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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, 2020 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)
|
4532 US Highway 19
Suite 200
New Port Richey, FL 34652
(Address, including zip code, of principal executive
offices)
(877) 654-1500
(Registrant’s telephone number including area
code)
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, 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
|
14
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
20
|
Item
4.
|
Controls
and Procedures
|
20
|
PART
II
|
||
Item
1.
|
Legal
Proceedings
|
21
|
Item
1A.
|
Risk
Factors
|
21
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
23
|
Item
3.
|
Defaults
Upon Senior Securities
|
23
|
Item
4.
|
Mine
Safety Disclosures
|
23
|
Item
5.
|
Other
Information
|
23
|
Item
6.
|
Exhibits
|
23
|
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Commonwealth
Income & Growth Fund V
|
||
Condensed
Balance Sheets
|
||
|
|
|
|
September
30,
|
December
31,
|
|
2020
|
2019
|
|
(unaudited)
|
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$177,034
|
$5,211
|
Lease income
receivable, net of reserve of approximately $9,000 and $76,000 at
September 30, 2020 and December 31, 2019, respectively
|
47,185
|
160,346
|
Accounts
receivable, Commonwealth Capital Corp
|
-
|
19,053
|
Other
receivables
|
341
|
1,054
|
Prepaid
expenses
|
4,779
|
1,323
|
|
229,339
|
186,987
|
|
|
|
Net investment in
finance leases
|
-
|
8,262
|
|
|
|
Equipment, at
cost
|
3,759,447
|
4,480,679
|
Accumulated
depreciation
|
(3,644,017)
|
(4,214,492)
|
|
115,430
|
266,187
|
|
|
|
Total
Assets
|
$344,769
|
$461,436
|
|
|
|
LIABILITIES
AND PARTNERS' (DEFICIT) CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$130,452
|
$134,153
|
Accounts payable,
CIGF, Inc., net
|
82,996
|
57,925
|
Accounts payable,
Commonwealth Capital Corp, net of accounts receivable of
approximately $5,000 and $28,000 at September 30, 2020 and December
31, 2019, respectively
|
123,520
|
115,504
|
Other accrued
expenses
|
-
|
2,977
|
Unearned lease
income
|
5,452
|
19,730
|
Notes
payable
|
17,477
|
87,215
|
Total
Liabilities
|
359,897
|
417,504
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
PARTNERS'
(DEFICIT) CAPITAL
|
|
|
General
Partner
|
1,000
|
1,000
|
Limited
Partners
|
(16,128)
|
42,932
|
Total
Partners' (Deficit) Capital
|
(15,128)
|
43,932
|
|
|
|
Total
Liabilities and Partners' (Deficit) Capital
|
$344,769
|
$461,436
|
|
|
|
see
accompanying notes to condensed financial statements
|
3
Commonwealth
Income & Growth Fund V
|
||||
Condensed
Statements of Operations
|
||||
(unaudited)
|
||||
|
|
|
|
|
|
Three
Months Ended
|
Nine
Months Ended
|
||
|
September
30,
|
September
30,
|
||
|
2020
|
2019
|
2020
|
2019
|
Revenue
|
|
|
|
|
Lease
|
$66,090
|
$123,869
|
$235,734
|
$378,752
|
Interest and
other
|
73
|
691
|
5,324
|
1,255
|
Sales and property
taxes
|
3,424
|
7,002
|
22,738
|
21,870
|
Gain on sale of
equipment
|
1,238
|
2,459
|
19,026
|
2,834
|
Total
revenue and gain on sale of equipment
|
70,825
|
134,021
|
282,822
|
404,711
|
|
|
|
|
|
Expenses
|
|
|
|
|
Operating,
excluding depreciation and amortization
|
50,610
|
2,770
|
219,970
|
67,686
|
Interest
|
395
|
2,407
|
2,107
|
9,265
|
Depreciation
|
40,547
|
63,550
|
130,892
|
218,305
|
Sales and property
taxes
|
3,424
|
7,002
|
22,738
|
21,870
|
Bad debt
recovery
|
-
|
-
|
(33,825)
|
-
|
Total
expenses
|
94,976
|
75,729
|
341,882
|
317,126
|
|
|
|
|
|
Net
(loss) income
|
$(24,151)
|
$58,292
|
$(59,060)
|
$87,585
|
|
|
|
|
|
Net
(loss) income allocated to Limited Partners
|
$(24,151)
|
$58,292
|
$(59,060)
|
$87,585
|
|
|
|
|
|
Net
(loss) income per equivalent Limited Partnership unit
|
$(0.02)
|
$0.05
|
$(0.05)
|
$0.07
|
|
|
|
|
|
Weighted
average number of equivalent Limited Partnership units outstanding
