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, 2018 or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number: 333-156357
COMMONWEALTH INCOME & GROWTH FUND VII, LP
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
26-3733264
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification Number)
|
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, 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
|
16
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
21
|
Item
4.
|
Controls
and Procedures
|
21
|
PART
II
|
Item
1.
|
Legal
Proceedings
|
21
|
Item
1A.
|
Risk
Factors
|
23
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
23
|
Item
3.
|
Defaults
Upon Senior Securities
|
23
|
Item
4.
|
Mine
Safety Disclosures
|
23
|
Item
5.
|
Other
Information23
|
23
|
Item
6.
|
Exhibits
|
23
|
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Commonwealth
Income & Growth Fund VII
|
Condensed
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$969,980
|
$887,167
|
Lease income
receivable, net of reserve of approximately $0 at March 31, 2018
and December 31, 2017
|
386,609
|
365,385
|
Accounts
receivable, Commonwealth Capital Corp, net
|
1,213,648
|
1,510,035
|
Other receivables,
net of reserve of approximately $239,000 at March 31, 2018 and
December 31, 2017
|
108,337
|
258,909
|
Receivable from COF
2
|
12,239
|
12,239
|
Prepaid
expenses
|
7,037
|
10,469
|
|
2,697,850
|
3,044,204
|
|
|
|
Net investment in
finance leases
|
82,432
|
121,570
|
|
|
|
Investment in COF
2
|
919,568
|
960,842
|
|
|
|
Equipment, at
cost
|
17,482,631
|
18,511,167
|
Accumulated
depreciation
|
(13,201,029)
|
(13,703,605)
|
|
4,281,602
|
4,807,562
|
|
|
|
Equipment
acquisition costs and deferred expenses, net of accumulated
amortization of approximately $77,000 and $68,000 at March 31,
2018 and December 31, 2017, respectively
|
180,478
|
200,808
|
|
180,478
|
200,808
|
Total
Assets
|
$8,161,930
|
$9,134,986
|
|
|
|
LIABILITIES
AND PARTNERS' CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$217,763
|
$171,939
|
Accounts payable,
CIGF, Inc.
|
127,978
|
306,756
|
Other accrued
expenses
|
232
|
77,803
|
Unearned lease
income
|
209,379
|
174,147
|
Notes
payable
|
3,048,996
|
3,455,653
|
Total
Liabilities
|
3,604,348
|
4,186,298
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
PARTNERS'
CAPITAL
|
|
|
|
|
|
General
Partner
|
1,050
|
1,050
|
Limited
Partners
|
4,556,532
|
4,947,638
|
Total
Partners' Capital
|
4,557,582
|
4,948,688
|
Total
Liabilities and Partners' Capital
|
$8,161,930
|
$9,134,986
|
|
|
|
see
accompanying notes to condensed financial statements
|
Commonwealth
Income & Growth Fund VII
|
Condensed
Statements of Operations
|
(unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
Revenue
|
|
|
Lease
|
$628,278
|
$619,433
|
Interest and
other
|
2,264
|
3,515
|
Gain on sale of
equipment
|
33,144
|
-
|
Total
revenue and gain on sale of equipment
|
663,686
|
622,948
|
|
|
|
Expenses
|
|
|
Operating,
excluding depreciation and amortization
|
320,513
|
273,096
|
Equipment
management fee, General Partner
|
31,970
|
31,740
|
Interest
|
37,003
|
11,018
|
Depreciation
|
522,812
|
634,227
|
Amortization of
equipment acquisition costs and deferred expenses
|
20,331
|
19,580
|
Bad debt
expense
|
-
|
14,034
|
Loss on sale of
equipment
|
-
|
6,705
|
Total
expenses
|
932,629
|
990,400
|
|
|
|
Other
gain (loss)
|
|
|
Gain from insurance
recovery
|
-
|
33,653
|
Loss in investment
from COF 2
|
(29,035)
|
(56,230)
|
Total
other loss
|
(29,035)
|
(22,577)
|
|
|
|
|
|
|
Net
loss
|
$(297,978)
|
$(390,029)
|
|
|
|
Net
loss allocated to Limited Partners
|
$(298,753)
|
$(391,582)
|
|
|
|
Net
loss per equivalent Limited Partnership unit
|
$(0.19)
|
$(0.25)
|
Weighted
average number of equivalent limited
|
|
|
partnership
units outstanding during the year
|
1,549,962
|
1,554,279
|
|
|
|
see
accompanying notes to condensed financial statements
|
|
|
|
Commonwealth
Income & Growth Fund VII
|
Condensed
Statement of Partners' Capital
|
For
the three months ended March 31, 2018
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2018
|
50
|
1,550,510
|
$1,050
|
$4,947,638
|
$4,948,688
|
Net income
(loss)
|
-
|
-
|
775
|
(298,753)
|
(297,978)
|
Distributions
|
-
|
-
|
(775)
|
(76,698)
|
(77,473)
|
Redemption
|
-
|
(1,970)
|
-
|
(15,655)
|
(15,655)
|
Balance,
March 31, 2018
|
50
|
1,548,540
|
$1,050
|
$4,556,532
|
$4,557,582
|
