Attached files
file | filename |
---|---|
EX-32.2 - CERTIFICATION - COMMONWEALTH INCOME & GROWTH FUND V | cigf5_ex32-2.htm |
EX-32.1 - CERTIFICATION - COMMONWEALTH INCOME & GROWTH FUND V | cigf5_ex32-1.htm |
EX-31.2 - CERTIFICATION - COMMONWEALTH INCOME & GROWTH FUND V | cigf5_ex31-2.htm |
EX-31.1 - CERTIFICATION - COMMONWEALTH INCOME & GROWTH FUND V | cigf5_ex31-1.htm |
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 SEPTEMBER 30, 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
September 30, 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
|
17
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
22
|
Item
4.
|
Controls
and Procedures
|
22
|
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
|
||
|
|
|
|
September
30,
|
December
31,
|
|
2017
|
2016
|
|
(unaudited)
|
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$9,934
|
$16,529
|
Lease income
receivable, net of reserve of approximately
|
|
|
$10,000 at
September 30, 2017 and December 31, 2016
|
80,023
|
41,927
|
Other
receivables
|
10,312
|
20,754
|
Prepaid
expenses
|
1,994
|
309
|
|
102,263
|
79,519
|
|
|
|
Net investment in
finance leases
|
39,176
|
66,789
|
|
|
|
Equipment, at
cost
|
6,743,712
|
6,142,862
|
Accumulated
depreciation
|
(5,759,964)
|
(5,492,621)
|
|
983,748
|
650,241
|
|
|
|
Total
Assets
|
$1,125,187
|
$796,549
|
|
|
|
LIABILITIES
AND PARTNERS' CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$135,912
|
$127,286
|
Accounts payable,
CIGF, Inc., net
|
74,884
|
104,992
|
Accounts payable,
Commonwealth Capital Corp., net
|
272,014
|
249,525
|
Other accrued
expenses
|
54,726
|
16,102
|
Unearned lease
income
|
41,324
|
27,977
|
Notes
payable
|
635,992
|
359,590
|
Total
Liabilities
|
1,214,852
|
885,472
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
PARTNERS'
CAPITAL (DEFICIT)
|
|
|
General
Partner
|
1,000
|
1,000
|
Limited
Partners
|
(90,665)
|
(89,923)
|
Total
Partners' Capital (Deficit)
|
(89,665)
|
(88,923)
|
|
|
|
Total
Liabilities and Partners' Capital (Deficit)
|
$1,125,187
|
$796,549
|
|
|
|
see
accompanying notes to condensed financial statements
|
3
Condensed
Statements of Operations
|
||||
(unaudited)
|
||||
|
|
|
|
|
|
Three
Months Ended
|
Nine
Months Ended
|
||
|
September
30,
|
September
30,
|
||
|
2017
|
2016
|
2017
|
2016
|
Revenue
|
|
|
|
|
Lease
|
$164,740
|
$179,717
|
$464,158
|
$537,534
|
Interest and
other
|
3,445
|
1,407
|
5,693
|
4,869
|
Gain on sale of
equipment
|
1,944
|
-
|
2,626
|
35,000
|
Total
revenue and gain on sale of equipment
|
170,129
|
181,124
|
472,477
|
577,403
|
|
|
|
|
|
Expenses
|
|
|
|
|
Operating,
excluding depreciation and amortization
|
41,445
|
97,145
|
142,254
|
322,888
|
Equipment
management fee, General Partner
|
-
|
-
|
-
|
4,633
|
Interest
|
6,631
|
3,978
|
14,956
|
14,276
|
Depreciation
|
120,333
|
126,083
|
324,545
|
447,548
|
Amortization of
equipment acquisition costs and deferred expenses
|
-
|
491
|
-
|
-
|
Total
expenses
|
168,409
|
227,697
|
481,755
|
789,345
|
|
|
|
|
|
Other
income
|
|
|
|
|
Gain from insurance
recovery
|
-
|
-
|
10,863
|
-
|
Total
other income
|
-
|
-
|
10,863
|
-
|
|
|
|
|
|
Net
income (loss)
|
$1,720
|
$(46,573)
|
$1,585
|
$(211,942)
|
|
|
|
|
|
Net
income (loss) allocated to Limited Partners
|
$1,720
|
$(46,573)
|
$1,585
|
$(211,942)
|
|
|
|
|
|
Net
income (loss) per equivalent Limited Partnership unit
|
$0.00
|
$(0.04)
|
$0.00
|
$(0.17)
|
|
|
|
|
|
Weighted
average number of equivalent Limited Partnership units outstanding
during the period
|
1,236,386
|
1,236,608
|
1,236,533
|
