UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20192020 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)

 

 

 

 (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):

 

 

Indicate by check mark whether the registrant is an emerging growth company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

 

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

 

 

 

 

 

 

 

 

 

 

Commonwealth Income & Growth Fund VII, LP (the “Partnership”) is a limited partnership organized in the Commonwealth of Pennsylvania on November 14, 2008. The Partnership offered for sale up to 2,500,000 units of limited partnership interest at the purchase price of $20 per unit (the “offering”). The Partnership reached the minimum amount in escrow and commenced operations on March 31, 2010. The offering terminated on November 22, 2011 with 1,572,900 units sold for a total of approximately $31,432,000 in limited partner contributions.

 

The Partnership uses the proceeds of the offering to acquire, own and lease various types of computer information technology equipment and other similar capital equipment, which is leased primarily to U.S. corporations and institutions. Commonwealth Capital Corp. (“CCC”), on behalf of the Partnership and other affiliated partnerships, acquires computer equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors.

 

The Partnership’s general partner is Commonwealth Income & Growth Fund, Inc. (the “General Partner”), a Pennsylvania corporation which is an indirect wholly-owned subsidiary of CCC. CCC is a member of the Institute for Portfolio Alternatives (“IPA”) and the Equipment Leasing and Finance Association (“ELFA”). Approximately ten years after the commencement of operations, the Partnership intends to sell or otherwise dispose of all of its equipment, make final distributions to partners, and to dissolve. Unless sooner terminated or extended pursuant to the terms of its Limited Partnership Agreement (the “Agreement”), the Partnership will continue until December 31, 2021.

 

 

 

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, 20182019 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 ninesix months ended SeptemberJune 30, 20192020 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2020.

The Partnership has determined that there has been an immaterial error in its cash flow presentation related to Distributions from Investment in COF2 for the six months ended June 30, 2019. The Partnership determined that the Distributions from Investment in COF2 in the amount of approximately $12,000 should be presented in investing activities in the Condensed Statement of Cash Flows instead of operating activities. A reclassification adjustment was made on the Condensed Statement of Cash Flows to move the amount out of operating activities and into investing activities.

 

 

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.

 

Estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, judgment was necessary to interpret market data and develop estimated fair value. Cash and cash equivalents, receivables, accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of SeptemberJune 30, 20192020 and December 31, 20182019 due to the short termshort-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 SeptemberJune 30, 20192020 and December 31, 20182019 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.

 

 

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

 

At SeptemberJune 30, 2019,2020, cash and cash equivalents was held in one bank account maintained at one financial institution with an aggregate balance of approximately $500,000.$351,000. Bank accounts are federally insured up to $250,000 by the FDIC. At SeptemberJune 30, 2019,2020, the total cash bank balance was as follows:

 

 

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 20192020 due to many factors, including cash receipts, equipment acquisitions, interest rates and distributions to limited partners.

 

 

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.

 

 

The Partnership is the lessor of equipment under operating leases with periods that generally will range from 12 to 48 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee.

 

Remarketing fees will be paid toGains or losses from the leasing companies from which the Partnership purchases leases. Thesesale of equipment are fees that are earned by the leasing companiesrecognized when the initial terms of the lease have been met. The General Partner believes that this strategy adds value since it entices the leasing company to remain actively involved with lesseeis modified and encourages potential extensions, remarketing orterminated concurrently. Gain from sale of equipment. This strategy is designed to minimize any conflictsequipment included in lease revenue for the leasing company may have with a new lessee and may assist in maximizing overall portfolio performance. The remarketing fee is tied into lease performance thresholds and is a factor in the negotiation of the fee. For the ninesix months ended SeptemberJune 30, 2020 and 2019 was $33,000 and 2018, there were no remarketing fees incurred, paid with cash or netted against receivables due from such parties.$29,000, respectively.

 

CCC, on behalf of the Partnership and on behalf of other affiliated companies and partnerships (“partnerships”), acquires equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various companies based on certain risk factors.