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
Commonwealth Income &
Growth Fund VII
|
Condensed
Statements of Cash Flows
|
(unaudited)
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
$99,638
|
$78,787
|
|
|
|
Cash
flows from investing activities
|
|
|
Capital
expenditures
|
-
|
(80,280)
|
Payment
from finance leases
|
28,326
|
38,438
|
Net
proceeds from the sale of equipment
|
47,977
|
17,875
|
Net
cash provided by (used in) investing activities
|
76,303
|
(23,967)
|
|
|
|
Cash
flows from financing activities
|
|
|
Redemptions
|
(15,655)
|
(47,609)
|
Debt
placement fee paid to the General Partner
|
-
|
(2,121)
|
Distributions
to partners
|
(77,473)
|
(156,269)
|
Net
cash used in financing activities
|
(93,128)
|
(205,999)
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
82,813
|
(151,179)
|
|
|
|
Cash
and cash equivalents beginning of period
|
887,167
|
2,100,201
|
|
|
|
Cash
and cash equivalents end of period
|
$969,980
|
$1,949,022
|
|
|
|
see
accompanying notes to condensed financial statements
|
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Business
Commonwealth
Income & Growth Fund VII, LP (the “Partnership”) is
a limited partnership organized in the Commonwealth of Pennsylvania
on November 14, 2008. The Partnership offered for sale up to
2,500,000 units of limited partnership interest at the purchase
price of $20 per unit (the “offering”). The Partnership
reached the minimum amount in escrow and commenced operations on
March 31, 2010. The offering terminated on November 22, 2011 with
1,572,900 units sold for a total of approximately $31,432,000 in
limited partner contributions.
The
Partnership uses the proceeds of the offering to acquire, own and
lease various types of computer information technology equipment
and other similar capital equipment, which is leased primarily to
U.S. corporations and institutions. Commonwealth Capital Corp.
(“CCC”), on behalf of the Partnership and other
affiliated partnerships, acquires computer equipment subject to
associated debt obligations and lease agreements and allocates a
participation in the cost, debt and lease revenue to the various
partnerships based on certain risk factors.
The
Partnership’s general partner is Commonwealth Income &
Growth Fund, Inc. (the “General Partner”), a
Pennsylvania corporation which is an indirect wholly-owned
subsidiary of CCC. CCC is a member of the Institute for Portfolio
Alternatives (“IPA”) and the Equipment Leasing and
Finance Association (“ELFA”). Approximately ten years
after the commencement of operations, the Partnership intends to
sell or otherwise dispose of all of its equipment, make final
distributions to partners, and to dissolve. Unless sooner
terminated or extended pursuant to the terms of its Limited
Partnership Agreement (the “Agreement”), the
Partnership will continue until December 31, 2021.
2. Summary of Significant Accounting Policies
Basis of Presentation
The
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 three months ended March 31, 2018 are not necessarily
indicative of financial results that may be expected for the full
year ended December 31, 2018.
Equity Method Investment
The
Partnership accounts for its investment in COF2 under the equity
method in accordance with Accounting Standards Codification
(“ASC”) 323. Under the equity method, the
Partnership records its proportionate share of the Fund’s net
income (loss). Capital contributions, distributions and net
income (loss) of such entities are recorded in accordance with the
terms of the governing documents. An allocation of net income
(loss) may differ from the stated ownership percentage interest in
such entity as a result of distributions and allocation formulas,
if any, as described in such governing documents.
Disclosure of Fair Value of Financial Instruments
Estimated
fair value was determined by management using available market
information and appropriate valuation methodologies. However,
judgment was necessary to interpret market data and develop
estimated fair value. Cash and cash equivalents, receivables,
accounts payable and accrued expenses and other liabilities are
carried at amounts which reasonably approximate their fair values
as of March 31, 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 March
31, 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 the
original maturity dates of 90 days or less.
