Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2017 or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number: 333-108057
COMMONWEALTH INCOME & GROWTH FUND V
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
65-1189593
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification Number)
|
17755
US Highway 19 North
Suite
400
Clearwater,
FL 33764
(Address,
including zip code, of principal executive offices)
(877)
654-1500
(Registrant’s
telephone number including area code)
Indicate
by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (ii) has
been subject to such filing requirements for the past 90
days:
YES
☒ NO
☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).YES ☒ NO ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of "accelerated filer,
“large accelerated filer" and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ☐
|
Accelerated
filer ☐
|
Non-accelerated
filer ☐
|
Smaller
reporting company ☒
|
(Do not
check if a smaller reporting company.)
|
Emerging
growth company ☐
|
Indicate
by check mark whether the registrant is an emerging growth company
(as defined in Rule 12b-2 of the Exchange Act). YES ☐
NO ☒
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES ☐ NO
☒
1
FORM
10-Q
March
31, 2017
TABLE
OF CONTENTS
PART
I
|
||
Item
1.
|
Financial
Statements
|
3
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
18
|
Item
3.
|
Quantitative and
Qualitative Disclosures About Market Risk
|
23
|
Item
4.
|
Controls and
Procedures
|
23
|
PART
II
|
||
Item
1.
|
Legal
Proceedings
|
23
|
Item
1A.
|
Risk
Factors
|
24
|
Item
2.
|
Unregistered Sales
of Equity Securities and Use of Proceeds
|
24
|
Item
3.
|
Defaults Upon
Senior Securities
|
24
|
Item
4.
|
Mine Safety
Disclosures
|
24
|
Item
5.
|
Other
Information
|
24
|
Item
6.
|
Exhibits
|
24
|
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Commonwealth Income & Growth Fund
V
|
||
Condensed
Balance Sheets
|
||
|
|
|
|
March
31,
|
December
31,
|
|
2017
|
2016
|
|
(unaudited)
|
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$33,313
|
$16,529
|
Lease income
receivable, net of reserve of approximately $10,000 at March 31,
2017 and December 31, 2016, respectively
|
63,187
|
41,927
|
Other
receivables
|
11,920
|
20,754
|
Prepaid
expenses
|
702
|
309
|
|
109,122
|
79,519
|
|
|
|
Net investment in
finance leases
|
58,452
|
66,789
|
|
|
|
Equipment, at
cost
|
6,269,021
|
6,142,862
|
Accumulated
depreciation
|
(5,528,126)
|
(5,492,621)
|
|
740,895
|
650,241
|
|
|
|
|
|
|
Total
Assets
|
$908,469
|
$796,549
|
|
|
|
LIABILITIES
AND PARTNERS' CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$127,303
|
$127,286
|
Accounts payable,
CIGF, Inc., net
|
76,654
|
104,992
|
Accounts payable,
Commonwealth Capital Corp., net
|
323,435
|
249,525
|
Other accrued
expenses
|
116,302
|
16,102
|
Unearned lease
income
|
23,723
|
27,977
|
Notes
payable
|
341,837
|
359,590
|
Total
Liabilities
|
1,009,254
|
885,472
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
PARTNERS'
CAPITAL
|
|
|
General
Partner
|
1,000
|
1,000
|
Limited
Partners
|
(101,785)
|
(89,923)
|
Total
Partners' Capital
|
(100,785)
|
(88,923)
|
|
|
|
Total
Liabilities and Partners' Capital
|
$908,469
|
$796,549
|
|
|
|
see
accompanying notes to condensed financial statements
|
3
Commonwealth Income & Growth Fund
V
|
||
Condensed
Statements of Operations
|
||
(unaudited)
|
||
|
|
|
|
Three
Months Ended March 31,
|
|
|
2017
|
2016
|
Revenue
|
|
|
Lease
|
$141,211
|
$177,773
|
Interest and
other
|
1,116
|
1,830
|
Gain on sale of
equipment
|
37
|
13,137
|
Total
revenue and gain on sale of equipment
|
142,364
|
192,740
|
|
|
|
Expenses
|
|
|
Operating,
excluding depreciation
|
67,922
|
92,492
|
Equipment
management fee, General Partner
|
-
|
4,633
|
Interest
|
4,053
|
5,333
|
Depreciation
|
93,114
|
185,135
|
Total
expenses
|
165,089
|
287,593
|
|
|
|
Other
income (loss)
|
|
|
Gain from insurance
recovery
|
10,863
|
-
|
Total
other income (loss)
|
10,863
|
-
|
|
|
|
Net
loss
|
$(11,862)
|
$(94,853)
|
|
|
|
Net
loss allocated to Limited Partners
|
$(11,862)
|
$(94,853)
|
|
|
|
Net
loss per equivalent Limited Partnership unit
|
$(0.01)
|
$(0.08)
|
|
|
|
Weighted
average number of equivalent Limited Partnership units outstanding
during the period
|
1,236,608
|
1,236,608
|
|
|
|
see
accompanying notes to condensed financial statements
|
4
Commonwealth Income & Growth Fund
V
|
|||||
Condensed
Statement of Partners' Capital
|
|||||
For
the three months ended March 31, 2017
|
|||||
(unaudited)
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance,
January 1, 2017
|
50
|
1,236,608
|
$1,000
|
$(89,923)
|
$(88,923)
|
Net
loss
|
-
|
-
|
-
|
(11,862)
|
(11,862)
|
Balance,
March 31, 2017
|
50
|
1,236,608
|
$1,000
|
$(101,785)
|
$(100,785)
|
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
5
Condensed
Statements of Cash Flow
|
||
(unaudited)
|
||
|
|
|
|
|
|
|
Three
months ended March 31,
|
|
|
2017
|
2016
|
|
|
|
Net
cash provided by operating activities
|
$27,189
|
$36,511
|
|
|
|
Investing
activities:
|
|
|
Capital
expenditures
|
(21,044)
|
(4,939)
|
Payments from
finance leases
|
9,439
|
9,439
|
Net proceeds from
the sale of equipment
|
1,200
|
13,137
|
Net
cash (used in) provided by investing activities
|
(10,405)
|
17,637
|
|
|
|
Net
increase in cash and cash equivalents
|
16,784
|
54,148
|
|
|
|
Cash
and cash equivalents at beginning of period
|
16,529
|
51,344
|
|
|
|
Cash
and cash equivalents at end of period
|
$33,313
|
$105,492
|
|
|
|
see
accompanying notes to condensed financial statements
|
6
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Business
Commonwealth
Income & Growth Fund V (the "Partnership") is a limited
partnership organized in the Commonwealth of Pennsylvania in May
2003. The Partnership offered for sale up to 1,250,000 units of the
limited partnership at the purchase price of $20 per unit (the
"offering"). The Partnership reached the minimum amount in escrow
and commenced operations on March 14, 2005. As of February 24,
2006, the Partnership was fully subscribed.
