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 JUNE 30, 2018 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
JUNE
30, 2018
TABLE
OF CONTENTS
PART
I
|
Item
1.
|
Financial
Statements
|
3
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
19
|
Item
4.
|
Controls
and Procedures
|
19
|
PART
II
|
Item
1.
|
Legal
Proceedings
|
19
|
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
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$64,221
|
$24,583
|
Lease income
receivable, net of reserve of approximately $33,000 at June 30,
2018 and December 31, 2017
|
129,436
|
132,566
|
Accounts
receivable, Commonwealth Capital Corp., net
|
126,993
|
247,286
|
Other receivables,
net of reserve of approximately $12,000 at June 30, 2018 and
December 31, 2017
|
13,082
|
33,949
|
Prepaid
expenses
|
1,244
|
3,713
|
|
334,976
|
442,097
|
|
|
|
Net investment in
finance leases
|
-
|
13,474
|
|
|
|
Equipment, at
cost
|
8,185,975
|
9,033,540
|
Accumulated
depreciation
|
(7,051,450)
|
(7,650,855)
|
|
1,134,525
|
1,382,685
|
|
|
|
Equipment
acquisition costs and deferred expenses, net of accumulated
amortization of approximately $47,000 and $33,000 at June 30, 2018
and December 31, 2017, respectively
|
43,039
|
56,019
|
|
|
|
Total
Assets
|
$1,512,540
|
$1,894,275
|
|
|
|
LIABILITIES
AND PARTNERS' CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$164,484
|
$162,009
|
Accounts payable,
CIGF, Inc., net
|
94,091
|
158,571
|
Other accrued
expenses
|
5,057
|
95,348
|
Unearned lease
income
|
71,540
|
60,847
|
Notes
payable
|
790,067
|
928,032
|
|
|
|
Total
Liabilities
|
1,125,239
|
1,404,807
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
PARTNERS'
CAPITAL
|
|
|
General
Partner
|
1,000
|
1,000
|
Limited
Partners
|
386,301
|
488,468
|
Total
Partners' Capital
|
387,301
|
489,468
|
|
|
|
Total
Liabilities and Partners' Capital
|
$1,512,540
|
$1,894,275
|
|
|
|
see
accompanying notes to condensed financial statements
|
Commonwealth
Income & Growth Fund VI
|
Condensed
Statements of Operations
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
Lease
|
$227,663
|
$251,817
|
$487,107
|
$499,254
|
Interest and
other
|
15
|
682
|
823
|
1,585
|
Gain on sale of
equipment
|
11,403
|
-
|
30,687
|
-
|
Total
revenue and gain on sale of equipment
|
239,081
|
252,499
|
518,617
|
500,839
|
|
|
|
|
|
Expenses
|
|
|
|
|
Operating,
excluding depreciation
|
61,503
|
85,881
|
220,211
|
217,702
|
Equipment
management fee, General Partner
|
11,383
|
12,818
|
24,451
|
25,417
|
Interest
|
10,440
|
10,718
|
20,702
|
19,905
|
Depreciation
|
147,623
|
180,688
|
313,759
|
360,940
|
Amortization of
equipment acquisition costs
|
|
|
|
|
and deferred
expenses
|
8,134
|
9,332
|
16,129
|
19,412
|
Bad debt
expense
|
-
|
19
|
-
|
570
|
Loss on sale of
computer equipment
|
-
|
14,329
|
-
|
13,579
|
Total
expenses
|
239,083
|
313,785
|
595,252
|
657,525
|
|
|
|
|
|
Other
income (loss)
|
|
|
|
|
Gain from insurance
recovery
|
-
|
-
|
-
|
24,135
|
Total
other income
|
-
|
-
|
-
|
24,135
|
|
|
|
|
|
Net
loss
|
$(2)
|
$(61,286)
|
$(76,635)
|
$(132,551)
|
|
|
|
|
|
Net
loss allocated to Limited Partners
|
$(2)
|
$(61,286)
|
$(76,635)
|
$(132,947)
|
|
|
|
|
|
Net
loss per equivalent Limited Partnership unit
|
$(0.00)
|
$(0.03)
|
$(0.04)
|
$(0.08)
|
|
|
|
|
|
Weighted
average number of equivalent Limited
|
|
|
|
|
Partnership
units outstanding during the period
|
1,750,871
|
1,760,681
|
1,753,214
|
1,762,234
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
Commonwealth
Income & Growth Fund VI
|
Condensed
Statement of Partners' Capital
|
For
the six months ended June 30, 2018
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2018
|
50
|
1,757,396
|
$1,000
|
$488,468
|
$489,468
|
Net
loss
|
-
|
-
|
-
|
(76,635)
|
(76,635)
|
Redemptions
|
-
|
(6,526)
|
-
|
(25,532)
|
(25,532)
|
Balance,
June 30, 2018
|
50
|
1,750,870
|
$1,000
|
$386,301
|
$387,301
|
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
Commonwealth
Income & Growth Fund VI
|
Condensed
Statements of Cash Flow
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
$37,114
|
$7,776
|
|
|
|
Cash
flows from investing activities
|