during the period
|
1,235,581
|
1,236,148
|
1,235,761
|
1,236,148
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
4
Commonwealth
Income & Growth Fund V
|
|||||
Condensed
Statement of Partners' (Deficit) Capital
|
|||||
For
the three, six and nine months ended September 30, 2020 and
2019
|
|||||
(unaudited)
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance,
January 1, 2020
|
50
|
1,236,148
|
$1,000
|
$42,932
|
$43,932
|
Net
loss
|
-
|
-
|
-
|
(1,551)
|
(1,551)
|
Redemption
|
-
|
(567)
|
-
|
-
|
-
|
Balance,
March 31, 2020
|
50
|
1,235,581
|
$1,000
|
$41,381
|
$42,381
|
Net
loss
|
-
|
-
|
-
|
(33,358)
|
(33,358)
|
Balance,
June 30, 2020
|
50
|
1,235,581
|
$1,000
|
$8,023
|
$9,023
|
Net
loss
|
-
|
-
|
-
|
(24,151)
|
(24,151)
|
Balance,
September 30, 2020
|
50
|
1,235,581
|
$1,000
|
$(16,128)
|
$(15,128)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance, January 1, 2019
|
50
|
1,236,148
|
1,000
|
(14,179)
|
(13,179)
|
Net
income
|
-
|
-
|
-
|
2,080
|
2,080
|
Balance, March 31, 2019
|
50
|
1,236,148
|
1,000
|
(12,099)
|
(11,099)
|
Net
income
|
-
|
-
|
-
|
27,213
|
27,213
|
Balance, June 30, 2019
|
50
|
1,236,148
|
1,000
|
15,114
|
16,114
|
Net
income
|
-
|
-
|
-
|
58,292
|
58,292
|
Balance, September 30, 2019
|
50
|
1,236,148
|
$1,000
|
$ 73,406
|
74,406
|
see accompanying notes to condensed financial
statements
|
5
Commonwealth
Income & Growth Fund V
|
||
Condensed
Statements of Cash Flow
|
||
(unaudited)
|
||
|
|
|
|
Nine
months ended
|
|
|
September
30,
|
|
|
2020
|
2019
|
|
|
|
Net
cash provided by (used in) operating activities
|
$130,080
|
$(31,261)
|
|
|
|
Cash
flows from investing activities
|
|
|
Capital
expenditures
|
(19,590)
|
-
|
Net proceeds from
the sale of equipment
|
61,333
|
15,136
|
|
|
|
Net
cash provided by investing activities
|
41,743
|
15,136
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
171,823
|
(16,125)
|
|
|
|
Cash
and cash equivalents, beginning of period
|
5,211
|
19,695
|
|
|
|
Cash
and cash equivalents, end of period
|
$177,034
|
$3,570
|
|
|
|
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.
Liquidity and Going Concern
For the
nine months ended September 30, 2020, the Partnership incurred
positive cash flow. However, historically the Partnership has
reported recurring negative cash flows. At September 30, 2020, the
Partnership has a working capital deficit of approximately
$125,000. Such factors raise substantial doubt about the
Partnership’s ability to continue as a going
concern.
The
General Partner agreed to forgo distributions and allocations of
net income owed to it, and suspended limited partner distributions.
The General Partner will continue to waive certain fees and may
defer certain related party payables owed to the Partnership in an
effort to further increase the Partnership’s cash flow.
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.
The Partnership may also attempt to obtain additional funds by
disposing of or refinancing equipment, or by borrowing within its
permissible limits. However, at this time, it is uncertain as to
whether the General Partner’s plans will be
successful.
7
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 nine months ended September 30, 2020 are not necessarily
indicative of financial results that may be expected for the full
year ended December 31, 2020.
Adjustment to Prior Financial Statements
The Partnership has determined that there had been an immaterial
error in its accounting for Other LP expenses in its financial
statements of the Commonwealth Income & Growth Fund V for the
year ended December 31, 2019 and the quarter ended March 31, 2020.
The Partnership determined that Other LP expenses should have been
presented in the Statement of Operations as an increase of expense
under Operating expenses, excluding depreciation and amortization.