The
Partnership used the proceeds of the offering to acquire, own and
lease various types of information technology, medical technology,
telecommunications technology, inventory management 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 equipment subject to
associated debt obligations and lease agreements and allocate a
participation in the cost, debt and lease revenue to the various
partnerships that it manages 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
acquires 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. Approximately
ten years after the commencement of operations (the "operational
phase"), the Partnership intended to sell or otherwise dispose of
all of its equipment; make final distributions to partners, and to
dissolve. The Partnership was originally scheduled to end its
operational phase on February 4, 2017. During the year ended
December 31, 2015, the operational phase was officially extended to
December 31, 2020 through an investor proxy vote. The Partnership
is expected to terminate on December 31, 2022.
For the first quarter of 2017, the General Partner elected
to forgo distributions and allocations of net income owed to it,
and suspended limited partner distributions for the three months
ended March 31, 2017. The
General Partner will reassess the funding of limited partner
distributions on a quarterly basis, throughout
2017.
7
Liquidity and Going Concern
The
Partnership has incurred recurring losses and has a working capital
deficit at March 31, 2017. The Partnership believes it has
alleviated these conditions as discussed below. The General Partner
and CCC have committed to fund, either through cash contributions
and/or forgiveness of indebtedness, any necessary operational cash
shortfalls of the Partnership through March 31, 2018. The General Partner and CCC will also
determine if related party payables owed to them by the Partnership
may be deferred (if deemed necessary) in an effort to further
increase the Partnership’s cash flow.
The
General Partner will continue to reassess the funding of limited
partner distributions throughout 2017 and will continue to waive
certain fees if the General Partner determines it is in the best
interest of the Partnership to do so. If available cash flow or net
disposition proceeds are insufficient to cover the Partnership
expenses and liabilities on a short and long term basis, the
Partnership may attempt to obtain additional funds by disposing of
or refinancing equipment, or by borrowing within its permissible
limits. Additionally, the Partnership will seek to enhance
portfolio returns and maximize cash flow through the use of
leveraged lease transactions: the acquisition of lease equipment
through debt financing. This strategy allows the General
Partner to acquire additional revenue generating leases thus
maximizing overall return. For the three months ended March
31, 2017, the Partnership has acquired approximately $185,000 in
equipment, of which approximately $51,000 is
leveraged.
2. Summary of Significant Accounting Policies
Basis of Presentation
The
financial information presented as of any date other than December
31, 2016 has been prepared from the books and records without
audit. The following unaudited condensed financial statements have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Financial information as of
December 31, 2016 has been derived from the audited financial
statements of the Partnership, but does not include all disclosures
required by generally accepted accounting principles to be included
in audited financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial information for
the periods indicated, have been included. Operating results for
the three months ended March 31, 2017 are not necessarily
indicative of financial results that may be expected for the full
year ended December 31, 2017.
Disclosure of Fair Value of Financial Instruments
Estimated fair value was determined by management using available
market information and appropriate valuation methodologies.
However, judgment was necessary to interpret market data and
develop estimated fair value. Cash and cash equivalents,
receivables, accounts payable and accrued expenses and other
liabilities are carried at amounts which reasonably approximate
their fair values as of March 31, 2017 and December 31, 2016 due to
the short term nature of these financial instruments.
The Partnership’s debt consists of notes payable, which are
secured by specific equipment and are nonrecourse liabilities of
the Partnership. The estimated fair value of this debt at March 31,
2017 and December 31, 2016 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.
Forgiveness of Related Party Payables
In accordance with ASC Topic 470-50 Debt Modifications and
Extinguishments, the
Partnership accounts for forgiveness of related party payables as
Partners' capital transactions.
8
Cash and cash equivalents
We
consider cash equivalents to be highly liquid investments with the
original maturity dates of 90 days or less.
At
March 31, 2017, cash and cash equivalents was held in two accounts
maintained at one financial institution with an aggregate balance
of approximately $35,000. Bank accounts are federally insured up to
$250,000 by the FDIC. At March 31, 2017, the total cash bank
balance was as follows:
At March 31, 2017
|
Balance
|
Total
bank balance
|
$35,000
|
FDIC
insured
|
(35,000)
|
Uninsured
amount
|
$-
|
The
Partnership’s bank balances are fully insured by the FDIC.
The Partnership deposits its funds with a Moody's Aaa-Rated banking
institution which is one of only three Aaa-Rated banks listed on
the New York Stock Exchange. The Partnership has not experienced
any losses in such accounts, and believes it is not exposed to any
significant credit risk. The amount in such accounts will fluctuate
throughout 2017 due to many factors, including cash receipts,
equipment acquisitions, interest rates, and distribution to limited
partners.
Recently Adopted Accounting Pronouncements
In
October 2016, the FASB issued Accounting Standards Update
2016-17— Consolidation
(Topic 810): Interests Held through Related Parties That Are under
Common Control. The amendments in this Update are effective
for public business entities for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal
years. Early adoption is permitted, including adoption in an
interim period. This standard was adopted January 1, 2017; however,
adoption of this ASU had no impact on the Partnership’s
financial statements during the three months ended March 31,
2017.
Recent Accounting Pronouncements Not Yet Adopted
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No.
2014-09, Revenue from Contracts with
Customers (“ASU 2014-09”). Various
amendments to ASU No. 2014-09 have been issued,
including;
●
ASU No. 2016-08
(issued in March 2016) which amends principal versus agent guidance
by reframing the indicators in the guidance to focus on evidence
that an entity is acting as a principal rather than as an
agent;
●
ASU No. 2016-10
(issued in April 2016) which amends criteria around licensing and
performance obligations;
●
ASU No. 2016-12
(issued in May 2016); which provides guidance on assessing
collectability, presentation of sales taxes, noncash consideration
and completed contracts and contract modifications at transition;
and
●
ASU No. 2016-20
(issued in December 2016) which contains various technical
corrections and improvements to ASU No. 2014-09.
