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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 MARCH 31, 2021 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 North
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
March 31, 2021
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.
|
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
Condensed
Balance Sheets
|
||
|
||
|
March
31,
|
December
31,
|
|
2021
|
2020
|
|
(unaudited)
|
(audited)
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$25,245
|
$33,920
|
Lease income
receivable, net of reserve of approximately $10,000 at both March
31, 2021 and December 31, 2020
|
15,514
|
21,710
|
Other
receivables
|
333
|
333
|
Prepaid
expenses
|
1,825
|
3,247
|
|
42,917
|
59,210
|
|
|
|
|
|
|
Equipment, at
cost
|
3,694,288
|
3,871,354
|
Accumulated
depreciation
|
(3,547,388)
|
(3,683,178)
|
|
146,900
|
188,176
|
Total
Assets
|
$189,817
|
$247,386
|
|
|
|
LIABILITIES
AND PARTNERS' DEFICIT
|
|
|
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$129,786
|
$131,056
|
Accounts payable,
CIGF, Inc.
|
96,172
|
84,411
|
Accounts payable,
Commonwealth Capital Corp, net of accounts receivable of
approximately $57,000 and $46,000 at March 31, 2021 and December
31, 2020, respectively
|
93,368
|
98,872
|
Unearned lease
income
|
217
|
1,499
|
Notes
payable
|
18,141
|
26,522
|
Total
Liabilities
|
337,684
|
342,360
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
PARTNERS'
DEFICIT
|
|
|
General
Partner
|
1,000
|
1,000
|
Limited
Partners
|
(148,867)
|
(95,974)
|
Total
Partners' Deficit
|
(147,867)
|
(94,974)
|
Total
Liabilities and Partners' Deficit
|
$189,817
|
$247,386
|
|
|
|
see
accompanying notes to condensed financial statements
|
3
Commonwealth
Income & Growth Fund V
|
||
Condensed
Statements of Operations
|
||
(unaudited)
|
||
|
|
|
|
Three
Months Ended March 31,
|
|
|
2021
|
2020
|
Revenue
|
|
|
Lease
|
$60,841
|
$88,182
|
Interest and
other
|
34
|
155
|
Sales and property
taxes
|
2,662
|
15,730
|
Gain on sale of
equipment
|
-
|
12,388
|
Total
revenue and gain on sale of equipment
|
63,537
|
116,455
|
|
|
|
Expenses
|
|
|
Operating,
excluding depreciation and amortization
|
74,578
|
86,091
|
Interest
|
313
|
1,074
|
Depreciation
|
33,797
|
48,945
|
Sales and property
taxes
|
2,662
|
15,730
|
Bad debt
recovery
|
-
|
(33,834)
|
Loss on sale of
equipment
|
5,080
|
-
|
Total
expenses
|
116,430
|
118,006
|
|
|
|
|
|
|
Net
Loss
|
$(52,893)
|
$(1,551)
|
|
|
|
Net
Loss allocated to Limited Partners
|
$(52,893)
|
$(1,551)
|
|
|
|
Net
Loss per equivalent Limited Partnership unit
|
$(0.04)
|
$(0.00)
|
Weighted
average number of equivalent limited
|
|
|
partnership
units outstanding during the period
|
1,235,066
|
1,236,123
|
|
|
|
see
accompanying notes to condensed financial statements
|
4
Commonwealth
Income & Growth Fund V
|
|||||
Condensed
Statement of Partners' Capital
|
|||||
For
the three months ended March 31, 2021 and 2020
|
|||||
(unaudited)
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance,
January 1, 2021 (audited)
|
50
|
1,235,581
|
$1,000
|
$(95,974)
|
$(94,974)
|
Net
loss
|
-
|
-
|
-
|
(52,893)
|
(52,893)
|
Redemptions
|
-
|
(833)
|
-
|
-
|
-
|
Balance
March 31, 2021
|
50
|
1,234,748
|
$1,000
|
$(148,867)
|
$(147,867)
|
|
|
|
|
|
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance,
January 1, 2020 (audited)
|
50
|
1,236,148
|
$1,000
|
$47,964
|
$48,964
|
Net
loss
|
-
|
-
|
-
|
(1,551)
|
(1,551)
|
Redemptions
|
-
|
(567)
|
-
|
-
|
-
|
Balance
March 31, 2020
|
50
|
1,235,581
|
$1,000
|
$46,413
|
$47,413
|
see
accompanying notes to condensed financial
statements
5
Commonwealth
Income & Growth Fund V
|
||
Condensed
Statements of Cash Flow
|
||
(unaudited)
|
||
|
|
|
|
|
|
|
Three
months ended March 31,
|
|
|
2021
|
2020
|
|
|
|
Net
cash used in operating activities
|
$(11,075)
|
$(47,895)
|
|
|
|
Investing
activities:
|
|
|
Net proceeds from
the sale of equipment
|
2,400
|
54,696
|
Net
cash provided by investing activities
|
2,400
|
54,696
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
(8,675)
|
6,801
|
|
|
|
Cash
and cash equivalents at beginning of period
|
33,920
|
5,211
|
|
|
|
Cash
and cash equivalents at end of period
|
$25,245
|
$12,012
|
|
|
|
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.
