Blueprint
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, 2017 or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number: 333-131736
COMMONWEALTH INCOME & GROWTH FUND VI
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
20-4115433
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification Number)
|
17755 US Highway 19 North
Suite 400
Clearwater, FL 33764
(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
☒
FORM 10-Q
March 31, 2017
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
|
19
|
Item
4.
|
Controls and
Procedures
|
19
|
PART II
|
Item
1.
|
Legal
Proceedings
|
20
|
Item
1A.
|
Risk
Factors
|
21
|
Item
2.
|
Unregistered Sales
of Equity Securities and Use of Proceeds
|
21
|
Item
3.
|
Defaults Upon
Senior Securities
|
21
|
Item
4.
|
Mine Safety
Disclosures
|
21
|
Item
5.
|
Other
Information
|
21
|
Item
6.
|
Exhibits
|
21
|
Part
I. FINANCIAL INFORMATION
Item 1. Financial Statements
Commonwealth Income & Growth Fund VI
|
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$41,752
|
$332,742
|
Lease income
receivable, net of reserve of approximately $33,000 at March 31,
2017 and December 31, 2016
|
149,137
|
173,415
|
Accounts
receivable, Commonwealth Capital Corp., net
|
200,944
|
131,445
|
Other receivables,
net of reserve of approximately $7,000 at March 31, 2017 and
December 31, 2016
|
23,839
|
20,853
|
Prepaid
expenses
|
1,582
|
2,505
|
|
417,254
|
660,960
|
|
|
|
Net investment in
finance leases
|
51,034
|
61,634
|
|
|
|
Equipment, at
cost
|
8,933,677
|
8,405,780
|
Accumulated
depreciation
|
(7,446,457)
|
(7,322,869)
|
|
1,487,220
|
1,082,911
|
|
|
|
Equipment
acquisition costs and deferred expenses, net of accumulated
amortization of approximately $44,000 and $42,000 at March 31, 2017
and December 31, 2016, respectively
|
57,788
|
39,987
|
|
|
|
Total
Assets
|
$2,013,296
|
$1,845,492
|
|
|
|
LIABILITIES
AND PARTNERS' CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$157,378
|
$175,294
|
Accounts payable,
CIGF, Inc., net
|
108,281
|
97,590
|
Other accrued
expenses
|
43,166
|
94,182
|
Unearned lease
income
|
62,863
|
38,843
|
Notes
payable
|
946,837
|
605,372
|
Total
Liabilities
|
1,318,525
|
1,011,281
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
PARTNERS'
CAPITAL
|
|
|
General
Partner
|
1,000
|
1,000
|
Limited
Partners
|
693,771
|
833,211
|
Total
Partners' Capital
|
694,771
|
834,211
|
|
|
|
Total
Liabilities and Partners' Capital
|
$2,013,296
|
$1,845,492
|
|
|
|
see
accompanying notes to condensed financial statements
|
Commonwealth Income
& Growth Fund VI
|
Condensed
Statements of Operations
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Lease
|
$247,438
|
$235,410
|
Interest and
other
|
903
|
1,649
|
Gain on sale of
equipment
|
750
|
3,040
|
Total
revenue and gain on sale of equipment
|
249,091
|
240,099
|
|
|
|
Expenses
|
|
|
Operating,
excluding depreciation
|
131,821
|
174,107
|
Equipment
management fee, General Partner
|
12,599
|
12,003
|
Interest
|
9,187
|
2,922
|
Depreciation
|
180,253
|
237,333
|
Amortization of
equipment acquisition costs and deferred expenses
|
10,080
|
6,860
|
Bad Debt
Expense
|
551
|
1,649
|
Total
expenses
|
344,491
|
434,874
|
|
|
|
Other
income (loss)
|
|
|
Gain from insurance
recovery
|
24,135
|
-
|
Total
other income (loss)
|
24,135
|
-
|
|
|
|
Net
loss
|
$(71,265)
|
$(194,775)
|
|
|
|
Net
loss allocated to Limited Partners
|
$(71,661)
|
$(194,775)
|
|
|
|
Net
loss per equivalent Limited Partnership unit
|
$(0.04)
|
$(0.11)
|
|
|
|
Weighted
average number of equivalent Limited Partnership units outstanding
during the period
|
1,759,805
|
1,788,296
|
|
|
|
see
accompanying notes to condensed financial statements
|
Commonwealth Income & Growth Fund VI
|
Condensed Statement of Partners' Capital
|
For the three months ended March 31, 2017
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2017
|
50
|
1,767,326
|
$1,000
|
$833,211
|
$834,211
|
Net Income
(Loss)
|
-
|
-
|
396
|
(71,661)
|
(71,265)
|
Redemptions
|
-
|
(6,646)
|
-
|
(30,066)
|
(30,066)
|
Distributions
|
-
|
-
|
(396)
|
(37,713)
|
(38,109)
|
Balance,
March 31, 2017
|
50
|
1,760,680
|
$1,000
|
$693,771
|
$694,771
|
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
Commonwealth Income & Growth Fund VI
|
Condensed Statements of Cash Flows
|
(unaudited)
|
|
|
|
|
Three
months ended March 31,
