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EX-32.2 - CERTIFICATION - Commonwealth Income & Growth Fund VII, LP | cigf7_ex32-2.htm |
EX-32.1 - CERTIFICATION - Commonwealth Income & Growth Fund VII, LP | cigf7_ex32-1.htm |
EX-31.2 - CERTIFICATION - Commonwealth Income & Growth Fund VII, LP | cigf7_ex31-2.htm |
EX-31.1 - CERTIFICATION - Commonwealth Income & Growth Fund VII, LP | cigf7_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
2020 or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number: 333-156357
COMMONWEALTH INCOME & GROWTH FUND VII, LP
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
26-3733264
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification Number)
|
4532 US Highway 19
Suite 200
New Port Richey, FL 34652
(Address, including zip code, of principal executive
offices)
(877) 654-1500
(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
☒
1
FORM 10-Q
SEPTEMBER 30, 2020
TABLE OF CONTENTS
PART
I
|
||
Item
1.
|
Financial
Statements
|
3
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
22
|
Item
4.
|
Controls
and Procedures
|
22
|
PART
II
|
||
Item
1.
|
Legal
Proceedings
|
23
|
Item
1A.
|
Risk
Factors
|
24
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
25
|
Item
3.
|
Defaults
Upon Senior Securities
|
25
|
Item
4.
|
Mine
Safety Disclosures
|
25
|
Item
5.
|
Other
Information
|
25
|
Item
6.
|
Exhibits
|
25
|
2
Part
I. FINANCIAL INFORMATION
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
Commonwealth
Income & Growth Fund VII
|
||
Condensed
Balance Sheets
|
||
|
|
|
|
September
30,
|
December
31,
|
|
2020
|
2019
|
|
(unaudited)
|
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$687,944
|
$540,798
|
Lease income
receivable, net of reserve of approximately $91,000 and $98,000 at
September 30, 2020 and December 31, 2019, respectively
|
70,765
|
294,915
|
Accounts
receivable, Commonwealth Capital Corp, net of accounts payable of
approximately $7,000 and $80,000 at September 30, 2020 and December
31, 2019, respectively
|
486,910
|
688,248
|
Other receivables,
net of reserve of approximately $305,000 and $246,000 at September
30, 2020 and December 31, 2019, respectively
|
3,246
|
64,608
|
Receivable from
COF2
|
-
|
4,080
|
Prepaid
expenses
|
15,514
|
12,618
|
|
1,264,379
|
1,605,267
|
|
|
|
Net investment in
Finance leases
|
49,068
|
56,759
|
|
|
|
Investment in COF
2
|
641,483
|
585,594
|
|
|
|
Equipment, at
cost
|
15,139,130
|
15,870,751
|
Accumulated
depreciation
|
(13,726,227)
|
(13,556,070)
|
|
1,412,903
|
2,314,681
|
|
|
|
Equipment
acquisition costs and deferred expenses, net of accumulated
amortization of approximately $139,000 and $173,000 at
September 30, 2020 and December 31, 2019, respectively
|
36,283
|
78,288
|
Total
Assets
|
$3,404,116
|
$4,640,589
|
|
|
|
LIABILITIES
AND PARTNERS' CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$111,787
|
$166,428
|
Accounts payable,
CIGF, Inc.
|
128,445
|
267,464
|
Other accrued
expenses
|
9
|
235
|
Unearned lease
income
|
79,057
|
63,952
|
Notes
payable
|
636,593
|
1,334,116
|
Total
Liabilities
|
955,891
|
1,832,195
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
PARTNERS'
CAPITAL
|
|
|
|
|
|
General
Partner
|
1,050
|
1,050
|
Limited
Partners
|
2,447,175
|
2,807,344
|
Total
Partners' Capital
|
2,448,225
|
2,808,394
|
Total
Liabilities and Partners' Capital
|
$3,404,116
|
$4,640,589
|
|
|
|
see
accompanying notes to condensed financial statements
|
3
Condensed
Statements of Operations
|
||||
(unaudited)
|
||||
|
|
|
|
|
|
Three
Months Ended
|
Nine
Months Ended
|
||
|
Ended
September 30,
|
Ended
September 30,
|
||
|
2020
|
2019
|
2020
|
2019
|
Revenue
|
|
|
|
|
Lease
|
$385,699
|
$497,030
|
$1,411,967
|
$1,522,604
|
Interest and
other
|
522
|
128
|
2,071
|
359
|
Sales and property
taxes
|
15,457
|
20,223
|
57,855
|
76,175
|
Gain on sale of
equipment
|
7,463
|
17,848
|
40,036
|
46,653
|
Total
revenue and gain on sale of equipment
|
409,141
|
535,229
|
1,511,929
|
1,645,791
|
|
|
|
|
|
Expenses
|
|
|
|
|
Operating,
excluding depreciation and amortization
|
147,545
|
156,322
|
585,639
|
618,518
|
Equipment
management fee, General Partner
|
19,345
|
24,738
|
67,177
|
76,166
|
Interest
|
11,383
|
26,662
|
42,609
|
93,270
|
Depreciation
|