At
March 31, 2018, cash and cash equivalents was held in a bank
account maintained at one financial institution with a balance of
approximately $975,000. Bank accounts are federally insured up to
$250,000 by the FDIC. At March 31, 2018, the total cash bank
balance was as follows:
At March 31, 2018
|
|
Total
bank balance
|
$975,000
|
FDIC
insured
|
(250,000)
|
Uninsured
amount
|
$725,000
|
The
Partnership believes it mitigates the risk of holding uninsured
deposits by only depositing funds with major financial
institutions. The Partnership has not experienced any losses in our
accounts, and believes it is not exposed to any significant credit
risk. The amount in its accounts will fluctuate throughout 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) and 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”). 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 operating leases with
periods that generally will range from 12 to 48 months. In general,
associated costs such as repairs and maintenance, insurance and
property taxes are paid by the lessee.
Remarketing
fees will be paid to the leasing companies from which the
Partnership purchases leases. These are fees that are earned by the
leasing companies when the initial terms of the lease have been
met. The General Partner believes that this strategy adds value
since it entices the leasing company to remain actively involved
with the 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,
2018 and 2017, there were no remarketing fees incurred, paid with
cash or netted against receivables due from such parties.
CCC, on behalf of the Partnership and on behalf of other affiliated
companies and partnerships (“partnerships”), acquires
equipment subject to associated debt obligations and lease
agreements and allocates a participation in the cost, debt and
lease revenue to the various companies based on certain risk
factors.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at March 31, 2018 was
approximately $9,539,000 and is included in the Partnership’s
equipment on its balance sheet. The Partnership’s share of
the outstanding debt associated with this equipment at March 31,
2018 was approximately $1,765,000 and is included in the
Partnership’s notes payable on its balance sheet. The total
cost of the equipment shared by the Partnership with other
partnerships at March 31, 2018 was approximately $22,802,000. The
total outstanding debt related to the equipment shared by the
Partnership at March 31, 2018 was approximately
$4,127,000.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2017 was
approximately $9,539,000 and is included in the Partnership’s
equipment on its balance sheet. The Partnership’s share of
the outstanding debt associated with this equipment at December 31,
2017 was approximately $1,978,000 and is included in the
Partnership’s notes payable on its balance sheet. The total
cost of the equipment shared by the Partnership with other
partnerships at December 31, 2017 was approximately $22,802,000.
The total outstanding debt related to the equipment shared by the
Partnership at December 31, 2017 was approximately
$4,583,000.
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
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:
Periods Ended December 31,
|
|
Nine months ended
December 31, 2018
|
$1,275,000
|
Year Ended December
31, 2019
|
1,236,000
|
Year Ended December
31, 2020
|
883,000
|
Year Ended December
31, 2021
|
144,000
|
|
$3,538,000
|
Finance Leases:
The
following lists the components of the net investment in direct
financing leases:
|
|
|
Total minimum lease
payments to be received
|
$41,000
|
$70,000
|
Estimated residual
value of leased equipment (unguaranteed)
|
42,000
|
54,000
|
Initial direct
costs finance leases
|
500
|
1,000
|
Less: unearned
income
|
(1,500)
|
(3,000)
|
Net investment in
finance leases
|
$82,000
|
$122,000
|
We
assess credit risk for all of our customers, including those that
lease under finance leases. This credit risk is assessed using an
internally developed model which incorporates credit scores from
third party providers and our own customer risk ratings and is
periodically reviewed. Our internal ratings are weighted based on
the industry that the customer operates in. 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.
A
reserve for credit losses is deemed necessary when payment has not
been received for one or more months of receivables due on the
equipment held under finance leases. At the end of each period,
management evaluates the open receivables due on this equipment and
determines the need for a reserve based on payment history and any
current factors that would have an impact on payments.
The
following table presents the credit risk profile, by
creditworthiness category, of our finance lease receivables at
March 31, 2018:
Risk Level
|
|
Low
|
-%
|
Moderate-Low
|
4%
|
Moderate
|
-%
|
Moderate-High
|
96%
|
High
|
-%
|
Net
finance lease receivable
|
100%
|
As of
March 31, 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.
The
Partnership’s share of the net investment in finance leases
in which it participates with other partnerships and is included on
its balance sheet at March 31, 2018 and December 31, 2017, was
approximately $42,000 and $56,000, respectively. The total net
investment in finance leases shared by the Partnership with other
partnerships at March 31, 2018 and December 31, 2017, was
approximately $84,000 and $112,000, respectively.
