UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022or

 

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 333-156357

 

COMMONWEALTH INCOME & GROWTH FUND VII, LP

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

26-3733264

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

4532 US Highway 19

Suite 200

New Port Richey, FL 34652

(Address, including zip code, of principal executive offices)

 

 (800) 249-3700

 (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 T

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO T

 

 

 

 

EXPLANATORY NOTE

 

The purpose of this amendment on Form 10-Q/A to the Quarterly Report on Form 10-Q of COMMONWEALTH INCOME & GROWTH FUND VII, LP’s for the quarterly period ended June 30, 2022 is to restate our condensed financial statements as of June 30, 2022 and for the three and six months then ended, as detailed below, filed with the Securities and Exchange Commission on September 8,2022 (the “Form 10-Q”). We discovered an error in our depreciation expense account and accumulated depreciation account which flow through the above-mentioned statements.

 

No attempt has been made in this Form 10-Q/A to modify or update other disclosures presented in the original report on Form 10-Q, except as required to reflect the effects of the restatement. The Form 10-Q/A does not reflect events occurring after the filing of the Form 10-Q or modify or update those disclosures, including the exhibits to the Form 10-Q affected by subsequent events. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the original filing of the Form 10-Q on September 8,2022. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-Q, including any amendments to those filings. The following items have been amended as a result of the restatement:

 

 

·

Part I - Item 1 - Financial Statements

 

·

Part I - Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Description of Restatement

 

Subsequent to the issuance of the condensed financial statements as of and for the three and six months ended June 30, 2022, included in the Form 10-Q filed with the SEC on September 8, 2022, we discovered an error in our depreciation calculation resulting in an understatement of depreciation expense for the three and six months ended June 30, 2022 in the amount of $98,000.See Note 2 of the condensed financial statements for further details.

 

 

 

 

FORM 10-Q/A

JUNE 30, 2022

 

TABLE OF CONTENTS

 

PART I

 

 

Item 1.

Financial Statements

 

3

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

21

 

Item 4.

Controls and Procedures

 

21

 

PART II

 

 

Item 1.

Commitments and Contingencies

 

22

 

Item 2.

Legal Proceedings

 

22

 

Item 2A.

Risk Factors

 

23

 

Item 3.

Unregistered Sales of Equity Securities and Use of Proceeds

 

24

 

Item 4.

Defaults Upon Senior Securities

 

24

 

Item 5.

Mine Safety Disclosures

 

24

 

Item 6.

Other Information

 

24

 

Item 7.

Exhibits

 

24

 

 

 
2

Table of Contents

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Commonwealth Income & Growth Fund VII

Condensed Balance Sheets

(unaudited)

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(As Restated)

 

 

 

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$-

 

 

$4,424

 

Lease income receivable, net of reserve of approximately $319,000 and $283,000 at June 30, 2022 and December 31, 2021

 

 

200,363

 

 

 

188,540

 

Accounts receivable, Commonwealth Capital Corp, net of accounts payable of approximately $229,935 and $100,329 at June 30, 2022 and December 31, 2021, respectively

 

 

1,124,761

 

 

 

1,167,860

 

Other receivables, net of reserve of approximately $305,000 at both June 30, 2022 and December 31, 2021, respectively

 

 

3,245

 

 

 

3,245

 

Prepaid expenses

 

 

4,273

 

 

 

4,339

 

 

 

 

1,332,642

 

 

 

1,368,407

 

 

 

 

 

 

 

 

 

 

Net investment in finance leases

 

 

30,287

 

 

 

35,774

 

 

 

 

 

 

 

 

 

 

Investment in COF 2

 

 

498,004

 

 

 

546,939

 

 

 

 

 

 

 

 

 

 

Equipment, at cost

 

 

12,925,484

 

 

 

12,891,552

 

Accumulated depreciation

 

 

(12,274,758)

 

 

(12,431,812)

 

 

 

650,726

 

 

 

459,741

 

 

 

 

 

 

 

 

 

 

Equipment acquisition costs and deferred expenses, net of accumulated amortization of approximately $11,000 and $12,000 at June 30, 2022 and December 31, 2021, respectively

 

 

16,842

 

 

 

7,425

 

 

 

 

16,842

 

 

 

7,425

 

Total Assets

 

$2,528,500

 

 

$2,418,285

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$161,285

 

 

$259,648

 

Accounts payable, CIGF, Inc.

 

 

488,636

 

 

 

195,241

 

Unearned lease income

 

 

25,437

 

 

 

28,891

 

Notes payable

 

 

241,787

 

 

 

121,091

 

Total Liabilities

 

 

917,147

 

 

 

604,873

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Partner

 

 

1,050

 

 

 

1,050

 

Limited Partners

 

 

1,610,303

 

 

 

1,812,362

 

Total Partners’ Capital

 

 

1,611,354

 

 

 

1,813,412

 

Total Liabilities and Partners’ Capital

 

$2,528,500

 

 

$2,418,285

 

 

see accompanying notes to condensed financial statements

 

 
3

Table of Contents

 

Commonwealth Income & Growth Fund VII

Condensed Statements of Operations

(unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022 (As Restated)

 

 

2021

 

 

2022 (As Restated)

 

 

2021

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Lease

 

$162,398

 

 

$305,641

 

 

$361,385

 

 

$654,530

 

Interest and other

 

 

292

 

 

 

387

 

 

 

4,533

 

 

 

7,695

 

Sales and property taxes

 

 

10,368

 

 

 

13,733

 

 

 

22,190

 

 

 

30,554

 

Gain on sale of equipment

 

 

51,863

 

 

 

54,193

 

 

 

54,843

 

 

 

65,818

 

Total revenue and gain on sale of equipment

 

 

224,921

 

 

 

373,953

 

 

 

442,951

 

 

 

758,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating, excluding depreciation and amortization

 

 

159,575

 

 

 

156,023

 

 

 

237,198

 

 

 

334,237

 

Equipment management fee, General Partner

 

 

8,089

 

 

 

15,343

 

 

 

18,099

 

 

 

32,848

 

Interest

 

 

1,077

 

 

 

2,894

 

 

 

2,353

 

