terms of the lease agreement.
Finance
lease interest income is recorded over the term of the lease using
the effective interest method. For finance leases, we record, at
lease inception, unearned finance lease income which is calculated
as follows: total lease payments, plus any residual value and
initial direct costs, less the cost of the leased
equipment.
Upon
the end of the lease term, if the lessee has not met the return
conditions as set out in the lease, the Partnership is entitled in
certain cases to additional compensation from the lessee. The
Partnership’s accounting policy for recording such payments
is to treat them as revenue.
Gains
or losses from sales of leased and off-lease equipment are recorded
on a net basis in the Partnership’s Statement of
Operations
Our
leases do not contain any step-rent provisions or escalation
clauses nor are lease revenues adjusted based on any
index.
Gains
from the termination of leases are recognized when the lease is
modified and terminated concurrently. Gains from lease termination
included in lease revenue for both the nine months ended September30, 2019 and 2018 were approximately $0.
LONG-LIVED ASSETS
Depreciation
on technology and inventory management equipment for financial
statement purposes is based on the straight-line method estimated
generally over useful lives of two to five years. Once an asset
comes off lease or is released, the Partnership reassesses the
useful life of an asset.
The
Partnership evaluates its long-lived assets when events or
circumstances indicate that the value of the asset may not be
recoverable. The Partnership determines whether impairment exists
by estimating the undiscounted cash flows to be generated by each
asset. If the estimated undiscounted cash flows are less than the
carrying value of the asset then impairment exists. The amount of
the impairment is determined based on the difference between the
carrying value and the fair value. Fair value is determined based
on estimated discounted cash flows to be generated by the asset,
third party appraisals or comparable sales of similar assets, as
applicable, based on asset type.
Residual
values are determined by management and are calculated using
information from both internal and external sources, as well as
other economic indicators.
18
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our
primary source of cash for the nine months ended September 30,2019, is net proceeds from the sale of equipment of approximately
$55,000. This compares to the nine months ended September 30, 2018
where our primary sources of cash were cash provided by operating
activities of approximately $541,000, net proceeds from the sale of
equipment of approximately $191,000 and payments received from
finance leases of approximately $65,000.
Our
primary uses of cash for the nine months ended September 30, 2019
were cash used in operating activities of approximately $93,000,
distributions to partners of approximately $309,000 and limited
partner redemptions of approximately $7,000. For the nine months
ended September 30, 2018, our primary uses of cash were
distributions to partners of approximately $232,000, limited
partner redemptions of approximately $58,000 and debt placement fee
paid to General Partner of approximately $7,000, purchase of new
equipment of approximately $196,000 and equipment acquisition fees
paid to General Partner of approximately $34,000.
Cash
used in operating activities for the nine months ended September30, 2019 was approximately $93,000, including a net loss of
approximately $513,000 and depreciation and amortization expenses
of approximately $1,168,000. Other noncash activities included in
the determination of net loss include direct payments to banks by
lessees of approximately $1,029,000. This compares to the nine
months ended September 30, 2018 with cash provided by operating
activities of approximately $541,000, including a net loss of
approximately $612,000 and depreciation and amortization expenses
of approximately $1,488,000. Other noncash activities included in
the determination of net loss include direct payments to banks by
lessees of approximately $1,681,000 and a net gain on sale of
equipment held under operating leases of approximately
$106,000.
As we
continue to increase the size of our equipment portfolio, operating
expenses will increase, which reflects the administrative costs of
servicing the portfolio, but because of our investment strategy of
leasing equipment primarily through triple-net leases, we avoid
operating expenses related to equipment maintenance or
taxes.
CCC, on
our behalf and on behalf of other affiliated partnerships, acquires
equipment subject to associated debt obligations and lease revenue
and allocates a participation in the cost, debt and lease revenue
to the various partnerships based on certain risk
factors.
Capital
expenditures and distributions are expected to continue to increase
overall during the remainder of 2019 as management focuses on
additional equipment acquisitions and funding limited partner
distributions.
We
consider cash equivalents to be highly liquid investments with the
original maturity dates of 90 days or less.
19
At
September 30, 2019, cash was held in one bank account maintained at
one financial institution with an aggregate balance of
approximately $500,000. Bank accounts are federally insured up to
$250,000. At September 30, 2019, the total cash bank balance was as
follows:
The
Partnership believes it mitigates the risk of holding uninsured
deposits by only depositing funds with major financial
institutions. The Partnership has not experienced any losses in our
accounts, and believes it is not exposed to any significant credit
risk. The amounts in such accounts will fluctuate throughout 2019
due to many factors, including the pace of cash receipts, equipment
acquisitions and distributions to limited partners.