An adjustment was made to correct the error in the prior period
ending December 31, 2019 by reporting as an increase of expense of
approximately $5,000 and an increase in Accounts Payable, CIGF,
Inc. by the same amount. An adjustment was also made to correct the
error in the prior period ending March 31, 2020 by reporting an
increase in Accounts Payable, CIGF, Inc. of approximately $5,000
and the cumulative decreasing effect on the Partners’ Capital
by the same amount.
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, 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
September 30, 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.
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, 2020, cash and cash equivalents was held in one
account maintained at one financial institution with an aggregate
balance of approximately $178,000. Bank accounts are federally
insured up to $250,000 by the FDIC. At September 30, 2020, the
total cash bank balance was as follows:
At September 30, 2020
|
Balance
|
Total
bank balance
|
$178,000
|
FDIC
insured
|
(178,000)
|
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 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,
Accounting Standards Update No.
2020-02, Financial Instruments –
Credit Losses (Topic 326) . The 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
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 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.
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.
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.
Gains
from the sale of equipment resulting from early buyouts are
recognized when the lease is modified and terminated concurrently.
Gains from the sale of equipment included in revenue for the nine
months ended September 30, 2020 and 2019 were approximately $19,000
and $3,000, respectively.
CCC, on behalf of the Partnership and on behalf of other affiliated
companies and partnerships (“partnerships”), acquires
equipment subject to associated debt obligations and lease
agreements and allocates a participation in the cost, debt and
lease revenue to the various companies based on certain risk
factors.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at September 30, 2020 was
approximately $2,014,000 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,
2020 was approximately $8,475,000. The Partnership’s share of
the outstanding debt associated with this equipment at September
30, 2020 was approximately $9,000 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, 2020 was approximately $302,000.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2019 was
approximately $2,213,000 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 $8,873,000. The Partnership’s share of
the outstanding debt associated with this equipment at December 31,
2019 was approximately $51,000 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 $798,000.
The
following is a schedule of approximate future minimum rentals on
non-cancellable operating leases at September 30,
2020:
For the period ended
December
|
Amount
|
Three months ended
December 31, 2020
|
$67,000
|
Year Ended December
31, 2021
|
20,000
|
Year Ended December
31, 2022
|
2,000
|
|
$89,000
|
9
Finance Leases:
The
following lists the approximate components of the net investment in
finance leases:
|
September
30, 2020
|
December 31,
2019
|
Carrying value of
lease receivable
|
$-
|
$6,000
|
Estimated residual
value of leased equipment (unguaranteed)
|
-
|
2,000
|
Initial direct
costs finance leases
|
-
|
-
|
Net investment in
finance leases
|
$-
|
$8,000
|
We assess credit risk for all of our customers, including those
that lease under finance leases. This credit risk is assessed using
an internally developed model which incorporates credit scores from
third party providers and our own customer risk ratings and is
periodically reviewed. Our internal ratings are weighted based on
the industry that the customer operates in. Factors taken into
consideration when assessing risk include both general and industry
specific qualitative and quantitative metrics. We separately take
into 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.
4. Related Party Transactions
Receivables/Payables
As of
September 30, 2020, and December 31, 2019, the Company’s
related party receivables and payables are short term, unsecured
and non-interest bearing. Effective April 2, 2020, CCC agreed to
convert approximately $169,000 of the December 31, 2019 related
party payables from due on demand to long term. Such payables won't
be due until sometime after April 15, 2021. The purpose of this was
to help the Partnership with preserving liquidity.
10
Nine months ended September 30,
|
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 September 30, 2020 and 2019, the General Partner
waived certain reimbursable expenses due to it by the Partnership.
For the nine months ended September 30, 2020 and 2019, the
Partnership was charged approximately $100,000 and $0 in Other LP
expense, respectively.
|
$210,000
|
$59,000
|
|
|
|
Equipment Acquisition Fee
|
|
|
The General Partner
earned an equipment acquisition fee of 4% of the purchase price of
each item of equipment purchased as compensation for the
negotiation of the acquisition of the equipment and lease thereof
or sale under a conditional sales contract. For the nine months
ended September 30, 2020 and 2019, approximately $800 and $0 of
acquisition fees were waived by the General Partner,
respectively.
