UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K/A
Amendment
#1
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2019 or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File
Number: 333-156357
COMMONWEALTH INCOME & GROWTH FUND VII, LP
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
26-3733264
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification Number)
|
4532 US Highway 19
Suite 200
New Port Richey, FL 34652
(Address, including zip code, of principal executive
offices)
(877) 654-1500
(Registrant’s
telephone number including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name of
exchange which registered
|
None
|
N/A
|
Securities
registered pursuant to Section 12(g) of the Act:
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer,
(as defined in Rule 405 of the Act): YES ☐ NO
☒
Indicate
by checkmark if the registrant is not required to file reports
pursuant to Section-13 or Section-15(d) of the Act. YES ☐ NO
☒
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K:
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 Act): YES ☐ NO ☒
State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked
price of such common equity, as of the last business day of the
Registrant’s most recently completed second fiscal quarter:
N/A
Documents
incorporated by reference: None.
1
EXPLANATORY NOTE
The
purpose of this Amendment No. 1 to COMMONWEALTH INCOME & GROWTH
FUND VII, LP’s Annual Report on Form 10-K for the year ended
December 31, 2019, filed with the Securities and Exchange
Commission on April 15, 2020 (the “Form 10-K”), is
being filed with the limited purpose of amending the Reports of
Independent Registered Public Accounting Firm on page F1 and of the
Original Form 10-K to correct a scrivener’s error with
respect to the omission of the city and state thereof.
No
other changes have been made to the Form 10-K. This Amendment No. 1
to the Form 10-K speaks as of the original filing date of the Form
10-K, does not reflect events that may have occurred subsequent to
the original filing date, and does not modify or update in any way
disclosures made in the original Form 10-K.
Item
No.
Description
Page
8.
Financial Statements
and Supplementary Data
3
Part IV
15.
Exhibits and
Financial Statement Schedules and Reports on Form
10-
4
Index to Exhibits
4
2
PART II
ITEM 8: FINANCIAL STATEMENTS
Our
financial statements for the fiscal years ended December 31, 2019
and 2018, and the reports thereon of the independent registered
public accounting firms are included in this annual
report.
3
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 10-K
(a) (1)
|
Financial
Statements
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Balance
Sheets as of December 31, 2019 and 2018
|
F-2
|
|
Statements
of Operations for the years ended December 31, 2019 and
2018
|
F-3
|
|
Statements
of Partners’ Capital for the years ended December 31, 2019
and 2018
|
F-4
|
|
Statements
of Cash Flows for the years ended December 31, 2019 and
2018
|
F-5
|
|
Notes
to Financial Statements
|
F-6
|
(a) (2)
|
Schedules
|
|
Schedules
are omitted because they are not applicable, not required, or
because the required information is included in the financial
statements and notes thereto.
(a) (3)
|
Exhibits
|
|
|
*3.1
|
Certificate
of Limited Partnership
|
|
|
|
|
*3.2
|
Agreement
of Limited Partnership
|
|
|
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certifications by the Chief Executive
Officer
|
|
|
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certifications by the Principal Financial
Officer
|
|
|
|
|
32
|
Section
1350 Certifications by the Chief Executive Officer and Principal
Financial Officer
|
|
|
|
|
*Incorporated
by reference from the Partnership’s Registration Statement on
Form S-1 (Registration No. 333-108057)
|
4
Commonwealth
Income &
Growth Fund VII
Financial Statements
For the years ended December 31, 2019 and 2018
Report of Independent Registered Public Accounting
Firm
|
F-1
|
|
|
Financial statements
|
|
Balance
Sheets
|
F-2
|
Statements
of Operations
|
F-3
|
Statements
of Partners’ Capital
|
F-4
|
Statements
of Cash Flows
|
F-5
|
|
|
Notes to financial statements
|
F-6
|
5
Report of Independent Registered Public Accounting
Firm
The
Partners
Commonwealth
Income & Growth Fund VII
New
Port Richey, Florida
Opinion on the Financial Statements
We have
audited the accompanying balance sheets of Commonwealth Income
& Growth Fund VII (the “Partnership”) as of
December 31, 2019 and 2018, the related statements of operations,
statements of Partners Capital, and cash flows for each of the two
years in the period ended December 31, 2019, and the related notes
(collectively referred to as the “financial
statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Partnership at December 31, 2019 and 2018, and the results of
its operations and its cash flows for each of the two years in the
period ended December 31, 2019, in conformity with accounting
principles generally accepted in the United States of
America.
Basis for Opinion
These
financial statements are the responsibility of the
Partnership’s management. Our responsibility is to express an
opinion on the Partnership’s financial statements based on
our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Partnership in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Partnership is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the
Partnership’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/BDO USA, LLP
We have
served as the Partnership's auditor since 2012.