As of
September 30, 2019, we had future minimum rentals on non-cancelable
operating leases of approximately $480,000 for the balance of the
year ending December 31, 2019 and approximately $1,420,000
thereafter.
As of
September 30, 2019, we had future minimum rentals on non-cancelable
finance leases of approximately $0 for the balance of the year
ending December 31, 2019 and approximately $0
thereafter.
As of
September 30, 2019, our non-recourse debt was approximately
$1,687,000 with interest rates ranging from 1.8% through 6.00% and
is payable through August 2021.
During
2015, the General Partner executed a collateralized debt financing
agreement on behalf of certain affiliates for a total shared loan
amount of approximately $847,000, of which the Partnership’s
share was approximately $290,000. The Partnership’s portion
of the current loan amount at September 30, 2019 and December 31,2018 was approximately $0 and $2,000, respectively, and is secured
by specific equipment under both operating and finance leases. The
carrying value of the secured equipment under operating leases at
both September 30, 2019 and December 31, 2018 is $0. The carrying
value of the secured equipment under finance leases at September30, 2019 and December 31, 2018 is approximately $0 and $5,000,
respectively.
Our
lease revenue decreased to approximately $497,000 for the three
months ended September 30, 2019, compared to approximately $613,000
for the three months ended September 30, 2018. The Partnership had
61 and 91 active operating leases that generated lease revenue for
the three months ended September 30, 2019 and 2018, respectively.
This decrease is primarily due to more
lease agreements ending versus new lease agreements being
acquired. New lease agreements approximated to number of
expired leases for the period from October 1, 2018 to September 30,2019. Management expects to
add new leases to our portfolio throughout the remainder of 2019,
funded primarily through debt financing.
Sale of Equipment
For the
three months ended September 30, 2019, the Partnership sold
equipment with net book value of approximately $1,000 for a net
gain of approximately $18,000. For the three months ended September30, 2018, the Partnership sold equipment with net book value of
approximately $27,000 for a net gain of approximately
$10,000.
Operating Expenses
Our
operating expenses, excluding depreciation, primarily consist of
accounting and legal fees, outside service fees and reimbursement
of expenses to CCC for administration and operation of the
Partnership. These expenses increased to approximately $156,000 for
the three months ended September 30, 2019, from approximately
$275,000 for the three months ended September 30, 2018.
This decrease is primarily due to a
reduction in legal fees of approximately $52,000, a decrease in
“Other LP” expenses charged by CCC for the
administration of the Partnership of approximately $61,000, a
decrease in partnership tax of approximately $6,000, a decrease in
temporary services-accounting of approximately $3,000, a decrease
in temporary services-investor services of approximately $2,000,
and a decrease in IT expense-accounting of approximately $4,000
partially offset by an increase in accounting fees of approximately
$9,000.
Equipment Management Fee
We pay
an equipment management fee to our general partner for managing our
equipment portfolio. The equipment management fee is approximately
5% of the gross lease revenue attributable to equipment that is
subject to operating leases and 2% of the gross lease revenue
attributable to equipment that is subject to finance leases. The
total equipment management fee decreased to approximately $25,000
for the three months ended September 30, 2019 from approximately
$30,000 for the three months ended September 30, 2018. This decrease is consistent with the decrease in
lease revenue. As more equipment is acquired to the
Partnership’s equipment portfolio, equipment management fees
are expected to increase throughout the remainder of 2019 as our
equipment and lease portfolio grows.
21
Depreciation and Amortization Expense
Depreciation
and amortization expenses consist of depreciation on equipment and
amortization of equipment acquisition fees. These expenses
decreased to approximately $383,000 for the three months ended
September 30, 2019, from approximately $444,000 for the three
months ended September 30, 2018. This decrease was due to the
higher frequency in the termination of leases and equipment being
fully depreciated as compared to the acquisition of new leases for
the three months ended September 30, 2019.
Net Loss
For the
three months ended September 30, 2019, we recognized revenue of
approximately $535,000, expenses of approximately $614,000 and
other loss of $41,000, resulting in a net loss of approximately
$120,000. This net loss is attributable to the changes in revenue
and expenses as discussed above. For the three months ended
September 30, 2018, we recognized revenue of approximately
$623,000, expenses of approximately $785,000 and other loss of
$27,000, resulting in a net loss of approximately
$188,000.
Our
lease revenue decreased to approximately $1,523,000 for the nine
months ended September 30, 2019, from approximately $1,887,000 for
the nine months ended September 30, 2018. The Partnership had 71
and 108 active operating leases that generated lease revenue for
the nine months ended September 30, 2019 and 2018, respectively.
