Washington, D.C. 20549
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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:
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. 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):
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 ☒
Part I. FINANCIAL INFORMATION
Item 1. 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.
2. Summary of Significant Accounting Policies
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 June 30, 20192020 and December 31, 20182019 due to the short termshort-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 June 30, 20192020 and December 31, 20182019 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.
3. Information Technology, Medical Technology, Telecommunications Technology, Inventory Management Equipment and otherOther Business-Essential Capital Equipment (“Equipment”)
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 June 30, 20192020 was approximately $1,819,000$2,053,000 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 June 30, 20192020 was approximately $7,540,000.$8,554,000. The Partnership’s share of the outstanding debt associated with this equipment at June 30, 20192020 was approximately $132,000$13,000 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 June 30, 20192020 was approximately $1,226,000.$450,000.
The Partnership’s share of the cost of the equipment in which it participates with other partnerships at December 31, 20182019 was approximately $1,853,000$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, 20182019 was approximately $7,609,000.$8,873,000. The Partnership’s share of the outstanding debt associated with this equipment at December 31, 20182019 was approximately $218,000$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, 20182019 was approximately $1,696,000.
The following is a schedule of approximate future minimum rentals on non-cancellable operating leases at June 30, 2019:2020:
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.
The following table presents the credit risk profile, by creditworthiness category, of our direct finance lease receivables at June 30, 2019:2020:
The following is a schedule of approximate future minimum rentals on non-cancellable finance leases at June 30, 2019:2020:
The Partnership was originally scheduled to end its operational phase on February 4, 2017. During the year ended December 31, 2015, the operational phase was officially extended to December 31, 2020 through an investor proxy vote (see note 1). The Partnership is expected to terminate on December 31, 2022. If the Partnership should terminate, CCC will assume all remaining active leases at their fair market value and related remaining revenue stream and any associated debt obligation for the duration of the remaining lease term.
4. Related Party Transactions
Receivables/Payables
As of June 30, 20192020, and December 31, 2018,2019, the Company’s related party receivables and payables are short term, unsecured and non-interest bearing.
Six months ended June 30, | | | 2020 | 2019 |
| | |
| 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 June 30, 2019 and 2018, the General Partner waived certain reimbursable expenses due to it by the Partnership. For the six months ended June 30, 2019 and 2018, the Partnership was charged approximately $0 in Other LP expense. | $49,000 | $57,000 | |
| 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 six months ended June 30, 2020 and 2019, the General Partner waived certain reimbursable expenses due to it by the Partnership. For the six months ended both June 30, 2020 and 2019, the Partnership was charged approximately $67,000 and $0 in Other LP expense, respectively. | | $155,000 | $49,000 |
| | | |
| 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 six months ended June 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% and 2% of the gross lease revenues attributable to equipment which is subject to operating leases, respectively. In an effort to increase future cash flow for the fund our General Partner had elected to reduce the percentage of equipment management fees paid to it from 5% to 2.5% of the gross lease revenues attributable to equipment which is subject to operating leases. The reduction was effective beginning in July 2010 and remained in effect for the six months ended June 30, 2019 and 2018. For the six months ended June 30, 2019 and 2018, equipment management fees of approximately $6,000 and $4,000 were earned but were waived by the General Partner, respectively. | $- | $- | |
| 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 six months ended June 30, 2020 and 2019, equipment management fees of approximately $8,000 and $6,000 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 six months ended June 30, 2020 and 2019, the General Partner waived approximately $5,000 and $200 of equipment liquidation fees, respectively. | | $- |
5. Notes Payable
Notes payable consisted of the following approximate amounts:
| | | |
| | | |
| Installment note payable to bank; interest at 4.47% due in monthly installments of $2,208, including interest, with final payment in February 2019 | - | 2,000 |
