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EX-32.2 - CERTIFICATION - Commonwealth Income & Growth Fund VI | cigf6_ex32-2.htm |
EX-32.1 - CERTIFICATION - Commonwealth Income & Growth Fund VI | cigf6_ex32-1.htm |
EX-31.2 - CERTIFICATION - Commonwealth Income & Growth Fund VI | cigf6_ex31-2.htm |
EX-31.1 - CERTIFICATION - Commonwealth Income & Growth Fund VI | cigf6_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 MARCH 31, 2020 or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number: 333-131736
COMMONWEALTH INCOME & GROWTH FUND VI
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
20-4115433
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification Number)
|
4532 US Highway 19 North
Suite 200
New Port Richey, FL 33652
(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, 2020
TABLE OF CONTENTS
PART
I
|
||
Item
1.
|
Financial
Statements
|
3
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
20
|
Item
4.
|
Controls
and Procedures
|
20
|
PART
II
|
||
Item
1.
|
Commitments
and Contingencies
|
20
|
Item
2.
|
Legal
Proceedings
|
20
|
Item
2A.
|
Risk
Factors
|
21
|
Item
3.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
22
|
Item
4.
|
Defaults
Upon Senior Securities
|
22
|
Item
5.
|
Mine
Safety Disclosures
|
22
|
Item
6.
|
Other
Information
|
22
|
Item
7.
|
Exhibits
|
22
|
2
Part
I. FINANCIAL INFORMATION
Item 1. Financial Statements
Commonwealth
Income & Growth Fund VI
|
||
Condensed
Balance Sheets
|
||
|
|
|
|
March
31,
|
December
31,
|
|
2020
|
2019
|
|
(unaudited)
|
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$8,660
|
$3,624
|
Lease income
receivable, net of reserve of approximately $31,000 and
$63,000 at March 31, 2020
and December 31, 2019, respectively
|
119,811
|
108,646
|
Accounts
receivable, Commonwealth Capital Corp., net
|
93,101
|
74,026
|
Other receivables,
net of reserve of approximately $12,000 at March 31, 2020 and
December 31, 2019, respectively
|
9,255
|
9,255
|
Prepaid
expenses
|
1,992
|
3,042
|
|
232,819
|
198,593
|
|
|
|
Equipment, at
cost
|
4,499,841
|
4,825,207
|
Accumulated
depreciation
|
(4,199,145)
|
(4,380,458)
|
|
300,696
|
444,749
|
|
|
|
Equipment
acquisition costs and deferred expenses, net of accumulated
amortization of approximately $22,000 and $27,000 at March 31,
2020 and December 31, 2019, respectively
|
7,628
|
10,328
|
|
|
|
Total
Assets
|
$541,143
|
$653,670
|
|
|
|
LIABILITIES
AND PARTNERS' CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$145,054
|
$133,865
|
Accounts payable,
CIGF, Inc., net
|
99,621
|
128,078
|
Other accrued
expenses
|
19,079
|
5,059
|
Unearned lease
income
|
4,538
|
41,988
|
Notes
payable
|
123,112
|
160,453
|
|
|
|
Total
Liabilities
|
391,404
|
469,443
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
PARTNERS'
CAPITAL
|
|
|
|
|
|
General
Partner
|
1,000
|
1,000
|
Limited
Partners
|
148,739
|
183,227
|
Total
Partners' Capital
|
149,739
|
184,227
|
|
|
|
Total
Liabilities and Partners' Capital
|
$541,143
|
$653,670
|
|
|
|
see
accompanying notes to condensed financial statements
|
3
Commonwealth
Income & Growth Fund VI
|
||
Condensed
Statements of Operations
|
||
(unaudited)
|
||
|
Three
months ended March 31,
|
|
|
2020
|
2019
|
|
|
|
Revenue
|
|
|
Lease
|
$160,856
|
$187,598
|
Interest and
other
|
19
|
2,501
|
Sales and property
taxes
|
11,240
|
-
|
Gain on sale of
equipment
|
33,957
|
-
|
Total
revenue and gain on sale of equipment
|
206,072
|
190,099
|
|
|
|
Expenses
|
|
|
Operating,
excluding depreciation
|
105,125
|
103,631
|
Equipment
management fee, General Partner
|
8,043
|
9,379
|
Interest
|
2,028
|
6,992
|
Depreciation
|
96,048
|
134,460
|
Amortization of
equipment acquisition costs and deferred expenses
|
2,701
|
6,862
|
Sales and property
taxes
|
11,240
|
-
|
Bad debt
expense
|
7,517
|
-
|
Total
expenses
|
232,702
|
261,324
|
|
|
|
|
|
|
Net
loss
|
$(26,630)
|
$(71,225)
|
|
|
|
Net
loss allocated to Limited Partners
|
$(26,630)
|
$(71,225)
|
|
|
|
Net
loss per equivalent Limited Partnership unit
|
$(0.02)
|
$(0.04)
|
|
|
|
Weighted
average number of equivalent Limited Partnership units outstanding
during the period
|
1,744,185
|
1,744,330
|
|
|
|
see
accompanying notes to condensed financial statements
|
4
Commonwealth
Income & Growth Fund VI
|
|||||
Condensed
Statement of Partners' Capital
|
|||||
For
the three months ended March 31, 2020 and 2019
|
|||||
(unaudited)
|
|||||
|
|
|
|
|
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance,
January 1, 2020
|
50
|
1,744,254
|
$1,000
|
$183,227
|
$184,227
|
Net
loss
|
-
|
-
|
-
|
(26,630)
|
(26,630)
|
Redemptions
|
-
|
(2,500)
|
-
|
(7,858)
|
(7,858)
|
Balance,
March 31, 2020
|
50
|
1,741,754
|
$1,000
|
$148,739
|
$149,739
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance,
January 1, 2019
|
50
|
1,744,254
|
$1,000
|
$300,574
|
$301,574
|
Net
loss
|
-
|
-
|
-
|
(71,225)
|
(71,225)
|
Redemptions
|
-
|
-
|
-
|
-
|
-
|
Balance,
March 31, 2019
|
50
|
1,744,254
|
$1,000
|
$229,349
|
$230,349
|
see
accompanying notes to condensed financial
statements
5
Commonwealth
Income & Growth Fund VI
|
||
Condensed
Statements of Cash Flows
|
||
(unaudited)
|
||
|
|
|
|
Three
months ended March 31,
|
|
|
2020
|
2019
|
|
|
|
Net
cash (used in) provided by operating activities
|
$(69,067)
|
$3,216
|
|
|
|
Cash
flows from investing activities
|
|
|
Net proceeds from
the sale of equipment
|
81,961
|
-
|
Net
cash provided by investing activities
|
81,961
|
-
|
|
|
|
Cash
flows from financing activities
|
|
|
Redemptions
|
(7,858)
|
-
|
Net
cash used in financing activities
|
(7,858)
|
-
|
|
|
|
Net
increase in cash and cash equivalents
|
5,036
|
3,216
|
|
|
|
Cash
and cash equivalents at beginning of the period
|
3,624
|
5,863
|
|
|
|
Cash
and cash equivalents at end of the period
|
$8,660
|
$9,079
|
|
|
|
see
accompanying notes to condensed financial statements
|
6
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Business
Commonwealth
Income & Growth Fund VI (“CIGF6” or the
“Partnership” or the “Fund”) is a limited
partnership organized in the Commonwealth of Pennsylvania on
January 6, 2006. The Partnership offered for sale up to 2,500,000
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 May 10, 2007.