This decrease is primarily due to more
lease agreements ending versus new lease agreements being
acquired. Management
expects to add new leases to our portfolio throughout the remainder
of 2019, funded primarily through debt
financing.
Sale of Equipment
For the
nine months ended September 30, 2019, the Partnership sold
equipment with net book value of approximately $9,000 for a net
gain of approximately $47,000. For the nine months ended September30, 2018, the Partnership sold equipment with net book value of
approximately $86,000 for a net gain of approximately
$106,000.
Operating Expenses
Our
operating expenses, excluding depreciation, primarily consist of
accounting and legal fees, outside service fees and reimbursement
of expenses to CCC for administration and operation of the
Partnership. These expenses decreased to approximately $619,000 for
the nine months ended September 30, 2019, from approximately
$825,000 for the nine months ended September 30, 2018. This decrease is primarily due to a reduction in
“Other LP” expenses charged by CCC for the
administration of the Partnership of approximately $105,000, a
decrease in legal fees of approximately $88,000 associated
with the FINRA matter (see Item 1. Legal Proceedings), a decrease in temporary services-accounting of
approximately $15,000, a decrease in outside office services-equity
placement of approximately $9,000, a decrease in IT
expense-accounting of approximately $7,000, a decrease in
partnership tax of approximately $7,000, and partially offset by an
increase in accounting fees of approximately
$26,000.
Equipment Management Fee
We pay
an equipment management fee to our general partner for managing our
equipment portfolio. The equipment management fee is approximately
5% of the gross lease revenue attributable to equipment that is
subject to operating leases and 2% of the gross lease revenue
attributable to equipment that is subject to finance leases. The
total equipment management fee decreased to approximately $76,000
for the nine months ended September 30, 2019 from approximately
$95,000 for the nine months ended September 30, 2018. This decrease is consistent with the decrease in
lease revenue. As more equipment is acquired to the
Partnership’s equipment portfolio, equipment management fees
are expected to increase throughout the remainder of 2019 as our
equipment and lease portfolio grows.
22
Depreciation and Amortization Expense
Depreciation
and amortization expenses consist of depreciation on equipment and
amortization of equipment acquisition fees. These expenses
decreased to approximately $1,168,000 for the nine months ended
September 30, 2019, from approximately $1,488,000 for the nine
months ended September 30, 2018. This decrease was due to the
higher frequency in the termination of leases and equipment being
fully depreciated as compared to the acquisition of new leases for
the nine months ended September 30, 2019.
Net Loss
For the
nine months ended September 30, 2019, we recognized revenue of
approximately $1,646,000, expenses of approximately $2,036,000 and
other loss of $123,000, resulting in a net loss of approximately
$513,000. This net loss is attributable to the changes in revenue
and expenses as discussed above. For the nine months ended
September 30, 2018, we recognized revenue of approximately
$1,996,000, expenses of approximately $2,519,000 and other loss of
$88,000, resulting in a net loss of approximately
$612,000.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
N/A
Item 4. Controls and Procedures
Our
management, under the supervision and with the participation of the
General Partner’s Chief Executive Officer and Principal
Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures related to our reporting and
disclosure obligations as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on such evaluation, the
General Partner’s Chief Executive Officer and Principal
Financial Officer have concluded that, as of September 30, 2019,
our disclosure controls and procedures are effective in ensuring
that information relating to us which is required to be disclosed
in our periodic reports filed or submitted under the Securities
Exchange Act of 1934 is (a) recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and (b) accumulated
and communicated to management, including the General
Partner’s Chief Executive Officer and Principal Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure. There were no changes in the
Partnership’s internal control over financial reporting
during the third quarter of 2019 that have materially affected or
are reasonably likely to materially affect its internal control
over financial reporting.
23
Part II: OTHER INFORMATION
Item 1.
Commitments and
Contingencies
Leased Equipment
The General Partner is in the process of negotiations with a lessee
to “Buy-out” certain equipment currently under lease
contract. If a “Buy-out” agreement is not
reached, the lessee will continue to lease the equipment as written
under the original lease contract. The equipment to be
included in the “Buy-out” represents approximately 2.1%
of the Partnership’s total equipment at cost as of September30, 2019.
Item 2.