The
following is a schedule of future minimum rentals on non-cancelable
direct financing leases at March 31, 2018:
|
|
Nine months ended
December 31, 2018
|
$39,000
|
2019
|
2,000
|
Total
|
$41,000
|
4. Investment in COF 2
On
August 13, 2015, the Partnership purchased 1,648 units for
$1,500,000, of Commonwealth Opportunity Fund 2 (“COF
2”), an affiliate fund of the General Partner. In accordance
with the Partnership Agreement, the Partnership is permitted to
invest in equipment programs formed by the General Partner or its
affiliates. COF 2 is an affiliate program that broke escrow on
August 13, 2015. The General Partner believes this action is in the
best interests of all the Programs. The Partnership accounts for
its investment in COF 2 under the equity method in accordance with
ASC 323. The Partnership’s net
investment in COF 2 at March 31, 2018 and December 31, 2017 was approximately
$920,000 and $961,000, respectively (see COF 2 Financial Summary
below). During the three months ended March 31, 2018, COF 2 declared a first
quarter
distribution to the Partnership of approximately $12,000, which is
recorded as a receivable from COF 2 at March 31, 2018.
|
|
|
COF 2 Summarized Financial Information
|
|
|
Assets
|
$3,820,000
|
$3,920,000
|
Liabilities
|
$1,184,000
|
$1,162,000
|
Partners'
capital
|
$2,636,000
|
$2,758,000
|
Revenue
|
$328,000
|
$1,331,000
|
Expenses
|
$413,000
|
$1,802,000
|
Net
loss
|
$(85,000)
|
$(471,000)
|
5. Related Party Transactions
Receivables/Payables
As of
March 31, 2018 and December 31, 2017, the Partnership’s
related party receivables and payables are short term, unsecured,
and non-interest bearing.
Three months ended March 31,
|
|
|
Reimbursable Expenses
|
|
|
The General Partner
and its affiliates are entitled to reimbursement by the Partnership
for the cost of goods, supplies or services obtained and used by
the General Partner in connection with the administration and
operation of the Partnership from third parties unaffiliated with
the General Partner. In addition, the General Partner and its
affiliates are entitled to reimbursement of certain expenses
incurred by the General Partner and its affiliates in connection
with the administration and operation of the Partnership. For the
three months ended March 31, 2018 and 2017, the Partnership was
charged approximately $138,000 and $124,000 in Other LP expense,
respectively.
|
$261,000
|
$271,000
|
|
|
|
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, 2018, the General Partner earned acquisition fees
from operating and finance leases of approximately $0 and $0,
respectively. For the three months ended March 31, 2017, the
General Partner earned acquisition fees from operating and finance
leases of approximately $17,000 and $0, respectively. At March 31,
2018, the remaining balance of prepaid acquisition fees was
approximately $0.
|
$-
|
$17,000
|
|
|
|
Debt placement fee
|
|
|
As compensation for
arranging term debt to finance our acquisition of equipment, we
will pay the general partner a fee equal to one percent of such
indebtedness; provided, however, that such fee shall be reduced to
the extent we incur such fees to third parties unaffiliated with
the general partner or the lender with respect to such
indebtedness. No such fee will be paid with respect to borrowings
from the general partner or its affiliates. We intend to initially
acquire leases on an all cash basis with the proceeds of this
offering, but may borrow funds after the offering proceeds have
been invested. The amount we borrow, and therefore the amount of
the fee, will depend upon interest rates at the time of a loan, and
the amount of leverage we determine is appropriate at the time. 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.
|
$-
|
$2,500
|
|
|
|
Equipment management fee
|
|
|
We pay our general
partner a monthly fee equal to the lesser of (a) the fees which
would be charged by an independent third party in the same
geographic market for similar services and equipment or (b) the sum
of (i) two percent of gross lease revenues attributable to
equipment subject to full payout net leases which contain net lease
provisions and (ii) five percent of the gross lease revenues
attributable to equipment subject to operating leases. Our general
partner, based on its experience in the equipment leasing industry
and current dealings with others in the industry, will use its
business judgment to determine if a given fee is competitive,
reasonable and customary. The amount of the fee will depend upon
the amount of equipment we manage, which in turn will depend upon
the amount we raise in this offering. Reductions in market rates
for similar services would also reduce the amount of this fee we
will receive.
|
$32,000
|
$32,000
|
|
|
|
Equipment liquidation fee
|
|
|
Also referred to as
a "resale fee." With respect to each item of equipment sold by the
general partner, we will pay a fee equal to the lesser of (i) 50%
of the competitive equipment sale commission or (ii) three percent
of the sales price of the equipment. The payment of this fee is
subordinated to the receipt by the limited partners of (i) a return
of their capital contributions and a 10% per annum cumulative
return, compounded daily, on adjusted capital contributions and
(ii) the net disposition proceeds from such sale in accordance with
the partnership agreement. Our general partner, based on its
experience in the equipment leasing industry and current dealings
with others in the industry, uses its business judgment to
determine ifa given sales commission is competitive, reasonable and
customary. Such fee will be reduced to the extent any liquidation
or resale fees are paid to unaffiliated parties. The amount of such
fees will depend upon the sale price of equipment sold. Sale prices
will vary depending upon the type, age and condition of equipment
sold. The shorter the terms of our leases, the more often we may
sell equipment, which will increase liquidation fees we
receive.