 

The Partnership’s share of the cost of the equipment in which it participates with other partnerships at SeptemberJune 30, 20192020 was approximately $9,335,000$10,077,000 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 SeptemberJune 30, 20192020 was approximately $1,216,000$798,000 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 SeptemberJune 30, 20192020 was approximately $21,376,000.$23,371,000. The total outstanding debt related to the equipment shared by the Partnership at SeptemberJune 30, 20192020 was approximately $2,629,000.$2,000,000.

 

The Partnership’s share of the cost of the equipment in which it participates with other partnerships at December 31, 20182019 was approximately $10,206,000$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, 20182019 was approximately $1,786,000$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, 20182019 was approximately $23,912,000.$22,760,000. The total outstanding debt related to the equipment shared by the Partnership at December 31, 20182019 was approximately $3,875,000.$2,202,000.

 

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 2019,2020, 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:

 

 

The following lists the components of the net investment in direct financingfinance leases:

 

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 creditscredit 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. When assessing risk, factors taken into consideration include both general and industry specific qualitative and quantitative metrics. We separately take in to consideration payment history, open lawsuits, liens and judgments. Typically, we will not extend credit to a company that has been in business for less than 5 years or that has filed for bankruptcy within the same period. Our internally based model may classify a company as high risk based on our analysis of their audited financial statements and their payment history. Additional considerations of high risk may include history of late payments, open lawsuits and liens or judgments. In an effort to mitigate risk, we typically require deposits from those in this category.

 

A reserve for credit losses is deemed necessary when payment has not been received for one or more months of receivables due on the equipment held under finance leases. At the end of each period, management evaluates the open receivables due on this equipment and determines the need for a reserve based on payment history and any current factors that would have an impact on payments.

 

As of SeptemberJune 30, 20192020, and December 31, 2018,2019, 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.

 

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.

 

 

 

 

 

As of SeptemberJune 30, 20192020, and December 31, 2018,2019, the Partnership’s related party receivables and payables are short term, unsecured, and non-interest bearing.

 

 

 

Notes payable consisted of the following approximate amounts:

 

The notes are secured by specific equipment with a carrying value of approximately $2,693,000$1,399,000 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 SeptemberJune 30, 20192020 are as follows:

 

No interest or principal on notes payable was paid by the Partnership during 20192020 and 20182019 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:

 

Noncash investing and financing activities include the following:

 

During the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, the Partnership wrote-off fully amortized acquisition and finance fees of approximately $29,000$22,000 and $23,000,$22,000, respectively.

 

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 NovemberAugust 14, 2019,2020, the Partnership had received approximately $728,000 of the approximate $1,033,000 sale proceeds and has recorded a reserve of $243,000$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 $243,000$246,000 reserve and recorded as a bad debt recovery.  As of November 13, 2019,August 14, 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. 

 

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 allocatedalready reallocated back approximately $87,000$151,225 of the $208,000 in(in allegedly misallocated expenses backexpenses) to the affected funds, which was fully documented, as a contingency accrual in CCC’s financial statements and a good faith paymentpayments 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 8487 items totaling $36,226 (which includes approximately $30,000 of continuing education expenses for personnel providing services to the Funds), and reduced the proposed fine from $100,000 to $50,000, but reaffirmed its position on the bar from the securities industry.  Respondents promptly appealed FINRA’s revised ruling to the SEC.  That appeal is pending as of November 13, 2019.  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 believesis even more confident that whateverregardless of final resolution, of this may be, it will not result in any material adverse financial impact onto the Funds, although a final assurance cannot be provided until the legal matter is resolved.

 

 

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, 20182019 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.

 

The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross section of the $1 trillion$900 billion equipment finance sector, showed their overall new business volume for SeptemberJune was $10$8.9 billion, up

Receivables over 30 days were 1.702.60 %, down from 2.04.30 % the previous month and up from 1.601.70 % the same period in 2018.2019. Charge-offs was 0.40were 0.71 %, downup from 0.420.61 % the previous month, and unchangedup from 0.33 % in the year-earlier period.