Legal
Proceedings
Medshare
In
January 2015, CCC, on behalf of the Funds, entered into a Purchase
Agreement (“Purchase Agreement”) for the sale of the
equipment to Medshare Technologies (“Medshare”) for
approximately $3,400,000. The Partnership’s share of
the sale proceeds was approximately $1,033,000. As of
November 13, 2019, the Partnership had received approximately
$728,000 of the approximate $1,033,000 sale proceeds and has
recorded a reserve of $243,000 against the outstanding
receivables. On April 3, 2015 Medshare was obligated to make
payment in full and failed to do so. As a result, Medshare
defaulted on its purchase agreement with CCC and was issued a
demand letter for full payment of the equipment. On June 25,2015, Medshare filed a lawsuit in Texas state court for breach of
contract (“State Suit”). On June 26, 2015,
Commonwealth filed a lawsuit in the Northern District of Texas
against Medshare seeking payment in full and/or return of the
Equipment and damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2,2016, the Defendants made payment to CCC of an initial $200,000 to
be followed by 24 structured monthly payments of approximately
$50,000 per month to begin no later than September 15, 2016.
The Partnership’s share of the Settlement Agreement is
approximately $453,000 and is to be applied against the net
Medshare receivable of approximately $350,000 as of the settlement
date. The remaining $103,000 will be applied against the $243,000
reserve and recorded as a bad debt recovery. As of November13, 2019, the Partnership received approximately $182,000 of the
approximate $453,000 settlement agreement which was applied against
the net Medshare receivable of approximately $350,000 as of the
settlement date. As Defendant defaulted on settlement
agreement, CCC sought and obtained consent judgment from U.S.
District Court for Northern District of Texas, Dallas Division on
July 27, 2017 in the amount of $1.5 million, less $450,000
previously paid plus $6,757 in attorney fees, both the Defendant
and Cleary being jointly and severally liable for the judgment
amount. The court also vacated the September 21, 2016
settlement dismissal.
On July27, 2017 Defendant filed Chapter 11 in Northern District of Texas
Dallas Division. On July 26, 2017 Legacy Texas Bank, a
secured creditor of the Defendant filed for a TRO in the U.S.
District Court of the Northern District of Texas, Dallas Division.
Included with the TRO filing was a request for appointment of
trustee for operation of Defendant, which was granted and the case
converted to Chapter 7. On December 18, 2018 the Bankruptcy Court
entered final order and issued its last payment to CCC in March
2019 of approximately $43,000, of which the Partnership’s
share was approximately $14,000. The Medshare Bankruptcy
matter is now closed. Although the trustee’s final
distribution to Commonwealth did not fully satisfy the
judgment, recovery may still be pursued directly against Cleary. As
such, management believes that the foregoing will not result
in any adverse financial impact on the Funds, but no assurance can
be provided until the proceedings are resolved.
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at
issue include amounts that were proper and that were properly
allocated to Funds, and also identified a smaller number of
expenses that had been allocated in error, but were adjusted and
repaid to the affected Funds when they were identified in
2012. During the period in question, Commonwealth Capital
Corp. (“CCC”) and Ms. Springsteen-Abbott provided
important financial support to the Funds, voluntarily absorbed
expenses and voluntarily waived fees in amounts aggregating in
excess of any questioned allocations. A Hearing Panel ruled
on March 30, 2015, that Ms. Springsteen-Abbott should be barred
from the securities industry because the Panel concluded that she
allegedly misallocated approximately $208,000 of expenses involving
certain Funds over the course of three years. As such,
management had allocated approximately $87,000 of the $208,000 in
allegedly misallocated expenses back to the affected funds as a
contingency accrual in CCC’s financial statements and a good
faith payment for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed
to FINRA's National Adjudicatory Council (the “NAC”)
pursuant to FINRA Rule 9311. The NAC issued a decision that
upheld the lower panel’s ruling and the bar took effect on
August 23, 2016. Ms. Springsteen-Abbott appealed the
NAC’s decision to the U.S. Securities and Exchange Commission
(the “SEC”). On March 31, 2017, the SEC
criticized that decision as so flawed that the SEC could not even
review it, and remanded the matter back to FINRA for further
consideration consistent with the SEC’s remand, but did not
suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling
$208,000 to a remaining list of 84 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. That appeal is
pending as of November 13, 2019. All requested or allowed
briefs have been filed with the SEC. Management believes that
whatever final resolution of this may be, it will not result in any
material adverse financial impact on the Funds, although, a final
assurance cannot be provided until the legal matter is
resolved.
24
Item
2A. Risk
Factors
N/A
Item 3.
Unregistered Sales of Equity
Securities and Use of Proceeds
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
COMMONWEALTH
INCOME & GROWTH FUND VII, LP
BY:
COMMONWEALTH INCOME & GROWTH FUND, INC., General
Partner
