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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 MARCH 31, 2021 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
MARCH 31, 2021
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.
|
Commitments
and Contingencies
|
22
|
Item
2.
|
Legal
Proceedings
|
22
|
Item
2A.
|
Risk
Factors
|
23
|
Item
3.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
24
|
Item
4.
|
Defaults
Upon Senior Securities
|
24
|
Item
5.
|
Mine
Safety Disclosures
|
24
|
Item
6.
|
Other
Information
|
24
|
Item
7.
|
Exhibits
|
24
|
2
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
Commonwealth Income & Growth Fund VII
|
||
Condensed Balance Sheets
|
||
|
|
|
|
March
31,
|
December
31,
|
|
2021
|
2020
|
|
(unaudited)
|
(audited)
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$254,673
|
$495,494
|
Lease income
receivable, net of reserve of approximately $67,000 at both March
31, 2021 and December 31, 2020
|
56,928
|
128,580
|
Accounts
receivable, Commonwealth Capital Corp, net of accounts payable of
approximately $41,000 and $46,000 at March 31, 2021 and December
31, 2020, respectively
|
704,006
|
449,627
|
Other receivables,
net of reserve of approximately $305,000 at March 31, 2021 and
December 31, 2020, respectively
|
3,245
|
18,436
|
Prepaid
expenses
|
5,539
|
10,282
|
|
1,024,391
|
1,102,419
|
|
|
|
Net investment in
finance leases
|
43,824
|
46,459
|
|
|
|
Investment in COF
2
|
603,918
|
616,771
|
|
|
|
Equipment, at
cost
|
14,692,945
|
14,912,479
|
Accumulated
depreciation
|
(13,663,530)
|
(13,596,631)
|
|
1,029,415
|
1,315,848
|
|
|
|
Equipment
acquisition costs and deferred expenses, net of accumulated
amortization of approximately $137,000 and $147,000 at March
31, 2021 and December 31, 2020, respectively
|
21,797
|
33,472
|
|
21,797
|
33,472
|
Total
Assets
|
$2,723,345
|
$3,114,969
|
|
|
|
LIABILITIES
AND PARTNERS' CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$93,204
|
$123,089
|
Accounts payable,
CIGF, Inc.
|
213,693
|
176,251
|
Other accrued
expenses
|
11
|
12
|
Unearned lease
income
|
64,170
|
79,063
|
Notes
payable
|
272,454
|
472,425
|
Total
Liabilities
|
643,532
|
850,840
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
PARTNERS'
CAPITAL
|
|
|
|
|
|
General
Partner
|
1,050
|
1,050
|
Limited
Partners
|
2,078,763
|
2,263,079
|
Total
Partners' Capital
|
2,079,813
|
2,264,129
|
Total
Liabilities and Partners' Capital
|
$2,723,345
|
$3,114,969
|
|
|
|
see accompanying notes to condensed financial
statements
|
3
Commonwealth
Income & Growth Fund VII
|
||
Condensed
Statements of Operations
|
||
(unaudited)
|
||
|
Three
Months Ended March 31,
|
|
|
2021
|
2020
|
Revenue
|
|
|
Lease
|
$348,889
|
$497,596
|
Interest and
other
|
7,308
|
576
|
Sales and property
taxes
|
16,821
|
20,905
|
Gain on sale of
equipment
|
9,273
|
57,853
|
Total
revenue and gain on sale of equipment
|
382,291
|
576,930
|
|
|
|
Expenses
|
|
|
Operating,
excluding depreciation and amortization
|
178,214
|
236,336
|
Equipment
management fee, General Partner
|
17,505
|
24,880
|
Interest
|
5,639
|
17,622
|
Depreciation
|
286,434
|
345,652
|
Amortization of
equipment acquisition costs and deferred expenses
|
11,674
|
18,372
|
Sales and property
taxes
|
16,821
|
20,905
|
Bad debt
expense
|
-
|
15,956
|
Total
expenses
|
516,287
|
679,723
|
|
|
|
Other
(loss) gain
|
|
|
(Loss) Gain in