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
$(22,061)
|
$115,080
|
|
|
|
Cash
flows from investing activities
|
|
|
Capital
expenditures
|
(134,717)
|
(1,113)
|
Equipment
acquisition fees paid to General Partner
|
(23,382)
|
(1,076)
|
Payments received
from finance leases
|
11,350
|
11,350
|
Net proceeds from
the sale of equipment
|
750
|
3,040
|
Net
cash (used in) provided by investing activities
|
(145,999)
|
12,201
|
|
|
|
Cash
flows from financing activities
|
|
|
Redemptions
|
(30,066)
|
(20,071)
|
Debt placement
fee
|
(4,498)
|
(48)
|
Distributions to
Partners
|
(88,366)
|
-
|
Net
cash used in financing activities
|
(122,930)
|
(20,119)
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
(290,990)
|
107,162
|
|
|
|
Cash
and cash equivalents at beginning of the period
|
332,742
|
20,855
|
|
|
|
Cash
and cash equivalents at end of the period
|
$41,752
|
$128,017
|
|
|
|
see
accompanying notes to condensed financial statements
|
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Business
Commonwealth
Income & Growth Fund VI ("CIGF7" or the "Partnership" or the
"Fund") is a limited partnership organized in the Commonwealth of
Pennsylvania on January 6, 2006. The Partnership offered for sale
up to 2,500,000 units of the limited partnership at the purchase
price of $20 per unit (the "offering"). The Partnership reached the
minimum amount in escrow and commenced operations on May 10, 2007.
The offering terminated on March 6, 2009 with 1,810,311 units sold
for a total of approximately $36,000,000 in limited partner
contributions.
The
Partnership used the proceeds of the offering to acquire, own and
lease various types of information technology equipment and other
similar capital equipment, which will be leased primarily to U.S.
corporations and institutions. Commonwealth Capital Corp.
(“CCC”), on behalf of the Partnership and other
affiliated 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 partnerships
that it manages 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 Investment Program Association (IPA), REISA,
Financial Planning Association (FPA), 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
Partnership will continue until December 31, 2018.
Liquidity and Going Concern
The
General Partner and CCC have committed to fund, either through cash
contributions and/or forgiveness of indebtedness, any necessary
operational cash shortfalls of the Partnership through March 31,
2018. The General Partner will continue to reassess the funding of
limited partner distributions throughout 2017 and will continue to
waive certain fees. The General Partner and CCC will also determine
if related party payables owed to them the Partnership may be
deferred (if deemed necessary in an effort to further increase the
Partnership’s cash flow. If available cash flow or net
disposition proceeds are insufficient to cover the Partnership
expenses and liabilities on a short and long term basis, the
Partnership may attempt to obtain additional funds by disposing of
or refinancing equipment, or by borrowing within its permissible
limits.
The
Partnership has incurred recurring losses and has a working capital
deficit at March 31, 2017. The Partnership believes it has
alleviated these conditions as discussed above. Allocations of
income and distributions of cash are based on the Agreement. The
various allocations under the Agreement prevent any limited
partner’s capital account from being reduced below zero and
ensure the capital accounts reflect the anticipated sharing ratios
of cash distributions, as defined in the Agreement.
2. Summary of Significant Accounting Policies
Basis of Presentation
The
financial information presented as of any date other than December
31, 2016 has been prepared from the books and records without
audit. The following 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, 2016 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, 2017 are not necessarily
indicative of financial results that may be expected for the full
year ended December 31, 2017.
Disclosure of Fair Value 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, 2017 and December 31, 2016 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, 2017 and December 31, 2016 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 an
original maturity of 90 days or less.