1,236,608
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
4
Commonwealth
Income & Growth Fund V
|
|||||
Condensed
Statement of Partners' Capital (Deficit)
|
|||||
For
the nine months ended September 30, 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
income
|
-
|
-
|
-
|
1,585
|
1,585
|
Redemptions
|
-
|
(460)
|
-
|
(2,610)
|
(2,610)
|
Capital
Contribution - CCC
|
-
|
-
|
-
|
283
|
283
|
Balance,
September 30, 2017
|
50
|
1,236,148
|
$1,000
|
$(90,665)
|
$(89,665)
|
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
5
Commonwealth
Income & Growth Fund V
|
||
Condensed
Statements of Cash Flow
|
||
(unaudited)
|
||
|
|
|
|
Nine
months ended
|
|
|
September
30,
|
|
|
2017
|
2016
|
|
|
|
Net
cash provided by (used in) operating activities
|
$76,108
|
$(44,756)
|
|
|
|
Cash
flows from investing activities
|
|
|
Capital
expenditures
|
(112,497)
|
(74,089)
|
Payments received
from finance leases
|
26,290
|
28,170
|
Net proceeds from
the sale of equipment
|
5,830
|
40,813
|
|
|
|
Net
cash used in investing activities
|
(80,377)
|
(5,106)
|
|
|
|
Cash
flows from financing activities
|
|
|
Redemptions
|
(2,326)
|
|
Distributions to
partners
|
-
|
(481)
|
Net
cash used in financing activities
|
(2,326)
|
(481)
|
|
|
|
Net
decrease in cash and cash equivalents
|
(6,595)
|
(50,343)
|
|
|
|
Cash
and cash equivalents, beginning of period
|
16,529
|
51,344
|
|
|
|
Cash
and cash equivalents, end of period
|
$9,934
|
$1,001
|
|
|
|
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
allocates 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 nine months ended September 30, 2017, the General Partner
elected to forgo distributions and allocations of net income owed
to it and suspended limited partner distributions. The General
Partner will reassess the funding of limited partner distributions
on a quarterly basis, throughout 2017. 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.
Liquidity and Going Concern
The
Partnership has incurred recurring losses and has a working capital
deficit at September 30, 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 September 30, 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 nine months ended September 30, 2017,
the Partnership has acquired approximately $657,000 in equipment,
of which approximately $545,000 is leveraged.
7
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 nine months ended September 30, 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 September 30, 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 September
30, 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.
Cash and cash equivalents
We consider cash equivalents to be highly liquid investments with
the original maturity dates of 90 days or less.
At September 30, 2017, cash was held in two accounts maintained at
one financial institution with an aggregate balance of
approximately $11,000. Bank accounts are federally insured up to
$250,000 by the FDIC. At September 30, 2017, the total cash bank
balance was as follows:
At September 30, 2017
|
Balance
|
Total
bank balance
|
$11,000
|
FDIC
insured
|
(11,000)
|
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 and interest rates.
8
Recent 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 nine months ended September 30,
2017.
Recent Accounting Pronouncements Not Yet Adopted
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.
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 nine
months ended September 30, 2017 and 2016, no remarketing fees were
incurred or paid.