306,166
|
363,155
|
984,893
|
1,106,088
|
Amortization of
equipment acquisition costs and deferred expenses
|
15,383
|
19,531
|
52,243
|
62,142
|
Sales and property
taxes
|
15,457
|
20,223
|
57,855
|
76,175
|
Bad debt
expense
|
82,905
|
3,302
|
108,830
|
3,302
|
Total
expenses
|
598,184
|
613,933
|
1,899,246
|
2,035,661
|
|
|
|
|
|
Other
Loss
|
|
|
|
|
Loss in investment
in COF 2
|
(520)
|
(40,930)
|
55,888
|
(123,079)
|
Total
other loss
|
(520)
|
(40,930)
|
55,888
|
(123,079)
|
|
|
|
|
|
Net
loss
|
$(189,563)
|
$(119,634)
|
$(331,429)
|
$(512,949)
|
|
|
|
|
|
Net
loss allocated to Limited Partners
|
$(189,563)
|
$(120,406)
|
$(331,429)
|
$(515,264)
|
|
|
|
|
|
Net
loss per equivalent Limited Partnership unit
|
$(0.12)
|
$(0.08)
|
$(0.22)
|
$(0.33)
|
|
|
|
|
|
Weighted
average number of equivalent Limited Partnership units outstanding
during the period
|
1,538,235
|
1,542,105
|
1,539,471
|
1,542,301
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
4
Commonwealth
Income & Growth Fund VII
|
|||||
Condensed
Statement of Partners' Capital
|
|||||
For
the three, six and nine months ended September 30, 2020 and
2019
|
|||||
(unaudited)
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance,
January 1, 2020
|
50
|
1,542,106
|
$1,050
|
$2,807,344
|
$2,808,394
|
Net
income
|
-
|
-
|
-
|
15,282
|
15,282
|
Distributions
|
-
|
-
|
-
|
(28,740)
|
(28,740)
|
Redemptions
|
-
|
(3,871)
|
-
|
-
|
-
|
Balance,
March 31, 2020
|
50
|
1,538,235
|
$1,050
|
$2,793,886
|
$2,794,936
|
Net
loss
|
-
|
-
|
-
|
(157,148)
|
(157,148)
|
Balance,
June 30, 2020
|
50
|
1,538,235
|
$1,050
|
$2,636,738
|
$2,637,788
|
Net
loss
|
-
|
-
|
-
|
(189,563)
|
(189,563)
|
Balance,
September 30, 2020
|
50
|
1,538,235
|
$1,050
|
$2,447,175
|
$2,448,225
|
|
|
|
|
|
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance,
January 1, 2019
|
50
|
1,542,940
|
$1,050
|
$3,823,611
|
$3,824,661
|
Net income
(loss)
|
-
|
-
|
771
|
(197,754)
|
(196,983)
|
Distributions
|
-
|
-
|
(771)
|
(76,379)
|
(77,150)
|
Redemptions
|
-
|
(834)
|
-
|
(6,576)
|
(6,576)
|
Balance,
March 31, 2019
|
50
|
1,542,106
|
$1,050
|
$3,542,902
|
$3,543,952
|
Net income
(loss)
|
-
|
-
|
771
|
(197,104)
|
(196,333)
|
Distributions
|
-
|
-
|
(771)
|
(76,379)
|
(77,150)
|
Balance,
June 30, 2019
|
50
|
1,542,106
|
$1,050
|
$3,269,419
|
$3,270,469
|
Net income
(loss)
|
-
|
-
|
772
|
(120,406)
|
(119,634)
|
Distributions
|
-
|
-
|
(772)
|
(76,379)
|
(77,151)
|
Balance,
September 30, 2019
|
50
|
1,542,106
|
$1,050
|
$3,072,634
|
$3,073,684
|
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
5
Commonwealth
Income & Growth Fund VII
|
||
Condensed
Statements of Cash Flow
|
||
(unaudited)
|
||
|
|
|
|
Nine
Months
|
|
|
Ended
September 30,
|
|
|
2020
|
2019
|
Net
cash provided by (used in) operating activities
|
$62,332
|
$(121,886)
|
|
|
|
Cash
flows from investing activities
|
|
|
Capital
Expenditures
|
(52,424)
|
-
|
Equipment
acquisition fees paid to General Partner
|
(8,609)
|
-
|
Net
proceeds from the sale of equipment
|
172,135
|
55,409
|
Distribution
from Investment in COF2
|
4,080
|
28,558
|
Net cash provided by investing activities
|
$115,182
|
$83,967
|
|
|
|
Cash
flows from financing activities
|
|
|
Distributions
to partners
|
-
|
(308,644)
|
Redemptions
|
(28,740)
|
(6,576)
|
Debt
placement fee paid to the General Partner
|
(1,628)
|
-
|
Net
cash used in financing activities
|
$(30,368)
|
$(315,220)
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
147,146
|
(353,139)
|
|
|
|
Cash
and cash equivalents, beginning of period
|
540,798
|
853,115
|
|
|
|
Cash
and cash equivalents, end of period
|
$687,944
|
$499,976
|
|
|
|
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 is scheduled to terminate on December 31, 2021. The
General Partner intends to initiate a proxy vote to investors to
extend the operational phase to December 31, 2024, in an effort to
increase overall return to investors. Upon completion of its
operational phase, it is anticipated that the Partnership will
begin its liquidation phase. Assuming the proxy vote is passed, the
General Partner intends to fully liquidate or otherwise dispose of
all of its equipment, make final distribution to partners, and
dissolve on or before December 31, 2026.