| Installment notes payable to bank; interest at 6.00%, due in monthly installments ranging from $803 to $1,216, including interest, with final payment in February 2019 | - | 2,000 |
| Installment note payable to bank; interest at 1.80% due in monthly installments of $2,116, including interest, with final payment in February 2019 | - | 4,000 |
| Installment note payable to bank; interest at 1.80% due in monthly installments of $175, including interest, with final payment in March 2019 | - | 1,000 |
| Installment notes payable to bank; interest at 1.80% due in monthly installments ranging from $121 to $175, including interest, with final payment in April 2019 | - | 2,000 |
| Installment note payable to bank; interest at 4.98% due in monthly installments of $2,847, including interest, with final payment in December 2019 | 17,000 | 33,000 |
| Installment note payable to bank; interest at 5.25% due in quarterly installments of $8,102, including interest, with final payment in December 2019 | 16,000 | 31,000 |
| Installment note payable to bank; interest at 4.87% due in quarterly installments of $11,897, including interest, with final payment in January 2020 | 35,000 | 57,000 |
| Installment note payable to bank; interest at 5.25% due in monthly installments of $679, including interest, with final payment in June 2020 | 8,000 | 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 | 34,000 | 50,000 |
| Installment note payable to bank; interest at 4.87% due in monthly installments of $1,902, including interest, with final payment in July 2020 | 9,000 | 13,000 |
| Installment note payable to bank; interest at 6.28% due in quarterly installments of $722, including interest, with final payment in September 2020 | 4,000 | 5,000 |
| Installment note payable to bank; interest at 5.75% due in monthly installments of $857, including interest, with final payment in November 2020 | 14,000 | 19,000 |
| Installment note payable to bank; interest at 5.31% due in quarterly installments of $4,618, including interest, with final payment in January 2021 | 31,000 | 39,000 |
| Installment note payable to bank; interest at 4.70% due in monthly installments of $1,360, including interest, with final payment in February 2021 | 26,000 | 34,000 |
| | $194,000 | $304,000 |
| | | |
| | | |
| Installment note payable to bank; interest at 4.87% due in quarterly installments of $11,897, including interest, with final payment in January 2020 | - | 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 | 2,000 | 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 | 1,500 | 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 | 4,000 | 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 | 13,500 | 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 | 11,000 | 18,000 |
| | $32,000 | $87,000 |
13
TheseThe notes are secured by specific equipment with a carrying value of approximately $345,000$48,000 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 June 30, 20192020 are as follows:
| | |
Six months ended December 31, 20192020 | $103,000 |
Year ended December 31, 2020 | 84,00025,000
|
| Year ended December 31, 2021 | 7,000 |
| | $194,00032,000 |
The Partnership was originally scheduled to end its operational phase on February 4, 2017. During the year ended December 31, 2015, the operational phase was officially extended to December 31, 2020 through an investor proxy vote (see note 1). The Partnership is expected to terminate on December 31, 2022. If the Partnership should terminate, CCC will assume the obligation related to the remaining notes payable for the duration of the remaining lease term.
During 2015, the General Partner executed a collateralized debt financing agreement on behalf of certain affiliates for a total shared loan amount of approximately $847,000, of which the Partnership’s share was approximately $101,000. The Partnership’s portion of the current loan amount at June 30, 2019 and December 31, 2018 was approximately $0 and $2,000, respectively, and is secured by specific equipment under both operating and finance leases. The carrying value of the secured equipment under operating leases at June 30, 2019 and December 31, 2018 is $0 and $0, respectively. The carrying value of the secured equipment under finance leases at June 30, 2019 and December 31, 2018 is approximately $12,000 and $22,000, respectively.
6. Supplemental Cash Flow Information
No interest or principal on notes payable was paid by the Partnership during 20192020 and 20182019 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:
| Six months ended June 30, | | |
| Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank | $110,000 | $160,000 |
During the six months ended June 30, 2019 and 2018, the Partnership wrote-off fully depreciated equipment of approximately $0 and $188,000, respectively.
Six months ended June 30,
| | |
Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank | $56,000 | $110,000 |
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.
The Company has not yet adopted ASC Topic 326,Credit Lossesbut is subject to ASC 310 (see Note 2, Recent Accounting Pronouncements Not Yet Adopted). ASC 310-10 provides general guidance for receivables and notes that receivables arise from credit sales, loans, or other transactions.