investment from COF 2
|
(12,853)
|
118,075
|
Total
other loss
|
(12,853)
|
118,075
|
|
|
|
|
|
|
Net
(loss) income
|
$(146,849)
|
$15,282
|
|
|
|
Net
(loss) income allocated to Limited Partners
|
$(146,849)
|
$15,282
|
|
|
|
Net
(loss) income per equivalent Limited Partnership unit
|
$(0.10)
|
$0.01
|
Weighted
average number of equivalent limited
|
|
|
partnership
units outstanding during the period
|
1,534,609
|
1,541,957
|
|
|
|
see
accompanying notes to condensed financial statements
|
4
Commonwealth
Income & Growth Fund VII
|
|||||
Condensed
Statement of Partners' Capital
|
|||||
For
the three months ended March 31, 2021 and 2020
|
|||||
(unaudited)
|
|||||
|
|
|
|
|
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance,
January 1, 2021 (audited)
|
50
|
1,537,535
|
$1,050
|
$2,263,079
|
$2,264,129
|
Net
loss
|
-
|
-
|
-
|
(146,849)
|
(146,849)
|
Redemptions
|
-
|
(4,500)
|
-
|
(37,467)
|
(37,467)
|
Balance,
March 31, 2021
|
50
|
1,533,035
|
$1,050
|
$2,078,763
|
$2,079,813
|
|
|
|
|
|
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance,
January 1, 2020 (audited)
|
50
|
1,542,106
|
$1,050
|
$2,807,344
|
$2,808,394
|
Net income
(loss)
|
-
|
-
|
-
|
15,282
|
15,282
|
Redemptions
|
-
|
(3,871)
|
-
|
(28,740)
|
(28,740)
|
Balance,
March 31, 2020
|
50
|
1,538,235
|
$1,050
|
$2,793,886
|
$2,794,936
|
see
accompanying notes to condensed financial
statements
5
Commonwealth
Income & Growth Fund VII
|
||
Condensed
Statements of Cash Flows
|
||
(unaudited)
|
||
|
|
|
|
Three
Months Ended March 31,
|
|
|
2021
|
2020
|
|
|
|
Net
cash used in operating activities
|
$(212,627)
|
$(188,550)
|
|
|
|
Cash
flows from investing activities
|
|
|
Net
proceeds from the sale of equipment
|
9,273
|
138,619
|
Distributions
from Investment in COF2
|
-
|
4,080
|
Net
cash provided by investing activities
|
9,273
|
142,699
|
|
|
|
Cash
flows from financing activities
|
|
|
Redemptions
|
(37,467)
|
(28,740)
|
Net
cash used in financing activities
|
(37,467)
|
(28,740)
|
|
|
|
Net
decrease in cash and cash equivalents
|
(240,821)
|
(74,591)
|
|
|
|
Cash
and cash equivalents beginning of period
|
495,494
|
540,798
|
|
|
|
Cash
and cash equivalents end of period
|
$254,673
|
$466,207
|
|
|
|
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, 2020
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 three months ended March 31, 2021 are not necessarily
indicative of financial results that may be expected for the full
year ended December 31, 2021.
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.
7
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 March 31, 2021 and December 31, 2020 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 March
31, 2021 and December 31, 2020 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
March 31, 2021, cash and cash equivalents was held in one bank
account maintained at one financial institution with an aggregate
balance of approximately $260,000. Bank accounts are federally
insured up to $250,000 by the FDIC. At March 31, 2021, the total
cash bank balance was as follows:
At March 31, 2021
|
Balance
|
Total
bank balance
|
$260,000
|
FDIC
insured
|
(250,000)
|
Uninsured
amount
|
$10,000
|
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 2021 due
to many factors, including cash receipts, equipment acquisitions,
interest rates and distributions to limited partners.