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, 2019
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, 2020 are not necessarily
indicative of financial results that may be expected for the full
year ended December 31, 2020.
Correction of an Immaterial Error
The
Partnership has determined that there has been an immaterial error
in its cash flow presentation related to Distributions from
Investment in COF2 for the nine months ended September 30, 2019.
The Partnership determined that the Distributions from Investment
in COF2 in the amount of approximately $29,000 should be presented
in investing activities in the Condensed Statement of Cash Flows
instead of operating activities. A reclassification adjustment was
made on the Condensed Statement of Cash Flows to move the amount
out of operating activities and into investing
activities.
7
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, 2020 and December 31, 2019 due to the
short-term nature of these financial instruments.
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, 2020 and December 31, 2019 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, 2020, cash and cash equivalents was held in one bank
account maintained at one financial institution with an aggregate
balance of approximately $693,000. Bank accounts are federally
insured up to $250,000 by the FDIC. At September 30, 2020, the
total cash bank balance was as follows:
At September 30, 2020
|
Balance
|
Total
bank balance
|
$693,000
|
FDIC
insured
|
(250,000)
|
Uninsured
amount
|
$443,000
|
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 2020 due
to many factors, including cash receipts, equipment acquisitions,
interest rates and distributions to limited partners.
Recent Accounting Pronouncements Not Yet Adopted
FASB issued 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,
Accounting Standards Update No.
2020-02, Financial Instruments –
Credit Losses (Topic 326) . The guidance is effective for fiscal years, within
those fiscal years, beginning after December 15, 2020 and interim
periods within fiscal years beginning after December 15, 2021. The
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 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.
8
The FASB developed the guidance in response to concerns that credit
losses were identified and recorded “too little, too
late” in the period leading up to the global financial crisis
of 2008. More recently, the impact of the COVID -19 pandemic may
bring new challenges to identifying credit losses. While the new
standard is expected to have a significant effect on entities in
the financial services industry, particularly banks and others with
lending operations, the guidance affects all entities in all
industries and applies to a wide variety of financial instruments,
including trade receivables.
On November 15, 2019, the FASB delayed the effective date of FASB
ASC Topic 326 for certain small public companies and other private
companies. As amended, the effective date of ASC Topic 326 was
delayed until fiscal years beginning after December 15, 2022 for
SEC filers that are eligible to be smaller reporting companies
under the SEC’s definition, as well as private companies and
not-for-profit entities. 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.
Gains
from the sale of equipment resulting from early buyouts are
recognized when the lease is modified and terminated
concurrently. Gain from sale of
equipment included in revenue for the nine months ended September
30, 2020 and 2019 was $40,000 and $47,000,
respectively.
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, 2020 was
approximately $10,077,000 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 September 30, 2020 was approximately $590,000 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, 2020 was approximately
$23,371,000. The total outstanding debt related to the equipment
shared by the Partnership at September 30, 2020 was approximately
$1,513,000.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2019 was
approximately $10,030,000 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, 2019 was approximately $1,021,000
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, 2019 was
approximately $22,760,000. The total outstanding debt related to
the equipment shared by the Partnership at December 31, 2019 was
approximately $2,202,000.
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
2020, the Partnership expects total shared equipment and related
debt to trend higher as the Partnership builds its
portfolio.
The
following is a schedule of approximate future minimum rentals on
non-cancellable operating leases:
Periods Ended December 31,
|
Amount
|
Three months ended
December 31, 2020
|
$362,000
|
Year Ended December
31, 2021
|
447,000
|
Year Ended December
31, 2022
|
67,000
|
Year Ended December
31, 2023
|
16,000
|
|
$892,000
|
9
Finance Leases:
The
following lists the components of the net investment in direct
financing leases:
|
September
30, 2020
|
December 31,
2019
|
Carrying value of
lease receivable
|
$45,000
|
$52,000
|
Estimated residual
value of leased equipment (unguaranteed)
|
2,000
|
2,000
|
Initial direct
costs finance leases
|
2,000
|
3,000
|
Net investment in
finance leases
|
$49,000
|
$57,000
|
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.