|
$-
|
$-
|
|
|
|
Equipment Management Fee
|
|
|
The General Partner
is entitled to be paid for managing the equipment portfolio a
monthly fee equal to the lesser of (i) the fees which would be
charged by an independent third party for similar services for
similar equipment or (ii) the sum of (a) two percent of (1) the
gross lease revenues attributable to equipment which is subject to
full payout net leases which contain net lease provisions plus (2)
the purchase price paid on conditional sales contracts as received
by the Partnership and (b) 5% of the gross lease revenues
attributable to equipment which is subject to operating leases. In
an effort to increase future cash flow for the fund our General
Partner has elected to waive equipment management fees. For the
nine months ended September 30, 2020 and 2019, equipment management
fees of approximately $11,000 and $10,000 were earned but waived by
the General Partner, respectively.
|
$-
|
$-
|
|
|
|
Equipment liquidation Fee
|
|
|
With respect to
each item of equipment sold by the General Partner (other than in
connection with a conditional sales contract), a fee equal to the
lesser of (i) 50% of the competitive equipment sale commission or
(ii) three percent of the sales price for such equipment is payable
to the General Partner. The payment of such fee is subordinated to
the receipt by the limited partners of (i) a return of their net
capital contributions and a 10% per annum cumulative return,
compounded daily, on adjusted capital contributions and (ii) the
net disposition proceeds from such sale in accordance with the
Partnership Agreement. Such fee will be reduced to the extent any
liquidation or resale fees are paid to unaffiliated parties. During
the nine months ended September 30, 2020 and 2019, the General
Partner waived approximately $5,000 and $500 of equipment
liquidation fees, respectively.
|
$-
|
$-
|
11
5. Notes Payable
Notes
payable consisted of the following approximate
amounts:
|
September
30,
|
December
31,
|
|
2020
|
2019
|
Installment
note payable to bank; interest at 4.87% due in quarterly
installments of $11,897, including interest, with final payment in
January 2020
|
-
|
12,000
|
Installment
note payable to bank; interest at 5.56% due in monthly installments
of $2,925, including interest, with final payment in June
2020
|
-
|
17,000
|
Installment
note payable to bank; interest at 4.87% due in monthly installments
of $1,902, including interest, with final payment in July
2020
|
-
|
6,000
|
Installment
note payable to bank; interest at 6.28% due in quarterly
installments of $722, including interest, with final payment in
September 2020
|
-
|
3,000
|
Installment
note payable to bank; interest at 5.75% due in monthly installments
of $857, including interest, with final payment in November
2020
|
1,500
|
9,000
|
Installment
note payable to bank; interest at 5.31% due in quarterly
installments of $4,618, including interest, with final payment in
January 2021
|
9,000
|
22,000
|
Installment
note payable to bank; interest at 4.70% due in monthly installments
of $1,360, including interest, with final payment in February
2021
|
6,500
|
18,000
|
|
$17,000
|
$87,000
|
These
notes are secured by specific equipment with a carrying value of
approximately $35,000 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 September 30, 2020 are as
follows:
|
Amount
|
Three months ended
December 31, 2020
|
$10,000
|
Year
ended December 31, 2021
|
7,000
|
|
$17,000
|
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:
Nine months ended September 30,
|
2020
|
2019
|
Lease revenue net
of interest expense on notes payable realized as a result of direct
payment of principal by lessee to bank
|
$70,000
|
$161,000
|
12
7. Commitments and Contingencies
COVID-19 Pandemic
The
amount of revenue recognized and the pattern of revenue recognition
may be impacted by COVID-19. Some of the business sectors that
we service such as education centers, medical facilities, payroll
administrators, manufacturing and transportation, we may need to
account for returns and refund liabilities. The pattern of revenue
recognition may change for delays in rendering
services.
In
periods ended subsequent to the outbreak of COVID-19, the
impact on expected credit losses and future cash flow projections
used in impairment testing will need to be considered.
The
Company continues to evaluate whether adjustments to the financial
statements are required or whether additional disclosures are
necessary. In our leasing business, the Company is always subject
to credit losses as it relates to a customer’s ability to
make timely rental payments. The impact of COVID-19 may contribute
to risk of non-performance, where a customer may experience
financial difficulty and may delay in making timely
payments.
The
Company recognizes impairment of receivables and loans when losses
are incurred, which is when it is probable that an entity will be
unable to collect all amounts due according to the contractual
terms of the arrangement. Impairment is measured based on the
present value of expected future cash flows discounted at the
receivable’s or loans effective interest rate, except that,
as a practical expedient, impairment can be measured based on a
receivable’s or loans’ observable market price or the
fair value of the underlying collateral.