At
March 31, 2017, cash and cash equivalents was held in two accounts
maintained at one financial institution with an aggregate balance
of approximately $44,000. Bank accounts are federally insured up to
$250,000 by the FDIC. At March 31, 2017, the total cash balance was
as follows:
At March 31, 2017
|
|
Total
bank balance
|
$44,000
|
FDIC
insured
|
(44,000)
|
Uninsured
amount
|
$-
|
The
Partnership believes it mitigates the risk of holding uninsured
deposits by only depositing funds with major financial
institutions. The Partnership has not experienced any losses in our
accounts, and believes it is not exposed to any significant credit
risk. The amounts in such accounts will fluctuate throughout 2017
due to many factors, including cash receipts, equipment
acquisitions, interest rates and distributions to limited
partners.
Recently Adopted Accounting Pronouncements
In
October 2016, the FASB issued Accounting Standards Update
2016-17— Consolidation
(Topic 810): Interests Held through Related Parties That Are under
Common Control. The amendments in this Update are effective
for public business entities for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal
years. Early adoption is permitted, including adoption in an
interim period. This was adopted January 1, 2017; however, adoption
of this ASU had no impact on the Partnership’s financial
statements during the three months ended March 31,
2017.
Recent Accounting Pronouncements Not Yet Adopted
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No.
2014-09, Revenue from Contracts with
Customers (“ASU 2014-09”). Various
amendments to ASU No. 2014-09 have been issued,
including;
●
ASU No. 2016-08
(issued in March 2016) which amends principal versus agent guidance
by reframing the indicators in the guidance to focus on evidence
that an entity is acting as a principal rather than as an
agent;
●
ASU No. 2016-10
(issued in April 2016) which amends criteria around licensing and
performance obligations;
●
ASU No. 2016-12
(issued in May 2016); which provides guidance on assessing
collectability, presentation of sales taxes, noncash consideration
and completed contracts and contract modifications at transition;
and
●
ASU No. 2016-20
(issued in December 2016) which contains various technical
corrections and improvements to ASU No. 2014-09.
FASB
Accounting Standards Update 2014-09 requires an entity to recognize
revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. In
doing so, entities will need to use more judgment and make more
estimates than under current guidance. These judgments and
estimates may include identifying performance obligations in the
contract, estimating the amount of variable consideration to
include in the transaction price and allocating the transaction
price to each separate performance obligation. ASU 2014-09 also
requires an entity to disclose sufficient qualitative and
quantitative information surrounding the nature, amount, timing and
uncertainty of revenue and cash flows arising from contracts with
customers. This ASU supersedes the revenue recognition requirements
in Topic 605, Revenue
Recognition, and most industry-specific guidance throughout
the Industry Topics of the Codification, and further permits the
use of either a retrospective or cumulative effect transition
method. The FASB agreed to a one-year deferral of the original
effective date of this guidance and, as a result, it will become
effective for fiscal years and interim periods after December 15,
2017. However, entities may adopt the new guidance as of the
original effective date (for fiscal years and interim periods
beginning after December 15, 2016). We expect to adopt ASU 2014-09
as of January 1, 2018. Our analysis of this comprehensive standard,
including our evaluation of the available transition methods, is
ongoing and the impact on our financial statements is not currently
estimable.
In
August 2016, the FASB issued Accounting Standards Update
2016-15—Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments- The amendments in this Update apply to all
entities, including both business entities and not-for-profit
entities that are required to present a statement of cash flows
under Topic 230. The amendments in this Update are effective for
public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early
adoption is permitted, including adoption in an interim period. The
Partnership is currently evaluating the effect that this ASU will
have on its financial statements.
In
February 2016, the FASB issued Accounting Standards Update No.
2016-02, Leases (Topic 842)
Section A—Leases: Amendments to the FASB Accounting Standards
Codification® Section B—Conforming Amendments Related to
Leases: Amendments to the FASB Accounting Standards
Codification® Section C—Background Information and Basis
for Conclusions- Effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal
years, for any of the following: A public business entity; A
not-for-profit entity that has issued, or is a conduit bond obligor
for, securities that are traded, listed, or quoted on an exchange
or an over-the-counter market; An employee benefit plan that files
financial statements with the U.S. Securities and Exchange
Commission (SEC). The new standard requires the recognition and
measurement of leases at the beginning of the earliest period
presented using a modified retrospective approach, which includes a
number of optional practical expedients that entities may elect to
apply. This guidance also expands the requirements for
lessees to record leases embedded in other arrangements and the
required quantitative and qualitative disclosures surrounding
leases. We have begun accumulating the information related to
leases and are evaluating our internal processes and controls with
respect to lease administration activities. Additionally, our
business involves lease agreements with our customers whereby we
are the lessor in the transaction. Accounting guidance for lessors
is largely unchanged. Our evaluation of this guidance is ongoing
and the impact that this new guidance will have on our financial
statements has not yet been determined.