9
FASB
Accounting Standards Update 2014-09 requires an entity to recognize
revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. In
doing so, entities will need to use more judgment and make more
estimates than under current guidance. These judgments and
estimates may include identifying performance obligations in the
contract, estimating the amount of variable consideration to
include in the transaction price and allocating the transaction
price to each separate performance obligation. ASU 2014-09 also
requires an entity to disclose sufficient qualitative and
quantitative information surrounding the nature, amount, timing and
uncertainty of revenue and cash flows arising from contracts with
customers. This ASU supersedes the revenue recognition requirements
in Topic 605, Revenue
Recognition, and most industry-specific guidance throughout
the Industry Topics of the Codification, and further permits the
use of either a retrospective or cumulative effect transition
method. The FASB agreed to a one-year deferral of the original
effective date of this guidance and, as a result, it will become
effective for fiscal years and interim periods after December 15,
2017. However, entities may adopt the new guidance as of the
original effective date (for fiscal years and interim periods
beginning after December 15, 2016). We expect to adopt ASU 2014-09
as of January 1, 2018. Our analysis of this comprehensive standard,
including our evaluation of the available transition methods, is
ongoing and the impact on our financial statements is not currently
estimable.
In
August 2016, the FASB issued Accounting Standards Update
2016-15—Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments- The amendments in this Update apply to all
entities, including both business entities and not-for-profit
entities that are required to present a statement of cash flows
under Topic 230. The amendments in this Update are effective for
public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early
adoption is permitted, including adoption in an interim period. The
Partnership is currently evaluating the effect that this ASU will
have on its financial statements.
In
February 2016, the FASB issued Accounting Standards Update No.
2016-02, Leases (Topic 842)
Section A—Leases: Amendments to the FASB Accounting Standards
Codification® Section B—Conforming Amendments Related to
Leases: Amendments to the FASB Accounting Standards
Codification® Section C—Background Information and Basis
for Conclusions- Effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal
years, for any of the following: A public business entity; A
not-for-profit entity that has issued, or is a conduit bond obligor
for, securities that are traded, listed, or quoted on an exchange
or an over-the-counter market; An employee benefit plan that files
financial statements with the U.S. Securities and Exchange
Commission (SEC). The new standard requires the recognition and
measurement of leases at the beginning of the earliest period
presented using a modified retrospective approach, which includes a
number of optional practical expedients that entities may elect to
apply. This guidance also expands the requirements for
lessees to record leases embedded in other arrangements and the
required quantitative and qualitative disclosures surrounding
leases. We have begun accumulating the information related to
leases and are evaluating our internal processes and controls with
respect to lease administration activities. Additionally, our
business involves lease agreements with our customers whereby we
are the lessor in the transaction. Accounting guidance for lessors
is largely unchanged. Our evaluation of this guidance is ongoing
and the impact that this new guidance will have on our financial
statements has not yet been determined.
In
January 2016, the FASB issued Accounting Standards Update No.
2016-01, Financial
Instruments—Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities-
the amendments in this Update are effective for fiscal years
beginning after December 15, 2017, including interim periods within
those fiscal years. The Partnership is currently evaluating the
effect that this ASU will have on its financial
statements.
10
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 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 are paid to the leasing companies from which the Partnership
purchases leases. These are fees that are earned by the leasing
companies when the initial terms of the lease have been met. The
General Partner believes that this strategy adds value since it
entices the leasing company to remain actively involved with the
lessee and encourages potential extensions, remarketing or sale of
equipment. This strategy is designed to minimize any conflicts the
leasing company may have with a new lessee and may assist in
maximizing overall portfolio performance. The remarketing fee is
tied into lease performance thresholds and is a factor in the
negotiation of the fee. Remarketing fees incurred in connection
with lease extensions are accounted for as operating costs.
Remarketing fees incurred in connection with the sale of equipment
are included in the gain or loss calculations. For the three months
ended March 31, 2017 and 2016, no remarketing fees were incurred or
paid.
Gains
from the termination of leases are recognized when the lease is
modified and terminated concurrently. Gains from lease termination
included in lease revenue for the three months ended March 31, 2017
and 2016 were approximately $1,000 and $0,
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 March 31, 2017 was
approximately $3,235,000 and is included in the Partnership’s
equipment on its balance sheet. The total cost of the equipment
shared by the Partnership with other partnerships at March 31, 2017
was approximately $10,156,000. The Partnership’s share of the
outstanding debt associated with this equipment at March 31, 2017
was approximately $294,000 and is included in the
Partnership’s notes payable on its balance sheet. The total
outstanding debt related to the equipment shared by the Partnership
at March 31, 2017 was approximately $1,366,000.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2016 was
approximately $4,166,000 and is included in the Partnership’s
equipment on its balance sheet. The total cost of the equipment
shared by the Partnership with other partnerships at December 31,
2016 was approximately $10,453,000. The Partnership’s share
of the outstanding debt associated with this equipment at December
31, 2016 was approximately $186,000 and is included in the
Partnership’s notes payable on its balance sheet. The total
outstanding debt related to the equipment shared by the Partnership
at December 31, 2016 was approximately $502,000.
As the
Partnership and the other programs managed by the General Partner
continue to acquire new equipment for the portfolio, 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.
11
The
following is a schedule of approximate future minimum rentals on
non-cancellable operating leases at March 31, 2017:
For the period ended
December
|
Amount
|
Nine months ended
December 31, 2017
|
$259,000
|
Year Ended December
31, 2018
|
178,000
|
Year Ended December
31, 2019
|
81,000
|
Year Ended December
31, 2020
|
5,000
|
|
$523,000
|
|
|
Finance Leases:
The
following lists the approximate components of the net investment in
direct financing leases:
|
March
31, 2017
|
December 31,
2016
|
Total minimum lease
payments to be received
|
$45,000
|
$55,000
|
Estimated residual
value of leased equipment (unguaranteed)
|
17,000
|
17,000
|
Less: unearned
income
|
(4,000)
|
(5,000)
|
Net investment in
finance leases
|
$58,000
|
$67,000
|
We assess credit risk for all of our customers, including those
that lease under finance leases. This credit risk is assessed using
an internally developed model which incorporates credits scores
from third party providers and our own customer risk ratings and is
periodically reviewed. Our internal ratings are weighted based on
the industry that the customer operates in. Factors taken into
consideration when assessing risk include both general and industry
specific qualitative and quantitative metrics. We separately take
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. 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.