Philadelphia,
Pennsylvania
April
15, 2020
F1
Commonwealth Income &
Growth Fund VII
Balance Sheets
|
December
31,
|
|
|
2019
|
2018
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$540,798
|
$853,115
|
Lease income
receivable, net of reserve of approximately $98,000 and $0 at
December 31, 2019 and 2018, respectively
|
294,915
|
284,972
|
Accounts
receivable, Commonwealth Capital Corp, net
|
688,248
|
1,265,023
|
Other receivables,
net of reserve of approximately $246,000 and $239,000 at December
31, 2019 and 2018, respectively
|
64,608
|
85,149
|
Receivable from
COF2
|
4,080
|
12,239
|
Prepaid
expenses
|
12,618
|
9,338
|
|
1,605,267
|
2,509,836
|
|
|
|
Net investment in
finance leases
|
56,759
|
4,941
|
|
|
|
Investment in COF
2
|
585,594
|
789,761
|
|
|
|
Equipment, at
cost
|
15,870,751
|
16,576,406
|
Accumulated
depreciation
|
(13,556,070)
|
(12,765,256)
|
|
2,314,681
|
3,811,150
|
Equipment
acquisition costs and deferred expenses, net of accumulated
amortization of approximately $173,000 and $127,000 at
December 31, 2019 and 2018, respectively
|
78,288
|
159,497
|
|
78,288
|
159,497
|
Total
Assets
|
$4,640,589
|
$7,275,185
|
|
|
|
LIABILITIES
AND PARTNERS' CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$166,428
|
$277,274
|
Accounts payable,
CIGF, Inc.
|
267,464
|
343,446
|
Other accrued
expenses
|
235
|
77,426
|
Unearned lease
income
|
63,952
|
36,949
|
Notes
payable
|
1,334,116
|
2,715,429
|
Total
Liabilities
|
1,832,195
|
3,450,524
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
PARTNERS'
CAPITAL
|
|
|
General
Partner
|
1,050
|
1,050
|
Limited
Partners
|
2,807,344
|
3,823,611
|
Total
Partners' Capital
|
2,808,394
|
3,824,661
|
Total
Liabilities and Partners' Capital
|
$4,640,589
|
$7,275,185
|
|
|
|
see
accompanying notes to financial statements
|
F2
Commonwealth Income &
Growth Fund VII
Statements of Operations
|
Years
ended December 31,
|
|
|
2019
|
2018
|
Revenue
|
|
|
Lease
|
$2,005,881
|
$2,393,338
|
Interest and
other
|
124,361
|
3,756
|
Sales and property
taxes
|
99,507
|
-
|
Gain on sale of
equipment
|
50,636
|
151,267
|
Total
revenue and gain on sale of equipment
|
2,280,385
|
2,548,361
|
|
|
|
Expenses
|
|
|
Operating,
excluding depreciation and amortization
|
813,562
|
1,016,919
|
Equipment
management fee, General Partner
|
100,350
|
120,990
|
Interest
|
115,617
|
148,515
|
Depreciation
|
1,462,043
|
1,814,918
|
Amortization of
equipment acquisition costs and deferred expenses
|
81,207
|
82,051
|
Sales and property
taxes
|
99,507
|
-
|
Bad debt
expense
|
125,418
|
-
|
Total
expenses
|
2,797,704
|
3,183,393
|
|
|
|
Other
loss
|
|
|
Loss on equity
investment in COF 2
|
(183,769)
|
(122,125)
|
Total
other loss
|
(183,769)
|
(122,125)
|
|
|
|
Net
loss
|
$(701,088)
|
$(757,157)
|
|
|
|
Net
loss allocated to Limited Partners
|
$(704,174)
|
$(760,251)
|
|
|
|
Net
loss per equivalent Limited Partnership unit
|
$(0.46)
|
$(0.49)
|
Weighted
average number of equivalent limited
|
|
|
partnership
units outstanding during the year
|
1,542,251
|
1,547,187
|
|
|
|
see
accompanying notes to financial statements
|
F3
Commonwealth Income
&
Growth Fund VII
Statements of Partners' Capital
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance,
January 1, 2018
|
50
|
1,550,510
|
$1,050
|
$4,947,638
|
$4,948,688
|
Net income
(loss)
|
-
|
-
|
3,094
|
(760,251)
|
(757,157)
|
Redemptions
|
-
|
(7,570)
|
-
|
(57,538)
|
(57,538)
|
Distributions
|
-
|
-
|
(3,094)
|
(306,238)
|
(309,332)
|
Balance,
December 31, 2018
|
50
|
1,542,940
|
$1,050
|
$3,823,611
|
$3,824,661
|
Net income
(loss)
|
-
|
-
|
3,086
|
(704,174)
|
(701,088)
|
Redemptions
|
-
|
(834)
|
-
|
(6,576)
|
(6,576)
|
Distributions
|
-
|
-
|
(3,086)
|
(305,517)
|
(308,603)
|
Balance,
December 31, 2019
|
50
|
1,542,106
|
$1,050
|
$2,807,344
|
$2,808,394
|
see
accompanying notes to financial statements
|
F4
Commonwealth Income &
Growth Fund VII
Statements of Cash Flows
|
Years
ended December 31,
|
|
|
2019
|
2018
|
Cash
flows from operating activities
|
|
|
Net
loss
|
$(701,088)
|
$(757,157)
|
Adjustments to
reconcile net loss to net cash
|
|
|
provided by
operating activities
|
|
|
Depreciation
and amortization
|
1,543,250
|
1,896,971
|
Amortization
of initial direct costs - finance leases
|
87
|
881
|
Gain
on sale of equipment
|
(50,636)
|
(151,267)
|
Bad
debt expense
|
125,418
|
-
|
Loss
on equity in COF 2 investment
|
183,769
|
122,125
|
Other noncash
activities
|
|
|
Lease
revenue net of interest expense, on notes payable,
realized
|
|
|
as
a result of direct payment of principal to the bank by
lessee
|
(1,381,313)
|
(1,398,284)
|
Earned
interest on finance leases
|
(303)
|
(2,689)
|
Changes in assets
and liabilities
|
|
|
Payment
from finance leases
|
2,774
|
-
|
Lease
income receivable
|
(135,361)
|
80,413
|
Accounts
receivable, Commonwealth Capital Corp., net
|
576,775
|
227,596
|
Other
receivables
|
20,541
|
191,176
|
Prepaid
expenses
|
(3,280)
|
1,131
|
Accounts
payable
|
(110,846)
|
105,335
|
Accounts
payable, CIGF, Inc., net
|
(75,982)
|
36,690
|
Other
accrued expenses
|
1
|
(378)
|
Unearned
lease income
|
27,003
|
(137,133)
|
Net
cash provided by operating activities
|
20,809
|
215,410
|
Cash
flows from investing activities
|
|
|
Capital
expenditures
|
-
|
(195,898)
|
Payment
from finance leases
|
-
|
67,724
|
Purchase
of finance leases
|
(55,384)
|
-
|
Equipment
acquisition fees paid to the General Partner
|
(2,215)
|
(34,158)
|
Net
proceeds from the sale of equipment
|
88,286
|
237,365
|
Distributions
from Investment in COF2
|
28,558
|
48,956
|
Net
cash provided by investing activities
|
59,245