9
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 nine months ended
September 30, 2017 and 2016 were approximately $0 and $500,
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 September 30, 2017 was
approximately $3,165,000 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 September 30,
2017 was approximately $11,456,000. The Partnership’s
share of the outstanding debt associated with this equipment at
September 30, 2017 was approximately $473,000 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 September 30, 2017 was approximately
$3,379,000.
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.
The following is a schedule of approximate future minimum rentals
on non-cancellable operating leases at September 30,
2017:
For the period ended
December
|
Amount
|
Three months ended
December 31, 2017
|
$143,000
|
Year Ended December
31, 2018
|
321,000
|
Year Ended December
31, 2019
|
218,000
|
Year Ended December
31, 2020
|
84,000
|
Year Ended December
31, 2021
|
7,000
|
|
$773,000
|
Finance Leases:
The following lists the approximate components of the net
investment in direct financing leases:
|
September
30, 2017
|
December 31,
2016
|
Total minimum lease
payments to be received
|
$28,000
|
$55,000
|
Estimated residual
value of leased equipment (unguaranteed)
|
13,000
|
17,000
|
Less: unearned
income
|
(2,000)
|
(5,000)
|
Net investment in
finance leases
|
$39,000
|
$67,000
|
10
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.
The following table presents the credit risk profile, by
creditworthiness category, of our direct finance lease receivables
at September 30, 2017:
Risk Level
|
Percent of Total
|
Low
|
-%
|
Moderate-Low
|
-%
|
Moderate
|
-%
|
Moderate-High
|
100%
|
High
|
-%
|
Net
finance lease receivable
|
100%
|
As of September 30, 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 September 30,
2017:
|
Amount
|
Three months ended
December 31, 2017
|
$7,000
|
2018
|
20,000
|
2019
|
1,000
|
Total
|
$28,000
|
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.
11
4. Related Party Transactions
Receivables/Payables
As of September 30, 2017 and December 31, 2016, the Company’s
related party receivables and payables are short term, unsecured,
and non-interest bearing.
Nine months ended September 30,
|
2017
|
2016
|
Reimbursable Expenses
|
|
|
Reimbursable
expenses, which are charged to the partnership by CCC in connection
with the administration and operation of the Partnership, are
allocated to the Partnership based upon several factors including,
but not limited to, the number of investors, compliance issues, and
the number of existing leases. For the nine months ended September
30, 2017 and 2016, “Other LP” expense was charged to
the Partnership of approximately $0 and $98,000,
respectively.
|
$122,000
|
$308,000
|
|
|
|
Equipment Management Fee
|
|
|
Reimbursable
expenses, which are charged to the partnership by CCC in connection
with the administration and operation of the Partnership, are
allocated to the Partnership based upon several factors including,
but not limited to, the number of investors, compliance issues, and
the number of existing leases. For the nine months ended June 30,
2017 and 2016, equipment management fees of approximately $12,000
and $9,000, respectively, were earned but waived by the General
Partner.