The offering terminated on March 6, 2009 with 1,810,311 units sold
for a total of approximately $36,000,000 in limited partner
contributions.
The
Partnership used the proceeds of the offering to acquire, own and
lease various types of information technology equipment and other
similar capital equipment, which will be 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 General Partner is Commonwealth Income &
Growth Fund, Inc. (the “General Partner”), a
Pennsylvania corporation which is an indirect wholly owned
subsidiary of CCC. CCC is a member of the Institute for Portfolio
Alternatives (“IPA”) and the Equipment Leasing and
Finance Association (“ELFA”). Approximately ten years
after the commencement of operations, the Partnership intends to
sell or otherwise dispose of all of its equipment, make final
distributions to partners, and to dissolve. The Partnership was
originally scheduled to end its operational phase on December 31,
2018. During the year ended December 31, 2018, the operational
phase was officially extended to December 31, 2021 through an
investor proxy vote. The Partnership is expected to terminate on
December 31, 2023.
Liquidity
The
General Partner elected to forgo distributions and allocations of
net income owed to it, and suspended limited partner distributions.
The General Partner will continue to reassess the funding of
limited partner distributions throughout 2020 and will continue to
waive certain fees. The General Partner and CCC will also defer
certain related party payables owed to the Partnership in an effort
to further increase the Partnership’s cash flow (see Note 8
– Subsequent Events). 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.
2. Summary of Significant Accounting Policies
Basis of Presentation
The
financial information presented as of any date other than December
31, 2019 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, 2019 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, 2020 are not necessarily
indicative of financial results that may be expected for the full
year ended December 31, 2020.
Disclosure of Fair Value 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, 2020 and December 31, 2019 due to the short term
nature of these financial instruments.
The
Partnership’s long-term debt consists of notes payable, which
are secured by specific equipment and are nonrecourse liabilities
of the Partnership. The estimated fair value of this debt at March
31, 2020 and December 31, 2019 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.
7
Cash and cash equivalents
We
consider cash equivalents to be highly liquid investments with an
original maturity of 90 days or less.
At
March 31, 2020, cash and cash equivalents were held in one account
maintained at one financial institution with an aggregate balance
of approximately $10,000. Bank accounts are federally insured up to
$250,000 by the FDIC. At March 31, 2020, the total cash balance was
as follows:
At March 31, 2020
|
Balance
|
Total
bank balance
|
$10,000
|
FDIC
insured
|
(10,000)
|
Uninsured
amount
|
$-
|
The
Partnership believes it mitigates the risk of holding uninsured
deposits by only depositing funds with major financial
institutions. The Partnership has not experienced any losses in our
accounts, and believes it is not exposed to any significant credit
risk. The amounts in such accounts will fluctuate throughout 2020
due to many factors, including cash receipts, equipment
acquisitions, interest rates and distributions to limited
partners.
8
Recent Accounting Pronouncements Not Yet Adopted
FASB issued a new guidance, Accounting Standards Update No.
2016-13, Financial Instruments –
Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, as
clarified and amended by ASU 2018-19, Codification Improvements to
Topic 326, Financial Instruments – Credit Losses and
ASU 2019-05, Financial Instruments –
Credit Losses (Topic 326): Targeted Transition Relief.
The new guidance is effective for
fiscal years, within those fiscal years, beginning after December
15, 2020 and interim periods within fiscal years beginning after
December 15, 2021. The new guidance requires an allowance for
credit losses based on the expectation of lifetime credit losses on
financial receivables carried at amortized cost, including, but not
limited to, mortgage loans, premium receivables, reinsurance
receivables and certain leases. The new current expected credit
loss (“CECL”) impairment model for financial assets
reported at amortized cost will be applicable to receivables
associated with sales-type and direct financing leases but not to
operating lease receivables.
The FASB developed the guidance in response to concerns that credit
losses were identified and recorded “too little, too
late” in the period leading up to the global financial crisis
of 2008. More recently, the impact of the COVID-19 pandemic may
bring new challenges to identifying credit losses. While the new
standard is expected to have a significant effect on entities in
the financial services industry, particularly banks and others with
lending operations, the guidance affects all entities in all
industries and applies to a wide variety of financial instruments,
including trade receivables.
ASC 326-20’s CECL impairment model requires an estimate of
expected credit losses, measured over the contractual life of an
instrument, that considers forecasts of future economic conditions
in addition to information about past events and current
conditions. The standard provides entities with significant
flexibility in how to pool financial assets with similar risk
characteristics, determine the contractual term and obtain and
adjust the relevant historical loss information that serves as the
starting point for developing the estimate of expected lifetime
credit losses.
The Financial reporting developments (“FRD”) addresses
the new guidance on the following topics:
●
The current expected credit loss (CECL) impairment model (ASC
326-20) for financial assets measured at amortized cost, including
net investments (i.e. for sales-type lease, the lease receivable
and the unguaranteed residual asset; for direct finance lease, the
lease receivable and the unguaranteed residual asset less any
deferred selling profit).