8
Recent Accounting Pronouncements Not Yet Adopted
In June
2016, the FASB issued Accounting Standards Update
(“ASU”) 2016-13, Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). This standard establishes an
impairment model (known as the current expected credit loss
(“CECL”) model) that is based on expected losses rather
than incurred losses. Under the new guidance, an entity recognizes
as an allowance its estimate of expected credit losses, which is
intended to result in a timelier recognition of losses. Under the
CECL model, entities will estimate credit losses over the entire
contractual term of the instrument (considering estimated
prepayments, but not expected extensions or modifications) from the
date of initial recognition of the financial instrument.
Measurement of expected credit losses are to be based on relevant
forecasts that affect collectability. The scope of financial assets
within the CECL methodology is broad and includes trade receivables
from certain revenue transactions and certain off-balance sheet
credit exposures. Different components of the guidance require
modified retrospective or prospective adoption.
In
November 2018, the FASB issued ASU No. 2018-19, Codification
Improvements to Topic 326, Financial Instruments-Credit Losses. ASU
2018-19 clarifies that receivables arising from operating leases
are not within the scope of the credit losses standard. Instead,
entities would need to apply other U.S. GAAP, namely Topic 842
(Leases), to account for changes in the collectability assessment
for operating leases. Other than operating lease receivables,
Partnership trade receivables include receivables from finance
leases and equipment sales. Under Topic 606 (Revenue from Contracts
with Customers), revenue is recognized when, among other criteria,
it is probable that the entity will collect the consideration to
which it is entitled for goods or services transferred to a
customer. At the point that finance lease receivables are recorded,
they become subject to the CECL model and estimates of expected
credit losses over their contractual life will be required to be
recorded at inception based on historical information, current
conditions, and reasonable and supportable forecasts. Trade
receivables derived from equipment sales are of short duration and
there is not a material difference between incurred losses and
expected losses.
In
April 2019, the FASB issued ASU 2019-04, Codification Improvements
to Topic 326, Financial Instruments-Credit Losses, Topic 815,
Derivatives and Hedging, and Topic 825, Financial Instruments,
which amends and clarifies several provisions of Topic 326. In May
2019, the FASB issued ASU 2019-05, Financial Instruments-Credit
Losses (Topic 326): Targeted Transition Relief, which amends Topic
326 to allow the fair value option to be elected for certain
financial instruments upon adoption. ASU 2019-10 extended the
effective date of ASU 2016-13 for the Partnership until December
15, 2022. While we continue to evaluate the new guidance, including
the subsequent updates to Topic 326, we do not anticipate that
adoption will have a material impact on the Partnership financial
statements and related disclosures. For both the quarters ended
March 31, 2021 and 2020, Partnership finance lease revenue subject
to CECL represented less than 1% of total lease
revenue.
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.
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 March 31, 2021 was
approximately $10,226,000 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 March 31, 2021 was approximately $196,000 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 March 31, 2021 was approximately
$23,869,000. The total outstanding debt related to the equipment
shared by the Partnership at March 31, 2021 was approximately
$607,000.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2020 was
approximately $10,226,000 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, 2020 was approximately $380,000 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, 2020 was approximately
$23,869,000. The total outstanding debt related to the equipment
shared by the Partnership at December 31, 2020 was approximately
$1,020,000.
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
2021, 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
operating leases:
Periods Ended December 31,
|
Amount
|
Nine
months ended December 31, 2021
|
$451,500
|
Year
Ended December 31, 2022
|
117,500
|
Year
Ended December 31, 2023
|
66,000
|
Year
Ended December 31, 2024
|
49,000
|
|
$684,000
|
Finance Leases:
The
following lists the components of the net investment in finance
leases:
At March 31,
|
March 31, 2021
|
December 31,
2020
|
Carrying value of
lease receivable
|
$41,000
|
$43,000
|
Estimated residual
value of leased equipment (unguaranteed)
|
2,000
|
2,000
|
Initial direct
costs - finance leases
|
1,000
|
1,000
|
Net investment in
finance leases
|
$44,000
|
$46,000
|
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 credit 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.