Credit approvals totaled 76.371.5 %, downup from 76.671.0 % in August.May. Total headcount for equipment finance companies was down 2.11.9 % year-over-year.

Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in OctoberJuly is 51.4, down from45.3, steady with the SeptemberMay index of 54.7.45.8.   

 

 

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.

 

 

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 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.

 

Through SeptemberJune 30, 2019,2020, 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.

 

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

 

GainsPartnership’s accounting policy for sales and property taxes collected from the termination of leaseslessees are recognized whenrecorded in the lease is modifiedcurrent period as gross revenues and terminated concurrently. Gains from lease termination included in lease revenue for both the nine months ended September 30, 2019 and 2018 were approximately $0.expenses.

 

 

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.

 

 

Our primary sourcesources of cash for the ninesix months ended SeptemberJune 30, 2019, is2020, were net proceeds from the sale of equipment of approximately $55,000.$143,000 and distributions from investments in COF2 of approximately $4,000. This compares to the ninesix months ended SeptemberJune 30, 20182019 where our primary sources of cash were cash provided by operating activities of approximately $541,000, net proceeds from the sale of equipment of approximately $191,000$37,000 and payments receiveddistributions from finance leasesinvestment in COF2 of approximately $65,000.$12,000.

 

Our primary uses of cash for the ninesix months ended SeptemberJune 30, 20192020 were cash used in operating activities of approximately $93,000, distributions to partners$251,000, capital expenditures of approximately $309,000$52,000 and limited partner redemptions of approximately $7,000. For the nine months ended September 30, 2018,$29,000. This compares to our primary uses of cash werefor the six months ended June 30, 2019 of operating activities of approximately $162,000, distributions to partners of approximately $232,000,$231,000 and limited partner redemptions of approximately $58,000 and debt placement fee paid to General Partner of approximately $7,000, purchase of new equipment of approximately $196,000 and equipment acquisition fees paid to General Partner of approximately $34,000.$7,000.

 

Cash used in operating activities for the ninesix months ended SeptemberJune 30, 20192020 was approximately $93,000,$251,000, including a net loss of approximately $513,000$142,000 and depreciation and amortization expenses of approximately $1,168,000.$716,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $1,029,000.$605,000. This compares to the ninesix months ended SeptemberJune 30, 20182019 with cash provided byused in operating activities of approximately $541,000,$162,000, including a net loss of approximately $612,000$393,000 and depreciation and amortization expenses of approximately $1,488,000.$786,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $1,681,000 and a net gain on sale of equipment held under operating leases of approximately $106,000.$700,000.

 

As we continue to increase the size of our equipment portfolio, operating expenses will increase, which reflects the administrative costs of servicing the portfolio, but because of our investment strategy of leasing equipment primarily through triple-net leases, we avoid operating expenses related to equipment maintenance or taxes.

 

CCC, on our behalf and on behalf of other affiliated partnerships, acquires equipment subject to associated debt obligations and lease revenue and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors.

 

Capital expenditures and distributions are expected to continue to increase overall during the remainder of 20192020 as management focuses on additional equipment acquisitions and funding limited partner distributions.acquisitions.

 

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

 

 

 

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 amountsamount in such accountsits account will fluctuate throughout 20192020 due to many factors, including the pace of cash receipts, equipment acquisitions and distributions to limited partners.

 

As of SeptemberJune 30, 2019,2020, we had future minimum rentals on non-cancelable operating leases of approximately $480,000$660,000 for the balance of the year ending December 31, 20192020 and approximately $1,420,000$426,000 thereafter.

 

As of SeptemberJune 30, 2019,2020, we had future minimum rentals on non-cancelable finance leases of approximately $0$6,000 for the balance of the year ending December 31, 20192020 and approximately $0$47,000 thereafter.

 

As of SeptemberJune 30, 2019,2020, our non-recourse debt was approximately $1,687,000$892,000 with interest rates ranging from 1.8%4.10% through 6.00% and is payable through August 2021.