7
Liquidity and Going Concern
For the
three months ended March 31, 2021, the Partnership incurred
positive cash flow. However, historically the Partnership has
reported recurring negative cash flows. At March 31, 2021, the
Partnership has a working capital deficit of approximately
$295,000. Such factors raise substantial doubt about the
Partnership’s ability to continue as a going concern.
The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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.
2. Summary of Significant Accounting Policies
Basis of Presentation
The
financial information presented as of any date other than December
31, 2020 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, 2020 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 30, 2021 are not necessarily
indicative of financial results that may be expected for the full
year ended December 31, 2021.
Disclosure of Fair Value of Financial Instruments
Estimated fair value was determined by management using available
market information and appropriate valuation methodologies.
However, judgment was necessary to interpret market data and
develop estimated fair value. Cash and cash equivalents,
receivables, accounts payable and accrued expenses and other
liabilities are carried at amounts which reasonably approximate
their fair values as of March 31, 2021 and December 31, 2020 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, 2021 and December 31, 2020 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.
8
Cash and cash equivalents
We
consider cash equivalents to be highly liquid investments with the
original maturity dates of 90 days or less.
At
March 31, 2021, cash and cash
equivalents was held in one account maintained at one financial
institution with an aggregate balance of approximately
$26,000. Bank accounts are federally insured up to $250,000 by the
FDIC. At March 31, 2021, the total cash bank balance was as
follows:
At March 31, 2021
|
Balance
|
Total
bank balance
|
$26,000
|
FDIC
insured
|
(26,000)
|
Uninsured
amount
|
$-
|
The
Partnership’s bank balances are fully insured by the FDIC.
The Partnership deposits its funds with a Moody's Aaa-Rated banking
institution which is one of only three Aaa-Rated banks listed on
the New York Stock Exchange. The Partnership has not experienced
any losses in such accounts, and believes it is not exposed to any
significant credit risk. The amount in such accounts will fluctuate
throughout 2021 due to many factors, including cash receipts,
equipment acquisitions and interest rates.
Recent Accounting Pronouncements Not Yet Adopted
In June
2016, the FASB issued Accounting Standards Update
(“ASU”) 2016-13, Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). This standard establishes an
impairment model (known as the current expected credit loss
(“CECL”) model) that is based on expected losses rather
than incurred losses. Under the new guidance, an entity recognizes
as an allowance its estimate of expected credit losses, which is
intended to result in a timelier recognition of losses. Under the
CECL model, entities will estimate credit losses over the entire
contractual term of the instrument (considering estimated
prepayments, but not expected extensions or modifications) from the
date of initial recognition of the financial instrument.
Measurement of expected credit losses are to be based on relevant
forecasts that affect collectability. The scope of financial assets
within the CECL methodology is broad and includes trade receivables
from certain revenue transactions and certain off-balance sheet
credit exposures. Different components of the guidance require
modified retrospective or prospective adoption.