 

 

8,533

 

Depreciation

 

 

118,508

 

 

 

287,918

 

 

 

219,573

 

 

 

574,352

 

Amortization of equipment acquisition costs and deferred expenses

 

 

1,977

 

 

 

4,875

 

 

 

3,454

 

 

 

16,549

 

Sales and property taxes

 

 

10,368

 

 

 

13,733

 

 

 

22,190

 

 

 

30,554

 

Bad debt expense

 

 

94,163

 

 

 

-

 

 

 

93,207

 

 

 

-

 

Loss on sale of equipment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total expenses

 

 

393,758

 

 

 

480,786

 

 

 

596,075

 

 

 

997,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss in investment from COF 2

 

 

(25,544)

 

 

(22,321)

 

 

(48,935)

 

 

(35,174)

Total other loss

 

 

(25,544)

 

 

(22,321)

 

 

(48,935)

 

 

(35,174)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(194,381)

 

$(129,154)

 

$(202,059)

 

$(273,651)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss income allocated to Limited Partners

 

$(194,381)

 

$(129,154)

 

$(202,059)

 

$(276,002)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per equivalent Limited Partnership unit

 

$(0.13)

 

$(0.08)

 

$(0.13)

 

$(0.18)

Weighted average number of equivalent limited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 partnership units outstanding during the year

 

 

1,529,785

 

 

 

1,533,035

 

 

 

1,533,035

 

 

 

1,533,035

 

 

see accompanying notes to condensed financial statements

 

 
4

Table of Contents

 

Commonwealth Income & Growth Fund VII

Condensed Statement of Partners’ Capital

(unaudited)

For the six months ended June 30, 2022 and 2021

 

 

 

General

 

 

Limited

 

 

 

 

Limited

 

 

 

 

 

Partner

 

 

Partner

 

 

General

 

 

Partners(As

 

 

 

 

 

Units

 

 

Units

 

 

Partner

 

 

Restated)

 

 

Total

 

Balance, January 1, 2022

 

 

50

 

 

 

1,529,785

 

 

$1,050

 

 

$1,812,362

 

 

$1,813,412

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,678)

 

 

(7,678)

Balance, March 31, 2022

 

 

50

 

 

 

1,529,785

 

 

$1,050

 

 

$1,804,684

 

 

$1,805,734

 

Net loss - As restated

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(194,381)

 

 

(194,381)

Redemptions

 

 

-

 

 

(500)

 

 

 

-

 

 

 

-

 

 

 

 

 

Balance, June 30, 2022 - As restated

 

 

50

 

 

 

1,529,285

 

 

$1,050

 

 

$1,610,303

 

 

$1,611,353

 

 

 

 

General

 

 

Limited

 

 

 

 

 

 

 

 

 

Partner

 

 

Partner

 

 

General

 

 

Limited

 

 

 

 

 

Units

 

 

Units

 

 

Partner

 

 

Partners

 

 

Total

 

Balance, January 1, 2021

 

 

50

 

 

 

1,537,535

 

 

$1,050

 

 

$2,263,079

 

 

$2,264,129

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(146,849)

 

 

(146,849)

Redemptions

 

 

-

 

 

 

(4,500)

 

 

-

 

 

 

(37,467)

 

 

(37,467)

Balance, March 31, 2021

 

 

50

 

 

 

1,533,035

 

 

$1,050

 

 

$2,078,763

 

 

$2,079,813

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(129,154)

 

 

(129,154)

Balance, June 30, 2021

 

 

50

 

 

 

1,533,035

 

 

$1,050

 

 

$1,949,610

 

 

$1,950,660

 

see accompanying notes to condensed financial statements

 

 
5

Table of Contents

 

Commonwealth Income & Growth Fund VII

Condensed Statements of Cash Flows

(unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$179,709

 

 

$(414,592)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

    Capital expenditures

 

 

(179,231)

 

 

(39,439)

    Equipment acquisition fees paid to General Partner

 

 

(7,882)

 

 

-

 

    Net proceeds from the sale of equipment

 

 

2,980

 

 

 

63,466

 

Net cash provided by investing activities

 

 

(184,133)

 

 

24,027

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

    Redemptions

 

 

-

 

 

 

(37,467)

Net cash used in financing activities

 

 

-

 

 

 

(37,467)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(4,424)

 

 

(428,032)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents beginning of period

 

 

4,424

 

 

 

495,494

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents end of period

 

$-

 

 

$67,462

 

 

see accompanying notes to condensed financial statements

 

 
6

Table of Contents

 

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

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, 2026.

 

2. . Restatement of Previously Issued Financial Statements

 

Subsequent to the issuance of the condensed financial statements as of and for the three and six months ended June 30, 2022, included in the Form 10-Q filed with the SEC on September 8, 2022, it was discovered that there was an error in the depreciation calculation resulting in an understatement of depreciation expense for the three and six months ended June 30, 2022 in the amount of $98,000. The impacts of the restatement is as follows:

 

Condensed Balance Sheet as of June 30, 2022 – Accumulated deprecation increased $97,943, from $12,176,815 as originally reported to $12,274,758 as restated. Total assets decreased $97,944, from $2,626,444 as originally reported to $2,528,500 as restated. Limited Partners’ capital account decreases $97,945, from $1,708,248 as originally reported to $1,610,303 as restated.

 

Condensed Statement of Operations for the three months ended June 30, 2022 – Depreciation expense increased $97,944, from $20,564 as originally reported to $118,508 as restated. Total expense increased $97,945, from $295,813 as originally reported to $393,758 as restated. Net loss increased $97,945, from $96,436 as originally reported to $194,381 as restated. Net loss allocated to limited partners increased $97,945, from $96,436 as originally reported to $194,381 as restated. Net loss per equivalent limited partners unit increase $0.07, from 0.06 as originally reported to $0.13 as restated.

 

Condensed Statement of Operations for the six months ended June 30, 2022 – Depreciation expense increased $97,944, from $121,629 as originally reported to $219,573 as restated. Total expense increased $97,945, from $498,130 as originally reported to $596,075 as restated. Net loss increased $97,945, from $104,114 as originally reported to $202,058 as restated. Net loss allocated to limited partners increased $97,945, from $104,114 as originally reported to $202,059 as restated. Net loss per equivalent limited partners unit increase $0.07, from 0.06 as originally reported to $0.13 as restated.