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses decreased to approximately $383,000$333,000 for the three months ended SeptemberJune 30, 2019,2020, from approximately $444,000$367,000 for the three months ended SeptemberJune 30, 2018.2019. This decrease was due to the higher frequency in the termination of leases and equipment being fully depreciated as compared to the acquisition of new leases for the three months ended SeptemberJune 30, 2019.2020.

 

 

For the three months ended SeptemberJune 30, 2020, we recognized revenue of approximately $551,000, expenses of approximately $646,000 and other loss of $62,000, resulting in net loss of approximately $157,000. For the three months ended June 30, 2019, we recognized revenue of approximately $535,000,$553,000, expenses of approximately $614,000$707,000 and other loss of $41,000,$42,000, resulting in a net loss of approximately $120,000.$196,000. This change in net loss is attributabledue to the changes in revenue and expenses as discusseddescribed above. For the three

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses decreased to approximately $1,168,000$679,000 for the ninesix months ended SeptemberJune 30, 2019,2020, from approximately $1,488,000$743,000 for the ninesix months ended SeptemberJune 30, 2018.2019. 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 ninesix months ended SeptemberJune 30, 2019.2020.

 

 

For the ninesix months ended SeptemberJune 30, 2020, we recognized revenue of approximately $1,128,000, expenses of approximately $1,326,000 and other gain of $56,000, resulting in a net loss of approximately $142,000. For the six months ended June 30, 2019, we recognized revenue of approximately $1,646,000,$1,111,000, expenses of approximately $2,036,000$1,422,000 and other loss of $123,000,$82,000, resulting in a net loss of approximately $513,000.$393,000. This change in net loss is attributabledue to the changes in revenue and expenses as discusseddescribed above. For the nine months ended September 30, 2018, we recognized revenue of approximately $1,996,000, expenses of approximately $2,519,000 and other loss of $88,000, resulting in a net loss of approximately $612,000.

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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 SeptemberJune 30, 2019,2020, our disclosure controls and procedures arewere not effective due to the presence of a material weakness in ensuringinternal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that information relatingthere is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013) and SEC guidance on conducting such assessments. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls. Based on this assessment, management has concluded that as of June 30, 2020, our internal control over financial reporting was not effective to us which is requiredprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The matters involving internal controls and procedures that our management considered to be disclosedmaterial weaknesses under the standards of the Public Company Accounting Oversight Board were: (i) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our principal financial officer and principal accounting officer, in connection with the review of our financial statements as of June 30, 2020.

We have implemented this procedure as part of our monthly close process and anticipate that this procedure will be incorporated in our periodic reports filed or submitted underwritten policies and procedures by the Securities Exchange Actend of 1934 is (a) recorded, processed, summarized and reported within the time periods specifiedSeptember 30, 2020.

There were no other changes in the Partnership’sour internal control over financial reporting during the third quarter of 2019ending June 30, 2020, that have materially affected, or are reasonably likely to materially affect, itsour internal control over financial reporting.

 

 

 

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 November 13, 2019,August 14, 2020, the Partnership had received approximately $728,000 of the approximate $1,033,000 sale proceeds and has recorded a reserve of $243,000$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 $243,000$246,000 reserve and recorded as a bad debt recovery.  As of November 13, 2019,August 14, 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. 

 

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.

 

 

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 allocatedalready reallocated back approximately $87,000$151,225 of the $208,000 in(in allegedly misallocated expenses backexpenses) to the affected funds, which was fully documented, as a contingency accrual in CCC’s financial statements and a good faith paymentpayments 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 8487 items totaling $36,226 (which includes approximately $30,000 of continuing education expenses for personnel providing services to the Funds), and reduced the proposed fine from $100,000 to $50,000, but reaffirmed its position on the bar from the securities industry.  Respondents promptly appealed FINRA’s revised ruling to the SEC.  That appeal is pending as of November 13, 2019.  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 believesis even more confident that whateverregardless of final resolution, of this may be, it will not result in any material adverse financial impact onto the Funds, although a final assurance cannot be provided until the legal matter is resolved.

 

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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.