●
The available-for-sale (AFS) debt security impairment model (ASC
326-30)
●
The initial recognition of what are called purchased financial
assets with evidence of credit deterioration or purchased
credit-deteriorated (PCD) assets
● The accounting for beneficial interests in
securitized financial assets in the scope of ASC 325-40,
Investments
— Other — Beneficial Interests in Securitized Financial
Assets
On November 15, 2019, the FASB delayed the effective date of FASB
ASC Topic 326 for certain small public companies and other private
companies. As amended, the effective date of ASC Topic 326 was
delayed until fiscal years beginning after December 15, 2022 for
SEC filers that are eligible to be smaller reporting companies
under the SEC’s definition, as well as private companies and
not-for-profit entities. The Partnership continues to evaluate the
impact of the new guidance on its condensed financial
statements.
In January 2020, The FASB issued ASU
2020-01, Investments – Equity
Securities (Topic 321), Investments – Equity Method and Joint
Ventures (Topic 323), and Derivatives and Hedging (Topic 815)
– Clarifying the Interactions between Topic 321, Topic 323,
and Topic 815 (a consensus of the Emerging Issues Task
Force). This ASU clarifies that the observable price
changes in orderly transactions that should be considered when
applying the measurement alternative in accordance with ASC 321
include transactions that require it to either apply or discontinue
the equity method of accounting under ASC 323. For example, as it
relates to investments for which the measurement alternative is
elected, if an observable price change in an orderly transaction
for the identical investment or similar security of the same issuer
results in a change in ownership that causes the investor to either
newly apply or discontinue the equity method, the carrying amount
of the security accounted for under the measurement alternative
should be adjusted to its fair value immediately before applying or
upon discontinuing the equity method.
ASU 2020-01 also addresses questions about how to apply the
guidance in Topic 815, “Derivatives and
Hedging,” for certain
forward contracts and purchased options to purchase securities
that, upon settlement or exercise, would be accounted for under the
equity method of accounting. The ASU clarifies that, for the
purpose of applying ASC 815-10-15-141(a), an entity should not
consider whether, upon the settlement of the forward contract or
exercise of the purchased option, the underlying securities would
be accounted for under the equity method in ASC 323 or the fair
value option in accordance with the financial instruments guidance
in Topic 825, “Financial
Instruments.” An entity
also should evaluate the remaining characteristics in ASC
815-10-15-141 to determine the accounting for those forward
contracts and purchased options.
For public business entities, ASU 2020-01 is effective for fiscal
years beginning after December 15, 2020, and interim periods within
those fiscal years. For all other entities, ASU 2020-01 is
effective for fiscal years beginning after December 15, 2021, and
interim periods within those fiscal years. Early adoption is
permitted, including early adoption in an interim period, (a) for
public business entities for periods for which financial statements
have not yet been issued and (b) for all other entities for periods
for which financial statements have not yet been made available for
issuance. The Partnership continues to evaluate the impact of the
new guidance on its condensed financial statements.
9
3. Information Technology, Medical Technology, Telecommunications
Technology, Inventory Management and Other Business-Essential
Capital Equipment (“Equipment”)
The
Partnership is the lessor of equipment under leases with periods
that generally will range from 12 to 48 months. In general,
associated costs such as repairs and maintenance, insurance and
property taxes are paid by the lessee.
Gains
or losses from the sale of equipment are recognized when the lease
is modified and terminated concurrently. Gain from the sale of
equipment included in lease revenue for the three months ended
March 31, 2020 and 2019 was $34,000 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, 2020 was
approximately $2,539,000 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, 2020
was approximately $9,007,000. The Partnership’s share of the
outstanding debt associated with this equipment at March 31, 2020
was approximately $64,000 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, 2020 was approximately $687,000.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2019 was
approximately $2,539,000 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,
2019 was approximately $9,007,000. The Partnership’s share of
the outstanding debt associated with this equipment at December 31,
2019 was approximately $88,000 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, 2019 was approximately $873,000.
As the
Partnership and the other programs managed by the General Partner
increase their overall portfolio size, opportunities for shared
participation are expected to continue. Sharing in the acquisition
of a lease portfolio gives the fund an opportunity to acquire
additional assets and revenue streams, while allowing the fund to
remain diversified and reducing its overall risk with respect to
one portfolio. As additional investment opportunities arise during
the remainder of 2020, the Partnership expects total shared
equipment and related debt to trend higher as the Partnership
builds its portfolio.
The
following is a schedule of approximate future minimum rentals on
non-cancellable operating leases:
Periods Ended December
31,
|
Amount
|
Nine months ended
December 31, 2020
|
$163,000
|
Year ended December
31, 2021
|
28,000
|
Year ended December
31, 2022
|
8,000
|
Year ended December
31, 2023
|
8,000
|
Year ended December
31, 2024
|
6,000
|
|
$213,000
|
The
Partnership is scheduled to terminate on December 31, 2023. CCC
will assume the rights to the remaining active leases and their
related remaining revenue stream through their
termination.
10
4. Related Party Transactions
Receivables/Payables
As of
March 31, 2020 and December 31, 2019, the Company’s related
party receivables and payables are short term, unsecured and
non-interest bearing.
Three months ended March 31,
|
2020
|
2019
|
|
|
|
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, 2020 and 2019, the Partnership was
charged approximately $22,000 and $27,000 in Other LP expense,
respectively.
|
$89,000
|
$74,000
|
Equipment
management fee
|
|
|
The general partner
is entitled to be paid a monthly fee equal to the lesser of (a) the
fees which would be charged by an independent third party in the
same geographic market for similar services and equipment or (b)
the sum of (i) two percent of gross lease revenues attributable to
equipment subject to full payout net leases which contain net lease
provisions and (ii) five percent of the gross lease revenues
attributable to equipment subject to operating leases. Our general
partner, based on its experience in the equipment leasing industry
and current dealings with others in the industry, will use its
business judgment to determine if a given fee is competitive,
reasonable and customary. The amount of the fee will depend upon
the amount of equipment we manage, which in turn will depend upon
the amount we raise in this offering. Reductions in market rates
for similar services would also reduce the amount of this fee we
will receive.