The
following table presents the credit risk profile, by
creditworthiness category, of our finance lease receivables at
September 30, 2020:
Risk Level
|
Percent of Total
|
Low
|
-%
|
Moderate-Low
|
-%
|
Moderate
|
-%
|
Moderate-High
|
100%
|
High
|
-%
|
Net finance lease receivable
|
100%
|
10
As of
September 30, 2020, and December 31, 2019, 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.
The
following is a schedule of future minimum rentals on non-cancelable
finance leases at September 30, 2020:
|
Amount
|
Three months ended
December 31, 2020
|
$3,000
|
2021
|
12,000
|
2022
|
12,000
|
2023
|
12,000
|
2024
|
11,000
|
Total
|
$50,000
|
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, 2020 and December 31, 2019 was
approximately $641,000 and $586,000, respectively (see COF 2
Financial Summary below). During the nine months ended
September 30, 2020, COF 2 did not declare any distribution to the
Partnership.
|
September, 30
|
December
31,
|
COF 2 Summarized Financial Information
|
2020
|
2019
|
Assets
|
$1,983,000
|
$2,114,000
|
Liabilities
|
$214,000
|
$509,000
|
Partners'
capital
|
$1,769,000
|
$1,605,000
|
Revenue
|
$791,000
|
$1,126,000
|
Expenses
|
$627,000
|
$1,666,000
|
Net
income (loss)
|
$164,000
|
$(540,000)
|
11
5. Related Party Transactions
Receivables/Payables
As of
September 30, 2020, and December 31, 2019, the Partnership’s
related party receivables and payables are short term, unsecured,
and non-interest bearing.
Nine months ended September
30,
|
2020
|
2019
|
Reimbursable Expenses
|
|
|
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,
2020 and 2019, the Partnership was charged approximately $315,000
and $376,000 in other LP expense, respectively.
|
$ 568,000
|
$ 599,000
|
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, 2020 and 2019, the General Partner
earned acquisition fees from operating and finance leases of
approximately $9,000 and $0, respectively.
|
$9,000
|
$-
|
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.
|
$2,000
|
$-
|
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.
|
$67,000
|
$76,000
|
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 proceeds from 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.
|
$6,000
|
$2,000
|
12
6. Notes Payable
Notes
payable consisted of the following approximate
amounts:
|
September 30,
2020
|
December
31,
2019
|
Installment
note payable to bank; interest at 5.49% due in monthly installments
of $4,177, including interest, with final payment in January
2020
|
-
|
4,000
|
Installment
note payable to bank; interest at 5.93% due in monthly installments
of $3,324, including interest, with final payment in February
2020
|
-
|
7,000
|
Installment
note payable to bank; interest at 5.25% due in quarterly
installments of $25,557, including interest, with final payment in
April 2020
|
-
|
50,000
|
Installment
note payable to bank; interest at 4.37% due in monthly installments
of $16,273, including interest, with final payment in April
2020
|
-
|
32,000
|
Installment
note payable to bank; interest at 4.88% due in monthly installments
of $1,363, including interest, with final payment in May
2020
|
-
|
7,000
|
Installment
note payable to bank; interest at 5.62% due in quarterly
installments of $2,897, including interest, with final payment in
July 2020
|
-
|
8,000
|
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
|
-
|
130,000
|
Installment
note payable to bank; interest at 5.66% due in quarterly
installments of $29,292, including interest, with final payment in
October 2020
|
29,000
|
113,000
|
Installment
note payable to bank; interest at 5.31% due in monthly installments
of $52,336, including interest, with final payment in January
2021
|
103,000
|
252,000
|
Installment
note payable to bank; interest at 6.00% due in quarterly
installments of $74,533, including interest, with final payment in
January 2021
|
146,000
|
356,000
|
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
|
210,000
|
375,000
|
Installment
note payable to bank; interest at 4.10% due in monthly installments
of $5,229, including interest, with final payment in March
2023
|
149,000
|
-
|
|
$637,000
|
$1,334,000
|
13
The
notes are secured by specific equipment with a carrying value of
approximately $1,165,000 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, 2020 are as
follows:
|
Amount
|
Three months ended
December 31, 2020
|
$223,000
|
Year
ended December 31, 2021
|
337,000
|
Year
ended December 31, 2022
|
61,000
|
Year
ended December 31, 2023
|
16,000
|
Total
|
$637,000
|
7. Supplemental Cash Flow Information
No
interest or principal on notes payable was paid by the Partnership
during 2020 and 2019 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:
Nine months ended September 30,
|
2020
|
2019
|
Lease revenue net
of interest expense on notes payable realized as a result of direct
payment of principal by lessee to bank
|
$860,000
|
$1,029,000
|
Noncash
investing and financing activities include the
following:
Nine months ended September 30,
|
2020
|
2019
|
Accrual for
distributions to partners paid in October (included in other
accrued expenses)
|
$-
|
$76,000
|
Debt assumed in
connection with the purchase of equipment
|
$163,000
|
$-
|
During
the nine months ended September 30, 2020 and 2019, the Partnership
wrote-off fully amortized acquisition and finance fees of
approximately $86,000 and $29,000, respectively.