|
$-
|
$5,000
|
12
5. Notes Payable
|
September 30, 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
|
-
|
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
|
-
|
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
|
-
|
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
|
-
|
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
|
-
|
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
|
2,000
|
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
|
19,000
|
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
|
1,000
|
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
|
3,000
|
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
|
8,000
|
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
|
2,000
|
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
|
10,000
|
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
|
19,000
|
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
|
8,000
|
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
|
36,000
|
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
|
3,000
|
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
|
9,000
|
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
|
73,000
|
95,000
|
Installment
note payable to bank; interest at 4.47% due in monthly installments
of $2,208, including interest, with final payment in February
2019
|
34,000
|
-
|
Installment
note payable to bank; interest at 5.25% due in quarterly
installments of $8,102, including interest, with final payment in
December 2019
|
68,000
|
-
|
Installment
note payable to bank; interest at 4.87% due in quarterly
installments of $11,897, including interest, with final payment in
January 2020
|
111,000
|
-
|
Installment
note payable to bank; interest at 5.56% due in monthly installments
of $2,925, including interest, with final payment in June
2020
|
89,000
|
-
|
Installment
note payable to bank; interest at 5.75% due in monthly installments
of $857, including interest, with final payment in November
2020
|
30,000
|
-
|
Installment
note payable to bank; interest at 5.31% due in quarterly
installments of $4,618, including interest, with final payment in
January 2021
|
59,000
|
-
|
Installment
note payable to bank; interest at 4.70% due in monthly installments
of $1,360, including interest, with final payment in February
2021
|
51,000
|
-
|
|
$636,000
|
$360,000
|
13
These notes are secured by specific equipment with a carrying value
of approximately 890,000 as of September 30, 2017 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
maturities of notes payable for each of the periods subsequent to
September 30, 2017 are as follows:
|
Amount
|
Three months ended
December 31, 2017
|
$42,000
|
Year
ended December 31, 2018
|
296,000
|
Year
ended December 31, 2019
|
210,000
|
Year
ended December 31, 2020
|
81,000
|
Year
ended December 31, 2021
|
7,000
|
|
$636,000
|
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 any
remaining notes payable for the duration of the remaining lease
term.
14
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 September
30, 2017 and December 31, 2016 was approximately $29,000 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 September 30, 2017 and
December 31, 2016 is $5,000 and $12,000, respectively. The carrying
value of the secured equipment under finance leases at September
30, 2017 and December 31, 2016 is approximately $46,000 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:
Nine months ended September 30,
|
2017
|
2016
|
Lease revenue net
of interest expense on notes payable realized as a result of direct
payment of principal by lessee to bank
|
$268,000
|
$296,000
|
Noncash investing and financing activities include the
following:
Nine months ended September 30,
|
2017
|
2016
|
Debt assumed in
conjunction with purchase of equipment
|
$545,000
|
$118,000
|
At September 30, 2017 and 2016, the Partnership wrote-off fully
depreciated equipment of approximately $83,000 and $0,
respectively.
15
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’). On July 17,
2017 the United States Court for the Middle District of Florida
dismissed all claims and closed the file.
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.
On July
21, 2017, FINRA reaffirmed its position on the bar from the
securities industry, but reduced the list of 1,840 items totaling
$208,000 to a remaining list of 84 items totaling $36,226, and
reduced the proposed fine from $100,000 to $50,000. On August 14,
2017 respondents appealed FINRA’s revised ruling. As of
November 14, 2017, management believes that final resolution will
not result in any material adverse financial impact on the Funds,
but no assurance can be provided until the legal matter is
resolved. Ms. Springsteen-Abbott has filed a Notice of Appeal and
Preliminary Statement with the SEC.
16
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 September was $8.7 billion, down 7%
year-over-year from new business volume in September 2016. Volume
was up 12% month-to-month from $7.8 billion in August. 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 down from 1.50% in the same period in 2016. Charge-offs
were 0.40%, down from 0.44% the previous month, and down from 0.46
in the year-earlier period. Credit approvals totaled 74% in
September, down from 75.3% in August. Total headcount for equipment
finance companies was up 16.5% year over year, largely attributable
to continued acquisition activity at an MLFI reporting company.
Separately, the Equipment Leasing & Finance Foundation’s
Monthly Confidence Index (MCI-EFI) for October is 63.7, unchanged
from September.
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.
17
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
As of September 30, 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 nine months ended
September 30, 2017 and 2016 were approximately $0 and $500,
respectively.
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.
18
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of cash for the nine months ended September 30,
2017 were provided by operating activities of approximately
$76,000, payments received from finance leases of approximately
$26,000 and proceeds from the sale of equipment of approximately
$6,000. This compares to the nine months ended September 30,
2016 where our primary sources of cash were provided by payments
received from finance leases of approximately $28,000 and proceeds
from the sale of equipment of approximately $41,000.