|
123,989
|
Cash
flows from financing activities
|
|
|
Redemptions
|
(6,576)
|
(57,538)
|
Debt
placement fee paid to the General Partner
|
-
|
(6,581)
|
Distributions
to partners
|
(385,795)
|
(309,332)
|
Net cash used in financing
activities
|
(392,371)
|
(373,451)
|
|
|
|
Net
decrease in cash and cash equivalents
|
(312,317)
|
(34,052)
|
Cash
and cash equivalents beginning of year
|
853,115
|
887,167
|
Cash
and cash equivalents end of year
|
$540,798
|
$853,115
|
see
accompanying notes to financial statements
|
F5
Commonwealth Income &
Growth Fund VII
Notes to 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.
For the
year ended December 31, 2019 and 2018, limited partners redeemed
834 and 7,570 units, respectively, of partnership interest for a
total redemption price of approximately $6,600 and $58,000,
respectively, in accordance with the terms of the
Partnership’s Limited Partnership Agreement (the
“Agreement”).
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 investment objective is to acquire primarily
high technology equipment. 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
information technology processing capacity, speed, and utility. In
the future, the rate and nature of equipment development may cause
equipment to become obsolete more rapidly. The Partnership also
intends to acquire high technology medical, telecommunications and
inventory management equipment. The Partnership’s general
partner will seek 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 will have a longer useful life than other types of
technology equipment. This allows for increased re-marketability,
if it is returned before its economic or announcement cycle is
depleted.
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.
Allocations
of income and distributions of cash are based on the Agreement. The
various allocations under the Agreement prevent any limited
partner’s capital account from being reduced below zero and
ensure the capital accounts reflect the anticipated sharing ratios
of cash distributions, as defined in the Agreement. During each of
the years ended December 31, 2019 and 2018, cash distributions to
limited partners for each quarter were made at a rate of
approximately 1.0% and 1.0% of their original contributed capital,
respectively. Distributions during each of the years ended December
31, 2019 and 2018 were made to limited partners in the amount of
approximately $.20 and $.20 per unit, respectively, based on each
investor's number of limited partnership units outstanding during
that year.
F6
Distributions
in the following approximate amounts declared to the Limited
Partners for the years ended December 31, 2019 and 2018 were as
follows:
Quarter
Ended
|
2019
|
2018
|
March
31
|
$77,000
|
$77,000
|
June
30
|
77,000
|
77,000
|
September
30
|
76,000
|
76,000
|
December
31
|
76,000
|
76,000
|
|
$306,000
|
$306,000
|
2. Summary of Significant Accounting Policies
Use of Estimates
The
preparation of financial statements is in conformity with
accounting principles generally accepted in the United States of
America which requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates and those differences could be material. Such
estimates relate primarily to the determination of residual values
at the end of the lease term, the expected future cash flows and
fair value used for impairment analysis purposes and determination
of the allowance for doubtful accounts.
Disclosure of Fair Value of Financial Instruments
Fair Value Measurements
The
Partnership applies the provisions included in the Fair Value
Measurements and Disclosures Topic to all financial and
non-financial assets and liabilities. This Topic emphasizes that
fair value is a market-based measurement, not an entity-specific
measurement. It clarifies that fair value is an exit price,
representing the price that would be received to sell an asset or
paid to transfer a liability in the principal or most advantageous
market in an orderly transaction between market participants on the
measurement date. The Topic requires the use of valuation
techniques to measure fair value that maximize the use of
observable inputs and minimize use of unobservable inputs. These
inputs are prioritized as follows:
●
Level 1: Observable
inputs such as quoted prices in active markets for identical assets
or liabilities.
●
Level 2: Inputs
other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for similar assets
or liabilities in active markets and inputs other than quoted
prices that are observable for the asset or liability, such as
interest rates and yield curves that are observable at commonly
quoted intervals.
●
Level 3:
Unobservable inputs for which there is little or no market data and
which require internal development of assumptions about how market
participants price the asset or liability.
There
were no assets or liabilities measured at fair value on a recurring
basis at December 31, 2019 and 2018. There were no assets measured
on a non-recurring basis at December 31, 2019 and
2018.
Fair Value disclosures 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, other receivables, accounts payable and
other accrued expenses are carried at amounts which reasonably
approximate their fair values as of December 31, 2019 and 2018 due
to the immediate or short-term nature of these financial
instruments.
F7
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
December 31, 2019 and 2018 approximates the carrying value of these
instruments, due to the interest rates on this 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.