|
|
Capital
expenditures
|
(13,091)
|
(137,962)
|
Payments received
from finance leases
|
4,814
|
22,701
|
Equipment
acquisition fees paid to General Partner
|
(2,623)
|
(24,263)
|
Net proceeds from
the sale of equipment
|
39,481
|
8,659
|
|
|
|
Net
cash provided by (used in) investing activities
|
28,581
|
(130,865)
|
|
|
|
Cash
flows from financing activities
|
|
|
Redemptions
|
(25,532)
|
(30,066)
|
Debt placement
fee
|
(525)
|
(4,498)
|
Distributions to
Partners
|
-
|
(126,475)
|
|
|
|
Net
cash used in financing activities
|
(26,057)
|
(161,039)
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
39,638
|
(284,128)
|
|
|
|
Cash
and cash equivalents, beginning of the period
|
24,583
|
332,742
|
|
|
|
Cash
and cash equivalents, end of the period
|
$64,221
|
$48,614
|
|
|
|
see
accompanying notes to condensed financial statements
|
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Business
Commonwealth
Income & Growth Fund VI (“CIGF6” 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 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 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 June 30,
2019. The General Partner will continue to reassess the funding of
limited partner distributions throughout 2018 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 June 30, 2018. 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, 2017 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, 2017 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 six months ended June 30, 2018 are not necessarily indicative
of financial results that may be expected for the full year ended
December 31, 2018.
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 June 30, 2018 and December 31, 2017 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 June
30, 2018 and December 31, 2017 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 June
30, 2018, cash and cash equivalents were held in one account
maintained at one financial institution with an aggregate balance
of approximately $66,000. Bank accounts are federally insured up to
$250,000 by the FDIC. At June 30, 2018, the total cash balance was
as follows:
At June 30, 2018
|
|
Total
bank balance
|
$66,000
|
FDIC
insured
|
(66,000)
|
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 2018
due to many factors, including cash receipts, equipment
acquisitions, interest rates and distributions to limited
partners.
Recent Accounting Pronouncements Not Yet Adopted
In
February 2018, the FASB issued Accounting Standards Update No.
2018-03, Technical Corrections and
Improvements to 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, and
interim periods within those fiscal years beginning after June 15,
2018. Public business entities with fiscal years beginning between
December 15, 2017, and June 15, 2018, are not required to adopt
these amendments until the interim period beginning after June 15,
2018, and public business entities with fiscal years beginning
between June 15, 2018, and December 15, 2018, are not required to
adopt these amendments before adopting the amendments in Update
2016-01. For all other entities, the effective date is the same as
the effective date in Update 2016-01. All entities may early adopt
these amendments for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years, as long
as they have adopted Update 2016-01. 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
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.
Included
within the scope of FASB Accounting Standards Update No. 2016-02,
Leases (Topic 842) is FASB
Accounting Standards Update No. 2017-13, Revenue Recognition (Topic
605), Revenue from Contracts with Customers (Topic 606), Leases
(Topic 840), and Leases (Topic 842); Accounting Standards
Update No. 2017-14, Income
Statement—Reporting Comprehensive Income (Topic 220), Revenue
Recognition (Topic 605), and Revenue from Contracts with Customers (Topic
606) (SEC Update)(“ASC 606”);FASB Accounting
Standards Update No. 2018-10, Codification Improvements- Leases (Topic
842) . The
Partnership has determined that its income streams fall outside the
scope of ASC 606.