In
January 2016, the FASB issued Accounting Standards Update No.
2016-01, Financial
Instruments—Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities-
the amendments in this Update are effective for fiscal years
beginning after December 15, 2017, including interim periods within
those fiscal years. The Partnership is currently evaluating the
effect that this ASU will have on its 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 leases with periods
that generally will range from 12 to 48 months. In general,
associated costs such as repairs and maintenance, insurance and
property taxes are paid by the lessee.
Remarketing
fees will be paid to the leasing companies from which the
Partnership purchases leases. These are fees that are earned by the
leasing companies when the initial terms of the lease have been
met. The General Partner believes that this strategy adds value
since it entices the leasing company to remain actively involved
with lessee and encourages potential extensions, remarketing or
sale of equipment. This strategy is designed to minimize any
conflicts the leasing company may have with a new lessee and may
assist in maximizing overall portfolio performance. The remarketing
fee is tied into lease performance thresholds and is a factor in
the negotiation of the fee. For the three months ended March 31,
2017 and 2016, remarketing fees of approximately $0 and $1,000 were
incurred, respectively. For the three months ended March 31, 2017
and 2016, there were no remarketing fees paid with cash or netted
against receivables due from such parties.
Gains
from the termination of leases are recognized when the lease is
modified and terminated concurrently. Gains from lease termination
included in lease revenue for the three months ended March 31, 2017
and 2016 was approximately $0 and $1,000,
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 March 31, 2017 was
approximately $4,709,000 and is included in the Partnership’s
equipment on its balance sheet. The total cost of the equipment
shared by the Partnership with other partnerships at March 31, 2017
was approximately $11,067,000. The Partnership’s share of the
outstanding debt associated with this equipment at March 31, 2017
was approximately $279,000 and is included in the
Partnership’s notes payable on its balance sheet. The total
outstanding debt related to the equipment shared by the Partnership
at March 31, 2017 was approximately $998,000.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2016 was
approximately $4,517,000 and is included in the Partnership’s
equipment on its balance sheet. The total cost of the equipment
shared by the Partnership with other partnerships at December 31,
2016 was approximately $10,060,000. The Partnership’s share
of the outstanding debt associated with this equipment at December
31, 2016 was approximately $33,000 and is included in the
Partnership’s notes payable on its balance sheet. The total
outstanding debt related to the equipment shared by the Partnership
at December 31, 2016 was approximately $96,000.
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
the remainder of 2017, 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,
|
|
Nine months ended
December 31, 2017
|
$391,000
|
Year ended December
31, 2018
|
450,000
|
Year ended December
31, 2019
|
278,000
|
Year ended December
31, 2020
|
9,000
|
|
$1,128,000
|
Finance Leases:
The
following lists the approximate components of the net investment in
direct financing leases:
|
|
|
Total minimum lease
payments to be received
|
$32,000
|
$44,000
|
Estimated residual
value of leased equipment (unguaranteed)
|
20,000
|
20,000
|
Initial direct
costs finance leases
|
500
|
1,000
|
Less: unearned
income
|
(1,500)
|
(3,000)
|
Net investment in
finance leases
|
$51,000
|
$62,000
|
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. Factors taken into consideration when assessing risk
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.
The
following table presents the credit risk profile, by
creditworthiness category, of our finance lease receivables at
March 31, 2017:
Risk Level
|
|
Percent of Total
|
Low
|
|
|
-%
|
Moderate-Low
|
|
|
-%
|
Moderate
|
|
|
-%
|
Moderate-High
|
|
|
100%
|
High
|
|
|
-%
|
Net finance lease receivable
|
|
|
100%
|
As of
March 31, 2017 and December 31, 2016, 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 approximate future minimum rentals on
non-cancelable direct financing leases at March 31,
2017:
|
|
Nine months ended
December 31, 2017
|
$27,000
|
2018
|
5,000
|
Total
|
$32,000
|
4. Related Party Transactions
Receivables/Payables
As of
March 31, 2017 and December 31, 2016, the Company’s related
party receivables and payables are short term, unsecured and
non-interest bearing.