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.
For the
years ended December 31, 2019 and 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.
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.
Recently Adopted Accounting Pronouncements
In
December 2018, the Financial Accounting Standard Board
(“FASB”) issued ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements
for Lessors, which is expected to reduce a lessor’s
implementation and ongoing costs associated with applying the new
leases standard. The ASU also clarifies a specific lessor
accounting requirement. Specifically, this ASU addresses
the following issues facing lessors when applying the leases
standard: Sales taxes and other similar taxes collected from
lessees, certain lessor costs paid directly by lessees and
recognition of variable payments for contracts with lease and
non-lease components. The Partnership concluded, upon adoption of
this update that there was no significant change to their
accounting.
F8
In
March 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. Additionally, our business involves lease agreements with
our customers whereby we are the lessor in the transaction.
Accounting guidance for lessors is largely unchanged. The
amendments are effective for fiscal years beginning after December
15, 2018, and interim periods within those fiscal
years. We adopted Topic 842 at the required adoption
date of January 1, 2019. We used the package of practical
expedients permitted under the transition guidance that allowed us
not to reassess: (1) lease classification for expired or existing
leases and (2) initial direct costs for any expired or existing
leases. We did not recognize an adjustment to the opening balance
of partner’s capital upon adoption.
In
March 2019, the FASB issued Accounting Standards Update No.
2019-01, Leases (Topic 842)
Codification Improvements — Effective for fiscal years
beginning after December 15, 2019, 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 amendments in this Update include
the following items brought to the Board’s attention through
those interactions with stakeholders:
●
Determining the
fair value of the underlying asset by lessors that are not
manufacturers or dealers (Issue 1).
●
Presentation on the
statement of cash flows—sales-type and direct financing
leases (Issue 2).
●
Transition
disclosures related to Topic 250, Accounting Changes and Error
Corrections (Issue 3).
We
adopted Topic 842 at the required adoption date of January 1, 2019.
The Partnership concluded that the sales taxes and other similar
taxes collected from the lessees are recorded in the current period
in the Condensed Statement of Operations as gross revenues and
expenses. As permitted by the guidance, we elected the practical
expedient that allows us not to restate comparative periods in the
financial statements. Upon adoption of this update, there was no
significant change to the Partnership accounting.
Recent Accounting Pronouncements Not Yet Adopted
FASB issued a new guidance, Accounting Standards Update No.
2016-13, Financial Instruments –
Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, as
clarified and amended by ASU 2018-19, Codification Improvements to
Topic 326, Financial Instruments – Credit Losses and
ASU 2019-05, Financial Instruments –
Credit Losses (Topic 326): Targeted Transition Relief.
The new guidance is effective for
fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. Thus, for a calendar-year
company, it would be effective January 1, 2020. The new guidance
requires an allowance for credit losses based on the expectation of
lifetime credit losses on financial receivables carried at
amortized cost, including, but not limited to, mortgage loans,
premium receivables, reinsurance receivables and certain leases.
The new current expected credit loss (“CECL”)
impairment model for financial assets reported at amortized cost
will be applicable to receivables associated with sales-type and
direct financing leases but not to operating lease
receivables.
On November 15, 2019, the FASB delayed the effective date of FASB
ASC Topic 326 for certain small public companies and other private
companies. As amended, the effective date of ASC Topic 326 was
delayed until fiscal years beginning after December 15, 2022 for
SEC filers that are eligible to be smaller reporting companies
under the SEC’s definition, as well as private companies and
not-for-profit entities. The Partnership continues to evaluate the
impact of the new guidance on its condensed financial
statements.
F9
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.
Other Assets
Equipment
acquisition costs and deferred expenses are amortized on a
straight-line basis over two-to-four year lives based on the
original term of the lease and loan, respectively. Unamortized
acquisition costs and deferred expenses are charged to amortization
expense when the associated leased equipment is sold.
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.
Reimbursable Expenses
Reimbursable
expenses are comprised of both ongoing operational expenses and
fees associated with the allocation of salaries and benefits,
referred to as other LP expenses. Reimbursable expenses, which are
charged to the Partnership by CCC in connection with the
administration and operation of the Partnership, are allocated to
the Partnership based upon several factors including, but not
limited to, the number of investors, compliance issues, and the
number of existing leases. For example, if a partnership has more
investors than another program sponsored by CCC, then higher
amounts of expenses related to investor services, including mailing
and printing costs will be allocated to that partnership. Also,
while a partnership is in its offering stage, higher compliance
costs are allocated to it than to a program not in its offering
stage, as compliance resources are utilized to review incoming
investor suitability and proper documentation. Finally, lease
related expenses, such as due diligence, correspondence, collection
efforts and analysis and staff costs, increase as programs purchase
more leases, and decrease as leases terminate and equipment is
sold. All of these factors contribute to CCC’s determination
as to the amount of expenses to allocate to the Partnership or to
other sponsored programs. CCC is not reimbursed for salary and
benefit costs of control persons. For the Partnership, all
reimbursable items are expensed as they are incurred.
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.
F10
Cash and cash equivalents
We
consider cash and cash equivalents to be cash on hand and highly
liquid investments with the original maturity dates of 90 days or
less.