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 the lessees for 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. Remarketing fees incurred in connection
with lease extensions are accounted for as operating costs.
Remarketing fees incurred in connection with the sale of equipment
are included in the gain or loss calculations. For the six months
ended June 30, 2018 and 2017, there were no remarketing fees
incurred and/or paid with cash or netted against receivables due
from such parties, respectively.
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 six months ended June 30, 2018
and 2017, was approximately $500 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 June 30, 2018 was
approximately $4,748,000 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 June 30, 2018
was approximately $13,363,000. The Partnership’s share of the
outstanding debt associated with this equipment at June 30, 2018
was approximately $283,000 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 June 30, 2018 was approximately $2,191,000.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2017 was
approximately $5,014,000 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,
2017 was approximately $13,881,000. The Partnership’s share
of the outstanding debt associated with this equipment at December
31, 2017 was approximately $390,000 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, 2017 was approximately $2,729,000.
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 2018, 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 at June 30, 2018:
For the period ended
December
|
|
Six months ended
December 31, 2018
|
$371,000
|
Year Ended December
31, 2019
|
427,000
|
Year Ended December
31, 2020
|
133,000
|
Year Ended December
31, 2021
|
17,000
|
|
$948,000
|
The
Partnership operational phase is scheduled to end on December 31,
2018. If the Partnership should terminate with a portfolio of
active leases, CCC will assume all remaining active leases at their
fair market value and related remaining revenue stream and any
associated debt obligation through their termination.
Finance Leases:
The
following lists the components of the net investment in direct
finance leases:
|
|
|
Total minimum lease
payments to be received
|
$-
|
$4,000
|
Estimated residual
value of leased equipment (unguaranteed)
|
-
|
9,000
|
Less: unearned
income
|
-
|
(1,000)
|
Initial direct
costs finance leases
|
-
|
1,000
|
Net investment in
finance leases
|
$-
|
$13,000
|
We
assess credit risk for all of our customers, including those that
lease under finance leases. This credit risk is assessed using an
internally developed model which incorporates credits scores from
third party providers and our own customer risk ratings and is
periodically reviewed. Our internal ratings are weighted based on
the industry that the customer operates in. Factors taken into
consideration when assessing risk include both general and industry
specific qualitative and quantitative metrics. We separately take
into 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.
As of
June 30, 2018 and December 31, 2017, 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.
4. Related Party Transactions
Receivables/Payables
As of
June 30, 2018 and December 31, 2017, the Company’s related
party receivables and payables are short term, unsecured and
non-interest bearing.
Six months ended June 30,
|
|
|
|
|
|
|
|
|
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 six months ended June 30, 2018 and
2017, the Partnership was charged approximately $78,000 and $72,000
in Other LP expense, respectively.
|
$210,000
|
$205,000
|
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.
|
$3,000
|
$24,000
|
|
|
|
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.
|
$24,000
|
$25,000
|
|
|
|
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.