10
The
following table presents the credit risk profile, by
creditworthiness category, of our finance lease receivables at
March 31, 2021:
Risk Level
|
|
Percent of Total
|
|
Low
|
|
|
-%
|
Moderate-Low
|
|
|
-%
|
Moderate
|
|
|
-%
|
Moderate-High
|
|
|
100%
|
High
|
|
|
-%
|
Net finance lease receivable
|
|
|
100%
|
As of
March 31, 2021 and December 31, 2020, 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 March 31, 2021:
Periods Ended December
31,
|
Amount
|
Nine
months ended December 31, 2021
|
9,000
|
Year ended December
31, 2022
|
12,000
|
Year ended December
31, 2023
|
12,000
|
Year
ended December 31, 2024
|
11,000
|
|
$44,000
|
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 March 31, 2021 and December 31, 2020 was approximately
$604,000 and $617,000, respectively (see COF 2 Financial Summary
below). During the three months ended March 31, 2021, COF 2 did not declare any first
quarter distribution to the Partnership.
|
March 31,
|
December
31,
|
COF 2 Summarized Financial Information
|
2021
|
2020
|
Assets
|
$1,947,000
|
$1,993,000
|
Liabilities
|
$288,000
|
$296,000
|
Partners'
capital
|
$1,659,000
|
$1,697,000
|
Revenue
|
$116,000
|
$794,000
|
Expenses
|
$153,000
|
$703,000
|
Net
(loss) income
|
$(37,000)
|
$91,000
|
11
5. Related Party Transactions
Receivables/Payables
As of
March 31, 2021 and December 31, 2020, the Partnership’s
related party receivables and payables are short term, unsecured,
and non-interest bearing.
Three months ended March 31,
|
2021
|
2020
|
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 three
months ended March 31, 2021 and 2020, the Partnership was charged
approximately $77,000 and $102,000 in other LP expense,
respectively.
|
$ 156,000
|
$211,000
|
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 three
months ended March 31, 2021 and 2020, the General Partner earned
acquisition fees from operating and finance leases of approximately
$0 and $0, respectively.
|
$-
|
$-
|
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.
|
$-
|
$-
|
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.
|
$18,000
|
$25,000
|
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.
|
$287
|
$5,000
|
12
6. Notes Payable
Notes
payable consisted of the following approximate
amounts:
|
March 31,
2021
|
December
31,
2020
|
Installment
note payable to bank; interest at 5.31% due in monthly installments
of $52,336, including interest, with final payment in January
2021
|
-
|
51,500
|
Installment
note payable to bank; interest at 6.00% due in quarterly
installments of $74,533, including interest, with final payment in
January 2021
|
-
|
73,000
|
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
|
97,000
|
154,000
|
Installment
note payable to bank; interest at 4.10% due in monthly installments
of $5,229, including interest, with final payment in March
2023
|
120,000
|
134,500
|
Installment
note payable to bank; interest at 5.00% due in monthly installments
of $1,377, including interest, with final payment in November
2024
|
55,000
|
59,000
|
|
$272,000
|
$472,000
|
The
notes are secured by specific equipment with a carrying value of
approximately $767,000 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 approximate maturities of notes payable
for each of the periods subsequent to March 31, 2021 are as
follows:
|
Amount
|
Nine
months ended December 31, 2021
|
$151,000
|
Year
ended December 31, 2022
|
75,000
|
Year
ended December 31, 2023
|
31,000
|
Year
ended December 31, 2024
|
15,000
|
|
$272,000
|
13
7. Supplemental Cash Flow Information
No
interest or principal on notes payable was paid by the Partnership
during 2021 and 2020 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:
Three months ended March 31,
|
2021
|
2020
|
Lease revenue net
of interest expense on notes payable realized as a result of direct
payment of principal by lessee to bank
|
$200,000
|
$307,000
|
Noncash
investing and financing activities include the
following:
Three months ended March 31,
|
2021
|
2020
|
Accrual for
redemptions to partners paid in April 2021 (included in other
accrued expenses)
|
$-
|
$4,000
|
During
the three months ended March 31, 2021 and 2020, the Partnership
wrote-off fully amortized acquisition and finance fees of
approximately $22,000 and $17,000, 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
2021 and beyond.
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 at that time 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.