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.
13
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 allocatedalready reallocated back approximately $87,000$151,225 of the $208,000 in(in allegedly misallocated expenses backexpenses) to the affected funds, which was fully documented, as a contingency accrual in CCC’s financial statements and a good faith paymentpayments 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 8487 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. That appeal is pending as of August 14, 2019. 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 believesis even more confident that whateverregardless of final resolution, of this may be, it will not result in any material adverse financial impact onto the Funds, although a final assurance cannot be provided until the legal matter is resolved.
Leased Equipment
The General Partner That appeal is in the process of negotiations with a lessee to “Buy-out” certain equipment currently under lease contract. If a “Buy-out” agreement is not reached, the lessee will continue to lease the equipment as written under the original lease contract. The equipment to be included in the “Buy-out” represents approximately 12.3% of the Partnership’s total equipment at costpending as of June 30, 2019.
August 14, 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, 20182019 filed with the SEC. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.
INDUSTRY OVERVIEW
The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross section of the $1 trillion$900 billion equipment finance sector, showed their overall new business volume for June was $9.9$8.9 billion, up 9.0%down 10 % year-over-year from new business volume in June 2018.2019. Volume was up 9.0%33 % month-to-month from $9.1$6.7 billion in May. Year to date,Year-to-date, cumulative new business volume was up 1.0%down 0.5 % compared to 2018. 2019.
Receivables over 30 days were 1.70%, unchanged2.60 %, down from 4.30 % the previous month and up from 1.40%1.70 % the same period in 2018.2019. Charge-offs were 0.33%, down0.71 %, up from 0.46%0.61 % the previous month, and unchangedup from 0.33 % in the year-earlier period.
Credit approvals totaled 77.0%,71.5 %, up from 75.9%71.0 % in May. Total headcount for equipment finance companies was down 2.2%1.9 % year-over-year.
Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in July is 57.9, up from45.3, steady with the JuneMay index of 52.8.45.8.
ELFA President and CEO Ralph Petta said, “The month of June’s pickup in new business volume is welcome news, but it remains to be seen whether this trend continues as the summer progresses. The economy is soft, too many employees are out of work as a result, and many states are struggling with the decision to re-open their economies. Depending on the specific sectors they support, some ELFA member companies report robust originations, while others are challenged putting new deals on their books.”
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,amounts, if any. The Partnership monitors lease income receivable to ensure timely and accurate payment by lessees. ItsThe Partnership’s Lease Relations department is responsible for monitoring lease income receivable and, as necessary, resolving outstanding invoices. Lease revenue is recognized on a monthly straight-line basis which is in accordance with the terms of the lease agreement.
The Partnership reviews a customer’s credit history before extending credit. When the analysis indicates that the probability of full collection is unlikely, the Partnership may establish an allowance for uncollectible lease income receivable based upon the credit risk of specific customers, historical trends and other information. The Partnership writes off its lease income receivable when it determines that it is uncollectible and all economically sensible means of recovery have been exhausted.
REVENUE RECOGNITION
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 June 30, 2019,2020, 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 agreements.
agreement. Finance lease interest income is recorded over the term of the lease using the effective interest method. For finance leases, we record, at lease inception, unearned finance lease income which is calculated as follows: total lease payments, plus any residual values and initial direct costs, less the cost of the leased equipment.
Upon the end of the lease term, if the lessee has not met the return conditions as set out in the lease, the Partnership is entitled in certain cases to additional compensation from the lessee. The Partnership’s accounting policy for recording such payments is to treat them as revenue.
GainGains or losses from sales of leased and off leaseoff-lease equipment are recorded on a net basis in the Fund’s condensedPartnership’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.