Three months ended March 31,
|
|
|
|
|
|
|
|
|
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, 2017 and 2016, the Partnership was
charged approximately $37,000 and $53,000 in Other LP expense,
respectively.
|
$120,000
|
$141,000
|
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, 2017, the General Partner earned acquisition fees
from operating and finance leases of approximately $23,000 and $0,
respectively.
|
$23,000
|
$1,000
|
|
|
|
The general partner
is entitled to be paid 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.
|
$13,000
|
$12,000
|
|
|
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. We
do not intend to use more than 30% leverage overall in our
portfolio. 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.
|
$4,000
|
$48
|
5. Notes Payable
Notes
payable consisted of the following approximate
amounts:
|
|
|
Installment
note payable to bank; interest rate of 1.60%, due in monthly
installments of $2,775, including interest, with final payment in
March 2017
|
$-
|
$8,000
|
Installment
note payable to bank; interest rate of 1.60%, due in monthly
installments of $5,138, including interest, with final payment in
April 2017
|
5,000
|
21,000
|
Installment
note payable to bank; interest rate of 4.85%, due in quarterly
installments of $7,699, including interest, with final payment in
July 2017
|
15,000
|
23,000
|
Installment
note payable to bank; interest rate of 4.23%, due in quarterly
installments of $420, including interest, with final payment in
August 2017
|
1,000
|
1,000
|
Installment
note payable to bank; interest rate of 4.88%, due in monthly
installments of $1,058, including interest, with final payment in
October 2017
|
7,000
|
10,000
|
Installment
note payable to bank; interest rate of 4.23%, due in quarterly
installments ranging from $1,370, to $1,927, including interest,
with final payment in February 2018
|
13,000
|
16,000
|
Installment
note payable to bank; interest rate of 4.23%, due in quarterly
installments of $141 including interest, with final payment in
October 2018
|
3,000
|
3,000
|
Installment
note payable to bank; interest rate of 1.80%, due in monthly
installments of $456, including interest, with final payment in
February 2019
|
10,000
|
12,000
|
Installment
note payable to bank; interest rate of 4.23%, due in monthly
installments of $1,339, including interest, with final payment in
August 2019
|
37,000
|
40,000
|
Installment
note payable to bank; interest rate of 4.37%, due in monthly
installments of $42,121, including interest, with final payment in
October 2019
|
435,000
|
471,000
|
Installment
note payable to bank; interest rate of 4.23%, due in monthly
installments of $9,935, including interest, with final payment in
January 2019
|
209,000
|
-
|
Installment
note payable to bank; interest rate of 5.46%, due in monthly
installments of $904, including interest, with final payment in
December 2019
|
28,000
|
-
|
Installment
note payable to bank; interest rate of 5.46%, due in monthly
installments of $4,364, including interest, with final payment in
January 2020
|
137,000
|
-
|
Installment
note payable to bank; interest rate of 5.93%, due in monthly
installments of $1,425, including interest, with final payment in
February 2020
|
47,000
|
-
|
|
$947,000
|
$605,000
|
The
notes are secured by specific equipment with a carrying value of
approximately $1,312,000 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, 2017 are as
follows:
|
|
Nine months ended
December 31, 2017
|
$305,000
|
Year
ended December 31, 2018
|
372,000
|
Year
ended December 31, 2019
|
263,000
|
Year
ended December 31, 2020
|
7,000
|
|
$947,000
|
6. Supplemental Cash Flow Information
No
interest or principal on notes payable was paid by the Partnership
during 2016 and 2015 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,
|
|
|
Lease revenue net
of interest expense on notes payable realized as a result of direct
payment of principal by lessee to bank
|
$108,000
|
$83,000
|
Noncash
investing and financing activities include the
following:
Three months ended March 31,
|
|
|
Debt assumed in
connection with purchase of equipment
|
$450,000
|
$5,000
|
Accrued expenses
incurred in connection with the purchase of technology
equipment
|
$-
|
$21,000
|
Accrual for
Q1distribution to partners paid in April 2017
|
$38,000
|
$-
|
During
the three months ended March 31, 2017 and 2016, the Partnership
wrote-off fully amortized acquisition and finance fees of
approximately $8,000 and $9,000, respectively.
During
the three months ended March 31, 2017 and 2016, the Partnership
wrote-off fully depreciated equipment of approximately $11,000 and
$0, respectively.