 

 
7

Table of Contents

 

Condensed Statement of Partners’ Equity as of and for the three months ended June 30, 2022 – Net loss allocated to limited partners increased $97,945, from $96,436 as originally reported to $194,381 as restated. Limited partners’ capital balance as of June 30, 2022 decreased $97,945, from $1,708,248 as reported to $1,610,303 as restated. 

 

There was no change to the Condensed Statement of Cash flows for the six months ended June 30, 2022.

 

3. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Financial information as of December 31, 2021 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 and six months June 30, 2022 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2022.

 

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. Receivables, accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of June 30, 2022 and December 31, 2021 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, 2022 and December 31, 2021 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 of 90 days or less.

 

At June 30, 2022, cash and cash equivalents was held in one bank account maintained at one financial institution with an aggregate balance of approximately $16,000. Bank accounts are federally insured up to $250,000 by the FDIC. At June 30, 2022, the total cash bank balance was as follows:

 

At June 30, 2022

 

Balance

 

Total bank balance

 

$16,000

 

FDIC insured

 

 

(16,000)

Uninsured amount

 

$-

 

 

 
8

Table of Contents

 

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 2022 due to many factors, including cash receipts, equipment acquisitions, interest rates and distributions to limited partners.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard establishes an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is intended to result in a timelier recognition of losses. Under the CECL model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of the financial instrument. Measurement of expected credit losses are to be based on relevant forecasts that affect collectability. The scope of financial assets within the CECL methodology is broad and includes trade receivables from certain revenue transactions and certain off-balance sheet credit exposures. Different components of the guidance require modified retrospective or prospective adoption.

 

In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of the credit losses standard. Instead, entities would need to apply other U.S. GAAP, namely Topic 842 (Leases), to account for changes in the collectability assessment for operating leases. Other than operating lease receivables, Partnership trade receivables include receivables from finance leases and equipment sales. Under Topic 606 (Revenue from Contracts with Customers), revenue is recognized when, among other criteria, it is probable that the entity will collect the consideration to which it is entitled for goods or services transferred to a customer. At the point that finance lease receivables are recorded, they become subject to the CECL model and estimates of expected credit losses over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. Trade receivables derived from equipment sales are of short duration and there is not a material difference between incurred losses and expected losses.

 

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which amends and clarifies several provisions of Topic 326. In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, which amends Topic 326 to allow the fair value option to be elected for certain financial instruments upon adoption. ASU 2019-10 extended the effective date of ASU 2016-13 for the Partnership until December 15, 2022. While the Partnership continues to evaluate the new guidance, including the subsequent updates to Topic 326, it does not anticipate that adoption will have a material impact on the Partnership’s financial statements and related disclosures.  For the three and fix months ended June 30, 2022, the Partnership’s finance lease revenue subject to CECL represented less than 1% of total lease revenue.

 

4. 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.

 

Gains or losses from the sale of equipment are recognized when the lease is modified and terminated concurrently.  Gain from sale of equipment included in lease revenue for the three months ended June 30, 2022 was approximately $52,000.  Gain from sale of equipment included in lease revenue for the three months ended June 30, 2021 was approximately $54,000.  Gain from sale of equipment included in lease revenue for the six months ended June 30, 2022 and 2021 was $55,000 and $66,000, respectively.

 

 
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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, 2022 was approximately $10,368,678 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 June 30, 2022 was approximately $197,813 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 June 30, 2022 was approximately $24,049,000. The total outstanding debt related to the equipment shared by the Partnership at June 30, 2022 was approximately $321,000.

 

The Partnership’s share of the cost of the equipment in which it participates with other partnerships at December 31, 2021 was approximately $10,115,911 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, 2021 was approximately $76,000 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, 2021 was approximately $23,449,000. The total outstanding debt related to the equipment shared by the Partnership at December 31, 2021 was approximately $305,000.

 

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 2022, 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 operating leases:

 

Periods Ended December 31,

 

Amount

 

Six months ended December 31, 2022

 

 

122,000

 

Year Ended December 31, 2023

 

 

174,000

 

Year Ended December 31, 2024

 

 

107,000

 

Year Ended December 31, 2025

 

 

16,000

 

 

 

$419,000

 

 

Finance Leases:

 

The following lists the components of the net investment in finance leases:

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Carrying value of lease receivable

 

$30,000

 

 

$33,000

 

Estimated residual value of leased equipment (unguaranteed)

 

 

-

 

 

 

2,000

 

Initial direct costs finance leases

 

 

-

 

 

 

-

 

Net investment in finance leases

 

$30,000

 

 

$35,000

 

 

The Partnership assesses credit risk for all of its 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 the Partnership’s own customer risk ratings and is periodically reviewed. The Partnership’s internal ratings are weighted based on the industry that the customer operates in. Factors taken into consideration when assessing risk, includes both general and industry specific qualitative and quantitative metrics.  The Partnership separately takes in to consideration payment history, open lawsuits, liens and judgments. Typically, the Partnership 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.  The Partnership’s internally based model may classify a company as high risk based on its 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, the Partnership typically requires deposits from those in this category.

 

 
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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 June 30, 2022:

 

Risk Level

 

Percent of Total

 

Low

 

-%

 

Moderate-Low

 

-%

 

Moderate

 

-%

 

Moderate-High

 

 

100%

High

 

-%

 

Net finance lease receivable

 

 

100%

 

As of June 30, 2022, and December 31, 2021, the Partnership 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 the Partnership, associated with these leases, has been positive.

 

CCC, on behalf of the Partnership and on behalf of other affiliated companies and 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 based on certain risk factors.

 

The following is a schedule of future minimum rentals on non-cancelable finance leases at June 30, 2022:   

                                                               

 

 

Amount

 

Six months ended December 31, 2022

 

$6,000

 

2023

 

 

12,000

 

2024

 

 

11,000

 

Total

 

$29,000

 

 

5. 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 June 30, 2022 and December 31, 2021 was approximately $498,000 and $547,000, respectively (see COF 2 Financial Summary below).  During the six months ended June 30, 2022, COF 2 did not declare any distribution to the Partnership. 