|
$1,500
|
$600
|
6. Notes Payable
Notes
payable consisted of the following approximate
amounts:
|
|
|
Installment
note payable to bank; interest at 4.23% due in quarterly
installments from $458 to $55,093, including interest, with final
payment in February 2018
|
6,000
|
7,000
|
Installment
notes payable to bank; interest at 4.23% due in quarterly
installments ranging from $458, including interest, with final
payment in March 2018
|
-
|
1,000
|
Installment
note payable to bank; interest at 4.85% due in monthly installments
of $1,238, including interest; with final payment in March
2018
|
-
|
4,000
|
Installment
note payable to bank; interest at 3.68% due in monthly installments
of $4,528, including interest; with final payment in May
2018
|
9,000
|
22,000
|
Installment
notes payable to bank; interest at 4.23% due in quarterly
installments ranging from $266 to $352, including interest, with
final payment in October 2018
|
2,000
|
2,000
|
Installment
notes payable to bank; interest at 6.00% due in monthly
installments ranging from $351 to $5,522, including interest, with
final payment in October 2018
|
9,000
|
21,000
|
Installment
note payable to bank; interest at 1.80% due in monthly installments
of $2,533, including interest; with final payment in April
2019
|
33,000
|
40,000
|
Installment
note payable to bank; interest at 1.80% due in monthly installments
of $8,677, including interest; with final payment in May
2019
|
120,000
|
145,000
|
Installment
notes payable to bank; interest at 6.00% due in monthly
installments ranging from $101 to $831, including interest, with
final payment in July 2019
|
9,000
|
11,000
|
Installment
note payable to bank; interest at 4.98% due in monthly installments
of $2,807, including interest, with final payment in September
2019
|
49,000
|
56,000
|
Installment
note payable to bank; interest at 5.49% due in monthly installments
of $4,177, including interest, with final payment in January
2020
|
87,000
|
99,000
|
Installment
note payable to bank; interest at 5.93% due in monthly installments
of $3,324, including interest, with final payment in February
2020
|
72,000
|
81,000
|
Installment
note payable to bank; interest at 5.25% due in quarterly
installments of $3,836, including interest, with final payment in
March 2020
|
29,000
|
32,000
|
Installment
note payable to bank; interest at 5.25% due in quarterly
installments of $25,557, including interest, with final payment in
April 2020
|
215,000
|
238,000
|
Installment
note payable to bank; interest at 4.37% due in monthly installments
of $16,273, including interest, with final payment in April
2020
|
139,000
|
153,000
|
Installment
note payable to bank; interest at 4.88% due in monthly installments
of $1,363, including interest, with final payment in May
2020
|
34,000
|
37,000
|
Installment
note payable to bank; interest at 5.62% due in quarterly
installments of $2,897, including interest, with final payment in
July 2020
|
27,000
|
29,000
|
Installment
note payable to bank; interest at 4.55% due in monthly installments
ranging from $1,723 to $14,777, including interest, with final
payment in August 2020
|
452,000
|
497,000
|
Installment
note payable to bank; interest at 5.66% due in quarterly
installments of $29,292, including interest, with final payment in
October 2020
|
296,000
|
321,000
|
Installment
note payable to bank; interest at 5.25% due in monthly installments
of $2,463, including interest, with final payment in October
2020
|
71,000
|
83,000
|
Installment
note payable to bank; interest at 5.31% due in monthly installments
of $52,336, including interest, with final payment in January
2021
|
577,000
|
624,000
|
Installment
note payable to bank; interest at 6.0% due in quarterly
installments of $74,533, including interest, with final payment in
January 2021
|
813,000
|
952,000
|
|
$3,049,000
|
$3,455,000
|
The
notes are secured by specific equipment with a carrying value of
approximately $4,046,000 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, 2018 are as
follows:
|
|
Nine months ended
December 31, 2018
|
$918,000
|
Year
ended December 31, 2019
|
1,144,000
|
Year
ended December 31, 2020
|
862,000
|
Year
ended December 31, 2021
|
125,000
|
|
$3,049,000
|
During
2015, the General Partner executed a collateralized debt financing
agreement on behalf of certain affiliates for a total shared loan
amount of approximately $847,000, of which the Partnership’s
share was approximately $290,000. The Partnership’s portion
of the current loan amount at March 31, 2018 and December 31, 2017
was approximately $18,000 and $32,000, respectively, and is secured
by specific equipment under both operating and finance leases. The
carrying value of the secured equipment under operating leases at
March 31, 2018 and December 31, 2017 is $2,600 and $3,000,
respectively. The carrying value of the secured equipment under
finance leases at March 31, 2018 and December 31, 2017 is
approximately $83,000 and $135,000, respectively.