|
$8,000
|
$9,000
|
11
5. Notes Payable
Notes
payable consisted of the following approximate
amounts:
|
March 31, 2020
|
December 31, 2019
|
Installment
note payable to bank; interest rate of 5.46%, due in monthly
installments of $4,364, including interest, with final payment in
January 2020
|
-
|
4,000
|
Installment
note payable to bank; interest rate of 5.93%, due in monthly
installments of $1,425, including interest, with final payment in
February 2020
|
-
|
3,000
|
Installment
note payable to bank; interest rate of 5.56%, due in monthly
installments of $2,925, including interest, with final payment in
June 2020
|
8,500
|
17,000
|
Installment
note payable to bank; interest rate of 4.87%, due in quarterly
installments of $4,785, including interest, with final payment in
October 2020
|
14,000
|
18,000
|
Installment
note payable to bank; interest rate of 5.31%, due in quarterly
installments of $6,157, including interest, with final payment in
January 2021
|
24,000
|
30,000
|
Installment
note payable to bank; interest rate of 6.33%, due in quarterly
installments of $5,805, including interest, with final payment in
January 2021
|
22,000
|
28,000
|
Installment
note payable to bank; interest rate of 6.66%, due in quarterly
installments of $2,774, including interest, with final payment in
January 2021
|
11,000
|
13,000
|
Installment
note payable to bank; interest rate of 5.33%, due in monthly
installments of $582, including interest, with final payment in
August 2021
|
9,500
|
11,000
|
Installment
note payable to bank; interest rate of 4.14%, due in monthly
installments of $705, including interest, with final payment in
August 2024
|
34,000
|
36,000
|
|
$123,000
|
$160,000
|
12
The
notes are secured by specific equipment with a carrying value of
approximately $195,000 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, 2020 are as
follows:
|
Amount
|
Nine months ended
December 31, 2020
|
$75,000
|
Year
ended December 31, 2021
|
26,000
|
Year
ended December 31, 2022
|
8,000
|
Year
ended December 31, 2023
|
8,000
|
Year
ended December 31, 2024
|
6,000
|
|
$123,000
|
The
Partnership is scheduled to terminate on December 31, 2023. CCC
will assume the obligation and rights to the remaining notes
payable and its related secured equipment as described above
through their termination.
6. Supplemental Cash Flow Information
No
interest or principal on notes payable was paid by the Partnership
during 2020 and 2019 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,
|
2020
|
2019
|
Lease revenue net
of interest expense on notes payable realized as a result of direct
payment of principal by lessee to bank
|
$37,000
|
$108,000
|
Noncash
investing and financing activities include the
following:
Three months ended March 31,
|
2020
|
2019
|
Accrual for
redemptions to partners paid in April 2020 (included in other
accrued expenses)
|
$4,000
|
$-
|
During
the three months ended March 31, 2020 and 2019, the Partnership
wrote-off fully amortized acquisition and finance fees of
approximately $13,000 and $16,000, respectively.
13
7. Commitments and Contingencies
Medshare
In
January 2015, CCC, on behalf of the Funds, entered into a Purchase
Agreement (“Purchase Agreement”) for the sale of the
equipment to Medshare Technologies (“Medshare”) for
approximately $3,400,000. The Partnership’s share of the sale
proceeds was approximately $77,000. As of May 15, 2020, the
Partnership has received approximately $62,000 of the approximate
$77,000 sale proceeds and has recorded a reserve against the
outstanding receivable of approximately $12,000. On April 3, 2015
Medshare was obligated to make payment in full and failed to do so.
As a result, Medshare defaulted on its purchase agreement with CCC
and was issued a demand letter for full payment of the equipment.
On June 25, 2015, Medshare filed a lawsuit in Texas state court for
breach of contract (“State Suit”). On June 26, 2015,
Commonwealth filed a lawsuit in the Northern District of Texas
against Medshare seeking payment in full and/or return of the
Equipment and damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2, 2016, the
Defendants made payment to CCC of an initial $200,000 to be
followed by 24 structured monthly payments of approximately $50,000
per month to begin no later than September 15, 2016. The
Partnership’s share of the Settlement Agreement is
approximately $23,000 and is to be applied against the net Medshare
receivable of approximately $18,000 as of the settlement date. The
remaining $5,000 will be applied against the $12,000 reserve and
recorded as a bad debt recovery. As of May 15, 2020, the
Partnership received approximately $9,000 of the approximate
$23,000 settlement agreement which was applied against the net
Medshare receivable of approximately $18,000 as of the settlement
date. As Defendant defaulted on settlement agreement, CCC sought
and obtained consent judgment from U.S. District Court for Northern
District of Texas, Dallas Division on July 27, 2017 in the amount
of $1.5 million, less $450,000 previously paid plus $6,757 in
attorney fees, both Defendant and Cleary being jointly and
severally liable for judgment amount. The court also vacated the
September 21, 2016 settlement dismissal.
On July
27, 2017 Defendant filed Chapter 11 in Northern District of Texas
Dallas Division. On July 26, 2017 Legacy Texas Bank, a
secured creditor of the Defendant filed for a TRO in the U.S.
District Court of the Northern District of Texas, Dallas Division.
Included with the TRO filing was a request for appointment of
trustee for operation of Defendant, which was granted and the case
converted to Chapter 7. On December 18, 2018 the Bankruptcy Court
entered final order and issued its last payment to CCC in March
2019 of approximately $43,000, of which the Partnership’s
share was approximately $700. The Medshare Bankruptcy matter
is now closed. Although the trustee’s final distribution to
Commonwealth did not fully satisfy the judgment, recovery may
still be pursued directly against Cleary. As such, management
believes that the foregoing will not result in any adverse
financial impact on the Funds, but no assurance can be provided
until the proceedings are resolved.