12
The
following table presents the credit risk profile, by
creditworthiness category, of our direct finance lease receivables
at March 31, 2017:
Risk Level
|
Percent of Total
|
Low
|
-%
|
Moderate-Low
|
-%
|
Moderate
|
-%
|
Moderate-High
|
100%
|
High
|
-%
|
Net finance lease receivable
|
100%
|
As of
March 31, 2017 and December 31, 2016, 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, with no
late payments.
The
following is a schedule of approximate future minimum rentals on
non-cancellable finance leases at March 31, 2017:
|
Amount
|
Nine months ended
December 31, 2017
|
$24,000
|
2018
|
19,000
|
2019
|
2,000
|
Total
|
$45,000
|
The
Partnership was originally scheduled to end its operational phase
on February 4, 2017. During the year ended December 31, 2015, the
operational phase was officially extended to December 31, 2020
through an investor proxy vote (see note 1). The Partnership is
expected to terminate on December 31, 2022. If the Partnership
should terminate, CCC will assume all remaining active leases at
their fair market value and related remaining revenue stream and
any associated debt obligation for the duration of the remaining
lease term.
13
4. Related Party Transactions
Receivables/Payables
As of
March 31, 2017 and December 31, 2016, the Company’s related
party receivables and payables are short term, unsecured and
non-interest bearing.
Three months ended March 31,
|
2017
|
2016
|
|
|
|
Reimbursable
Expenses
|
|
|
The General Partner
and its affiliates are entitled to reimbursement by the Partnership
for the cost of goods, supplies or services obtained and used by
the General Partner in connection with the administration and
operation of the Partnership from third parties unaffiliated with
the General Partner. In addition, the General Partner and its
affiliates are entitled to reimbursement of certain expenses
incurred by the General Partner and its affiliates in connection
with the administration and operation of the Partnership. For the
three months ended March 31, 2017 and 2016, the General Partner
waived certain reimbursable expenses due to it by the Partnership.
For the three months ended March 31, 2017 and 2016, the Partnership
was charged approximately $0 and $38,000 in Other LP expense,
respectively.
|
$61,000
|
$40,000
|
|
|
|
Equipment Management
Fee
|
|
|
The General Partner
and its affiliates are entitled to reimbursement by the Partnership
for the cost of goods, supplies or services obtained and used by
the General Partner in connection with the administration and
operation of the Partnership from third parties unaffiliated with
the General Partner. In addition, the General Partner and its
affiliates are entitled to reimbursement of certain expenses
incurred by the General Partner and its affiliates in connection
with the administration and operation of the Partnership. For the
three months ended March 31, 2017 and 2016, the General Partner
waived certain reimbursable expenses due to it by the Partnership.
For the three months ended March 31, 2017 and 2016, the Partnership
was charged approximately $0 and $38,000 in Other LP expense,
respectively.
|
$-
|
$5,000
|
14
5. Notes Payable
Notes
payable consisted of the following approximate
amounts:
|
March 31, 2017
|
December 31, 2016
|
Installment
note payable to bank; interest at 4.23%, due in quarterly
installments of $478, including interest, with final payment in
February 2017
|
-
|
1,000
|
Installment
notes payable to bank; interest at 4.23%, due in quarterly
installments ranging from $951 to $1,327, including interest, with
final payment in March 2017
|
-
|
2,000
|
Installment
note payable to bank; interest at 4.85%, due in monthly
installments of $922, including interest, with final payment in
March 2017
|
-
|
3,000
|
Installment
note payable to bank; interest at 1.60%, due in monthly
installments of $2,286, including interest, with final payment in
May 2017
|
5,000
|
11,000
|
Installment
note payable to bank; interest at 4.23%, due in quarterly
installments of $1,991, including interest, with final payment in
June 2017
|
2,000
|
4,000
|
Installment
note payable to bank; interest at 4.23%, due in quarterly
installments of $2,711, including interest, with final payment in
May 2017
|
3,000
|
5,000
|
Installment
notes payable to bank; interest at 6.00%, due in monthly
installments ranging from $132 to $663, including interest, with
final payment in August 2017
|
2,000
|
4,000
|
Installment
note payable to bank; interest at 4.85%, due in quarterly
installments of $1,751, including interest, with final payment in
September 2017
|
3,000
|
5,000
|
Installment
note payable to bank; interest at 4.88%, due in quarterly
installments of $1,852, including interest, with final payment in
October 2017
|
13,000
|
18,000
|
Installment
note payable to bank; interest at 4.23%, due in quarterly
installments of $9,663, including interest, with final payment in
February 2018
|
38,000
|
47,000
|
Installment
notes payable to bank; interest at 4.23%, due in quarterly
installments of $278, including interest, with final payment in
March 2018
|
2,000
|
3,000
|
Installment
notes payable to bank; interest at 4.23%, due in quarterly
installments of $278, including interest, with final payment in
April 2018
|
4,000
|
5,000
|
Installment
note payable to bank; interest at 4.23% due in quarterly
installments of $2,797, including interest, with final payment in
June 2018
|
14,000
|
16,000
|
Installment
notes payable to bank; interest at 4.23% due in quarterly
installments of $458, including interest, with final payment in
September 2018
|
5,000
|
3,000
|
Installment
notes payable to bank; interest at 6.00% due in monthly
installments ranging from $132 to $1,479, including interest, with
final payment in September 2018
|
18,000
|
22,000
|
Installment
notes payable to bank; interest at 6.00%, due in monthly
installments ranging from $803 to $1,216, including interest, with
final payment in February 2019
|
25,000
|
29,000
|
Installment
notes payable to bank; interest at 4.23%, due in quarterly
installments ranging from $296 to $458, including interest, with
final payment in October 2018
|
9,000
|
13,000
|
Installment
note payable to bank; interest at 4.23% due in quarterly
installments of $208, including interest, with final payment in
November 2018
|
1,000
|
2,000
|
Installment
note payable to bank; interest at 1.80% due in monthly installments
of $2,116, including interest, with final payment in February
2019
|
48,000
|
54,000
|
Installment
note payable to bank; interest at 1.80% due in monthly installments
of $175, including interest, with final payment in March
2019
|
4,000
|
5,000
|
Installment
notes payable to bank; interest at 1.80% due in monthly
installments ranging from $121 to $175, including interest, with
final payment in April 2019
|
11,000
|
13,000
|
Installment
note payable to bank; interest at 4.98% due in monthly installments
of $2,847, including interest, with final payment in December
2019
|
88,000
|
95,000
|
Installment
note payable to bank; interest at 4.98% due in monthly installments
of $2,208, including interest, with final payment in February
2019
|
47,000
|
95,000
|
|
$342,000
|
$360,000
|
15
These
notes are secured by specific equipment with a carrying value of
approximately $616,000 and are nonrecourse liabilities of the
Partnership. As such, the notes do not contain any financial debt
covenants with which we must comply on either an annual or
quarterly basis. Aggregate approximate maturities of notes payable
for each of the periods subsequent to March 31, 2017 are as
follows:
|
Amount
|
Nine months ended
December 31, 2017
|
$163,000
|
Year
ended December 31, 2018
|
136,000
|
Year
ended December 31, 2019
|
43,000
|
|
$342,000
|
The
Partnership was originally scheduled to end its operational phase
on February 4, 2017. During the year ended December 31, 2015, the
operational phase was officially extended to December 31, 2020
through an investor proxy vote (see note 1). The Partnership is
expected to terminate on December 31, 2022. If the Partnership
should terminate, CCC will assume the obligation related to the
remaining notes payable for the duration of the remaining lease
term.