At
December 31, 2019, cash was held in one bank maintained at one
financial institution with an aggregate balance of approximately
$549,000. Bank accounts are federally insured up to $250,000 by the
FDIC. At December 31, 2019 and 2018, the total cash bank balance
was approximately as follows:
Balance at December 31
|
2019
|
2018
|
Total bank
balance
|
$549,000
|
$865,000
|
FDIC
insured
|
(250,000)
|
(250,000)
|
Uninsured
amount
|
$299,000
|
$615,000
|
The
Partnership believes it mitigates the risk of holding uninsured
deposits by only depositing funds with major financial
institutions. The Partnership has not experienced any losses in our
accounts, and believes it is not exposed
to any
significant credit risk. The amounts in such accounts will
fluctuate throughout 2020 due to many factors, including the pace
of cash receipts, equipment acquisitions, interest rates and
distributions to limited partners.
Income Taxes
Pursuant
to the provisions of Section 701 of the Internal Revenue Code, the
Partnership is not subject to federal or state income taxes. All
income and losses of the Partnership are the liability of the
individual partners and are allocated to the partners for inclusion
in their individual tax returns. The Partnership does not have any
entity-level uncertain tax positions. In addition, the Partnership
believes its tax status as a pass-through entity would be sustained
under U.S. Federal, state or local tax examination. The Partnership
files U.S. federal and various state income tax returns and is
generally subject to examination by federal, state and local income
tax authorities for three years from the filing of a tax
return.
Taxable
income differs from financial statement net income as a result of
reporting certain income and expense items for tax purposes in
periods other than those used for financial statement purposes,
principally relating to depreciation, amortization, and lease
revenue.
Net Loss Per Equivalent Limited Partnership Unit
The net
loss per equivalent limited partnership unit is computed based upon
net income (loss) allocated to the limited partners and the
weighted average number of equivalent units outstanding during the
year.
3. Information Technology, Medical Technology, Telecommunications
Technology, Inventory Management Equipment and Other
Business-Essential Capital Equipment
(“equipment”)
The
Partnership is the lessor of equipment under leases with periods
that generally range from 12 to 48 months. In general, associated
costs such as repairs and maintenance, insurance and property taxes
are paid by the lessee.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2019 was
approximately $10,030,000 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, 2019 was approximately $1,021,000
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, 2019 was
approximately $22,760,000. The total outstanding debt related to
the equipment shared by the Partnership at December 31, 2019 was
approximately $2,202,000.
F11
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2018 was
approximately $10,206,000 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, 2018 was approximately $1,786,000
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, 2018 was
approximately $23,912,000. The total outstanding debt related to
the equipment shared by the Partnership at December 31, 2018 was
approximately $3,875,000.
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 for
2020, 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:
Years Ended December
31,
|
Amount
|
2020
|
$1,242,000
|
2021
|
301,000
|
|
$1,543,000
|
Finance Leases:
The
following lists the approximate components of the net investment in
finance leases:
At December 31,
|
2019
|
2018
|
Carrying value of
lease receivable
|
$52,000
|
$2,000
|
Estimated residual
value of leased equipment (unguaranteed)
|
2,000
|
3000
|
Initial direct
costs- finance leases
|
3,000
|
-
|
Net investment in
finance leases
|
$57,000
|
$5,000
|
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, includes 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.
F12
The
following table presents the credit risk profile, by
creditworthiness category, of our finance lease receivables at
December 31, 2019:
|
Percent of Total
|
|
Risk Level
|
2019
|
2018
|
Low
|
-%
|
-%
|
Moderate-Low
|
-%
|
-%
|
Moderate
|
-%
|
-%
|
Moderate-High
|
100%
|
100%
|
High
|
-%
|
-%
|
Net Finance lease receivable
|
100%
|
100%
|
As of
the year ended December 31, 2019 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.
The
following is a schedule of approximate future minimum rentals on
non-cancelable finance leases:
Years Ended December
31,
|
Amount
|
2020
|
$12,000
|
2021
|
$12,000
|
2022
|
$12,000
|
2023
|
$12,000
|
2024
|
$11,000
|
|
$ 59,000
|
The
Partnership is scheduled to terminate on December 31, 2021. CCC
will assume the rights to the remaining active leases and their
related remaining revenue stream through their
termination.
4. Significant Customers
Lessees
equal to or exceeding 10% of lease revenue:
Years Ended December 31,
|
2019
|
2018
|
Alliant
Techsystems
|
34%
|
40%
|
Hofstra
University
|
22%
|
12%
|
Cummins,
Inc.
|
20%
|
22%
|
Automatic
Data Processing
|
14%
|
12%
|
Lessees
equal to or exceeding 10% of lease income receivable:
At December 31,
|
2019
|
2018
|
Cummins,
Inc.
|
80%
|
34%
|
Advanced
Data Processing
|
**
|
27%
|
Raytheon
|
15%
|
20%
|
** Represents less than 10% of lease income
receivable
F13
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
December 31, 2019 and 2018 was approximately $586,000 and $790,000,
respectively (see COF 2 Financial Summary below). For the year
ended December 31, 2019, COF 2 declared distributions to the
Partnership of approximately $20,000 of which approximately $16,000
was paid in 2019 and approximately $4,000 is recorded as a
receivable from COF 2 at December 31, 2019.
At December 31,
|
2019
|
2018
|
Assets
|
$ 2,113,766
|
3,214,356
|
Liabilities
|
$459,166
|
$960,139
|
Partners'
capital
|
$1,654,600
|
$2,254,217
|
Revenue
|
$1,077,881
|
$1,318,959
|
Expenses
|
$1,617,060
|
$1,677,271
|
Net
loss
|
$(539,179)
|
$(358,312)
|
6. Related Party Transactions
Receivables/Payables
As of
December 31, 2019 and 2018, the Partnership’s related party
receivables and payables are short term, unsecured, non-interest
bearing, and are presented net of related party receivables of
approximately $688,000 and $1,265,000 at December 31, 2019 and
2018, respectively, and related party payables of approximately
$267,000 and $343,000 at December 31, 2019 and 2018,
respectively.