|
$500
|
$4,000
|
5. Notes Payable
Notes
payable consisted of the following approximate
amounts:
|
|
|
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
|
$-
|
$3,000
|
Installment
note payable to bank; interest rate of 4.23%, due in quarterly
installments of $141 including interest, with final payment in
October 2018
|
1,000
|
2,000
|
Installment
note payable to bank; interest rate of 4.47%, due in monthly
installments of $9,935, including interest, with final payment in
January 2019
|
69,000
|
126,000
|
Installment
note payable to bank; interest rate of 1.80%, due in monthly
installments of $456, including interest, with final payment in
February 2019
|
4,000
|
6,000
|
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
|
18,000
|
26,000
|
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
|
243,000
|
321,000
|
Installment
note payable to bank; interest rate of 5.46%, due in monthly
installments of $904, including interest, with final payment in
December 2019
|
16,000
|
20,000
|
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
|
79,000
|
103,000
|
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
|
27,000
|
35,000
|
Installment
note payable to bank; interest rate of 5.56%, due in monthly
installments of $2,925, including interest, with final payment in
June 2020
|
66,000
|
82,000
|
Installment
note payable to bank; interest rate of 5.25%, due in monthly
installments of $253, including interest, with final payment in
August 2020
|
6,000
|
8,000
|
Installment
note payable to bank; interest rate of 5.25%, due in quarterly
installments of $5,330, including interest, with final payment in
August 2020
|
45,000
|
60,000
|
Installment
note payable to bank; interest rate of 4.87%, due in quarterly
installments of $4,785, including interest, with final payment in
October 2020
|
45,000
|
63,000
|
Installment
note payable to bank; interest rate of 5.31%, due in quarterly
installments of $6,157, including interest, with final payment in
January 2021
|
63,000
|
73,000
|
Installment
note payable to bank; interest rate of 6.33%, due in quarterly
installments of $5,805, including interest, with final payment in
January 2021
|
58,000
|
-
|
Installment
note payable to bank; interest rate of 6.66%, due in quarterly
installments of $2,774, including interest, with final payment in
January 2021
|
30,000
|
-
|
Installment
note payable to bank; interest rate of 6.66%, due in monthly
installments of $665, including interest, with final payment in
March 2021
|
20,000
|
-
|
|
$790,000
|
$928,000
|
The
notes are secured by specific equipment with a carrying value of
approximately $1,096,000 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 June 30, 2018 are as
follows:
|
|
Six months ended
December 31, 2018
|
$253,000
|
Year
ended December 31, 2019
|
396,000
|
Year
ended December 31, 2020
|
124,000
|
Year
ended December 31, 2021
|
17,000
|
|
$790,000
|
The
Partnership’s operational phase is scheduled to end on
December 31, 2018. If the Partnership should terminate, CCC will
assume all remaining active leases at their fair market value and
related remaining revenue stream and any associated debt obligation
through their termination.
6. Supplemental Cash Flow Information
No
interest or principal on notes payable was paid by the Partnership
during 2018 and 2017 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:
Six months ended June 30,
|
|
|
Lease revenue net
of interest expense on notes payable realized as a result of direct
payment of principal by lessee to bank
|
$190,000
|
$217,000
|
Noncash
investing and financing activities include the
following:
Six months ended June 30,
|
|
|
Debt assumed in
connection with purchase of equipment
|
$52,000
|
$451,000
|
During
the six months ended June 30, 2018 and 2017, the Partnership
wrote-off fully amortized acquisition and finance fees of
approximately $2,000 and $31,000, respectively.
During
the three months ended June 30, 2018 and 2017, the Partnership
wrote-off fully depreciated equipment of approximately $655,000 and
$11,000, 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 August 14,
2018, the Partnership has received approximately $61,000 of the
approximate $77,000 sale proceeds and has recorded a reserve of
$12,000 against the outstanding receivables. On April 3, 2015
Medshare was obligated to make payment in full and failed to do
so. As a result, Medshare defaulted on its purchase agreement
with CCC and was issued a demand letter for full payment of the
equipment. On June 25, 2015, Medshare filed a lawsuit in
Texas state court for breach of contract (“State
Suit”). On June 26, 2015, Commonwealth filed a lawsuit
in the Northern District of Texas against Medshare seeking payment
in full and/or return of the Equipment and
damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2,
2016, the Defendants made payment to CCC of an initial $200,000 to
be followed by 24 structured monthly payments of approximately
$50,000 per month to begin no later than September 15, 2016.
The Partnership’s share of the Settlement Agreement is
approximately $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
$12,000 reserve and recorded as a bad debt recovery. As of
August 14, 2018, the Partnership received approximately $8,000 of
the approximate $23,000 settlement agreement which was applied
against the net Medshare receivable of approximately $18,000 as of
the settlement date. As Defendant defaulted on settlement
agreement, CCC sought and obtained consent judgement from U.S.
District Court for Northern District of Texas, Dallas Division on
July 27, 2017 in the amount of $1.5 million, less $450,000
previously paid plus $6,757 in attorney fees, both Defendant and
Cleary being jointly and severally liable for judgement
amount. The court also vacated the September 21, 2016
settlement dismissal.