During
2015, the General Partner executed a collateralized debt financing
agreement on behalf of certain affiliates for a total shared loan
amount of approximately $847,000, of which the Partnership’s
share was approximately $101,000. The Partnership’s portion
of the current loan amount at March 31, 2017 and December 31, 2016
was approximately $46,000 and $55,000, respectively, and is secured
by specific equipment under both operating and finance leases. The
carrying value of the secured equipment under operating leases at
March 31, 2017 and December 31, 2016 is $9,000 and $12,000,
respectively. The carrying value of the secured equipment under
finance leases at March 31, 2017 and December 31, 2016 is
approximately $62,000 and $72,000, respectively.
6. Supplemental Cash Flow Information
No
interest or principal on notes payable was paid by the Partnership
during 2017 and 2016 because direct payment was made by lessee to
the bank in lieu of collection of lease income and payment of
interest and principal by the Partnership.
Other
noncash activities included in the determination of net loss are as
follows:
Three months ended March 31,
|
2017
|
2016
|
Lease revenue net
of interest expense on notes payable realized as a result of direct
payment of principal by lessee to bank
|
$68,000
|
$97,000
|
Noncash
investing and financing activities include the
following:
Three months ended March 31,
|
2017
|
2016
|
Debt assumed in
connection with purchase of equipment
|
$51,000
|
$95,000
|
Accrued expenses
incurred in connection with the purchase of technology
equipment
|
$113,000
|
$32,000
|
16
7. Commitments and Contingencies
Investor Complaint
On November 10, 2015, certain investors (the "Claimants") of
Commonwealth Income & Growth Fund V ("CIGF5") and Commonwealth
Income & Growth Private Fund III ("CIGPF3") (Collectively
referred to as the "Funds"), filed an investor complaint with FINRA
naming CCSC and Ms. Springsteen-Abbott (the "Respondents").
The Claimants, at the advice and recommendation of their personal
financial advisors, purchased limited partnership units in CIGF5
between February 2005 and February 2006 and in CIGPF3 between April
2005 and February 2007. The Claimants allege that the
Respondents did not properly perform their duties as fund
manager. The Funds are not members of FINRA and/or subject to
its jurisdiction. The Respondents filed a complaint on December 23,
2015, against the Claimants in the United States District Court for
the District of Maryland to enjoin the Claimants from proceeding
with the arbitration and requiring its dismissal. The
Claimants withdrew its complaint with FINRA on July 27, 2016.
On August 1, 2016, the Respondents were granted voluntary dismissal
in Federal court given the withdrawal of the FINRA
claim.
On September 28, 2016, 23 investors, in addition to the original
Claimants (the "Florida Claimants") filed a complaint in the United
States District Court for the Middle District of Florida, Albers et
al. v. Commonwealth Capital Corp. et al., Case No.
6:16-cv-01713-Orl-37DCI, against the Partnership, Commonwealth
Income & Growth Private Fund I, Commonwealth Income &
Growth Private Fund II, CIGPF3 and CIGF5. The allegation
consists of breach of contract, securities fraud, misstatement in
the prospectus, fraudulent concealment, negligence, common law
fraud (the "Original Complaint"). On October 18, 2016, the
judge dismissed the Original Complaint without prejudice with leave
to refile. The judge dismissed the Original Complaint for
procedural failures. On October 28, 2016, the Florida Claimants
filed an amended complaint that included the original claims with
the addition of claims for negligent supervision and breach of
industry standards ("Amended Complaint"). The Respondents' counsel
believes the allegations in the Amended Complaint fail to meet
procedural requirements and are without merit, including the lapse
of the statute of limitations on certain claims. On January
6, 2017, the Respondents filed a motion to dismiss, which is
pending at this time. Management believes that resolution of
the matter will not result in any adverse financial impact to the
Partnership.
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. That Panel ruled on March 30, 2015, that Ms.
Springsteen-Abbott should be barred from the securities industry
because the Panel concluded that she allegedly misallocated
approximately $208,000 of expenses involving certain Funds over the
course of three years. As such, management has allocated
approximately $87,000 of the $208,000 in allegedly misallocated
expenses back to the affected funds as a contingency accrual
in CCC’s financial statements and a good faith payment for
the benefit of those Income Funds. Decisions issued by
FINRA's Office of Hearing Officers may be appealed to FINRA's
National Adjudicatory Council (NAC) pursuant to FINRA Rule
9311. The NAC Decision upheld the Panel’s ruling.
The bar took effect on August 23, 2016. Ms.
Springsteen-Abbott appealed the NAC Decision to the SEC. On
March 31, 2017, the SEC 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. While a
decision is being reconsidered by FINRA, the sanctions for
disgorgement and fines are not enforced against the Company.
As of May 15, 2017, management believes that resolution of the
appeal will not result in any material adverse financial impact on
the Funds, but no assurance can be provided until the FINRA matter
is resolved.