 

 

 

June 30,

 

 

December 31,

 

COF 2 Summarized Financial Information

 

2022

 

 

2021

 

Assets

 

$1,648,000

 

 

$1,847,000

 

Liabilities

 

$300,000

 

 

$356,000

 

Partners’ capital

 

$1,348,000

 

 

$1,492,000

 

Revenue

 

$205,000

 

 

$401,000

 

Expenses

 

$348,000

 

 

$606,000

 

Net income (loss)

 

$(144,000)

 

$(205,000)

 

 
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6. Related Party Transactions

 

Receivables/Payables

 

As of June 30, 2022, and December 31, 2021, the Partnership’s related party receivables and payables are short term, unsecured, and non-interest bearing.

 

For the six months ended June 30,

 

2022

 

 

2021 

 

 

 

 

 

 

 

 

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 six months ended June 30, 2022 and 2021, the Partnership was charged approximately $124,000 and $179,000 in Other LP expense, respectively.

 

$183,000

 

 

$312,000

 

 

 

 

 

 

 

 

 

 

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 six months ended June 30, 2022, the General Partner earned acquisition fees from operating and finance leases of approximately $14,000 and $2,000, respectively.

 

$14,000

 

 

$2,000

 

 

 

 

 

 

 

 

Debt placement fee

 

 

 

 

 

 

As compensation for arranging term debt to finance our acquisition of equipment, the Partnership 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 the Partnership incurs 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.  The amount the Partnership borrows, and therefore the amount of the fee, will depend upon interest rates at the time of a loan, and the amount of leverage the Partnership determines is appropriate at the time. Fees will increase as the amount of leverage increases, and as turnover in the portfolio increases and additional equipment is purchased using leverage.

 

$-

 

 

$-

 

 

 

 

 

 

 

 

Equipment management fee

 

 

 

 

 

 

The Partnership pays 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. The 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 managed.  Reductions in market rates for similar services would also reduce the amount of this fee.

 

$18,000

 

 

$33,000

 

 

 

 

 

 

 

 

 

 

Equipment liquidation fee

 

 

 

 

 

 

 

 

equipment sold by the General Partner, the Partnership 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.  The General Partner, based on its experience in the equipment leasing industry and current dealings with others in the industry, uses its business judgment to determine if a given sales commission is competitive, reasonable and customary. Such fee will be reduced to the extent any liquidation or resale fees are paid to unaffiliated parties. The amount of such fees will depend upon the sale price of equipment sold. Sale prices will vary depending upon the type, age and condition of equipment sold. The shorter the terms of the leases, the more often the Partnership may sell equipment, which will increase liquidation fees.

 

$92

 

 

$2,000

 

 

 
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7. Notes Payable

 

Notes payable consisted of the following approximate amounts:

 

 

 

June 30,

2022

 

 

December 31,

2022

 

Installment note payable to bank; interest at 4.10% due in monthly installments of $5,229, including interest, with final payment in March 2023

 

 

46,000

 

 

 

76,000

 

Installment note payable to bank; interest at 5.00% due in monthly installments of $1,377, including interest, with final payment in November 2024

 

 

38,000

 

 

 

45,000

 

Installment note payable to bank; interest at 4.65% due in monthly installments of $1,176, including interest, with final payment in March 2024

 

 

27,000

 

 

 

-

 

Installment note payable to bank; interest at 4.75% due in monthly installments of $3,527, including interest, with final payment in May 2024

 

 

81,000

 

 

 

-

 

Installment note payable to bank; interest at 6.21% due in monthly installments of $2,214, including interest, with final payment in June 2024

 

 

50,000

 

 

 

-

 

 

 

 

242,000

 

 

 

121,000

 

 

The notes are secured by specific equipment with a carrying value of approximately $411,119 and are nonrecourse liabilities of the Partnership. As such, the notes do not contain any financial debt covenants with which the Partnership must comply on either an annual or quarterly basis. Aggregate approximate maturities of notes payable for each of the periods subsequent to June 30, 2022 are as follows:

 

 

 

Amount

 

Six months ended December 31, 2022

 

 

85,000

 

Year ended December 31, 2023

 

 

110,000

 

Year ended December 31, 2024

 

 

47,000

 

 

 

$242,000

 

 

8. Supplemental Cash Flow Information

 

No interest or principal on notes payable was paid by the Partnership during 2022 and 2021 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,

 

2022

 

 

2021

 

Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank

 

$37,000

 

 

$276,000

 

 

 
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During the six months ended June 30, 2022 and 2021, the Partnership wrote-off fully amortized acquisition and finance fees of approximately $0 and $117,000, respectively.

 

Noncash investing and financing activities included the following:

 

Six Months ended June 30,

 

2022

 

 

2021

 

Debt assumed in connection with purchase of equipment 

 

$157,978

 

 

 

-

 

 

9. Commitments and Contingencies

 

COVID-19 Pandemic

 

The amount of revenue recognized and the pattern of revenue recognition may be impacted by COVID-19. In December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, and has spread globally, and on March 12, 2020, the World Health Organization (“WHO”) declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, have imposed unprecedented restrictions on travel, quarantines, and other public health safety measures. Such government-imposed precautionary measures may have been relaxed in certain countries or states, but there is no assurance that more strict measures will be put in place again due to a resurgence in COVID-19 cases. In addition, the COVID-19 virus and other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact the Company’s business, financial condition, and results of operations. The pattern of revenue recognition may change for delays in rendering services.

 

In periods ended subsequent to the outbreak of COVID-19, the impact on expected credit losses and future cash flow projections used in impairment testing will need to be considered.

 

The Partnership continues to evaluate whether adjustments to the financial statements are required or whether additional disclosures are necessary.  In its leasing business, the Partnership is always subject to credit losses as it relates to a customer’s ability to make timely rental payments.  The impact of COVID-19 may contribute to risk of non-performance, where a customer may experience financial difficulty and may delay in making timely payments.