On July
27, 2017 Defendant filed Chapter 11 in Northern District of Texas
Dallas Division. On July 26, 2017 Legacy Texas Bank, a
secured creditor of Defendant filed for a TRO from U.S. District
Court for Northern District of Texas, Dallas Division on July 27,
2017 with request for appointment of trustee for operation of
Defendant, which was granted and case has been converted to Chapter
7. On April 19, 2018 the Bankruptcy Court approved payment of
$70,000 in partial settlement of CCC claims and the Trustee remains
is in process of negotiation in claims for estate with a
distribution to creditors, including additional Commonwealth
claims. While it is not anticipated that the trustee’s
distribution to Commonwealth will fully cover the judgment,
recovery may still be pursued directly against Cleary. As
such, management believes that the foregoing will not result
in any adverse financial impact on the Funds, but no assurance can
be provided until the proceedings are resolved.
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at
issue include amounts that were proper and that were properly
allocated to Funds, and also identified a smaller number of
expenses that had been allocated in error, but were adjusted and
repaid to the affected Funds when they were identified in
2012. During the period in question, Commonwealth Capital
Corp. (“CCC”) and Ms. Springsteen-Abbott provided
important financial support to the Funds, voluntarily absorbed
expenses and voluntarily waived fees in amounts aggregating in
excess of any questioned allocations. A Hearing Panel ruled
on March 30, 2015, that Ms. Springsteen-Abbott should be barred
from the securities industry because the Panel concluded that she
allegedly misallocated approximately $208,000 of expenses involving
certain Funds over the course of three years. As such,
management had allocated approximately $87,000 of the $208,000 in
allegedly misallocated expenses back to the affected funds as a
contingency accrual in CCC’s financial statements and a good
faith payment for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed
to FINRA's National Adjudicatory Council (the “NAC”)
pursuant to FINRA Rule 9311. The NAC issued a decision that
upheld the lower panel’s ruling and the bar took effect on
August 23, 2016. Ms. Springsteen-Abbott appealed the
NAC’s decision to the U.S. Securities and Exchange Commission
(the “SEC”). On March 31, 2017, the SEC
criticized that decision as so flawed that the SEC could not even
review it, and remanded the matter back to FINRA for further
consideration consistent with the SEC’s remand, but did not
suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling
$208,000 to a remaining list of 84 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. That appeal is
pending as of August 14,
2018. All requested or allowed briefs have been filed with
the SEC. Management believes that whatever the final
resolution of this may be, it will not result in any material
adverse financial impact on the Funds, although final assurance
cannot be provided until the legal 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, 2017 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 June was $9.1
billion, down 7% year-over-year from new business volume in June
2017. Volume was up 18% month-to-month from $7.7 billion in May.
Year to date, cumulative new business volume was up
4% compared to 2017. Receivables over 30 days were 1.40%, down
from 1.60% the previous month and up from 1.30% the same period in
2017. Charge-offs were 0.33%, up from 0.31% the previous month, and
down from 0.38% in the year-earlier period. Credit approvals
totaled 75.8% in June, down from 76.8% in May. Total headcount for
equipment finance companies was down 0.2% year over year.
During 2017, headcount was elevated due to acquisition
activity at an MLFI reporting company. Separately, the Equipment
Leasing & Finance Foundation’s Monthly Confidence Index
(MCI-EFI) in July is 62.8, easing from the June index of
66.2.
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 of recent accounting
pronouncements.
LEASE INCOME RECEIVABLE
Lease
income receivable includes current lease income receivable net of
allowances for uncollectible amounts. The Partnership monitors
lease income receivable to ensure timely and accurate payment by
lessees. Its 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. The Partnership may establish an allowance for
uncollectible lease income receivable based upon the credit risk of
specific customers, historical trends and other information when
the analysis indicates that the probability of full collection is
unlikely. The Partnership writes off its accounts receivable when
it determines that it is uncollectible and all economically
sensible means have been exhausted.
