●
The General Partner 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 tomay be included in the “Buy-out” represents approximately 12.5%eligible for forgiveness of the Partnership’s total equipment at cost asPPP loan based on the sum of September 30, 2019.
the costs incurred and payments made during the 8-week covered period (average number of full-time employees of the borrower per month between January 1, 2020 and February 29, 2020) on:
■
Any interest payment on any covered mortgage obligation (not including any prepayment of or principal payment on a covered mortgage obligation),
■
Any payment on any covered rent obligation, and
■
Any covered utility payment
●
The full principal amount of the loan and accrued interest may be forgiven, borrowers must follow the Small Business Association’s (“SBA’s”) strict guidelines on the use of the loan proceeds to obtain full loan forgiveness. Notably, a borrower must use the full loan amount within the 8-week period, with 75 percent of that amount going towards payroll costs. We continue to examine the impacts the CARES Act may have on our business through the General Partner and indirectly, the Funds.
●
The Funds do not have any employees. The General Partner provides administrative services, such as sales and marketing, IT, legal and accounting that indirectly benefit the Fund, which pay for these services through an agreed upon partnership agreement. The PPP loan provides additional stimulus to the General Partner to maintain an on-going group of employees, without any furlough or layoffs during this COVID-19 pandemic crisis.
Related Party Payables
In order to provide additional support for the Partnership, the General Partner (“GP”) has converted certain payables that were classified as current to noncurrent payables. These payables were deferred to increase the Partnership’s cash flow from the date of issuance of our audited financial statements. Effective April 2, 2020, CCC agreed to convert approximately $169,000 of payables from due on demand to long term. Such payables won't be due until sometime after April 15, 2021.
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
This section, as well as other portions of this document, includes certain forward-looking statements about our business and our prospects, tax treatment of certain transactions and accounting matters, sales of securities, expenses, cash flows, distributions, investments and operating and capital requirements. Such forward-looking statements include, but are not limited to: acquisition policies of our general partner; the nature of present and future leases; provisions for uncollectible accounts; the strength and sustainability of the U.S. economy; the continued difficulties in the credit markets and their impact on the economy in general; and the level of future cash flow, debt levels, revenues, operating expenses, amortization and depreciation expenses. You can identify those statements by the use of words such as “could,” “should,” “would,” “may,” “will,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and “contemplate,” as well as similar words and expressions.
Actual results may differ materially from those in any forward-looking statements because any such statements involve risks and uncertainties and are subject to change based upon various important factors, including, but not limited to, nationwide economic, financial, political and regulatory conditions; the health of debt and equity markets, including interest rates and credit quality; the level and nature of spending in the information, medical and telecommunications technologies markets; and the effect of competitive financing alternatives and lease pricing.
Readers are also directed to other risks and uncertainties discussed in other documents we file with the SEC, including, without limitation, those discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 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 SeptemberMarch was $10$8.9 billion, up 189 % year-over-year from new business volume in September 2018.March 2019. Volume was up 931 % month-to-month from $9.2$6.8 billion in August. Year to date,February. Year-to-date, cumulative new business volume was up 517 % compared to 2018. 2019.
Receivables over 30 days were 1.702.60 %, downup from 2.02.00 % the previous month and up from 1.601.90 % the same period in 2018.2019. Charge-offs was 0.40were 0.55 %, downup from 0.420.51 % the previous month, and unchangedup from 0.37 % in the year-earlier period.
Credit approvals totaled 76.374.2 %, down from 76.674.7 % in August.February. Total headcount for equipment finance companies was down 2.12.9 % year-over-year.
Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) decreased from 46.0 in OctoberMarch to a historic low of 22.3 in April due to the impact of COVID-19.
ELFA President and CEO Ralph Petta said, “The increase in March new business volume data is 51.4, downmisleading. It presents a ‘tale of two cities.’ During the first half of the month, economic activity and industry performance were strong, mirroring overall strength in the U.S. economy. However, during the second half of March, as the coronavirus pandemic’s impact—both from a health and economic standpoint—entered the September indexcountry’s consciousness, all that changed. One need not look any further than the delinquency and charge-off data to understand the myriad challenges confronting U.S. businesses, both large and small, in the weeks and months ahead as this insidious disease grips the nation and our people. For now, acquiring and financing business equipment takes a back seat to critical efforts by families vitally concerned about their health and safety. Things we know: this crisis is temporary; the equipment leasing and finance industry’s resilience and resolve are enduring.”
Nancy Pistorio, CLFP, President, Madison Capital LLC, said, “March results for the equipment finance industry illustrate how robust activity was as we headed into the final month of 54.7.the first quarter. However, due to coronavirus-induced containment measures, many businesses began to close in mid-March and, not unexpectedly, delinquency is beginning to rise. As evidenced by declining approvals, new business is and will continue to be negatively impacted. This will be an extremely challenging time for our industry. I believe independents in the small-ticket space will be hit particularly hard as their customers—small and medium-sized businesses—struggle to survive in the wake of widespread shutdowns. With a developing global economic recession, the Equipment Leasing & Finance Foundation currently projects an 8.6% to 13.5% contraction in equipment and software investment for this year. Government officials relaxing stay-at-home orders and allowing those at low risk to return to work under a responsible plan, sooner rather than later, will be essential in mitigating further economic decline.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base 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.