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at
issue include amounts that were proper and that were properly
allocated to Funds, and also identified a smaller number of
expenses that had been allocated in error, but were adjusted and
repaid to the affected Funds when they were identified in
2012. During the period in question, Commonwealth Capital
Corp. (“CCC”) and Ms. Springsteen-Abbott provided
important financial support to the Funds, voluntarily absorbed
expenses and voluntarily waived fees in amounts aggregating in
excess of any questioned allocations. A Hearing Panel ruled
on March 30, 2015, that Ms. Springsteen-Abbott should be barred
from the securities industry because the Panel concluded that she
allegedly misallocated approximately $208,000 of expenses involving
certain Funds over the course of three years. As such,
management had already reallocated back approximately
$151,225 of the $208,000 (in allegedly misallocated expenses)
to the affected funds, which was fully documented, as good faith
payments for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed
to FINRA's National Adjudicatory Council (the “NAC”)
pursuant to FINRA Rule 9311. The NAC issued a decision that
upheld the lower panel’s ruling and the bar took effect on
August 23, 2016. Ms. Springsteen-Abbott appealed the
NAC’s decision to the U.S. Securities and Exchange Commission
(the “SEC”). On March 31, 2017, the SEC
criticized that decision as so flawed that the SEC could not even
review it, and remanded the matter back to FINRA for further
consideration consistent with the SEC’s remand, but did not
suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling
$208,000 to a remaining list of 87 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. All the
requested or allowed briefs have been filed with the SEC. The
SEC upheld FINRA’s order on February 7, 2020 to bar, but
eliminated FINRA’s proposed fine. Ms.
Springsteen-Abbott has filed a Petition for Review in the United
States Court of Appeals for the District of Columbia Circuit to
review a final order entered against her by the U.S. Securities and
Exchange Commission. As the SEC eliminated FINRA’s fine
completely, Management is even more confident that regardless of
final resolution, it will not result in any material adverse
financial impact to the Funds, although a final assurance cannot be
provided until the legal matter is resolved. That appeal is
pending as of May 15, 2020.
14
8. Subsequent Events
COVID-19 Pandemic
In
March 2020, the World Health Organization classified the novel
coronavirus (“COVID-19”) outbreak as a pandemic, based
on the rapid increase in exposure globally. The Fund’s
operation is located in Florida, which has been restricted during
April-May for gatherings of people due to the coronavirus outbreak.
On May 4th, Governor DeSantis
of Florida started his plan to begin opening certain retail stores
and restaurants at limited capacity. At present, the Fund’s
operations have not been adversely affected and continue to
function effectively.
●
On May
11th,
certain administrative employees will begin to return to the office
on a full-time basis, based on a three-phase plan.
●
On May
4th, the
General Partner applied and received a grant for Paycheck
Protection Program (“PPP”) based on the
“Coronavirus Aid, Relief and Economic Security
(“CARES”) Act. The CARES Act, among other things,
includes provisions relating to refundable payroll tax credits,
deferments of employer side social security payments, net operating
loss carryback periods, alternative minimum tax credit refunds,
modification to the net interest deduction limitations and
technical corrections to tax depreciation methods for qualified
improvement property.
●
The General Partner
may be eligible for forgiveness of the PPP loan based on the sum of
the costs incurred and payments made during the 8-week covered
period (average number of full-time employees of the borrower per
month between January 1, 2020 and February 29, 2020)
on:
■
Payroll
costs
■
Any interest
payment on any covered mortgage obligation (not including any
prepayment of or principal payment on a covered mortgage
obligation),
■
Any payment on any
covered rent obligation, and
■
Any covered utility
payment
●
The full principal
amount of the loan and accrued interest may be forgiven, borrowers
must follow the Small Business Association’s
(“SBA’s”) strict guidelines on the use of the
loan proceeds to obtain full loan forgiveness. Notably, a borrower
must use the full loan amount within the 8-week period, with 75
percent of that amount going towards payroll costs. We continue to
examine the impacts the CARES Act may have on our business through
the General Partner and indirectly, the Funds.
●
The Funds do not
have any employees. The General Partner provides administrative
services, such as sales and marketing, IT, legal and accounting
that indirectly benefit the Fund, which pay for these services
through an agreed upon partnership agreement. The PPP loan provides
additional stimulus to the General Partner to maintain an on-going
group of employees, without any furlough or layoffs during this
COVID-19 pandemic crisis.
Related Party Payables
In
order to provide additional support for the Partnership, the
General Partner (“GP”) has converted certain payables
that were classified as current to noncurrent payables. These
payables were deferred to increase the Partnership’s cash
flow from the date of issuance of our audited financial statements.
To provide additional support to the Partnership, CCC agreed to
convert approximately $128,000 of payables from due on demand to
long term. Such payables won't be due until sometime after April
15, 2021.
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, 2019 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.
15
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 $900
billion equipment finance sector, showed their overall new business
volume for March was $8.9 billion, up 9 % year-over-year from new
business volume in March 2019. Volume was up 31 % month-to-month
from $6.8 billion in February. Year-to-date, cumulative new
business volume was up 17 % compared to 2019.
Receivables
over 30 days were 2.60 %, up from 2.00 % the previous month and up
from 1.90 % the same period in 2019. Charge-offs were 0.55 %, up
from 0.51 % the previous month, and up from 0.37 % in the
year-earlier period.
Credit
approvals totaled 74.2 %, down from 74.7 % in February. Total
headcount for equipment finance companies was down 2.9 %
year-over-year.
Separately,
the Equipment Leasing & Finance Foundation’s Monthly
Confidence Index (MCI-EFI) decreased from 46.0 in March to a
historic low of 22.3 in April due to the impact of
COVID-19.
ELFA
President and CEO Ralph Petta said, “The increase in March
new business volume data is misleading. It presents a ‘tale
of two cities.’ During the first half of the month, economic
activity and industry performance were strong, mirroring overall
strength in the U.S. economy. However, during the second half of
March, as the coronavirus pandemic’s impact—both from a
health and economic standpoint—entered the country’s
consciousness, all that changed. One need not look any further than
the delinquency and charge-off data to understand the myriad
challenges confronting U.S. businesses, both large and small, in
the weeks and months ahead as this insidious disease grips the
nation and our people. For now, acquiring and financing business
equipment takes a back seat to critical efforts by families vitally
concerned about their health and safety. Things we know: this
crisis is temporary; the equipment leasing and finance
industry’s resilience and resolve are
enduring.”