F14
ENTITY RECEIVING
COMPENSATION
|
TYPE
OF COMPENSATION
|
AMOUNT
INCURRED
DURING 2019
|
AMOUNT
INCURRED
DURING
2018
|
|
|
|
|
|
OPERATIONAL
AND SALE OR LIQUIDATION STAGES
|
|
|
|
|
|
|
The General
Partner and its Affiliates
|
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, not including costs of the control
persons, as defined in Item 10, in connection with the
administration and operation of the partnership from third parties
unaffiliated with the General Partner. The amounts set forth on
this table do not include expenses incurred in the offering of
units. For the years ended December 31, 2019 and 2018, the
Partnership was charged approximately $504,000 and $619,000 in
other LP expense, respectively.
|
$797,000
|
$1,063,000
|
The General
Partner
|
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. At December 31, 2019, the prepaid acquisition fees
balance was $0. For the year ended December 31, 2019 and
2018, equipment acquisition fees earned by the General Partner for
operating and finance leases was approximately $2,000 and $34,000,
respectively.
|
$2,000
|
$34,000
|
The General
Partner
|
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.
|
$-
|
$7,000
|
The General
Partner
|
Equipment Management
Fee. 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 similar equipment or (b) the sum of (i) two percent of
the 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 and (iii) two percent of the gross
lease revenues attributable to equipment subject to finance
leases.
|
$100,000
|
$122,000
|
The General
Partner
|
Equipment Liquidation
Fee. With respect to
each item of equipment sold by the general partner, a fee equal to
the lesser of (i) 50% of the competitive equipment sale commission
or (ii) three percent of the sales price for such equipment. The
payment of this fee is subordinated to the receipt by the Limited
Partners of (i) a return of their capital contributions and 10%
annum cumulative return, compounded daily, on adjusted capital
contributions and (ii) the net disposition proceeds from such sale
in accordance with the Partnership Agreement. Such fee is reduced
to the extent any liquidation or resale fees are paid to
unaffiliated parties.
|
$2,700
|
$7,000
|
The General
Partner
|
Partnership Interest and Distribution.
The General Partner has a present and continuing one percent
interest of $1,000 in the Partnership’s item of income, gain,
loss, deduction, credit, and tax preference. In addition, the
General Partner receives one percent of cash available for
distribution until the Limited Partners have received distributions
of cash available for Distribution equal to their capital
contributions plus the 10% cumulative return and thereafter, the
General Partner will receive 10% of cash available for
distribution.
|
$3,100
|
$3,100
|
F15
6.
Notes Payable
Notes payable consisted of the following approximate
amounts:
|
December 31,
|
|
|
2019
|
2018
|
Installment
note payable to bank; interest at 1.80% due in monthly installments
of $2,533, including interest; with final payment in April
2019
|
-
|
10,000
|
Installment
note payable to bank; interest at 1.80% due in monthly installments
of $8,677, including interest; with final payment in May
2019
|
-
|
43,000
|
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
|
-
|
2,000
|
Installment
note payable to bank; interest at 4.98% due in monthly installments
of $2,807, including interest, with final payment in September
2019
|
-
|
25,000
|
Installment
note payable to bank; interest at 4.37% due in monthly installments
of $16,273, including interest, with final payment in April
2020
|
32,000
|
94,000
|
Installment
note payable to bank; interest at 5.49% due in monthly installments
of $4,177, including interest, with final payment in January
2020
|
4,000
|
53,000
|
Installment
note payable to bank; interest at 5.93% due in monthly installments
of $3,324, including interest, with final payment in February
2020
|
7,000
|
45,000
|
Installment
note payable to bank; interest at 5.25% due in quarterly
installments of $3,836, including interest, with final payment in
March 2020
|
-
|
18,000
|
Installment
note payable to bank; interest at 5.25% due in quarterly
installments of $25,557, including interest, with final payment in
April 2020
|
50,000
|
146,000
|
Installment
note payable to bank; interest at 4.88% due in monthly installments
of $1,363, including interest, with final payment in May
2020
|
7,000
|
22,000
|
Installment
note payable to bank; interest at 5.66% due in quarterly
installments of $29,292, including interest, with final payment in
October 2020
|
113,000
|
220,000
|
Installment
note payable to bank; interest at 5.62% due in quarterly
installments of $2,897, including interest, with final payment in
July 2020
|
8,000
|
19,000
|
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
|
130,000
|
317,000
|
Installment
note payable to bank; interest at 5.25% due in monthly installments
of $2,463, including interest, with final payment in October
2020
|
-
|
52,000
|
Installment
note payable to bank; interest at 5.31% due in monthly installments
of $52,336, including interest, with final payment in January
2021
|
252,000
|
441000
|
Installment
note payable to bank; interest at 6.00% due in quarterly
installments of $74,533, including interest, with final payment in
January 2021
|
356,000
|
623,000
|
Installment
notes payable to bank; interest at 5.33% due in monthly
installments ranging from $4,312 to $15,329, including interest,
with final payment in August 2021
|
375,000
|
585,000
|
|
$1,334,000
|
$2,715,000
|
F16
The
notes are secured by specific technology equipment with a carrying
value of approximately $2,309,000 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 December 31, 2019 are as
follows:
Years Ended December 31,
|
Amount
|
2020
|
1,055,000
|
2021
|
279,000
|
|
$1,334,000
|
7. Supplemental Cash Flow Information
No
interest or principal on notes payable was paid by the Partnership
during 2019 and 2018 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.