REVENUE RECOGNITION
Through
June 30, 2018, the Partnership’s lease portfolio consisted of
operating and finance leases. For operating leases, lease revenue
is recognized on a straight-line basis in accordance with the terms
of the lease agreements.
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.
Gain or
losses from sales of leased and off lease equipment are recorded on
a net basis in the Fund’s condensed 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 six months ended June 30, 2018
and 2017, was approximately $500 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 sources of cash for the six months ended June 30, 2018 were
cash provided by operating activities of approximately $37,000,
payments received from finance leases of approximately $5,000 and
net proceeds from the sale of equipment of approximately $39,000.
This compares to the six months ended June 30, 2017 where our
primary sources of cash were provided by operating activities of
approximately $8,000, payments received from finance leases of
approximately $23,000 and net proceeds from the sale of equipment
of approximately $9,000.
Our
primary uses of cash for the six months ended June 30, 2018, were
partner redemptions of approximately $26,000, capital expenditures
of approximately $13,000 and equipment acquisition fees paid to the
General Partner of approximately $3,000. Our primary uses of cash
for the six months ended June 30, 2017, were distributions to
partners of approximately $126,000, partner redemptions of
approximately $30,000, capital expenditures of approximately
$138,000, debt placement fees of approximately $4,000 and equipment
acquisition fees paid to the General Partner of approximately
$24,000.
Cash
was provided by operating activities for the six months ended June
30, 2018 of approximately $37,000, which includes a net loss of
approximately $77,000, depreciation and amortization expenses of
approximately $330,000 and gain on sale of equipment of
approximately $31,000. Other noncash activities included in the
determination of net income include direct payments to banks by
lessees of approximately $190,000. For the six months ended June
30, 2017, cash was provided by operating activities of
approximately $8,000, which includes a net loss of approximately
$133,000, depreciation and amortization expenses of approximately
$381,000 and loss on sale of equipment of approximately $14,000.
Other noncash activities included in the determination of net
income include direct payments to banks by lessees of approximately
$217,000.
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 2018 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 2018, primarily
through debt financing.
We
consider cash and cash equivalents to be highly liquid investments
with an original maturity of 90 days or less.
At June
30, 2018, cash and cash equivalents were held in one account
maintained at one financial institution with an aggregate balance
of approximately $66,000. Bank accounts are federally insured up to
$250,000 by the FDIC. At June 30, 2018, the total cash balance was
as follows:
|
|
Total
bank balance
|
$66,000
|
|
(66,000)
|
|
$-
|
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 amounts in such accounts will fluctuate throughout 2018
due to many factors, including cash receipts, equipment
acquisitions, interest rates and distributions to limited
partners.
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 June 30, 2018, the Partnership had future
minimum rentals on non-cancelable operating leases of approximately
$371,000 for the balance of the year ending December 31, 2018 and
approximately $577,000 thereafter. As of June 30, 2018, the
Partnership had future minimum rentals on non-cancelable finance
leases of approximately $0 for the balance of the year ended
December 31, 2018 and approximately $0 thereafter.
As of
June 30, 2018, our non-recourse debt was approximately $790,000
with interest rates ranging from 1.80% to 6.66% and will be payable
through March 2021.
The
Partnership’s operational phase is scheduled to end on
December 31, 2018. If the Partnership should terminate, CCC will
assume all remaining active leases at their fair market value and
related remaining revenue stream and any associated debt obligation
through their termination.
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 June 30,
2019. The General Partner will continue to reassess the funding of
limited partner distributions throughout 2018 and will continue to
waive certain fees if the General Partner determines it is in the
best interest of the Partnership to do so. 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. Additionally, the Partnership will seek to
enhance portfolio returns and maximize cash flow through the use of
leveraged lease transactions; the acquisition of lease equipment
through financing. This strategy allows the General
Partner to acquire additional revenue generating leases without the
use of investor funds, thus maximizing overall return.
RESULTS OF OPERATIONS
Three months ended June 30, 2018 compared to three months ended
June 30, 2017
Lease Revenue
Lease
revenue decreased to approximately $228,000 for the three months
ended June 30, 2018, from approximately $252,000 for the three
months ended June 30, 2017. The Partnership had 50 and 46 active
operating leases for the three months ended June 30, 2018 and 2017,
respectively. This increase was primarily due the acquisition of
new lease agreements. Management expects to add new leases to the
Partnership’s portfolio throughout 2018, primarily through
debt financing.