7. 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:
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
|
$407,000
|
$279,000
|
Noncash
investing and financing activities include the
following:
Three months ended March 31,
|
|
|
Debt assumed in
connection with purchase of equipment
|
$-
|
$248,000
|
Accrual for
Q1distribution to partners paid in April 2017
|
$-
|
$155,000
|
Equipment
acquisition fees earned by General Partner upon purchase of
equipment from prepaid acquisition fees
|
$-
|
$17,000
|
During
the three months ended March 31, 2018 and 2017, the Partnership
wrote-off fully amortized acquisition and finance fees of
approximately $11,000 and $43,000, respectively.
During
the three months ended March 31, 2018 and 2017, the Partnership
wrote-off fully depreciated equipment of approximately $992,000 and
$0, respectively.
8. Commitments and Contingencies
Medshare
In
January 2015, CCC, on behalf of the Funds, entered into a Purchase
Agreement (“Purchase Agreement”) for the sale of the
equipment to Medshare Technologies (“Medshare”) for
approximately $3,400,000. The Partnership’s share of
the sale proceeds was approximately $1,033,000. As of May 15,
2018, the Partnership had received approximately $714,000 of the
approximate $1,033,000 sale proceeds and has recorded a reserve of
$239,000 against the outstanding receivable. On April 3, 2015
Medshare was obligated to make payment in full and failed to do
so. As a result, Medshare defaulted on its purchase agreement
with CCC and was issued a demand letter for full payment of the
equipment. On June 25, 2015, Medshare filed a lawsuit in
Texas state court for breach of contract (“State
Suit”). On June 26, 2015, Commonwealth filed a lawsuit
in the Northern District of Texas against Medshare seeking payment
in full and/or return of the Equipment and
damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2,
2016, the Defendants made payment to CCC of an initial $200,000 to
be followed by 24 structured monthly payments of approximately
$50,000 per month to begin no later than September 15, 2016.
The Partnership’s share of the Settlement Agreement is
approximately $453,000 and is to be applied against the net
Medshare receivable of approximately $350,000 as of the settlement
date. The remaining $103,000 will be applied against the $239,000
reserve and recorded as a bad debt recovery. As of May 15,
2018, the Partnership received approximately $168,000 of the
approximate $453,000 settlement agreement which was applied against
the net Medshare receivable of approximately $350,000 as of the
settlement date. As Defendant defaulted on settlement
agreement, CCC sought and obtained consent 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 the Defendant
and Cleary being jointly and severally liable for the 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 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.
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 May 15, 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 a
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 March was $9.1 billion, up 2% year-over-year
from new business volume in March 2017. Volume was up 18%
month-to-month from $7.7 billion in February. Year to date,
cumulative new business volume was up 12% compared to 2017.
Receivables over 30 days were 2% percent, up from 1.6% the previous
month and up from 1.4% percent the same period in 2017. Charge-offs
were 0.51%, up from 0.28% the previous month, and down from 0.68%
in the year-earlier period. Credit approvals totaled 75.2% in
March, up from 74.2% in February. Total headcount for equipment
finance companies was up 0.3% 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 April is
68.3, easing from 72.2 in March.
ELFA
President and CEO Ralph Petta said, “The first quarter
of the year concludes with a continued steady increase in new
business growth. Tempering this trend, which reflects sound
fundamentals in the overall economy and high business confidence,
is the reality that charge-offs and delinquencies are also inching
forward, ever so slightly.”
CRITICAL ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of
operations are based upon our financial statements which have been
prepared in accordance with generally accepted accounting
principles in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses.
We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
We
believe that our critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
financial statements. See Note 2 to our condensed financial
statements included herein for a discussion related to recent
accounting pronouncements.
Equity Method Investment
The
Partnership accounts for its investment in COF2 under the equity
method in accordance with Accounting Standards Codification
(“ASC”) 323. Under the equity method, the
Partnership records its proportionate share of the Fund’s net
income (loss). Capital contributions, distributions and net
income (loss) of such entities are recorded in accordance with the
terms of the governing documents. An allocation of net income
(loss) may differ from the stated ownership percentage interest in
such entity as a result of distributions and allocation formulas,
if any, as described in such governing documents.
LEASE INCOME RECEIVABLE
Lease
income receivable includes current lease income receivable net of
allowances for uncollectible amounts, if any. The Partnership
monitors lease income receivable to ensure timely and accurate
payment by lessees. The Partnership’s Lease Relations
department is responsible for monitoring lease income receivable
and, as necessary, resolving outstanding invoices.