Noncash
investing and financing activities approximately include the
following:
Years Ended December 31,
|
2019
|
2018
|
Debt assumed in
connection with purchase of technology equipment
|
$-
|
$658,000
|
Accrual for
distribution to partners paid in January 2020
|
$76,000
|
$77,000
|
Equipment
acquisition fees earned by General Partner upon purchase of
equipment from prepaid acquisition fees
|
$-
|
$34,000
|
Receivable for
distribution from investment in COF2
|
$4,000
|
$12,000
|
During
the years ended December 31, 2019 and 2018, the Partnership wrote
off fully amortized acquisition and finance fees of approximately
$34,000 and $21,000, 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 April
15, 2020, the Partnership had received approximately $728,000 of
the approximate $1,033,000 sale proceeds and has recorded a reserve
of $246,000 against the outstanding receivables. On April 3,
2015 Medshare was obligated to make payment in full and failed to
do so. As a result, Medshare defaulted on its purchase
agreement with CCC and was issued a demand letter for full payment
of the equipment. On June 25, 2015, Medshare filed a lawsuit
in Texas state court for breach of contract (“State
Suit”). On June 26, 2015, Commonwealth filed a lawsuit
in the Northern District of Texas against Medshare seeking payment
in full and/or return of the Equipment and
damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2,
2016, the Defendants made payment to CCC of an initial $200,000 to
be followed by 24 structured monthly payments of approximately
$50,000 per month to begin no later than September 15, 2016.
The Partnership’s share of the Settlement Agreement is
approximately $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 $246,000
reserve and recorded as a bad debt recovery. As of April 15,
2020, the Partnership received approximately $182,000 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 judgment 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 judgment
amount. The court also vacated the September 21, 2016
settlement dismissal.
F17
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 the Defendant filed for a TRO in the U.S.
District Court of the Northern District of Texas, Dallas Division.
Included with the TRO filing was a request for appointment of
trustee for operation of Defendant, which was granted and the case
converted to Chapter 7. On December 18, 2018 the Bankruptcy Court
entered final order and issued its last payment to CCC in March
2019 of approximately $43,000, of which the Partnership’s
share was approximately $14,000. The Medshare Bankruptcy
matter is now closed. Although the trustee’s final
distribution to Commonwealth did not fully satisfy the
judgment, recovery may still be pursued directly against Cleary. As
such, management believes that the foregoing will not result
in any adverse financial impact on the Funds, but no assurance can
be provided until the proceedings are resolved.
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at
issue include amounts that were proper and that were properly
allocated to Funds, and also identified a smaller number of
expenses that had been allocated in error, but were adjusted and
repaid to the affected Funds when they were identified in
2012. During the period in question, Commonwealth Capital
Corp. (“CCC”) and Ms. Springsteen-Abbott provided
important financial support to the Funds, voluntarily absorbed
expenses and voluntarily waived fees in amounts aggregating in
excess of any questioned allocations. A Hearing Panel ruled
on March 30, 2015, that Ms. Springsteen-Abbott should be barred
from the securities industry because the Panel concluded that she
allegedly misallocated approximately $208,000 of expenses involving
certain Funds over the course of three years. As such,
management had allocated approximately $87,000 of the $208,000 in
allegedly misallocated expenses back to the affected funds as a
contingency accrual in CCC’s financial statements and a good
faith payment for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed
to FINRA's National Adjudicatory Council (the “NAC”)
pursuant to FINRA Rule 9311. The NAC issued a decision that
upheld the lower panel’s ruling and the bar took effect on
August 23, 2016. Ms. Springsteen-Abbott appealed the
NAC’s decision to the U.S. Securities and Exchange Commission
(the “SEC”). On March 31, 2017, the SEC
criticized that decision as so flawed that the SEC could not even
review it, and remanded the matter back to FINRA for further
consideration consistent with the SEC’s remand, but did not
suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling
$208,000 to a remaining list of 84 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. All the requested
or allowed briefs have been filed with the SEC. The SEC upheld
FINRA’s order on February 7, 2020 to bar, but eliminated
FINRA’s proposed fine. Ms. Springsteen-Abbott has filed a
Petition for Review in the United States Court of Appeals for the
District of Columbia Circuit to review a final order entered
against her by the U.S. Securities and Exchange Commission. As the
SEC eliminated FINRA’s fine completely, Management is even
more confident that regardless of final resolution, it will not
result in any material adverse financial impact to the Funds,
although a final assurance cannot be provided until the legal
matter is resolved. That appeal is pending as of April 15,
2020.
F18
9. Reconciliation of Amounts
Reported for Financial Reporting Purposes to Amounts on the Federal
Partnership Return (Unaudited)
The tax
basis of the Company’s net assets and liabilities vary from
the amounts presented in these financial statements at December 31,
2019 and 2018 as follows:
Years Ended December 31,
|
2019
|
2018
|
Financial statement
basis of net assets
|
$2,808,394
|
$3,824,661
|
Tax basis of net
assets (unaudited)
|
2,634,263
|
2,216,006
|
Difference
(unaudited)
|
$(174,131)
|
$(1,608,655)
|
The
primary differences between the tax basis of net assets and the
amounts recorded in the financial statements are the result of
differences in accounting for impairment losses, syndication costs
and differences between the depreciation methods used in the
financial statements and the Partnership’s tax returns
(unaudited).