In
November 2018, the FASB issued ASU No. 2018-19, Codification
Improvements to Topic 326, Financial Instruments-Credit Losses. ASU
2018-19 clarifies that receivables arising from operating leases
are not within the scope of the credit losses standard. Instead,
entities would need to apply other U.S. GAAP, namely Topic 842
(Leases), to account for changes in the collectability assessment
for operating leases. Other than operating lease receivables,
Partnership trade receivables include receivables from finance
leases and equipment sales. Under Topic 606 (Revenue from Contracts
with Customers), revenue is recognized when, among other criteria,
it is probable that the entity will collect the consideration to
which it is entitled for goods or services transferred to a
customer. At the point that finance lease receivables are recorded,
they become subject to the CECL model and estimates of expected
credit losses over their contractual life will be required to be
recorded at inception based on historical information, current
conditions, and reasonable and supportable forecasts. Trade
receivables derived from equipment sales are of short duration and
there is not a material difference between incurred losses and
expected losses.
In
April 2019, the FASB issued ASU 2019-04, Codification Improvements
to Topic 326, Financial Instruments-Credit Losses, Topic 815,
Derivatives and Hedging, and Topic 825, Financial Instruments,
which amends and clarifies several provisions of Topic 326. In May
2019, the FASB issued ASU 2019-05, Financial Instruments-Credit
Losses (Topic 326): Targeted Transition Relief, which amends Topic
326 to allow the fair value option to be elected for certain
financial instruments upon adoption. ASU 2019-10 extended the
effective date of ASU 2016-13 for the Partnership until December
15, 2022. While we continue to evaluate the new guidance, including
the subsequent updates to Topic 326, we do not anticipate that
adoption will have a material impact on the Partnership financial
statements and related disclosures. For both the quarters ended
March 31, 2021 and 2020, Partnership finance lease revenue subject
to CECL represented less than 1% of total lease
revenue.
9
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
and 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, 2021, was approximately $0.
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, 2021 was
approximately $1,924,000 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, 2021
was approximately $8,295,000. The Partnership’s share of the
outstanding debt associated with this equipment at March 31, 2021
was approximately $0 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,
2021 was approximately $0.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2020 was
approximately $2,069,000 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,
2020 was approximately $8,586,000. The Partnership’s share of
the outstanding debt associated with this equipment at December 31,
2020 was approximately $5,000 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, 2020 was approximately $152,000.
As the
Partnership and the other programs managed by the General Partner
continue to acquire new equipment for the portfolio, opportunities
for shared participation are expected to continue. Sharing in the
acquisition of a lease portfolio gives the fund an opportunity to
acquire additional assets and revenue streams, while allowing the
fund to remain diversified and reducing its overall risk with
respect to one portfolio.
The
following is a schedule of approximate future minimum rentals on
operating leases at March 31, 2021:
For the period ended
December
|
Amount
|
Nine months ended
December 31, 2021
|
$78,500
|
Year Ended December
31, 2022
|
25,000
|
Year Ended December
31, 2023
|
23,500
|
Year Ended December
31, 2024
|
21,000
|
Year Ended December
31, 2025
|
9,000
|
|
$157,000
|
|
|
10
4. Related Party Transactions
Receivables/Payables
As of
March 31, 2021, and December 31, 2020, the Company’s related
party receivables and payables are short term, unsecured and
non-interest bearing.
Three months ended March 31,
|
2021
|
2020
|
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, 2021 and 2020, the General Partner
waived certain reimbursable expenses due to it by the Partnership.
For the three months ended March 31, 2021 and 2020, the Partnership
was charged approximately $21,000 and $27,000 in Other LP expense,
respectively.
|
$68,000
|
$73,000
|
|
|
|
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 three months
ended March 31, 2021 and 2020, approximately $0 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
three months ended March 31, 2021 and 2020, equipment management
fees of approximately $3,000 and $4,000 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 three months ended March 31, 2021 and 2020, the General Partner
waived approximately $39 and $5,000 of equipment liquidation fees,
respectively.