Nancy
Pistorio, CLFP, President, Madison Capital LLC, said, “March
results for the equipment finance industry illustrate how robust
activity was as we headed into the final month of the first
quarter. However, due to coronavirus-induced containment measures,
many businesses began to close in mid-March and, not unexpectedly,
delinquency is beginning to rise. As evidenced by declining
approvals, new business is and will continue to be negatively
impacted. This will be an extremely challenging time for our
industry. I believe independents in the small-ticket space will be
hit particularly hard as their customers—small and
medium-sized businesses—struggle to survive in the wake of
widespread shutdowns. With a developing global economic recession,
the Equipment Leasing & Finance Foundation currently projects
an 8.6% to 13.5% contraction in equipment and software investment
for this year. Government officials relaxing stay-at-home orders
and allowing those at low risk to return to work under a
responsible plan, sooner rather than later, will be essential in
mitigating further economic decline.
CRITICAL ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of
operations are based upon our financial statements which have been
prepared in accordance with generally accepted accounting
principles in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses.
We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
We
believe that our critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
financial statements. See Note 2 to our condensed financial
statements included herein for a discussion related to recent
accounting pronouncements.
16
LEASE INCOME RECEIVABLE
Lease
income receivable includes current lease income receivable net of
allowances for uncollectible amounts, if any. The Partnership
monitors lease income receivable to ensure timely and accurate
payment by lessees. The Partnership’s Lease Relations
department is responsible for monitoring lease income receivable
and, as necessary, resolving outstanding invoices.
The
Partnership reviews a customer’s credit history before
extending credit. When the analysis indicates that the probability
of full collection is unlikely, the Partnership may establish an
allowance for uncollectible lease income receivable based upon the
credit risk of specific customers, historical trends and other
information. The Partnership writes off its lease income receivable
when it determines that it is uncollectible and all economically
sensible means of recovery have been exhausted.
REVENUE RECOGNITION
The
Partnership is principally engaged in business of leasing
equipment. Ancillary to the Partnership’s principal equipment
leasing business, the Partnership also sells certain equipment and
may offer certain services to support its customers.
The
Partnership’s lease transactions are principally accounted
for under Topic 842 on January 1, 2019. Prior to Topic 842, the
Partnership accounted for these transactions under Topic 840,
Leases (“Topic 840”). Lease revenue includes revenue
generated from leasing equipment to customers, including re-rent
revenue, and is recognized as either on a straight line basis or
using the effective interest method over the length of the lease
contract, if such lease is either an operating lease or finance
lease, respectively.
The
Partnership’s sale of equipment along with certain services
provided to customers is recognized under ASC Topic 606, Revenue
from Contracts with Customers, (“Topic 606”), which was
adopted on January 1, 2018. Prior to adoption of Topic 606, the
Partnership recognized these transactions under ASC Topic 605,
Revenue Recognized, and (“Topic 605”). The Partnership
recognizes revenue when it satisfies a performance obligation by
transferring control over a product or service to a customer. The
amount of revenue recognized reflects the consideration the
Partnership expects to be entitled to in exchange for such products
or services.
Through
March 31, 2020, the Partnership’s lease portfolio consisted
of operating leases and finance leases. For operating leases, lease
revenue is recognized on a straight-line basis in accordance with
the terms of the lease agreement. Finance lease interest income is
recorded over the term of the lease using the effective interest
method.
Upon
the end of the lease term, if the lessee has not met the return
conditions as set out in the lease, the Partnership is entitled in
certain cases to additional compensation from the lessee. The
Partnership’s accounting policy for recording such payments
is to treat them as revenue.
Gains
or losses from sales of leased and off-lease equipment are recorded
on a net basis in the Partnership’s Statement of Operations.
Gains from the termination of leases are recognized when the lease
is modified and terminated concurrently. Our leases do not contain
any step-rent provisions or escalation clauses nor are lease
revenues adjusted based on any index.
Partnership’s
accounting policy for sales and property taxes collected from the
lessees are recorded in the current period as gross revenues and
expenses.
LONG-LIVED ASSETS
Depreciation
on technology and inventory management equipment for financial
statement purposes is based on the straight-line method estimated
generally over useful lives of two to five years. Once an asset
comes off lease or is released, the Partnership reassesses the
useful life of an asset.
The
Partnership evaluates its long-lived assets when events or
circumstances indicate that the value of the asset may not be
recoverable. The Partnership determines whether impairment exists
by estimating the undiscounted cash flows to be generated by each
asset. If the estimated undiscounted cash flows are less than the
carrying value of the asset then impairment exists. The amount of
the impairment is determined based on the difference between the
carrying value and the fair value. Fair value is determined based
on estimated discounted cash flows to be generated by the asset,
third party appraisals or comparable sales of similar assets, as
applicable, based on asset type.
Residual
values are determined by management and are calculated using
information from both internal and external sources, as well as
other economic indicators.
17
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our
primary source of cash for the three months ended March 31, 2020
was cash provided by net proceeds from the sale of computer
equipment of approximately $82,000. Our primary source of cash for
the three months ended March 31, 2019 was cash provided by
operating activities of approximately $3,000.
Our
primary uses of cash for the three months ended March 31, 2020 were
cash used in operating activities of approximately $69,000 and
partnership redemptions of approximately $8,000. For the three
months ended March 31, 2019 the Partnership had no primary uses of
cash.
Cash
was used in operating activities for the three months ended March
31, 2020 of approximately $69,000, which includes net loss of
approximately $27,000 and depreciation and amortization expenses of
approximately $99,000. Other noncash activities included in the
determination of operating activities include direct payments to
banks by lessees of approximately $37,000. Cash was provided by
operating activities for the three months ended March 31, 2019 of
approximately $3,000, which includes net loss of approximately
$71,000 and depreciation and amortization expenses of approximately
$141,000. Other noncash activities included in the determination of
operating activities include direct payments to banks by lessees of
approximately $108,000.
When we
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.
CCC, on
our behalf and on behalf of other affiliated partnerships, acquires
equipment subject to associated debt obligations and lease revenue
and allocates a participation in the cost, debt and lease revenue
to the various partnerships based on certain risk
factors.
We
consider cash equivalents to be highly liquid investments with an
original maturity of 90 days or less.