GainsPartnership’s accounting policy for sales and property taxes collected from the termination of leaseslessees are recognized whenrecorded in the lease is modifiedcurrent period as gross revenues and terminated concurrently. Gains from lease termination included in lease revenue for the six months ended June 31, 2019 and 2018 were approximately $0 and $3,000, respectively.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.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our primary source of cash for the six months ended June 30, 2019 is2020 was net proceeds from the sale of equipment of approximately $8,000.$60,000. This compares to the six months ended June 30, 2018 were payments from finance leases2019, where our primary source of approximately $16,000 andcash was net proceeds from the sale of equipment of approximately $12,000.$8,000.
Our primary uses of cash for the six months ended June 30, 2020 were cash used in operating activities of approximately $11,000 and capital expenditures in investing activities of approximately $20,000. Our primary use of cash for the six months ended June 30, 2019 was cash used in operating activities of approximately $27,000. Our primary uses of cash$22,000.
Cash was used in operating activities for the six months ended June 30, 2018 was cash used in operating activities2020 of approximately $1,000.
For$11,000, which includes net loss of approximately $35,000 and depreciation and amortization expenses of approximately $90,000. Other non-cash activities included in the six months ended June 30, 2019 and 2018, the Partnership had no financing activities.
As we continuedetermination of net loss include direct payments of lease income by lessees to acquire equipment for the equipment portfolio, operating expenses may increase, but becausebanks of our investment strategy of leasing equipment primarily through triple-net leases, we avoid operating expenses related to equipment maintenance or taxes.
approximately $56,000. Cash was used in operating activities for the six months ended June 30, 2019 of approximately $27,000,$22,000, which includes net income of approximately $29,000 and depreciation and amortization expenses of approximately $155,000. Other non-cash activities included in the determination of net loss include direct payments of lease income by lessees to banks of approximately $110,000. Cash was provided by operating activities for the six months ended June 30, 2018 of approximately $1,000, which includes net income of approximately $27,000 and depreciation and amortization expenses of approximately $203,000. Other non-cash activities included in the determination of net loss include direct payments of lease income by lessees to banks of approximately $160,000.
During 2015, the General Partner executed a collateralized debt financing agreement on behalf of certain affiliates for a total shared loan amount of approximately $847,000, of which the Partnership’s share was approximately $101,000. The Partnership’s portion of the current loan amount at June 30, 2019 and December 31, 2018 was approximately $0 and $2,000, respectively, and is secured by specific equipment under both operating and finance leases. The carrying value of the secured equipment under operating leases at June 30, 2019 and December 31, 2018 is $0 and $0, respectively. The carrying value of the secured equipment under finance leases at June 30, 2019 and December 31, 2018 is approximately $12,000 and $22,000, respectively.
We consider cash equivalents to be highly liquid investments with the original maturity dates of 90 days or less.
At June 30, 2019, 2020, cash and cash equivalents waswere held in one account maintained at one financial institution with an aggregatea balance of approximately $7,000. $36,000. Bank accounts are federally insured up to $250,000 by the FDIC. At June 30, 2019,2020, the total cash bank balance was as follows:
At June 30, 20192020 | |
| Total bank balance | $7,00036,000 |
| FDIC insured | (7,00036,000) |
| 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 20192020 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 June 30, 2020, we had future minimum rentals on non-cancelable operating leases of approximately $97,000 for the balance of the year ending December 31, 2020 and approximately $22,000 thereafter. As of June 30, 2019, we had future minimum rentals on non-cancelable operating leases of approximately $147,000 for the balance of the year ending December 31, 20182019 and approximately $109,000 thereafter. As of June 30, 2018, we had future minimum rentals on non-cancelable operating leases of approximately $216,000 for the balance of the year ending December 31, 2018 and approximately $323,000 thereafter.
As of June 30, 2019,2020, our non-recourse debt was approximately $194,000,$32,000, with interest rates ranging from 1.8%4.70% to 6.28%, 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, it is the Partnership willPartnership’s intention to continue to report its financial statements on a going concern basis until a formal plan of liquidation is approved by the General Partner.