The
Company believes its estimate of expected losses have been
recognized based on historical experience, current conditions, and
reasonable forecasts. The impacts of COVID-19 may necessitate
additional adjustments in future forecasts of expected
losses.
Although
the Partnership cannot estimate the length or gravity of the impact
of the COVID-19 outbreak at this time, if the pandemic continues,
it may have a material adverse effect on the Partnership results of
future operations, financial position, and liquidity in fiscal year
2020 and beyond.
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.
13
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 November 16, 2020.
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.
INDUSTRY OVERVIEW
ELFA
President and CEO Ralph Petta said, “Despite the drop in
September year-over-year new business, a look at the data beginning
with the advent of the pandemic in February shows that the
industry, in general is holding its own. In fact, anecdotal
evidence from some ELFA member companies indicates they are
enjoying a very strong year. Tempering this positive data point;
however, is a spike in losses – not surprising, given that
the losses in all likelihood reflect customers in distressed
industry sectors significantly impacted by the economic downturn
resulting from the COVID pandemic.”
“The
pandemic continues to have a negative impact on the overall
economy, and this data demonstrates that our industry is not
immune. However, the 24% growth in month-to-month volume in
September 2020 MLFI-25 is promising,” said Anthony Sasso,
Head of TD Equipment Finance. “Within any disruption, there
is opportunity. Here at TDEF, we have seen our customers find
innovative ways to continue to grow, and we ourselves have been
able to increase our portfolio. The low interest rate environment,
combined with rising spot rates within trucking, presents a good
opportunity for those companies who are in a position to
expand.”
14
CRITICAL ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of
operations are based upon our financial statements which have been
prepared in accordance with generally accepted accounting
principles in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses.
We base these estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
We
believe that our critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
financial statements. See Note 2 to our condensed financial
statements included herein for a discussion related to recent
accounting pronouncements.
LEASE INCOME RECEIVABLE
Lease
income receivable includes current lease income receivable net of
allowances for uncollectible 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 the 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 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. 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
September 30, 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 sale of equipment resulting from early buyouts 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.
15
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 five years. Once an asset comes off lease or is re-leased, the
Partnership reassesses the useful life of an asset.
The
Partnership evaluates its long-lived assets when events or
circumstances indicate that the value of the asset may not be
recoverable. The Partnership determines whether impairment exists
by estimating the undiscounted cash flows to be generated by each
asset. If the estimated undiscounted cash flows are less than the
carrying value of the asset then impairment exists. The amount of
the impairment is determined based on the difference between the
carrying value and the fair value. Fair value is determined based
on estimated discounted cash flows to be generated by the asset,
third party appraisals or comparable sales of similar assets, as
applicable, based on asset type. Residual values are determined by
management and are calculated using information from both internal
and external sources, as well as other economic
indicators.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our
primary sources of cash for the nine months ended September 30,
2020 were cash provided by operating activities of approximately
$130,000 and net proceeds from the sale of equipment of
approximately $61,000. This compares to the nine months ended
September 30, 2019 where our primary source of cash was net
proceeds from the sale of equipment of approximately
$15,000.
Our
primary use of cash for the nine months ended September 30, 2020
was capital expenditures in investing activities of approximately
$20,000. Our primary use of cash for the nine months ended
September 30, 2019 was cash used in operating activities of
approximately $31,000. For the nine months ended September 30, 2020
and 2019, the Partnership had no financing activities.
Cash
was provided by operating activities for the nine months ended
September 30, 2020 of approximately $130,000, which includes net
loss of approximately $59,000 and depreciation and amortization
expenses of approximately $131,000. Other non-cash activities
included in the determination of net loss include direct payments
of lease income by lessees to banks of approximately $70,000. Cash
was used in operating activities for the nine months ended
September 30, 2019 of approximately $31,000, which includes net
income of approximately $88,000 and depreciation and amortization
expenses of approximately $218,000. Other non-cash activities
included in the determination of net loss include direct payments
of lease income by lessees to banks of approximately
$161,000.
We
consider cash equivalents to be highly liquid investments with the
original maturity dates of 90 days or less.