At
March 31, 2020, cash and cash equivalents were held in one account
maintained at one financial institution with an aggregate balance
of approximately $10,000. Bank accounts are federally insured up to
$250,000 by the FDIC. At March 31, 2020, the total cash balance was
as follows:
At March 31, 2020
|
Balance
|
Total
bank balance
|
$10,000
|
FDIC
insured
|
(10,000)
|
Uninsured
amount
|
$-
|
The
Partnership believes it mitigates the risk of holding uninsured
deposits by only depositing funds with major financial
institutions. The Partnership has not experienced any losses in our
accounts, and believes it is not exposed to any significant credit
risk. The amounts in such accounts will fluctuate throughout 2020
due to many factors, including cash receipts, equipment
acquisitions, interest rates and distributions to limited
partners.
The
Partnership’s 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, 2020, the Partnership had
future minimum rentals on non-cancelable operating leases of
approximately $163,000 for the balance of the year ending December
31, 2020 and approximately $50,000 thereafter.
As of
March 31, 2020, our non-recourse debt was approximately $123,000
with interest rates ranging from 4.14% to 6.66% and will be payable
through August 2024. The Partnership is scheduled to terminate on
December 31, 2023. CCC will assume the obligation and rights to the
remaining notes payable and its related secured equipment through
their termination.
The
Partnership was originally scheduled to end its operational phase
on December 31, 2018. During the year ended December 31, 2018, the
operational phase was officially extended to December 31, 2021
through an investor proxy vote. The Partnership is expected to
terminate on December 31, 2023.
In
order to provide additional support for the Partnership, the
General Partner (“GP”) has converted certain payables
that were classified as current to noncurrent payables. These
payables were deferred to increase the Partnership’s cash
flow from the date of issuance of our audited financial statements.
To provide additional support to the Partnership, CCC agreed to
convert approximately $128,000 of payables from due on demand to
long term. Such payables won't be due until sometime after April
15, 2021.
18
RESULTS OF OPERATIONS
Three months ended March 31, 2020 compared to three months ended
March 31, 2019
Lease Revenue
Our
lease revenue decreased to approximately $161,000 for the three
months ended March 31, 2020, from approximately $188,000 for the
three months ended March 31, 2019. The Partnership had 32 and 34
active operating leases for the three months ended March 31, 2020
and 2019, respectively. This decrease
in lease revenue is primarily due to a greater number of lease
agreements ending versus new lease agreements being acquired.
Management expects to add new leases to the Partnership’s
portfolio throughout 2020, primarily through debt
financing.
Sale of Equipment
On
January 31,2020 the Partnership entered into a Purchase and Sale
Agreement, (the “Purchase Agreement”) with Cummins,
Inc. (the “Buyer”) to sell to the Buyer approximately
1,475 items of equipment that the Buyer previously leased from the
Company. The General Partner allocated to the Partnership its share
of approximately $180,000, for the sale price of primarily, High
End Sun Servers and Small IBM Servers and recorded a gain on sale
of equipment of approximately $34,000.
Operating Expenses
Our
operating expenses, excluding depreciation, primarily consist of
accounting and legal fees, outside service fees and reimbursement
of expenses to CCC for administration and operation of the
Partnership. These expenses increased to approximately $105,000 for
the three months ended March 31, 2020, from approximately $104,000
for the three months ended March 31, 2019. This increase is
primarily attributable to an increase in accounting fees of
approximately $12,000, offset by a decrease in legal fees of
approximately $7,000 and a decrease in other LP 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
5% of the gross lease revenue attributable to equipment that is
subject to operating leases and approximately 2% of the gross lease
revenue attributable to equipment that is subject to direct
financing leases. The equipment management fee was approximately
$8,000 for the three months ended March 31, 2020 and approximately
$9,000 for the three months ended March 31, 2019, which is
consistent with the lease revenue.
Depreciation and Amortization Expense
Depreciation
and amortization expenses consist of depreciation on equipment and
amortization of equipment acquisition fees. These expenses
decreased to approximately $99,000 for the three months ended March
31, 2020, from approximately $141,000 for the three months ended
March 31, 2019. This decrease was due to the higher frequency in
the termination of leases and equipment being fully depreciated as
compared to the acquisition of new leases for the three months
ended March 31, 2020.
Net Loss
For the
three months ended March 31, 2020, we recognized revenue of
approximately $206,000 and expenses of approximately $233,000
resulting in net loss of approximately $27,000. For the three
months ended March 31, 2019, we recognized revenue of approximately
$190,000 and expenses of approximately $261,000 resulting in a net
loss of approximately $71,000. This change in net loss is due to
the changes in revenue and expenses as described
above.
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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, 2020, 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 2020 that have materially affected or are reasonably likely to
materially affect its internal control over financial
reporting.
Part II: OTHER INFORMATION
Item
1. Commitments and
Contingencies
N/A
Item 2.
Legal
Proceedings
Medshare
In
January 2015, CCC, on behalf of the Funds, entered into a Purchase
Agreement (“Purchase Agreement”) for the sale of the
equipment to Medshare Technologies (“Medshare”) for
approximately $3,400,000. The Partnership’s share of the sale
proceeds was approximately $77,000. As of May 15, 2020, the
Partnership has received approximately $62,000 of the approximate
$77,000 sale proceeds and has recorded a reserve against the
outstanding receivable of approximately $12,000. On April 3, 2015
Medshare was obligated to make payment in full and failed to do so.
As a result, Medshare defaulted on its purchase agreement with CCC
and was issued a demand letter for full payment of the equipment.
On June 25, 2015, Medshare filed a lawsuit in Texas state court for
breach of contract (“State Suit”). On June 26, 2015,
Commonwealth filed a lawsuit in the Northern District of Texas
against Medshare seeking payment in full and/or return of the
Equipment and damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2, 2016, the
Defendants made payment to CCC of an initial $200,000 to be
followed by 24 structured monthly payments of approximately $50,000
per month to begin no later than September 15, 2016. The
Partnership’s share of the Settlement Agreement is
approximately $23,000 and is to be applied against the net Medshare
receivable of approximately $18,000 as of the settlement date. The
remaining $5,000 will be applied against the $12,000 reserve and
recorded as a bad debt recovery. As of May 15, 2020, the
Partnership received approximately $9,000 of the approximate
$23,000 settlement agreement which was applied against the net
Medshare receivable of approximately $18,000 as of the settlement
date. As Defendant defaulted on settlement agreement, CCC sought
and obtained consent judgment from U.S. District Court for Northern
District of Texas, Dallas Division on July 27, 2017 in the amount
of $1.5 million, less $450,000 previously paid plus $6,757 in
attorney fees, both Defendant and Cleary being jointly and
severally liable for judgment amount. The court also vacated the
September 21, 2016 settlement dismissal.