17
Item 2: Management’s Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD LOOKING STATEMENTS
This
section, as well as other portions of this document, includes
certain forward-looking statements about our business and our
prospects, tax treatment of certain transactions and accounting
matters, sales of securities, expenses, cash flows, distributions,
investments and operating and capital requirements. Such
forward-looking statements include, but are not limited to:
acquisition policies of our general partner; the nature of present
and future leases; provisions for uncollectible accounts; the
strength and sustainability of the U.S. economy; the continued
difficulties in the credit markets and their impact on the economy
in general; and the level of future cash flow, debt levels,
revenues, operating expenses, amortization and depreciation
expenses. You can identify those statements by the use of words
such as “could,” “should,”
“would,” “may,” “will,”
“project,” “believe,”
“anticipate,” “expect,” “plan,”
“estimate,” “forecast,”
“potential,” “intend,”
“continue” and “contemplate,” as well as
similar words and expressions.
Actual
results may differ materially from those in any forward-looking
statements because any such statements involve risks and
uncertainties and are subject to change based upon various
important factors, including, but not limited to, nationwide
economic, financial, political and regulatory conditions; the
health of debt and equity markets, including interest rates and
credit quality; the level and nature of spending in the
information, medical and telecommunications technologies markets;
and the effect of competitive financing alternatives and lease
pricing.
Readers
are also directed to other risks and uncertainties discussed in
other documents we file with the SEC, including, without
limitation, those discussed in Item 1A. “Risk Factors”
of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2016 filed with the SEC. We undertake no obligation to
update or revise any forward-looking information, whether as a
result of new information, future developments or
otherwise.
INDUSTRY OVERVIEW
The
Equipment Leasing and Finance Association's (ELFA) Monthly Leasing
and Finance Index (MLFI-25), which reports economic activity from
25 companies representing a cross section of the $1 trillion
equipment finance sector, showed their overall new business volume
for March was $8.9 billion, up 10% year-over-year from new business
volume in March 2016. Volume was up 51% month-to-month from $5.9
billion in February. Year to date, cumulative new business volume
was up 4% compared to 2016. Receivables over 30 days were 1.40%,
down from 1.50% the previous month and up from 1.20% in the same
period in 2016. Charge-offs were 0.68%, up from 0.38% the previous
month, and up from 0.51% in the year-earlier period. Credit
approvals totaled 74.5% in March, down slightly from 74.8% in
February. Total headcount for equipment finance companies was up
19.9% year over year, a spike largely attributable to continued
acquisition activity at an MLFI reporting company. Separately, the
Equipment Leasing & Finance Foundation's Monthly Confidence
Index (MCI-EFI) for April is 65.8, easing from the March index of
71.1.
18
CRITICAL ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of
operations are based upon our financial statements which have been
prepared in accordance with generally accepted accounting
principles in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses.
We base these 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.
LEASE INCOME RECEIVABLE
Lease
income receivable includes current lease income receivable net of
allowances for uncollectible accounts, if any. The Partnership
monitors lease income receivable to ensure timely and accurate
payment by lessees. Its Lease Relations department is responsible
for monitoring lease income receivable and, as necessary, resolving
outstanding invoices. Lease revenue is recognized on a monthly
straight-line basis which is in accordance with the terms of the
lease agreement.
The
Partnership reviews a customer’s credit history before
extending credit. When the analysis indicates that the probability
of full collection is unlikely, the Partnership may establish an
allowance for uncollectible lease income receivable based upon the
credit risk of specific customers, historical trends and other
information. The Partnership writes off its lease income receivable
when it determines that it is uncollectible and all economically
sensible means of recovery have been exhausted.
REVENUE RECOGNITION
Through
March 31, 2017, the Partnership’s lease portfolio consisted
of operating and finance leases. For operating leases, lease
revenue is recognized on a straight-line basis in accordance with
the terms of the lease agreements.
Finance
lease interest income is recorded over the term of the lease using
the effective interest method. For finance leases, we record, at
lease inception, unearned finance lease income which is calculated
as follows: total lease payments, plus any residual values and
initial direct costs, less the cost of the leased
equipment.
Upon
the end of the lease term, if the lessee has not met the return
conditions as set out in the lease, the Partnership is entitled, in
certain cases, to additional compensation from the lessee. The
Partnership’s accounting policy for recording such payments
is to treat them as revenue.
Gain or
losses from sales of leased and off lease equipment are recorded on
a net basis in the Fund’s condensed Statement of
Operations.
Our
leases do not contain any step-rent provisions or escalation
clauses nor are lease revenues adjusted based on any
index.
Gains
from the termination of leases are recognized when the lease is
modified and terminated concurrently. Gains from lease termination
included in lease revenue for the three months ended March 31, 2017
and 2016 were approximately $1,000 and $0,
respectively.
19
LONG-LIVED ASSETS
Depreciation
on equipment for financial statement purposes is based on the
straight-line method estimated generally over useful lives of two
to four years. Once an asset comes off lease or is re-leased, the
Partnership reassesses the useful life of an asset.
The
Partnership evaluates its long-lived assets when events or
circumstances indicate that the value of the asset may not be
recoverable. The Partnership determines whether impairment exists
by estimating the undiscounted cash flows to be generated by each
asset. If the estimated undiscounted cash flows are less than the
carrying value of the asset then impairment exists. The amount of
the impairment is determined based on the difference between the
carrying value and the fair value. Fair value is determined based
on estimated discounted cash flows to be generated by the asset,
third party appraisals or comparable sales of similar assets, as
applicable, based on asset type.
Residual
values are determined by management and are calculated using
information from both internal and external sources, as well as
other economic indicators.
LIQUIDITY AND CAPITAL RESOURCES
Our
primary source of cash for the three months ended March 31, 2017
was cash provided by operating activities of approximately $27,000,
net proceeds from the sale of equipment of approximately $1,000 and
payments from finance leases of approximately $9,000. This compares
to the three months ended March 31, 2016 where our primary source
of cash was cash provided by operating activities of approximately
$37,000, net proceeds from the sale of equipment of approximately
$13,000 and payments from finance leases of approximately
$9,000.
Our
primary use of cash for the three months ended March 31, 2017 was
for the purchase of new equipment of approximately $21,000. Our
primary uses of cash for the three months ended March 31, 2016 was
for the purchase of new equipment of approximately
$5,000.
As we
continue to acquire equipment for the equipment portfolio,
operating expenses may increase, but because of our investment
strategy of leasing equipment primarily through triple-net leases,
we avoid operating expenses related to equipment maintenance or
taxes.