Our primary use of cash for the nine months ended September 30,
2017 was for the purchase of new equipment of approximately
$112,000. For the nine months ended September 30, 2016, our
primary uses of cash were operating activities of approximately
$45,000 and for the purchase of new equipment of approximately
$74,000.
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.
For the nine months ended September 30, 2017 cash was used in the
purchase of new equipment of approximately $112,000, which includes
a net gain of approximately $2,000 and depreciation and
amortization expenses of approximately $325,000. Other
non-cash activities included in the determination of net gain
include direct payments of lease income by lessees to banks of
approximately $268,000 and a gain on sale of equipment in the
amount of approximately $3,000. For the nine months ended
September 30, 2016 cash was used in operating activities of
approximately $45,000, which includes a net loss of approximately
$212,000 and depreciation and amortization expenses of
approximately $448,000. Other non-cash activities included in
the determination of net loss include direct payments of lease
income by lessees to banks of approximately $296,000 and a gain on
sale of equipment in the amount of approximately
$35,000.
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 September
30, 2017 and December 31, 2016 was approximately $29,000 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 September 30, 2017 and
December 31, 2016 is $5,000 and $12,000, respectively. The carrying
value of the secured equipment under finance leases at September
30, 2017 and December 31, 2016 is approximately $46,000 and
$72,000, respectively.
We consider cash equivalents to be highly liquid investments with
the original maturity dates of 90 days or less. At September 30,
2017, cash was held in two accounts maintained at one financial
institution with an aggregate balance of approximately $11,000.
Bank accounts are federally insured up to $250,000 by the FDIC. At
September 30, 2017, the total cash bank balance was as
follows:
At September 30, 2017
|
Balance
|
Total
bank balance
|
$11,000
|
FDIC
insured
|
(11,000)
|
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 distributions 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 September 30, 2017, we had future minimum rentals on
non-cancelable operating leases of approximately $143,000 for the
balance of the year ending December 31, 2017 and approximately
$630,000 thereafter. As of September 30, 2017, we had
future minimum rentals on non-cancelable finance leases of
approximately $9,000 for the balance of the year ending December
31, 2017 and approximately $42,000 thereafter.
19
As of September 30, 2017, our non-recourse debt was approximately
$636,000, with interest rates ranging from 1.80% to 6.00%, and will
be payable through February 2021.
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 nine months ended September 30, 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
June 30, 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.
RESULTS OF OPERATIONS
Three months ended September 30, 2017 compared to three months
ended September 30, 2016
Lease Revenue
Our lease revenue decreased to approximately $165,000 for the three
months ended September 30, 2017, from approximately $180,000 for
the three months ended September 30, 2016. This decrease is
primarily due to more lease agreements ending versus new lease
agreements being acquired.
The Partnership had 78 and 84 operating leases during the three
months ended September 30, 2017 and 2016, respectively. The
decline 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.
20
Sale of Equipment
For the three months ended September 30, 2017, the Partnership sold
equipment with a net book value of approximately $3,000 for a net
gain of approximately $2,000. For the three months ended
September 30, 2016, the Partnership sold equipment with net book
value of approximately $4,000 for a net loss of approximately
$500.
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
$41,000 for the three months ended September 30, 2017, from
approximately $97,000 for the three months ended September 30,
2016. This increase is primarily attributable to a decrease
in other LP expenses of approximately $29,000, a decrease in legal
fees of approximately $23,000 and a decrease in accounting fees of
approximately $3,000.
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 September 30,
2017 as well as for the three months ended September 30,
2016.
Depreciation and Amortization Expenses
Depreciation and amortization expenses consist of depreciation on
equipment and amortization of equipment acquisition fees. These
expenses decreased to approximately $120,000 for the three months
ended September 30, 2017, from approximately $126,000 for the three
months ended September 30, 2016. This decrease is primarily
due to significant leases that became fully depreciated, partially
offset by new equipment acquisitions.
Net Income
For the three months ended September 30, 2017, we recognized
revenue of approximately $170,000 and expenses of approximately
$168,000, resulting in a net gain of approximately $2,000.