As the Partnership and the other programs managed by the General Partner increase their overall portfolio size, opportunities for shared participation are expected to continue. Sharing in the acquisition of a lease portfolio gives the fund an opportunity to acquire additional assets and revenue streams, while allowing the fund to remain diversified and reducing its overall risk with respect to one portfolio. Thus, total shared equipment and related debt should continue to trend higher in fiscal year 2019, as
The Partnership has incurred recurring negative cash flows. At June 30, 2020, the Partnership builds its portfolio.
Our cash flow from operations is expectedhas a working capital deficit of approximately $149,000. Such factors raise substantial doubt about the Partnership’s ability to continue to be adequate to cover all operating expenses and liabilities during the next 12-month period. If available cash flow or net disposition proceeds are insufficient to cover our expenses and liabilities onas a short and long term basis, we will attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within its permissible limits.going concern.
The General Partner elected to forgo distributions and allocations of net income owed to it, and suspended limited partner distributions for the six months ended June 30, 2019.distributions. The General Partner will continue to reassess the funding of limited partner distributions throughout 2019 and will continue to waive certain fees if the General Partner determines it is in the best interest ofand may defer certain related party payables owed to the Partnership in an effort to do so. If availablefurther increase the Partnership’s cash flow or net disposition proceeds are insufficient to cover the Partnership expenses and liabilities on a short and long term basis, the Partnership may attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within its permissible limits.
The General Partner and CCC have committed to fund, either through cash contributions and/or forgiveness of indebtedness, any necessary operational cash shortfalls of the Partnership through August 14, 2020. The General Partner will continue to reassess the funding of limited partner distributions throughout 2019 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.flow. Additionally, the Partnership will seek to enhance portfolio returns and maximize cash flow through the use of leveraged lease transactions;transactions: the acquisition of lease equipment through financing. This strategy allowsThe 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 to acquire additional revenue generating leases without the use of investor funds, thus maximizing overall return.
Partner’s plans will be successful.
RESULTS OF OPERATIONS
Three months ended June 30, 20192020 compared to three months ended June 30, 20182019
Lease Revenue
Our lease revenue decreased to approximately $81,000 for the three months ended June 30, 2020, from approximately $127,000 for the three months ended June 30, 2019, from approximately $145,000 for the three months ended June 30, 2018.2019. This revenue decrease is primarily due to morea decrease in active lease agreements ending versus new lease agreements being acquired.as described below.
The Partnership had 25 and 62 and 74active operating leases during the three months ended June 30, 2020 and 2019,and 2018, respectively. The declinedecrease 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 2019, 2020, funded primarily through debt financing. As the operational phase of the Partnership has been extended to December 31, 2020, managementManagement will continue to seek lease opportunities to enhance portfolio returns and cash flow.
Sale of Equipment
For the three months ended June 30, 2019,2020, the Partnership sold fully depreciated equipment with a net book value of approximately $0 for a net gain of approximately $0. For the three months ended June 30, 2018, the Partnership sold equipment with a net book value of approximately $2,000 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 $22,000 for the three months ended June 30, 2019, from approximately $12,000 for the three months ended June 30, 2018. This increase is primarily attributable to an increase accounting fees of approximately $7,000 and legal fees related to the FINRA matter of approximately $6,000 (see note 7), partially offset by a decrease in outside office services of approximately $1,000.
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. An equipment management fee of approximately $3,000 and $4,000 was earned but waived by the General Partner for both the three months ended June 30, 2019 and 2018, 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 $75,000 for the three months ended June 30, 2019, from $98,000 for the three months ended June 30, 2018. This decrease is primarily due to significant leases that became fully depreciated, partially offset by new equipment acquisitions.
Net Income
$5,000. For the three months ended June 30, 2019, we recognized revenue of approximately $135,000 and expenses of approximately $108,000, resulting in net income of approximately $27,000. For the three months ended June 30, 2018, we recognized revenue of approximately $150,000 and expenses of approximately $116,000, resulting in net income of approximately $34,000. This change in net income due to the changes in revenue and expenses as described above.