Cash
was provided by operating activities for the three months ended
March 31, 2017 of approximately $27,000, which includes a net loss
of approximately $12,000 and depreciation expenses of approximately
$93,000. Other non-cash activities included in the determination of
net loss include direct payments of lease income by lessees to
banks of approximately $68,000. For the three months ended March
31, 2016, cash was provided by operating activities of
approximately $37,000, which includes a net loss of approximately
$95,000 and depreciation expenses of approximately $185,000. Other
non-cash activities included in the determination of net loss
include direct payments of lease income by lessees to banks of
approximately $97,000 and gain on sale of equipment of
approximately $13,000.
During
2015, the General Partner executed a collateralized debt financing
agreement on behalf of certain affiliates for a total shared loan
amount of approximately $847,000, of which the Partnership’s
share was approximately $101,000. The Partnership’s portion
of the current loan amount at March 31, 2017 and December 31, 2016
was approximately $46,000 and $55,000, respectively, and is secured
by specific equipment under both operating and finance leases. The
carrying value of the secured equipment under operating leases at
March 31, 2017 and December 31, 2016 is $9,000 and $12,000,
respectively. The carrying value of the secured equipment under
finance leases at March 31, 2017 and December 31, 2016 is
approximately $62,000 and $72,000, respectively.
20
We
consider cash equivalents to be highly liquid investments with the
original maturity dates of 90 days or less.
At
March 31, 2017, cash and cash equivalents was held in two accounts
maintained at one financial institution with an aggregate balance
of approximately $35,000. Bank accounts are federally insured up to
$250,000 by the FDIC. At March 31, 2017, the total cash bank
balance was as follows:
At March 31, 2017
|
Balance
|
Total
bank balance
|
$35,000
|
FDIC
insured
|
(35,000)
|
Uninsured
amount
|
$-
|
The
Partnership’s bank balances are fully insured by the FDIC.
The Partnership deposits its funds with a Moody's Aaa-Rated banking
institution which is one of only three Aaa-Rated banks listed on
the New York Stock Exchange. The Partnership has not experienced
any losses in such accounts, and believes it is not exposed to any
significant credit risk. The amount in such accounts will fluctuate
throughout 2017 due to many factors, including cash receipts,
equipment acquisitions, interest rates, and distribution to limited
partners.
Our
investment strategy of acquiring equipment and generally leasing it
under triple-net leases to operators who generally meet specified
financial standards minimizes our operating expenses. As of March
31, 2017, we had future minimum rentals on non-cancelable operating
leases of approximately $259,000 for the balance of the year ending
December 31, 2017 and approximately $264,000 thereafter. As of
March 31, 2017, we had future minimum rentals on non-cancelable
finance leases of approximately $24,000 for the balance of the year
ending December 31, 2017 and approximately $21,000
thereafter.
As of
March 31, 2017, our non-recourse debt was approximately $342,000,
with interest rates ranging from 1.60% to 6.00%, and will be
payable through February 2019.
The
Partnership was originally scheduled to end its operational phase
on February 4, 2017. During the year ended December 31, 2015,
the operational phase was officially extended to December 31, 2020
through an investor proxy vote. The Partnership is expected to
terminate on December 31, 2022. As such, the Partnership will
continue to report its financial statements on a going concern
basis until a formal plan of liquidation is approved by the General
Partner.
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. Thus, total shared equipment and related debt should
continue to trend higher in fiscal 2017, as the Partnership builds
its portfolio.
Our
cash flow from operations is expected to continue to be adequate to
cover all operating expenses and liabilities during the next
12-month period. If available cash flow or net disposition proceeds
are insufficient to cover our expenses and liabilities on a short
and long term basis, we will attempt to obtain additional funds by
disposing of or refinancing equipment, or by borrowing within its
permissible limits.
The
General Partner elected to forgo distributions and allocations of
net income owed to it, and suspended limited partner distributions
for the three months ended March 31, 2017. The General Partner will
continue to reassess the funding of limited partner distributions
throughout 2017 and will continue to waive certain fees if the
General Partner determines it is in the best interest of the
Partnership to do so. If available cash flow or net disposition
proceeds are insufficient to cover the Partnership expenses and
liabilities on a short and long term basis, the Partnership may
attempt to obtain additional funds by disposing of or refinancing
equipment, or by borrowing within its permissible
limits.
The
General Partner and CCC have committed to fund, either through cash
contributions and/or forgiveness of indebtedness, any necessary
operational cash shortfalls of the Partnership through March 31,
2018. The General Partner will continue to reassess the funding of
limited partner distributions throughout 2017 and will continue to
waive certain fees if the General Partner determines it is in the
best interest of the Partnership to do so. If available cash flow
or net disposition proceeds are insufficient to cover the
Partnership expenses and liabilities on a short and long term
basis, the Partnership may attempt to obtain additional funds by
disposing of or refinancing equipment, or by borrowing within its
permissible limits. Additionally, the Partnership will seek to
enhance portfolio returns and maximize cash flow through the use of
leveraged lease transactions; the acquisition of lease equipment
through financing. This strategy allows the General
Partner to acquire additional revenue generating leases without the
use of investor funds, thus maximizing overall return.
21
RESULTS OF OPERATIONS
Three months ended March 31, 2017 compared to three months ended
March 31, 2016
Lease Revenue
Our
lease revenue decreased to approximately $141,000 for the three
months ended March 31, 2017, from approximately $178,000 for the
three months ended March 31, 2016. This decrease is primarily due
to more lease agreements ending versus new lease agreements being
acquired.
The Partnership had 71 and 78 active operating leases during the
three months ended March 31, 2017 and 2016, respectively. The
decrease in number of active leases is consistent with the overall
decrease in lease revenue. Management expects to add new leases to
our portfolio throughout the remainder of 2017, funded primarily
through debt financing. As the operational phase of the Partnership
has been extended to December 31, 2020, Management will continue to
seek lease opportunities to enhance portfolio returns and cash
flow.
Sale of Equipment
For the
three months ended March 31, 2017, we sold fully depreciated
equipment for a net gain of $37. During the three months ended
March 31, 2016, we sold fully depreciated equipment for a net gain
of approximately $13,000.
Operating Expenses
Our
operating expenses, excluding depreciation, primarily consist of
accounting and legal fees, outside service fees and reimbursement
of expenses to CCC for administration and operation of the
Partnership. These expenses decreased to approximately $68,000 for
the three months ended March 31, 2017, from approximately $92,000
for the three months ended March 31, 2016. This decrease is
primarily attributable to a decrease in reimbursable expenses in
connection with the administration and operation of the Partnership
of approximately $38,000, partially offset by an increase in legal
expense of approximately $21,000.