|
$-
|
$-
|
11
5. Notes Payable
Notes
payable consisted of the following approximate
amounts:
|
March
31,
|
December
31,
|
|
2021
|
2020
|
Installment
note payable to bank; interest at 5.31% due in quarterly
installments of $4,618, including interest, with final payment in
January 2021
|
-
|
5,000
|
Installment
note payable to bank; interest at 4.70% due in monthly installments
of $1,360, including interest, with final payment in February
2021
|
-
|
3,000
|
Installment
note payable to bank; interest at 5.00% due in monthly installments
of $452, including interest, with final payment in November
2024
|
18,000
|
19,000
|
|
$18,000
|
$27,000
|
These
notes are secured by specific equipment with a carrying value of
approximately $26,000 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, 2021 are as
follows:
|
Amount
|
Nine months ended
December 31, 2021
|
$3,000
|
Year
ended December 31, 2022
|
5,000
|
Year
ended December 31, 2023
|
5,000
|
Year
ended December 31, 2024
|
5,000
|
|
$18,000
|
6. Supplemental Cash Flow Information
No
interest or principal on notes payable was paid by the Partnership
during 2021 and 2020 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 income
(loss) are as follows:
Three months ended March 31,
|
2021
|
2020
|
Lease revenue net
of interest expense on notes payable realized as a result of direct
payment of principal by lessee to bank
|
$8,000
|
$33,000
|
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
2021 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 at that time 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.
Despite offering no additional evidence or legal reasoning from
when SEC originally remanded this matter (for FINRA’s opinion
being an unreviewably flawed opinion), the SEC upheld FINRA’s new 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. On February 26, 2021, the United States
Court of Appeals for the District of Columbia Circuit, made their
ruling. They dismissed in part and denied in part Ms.
Springsteen-Abbott’s petition. This was regardless of
CCC’s good faith reimbursements made many years ago of the
questioned expense items of $208,000 (due to improper
documentation), initially claimed misallocations by FINRA, even
prior to FINRA’s reducing its final claim to
$36,226.
13
Prior
to the original appeal to the SEC, Ms. Springsteen-Abbott
discovered CCC’s required documentation of these items for
FINRA review, which FINRA refused to consider, despite such efforts
the District Court upheld the bar, despite admittingly not
addressing her “due process” rights, for legal
administrative procedural reasons. However, given the
SEC’s prior removal of FINRA’s fine and the District
Court upholding that removal, the General Partner anticipates that
this ruling will not result in any material financial impact to the
Funds.
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, 2020 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
We
invest in various types of domestic information technology
equipment leases located solely within the United States. Our
investment objective is to acquire primarily high technology
equipment. We believe that dealing in high
technology
equipment is particularly advantageous due to a robust aftermarket.
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 computer processing capacity,
speed, and utility. In the future, the rate and nature of equipment
development may cause equipment to become obsolete more rapidly. In
an effort to mitigate this risk our portfolio manager attempts to
diversify our fund through the acquisition of different types of
equipment, staggered lease maturities, various lessees, and
businesses located throughout the U.S., and industries
served.
We also
acquire high technology medical, telecommunications and inventory
management equipment. Our General Partner seeks 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 has a longer
useful life. This allows for increased re-marketability, if it is
returned before its economic or announcement cycle is
depleted.
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 $9.3 billion, up 4% year-over-year from new
business volume in March 2020. Volume was up 26% month-to-month
from $7.4 billion in February. Year-to-date, cumulative new
business volume was down 1% compared to 2020.
Receivables
over 30 days were 1.9%, down from 2.1% the previous month and down
from 2.6% in the same period in 2020. Charge-offs were 0.43%, down
from 0.55% the previous month and down from 0.55% in the
year-earlier period.
Credit
approvals totaled 77%, up from 75.8% in February. Total headcount
for equipment finance companies was down 15.2% year-over-year, a
decrease due to significant downsizing at an MLFI reporting
company.
Separately,
the Equipment Leasing & Finance Foundation’s Monthly
Confidence Index (MCI-EFI) in April is an all-time high of 76.1,
and an increase from the March index of 67.7.