Six months ended June 30, 2019 compared to six months ended June 30, 2018
Lease Revenue
Our lease revenue decreased to approximately $255,000 for the six months ended June 30, 2019, from approximately $297,000 for the six months ended June 30, 2018. The Partnership had 63 and 78 operating leases during the six months ended June 30, 2019 and 2018, respectively. The decline in numberno sales 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 2019, funded primarily through debt financing. As the operational phase of the Partnership has been extended to December 31, 2020, management will continue to seek lease opportunities to enhance portfolio returns and cash flow.
Sale of Equipment
The Partnership sold equipment with net book value of approximately $7,000 for the six months ended June 30, 2019 for a net gain of approximately $400. This compared to equipment sold for the six months ended June 30, 2018 with net book value of approximately $3,000, for a net gain of approximately $9,000.equipment.
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 decreasedincreased to approximately $65,000$83,000 for the sixthree months ended June 30, 2019,2020, from approximately $66,000$22,000 for the sixthree months ended June 30, 2018.2019. This decreaseincrease is primarily attributable to a decreasean increase in other LP expenses of $40,000 when previously no expense had been allocated. Other attributable reasons for an increase are in legal fees related to FINRA of approximately $6,000, office relocation expenses of approximately $4,000, a decrease in bank services charges of approximately $2,000 and a decrease in outside office services of approximately $1,000, partially offset by an increase in$4,000, office equipment and other of approximately $3,000, IT expenses of approximately $2,000 and accounting fees of approximately $6,000.$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 2.5%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. TheFor both the three months ended June 30, 2020 and 2019, total equipment management feefees of approximately $6,000$3,000 were earned but waived by the General Partner.
Depreciation and $7,000Amortization Expenses
Depreciation expenses consist of depreciation on equipment. This expense decreased to approximately $41,000 for the three months ended June 30, 2020, from $75,000 for the three months ended June 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 June 30, 2020, we recognized revenue of approximately $96,000, expenses of approximately $129,000, resulting in net loss of approximately $33,000. For the three months ended June 30, 2019, we recognized revenue of approximately $135,000, expenses of approximately $108,000, resulting in net income of approximately $27,000. This change to a net loss is due to the changes in revenue and expenses described above.
Six months ended June 30, 2020 compared to six months ended June 30, 2019
Lease Revenue
Our lease revenue decreased to approximately $170,000 for the six months ended June 30, 2020, from approximately $255,000 for the six months ended June 30, 2019. The Partnership had 54 and 63 operating leases during the six months ended June 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 2018 wascash flow.
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 $261,000, 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 the 2020 quarter. For the six months ended June 30, 2020, the Partnership sold equipment to other customers besides Cummins with a total net book value of $0 and net gain of approximately $6,000 (for total net book value of approximately $42,000 and total net gain of approximately $18,000, after adding for Cummins gain). This compared to the six months ended June 30, 2019, the Partnership sold equipment with net book valued of approximately $7,000 for a net gain of approximately $400.
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 $169,000 for the six months ended June 30, 2020, from approximately $65,000 for the six months ended June 30, 2019. This increase is primarily attributable to an increase in other LP expenses of $67,000 when previously no expense had been allocated. Other attributable reasons for an increase are in accounting fees of approximately $11,000, IT expenses of approximately $5,000, office relocation expenses of approximately $4,000, outside office services of approximately $4,000, recruiting fees of approximately $4,000, other miscellaneous expenses of approximately $4,000, legal fees related to FINRA of approximately $3,000 and partnership taxes 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. For the six months ended June 30, 2020 and 2019, total equipment management fees of approximately $8,000 and $6,000 were earned but waived by the General Partner.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 $90,000 for the six months ended June 30, 2020, from $155,000 for the six months ended June 30, 2019, from $203,0002019. 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 six months ended June 30, 2018.2020.