7. Commitments and Contingencies
Medshare
In
January 2015, CCC, on behalf of the Funds, entered into a Purchase
Agreement (“Purchase Agreement”) for the sale of the
equipment to Medshare Technologies (“Medshare”) for
approximately $3,400,000. The Partnership’s share of
the sale proceeds was approximately $77,000. As of June 30,
2016, the Partnership has received approximately $53,000 of the
approximate $77,000 sale proceeds and has recorded a reserve
against the outstanding receivable of approximately $7,000.
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 $23,000 and is to be applied against the net Medshare
receivable of approximately $18,000 as of the settlement date. The
remaining $5,000 will be applied against the $7,000 reserve and
recorded as a bad debt recovery. As of May 4, 2017, the Partnership
received approximately $7,000 of the approximate $23,000 settlement
agreement which was applied against the net Medshare receivable of
approximately $18,000 as of the settlement date. Should the
Defendants default at any time, the settlement agreement includes a
consent judgment that allows CCC to seek immediate judgment against
the Defendants from a court of competent jurisdiction for the
liquidated damage amount of $1.5 million (less any payment received
after execution of the agreement). The Partnership’s share of
the judgment would be approximately $24,000. Based on discussions
with counsel, management believes that the likelihood of loss is
remote. As such, management believes that the settlement
of the lawsuits will not result in any adverse financial impact on
the Funds, but no assurance can be provided until the proceeding is
resolved.
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at issue
include amounts that were proper and that were properly allocated
to Funds, and also identified a smaller number of expenses that had
been allocated in error, but were adjusted and repaid to the
affected Funds when they were identified in 2012. During the
period in question, Commonwealth Capital Corp. (“CCC”)
and Ms. Springsteen-Abbott provided important financial support to
the Funds, voluntarily absorbed expenses and voluntarily waived
fees in amounts aggregating in excess of any questioned
allocations. That 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 has allocated
approximately $87,000 of the $208,000 in allegedly misallocated
expenses back to the affected funds as a contingency accrual
in CCC’s financial statements and a good faith payment for
the benefit of those Income Funds. Decisions issued by
FINRA's Office of Hearing Officers may be appealed to FINRA's
National Adjudicatory Council (NAC) pursuant to FINRA Rule
9311. The NAC Decision upheld the Panel’s ruling.
The bar took effect on August 23, 2016. Ms.
Springsteen-Abbott appealed the NAC Decision to the SEC. On
March 31, 2017, the SEC 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. While a
decision is being reconsidered by FINRA, the sanctions for
disgorgement and fines are not enforced against the Company.
As of May 15, 2017, management believes that resolution of the
appeal will not result in any material adverse financial impact on
the Funds, but no assurance can be provided until the FINRA matter
is resolved.
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, 2016 filed with the SEC. We undertake no obligation to
update or revise any forward-looking information, whether as a
result of new information, future developments or
otherwise.
INDUSTRY OVERVIEW
The
Equipment Leasing and Finance Association's (ELFA) Monthly Leasing
and Finance Index (MLFI-25), which reports economic activity from
25 companies representing a cross section of the $1 trillion
equipment finance sector, showed their overall new business volume
for March was $8.9 billion, up 10% year-over-year from new business
volume in March 2016. Volume was up 51% month-to-month from $5.9
billion in February. Year to date, cumulative new business volume
was up 4% compared to 2016. Receivables over 30 days were 1.40%,
down from 1.50% the previous month and up from 1.20% in the same
period in 2016. Charge-offs were 0.68%, up from 0.38% the previous
month, and up from 0.51% in the year-earlier period. Credit
approvals totaled 74.5% in March, down slightly from 74.8% in
February. Total headcount for equipment finance companies was up
19.9% year over year, a spike largely attributable to continued
acquisition activity at an MLFI reporting company. Separately, the
Equipment Leasing & Finance Foundation's Monthly Confidence
Index (MCI-EFI) for April is 65.8, easing from the March index of
71.1.
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.
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
Through
March 31, 2017, the Partnership’s lease portfolio consisted
of operating leases and finance leases. For operating leases, lease
revenue is recognized on a straight-line basis in accordance with
the terms of the lease agreement.
Finance
lease interest income is recorded over the term of the lease using
the effective interest method. For finance leases, we record, at
lease inception, unearned finance lease income which is calculated
as follows: total lease payments, plus any residual value and
initial direct costs, less the cost of the leased
equipment.
Upon
the end of the lease term, if the lessee has not met the return
conditions as set out in the lease, the Partnership is entitled in
certain cases to additional compensation from the lessee. The
Partnership’s accounting policy for recording such payments
is to treat them as revenue.