Sale of Equipment
For the
three months ended June 30, 2018, the Partnership sold fully
depreciated equipment with a net book value of approximately $6,000
for a net gain of approximately $11,000. This compares to the three
months ended June 30, 2017, when the Partnership sold fully
depreciated equipment with a net book value of approximately
$22,000 for net loss of approximately $14,000.
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 $62,000 for
the three months ended June 30, 2018, from approximately $86,000
for the three months ended June 30, 2017. This decrease is
primarily attributable to a decrease in accounting fees of
approximately $9,000, other LP expenses of approximately $5,000,
legal fees of approximately $6,000 and investor shareholder service
expenses of approximately $7,000.
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 decreased to
approximately $11,000 for the three months ended June 30, 2018 from
approximately $13,000 for the three months ended June 30, 2017,
which 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 $156,000 for the three months ended June
30, 2018, from approximately $190,000 for the three months ended
June 30, 2017. 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 June 30, 2018.
Net Loss
For the
three months ended June 30, 2018, we recognized revenue of
approximately $239,081, expenses of approximately $239,083,
resulting in a net loss of approximately $2. For the three months
ended June 30, 2017, we recognized revenue of approximately
$253,000 and expenses of approximately $314,000, resulting in net
loss of approximately $61,000. This change in net loss is due to
the changes in revenue and expenses as described
above.
Six months ended June 30, 2018 compared to six months ended June
30, 2017
Lease Revenue
Lease
revenue decreased to approximately $487,000 for the six months
ended June 30, 2018, from approximately $499,000 for the six months
ended June 30, 2017. The Partnership had 53 and 52 active operating
leases for the six months ended June 30, 2018 and 2017,
respectively. Overall lease revenue decreased while the overall
number of active leases increased. This decrease in lease revenue
is primarily due to the replacement of existing leases at lower
rental rates. Management expects to add new leases to the
Partnership’s portfolio throughout 2018, primarily through
debt financing.
Sale of Equipment
For the
six months ended June 30, 2018, we sold equipment held under
operating leases with a net book value of approximately $9,000 for
a net gain of approximately $31,000. This compares to the six
months ended June 30, 2017, we sold equipment held under operating
leases with a net book value of approximately $22,000 for net loss
of approximately $14,000.
Operating Expenses
Our
operating expenses, excluding depreciation, primarily consist of
accounting and legal fees, outside service fees and reimbursement
of expenses to CCC for administration and operation of the
Partnership. These expenses increased to approximately $220,000 for
the six months ended June 30, 2018, from approximately $218,000 for
the six months ended June 30, 2017. This increase is primarily
attributable to an increase in Other LP expense of approximately
$6,000 and legal fees of approximately $24,000, partially offset by
a decrease in accounting fees of approximately
$24,000.
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 decreased to
approximately $24,000 for the six months ended June 30, 2018 from
approximately $25,000 for the six months ended June 30, 2017. This
increase is consistent with the overall 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 $330,000 for the six months ended June
30, 2018, from approximately $381,000 for the six months ended June
30, 2017. 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 six months ended
June 30, 2018.
Net Loss
For the
six months ended June 30, 2018, we recognized revenue of
approximately $518,000 expenses of approximately $595,000,
resulting in a net loss of approximately $77,000. For the six
months ended June 30, 2017, we recognized revenue of approximately
$501,000 expenses of approximately $658,000 and an insurance
recovery gain of approximately $24,000, resulting in a net loss of
approximately $133,000.This change in net loss 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 June 30, 2018, 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 second quarter
of 2018 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 August 14,
2018, the Partnership has received approximately $61,000 of the
approximate $77,000 sale proceeds and has recorded a reserve of
$12,000 against the outstanding receivables. On April 3, 2015
Medshare was obligated to make payment in full and failed to do
so. As a result, Medshare defaulted on its purchase agreement
with CCC and was issued a demand letter for full payment of the
equipment. On June 25, 2015, Medshare filed a lawsuit in
Texas state court for breach of contract (“State
Suit”). On June 26, 2015, Commonwealth filed a lawsuit
in the Northern District of Texas against Medshare seeking payment
in full and/or return of the Equipment and
damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2,
2016, the Defendants made payment to CCC of an initial $200,000 to
be followed by 24 structured monthly payments of approximately
$50,000 per month to begin no later than September 15, 2016.