For the three months ended September 30, 2016, we recognized
revenue of approximately $181,000 and expenses of approximately
$228,000, resulting in a net loss of approximately $47,000. This
change in net gain is due to the changes in revenue and expenses as
described above.
Nine months ended September 30, 2017 compared to nine months ended
September 30, 2016
Lease Revenue
Our lease revenue decreased to approximately $464,000 for the nine
months ended September 30, 2017, from approximately $538,000 for
the nine months ended September 30, 2016. This decrease was
primarily due to the replacement of matured leases with newly
acquired leases generating less in revenue.
The Partnership had 82 operating leases during both the
nine months ended September
30,
2017 and 2016. 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.
21
Sale of Equipment
The Partnership sold equipment
with net book value of approximately $3,000 for the nine months
ended September 30, 2017 for a net gain of approximately $3,000.
This compared to equipment sold for the nine months ended
September 30, 2016 with net book value of approximately $6,000, for
a net gain of approximately $35,000.
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
$142,000 for the nine months ended September 30, 2017, from
approximately $323,000 for the nine months ended September 30,
2016. This decrease is primarily attributable to a decrease
in other LP expenses of approximately $98,000, a decrease in legal
fees of approximately $74,000, a decrease in accounting fees of
approximately $15,000 and a decrease in IT related accounting
expenses of approximately $4,000.
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 decreased to approximately $0 for the nine months
ended September 30, 2017 from approximately $5,000 for the nine
months ended September 30, 2016. This decline is consistent
with the decrease in overall lease revenue and the waiving of
equipment management fees by the General Partner effective in the
second quarter of 2016.
Depreciation and Amortization Expenses
Depreciation and amortization expenses consist of depreciation on
equipment and amortization of equipment acquisition fees. These
expenses decreased to approximately $325,000 for the nine months
ended September 30, 2017, from $448,000 for the nine months ended
September 30, 2016. This decrease is primarily due to
significant leases that became fully depreciated, partially offset
by new equipment acquisitions.
Net Income
For the nine months ended September 30, 2017, we recognized revenue
of approximately $472,000 expenses of approximately $482,000 and an
insurance recovery of approximately $11,000, resulting in net loss
of approximately $1,000. For the nine months ended September 30,
2016, we recognized revenue of approximately $577,000 and expenses
of approximately $789,000, resulting in net loss of approximately
$212,000. This change in net gain is due to the changes in revenue
and expenses as described above.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
N/A
Item 4. Controls and Procedures
Our management, under the supervision and with the participation of
the General Partner’s Chief Executive Officer and Principal
Financial Officer, has 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 September 30, 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 second quarter of 2017 that have materially affected or
are reasonably likely to materially affect its internal control
over financial reporting.
22
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’). On July 17,
2017 the United States Court for the Middle District of Florida
dismissed all claims and closed the file.
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.
On July
21, 2017, FINRA reaffirmed its position on the bar from the
securities industry, but reduced the list of 1,840 items totaling
$208,000 to a remaining list of 84 items totaling $36,226, and
reduced the proposed fine from $100,000 to $50,000. On August 14,
2017 respondents appealed FINRA’s revised ruling. As of
November 14, 2017, management believes that final resolution will
not result in any material adverse financial impact on the Funds,
but no assurance can be provided until the legal matter is
resolved. Ms. Springsteen-Abbott has filed a Notice of Appeal and
Preliminary Statement with the SEC.
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
|
|
|
|
|
November 14, 2017
|
By:
/s/ Kimberly A.
Springsteen-Abbott
|
Date
|
Kimberly
A. Springsteen-Abbott
|
|
Chief
Executive Officer
|
|
Commonwealth Income
& Growth Fund, Inc.
|
|
|
|
|
November 14, 2017
|
By:
/s/ Lynn A.
Whatley
|
Date
|
Lynn A.
Whatley
|
|
Executive
Vice President, Chief Operating Officer
|
25