Net (Loss) Income
For the six months ended June 30, 2020, we recognized revenue of approximately $212,000 and expenses of approximately $247,000, resulting in net loss of approximately $35,000. For the six months ended June 30, 2019, we recognized revenue of approximately $270,000 and expenses of approximately $241,000, resulting in net income of approximately $29,000. For the six months ended June 30, 2018, we recognized revenue of approximately $308,000 and expenses of approximately $281,000, resulting in net income of approximately $27,000. This change into a net loss is due to the changes in revenue and expenses as described above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
N/A
Item 4. Controls and Procedures
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 June 30, 2019,2020, our disclosure controls and procedures arewere not effective due to the presence of a material weakness in ensuringinternal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that information relatingthere 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 June 30, 2020, our internal control over financial reporting was not effective to us which is requiredprovide 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 disclosedmaterial 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 initiated, or plan to initiate, the following measure:
1.
We plan to incorporate a procedure within our written policies and procedures to require for nonrecurring, referenced as “one-off” journal entries to be reviewed and signed-off by two senior accounting officers 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.
We have started to implement this procedure as part of our monthly close process and anticipate that this procedure will be incorporated in our periodic reports filed or submitted underwritten policies and procedures by the Securities Exchange Actend of 1934 is (a) recorded, processed, summarizedfiscal year 2020. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and reported withinmanagement has concluded, through testing, that these controls are operating effectively. We expect that the time periods specifiedremediation of this material weakness will be completed prior to the end of fiscal year 2020.
Changes 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 PrincipalInternal Control over Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Reporting:
There were no other changes in the Partnership’sour internal control over financial reporting during the second quarter of 2019ending June 30, 2020, that have materially affected, or are reasonably likely to materially affect, itsour internal control over financial reporting.
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 allocatedalready reallocated back approximately $87,000$151,225 of the $208,000 in(in allegedly misallocated expenses backexpenses) to the affected funds, which was fully documented, as a contingency accrual in CCC’s financial statements and a good faith paymentpayments 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 8487 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. That appeal is pending as of August 14, 2019. 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 believesis even more confident that whateverregardless of final resolution, of this may be, it will not result in any material adverse financial impact onto the Funds, although a final assurance cannot be provided until the legal matter is resolved.
Leased Equipment
The General Partner That appeal is in the process of negotiations with a lessee to “Buy-out” certain equipment currently under lease contract. If a “Buy-out” agreement is not reached, the lessee will continue to lease the equipment as written under the original lease contract. The equipment to be included in the “Buy-out” represents approximately 12.3% of the Partnership’s total equipment at costpending as of June 30, 2019.
August 14, 2020.
Item 1A.1A. Risk Factors
Going Concern
The Partnership has incurred recurring negative cash flows. At June 30, 2020, the Partnership has a working capital deficit of approximately $149,000. Such factors raise substantial doubt about the Partnership’s ability to continue as a going concern within one year after the date that the financial statements are issued.
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.
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.
The Company has not yet adopted ASC Topic 326,Credit Lossesbut is subject to ASC 310 (see Note 2, Recent Accounting Pronouncements Not Yet Adopted). ASC 310-10 provides general guidance for receivables and notes that receivables arise from credit sales, loans, or other transactions.
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 June 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.
We have started to implement this procedure as part of our monthly close process and anticipate that this procedure will be incorporated in our written policies and procedures by the end of fiscal year 2020. 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 prior to 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
N/A
Item | 2. Unregistered Sales of Equity Securities and Use of Proceeds |
| N/A |
| |
Item | 3. Defaults Upon Senior Securities |
| N/A |
| |
Item | 4. Mine Safety Disclosures |
| N/A |
| |
Item | 5. Other Information |
| NONE |
| |
Item | 6. Exhibits |
Item 3. Defaults Upon Senior SecuritiesN/A
Item 4. Mine Safety Disclosures
N/A
Item 5. Other Information
NONE
Item 6. Exhibits
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 |
| |
| |
August 14, 20192020 | By: /s/ Kimberly A. Springsteen-Abbott |
Date | Kimberly A. Springsteen-Abbott |
| | Chief Executive Officer And Principal Financial Officer Commonwealth Income & Growth Fund, Inc. |
| | |
| |
August 14, 20192020 Date | By: /s/ Theodore CavaliereKarl A. Hazen |
| Theodore Cavaliere |
| Vice President, Financial Operations PrincipalKarl A. Hazen SEC Reporting Officer |