Gains
or losses from sales of leased and off-lease equipment are recorded
on a net basis in the Partnership’s Statement of
Operations
Our
leases do not contain any step-rent provisions or escalation
clauses nor are lease revenues adjusted based on any
index.
Gains
from the termination of leases are recognized when the lease is
modified and terminated concurrently. Gains from lease termination
included in lease revenue for the three months ended March 31, 2017
and 2016 was approximately $0 and $1,000,
respectively.
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 source of cash for the three months ended March 31, 2017
was cash provided by payments from finance leases of approximately
$11,000, compared to the three months ended March 31, 2016 where
our primary sources of cash were provided by operating activities
of approximately $115,000, payments from finance leases of
approximately $11,000 and net proceeds from the sale of equipment
of approximately $3,000.
Our
primary uses of cash for the three months ended March 31, 2017,
were distributions to partners of approximately $88,000, partner
redemptions of approximately $30,000, capital expenditures of
approximately $135,000 and equipment acquisition fees paid to the
General Partner of approximately $23,000. Our primary uses of cash
for the three months ended March 31, 2016, were capital
expenditures of approximately $1,000, equipment acquisition fees
paid to the General Partner of approximately $1,000 and partner
redemptions of approximately $20,000.
Cash
was used in operating activities for the three months ended March
31, 2017 of approximately $22,000, which includes net loss of
approximately $71,000 and depreciation and amortization expenses of
approximately $190,000. Other noncash activities included in the
determination of net loss include direct payments to banks by
lessees of approximately $108,000. For the three months ended March
31, 2016, cash was provided by operating activities of
approximately $115,000, which includes a net loss of approximately
$195,000, depreciation and amortization expenses of approximately
$244,000 and gain on sale of equipment of approximately $3,000.
Other noncash activities included in the determination of net loss
include direct payments to banks by lessees of approximately
$83,000.
As we
continue to acquire equipment for the equipment portfolio,
operating expenses may increase, 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 2017 as management focuses
on additional equipment acquisitions and funding limited partner
distributions. We intend to invest approximately $500,000 in
additional equipment during the remainder of 2017, primarily
through debt financing.
We
consider cash equivalents to be highly liquid investments with an
original maturity of 90 days or less.
At
March 31, 2017, cash and cash equivalents was held in two accounts
maintained at one financial institution with an aggregate balance
of approximately $44,000. Bank accounts are federally insured up to
$250,000 by the FDIC. At March 31, 2017, the total cash balance was
as follows:
At March 31, 2017
|
|
Total
bank balance
|
$44,000
|
FDIC
insured
|
(44,000)
|
Uninsured
amount
|
$-
|
The
Partnership believes it mitigates the risk of holding uninsured
deposits by depositing funds with more than one institution and by
only depositing funds with major financial institutions. The
Partnership deposits its funds with two institutions that are
Moody's Aaa-and Aa3 Rated. The Partnership has not experienced any
losses in such accounts, and believes it is not exposed to any
significant credit risk. The amounts in such accounts will
fluctuate throughout 2017 due to many factors, including cash
receipts, equipment acquisitions, interest rates and distributions
to investors.
The
Partnership’s investment strategy of acquiring equipment and
generally leasing it under triple-net leases to operators who
generally meet specified financial standards minimizes our
operating expenses. As of March 31, 2017, the Partnership had
future minimum rentals on non-cancelable operating leases of
approximately $391,000 for the balance of the year ending December
31, 2017 and approximately $737,000 thereafter. As of March 31,
2017, the Partnership had future minimum rentals on non-cancelable
finance leases of approximately $27,000 for the balance of the year
ending December 31, 2017 and approximately $5,000
thereafter.
As of
March 31, 2017, our non-recourse debt was approximately $947,000
with interest rates ranging from 1.60% to 5.93% and will be payable
through February 2020.
RESULTS OF OPERATIONS
Three months ended March 31, 2017 compared to three months ended
March 31, 2016
Lease Revenue
Our
lease revenue increased to approximately $247,000 for the three
months ended March 31, 2017, from approximately $235,000 for the
three months ended March 31, 2016. The Partnership had 50 and 61
active operating leases for the three months ended March 31, 2017
and 2016, respectively. Overall lease revenue increased while the
overall number of active leases decreased. This increase in lease
revenue is primarily due to the acquisition of fewer leases at
higher rental rates. Management expects to add new leases to the
Partnership’s portfolio throughout 2017, primarily through
debt financing.