 

The Partnership recognizes impairment of receivables and loans when losses are incurred, which is when it is probable that an entity will be unable to collect all amounts due according to the contractual terms of the arrangement.  Impairment is measured based on the present value of expected future cash flows discounted at a receivable’s or a loan’s effective interest rate, except that, as a practical expedient, impairment can be measured based on a receivable’s or a loans’ observable market price or the fair value of the underlying collateral.

 

The Partnership believes its estimate of expected losses have been recognized based on historical experience, current conditions, and reasonable forecasts.  The impacts of COVID-19 may necessitate additional adjustments in future forecasts of expected losses.

 

Although the Partnership cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the Partnership’s results of future operations, financial position, and liquidity in fiscal year 2022 and beyond.

 

FINRA

 

On May 3, 2013, the FINRA Department of Enforcement filed a complaint naming Commonwealth Capital Securities Corp. (“CCSC”) and the owner of the firm, Kimberly Springsteen-Abbott, as respondents; however, on October 22, 2013, FINRA filed an amended complaint that dropped the allegations against CCSC and reduced the scope of the allegations against Ms. Springsteen-Abbott.  The sole remaining charge was that Ms. Springsteen-Abbott had approved the misallocation of some expenses to certain Funds.  Management believes that the expenses at issue include amounts that were proper and that were properly allocated to Funds, and also identified a smaller number of expenses that had been allocated in error, but were adjusted and repaid to the affected Funds when they were identified in 2012.  During the period in question, Commonwealth Capital Corp. (“CCC”) and Ms. Springsteen-Abbott provided important financial support to the Funds, voluntarily absorbed expenses and voluntarily waived fees in amounts aggregating in excess of any questioned allocations.  A Hearing Panel ruled on March 30, 2015, that Ms. Springsteen-Abbott should be barred from the securities industry because the Panel concluded that she allegedly misallocated approximately $208,000 of expenses involving certain Funds over the course of three years.  As such, management had already at that time reallocated back approximately $151,225 of the $208,000 (in allegedly misallocated expenses) to the affected funds, which was fully documented, as good faith payments for the benefit of those Income Funds.

  

The decision of the Hearing Panel was stayed when it was appealed to FINRA’s National Adjudicatory Council (the “NAC”) pursuant to FINRA Rule 9311.  The NAC issued a decision that upheld the lower panel’s ruling and the bar took effect on August 23, 2016.  Ms. Springsteen-Abbott appealed the NAC’s decision to the U.S. Securities and Exchange Commission (the “SEC”).  On March 31, 2017, the SEC criticized that decision as so flawed that the SEC could not even review it, and remanded the matter back to FINRA for further consideration consistent with the SEC’s remand, but did not suggest any view as to a particular outcome.

 

On July 21, 2017, FINRA reduced the list of 1,840 items totaling $208,000 to a remaining list of 87 items totaling $36,226 (which includes approximately $30,000 of continuing education expenses for personnel providing services to the Funds), and reduced the proposed fine from $100,000 to $50,000, but reaffirmed its position on the bar from the securities industry.  Respondents promptly appealed FINRA’s revised ruling to the SEC.  All the requested or allowed briefs have been filed with the SEC.  Despite offering no additional evidence or legal reasoning from when SEC originally remanded this matter (for FINRA’s opinion being an unreviewably flawed opinion), the SEC upheld FINRA’s new order on February 7, 2020 as to the bar; however, FINRA’s fine was voided.  Ms. Springsteen-Abbott has filed a Petition for Review in the United States Court of Appeals for the District of Columbia Circuit to review a final order entered against her by the U.S. Securities and Exchange Commission.  On February 26, 2021, the United States Court of Appeals for the District of Columbia Circuit, made their ruling.  They dismissed in part and denied in part Ms. Springsteen-Abbott’s petition. This was regardless of CCC’s good faith reimbursements made many years ago of the questioned expense items of $208,000 (due to improper documentation), initially claimed misallocations by FINRA, even prior to FINRA’s reducing its final claim to $36,226

 

Prior to the original appeal to the SEC, Ms. Springsteen-Abbott discovered CCC’s required documentation of these items for FINRA review, which FINRA refused to consider, despite such efforts the District Court upheld the bar, despite admittingly not addressing her “due process” rights, for legal administrative procedural reasons.  However, given the SEC’s prior removal of FINRA’s fine and the District Court upholding that removal, the General Partner anticipates that this ruling will not result in any material financial impact to the Funds.

 

 
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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, 2021 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

 

We invest in various types of domestic information technology equipment leases located solely within the United States. Our investment objective is to acquire primarily high technology equipment. We believe that dealing in hightechnology equipment is particularly advantageous due to a robust aftermarket. Information technology has developed rapidly in recent years and is expected to continue to do so. Technological advances have permitted reductions in the cost of computer processing capacity, speed, and utility. In the future, the rate and nature of equipment development may cause equipment to become obsolete more rapidly. In an effort to mitigate this risk our portfolio manager attempts to diversify our fund through the acquisition of different types of equipment, staggered lease maturities, various lessees, and businesses located throughout the U.S., and industries served.

 

We also acquire high technology medical, telecommunications and inventory management equipment. Our General Partner seeks to maintain an appropriate balance and diversity in the types of equipment acquired. The market for high technology medical equipment is growing each year. Generally, this type of equipment has a longer useful life. This allows for increased re-marketability, if it is returned before its economic or announcement cycle is depleted. 

 

The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross section of the $900 billion equipment finance sector, showed their overall new business volume for June was $10.3 billion, down 1 percent year-over-year from new business volume in June 2021. Volume was up 10 percent from $9.4 billion in May. Year-to-date, cumulative new business volume was up 6 percent compared to 2021.

 

Receivables over 30 days were 1.5 percent, down from 1.6 percent the previous month and down from 1.8 percent in the same period in 2021. Charge-offs were 0.15 percent, up from 0.12 percent the previous month and down from 0.22 percent in the year-earlier period.

 

 
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Credit approvals totaled 78.1 percent, up from 76.8 percent in May. Total headcount for equipment finance companies was down 3.5 percent year-over-year.