At
September 30, 2020, cash and cash equivalents was held in one
account maintained at one financial institution with an aggregate
balance of approximately $178,000. Bank accounts are federally
insured up to $250,000 by the FDIC. At September 30, 2020, the
total cash bank balance was as follows:
At September 30, 2020
|
Balance
|
Total
bank balance
|
$178,000
|
FDIC
insured
|
(178,000)
|
Uninsured
amount
|
$-
|
16
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 2020 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, 2020, we had future minimum rentals on non-cancelable
operating leases of approximately $67,000 for the balance of the
year ending December 31, 2020 and approximately $22,000
thereafter. As of September
30, 2019, we had future minimum rentals on non-cancelable finance
leases of approximately $90,000 for the balance of the year ending
December 31, 2019 and approximately $109,000
thereafter.
As of
September 30, 2020, our non-recourse debt was approximately
$17,000, with interest rates ranging from 4.70% to 5.75%, 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.
For the
nine months ended September 30, 2020, the Partnership incurred
positive cash flow. However, historically the Partnership has
reported recurring negative cash flows. At September 30, 2020, the
Partnership has a working capital deficit of approximately
$125,000. Such factors raise substantial doubt about the
Partnership’s ability to continue as a going
concern.
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 waive certain fees and may
defer certain related party payables owed to the Partnership in an
effort to further increase the Partnership’s cash flow.
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.
The Partnership may also attempt to obtain additional funds by
disposing of or refinancing equipment, or by borrowing within its
permissible limits.
RESULTS OF OPERATIONS
Three months ended September 30, 2020 compared to three months
ended September 30, 2019
Lease Revenue
Our
lease revenue decreased to approximately $66,000 for the three
months ended September 30, 2020, from approximately $124,000 for
the three months ended September 30, 2019. This revenue decrease is
primarily due to a decrease in active lease agreements as described
below.
The Partnership had 25 and 61 operating leases during the three
months ended September 30, 2020 and 2019, 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 2020, 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.
17
Sale of Equipment
For the
three months ended September 30, 2020,
the Partnership sold equipment with a net book value of
approximately $0 for a net gain of approximately $1,000.
For the three months ended September
30, 2019, the Partnership sold equipment with a net book value of
approximately $5,000 for a net gain of approximately
$2,000.
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 $51,000 for
the three months ended September 30, 2020, from approximately
$3,000 for the three months ended September 30, 2019. This increase
is primarily attributable to the reestablishment of previously
waived other LP expenses of approximately $33,000, an increase in
legal fees associated with the FINRA
matter (see Item 1. Legal Proceedings) of approximately
$6,000, an increase in outside office services-investor services of
approximately $3,000 and an increase in IT expenses of
approximately $2,000.
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 2% of the gross lease revenue
attributable to equipment that is subject to finance leases. An
equipment management fee of approximately $3,000 and $3,000 was
earned but waived by the General Partner for both the three months
ended September 30, 2020 and 2019, respectively.
Depreciation and Amortization Expenses
Depreciation
expenses consist of depreciation on equipment. This expense
decreased to approximately $41,000 for the three months ended
September 30, 2020, from $64,000 for the three months ended
September 30, 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 June 30, 2020.
Net (Loss) Income
For the
three months ended September 30, 2020, we recognized revenue of
approximately $71,000 and expenses of approximately $95,000,
resulting in net loss of approximately $24,000. For the three months ended September 30, 2019, we
recognized revenue of approximately $134,000 and expenses of
approximately $76,000, resulting in net income of approximately
$58,000. This change to a net loss is due to the changes in
revenue and expenses as described above.
Nine months ended September 30, 2020 compared to nine months ended
September 30, 2019
Lease Revenue
Our
lease revenue decreased to approximately $236,000 for the nine
months ended September 30, 2020, from approximately $379,000 for
the nine months ended September 30, 2019. The Partnership had 54 and 63 operating
leases during the nine months ended September 30, 2020 and 2019,
respectively. The decline in number of active leases is consistent
with the overall decrease in lease revenue. 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.
18
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 for 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 $55,000, for the sale price of primarily, Small
IBM Servers and High Volume & Spec Printers and recorded a gain
on sale of equipment of approximately $12,000. The Partnership
disposed of and sold other equipment to various customers during
2020. For the nine months ended September 30, 2020, the Partnership
sold equipment to other customers besides Cummins with a total net
book value of $0 and net gain of approximately $7,000. This
compared to the nine months ended September 30, 2019, the
Partnership sold equipment with net book value of approximately
$12,000 for a net gain of approximately $3,000.