14
ELFA
President and CEO Ralph Petta said, “The equipment finance
industry appears poised to take advantage of an economic tailwind
that is manifesting itself in an improving labor market, a
continued low interest-rate environment, a strong corporate
earnings season, and high business confidence that is creating
demand for investment in commercial equipment. ELFA member
organizations also report improving portfolio quality, which is
reflective of their customers’ ability to meet their payment
obligations as the pandemic’s grip on many businesses
loosens.”
Marci
Slagle, President, BankFinancial Equipment Finance, said,
“Thus far in 2021, as we continue to work our way through the
pandemic, market demand has remained high, both on applications and
credit approvals. Our existing portfolios continue to remain
stable, with few leases stretching payables along while the
underlying financials remain strong. Approval to funding
continues to lag a bit as the supply chain stretches, especially
when there are multiple and/or foreign vendors involved.
Overall, continuing into second quarter, there seems to be
continued growth and strength across all of our markets, which
encompass small, middle, corporate and
governmental.”
Our
business is directly impacted by factors such as economic,
political, and market conditions, broad trends in industry and
finance, legislative and regulatory changes, changes in government
monetary and fiscal policies, and inflation, all of which are
beyond our control. Given these circumstances, we believe companies
overall, will continue to increasingly turn to leasing, as a
financing solution. It is our belief that companies lease
business-essential equipment because leasing can provide many
benefits to a company. The number one benefit of leasing that we
see is that there is no large outlay of cash required. Therefore,
companies can preserve their working capital, lease equipment,
which is an expense item, have the flexibility to upgrade the
equipment when needed, and have no risk of obsolescence. Because we
expect leasing to remain an attractive financing solution for
American businesses during the next 12 months, we feel that our
ability to increase our portfolio size and leasing revenues during
that period will remain strong.
We, at
Commonwealth, are currently operating business as usual (with our
employees working remotely). We may see a slowdown on new equipment
acquisition decisions from Corporate Lessees until the crisis is
resolved and businesses can resume their normal operation. We have
no way of knowing what this period of time will be. We will keep
our investors informed of subsequent events. For information
relating to COVID-19 and the overall effects, as expressed by Ralph
Petta, President of ELFA (The Equipment Leasing & Finance
Association), please refer to elfaonline.org.
CRITICAL ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of
operations are based upon our financial statements which have been
prepared in accordance with generally accepted accounting
principles in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses.
We base these estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
We
believe that our critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
financial statements. See Note 2 to our condensed financial
statements included herein for a discussion related to recent
accounting pronouncements.
LEASE INCOME RECEIVABLE
Lease
income receivable includes current lease income receivable net of
allowances for uncollectible accounts, if any. The Partnership
monitors lease income receivable to ensure timely and accurate
payment by lessees. Its Lease Relations department is responsible
for monitoring lease income receivable and, as necessary, resolving
outstanding invoices. Lease revenue is recognized on a monthly
straight-line basis which is in accordance with the terms of the
lease agreement.
The
Partnership reviews a customer’s credit history before
extending credit. When the analysis indicates that the probability
of full collection is unlikely, the Partnership may establish an
allowance for uncollectible lease income receivable based upon the
credit risk of specific customers, historical trends and other
information. The Partnership writes off its lease income receivable
when it determines that it is uncollectible and all economically
sensible means of recovery have been exhausted.
15
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, 2021, the Partnership’s lease portfolio consisted
of operating 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 equipment for financial statement purposes is based on the
straight-line method estimated generally over useful lives of two
to four years. Once an asset comes off lease or is re-leased, the
Partnership reassesses the useful life of an asset.
The
Partnership evaluates its long-lived assets when events or
circumstances indicate that the value of the asset may not be
recoverable. The Partnership determines whether impairment exists
by estimating the undiscounted cash flows to be generated by each
asset. If the estimated undiscounted cash flows are less than the
carrying value of the asset then impairment exists. The amount of
the impairment is determined based on the difference between the
carrying value and the fair value. Fair value is determined based
on estimated discounted cash flows to be generated by the asset,
third party appraisals or comparable sales of similar assets, as
applicable, based on asset type. Residual values are determined by
management and are calculated using information from both internal
and external sources, as well as other economic
indicators.