 

Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in July is 46.1, a decrease from 50.9 in June.

 

ELFA President and CEO Ralph Petta said, “Respondents to the June report indicate another strong month in originations and credit quality. Inflation continues to provide a headwind in an otherwise benign economy. The Fed has signaled its resolve to meet these inflationary pressures by steadily increasing short-term interest rates, without throwing cold water on our post-pandemic economic recovery. Providers of equipment finance have risen to the occasion, enabling businesses, both large and small, to acquire the productive assets they need to grow their businesses to meet their customers’ needs.”

 

Brad Peterson, CEO, Channel, said, “Channel volume versus last month and last year significantly exceeds the MLFI-25, mainly driven by two new business units and product development. Like most, our portfolio is also outperforming expectations and historical levels in both delinquency and write-offs. We monitor performance data intensely to identify potential economic-driven deterioration by industry, geography and equipment type, among others. The primary business challenges we face today are the rapidly changing cost of funds, an uncertain economic environment, and dramatic growth compounded by the complexity of finding new employees.”

 

Our business is directly impacted by factors such as economic, political, and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond our control. Given these circumstances, we believe companies overall, will continue to increasingly turn to leasing, as a financing solution. It is our belief that companies lease business-essential equipment because leasing can provide many benefits to a company. The number one benefit of leasing that we see is that there is no large outlay of cash required. Therefore, companies can preserve their working capital, lease equipment, which is an expense item, have the flexibility to upgrade the equipment when needed, and have no risk of obsolescence. Because we expect leasing to remain an attractive financing solution for American businesses during the next 12 months, we feel that our ability to increase our portfolio size and leasing revenues during that period will remain strong.

 

We, at Commonwealth, are currently operating business as usual (with our employees working remotely).  We may see a slowdown on new equipment acquisition decisions from Corporate Lessees until the crisis is resolved and businesses can resume their normal operation.  We have no way of knowing what this period of time will be.  We will keep our investors informed of subsequent events.  For information relating to COVID-19 and the overall effects, as expressed by Ralph Petta, President of ELFA (The Equipment Leasing & Finance Association), please refer to elfaonline.org.

 

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.

 

 
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EQUITY METHOD INVESTMENT

 

The Partnership accounts for its investment in COF2 under the equity method in accordance with Accounting Standards Codification (“ASC”) 323.  Under the equity method, the Partnership records its proportionate share of the Fund’s net income (loss).  Capital contributions, distributions and net income (loss) of such entities are recorded in accordance with the terms of the governing documents. An allocation of net income (loss) may differ from the stated ownership percentage interest in such entity as a result of distributions and allocation formulas, if any, as described in such governing documents.

 

LEASE INCOME RECEIVABLE

 

Lease income receivable includes current lease income receivable net of allowances for uncollectible amounts, if any. The Partnership monitors lease income receivable to ensure timely and accurate payment by lessees. The Partnership’s Lease Relations department is responsible for monitoring lease income receivable and, as necessary, resolving outstanding invoices.

 

The Partnership reviews a customer’s credit history before extending credit. When the analysis indicates that the probability of full collection is unlikely, the Partnership may establish an allowance for uncollectible lease income receivable based upon the credit risk of specific customers, historical trends and other information. The Partnership writes off its lease income receivable when it determines that it is uncollectible and all economically sensible means of recovery have been exhausted.

 

REVENUE RECOGNITION

 

The Partnership is principally engaged in business of leasing equipment.  Ancillary to the Partnership’s principal equipment leasing business, the Partnership also sells certain equipment and may offer certain services to support its customers.

 

The Partnership’s lease transactions are principally accounted for under Topic 842 on January 1, 2019.  Prior to Topic 842, the Partnership accounted for these transactions under Topic 840, Leases (“Topic 840”).   Lease revenue includes revenue generated from leasing equipment to customers, including re-rent revenue, and is recognized as either on a straight line basis or using the effective interest method over the length of the lease contract, if such lease is either an operating lease or finance lease, respectively.

 

The Partnership’s sale of equipment along with certain services provided to customers is recognized under ASC Topic 606, Revenue from Contracts with Customers, (“Topic 606”), which was adopted on January 1, 2018.  Prior to adoption of Topic 606, the Partnership recognized these transactions under ASC Topic 605, Revenue Recognized, and (“Topic 605”).  The Partnership recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.  The amount of revenue recognized reflects the consideration the Partnership expects to be entitled to in exchange for such products or services.

 

Through June 30, 2022, the Partnership’s lease portfolio consisted of operating leases and finance leases. For operating leases, lease revenue is recognized on a straight-line basis in accordance with the terms of the lease agreement.  Finance lease interest income is recorded over the term of the lease using the effective interest method.

 

Upon the end of the lease term, if the lessee has not met the return conditions as set out in the lease, the Partnership is entitled in certain cases to additional compensation from the lessee. The Partnership’s accounting policy for recording such payments is to treat them as revenue.

 

Gains or losses from sales of leased and off-lease equipment are recorded on a net basis in the Partnership’s Statement of Operations.  Gains from the termination of leases are recognized when the lease is modified and terminated concurrently. Our leases do not contain any step-rent provisions or escalation clauses nor are lease revenues adjusted based on any index.

 

Partnership’s accounting policy for sales and property taxes collected from the lessees are recorded in the current period as gross revenues and expenses.

  

 
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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, 2022, were cash provided by operating activities of approximately $180,000 and net proceeds from the sale of equipment of approximately $3,000.   This compares to the six months ended June 30, 2021 where our primary sources of cash were net proceeds from the sale of equipment of approximately $63,000.

 

Our primary uses of cash for the six months ended June 30, 2022 capital expenditures of approximately $180,000 and equipment acquisition fees paid to the General Partner of approximately $3,000.  This compares to our primary uses of cash for the six months ended June 30, 2021 of operating activities of approximately $415,000, capital expenditures of approximately $39,000 and limited partner redemptions of approximately $37,000. 