Despite offering no additional evidence or legal reasoning from
when SEC originally remanded this matter (for FINRA’s opinion
being an unreviewably flawed opinion), the SEC upheld FINRA’s new 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. On February 26, 2021, the United States
Court of Appeals for the District of Columbia Circuit, made their
ruling. They dismissed in part and denied in part Ms.
Springsteen-Abbott’s petition. This was regardless of
CCC’s good faith reimbursements made many years ago of the
questioned expense items of $208,000 (due to improper
documentation), initially claimed misallocations by FINRA, even
prior to FINRA’s reducing its final claim to
$36,226.
Prior
to the original appeal to the SEC, Ms. Springsteen-Abbott
discovered CCC’s required documentation of these items for
FINRA review, which FINRA refused to consider, despite such efforts
the District Court upheld the bar, despite admittingly not
addressing her “due process” rights, for legal
administrative procedural reasons. However, given the
SEC’s prior removal of FINRA’s fine and the District
Court upholding that removal, the General Partner anticipates that
this ruling will not result in any material financial impact to the
Funds.
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, 2020 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.
16
INDUSTRY OVERVIEW
We
invest in various types of domestic information technology
equipment leases located solely within the United States. Our
investment objective is to acquire primarily high technology
equipment. We believe that dealing in high
technology
equipment is particularly advantageous due to a robust aftermarket.
Information technology has developed rapidly in recent years and is
expected to continue to do so. Technological advances have
permitted reductions in the cost of computer processing capacity,
speed, and utility. In the future, the rate and nature of equipment
development may cause equipment to become obsolete more rapidly. In
an effort to mitigate this risk our portfolio manager attempts to
diversify our fund through the acquisition of different types of
equipment, staggered lease maturities, various lessees, and
businesses located throughout the U.S., and industries
served.
We also
acquire high technology medical, telecommunications and inventory
management equipment. Our General Partner seeks to maintain an
appropriate balance and diversity in the types of equipment
acquired. The market for high technology medical equipment is
growing each year. Generally, this type of equipment has a longer
useful life. This allows for increased re-marketability, if it is
returned before its economic or announcement cycle is
depleted.
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 $900
billion equipment finance sector, showed their overall new business
volume for March was $9.3 billion, up 4% year-over-year from new
business volume in March 2020. Volume was up 26% month-to-month
from $7.4 billion in February. Year-to-date, cumulative new
business volume was down 1% compared to 2020.
Receivables
over 30 days were 1.9%, down from 2.1% the previous month and down
from 2.6% in the same period in 2020. Charge-offs were 0.43%, down
from 0.55% the previous month and down from 0.55% in the
year-earlier period.
Credit
approvals totaled 77%, up from 75.8% in February. Total headcount
for equipment finance companies was down 15.2% year-over-year, a
decrease due to significant downsizing at an MLFI reporting
company.
Separately,
the Equipment Leasing & Finance Foundation’s Monthly
Confidence Index (MCI-EFI) in April is an all-time high of 76.1,
and an increase from the March index of 67.7.
ELFA
President and CEO Ralph Petta said, “The equipment finance
industry appears poised to take advantage of an economic tailwind
that is manifesting itself in an improving labor market, a
continued low interest-rate environment, a strong corporate
earnings season, and high business confidence that is creating
demand for investment in commercial equipment. ELFA member
organizations also report improving portfolio quality, which is
reflective of their customers’ ability to meet their payment
obligations as the pandemic’s grip on many businesses
loosens.”
Marci
Slagle, President, BankFinancial Equipment Finance, said,
“Thus far in 2021, as we continue to work our way through the
pandemic, market demand has remained high, both on applications and
credit approvals. Our existing portfolios continue to remain
stable, with few leases stretching payables along while the
underlying financials remain strong. Approval to funding
continues to lag a bit as the supply chain stretches, especially
when there are multiple and/or foreign vendors involved.
Overall, continuing into second quarter, there seems to be
continued growth and strength across all of our markets, which
encompass small, middle, corporate and
governmental.”