The Partnership’s share of the Settlement Agreement is
approximately $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
$12,000 reserve and recorded as a bad debt recovery. As of
August 14, 2018, the Partnership received approximately $8,000 of
the approximate $23,000 settlement agreement which was applied
against the net Medshare receivable of approximately $18,000 as of
the settlement date. As Defendant defaulted on settlement
agreement, CCC sought and obtained consent judgement from U.S.
District Court for Northern District of Texas, Dallas Division on
July 27, 2017 in the amount of $1.5 million, less $450,000
previously paid plus $6,757 in attorney fees, both Defendant and
Cleary being jointly and severally liable for judgement
amount. The court also vacated the September 21, 2016
settlement dismissal.
On July
27, 2017 Defendant filed Chapter 11 in Northern District of Texas
Dallas Division. On July 26, 2017 Legacy Texas Bank, a
secured creditor of Defendant filed for a TRO from U.S. District
Court for Northern District of Texas, Dallas Division on July 27,
2017 with request for appointment of trustee for operation of
Defendant, which was granted and case has been converted to Chapter
7. On April 19, 2018 the Bankruptcy Court approved payment of
$70,000 in partial settlement of CCC claims and the Trustee remains
is in process of negotiation in claims for estate with a
distribution to creditors, including additional Commonwealth
claims. While it is not anticipated that the trustee’s
distribution to Commonwealth will fully cover the judgment,
recovery may still be pursued directly against Cleary. As
such, management believes that the foregoing will not result
in any adverse financial impact on the Funds, but no assurance can
be provided until the proceedings are resolved.
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at
issue include amounts that were proper and that were properly
allocated to Funds, and also identified a smaller number of
expenses that had been allocated in error, but were adjusted and
repaid to the affected Funds when they were identified in
2012. During the period in question, Commonwealth Capital
Corp. (“CCC”) and Ms. Springsteen-Abbott provided
important financial support to the Funds, voluntarily absorbed
expenses and voluntarily waived fees in amounts aggregating in
excess of any questioned allocations. A Hearing Panel ruled
on March 30, 2015, that Ms. Springsteen-Abbott should be barred
from the securities industry because the Panel concluded that she
allegedly misallocated approximately $208,000 of expenses involving
certain Funds over the course of three years. As such,
management had allocated approximately $87,000 of the $208,000 in
allegedly misallocated expenses back to the affected funds as a
contingency accrual in CCC’s financial statements and a good
faith payment for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed
to FINRA's National Adjudicatory Council (the “NAC”)
pursuant to FINRA Rule 9311. The NAC issued a decision that
upheld the lower panel’s ruling and the bar took effect on
August 23, 2016. Ms. Springsteen-Abbott appealed the
NAC’s decision to the U.S. Securities and Exchange Commission
(the “SEC”). On March 31, 2017, the SEC
criticized that decision as so flawed that the SEC could not even
review it, and remanded the matter back to FINRA for further
consideration consistent with the SEC’s remand, but did not
suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling
$208,000 to a remaining list of 84 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. That appeal is
pending as of August 14,
2018. All requested or allowed briefs have been filed with
the SEC. Management believes that whatever the final
resolution of this may be, it will not result in any material
adverse financial impact on the Funds, although final assurance
cannot be provided until the legal 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
|
August 14, 2018
|
By: /s/ Kimberly A. Springsteen-Abbott
|
|
Kimberly
A. Springsteen-Abbott
|
|
Chief
Executive Officer
Commonwealth
Income & Growth Fund, Inc.
|
|
|
|
|
August 14, 2018
|
By: /s/ Lynn
A. Whatley
|
|
Lynn A.
Whatley
|
|
Executive
Vice President, Chief Operating Officer
|