 

Cash provided by operating activities for the six months ended June 30, 2022 was approximately $180,000, including a net loss of approximately $202,000 and depreciation and amortization expenses of approximately $223,000.  Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $37,000. This compares to the six months ended June 30, 2021 with cash used in operating activities of approximately $415,000, including a net loss of approximately $276,000 and depreciation and amortization expenses of approximately $591,000.  Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $276,000.

 

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 are expected to continue to increase overall during the remainder of 2022 as management focuses on additional equipment acquisitions.

 

We consider cash equivalents to be highly liquid investments with the original maturity dates of 90 days or less.

 

 
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At June 30, 2022, cash and cash equivalents were held in one bank account maintained at one financial institution with an aggregate balance of approximately $16,000. Bank accounts are federally insured up to $250,000 by the FDIC. At June 30, 2022, the total cash bank balance was as follows:

 

At June 30, 2022

 

Balance

 

Total bank balance

 

$16,000

 

FDIC insured

 

 

(16,000)

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 amount in its account will fluctuate throughout 2022 due to many factors, including the pace of cash receipts, equipment acquisitions and distributions to limited partners.

 

As of June 30, 2022, we had future minimum rentals on non-cancelable finance leases of approximately $6,000 for the balance of the year ending December 31, 2022 and approximately $30,000 thereafter.

 

As of June 30, 2022, our non-recourse debt was approximately $242,000 with interest rates ranging from 4.10% through 6.21% and is payable through November 2024.

 

The Shareholders at Meeting of Shareholders on October 26, 2021 approved extending the Fund to December 31, 2026.  Upon completion of this period, it is anticipated that the Partnership will be liquidation in accordance with the Partnership Agreement. 

 

RESULTS OF OPERATIONS

 

Three months ended June 30, 2022 compared to three months ended June 30, 2021

 

Lease Revenue

 

Our lease revenue decreased to approximately $162,000 for the three months ended June 30, 2022, from approximately $306,000 for the three months ended June 30, 2021.  The Partnership had 12 and 32 active operating leases that generated lease revenue for the three months ended June 30, 2022 and 2021, respectively.  Management expects to add new leases to our portfolio throughout the remainder of 2022, funded primarily through debt financing.

 

Sale of Equipment

 

For the three months ended June 30, 2022, the Partnership sold equipment with net book value of approximately $52,000 for a net gain of approximately $55,000.   Compared to the three months ended June 30, 2021, the Partnership sold equipment with net book value of approximately $54,000 for a net gain of approximately $66,000.

 

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 $160,000 for the three months ended June 30, 2022, from approximately $156,000 for the three months ended June 30, 2021.  Operating expenses decreased primarily due to a decrease in “Other LP” fees of approximately $38,000, partially offset by an increase in accounting fees of approximately $23,000.

 

 
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Equipment Management Fee

 

We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases and 2% of the gross lease revenue attributable to equipment that is subject to finance leases. The total equipment management fee decreased to approximately $8,000 for the three months ended June 30, 2022 from approximately $15,000 for the three months ended June 30, 2021.  

 

Depreciation and Amortization Expense

 

Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses increased to approximately $118,000 for the three months ended June 30, 2022, from approximately $293,000 for the three months ended June 30, 2021.  This increase was due to the lower 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, 2022.

 

Net Loss

 

For the three months ended June 30, 2022, we recognized revenue of approximately $225,000, expenses of approximately $394,000 and other loss of $26,000, resulting in net loss of approximately $194,000.  For the three months ended June 30, 2021, we recognized revenue of approximately $374,000, expenses of approximately $481,000 and other loss of $22,000, resulting in net loss of approximately $129,000.  This change in net loss is due to the changes in revenue and expenses as described above.

 

Six months ended June 30, 2022 compared to six months ended June 30, 2021

 

Lease Revenue

 

Our lease revenue decreased to approximately $361,000 for the six months ended June 30, 2022 from approximately $655,000 for the six months ended June 30, 2021.  The Partnership had 12 and 32 active operating leases that generated lease revenue for the six months ended June 30, 2022 and 2021, respectively.  Management expects to add new leases to our portfolio throughout the remainder of 2022, funded primarily through debt financing.

 

Sale of Equipment

 

For the six months ended June 30, 2022, the Partnership sold fully depreciated equipment with a net book value of approximately $0 for a net gain of approximately $55,000.  For the six months ended June 30, 2021, the Partnership sold fully depreciated equipment with a net book value of approximately $0 for a net gain of approximately $63,000.

 

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 $237,000 for the six months ended June 30, 2022, from approximately $334,000 for the six months ended June 30, 2021.  This decrease is primarily due to a decrease in “Other LP” fees of approximately $55,000, accounting fees of approximately $36,000 and penalty & interest expense of approximately $7,000.

 

Equipment Management Fee

 

We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases and 2% of the gross lease revenue attributable to equipment that is subject to finance leases. The total equipment management fee decreased to approximately $18,000 for the six months ended June 30, 2022 from approximately $33,000 for the six months ended June 30, 2021.

 

 
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Depreciation and Amortization Expense

 

Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses decreased to approximately $220,000 for the six months ended June 30, 2022, from approximately $591,000 for the six months ended June 30, 2021.  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, 2022.

 

Net Loss

 

For the six months ended June 30, 2022, we recognized revenue of approximately $443,000, expenses of approximately $597,000 and other loss of $49,000, resulting in a net loss of approximately $203,000.  For the six months ended June 30, 2021, we recognized revenue of approximately $759,000, expenses of approximately $997,000 and other loss of $35,000, resulting in a net loss of approximately $276,000.  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 reevaluated 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/A. Based on such evaluation, the General Partner’s Chief Executive Officer and Principal Financial Officer have concluded that, as of June 30, 2022, 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 2022 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

 

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, 2022, 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 2022 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

 

 
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Part II: OTHER INFORMATION

 

Item 1. Commitments and Contingencies

 

N/A

 

Item 2. Legal Proceedings

 

FINRA

 