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 $220,000 for
the nine months ended September 30, 2020, from approximately
$68,000 for the nine months ended September 30, 2019. This increase
is primarily attributable to the reestablishment of previously
waived other LP expenses of approximately $100,000, an increase in accounting fees related to changes
in tax reporting of approximately $11,000, an increase in
legal fees associated with the FINRA
matter (see Item 1. Legal Proceedings) of approximately
$9,000, an increase in IT expenses of approximately $7,000, an
increase in outside services-investor services of approximately
$6,000, an increase in expenses
related to the corporate office relocation of approximately
$4,000, an increase in recruiting fees of approximately $4,000 and
an increase in partnership taxes 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
5% of the gross lease revenue attributable to equipment that is
subject to operating leases and 2% of the gross lease revenue
attributable to equipment that is subject to finance leases.
For the nine months ended
September 30, 2020 and 2019, total equipment management fees
of approximately $11,000 and $10,000 were earned but waived by the
General Partner, respectively.
Depreciation and Amortization Expenses
Depreciation
and amortization expenses consist of depreciation on equipment and
amortization of equipment acquisition fees. These expenses
decreased to approximately $131,000 for the nine months ended
September 30, 2020, from $218,000 for the nine months ended
September, 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 nine months ended
September 30, 2020
Net (Loss) Income
For the
nine months ended September 30, 2020, we recognized revenue of
approximately $283,000 and expenses of approximately $342,000,
resulting in net loss of approximately $59,000. For the nine months ended September 30, 2019, we
recognized revenue of approximately $405,000 and expenses of
approximately $317,000, resulting in net income of approximately
$88,000. This change to a net loss is due to the changes in
revenue and expenses as described above.
19
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
N/A
Item 4. Controls and Procedures
Evaluation of Disclosure 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, 2020,
our disclosure controls and procedures were not effective due to
the presence of a material weakness in internal control over
financial reporting.
A
material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will
not be prevented or detected on a timely basis. In evaluating the
effectiveness of our internal control over financial reporting, our
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control – Integrated
Framework (2013) and SEC guidance on conducting such assessments.
Management’s assessment included an evaluation of the design
of our internal control over financial reporting and testing of the
operational effectiveness of these controls. Based on this
assessment, management has concluded that as of September 30, 2020,
our internal control over financial reporting was not effective to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting
principles. The matters involving internal controls and procedures
that our management considered to be material weaknesses under the
standards of the Public Company Accounting Oversight Board were:
(i) ineffective controls over period end financial disclosure and
reporting processes. The aforementioned material weaknesses were
identified by our principal financial officer and principal
accounting officer, in connection with the review of our financial
statements as of June 30, 2020.
Remediation of Material Weakness
In an
effort to remediate the identified material weaknesses and other
deficiencies and enhance our internal controls, we have implemented
the following measure:
1. We have
incorporated a procedure within our written policies and procedures
to require for nonrecurring journal entries, referenced as
“one-off” journal entries to be reviewed and signed-off
by both the accounting manager and a senior staff accountant to
ensure appropriate transactions are recorded as intended to be
reported for financial reporting
and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted
accounting principles.
The
material weakness will not be considered remediated, however, until
the applicable controls operate for a sufficient period of time and
management has concluded, through testing, that these controls are
operating effectively. We expect that the remediation of this
material weakness will be completed by the end of fiscal year
2020.
Changes in Internal Control over Financial Reporting:
There
were no other changes in our internal control over financial
reporting during the quarter ending September 30, 2020, that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
20
Part II: OTHER INFORMATION
Item 1.
Legal
Proceedings
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 November 16, 2020.
Item
1A. Risk
Factors
Going Concern
For the
nine months ended September 30, 2020, the Partnership incurred
positive cash flow. However, historically the Partnership has
reported recurring negative cash flows. At September 30, 2020, the
Partnership has a working capital deficit of approximately
$125,000. Such factors raise substantial doubt about the
Partnership’s ability to continue as a going
concern.
The
General Partner has evaluated that significant improvement in the
Partner’s cash flow would be required to avoid substantial
doubt about the entity’s ability to continue as a going
concern.
The
General Partner agreed to forgo distributions and allocations of
net income owed to it, and suspended limited partner distributions.
The General Partner will continue to waive certain fees and may
defer certain related party payables owed to the Partnership in an
effort to further increase the Partnership’s cash flow.