The
Partnership reviews a customer’s credit history before
extending credit. When the analysis indicates that the probability
of full collection is unlikely, the Partnership may establish an
allowance for uncollectible lease income receivable based upon the
credit risk of specific customers, historical trends and other
information. The Partnership writes off its lease income receivable
when it determines that it is uncollectible and all economically
sensible means of recovery have been exhausted.
REVENUE RECOGNITION
Through
March 31, 2018, 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, 2018
and 2017 were approximately $0 and $3,000,
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 three months ended March 31,
2018, were cash provided by operating activities of approximately
$100,000, net proceeds from the sale of equipment of approximately
$48,000 and payments received from finance leases of approximately
$28,000. This compares to our primary sources of cash for the three
months ended March 31, 2017 of cash provided by operating
activities of approximately $79,000, net proceeds from the sale of
equipment of approximately $18,000 and payments received from
finance leases of approximately $38,000.
Our
primary uses of cash for the three months ended March 31, 2018 were
distributions to limited partners of approximately $77,000 and
limited partner redemptions of approximately $16,000. This compares
to our primary uses of cash for the three months ended March 31,
2017 of distributions to partners of approximately $156,000,
capital expenditures of approximately $80,000 and limited partner
redemptions of approximately $48,000.
Cash
provided by operating activities for the three months ended March
31, 2018 was approximately $100,000, including a net loss of
approximately $298,000 and depreciation and amortization expenses
of approximately $543,000. Other noncash activities included in the
determination of net loss include direct payments to banks by
lessees of approximately $407,000. This compares to cash provided
by operating activities for the three months ended March 31, 2017
of approximately $79,000, including a net loss of approximately
$390,000 and depreciation and amortization expenses of
approximately $654,000. Other noncash activities included in the
determination of net loss include direct payments to banks by
lessees of approximately $279,000.
As we
continue to increase the size of our equipment portfolio, operating
expenses will increase, which reflects the administrative costs of
servicing the portfolio, but because of our investment strategy of
leasing equipment primarily through triple-net leases, we avoid
operating expenses related to equipment maintenance or
taxes.
CCC, on
our behalf and on behalf of other affiliated partnerships, acquires
equipment subject to associated debt obligations and lease revenue
and allocates a participation in the cost, debt and lease revenue
to the various partnerships based on certain risk
factors.
Capital
expenditures and distributions are expected to continue to increase
overall during the remainder of 2018 as management focuses on
additional equipment acquisitions and funding limited partner
distributions. We intend to invest approximately $5,000,000 or more
during the remainder of 2018, depending on the availability of
investment opportunities.
We
consider cash equivalents to be highly liquid investments with the
original maturity dates of 90 days or less.
At
March 31, 2018, cash and cash equivalents was held in a bank
account maintained at one financial institution with a balance of
approximately $975,000. Bank accounts are federally insured up to
$250,000 by the FDIC. At March 31, 2018, the total cash bank
balance was as follows:
At March 31, 2018
|
|
Total
bank balance
|
$975,000
|
FDIC
insured
|
(250,000)
|
Uninsured
amount
|
$725,000
|
The
Partnership believes it mitigates the risk of holding uninsured
deposits by only depositing funds with major financial
institutions. The Partnership has not experienced any losses in our
accounts, and believes it is not exposed to any significant credit
risk. The amount in its account will fluctuate throughout 2018 due
to many factors, including the pace of cash receipts, equipment
acquisitions and distributions to limited partners.
As of
March 31, 2018, we had future minimum rentals on non-cancelable
operating leases of approximately $1,275,000 for the balance of the
year ending December 31, 2018 and approximately $2,263,000
thereafter.
As of
March 31, 2018, we had future minimum rentals on non-cancelable
finance leases of approximately $39,000 for the balance of the year
ending December 31, 2018 and approximately $2,000
thereafter.
As of
March 31, 2018, our non-recourse debt was approximately $3,049,000
with interest rates ranging from 1.80% through 6.00% and is payable
through January 2021.
During
2015, the General Partner executed a collateralized debt financing
agreement on behalf of certain affiliates for a total shared loan
amount of approximately $847,000, of which the Partnership’s
share was approximately $290,000. The Partnership’s portion
of the current loan amount at March 31, 2018 and December 31, 2017
was approximately $18,000 and $32,000, respectively, and is secured
by specific equipment under both operating and finance leases. The
carrying value of the secured equipment under operating leases at
March 31, 2018 and December 31, 2017 is $2,600 and $3,000,
respectively. The carrying value of the secured equipment under
finance leases at March 31, 2018 and December 31, 2017 is
approximately $83,000 and $135,000, respectively.