On May 3, 2013, the FINRA Department of Enforcement filed a complaint naming Commonwealth Capital Securities Corp. (“CCSC”) and the owner of the firm, Kimberly Springsteen-Abbott, as respondents; however, on October 22, 2013, FINRA filed an amended complaint that dropped the allegations against CCSC and reduced the scope of the allegations against Ms. Springsteen-Abbott.  The sole remaining charge was that Ms. Springsteen-Abbott had approved the misallocation of some expenses to certain Funds.  Management believes that the expenses at issue include amounts that were proper and that were properly allocated to Funds, and also identified a smaller number of expenses that had been allocated in error, but were adjusted and repaid to the affected Funds when they were identified in 2012.  During the period in question, Commonwealth Capital Corp. (“CCC”) and Ms. Springsteen-Abbott provided important financial support to the Funds, voluntarily absorbed expenses and voluntarily waived fees in amounts aggregating in excess of any questioned allocations.  A Hearing Panel ruled on March 30, 2015, that Ms. Springsteen-Abbott should be barred from the securities industry because the Panel concluded that she allegedly misallocated approximately $208,000 of expenses involving certain Funds over the course of three years.  As such, management had already at that time reallocated back approximately $151,225 of the $208,000 (in allegedly misallocated expenses) to the affected funds, which was fully documented, as good faith payments for the benefit of those Income Funds.

 

The decision of the Hearing Panel was stayed when it was appealed to FINRA’s National Adjudicatory Council (the “NAC”) pursuant to FINRA Rule 9311.  The NAC issued a decision that upheld the lower panel’s ruling and the bar took effect on August 23, 2016.  Ms. Springsteen-Abbott appealed the NAC’s decision to the U.S. Securities and Exchange Commission (the “SEC”).  On March 31, 2017, the SEC criticized that decision as so flawed that the SEC could not even review it, and remanded the matter back to FINRA for further consideration consistent with the SEC’s remand, but did not suggest any view as to a particular outcome.

 

On July 21, 2017, FINRA reduced the list of 1,840 items totaling $208,000 to a remaining list of 87 items totaling $36,226 (which includes approximately $30,000 of continuing education expenses for personnel providing services to the Funds), and reduced the proposed fine from $100,000 to $50,000, but reaffirmed its position on the bar from the securities industry.  Respondents promptly appealed FINRA’s revised ruling to the SEC.  All the requested or allowed briefs have been filed with the SEC.  Despite offering no additional evidence or legal reasoning from when SEC originally remanded this matter (for FINRA’s opinion being an unreviewably flawed opinion), the SEC upheld FINRA’s new order on February 7, 2020 as to the bar; however, FINRA’s fine was voided.  Ms. Springsteen-Abbott has filed a Petition for Review in the United States Court of Appeals for the District of Columbia Circuit to review a final order entered against her by the U.S. Securities and Exchange Commission.  On February 26, 2021, the United States Court of Appeals for the District of Columbia Circuit, made their ruling.  They dismissed in part and denied in part Ms. Springsteen-Abbott’s petition. This was regardless of CCC’s good faith reimbursements made many years ago of the questioned expense items of $208,000 (due to improper documentation), initially claimed misallocations by FINRA, even prior to FINRA’s reducing its final claim to $36,226. 

 

Prior to the original appeal to the SEC, Ms. Springsteen-Abbott discovered CCC’s required documentation of these items for FINRA review, which FINRA refused to consider, despite such efforts the District Court upheld the bar, despite admittingly not addressing her “due process” rights, for legal administrative procedural reasons.  However, given the SEC’s prior removal of FINRA’s fine and the District Court upholding that removal, the General Partner anticipates that this ruling will not result in any material financial impact to the Funds.

 

 
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Item 2A. Risk Factors

 

COVID-19 Pandemic

 

The amount of revenue recognized and the pattern of revenue recognition may be impacted by COVID-19. In December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, and has spread globally, and on March 12, 2020, the World Health Organization (“WHO”) declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, have imposed unprecedented restrictions on travel, quarantines, and other public health safety measures. Such government-imposed precautionary measures may have been relaxed in certain countries or states, but there is no assurance that more strict measures will be put in place again due to a resurgence in COVID-19 cases. In addition, the COVID-19 virus and other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact the Company’s business, financial condition, and results of operations. The pattern of revenue recognition may change for delays in rendering services.

 

In periods ended subsequent to the outbreak of COVID-19, the impact on expected credit losses and future cash flow projections used in impairment testing will need to be considered.

 

The Partnership continues to evaluate whether adjustments to the financial statements are required or whether additional disclosures are necessary.  In its leasing business, the Partnership is always subject to credit losses as it relates to a customer’s ability to make timely rental payments.  The impact of COVID-19 may contribute to risk of non-performance, where a customer may experience financial difficulty and may delay in making timely payments.

 

The Partnership recognizes impairment of receivables and loans when losses are incurred, which is when it is probable that an entity will be unable to collect all amounts due according to the contractual terms of the arrangement.  Impairment is measured based on the present value of expected future cash flows discounted at a receivable’s or a loan’s effective interest rate, except that, as a practical expedient, impairment can be measured based on a receivable’s or a loans’ observable market price or the fair value of the underlying collateral.

 

The Partnership believes its estimate of expected losses have been recognized based on historical experience, current conditions, and reasonable forecasts.  The impacts of COVID-19 may necessitate additional adjustments in future forecasts of expected losses.

 

Although the Partnership cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the Partnership’s results of future operations, financial position, and liquidity in fiscal year 2022 and beyond.

 

 
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Item 3. Unregistered Sales of Equity Securities and Use of Proceeds

 

N/A

 

Item 4. Defaults Upon Senior Securities

 

N/A

 

Item 5. Mine Safety Disclosures

 

N/A

 

Item 6. Other Information

 

NONE

 

Item 7. Exhibits

 

31.1

RULE 15d-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER

31.2

RULE 15d-14(a) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

32.1

SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

32.2

SECTION 1350 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

 

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

COMMONWEALTH INCOME & GROWTH FUND VII, LP

 

 

BY: COMMONWEALTH INCOME & GROWTH FUND, INC., General Partner

 

 

November 30, 2022

By:

/s/ Kimberly A. Springsteen-Abbott

 

Date

 

Kimberly A. Springsteen-Abbott

 

 

Chief Executive Officer And Principal Financial Officer

Commonwealth Income & Growth Fund, Inc.

 

 

 
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