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.
The Partnership may also attempt to obtain additional funds by
disposing of or refinancing equipment, or by borrowing within its
permissible limits.
If it
is not probable that the General Partner will be able to
effectively implement its plan or if it is not probable that the
plan will mitigate the relevant conditions that gave rise to the
substantial doubt, the Partnership may begin its liquidation
process through the sale of its assets and payment of its
obligations as per the Partnership agreement. If liquidation ever
becomes imminent, the entity will prepare its financial statements
under the liquidation basis of accounting.
21
COVID-19 Pandemic
The
amount of revenue recognized and the pattern of revenue recognition
may be impacted by COVID-19. Some of the business sectors that
we service such as education centers, medical facilities, payroll
administrators, manufacturing and transportation, we may need to
account for returns and refund liabilities. The pattern of revenue
recognition may change for delays in rendering
services.
In
periods ended subsequent to the outbreak of COVID-19, the
impact on expected credit losses and future cash flow projections
used in impairment testing will need to be considered.
The
Company continues to evaluate whether adjustments to the financial
statements are required or whether additional disclosures are
necessary. In our leasing business, the Company is always subject
to credit losses as it relates to a customer’s ability to
make timely rental payments. The impact of COVID-19 may contribute
to risk of non-performance, where a customer may experience
financial difficulty and may delay in making timely
payments.
The
Company recognizes impairment of receivables and loans when losses
are incurred, which is when it is probable that an entity will be
unable to collect all amounts due according to the contractual
terms of the arrangement. Impairment is measured based on the
present value of expected future cash flows discounted at the
receivable’s or loans effective interest rate, except that,
as a practical expedient, impairment can be measured based on a
receivable’s or loans’ observable market price or the
fair value of the underlying collateral.
The
Company believes its estimate of expected losses have been
recognized based on historical experience, current conditions, and
reasonable forecasts. The impacts of COVID-19 may necessitate
additional adjustments in future forecasts of expected
losses.
Although
the Partnership cannot estimate the length or gravity of the impact
of the COVID-19 outbreak at this time, if the pandemic continues,
it may have a material adverse effect on the Partnership results of
future operations, financial position, and liquidity in fiscal year
2020 and beyond.
Material Weakness
Failure
to maintain effective systems of internal control over financial
reporting and disclosure controls and procedures could result in
additional costs being incurred for remediation and cause a loss of
confidence in our financial reporting.
Effective
internal control over financial reporting is necessary for us to
provide accurate financial information. We
previously
identified a material weakness in our internal controls over
financial reporting as of June 30, 2020. We have concluded that our
internal controls over financial reporting were not effective as of
September 30, 2020 due to the existence of material weaknesses in
our monthly close for not properly reviewing certain journal
entries that had an impact on the internal controls over financial
reporting.
The
material weakness will not be considered remediated, however, until
the applicable controls operate for a sufficient period of time and
management has concluded, through testing, that these controls are
operating effectively. We expect that the remediation of this
material weakness will be completed by the end of fiscal year
2020.
If our
remediation measures are insufficient to address the identified
deficiencies, or if additional deficiencies in our
internal
control over financial reporting are discovered or occur in the
future, our financial statements may contain material misstatements
and we could be required to restate our financial results.
Moreover, because of the inherent limitations of any control
system, material misstatements due to error or fraud may not be
prevented or detected on a timely basis, or at all. If we are
unable to provide reliable and timely financial reports in the
future, our business and reputation may be further harmed. Failures
in internal controls may negatively affect investor confidence in
our management and the accuracy of our financial statements and
disclosures, or result in adverse publicity and concerns from
investors, any of which could have a negative effect, subject us to
regulatory investigations and penalties and/or shareholder
litigation, and materially adversely impact our business and
financial condition.
22
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
23
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.
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COMMONWEALTH
INCOME & GROWTH FUND V
|
|
BY:
COMMONWEALTH INCOME & GROWTH FUND, INC., General
Partner
|
|
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November 16, 2020
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By: /s/ Kimberly A. Springsteen-Abbott
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Date
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Kimberly
A. Springsteen-Abbott
|
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Chief
Executive Officer And Principal Financial Officer
Commonwealth
Income & Growth Fund, Inc.
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|
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November 16, 2020
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By: /s/
Theodore Cavaliere
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Date
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Theodore
Cavaliere
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Vice
President, Financial Operations Principal
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24