Years Ended December 31,
|
2019
|
2018
|
Net
loss for financial reporting purposes to taxable gain
(loss)
|
$(701,088)
|
$(757,157)
|
Gain (loss) on sale
of equipment
|
14,881
|
(32,756)
|
Depreciation
|
966,007
|
5,496
|
Amortization
|
47,055
|
48,372
|
Unearned lease
income
|
(12,104)
|
(780,028)
|
Penalties
|
1,297
|
(1,977)
|
Bad
debts
|
105,087
|
80,959
|
*Other
|
323,247
|
(103,289)
|
Taxable
gain (loss) on the Federal Partnership return
(unaudited)
|
$744,382
|
$(1,540,380)
|
*Other-
includes financial statement adjustments that will be reflected on
the tax return in the subsequent year.
10. Subsequent Events
Leased Equipment
Purchase
and Sale Agreement – On January 31, 2020 the Partnership
entered into a Purchase and Sale Agreement, (the “Purchase
Agreement”) with Cummins, Inc. (the “Buyer”) to
sell to the Buyer approximately 1,475 items of equipment that the
Buyer previously leased from the Company . The General
Partner allocated to the Partnership its share of approximately
$227,000, for the sale price of primarily, Small IBM Servers and
High Volume & Spec Printers and will record a gain on sale of
equipment of approximately $59,000 on the Condensed Statement of
Operations, during the first quarter ended March 31,
2020.
COVID-19 Pandemic
Subsequent
to December 31, 2019, the World Health Organization declared the
novel coronavirus outbreak a public health emergency. The
Fund’s operations is located in Florida, which has restricted
gatherings of people due to the coronavirus outbreak. At present,
the Fund’s operations have not been adversely affected and
continues to function effectively. Due to the dynamic nature of
these unprecedented circumstances and possible business disruption,
the Fund will continue to monitor the situation closely, but given
the uncertainty about the situation, an estimate of the future
impact, if any, cannot be made at this time.
F19
31.1 THE RULE 15d-14(a) CERTIFICATION OF CHIEF EXECUTIVE
OFFICER
I, Kimberly A. Springsteen-Abbott certify
that:
1.
I have reviewed
this annual report on Form 10-K of Commonwealth Income & Growth
Fund VII (the Registrant);
2.
Based on my
knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this report;
3.
Based on my
knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4.
The
registrant’s other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and
have:
(a)
Designed such
disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this report is being prepared;
(b)
Designed such
internal control over financial reporting or caused such internal
control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c)
Evaluated the
effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
(d)
Disclosed in this
report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5.
The registrant's
other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent functions):
(a)
All significant
deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
(b)
Any fraud, whether
or not material, that involves management or other employees who
have a significant role in the registrant's internal control over
financial reporting.
/s/ Kimberly A. Springsteen-Abbott
Kimberly
A. Springsteen-Abbott
Chief
Executive Officer
April 28,
2020
F20
31.2 RULE 15d-14(a) CERTIFICATION OF PRINCIPAL FINANCIAL
OFFICER
I,
Kimberly A. Springsteen-Abbott, certify that:
1.
I have reviewed
this annual report on Form 10-K of Commonwealth Income & Growth
Fund VII (the Registrant);
2.
Based on my
knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this report;
3.
Based on my
knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4.
The
registrant’s other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and
have:
(a)
Designed such
disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this report is being prepared;
(b)
Designed such
internal control over financial reporting or caused such internal
control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c)
Evaluated the
effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
(d)
Disclosed in this
report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5.
The registrant's
other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent functions):
(a)
All significant
deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
(b)
Any fraud, whether
or not material, that involves management or other employees who
have a significant role in the registrant's internal control over
financial reporting.
/s/ Kimberly A. Springsteen-Abbott
Kimberly
A. Springsteen-Abbott
Principal
Financial Officer
April
28, 2020
F21
EXHIBIT 32
WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER
AND PRINCIPAL FINANCIAL OFFICER
FURNISHED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION
1350)
AND FOR THE PURPOSE OF COMPLYING WITH RULE 13a-14(b)
OF THE SECURITIES EXCHANGE ACT OF 1934.
In
connection with the Annual Report of Commonwealth Income &
Growth Fund VII (the “Company”) on Form 10-K for the
period ending December 31, 2019, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”),
the undersigned, the Chief Executive Officer and the Principal
Financial Officer of the Company hereby certifies pursuant to 18
U.S.C. § 1350, as adopted pursuant to § 906 of
the Sarbanes-Oxley Act of 2002, to such officer’s knowledge,
that: (a) the Annual Report on Form 10-K of the Company for the
year ended December 31, 2019 filed on the date hereof with the
Securities and Exchange Commission (the “Report”) fully
complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and (b) information contained in
the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
|
/s/Kimberly A.
Springsteen-Abbott
|
|
Kimberly A.
Springsteen-Abbott
|
|
Chief Executive
Officer and Principal Financial Officer
|
|
April 28,
2020
|
F22
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
|
|
|
April 28,
2020
|
By: /s/
Kimberly A. Springsteen-Abbott
|
Date
|
Kimberly
A. Springsteen-Abbott
|
|
Chief
Executive Officer
Commonwealth
Income & Growth Fund, Inc.
|
|
|
|
|
April 28,
2020
|
By: /s/ Henry
J. Abbott
|
Date
|
Henry
J. Abbott
|
|
Director, President,Commonwealth Income & Growth Fund,
Inc.
|
F23