RESULTS OF OPERATIONS
Three months ended March 31, 2018 compared to three months ended
March 31, 2017
Lease Revenue
Our
lease revenue increased to approximately $628,000 for the three
months ended March 31, 2018, from approximately $619,000 for the
three months ended March 31, 2017. The Partnership had 96 and 103
active operating leases that generated lease revenue for the three
months ended March 31, 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, funded primarily through debt
financing.
Sale of Equipment
For the
three months ended March 31, 2018, the Partnership sold equipment
with net book value of approximately $15,000 for a net gain of
approximately $33,000. For the three months ended March 31, 2017,
the Partnership sold equipment with net book value of approximately
$25,000 for a net loss of approximately $7,000.
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 $321,000 for
the three months ended March 31, 2018, from approximately $273,000
for the three months ended March 31, 2017. This increase is primarily due to an increase in
“Other LP” expenses charged by CCC for the
administration of the Partnership of approximately $14,000 and
legal fees of approximately $90,000 associated with the
FINRA matter (see Item 1. Legal Proceedings), partially offset by a decrease in accounting
fees of approximately $22,000.
Equipment Management Fee
We pay
an equipment management fee to our general partner for managing our
equipment portfolio. The equipment management fee is approximately
5% of the gross lease revenue attributable to equipment that is
subject to operating leases and 2% of the gross lease revenue
attributable to equipment that is subject to finance leases. The
total equipment management fee remained the same at approximately
$32,000 for the three months ended March 31, 2018 from
approximately $32,000 for the three months ended March 31, 2017.
This fee remained the same because the lease revenue virtually
remained the same over the period.. As more equipment is acquired
into the Partnership’s equipment portfolio, management fees
are expected to increase throughout the remainder of
2018.
Depreciation and Amortization Expense
Depreciation
and amortization expenses consist of depreciation on equipment and
amortization of equipment acquisition fees. These expenses
decreased to approximately $543,000 for the three months ended
March 31, 2018, from approximately $654,000 for the three months
ended March 31, 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 March 31, 2018.
Net Loss
For the
three months ended March 31, 2018, we recognized revenue of
approximately $664,000, expenses of approximately $933,000 and
other loss of $29,000, resulting in a net loss of approximately
$298,000. This net loss is attributable to the changes in revenue
and expenses as discussed above. For the three months ended March
31, 2017, we recognized revenue of approximately $623,000, expenses
of approximately $990,000 and other loss of $23,000, resulting in a
net loss of approximately $390,000.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
N/A
Item 4. Controls and Procedures
Our
management, under the supervision and with the participation of the
General Partner’s Chief Executive Officer and Principal
Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures related to our reporting and
disclosure obligations as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on such evaluation, the
General Partner’s Chief Executive Officer and Principal
Financial Officer have concluded that, as of March 31, 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 first 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 $1,033,000. As of May 15,
2018, the Partnership had received approximately $714,000 of the
approximate $1,033,000 sale proceeds and has recorded a reserve of
$239,000 against the outstanding receivable. On April 3, 2015
Medshare was obligated to make payment in full and failed to do
so. As a result, Medshare defaulted on its purchase agreement
with CCC and was issued a demand letter for full payment of the
equipment. On June 25, 2015, Medshare filed a lawsuit in
Texas state court for breach of contract (“State
Suit”). On June 26, 2015, Commonwealth filed a lawsuit
in the Northern District of Texas against Medshare seeking payment
in full and/or return of the Equipment and
damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2,
2016, the Defendants made payment to CCC of an initial $200,000 to
be followed by 24 structured monthly payments of approximately
$50,000 per month to begin no later than September 15, 2016.
The Partnership’s share of the Settlement Agreement is
approximately $453,000 and is to be applied against the net
Medshare receivable of approximately $350,000 as of the settlement
date. The remaining $103,000 will be applied against the $239,000
reserve and recorded as a bad debt recovery. As of May 15,
2018, the Partnership received approximately $168,000 of the
approximate $453,000 settlement agreement which was applied against
the net Medshare receivable of approximately $350,000 as of the
settlement date. As Defendant defaulted on settlement
agreement, CCC sought and obtained consent 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 the Defendant
and Cleary being jointly and severally liable for the 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 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.
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 May 15, 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 a
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 VII, LP
|
|
BY:
COMMONWEALTH INCOME & GROWTH FUND, INC., General
Partner
|
May 15, 2018
|
By: /s/
Kimberly A. Springsteen-Abbott
|
|
Kimberly
A. Springsteen-Abbott
|
|
Chief
Executive Officer
Commonwealth
Income & Growth Fund, Inc.
|
|
|
|
|
May 15, 2018
|
By: /s/ Lynn
A. Whatley
Lynn A. WhatleyExecutive Vice President, Chief Operating
Officer
|
|
|
|
|