Our
business is directly impacted by factors such as economic,
political, and market conditions, broad trends in industry and
finance, legislative and regulatory changes, changes in government
monetary and fiscal policies, and inflation, all of which are
beyond our control. Given these circumstances, we believe companies
overall, will continue to increasingly turn to leasing, as a
financing solution. It is our belief that companies lease
business-essential equipment because leasing can provide many
benefits to a company. The number one benefit of leasing that we
see is that there is no large outlay of cash required. Therefore,
companies can preserve their working capital, lease equipment,
which is an expense item, have the flexibility to upgrade the
equipment when needed, and have no risk of obsolescence. Because we
expect leasing to remain an attractive financing solution for
American businesses during the next 12 months, we feel that our
ability to increase our portfolio size and leasing revenues during
that period will remain strong.
We, at
Commonwealth, are currently operating business as usual (with our
employees working remotely). We may see a slowdown on new equipment
acquisition decisions from Corporate Lessees until the crisis is
resolved and businesses can resume their normal operation. We have
no way of knowing what this period of time will be. We will keep
our investors informed of subsequent events. For information
relating to COVID-19 and the overall effects, as expressed by Ralph
Petta, President of ELFA (The Equipment Leasing & Finance
Association), please refer to elfaonline.org.
17
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 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 as 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. Prior to adoption of Topic 606, the
Partnership recognized these transactions under ASC Topic 605,
Revenue Recognized, and (“Topic 605”). 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
March 31, 2021, 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.
18
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 termination of leases 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.
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 three months ended March 31, 2021,
were cash provided by net proceeds from the sale of equipment of
approximately $9,000. This compares to our primary sources of cash
for the three months ended March 31, 2020 of cash provided by net
proceeds from the sale of equipment of approximately $139,000 and
distributions from investment in COF2 of approximately
$4,000.
Our
primary use of cash for the three months ended March 31, 2021 was
limited partner redemptions of approximately $37,000. This compares
to our primary use of cash for the three months ended March 31,
2020 of limited partner redemptions of approximately
$29,000.
Cash
used in operating activities for the three months ended March 31,
2021 was approximately $213,000, including a net loss of
approximately $147,000 and depreciation and amortization expenses
of approximately $298,000. Other noncash activities included in the
determination of net loss include direct payments to banks by
lessees of approximately $200,000. This compares to cash used in
operating activities for the three months ended March 31, 2020, of
approximately $189,000, including a net income of approximately
$15,000 and depreciation and amortization expenses of approximately
$364,000. Other noncash activities included in the determination of
net income include direct payments to banks by lessees of
approximately $307,000.
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 2021 as management focuses on
additional equipment acquisitions and funding limited partner
distributions.
19
We
consider cash equivalents to be highly liquid investments with the
original maturity dates of 90 days or less.
At
March 31, 2021, cash and cash equivalents were held in one bank
account maintained at one financial institution with an aggregate
balance of approximately $260,000. Bank accounts are federally
insured up to $250,000 by the FDIC. At March 31, 2021, the total
cash bank balance was as follows:
At March 31, 2021
|
Balance
|
Total
bank balance
|
$260,000
|
FDIC
insured
|
(250,000)
|
Uninsured
amount
|
$10,000
|
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 2021 due
to many factors, including the pace of cash receipts, equipment
acquisitions and distributions to limited partners.
As of
March 31, 2021, we had future minimum rentals on operating leases
of approximately $451,500 for the balance of the year ending
December 31, 2021 and approximately $232,500
thereafter.
As of
March 31, 2021, we had future minimum rentals on non-cancelable
finance leases of approximately $9,000 for the balance of the year
ending December 31, 2021 and approximately $35,000 through
2024.
As of
March 31, 2021, our non-recourse debt was approximately $272,000
with interest rates ranging from 4.10% through 6.00% and is payable
through November 2024.
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.
20
RESULTS OF OPERATIONS
Three months ended March 31, 2021 compared to three months ended
March 31, 2020
Lease Revenue
Our
lease revenue decreased to approximately $349,000 for the three
months ended March 31, 2021, from approximately $498,000 for the
three months ended March 31, 2020. The Partnership had 32 and 54
active operating leases that generated lease revenue for the three
months ended March 31, 2021 and 2020, 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 2021, funded primarily through debt
financing.