14
8. Commitments and Contingencies
COVID-19 Pandemic
The
amount of revenue recognized and the pattern of revenue recognition
may be impacted by COVID-19. Some of the business sectors that
we service such as education centers, medical facilities, payroll
administrators, manufacturing and transportation, we may need to
account for returns and refund liabilities. The pattern of revenue
recognition may change for delays in rendering
services.
In
periods ended subsequent to the outbreak of COVID-19, the
impact on expected credit losses and future cash flow projections
used in impairment testing will need to be considered.
The
Company continues to evaluate whether adjustments to the financial
statements are required or whether additional disclosures are
necessary. In our leasing business, the Company is always subject
to credit losses as it relates to a customer’s ability to
make timely rental payments. The impact of COVID-19 may contribute
to risk of non-performance, where a customer may experience
financial difficulty and may delay in making timely
payments.
The
Company recognizes impairment of receivables and loans when losses
are incurred, which is when it is probable that an entity will be
unable to collect all amounts due according to the contractual
terms of the arrangement. Impairment is measured based on the
present value of expected future cash flows discounted at the
receivable’s or loans effective interest rate, except that,
as a practical expedient, impairment can be measured based on a
receivable’s or loans’ observable market price or the
fair value of the underlying collateral.
The
Company believes its estimate of expected losses have been
recognized based on historical experience, current conditions, and
reasonable forecasts. The impacts of COVID-19 may necessitate
additional adjustments in future forecasts of expected
losses.
Although
the Partnership cannot estimate the length or gravity of the impact
of the COVID-19 outbreak at this time, if the pandemic continues,
it may have a material adverse effect on the Partnership results of
future operations, financial position, and liquidity in fiscal year
2020 and beyond.
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 16, 2020, the Partnership had received approximately
$728,000 of the approximate $1,033,000 sale proceeds and has
recorded a reserve of approximately $305,000 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
approximate $305,000 reserve and recorded as a bad debt
recovery. As of November 16, 2020, 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 July
27, 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.
15
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 already reallocated back approximately
$151,225 of the $208,000 (in allegedly misallocated expenses)
to the affected funds, which was fully documented, as good faith
payments 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 87 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. All the
requested or allowed briefs have been filed with the SEC. The
SEC upheld FINRA’s order on February 7, 2020 to bar, but
eliminated FINRA’s proposed fine. Ms.
Springsteen-Abbott has filed a Petition for Review in the United
States Court of Appeals for the District of Columbia Circuit to
review a final order entered against her by the U.S. Securities and
Exchange Commission. As the SEC eliminated FINRA’s fine
completely, Management is even more confident that regardless of
final resolution, it will not result in any material adverse
financial impact to the Funds, although a final assurance cannot be
provided until the legal matter is resolved. That appeal is
pending as of November 16, 2020.
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, 2019 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
ELFA
President and CEO Ralph Petta said, “Despite the drop in
September year-over-year new business, a look at the data beginning
with the advent of the pandemic in February shows that the
industry, in general is holding its own. In fact, anecdotal
evidence from some ELFA member companies indicates they are
enjoying a very strong year. Tempering this positive data point;
however, is a spike in losses – not surprising, given that
the losses in all likelihood reflect customers in distressed
industry sectors significantly impacted by the economic downturn
resulting from the COVID pandemic.”
“The
pandemic continues to have a negative impact on the overall
economy, and this data demonstrates that our industry is not
immune. However, the 24% growth in month-to-month volume in
September 2020 MLFI-25 is promising,” said Anthony Sasso,
Head of TD Equipment Finance. “Within any disruption, there
is opportunity. Here at TDEF, we have seen our customers find
innovative ways to continue to grow, and we ourselves have been
able to increase our portfolio. The low interest rate environment,
combined with rising spot rates within trucking, presents a good
opportunity for those companies who are in a position to
expand.”
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.
REVENUE RECOGNITION
The
Partnership is principally engaged in the business of leasing
equipment. Ancillary to the Partnership’s principal equipment
leasing business, the Partnership also sells certain equipment and
may offer certain services to support its customers.
The
Partnership’s lease transactions are principally accounted
for under Topic 842 on January 1, 2019. Prior to Topic 842, the
Partnership accounted for these transactions under Topic 840,
Leases (“Topic 840”). Lease revenue includes revenue
generated from leasing equipment to customers, including re-rent
revenue, and is recognized either on a straight-line basis or using
the effective interest method over the length of the lease
contract, if such lease is either an operating lease or finance
lease, respectively.
The
Partnership’s sale of equipment along with certain services
provided to customers is recognized under ASC Topic 606, Revenue
from Contracts with Customers, (“Topic 606”), which was
adopted on January 1, 2018. The Partnership recognizes revenue when
it satisfies a performance obligation by transferring control over
a product or service to a customer. The amount of revenue
recognized reflects the consideration the Partnership expects to be
entitled to in exchange for such products or services.