On July
27, 2017 Defendant filed Chapter 11 in Northern District of Texas
Dallas Division. On July 26, 2017 Legacy Texas Bank, a
secured creditor of the Defendant filed for a TRO in the U.S.
District Court of the Northern District of Texas, Dallas Division.
Included with the TRO filing was a request for appointment of
trustee for operation of Defendant, which was granted and the case
converted to Chapter 7. On December 18, 2018 the Bankruptcy Court
entered final order and issued its last payment to CCC in March
2019 of approximately $43,000, of which the Partnership’s
share was approximately $700. The Medshare Bankruptcy matter
is now closed. Although the trustee’s final distribution to
Commonwealth did not fully satisfy the judgment, recovery may
still be pursued directly against Cleary. As such, management
believes that the foregoing will not result in any adverse
financial impact on the Funds, but no assurance can be provided
until the proceedings are resolved.
20
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at
issue include amounts that were proper and that were properly
allocated to Funds, and also identified a smaller number of
expenses that had been allocated in error, but were adjusted and
repaid to the affected Funds when they were identified in
2012. During the period in question, Commonwealth Capital
Corp. (“CCC”) and Ms. Springsteen-Abbott provided
important financial support to the Funds, voluntarily absorbed
expenses and voluntarily waived fees in amounts aggregating in
excess of any questioned allocations. A Hearing Panel ruled
on March 30, 2015, that Ms. Springsteen-Abbott should be barred
from the securities industry because the Panel concluded that she
allegedly misallocated approximately $208,000 of expenses involving
certain Funds over the course of three years. As such,
management had already reallocated back approximately
$151,225 of the $208,000 (in allegedly misallocated expenses)
to the affected funds, which was fully documented, as good faith
payments for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed
to FINRA's National Adjudicatory Council (the “NAC”)
pursuant to FINRA Rule 9311. The NAC issued a decision that
upheld the lower panel’s ruling and the bar took effect on
August 23, 2016. Ms. Springsteen-Abbott appealed the
NAC’s decision to the U.S. Securities and Exchange Commission
(the “SEC”). On March 31, 2017, the SEC
criticized that decision as so flawed that the SEC could not even
review it, and remanded the matter back to FINRA for further
consideration consistent with the SEC’s remand, but did not
suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling
$208,000 to a remaining list of 87 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. All the
requested or allowed briefs have been filed with the SEC. The
SEC upheld FINRA’s order on February 7, 2020 to bar, but
eliminated FINRA’s proposed fine. Ms.
Springsteen-Abbott has filed a Petition for Review in the United
States Court of Appeals for the District of Columbia Circuit to
review a final order entered against her by the U.S. Securities and
Exchange Commission. As the SEC eliminated FINRA’s fine
completely, Management is even more confident that regardless of
final resolution, it will not result in any material adverse
financial impact to the Funds, although a final assurance cannot be
provided until the legal matter is resolved. That appeal is
pending as of May 15, 2020.
Item 2A. Risk
Factors
COVID-19 Pandemic
In
March 2020, the World Health Organization classified the novel
coronavirus (“COVID-19”) outbreak as a pandemic, based
on the rapid increase in exposure globally. The Fund’s
operation is located in Florida, which has been restricted during
April-May for gatherings of people due to the coronavirus outbreak.
On May 4th, Governor DeSantis
of Florida started his plan to begin opening certain retail stores
and restaurants at limited capacity. At present, the Fund’s
operations have not been adversely affected and continue to
function effectively.
●
On May
11th,
certain administrative employees will begin to return to the office
on a full-time basis, based on a three-phase plan.
●
On May
4th, the
General Partner applied and received a grant for Paycheck
Protection Program (“PPP”) based on the
“Coronavirus Aid, Relief and Economic Security
(“CARES”) Act. The CARES Act, among other things,
includes provisions relating to refundable payroll tax credits,
deferments of employer side social security payments, net operating
loss carryback periods, alternative minimum tax credit refunds,
modification to the net interest deduction limitations and
technical corrections to tax depreciation methods for qualified
improvement property.
●
The General Partner
may be eligible for forgiveness of the PPP loan based on the sum of
the costs incurred and payments made during the 8-week covered
period (average number of full-time employees of the borrower per
month between January 1, 2020 and February 29, 2020)
on:
■
Payroll
costs
■
Any interest
payment on any covered mortgage obligation (not including any
prepayment of or principal payment on a covered mortgage
obligation),
■
Any payment on any
covered rent obligation, and
■
Any covered utility
payment
●
The full principal
amount of the loan and accrued interest may be forgiven, borrowers
must follow the Small Business Association’s
(“SBA’s”) strict guidelines on the use of the
loan proceeds to obtain full loan forgiveness. Notably, a borrower
must use the full loan amount within the 8-week period, with 75
percent of that amount going towards payroll costs. We continue to
examine the impacts the CARES Act may have on our business through
the General Partner and indirectly, the Funds.
●
The Funds do not
have any employees. The General Partner provides administrative
services, such as sales and marketing, IT, legal and accounting
that indirectly benefit the Fund, which pay for these services
through an agreed upon partnership agreement. The PPP loan provides
additional stimulus to the General Partner to maintain an on-going
group of employees, without any furlough or layoffs during this
COVID-19 pandemic crisis.
21
Item 3.
Unregistered Sales of Equity
Securities and Use of Proceeds
N/A
Item 4.
Defaults Upon Senior
Securities
N/A
Item 5.
Mine Safety
Disclosures
N/A
Item 6.
Other
Information
NONE
Item 7.
Exhibits
22
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 VI
|
|
BY:
COMMONWEALTH INCOME & GROWTH FUND, INC., General
Partner
|
May 15, 2020
|
By: /s/ Kimberly A. Springsteen-Abbott
|
Date
|
Kimberly
A. Springsteen-Abbott
|
|
Chief
Executive Officer And Principal Financial Officer
Commonwealth
Income & Growth Fund, Inc.
|
|
|
|
|
May 15, 2020
Date
|
By: /s/ Karl
A. Hazen
Karl A. Hazen
SEC Reporting Officer
|
23