16
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our
primary source of cash for the three months ended March 31, 2021
was net proceeds from the sale of equipment of approximately
$2,000. This compares to the three months ended March 31, 2020,
where our primary source of cash was net proceeds from the sale of
equipment of approximately $55,000.
Our
primary use of cash for the three months ended March 31, 2021 and
2020 was cash used in operating activities of approximately $11,000
and $48,000, respectively. For the three months ended March 31,
2021 and March 31, 2020, the Partnership had no financing
activities.
Cash
was used in operating activities for the three months ended March
31, 2021 of approximately $11,000 which includes net loss of
approximately $53,000, depreciation expenses of approximately
$34,000 and loss on sale of computer equipment of approximately
$5,000. Other non-cash activities included in the determination of
net loss include direct payments of lease income by lessees to
banks of approximately $8,000. For the three months ended March 31,
2020, cash was used in operating activities of approximately
$48,000 which includes net loss of approximately $2,000,
depreciation expenses of approximately $49,000, gain on sale of
computer equipment of approximately $12,000, and bad debt recovery
of approximately $34,000. Other non-cash activities included in the
determination of net income include direct payments of lease income
by lessees to banks of approximately $33,000.
We
consider cash equivalents to be highly liquid investments with the
original maturity dates of 90 days or less.
At
March 31, 2021, cash and cash
equivalents were held in one account maintained at one financial
institution with a balance of approximately $26,000. Bank
accounts are federally insured up to $250,000 by the FDIC. At March
31, 2021, the total cash bank balance was as follows:
At March 31, 2021
|
Balance
|
Total
bank balance
|
$26,000
|
FDIC
insured
|
(26,000)
|
Uninsured
amount
|
$-
|
The
Partnership’s bank balances are fully insured by the FDIC.
The Partnership deposits its funds with a Moody's Aaa-Rated banking
institution which is one of only three Aaa-Rated banks listed on
the New York Stock Exchange. The Partnership has not experienced
any losses in such accounts, and believes it is not exposed to any
significant credit risk. The amount in such accounts will fluctuate
throughout 2021 due to many factors, including cash receipts,
equipment acquisitions, interest rates, and distributions to
limited partners.
17
Our
investment strategy of acquiring equipment and generally leasing it
under triple-net leases to operators who generally meet specified
financial standards minimizes our operating expenses. As of March
31, 2021, we had future minimum rentals on operating leases of
approximately $78,500 for the balance of the year ending December
31, 2021 and approximately $78,500 thereafter
As of
March 31, 2021, our non-recourse debt was approximately $18,000,
with interest rates ranging from 4.70% to 5.31%, and will be
payable through November 2024.
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
three months ended March 31, 2021, the Partnership incurred
positive cash flow. However, historically the Partnership has
reported recurring negative cash flows. At March 31, 2021, the
Partnership has a working capital deficit of approximately
$295,000. 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
for the three months ended March 31, 2021. The General Partner will
continue to reassess the funding of limited partner distributions
throughout 2021 and will continue to waive certain fees if the
General Partner determines it is in the best interest of the
Partnership to do so. If available cash flow or net disposition
proceeds are insufficient to cover the Partnership expenses and
liabilities on a short and long-term basis, the Partnership may
attempt to obtain additional funds by disposing of or refinancing
equipment, or by borrowing within its permissible
limits.
The
General Partner will continue to reassess the funding of limited
partner distributions throughout 2021 and will continue to waive
certain fees. If available cash flow or net disposition proceeds
are insufficient to cover the Partnership expenses and liabilities
on a short and long-term basis, the Partnership may attempt to
obtain additional funds by disposing of or refinancing equipment,
or by borrowing within its permissible limits. Additionally, the
Partnership will seek to enhance portfolio returns and maximize
cash flow through the use of leveraged lease transactions: the
acquisition of lease equipment through debt financing. This
strategy allows the General Partner to acquire additional revenue
generating leases without the use of investor funds thus maximizing
overall return.