Through
September 30, 2020, 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.
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.
Gains from the sale of equipment resulting from early buyouts are
recognized when the lease is modified and terminated concurrently.
Our leases do not contain any step-rent provisions or escalation
clauses nor are lease revenues adjusted based on any
index.
Partnership’s
accounting policy for sales and property taxes collected from the
lessees are recorded in the current period as gross revenues and
expenses.
17
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.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our
primary sources of cash for the nine months ended September 30,
2020, were cash provided by operating activities of approximately
$62,000, net proceeds from the sale of equipment of approximately
$172,000 and distributions from investment in COF2 of approximately
$4,000. This compares to the nine months ended September 30, 2019
where our primary sources of cash were net proceeds from the sale
of equipment of approximately $55,000 and distributions from
investments in COF 2 of approximately $29,000.
Our
primary uses of cash for the nine months ended September 30, 2020
were capital expenditures in investing
activities of approximately $52,000, redemptions of
approximately $29,000, equipment
acquisition fees paid to General Partner of approximately $9,000
and debt placement fees of approximately $2,000. For the
nine months ended September 30, 2019, our primary uses of cash were
cash used in operating activities of approximately $122,000,
distributions to partners of approximately $309,000 and limited
partner redemptions of approximately $7,000.
Cash
was provided by operating activities for the nine months ended
September 30, 2020 of approximately $62,000, including a net loss
of approximately $331,000, bad debt expense of approximately
$109,000 and depreciation and amortization expenses of
approximately $1,037,000. Other noncash activities included in the
determination of net gain include direct payments to banks by
lessees of approximately $860,000. This compares to the nine months
ended September 30, 2019 with cash used in operating activities of
approximately $122,000, 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.
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 2020 as management focuses on
additional equipment acquisitions.
18
We
consider cash equivalents to be highly liquid investments with the
original maturity dates of 90 days or less.
At
September 30, 2020, cash was held in one bank account maintained at
one financial institution with an aggregate balance of
approximately $693,000. Bank accounts are federally insured up to
$250,000. At September 30, 2020, the total cash bank balance was as
follows:
At September 30, 2020
|
Balance
|
Total
bank balance
|
$693,000
|
FDIC
insured
|
(250,000)
|
Uninsured
amount
|
$443,000
|
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 account will fluctuate throughout 2020 due
to many factors, including the pace of cash receipts, equipment
acquisitions and distributions to limited partners.
As of
September 30, 2020, we had future minimum rentals on non-cancelable
operating leases of approximately $362,000 for the balance of the
year ending December 31, 2020 and approximately $530,000
thereafter.
As of
September 30, 2020, we had future minimum rentals on non-cancelable
finance leases of approximately $3,000 for the balance of the year
ending December 31, 2020 and approximately $47,000
thereafter.
As of
September 30, 2020, our non-recourse debt was approximately
$637,000 with interest rates ranging from 4.10% through 6.00% and
is payable through March 2023.
The
General Partner intends to initiate a proxy vote to investors to
extend the operational phase to December 31, 2024. Upon completion
of its operational phase, it is anticipated that the Partnership
will begin its liquidation phase. Assuming the proxy
vote is passed, the General Partner intends to fully
liquidate or otherwise dispose of all of its equipment, make final
distribution to partners, and dissolve on or before December 31,
2026.
RESULTS OF OPERATIONS
Three months ended September 30, 2020 compared to three months
ended September 30, 2019
Lease Revenue
Our
lease revenue decreased to approximately $386,000 for the three
months ended September 30, 2020, compared to approximately $497,000
for the three months ended September 30, 2019. The Partnership had
32 and 61 active operating leases that generated lease revenue for
the three months ended September 30, 2020 and 2019, 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 2020, funded primarily through debt
financing.
19
Sale of Equipment
The Partnership disposed of and sold equipment to various customers
during 2020. For the three months ended September 30, 2020,
the Partnership sold equipment with net book value of approximately
$22,000 for a net gain of approximately $7,000. 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.
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 $148,000 for
the three months ended September 30, 2020, from approximately
$156,000 for the three months ended September 30, 2019.
This decrease is primarily due to a
decrease in “Other LP” expenses charged by CCC for the
administration of the Partnership of approximately
$8,000.
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 equipment management fee decreased
to approximately $19,000 for the three months ended September 30,
2020, from approximately $25,000 for the three months ended
September 30, 2019. This decrease in equipment management fees is
consistent with the decrease in lease revenue as described
above.
Depreciation and Amortization Expense
Depreciation
and amortization expenses consist of depreciation on equipment and
amortization of equipment acquisition fees. These expenses
decreased to approximately $322,000 for the three months ended
September 30, 2020, from approximately $383,000 for the three
months ended September 30, 2019. 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, 2020.