Sale of Equipment
We sold
equipment with net book value of $0 for a net gain of approximately
$750 for the three months ended March 31, 2017. This compares to
the three months ended March 31, 2016, when we sold equipment with
net book value of $0 for a net gain of approximately
$3,000.
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 $132,000 for
the three months ended March 31, 2017, from approximately $174,000
for the three months ended March 31, 2016. This decrease is
primarily attributable to a decrease in other LP expenses of
approximately $16,000, reimbursable expenses of approximately
$9,000 and legal fees of approximately $16,000.
Equipment Management Fees
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 approximately 2% of the gross lease
revenue attributable to equipment that is subject to direct
financing leases. The equipment management fee increased to
approximately $13,000 for the three months ended March 31, 2017
from approximately $12,000 for the three months ended March 31,
2016, which is consistent with the increase 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 $190,000 for the three months ended
March 31, 2017, from approximately $244,000 for the three months
ended March 31, 2016. 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, 2017.
Net Loss
For the
three months ended March 31, 2017, we recognized revenue of
approximately $249,000, expenses of approximately $344,000 and an
insurance recovery gain of $24,000, resulting in a net loss of
approximately $71,000. For the three months ended March 31, 2016,
we recognized revenue of approximately $240,000 and expenses of
approximately $435,000, resulting in a net loss of approximately
$195,000. This change is due to the changes in revenue and expenses
as described above.
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, 2017, 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 2017 that have materially affected or are reasonably likely to
materially affect its internal control over financial
reporting.
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 $77,000. As of June 30,
2016, the Partnership has received approximately $53,000 of the
approximate $77,000 sale proceeds and has recorded a reserve
against the outstanding receivable of approximately $7,000.
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 $23,000 and is to be applied against the net Medshare
receivable of approximately $18,000 as of the settlement date. The
remaining $5,000 will be applied against the $7,000 reserve and
recorded as a bad debt recovery. As of May 4, 2017, the Partnership
received approximately $7,000 of the approximate $23,000 settlement
agreement which was applied against the net Medshare receivable of
approximately $18,000 as of the settlement date. Should the
Defendants default at any time, the settlement agreement includes a
consent judgment that allows CCC to seek immediate judgment against
the Defendants from a court of competent jurisdiction for the
liquidated damage amount of $1.5 million (less any payment received
after execution of the agreement). The Partnership’s share of
the judgment would be approximately $24,000. Based on discussions
with counsel, management believes that the likelihood of loss is
remote. As such, management believes that the settlement
of the lawsuits will not result in any adverse financial impact on
the Funds, but no assurance can be provided until the proceeding is
resolved.
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at issue
include amounts that were proper and that were properly allocated
to Funds, and also identified a smaller number of expenses that had
been allocated in error, but were adjusted and repaid to the
affected Funds when they were identified in 2012. During the
period in question, Commonwealth Capital Corp. (“CCC”)
and Ms. Springsteen-Abbott provided important financial support to
the Funds, voluntarily absorbed expenses and voluntarily waived
fees in amounts aggregating in excess of any questioned
allocations. That 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 has allocated
approximately $87,000 of the $208,000 in allegedly misallocated
expenses back to the affected funds as a contingency accrual
in CCC’s financial statements and a good faith payment for
the benefit of those Income Funds. Decisions issued by
FINRA's Office of Hearing Officers may be appealed to FINRA's
National Adjudicatory Council (NAC) pursuant to FINRA Rule
9311. The NAC Decision upheld the Panel’s ruling.
The bar took effect on August 23, 2016. Ms.
Springsteen-Abbott appealed the NAC Decision to the SEC. On
March 31, 2017, the SEC 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. While a
decision is being reconsidered by FINRA, the sanctions for
disgorgement and fines are not enforced against the Company.
As of May 15, 2017, management believes that resolution of the
appeal will not result in any material adverse financial impact on
the Funds, but no assurance can be provided until the FINRA matter
is resolved.
Item
1A. Risk
Factors
N/A
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
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 VI
|
|
BY:
COMMONWEALTH INCOME & GROWTH FUND, INC., General
Partner
|
May 15, 2017
|
By: /s/ Kimberly A. Springsteen-Abbott
|
Date
|
Kimberly
A. Springsteen-Abbott
|
|
Chief
Executive Officer
Commonwealth
Income & Growth Fund, Inc.
|
|
|
|
|
May 15, 2017
|
By: /s/ Lynn
A. Whatley
|
Date
|
Lynn A. Whatley
|
|
Executive Vice President, Chief Operating Officer
|