18
RESULTS OF OPERATIONS
Three months ended March 31, 2021 compared to three months ended
March 31, 2020
Lease Revenue
Our
lease revenue decreased to approximately $61,000 for the three
months ended March 31, 2021, from approximately $88,000 for the
three months ended March 31, 2020. This revenue decrease is
primarily due to a decrease in active lease agreements as described
below.
The Partnership had 28 and 53 active operating leases during the
three months ended March 31, 2021 and 2020, respectively. The
decrease in number of active leases is consistent with the overall
decrease in lease revenue. Management expects to add new leases to
our portfolio throughout the remainder of 2021, funded primarily
through debt financing. As the operational phase of the Partnership
has been extended to December 31, 2021, Management will continue to
seek lease opportunities to enhance portfolio returns and cash
flow.
Sale of Equipment
For the
three months ended March 31, 2021,
the Partnership sold equipment with a net book value of
approximately $7,000 for a net loss of approximately $5,000.
For the three months ended March 30,
2020, the Partnership sold equipment with a net book value of
approximately $42,000 for a net gain of approximately
$12,000.
Operating Expenses
Our
operating expenses, excluding depreciation, primarily consist of
accounting and legal fees, outside service fees and reimbursement
of expenses to CCC for administration and operation of the
Partnership. These expenses decreased to approximately $75,000 for
the three months ended March 31, 2021, from approximately $86,000
for the three months ended March 31, 2020. This decrease is
primarily attributable to a decrease in legal fees of approximately
$7,000 and other LP expenses of approximately $5,000.
Equipment Management Fees
We pay
an equipment management fee to our general partner for managing our
equipment portfolio. The equipment management fee is approximately
2.5% of the gross lease revenue attributable to equipment that is
subject to operating leases. For the
three months ended March 31, 2021 and 2020, the equipment management fee was
waived.
Depreciation and Amortization Expenses
Depreciation
expenses consist of depreciation on equipment. This expense
decreased to approximately $34,000 for the three months ended March
31, 2021, from $49,000 for the three months ended March 31, 2020.
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,
2021.
Net Loss
For the
three months ended March 31, 2021, we recognized revenue of
approximately $63,000, expenses of approximately $116,000,
resulting in net loss of approximately $53,000. For the three
months ended March 31, 2020, we recognized revenue of approximately
$116,000, expenses of approximately $118,000, resulting in net loss
of approximately $2,000. This change to a net loss is due to the
changes in revenue and expenses described above.
19
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, 2021, 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 2021 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
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 at that time 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.
Despite offering no additional evidence or legal reasoning from
when SEC originally remanded this matter (for FINRA’s opinion
being an unreviewably flawed opinion), the SEC upheld FINRA’s new 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. On February 26, 2021, the United States
Court of Appeals for the District of Columbia Circuit, made their
ruling. They dismissed in part and denied in part Ms.
Springsteen-Abbott’s petition. This was regardless of
CCC’s good faith reimbursements made many years ago of the
questioned expense items of $208,000 (due to improper
documentation), initially claimed misallocations by FINRA, even
prior to FINRA’s reducing its final claim to
$36,226.
20
Prior
to the original appeal to the SEC, Ms. Springsteen-Abbott
discovered CCC’s required documentation of these items for
FINRA review, which FINRA refused to consider, despite such efforts
the District Court upheld the bar, despite admittingly not
addressing her “due process” rights, for legal
administrative procedural reasons. However, given the
SEC’s prior removal of FINRA’s fine and the District
Court upholding that removal, the General Partner anticipates that
this ruling will not result in any material financial impact to the
Funds.
Item
2A. Risk
Factors
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
2021 and beyond.
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 V
|
|
BY:
COMMONWEALTH INCOME & GROWTH FUND, INC., General
Partner
|
May 24, 2021
|
By: /s/ Kimberly A. Springsteen-Abbott
|
Date
|
Kimberly
A. Springsteen-Abbott
|
|
Chief
Executive Officer And Principal Financial Officer
Commonwealth
Income & Growth Fund, Inc.
|
|
|
May 24, 2021
Date
|
By: /s/
Theodore Cavaliere
Theodore Cavaliere
Vice President, Financial Operations Principal
|
23