Net Loss
For the
three months ended September 30, 2020, we recognized revenue of
approximately $409,000, expenses of approximately $598,000 and
other loss of $500, resulting in net loss of approximately
$189,500. 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 net
loss of approximately $120,000. This change in net loss is due to
the changes in revenue and expenses as described
above.
20
Nine months ended September 30, 2020 compared to nine months ended
September 30, 2019
Lease Revenue
Our
lease revenue decreased to approximately $1,412,000 for the nine
months ended September 30, 2020, from approximately $1,523,000 for
the nine months ended September 30, 2019. The Partnership had 56
and 71 active operating leases that generated lease revenue for the
nine months ended September 30, 2020 and 2019, 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 2020, funded primarily
through debt financing.
Sale of Equipment
On January 31, 2020 the Partnership entered into a Purchase and
Sale Agreement, (the “Purchase Agreement”) with
Cummins, Inc. (the “Buyer”) to sell to the Buyer
approximately 1,475 items of equipment that the Buyer previously
leased from the Company. The General Partner allocated
to the Partnership its share of approximately $114,000, for the
sale price of primarily, Small IBM Servers and High Volume &
Spec Printers and recorded a gain on sale of equipment of
approximately $51,000. The Partnership disposed of and sold other
equipment to various customers during 2020. For the nine
months ended September 30, 2020, the Partnership sold equipment to
other customers besides Cummins with net book value of
approximately $73,000 for a net loss of approximately $11,000. 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.
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 $586,000 for
the nine months ended September 30, 2020, from approximately
$619,000 for the nine months ended September 30, 2019. This decrease is primarily due to a reduction in
“Other LP” expenses charged by CCC for the
administration of the Partnership of approximately $61,000, a
decrease in conferences expenses of approximately $10,000 and a
decrease in travel expenses of approximately $5,000, partially
offset by an increase in legal fees associated with the
FINRA matter (see Item 1. Legal Proceedings) of approximately
$19,000, an increase in expenses
related to the corporate office relocation of approximately $13,000
and an increase in accounting fees related to changes in tax
reporting of approximately $12,000.
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
equipment management fee decreased to approximately $67,000 for the
nine months ended September 30, 2020 from approximately $76,000 for
the nine months ended September 30, 2019. This decrease in
equipment management fees is consistent with the decrease in lease
revenue as described above.
Depreciation and Amortization Expense
Depreciation
and amortization expenses consist of depreciation on equipment and
amortization of equipment acquisition fees. These expenses
decreased to approximately $1,037,000 for the nine months ended
September 30, 2020, from approximately $1,168,000 for the nine
months ended September 30, 2019. 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, 2020.
Net Loss
For the
nine months ended September 30, 2020, we recognized revenue of
approximately $1,512,000, expenses of approximately $1,899,000 and
other gain of $56,000, resulting in net loss of approximately
$331,000. 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
net loss of approximately $513,000. This change in net loss is due
to the changes in revenue and expenses as described
above.
21
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
N/A
Item 4. Controls and Procedures
Evaluation of Disclosure 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, 2020,
our disclosure controls and procedures were not effective due to
the presence of a material weakness in internal control over
financial reporting.
A
material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will
not be prevented or detected on a timely basis. In evaluating the
effectiveness of our internal control over financial reporting, our
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control – Integrated
Framework (2013) and SEC guidance on conducting such assessments.
Management’s assessment included an evaluation of the design
of our internal control over financial reporting and testing of the
operational effectiveness of these controls. Based on this
assessment, management has concluded that as of September 30, 2020,
our internal control over financial reporting was not effective to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting
principles. The matters involving internal controls and procedures
that our management considered to be material weaknesses under the
standards of the Public Company Accounting Oversight Board were:
(i) ineffective controls over period end financial disclosure and
reporting processes. The aforementioned material weaknesses were
identified by our principal financial officer and principal
accounting officer, in connection with the review of our financial
statements as of June 30, 2020.
Remediation of Material Weakness
In an
effort to remediate the identified material weaknesses and other
deficiencies and enhance our internal controls, we have implemented
the following measure:
1. We have
incorporated a procedure within our written policies and procedures
to require for nonrecurring journal entries, referenced as
“one-off” journal entries to be reviewed and signed-off
by both the accounting manager and a senior staff accountant to
ensure appropriate transactions are recorded as intended to be
reported for financial reporting
and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted
accounting principles.
The
material weakness will not be considered remediated, however, until
the applicable controls operate for a sufficient period of time and
management has concluded, through testing, that these controls are
operating effectively. We expect that the remediation of this
material weakness will be completed by the end of fiscal year
2020.
Changes in Internal Control over Financial Reporting:
There
were no other changes in our internal control over financial
reporting during the quarter ending September 30, 2020, that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
22
Part II: OTHER INFORMATION
Item 1.
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 16, 2020, the Partnership had received approximately
$728,000 of the approximate $1,033,000 sale proceeds and has
recorded a reserve of approximately $305,000 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
approximate $305,000 reserve and recorded as a bad debt
recovery. As of November 16, 2020, 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 July
27, 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.