Equipment Management Fees
We pay
an equipment management fee to our general partner for managing our
equipment portfolio. The equipment management fee is approximately
2.5% of the gross lease revenue attributable to equipment that is
subject to operating leases. The
equipment management fee was waived for the three months
ended March 31, 2017 as
compared to approximately $5,000 earned for the three months
ended March 31, 2016.
Depreciation and Amortization Expenses
Depreciation
expenses consist of depreciation on equipment. These expenses
decreased to approximately $93,000 for the three months ended March
31, 2017, from $185,000 for the three months ended March 31, 2016.
This decrease is primarily due to significant leases that became
fully depreciated, partially offset by new equipment
acquisitions.
Net Loss
For the
three months ended March 31, 2017, we recognized revenue of
approximately $142,000, expenses of approximately $165,000 and
other gain of approximately $11,000, resulting in a net loss of
approximately $12,000. For the three months ended March 31, 2016,
we recognized revenue of approximately $193,000 and expenses of
approximately $288,000, resulting in a net loss of approximately
$95,000. This change in net loss is due to the changes in revenue
and expenses as described above.
22
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
N/A
Item 4. Controls and Procedures
Our
management, under the supervision and with the participation of the
General Partner’s Chief Executive Officer and Principal
Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures related to our reporting and
disclosure obligations as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on such evaluation, the
General Partner’s Chief Executive Officer and Principal
Financial Officer have concluded that, as of March 31, 2017, our
disclosure controls and procedures are effective in ensuring that
information relating to us which is required to be disclosed in our
periodic reports filed or submitted under the Securities Exchange
Act of 1934 is (a) recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and (b) accumulated and
communicated to management, including the General Partner’s
Chief Executive Officer and Principal Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. There were no changes in the Partnership’s
internal control over financial reporting during the first quarter
of 2017 that have materially affected or are reasonably likely to
materially affect its internal control over financial
reporting.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
Investor Complaint
On November 10, 2015, certain investors (the "Claimants") of
Commonwealth Income & Growth Fund V ("CIGF5") and Commonwealth
Income & Growth Private Fund III ("CIGPF3") (Collectively
referred to as the "Funds"), filed an investor complaint with FINRA
naming CCSC and Ms. Springsteen-Abbott (the "Respondents").
The Claimants, at the advice and recommendation of their personal
financial advisors, purchased limited partnership units in CIGF5
between February 2005 and February 2006 and in CIGPF3 between April
2005 and February 2007. The Claimants allege that the
Respondents did not properly perform their duties as fund
manager. The Funds are not members of FINRA and/or subject to
its jurisdiction. The Respondents filed a complaint on December 23,
2015, against the Claimants in the United States District Court for
the District of Maryland to enjoin the Claimants from proceeding
with the arbitration and requiring its dismissal. The
Claimants withdrew its complaint with FINRA on July 27, 2016.
On August 1, 2016, the Respondents were granted voluntary dismissal
in Federal court given the withdrawal of the FINRA
claim.
On September 28, 2016, 23 investors, in addition to the original
Claimants (the "Florida Claimants") filed a complaint in the United
States District Court for the Middle District of Florida, Albers et
al. v. Commonwealth Capital Corp. et al., Case No.
6:16-cv-01713-Orl-37DCI, against the Partnership, Commonwealth
Income & Growth Private Fund I, Commonwealth Income &
Growth Private Fund II, CIGPF3 and CIGF5. The allegation
consists of breach of contract, securities fraud, misstatement in
the prospectus, fraudulent concealment, negligence, common law
fraud (the "Original Complaint"). On October 18, 2016, the
judge dismissed the Original Complaint without prejudice with leave
to refile. The judge dismissed the Original Complaint for
procedural failures. On October 28, 2016, the Florida Claimants
filed an amended complaint that included the original claims with
the addition of claims for negligent supervision and breach of
industry standards ("Amended Complaint"). The Respondents' counsel
believes the allegations in the Amended Complaint fail to meet
procedural requirements and are without merit, including the lapse
of the statute of limitations on certain claims. On January
6, 2017, the Respondents filed a motion to dismiss, which is
pending at this time. Management believes that resolution of
the matter will not result in any adverse financial impact to the
Partnership.
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. That Panel ruled on March 30, 2015, that Ms.
Springsteen-Abbott should be barred from the securities industry
because the Panel concluded that she allegedly misallocated
approximately $208,000 of expenses involving certain Funds over the
course of three years. As such, management has allocated
approximately $87,000 of the $208,000 in allegedly misallocated
expenses back to the affected funds as a contingency accrual
in CCC’s financial statements and a good faith payment for
the benefit of those Income Funds. Decisions issued by
FINRA's Office of Hearing Officers may be appealed to FINRA's
National Adjudicatory Council (NAC) pursuant to FINRA Rule
9311. The NAC Decision upheld the Panel’s ruling.
The bar took effect on August 23, 2016. Ms.
Springsteen-Abbott appealed the NAC Decision to the SEC. On
March 31, 2017, the SEC 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. While a
decision is being reconsidered by FINRA, the sanctions for
disgorgement and fines are not enforced against the Company.
As of May 15, 2017, management believes that resolution of the
appeal will not result in any material adverse financial impact on
the Funds, but no assurance can be provided until the FINRA matter
is resolved.
23
Item
1A. Risk
Factors
N/A
Item 2.
Unregistered Sales of Equity
Securities and Use of Proceeds
N/A
Item 3.
Defaults Upon Senior
Securities
N/A
Item 4.
Mine Safety
Disclosures
N/A
Item 5.
Other
Information
NONE
Item 6.
Exhibits
24
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 V
|
|
BY:
COMMONWEALTH INCOME & GROWTH FUND, INC., General
Partner
|
May 15, 2017
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By:
/s/ Kimberly A.
Springsteen-Abbott
|
Date
|
Kimberly
A. Springsteen-Abbott
|
|
Chief
Executive Officer
Commonwealth
Income & Growth Fund, Inc.
|
|
|
May 15, 2017
Date
|
By: /s/ Lynn A.
Whatley
Lynn A. Whatley
Executive Vice President, Chief Operating Officer
|
|
|
|
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25