Sale of Equipment
For the
three months ended March 31, 2021, the Partnership sold equipment
with net book value of approximately $0 for a net gain of
approximately $9,000. For the three months ended March 30, 2020,
the Partnership sold equipment with net book value of approximately
$81,000 for a net gain of approximately $58,000.
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 $178,000 for
the three months ended March 31, 2021, from approximately $236,000
for the three months ended March 31, 2020. This decrease is primarily due to a decrease in
other LP expenses of approximately $25,000, a decrease in legal
fees of approximately $17,000, a decrease in accounting fees of
approximately $11,000 and a decrease in recruiting fees of
approximately $10,000, partially off-set by an increase in penalty
& interest expense 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
total equipment management fee decreased to approximately $18,000
for the three months ended March 31, 2021 from approximately
$25,000 for the three months ended March 31, 2020. This decrease is consistent with the decrease in
lease revenue.
Depreciation and Amortization Expense
Depreciation
and amortization expenses consist of depreciation on equipment and
amortization of equipment acquisition fees. These expenses
decreased to approximately $298,000 for the three months ended
March 31, 2021, from approximately $364,000 for the three months
ended March 31, 2020. 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 March 31, 2021.
Net (Loss)/Income
For the
three months ended March 31, 2021, we recognized revenue of
approximately $382,000, expenses of approximately $516,000 and
other loss of $13,000, resulting in net loss of approximately
$147,000. This net loss is primarily attributable to the loss in
investment from COF2 related to sale of equipment and changes in
revenue and expenses as discussed above. For the three months ended
March 31, 2020, we recognized revenue of approximately $577,000,
expenses of approximately $680,000 and other gain of $118,000,
resulting in net income of approximately $15,000.
21
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 March 31, 2021, 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 first quarter
of 2021 that have materially affected or are reasonably likely to
materially affect its internal control over financial
reporting.
Part II: OTHER INFORMATION
Item 1.
Commitments and
Contingencies
N/A
Item 2.
Legal
Proceedings
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 at that time 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.
22
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.
Despite offering no additional evidence or legal reasoning from
when SEC originally remanded this matter (for FINRA’s opinion
being an unreviewably flawed opinion), the SEC upheld FINRA’s new 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. On February 26, 2021, the United States
Court of Appeals for the District of Columbia Circuit, made their
ruling. They dismissed in part and denied in part Ms.
Springsteen-Abbott’s petition. This was regardless of
CCC’s good faith reimbursements made many years ago of the
questioned expense items of $208,000 (due to improper
documentation), initially claimed misallocations by FINRA, even
prior to FINRA’s reducing its final claim to
$36,226.
Prior
to the original appeal to the SEC, Ms. Springsteen-Abbott
discovered CCC’s required documentation of these items for
FINRA review, which FINRA refused to consider, despite such efforts
the District Court upheld the bar, despite admittingly not
addressing her “due process” rights, for legal
administrative procedural reasons. However, given the
SEC’s prior removal of FINRA’s fine and the District
Court upholding that removal, the General Partner anticipates that
this ruling will not result in any material financial impact to the
Funds.
Item
2A. 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
2021 and beyond.
23
Item 3.
Unregistered Sales of Equity
Securities and Use of Proceeds
N/A
Item 4.
Defaults Upon Senior
Securities
N/A
Item 5.
Mine Safety
Disclosures
N/A
Item 6.
Other
Information
NONE
Item 7.
Exhibits
24
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
|
May 24, 2021
|
By: /s/
Kimberly A. Springsteen-Abbott
|
Date
|
Kimberly
A. Springsteen-Abbott
|
|
Chief
Executive Officer And Principal Financial Officer
Commonwealth
Income & Growth Fund, Inc.
|
|
|
May 24, 2021
Date
|
By: /s/
Theodore Cavaliere
Theodore Cavaliere
Vice President, Financial Operations Principal
|
25