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 already reallocated back approximately
$151,225 of the $208,000 (in allegedly misallocated expenses)
to the affected funds, which was fully documented, as good faith
payments 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 87 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. All the
requested or allowed briefs have been filed with the SEC. The
SEC upheld FINRA’s order on February 7, 2020 to bar, but
eliminated FINRA’s proposed fine. Ms.
Springsteen-Abbott has filed a Petition for Review in the United
States Court of Appeals for the District of Columbia Circuit to
review a final order entered against her by the U.S. Securities and
Exchange Commission. As the SEC eliminated FINRA’s fine
completely, Management is even more confident that regardless of
final resolution, it will not result in any material adverse
financial impact to the Funds, although a final assurance cannot be
provided until the legal matter is resolved. That appeal is
pending as of November 16, 2020.
23
Item
1A. Risk
Factors
COVID-19 Pandemic
The
amount of revenue recognized and the pattern of revenue recognition
may be impacted by COVID-19. Some of the business sectors that
we service such as education centers, medical facilities, payroll
administrators, manufacturing and transportation, we may need to
account for returns and refund liabilities. The pattern of revenue
recognition may change for delays in rendering
services.
In
periods ended subsequent to the outbreak of COVID-19, the
impact on expected credit losses and future cash flow projections
used in impairment testing will need to be considered.
The
Company continues to evaluate whether adjustments to the financial
statements are required or whether additional disclosures are
necessary. In our leasing business, the Company is always subject
to credit losses as it relates to a customer’s ability to
make timely rental payments. The impact of COVID-19 may contribute
to risk of non-performance, where a customer may experience
financial difficulty and may delay in making timely
payments.
The
Company recognizes impairment of receivables and loans when losses
are incurred, which is when it is probable that an entity will be
unable to collect all amounts due according to the contractual
terms of the arrangement. Impairment is measured based on the
present value of expected future cash flows discounted at the
receivable’s or loans effective interest rate, except that,
as a practical expedient, impairment can be measured based on a
receivable’s or loans’ observable market price or the
fair value of the underlying collateral.
The
Company believes its estimate of expected losses have been
recognized based on historical experience, current conditions, and
reasonable forecasts. The impacts of COVID-19 may necessitate
additional adjustments in future forecasts of expected
losses.
Although
the Partnership cannot estimate the length or gravity of the impact
of the COVID-19 outbreak at this time, if the pandemic continues,
it may have a material adverse effect on the Partnership results of
future operations, financial position, and liquidity in fiscal year
2020 and beyond.
Material Weakness
Failure
to maintain effective systems of internal control over financial
reporting and disclosure controls and procedures could result in
additional costs being incurred for remediation and cause a loss of
confidence in our financial reporting.
Effective
internal control over financial reporting is necessary for us to
provide accurate financial information. We previously identified a
material weakness in our internal controls over financial reporting
as of June 30, 2020. We have concluded that our internal controls
over financial reporting were not effective as of September 30,
2020 due to the existence of material weaknesses in our monthly
close for not properly reviewing certain journal entries that had
an impact on the internal controls over financial
reporting.
The
material weakness will not be considered remediated, however, until
the applicable controls operate for a sufficient period of time and
management has concluded, through testing, that these controls are
operating effectively. We expect that the remediation of this
material weakness will be completed by the end of fiscal year
2020.
If our
remediation measures are insufficient to address the identified
deficiencies, or if additional deficiencies in our internal control
over financial reporting are discovered or occur in the future, our
financial statements may contain material misstatements and we
could be required to restate our financial results. Moreover,
because of the inherent limitations of any control system, material
misstatements due to error or fraud may not be prevented or
detected on a timely basis, or at all. If we are unable to provide
reliable and timely financial reports in the future, our business
and reputation may be further harmed. Failures in internal controls
may negatively affect investor confidence in our management and the
accuracy of our financial statements and disclosures, or result in
adverse publicity and concerns from investors, any of which could
have a negative effect, subject us to regulatory investigations and
penalties and/or shareholder litigation, and materially adversely
impact our business and financial condition.
24
Item 2.
Unregistered Sales of Equity
Securities and Use of Proceeds
N/A
Item 3.
Defaults Upon Senior
Securities
N/A
Item 4.
Mine Safety
Disclosures
N/A
Item 5.
Other
Information
NONE
Item 6.
Exhibits
25
SIGNATURES
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
|
November 16, 2020
|
By: /s/
Kimberly A. Springsteen-Abbott
|
Date
|
Kimberly
A. Springsteen-Abbott
|
|
Chief
Executive Officer And Principal Financial Officer
Commonwealth
Income & Growth Fund, Inc.
|
|
|
|
|
November 16, 2020
|
By: /s/
Theodore Cavaliere
|
Date
|
Theodore
Cavaliere
|
|
Vice
President, Financial Operations Principal
|
26