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 September 30, 2019,March 31, 2020, the Partnership’s lease portfolio consisted of operating leases and finance leases. For operating leases, lease revenue is recognized on a straight-line basis in accordance with the terms of the lease 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 nine months ended September 30, 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
Our primary source of cash for the ninethree months ended September 30, 2019 isMarch 31, 2020 was net proceeds from the sale of equipment of approximately $15,000.$55,000. This compares to the ninethree months ended September 30, 2018March 31, 2019, where our primary sourcessource of cash were payments from finance leases of approximately $22,000 andwas net proceeds from the sale of equipment of approximately $20,000.$8,000.
Our primary usesuse of cash for the ninethree months ended September 30,March 31, 2020 and 2019 was cash used in operating activities of approximately $31,000. Our primary uses of cash for the nine months ended September 30, 2018 was for the purchase of new equipment of approximately $30,000.$48,000 and $16,000, respectively.
For the ninethree months ended September 30,March 31, 2020 and March 31, 2019, and 2018, the Partnership had no financing activities.
As we continue to increaseacquire equipment for the size of our equipment portfolio, operating expenses willmay increase, which reflects the administrative costs of servicing the portfolio, but because of our investment strategy of leasing equipment primarily through triple-net leases, we avoid operating expenses related to equipment maintenance or taxes.
Cash was used in operating activities for the ninethree months ended September 30, 2019March 31, 2020 of approximately $31,000,$48,000 which includes net incomeloss of approximately $88,000 and$2,000, depreciation and amortization expenses of approximately $218,000.$49,000, loss 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 lossincome include direct payments of lease income by lessees to banks of approximately $161,000. Cash$33,000. For the three months ended March 31, 2019, cash was used in operating activities for the nine months ended September 30, 2018 of approximately $400,$16,000 which includes a net income of approximately $32,000$2,000 and depreciation and amortization expenses of approximately $296,000.$80,000. Other non-cash activities included in the determination of net gainincome include direct payments of lease income by lessees to banks of approximately $229,000 and a gain on sale of equipment in the amount of approximately $13,000.$59,000.
During 2015, the General Partner executed a collateralized debt financing agreement on behalf of certain affiliates for a total shared loan amount of approximately $847,000, of which the Partnership’s share was approximately $101,000. The Partnership’s portion of the current loan amount at September 30, 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 both September 30, 2019 and December 31, 2018 is $0. The carrying value of the secured equipment under finance leases at September 30, 2019 and December 31, 2018 is approximately $10,000 and $22,000, respectively.
We consider cash equivalents to be highly liquid investments with the original maturity dates of 90 days or less.
At September 30, 2019, March 31, 2020, cash and cash equivalents waswere held in one account maintained at one financial institution with an aggregatea balance of approximately $5,000. $12,000. Bank accounts are federally insured up to $250,000 by the FDIC. At September 30, 2019,March 31, 2020, the total cash bank balance was as follows:
March 31, 2020 | |
| $5,00012,000 |
| (5,00012,000) |
| $- |
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 September 30, 2019,March 31, 2020, we had future minimum rentals on non-cancelable operating leases of approximately $90,000$78,000 for the balance of the year ending December 31, 20192020 and approximately $109,000$13,000 thereafter. As of September 30, 2019,March 31, 2020, we had future minimum rentals on non-cancelable finance leases of approximately $2,000$4,000 for the balance of the year ending December 31, 20192020 and approximately $6,000none thereafter.
As of September 30, 2019,March 31, 2020, our non-recourse debt was approximately $143,000,$54,000, 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, the Partnership will continue to report its financial statements on a going concern basis until a formal plan of liquidation is approved by the General Partner.
As the Partnership and the other programs managed by the General Partner increase their overall portfolio size, opportunities for shared participation are expected to continue. Sharing in the acquisition of a lease portfolio gives the fund an opportunity to acquire additional assets and revenue streams, while allowing the fund to remain diversified and reducing its overall risk with respect to one portfolio. Thus, total shared equipment and related debt should continue to trend higher in fiscal year 2019, as the Partnership builds its portfolio.
The General Partner elected to forgo distributions and allocations of net income owed to it, and suspended limited partner distributions for the ninethree months ended September 30, 2019.March 31, 2020. The General Partner will continue to reassess the funding of limited partner distributions throughout 20192020 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 termlong-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 September 30, 2020. The General Partner will continue to reassess the funding of limited partner distributions throughout 20192020 and will continue to waive certain fees if the General Partner determines it is in the best interest of the Partnership to do so.fees. If available cash flow or net disposition proceeds are insufficient to cover the Partnership expenses and liabilities on a short and long termlong-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;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.
Effective April 2, 2020, CCC agreed to convert approximately $169,000 of payables from due on demand to long term. Such payables won't be due until sometime after April 15, 2021. The purpose of this was to help the Partnership with preserving liquidity.
RESULTS OF OPERATIONS
Three months ended September 30, 2019March 31, 2020 compared to three months ended September 30, 2018March 31, 2019
Lease Revenue
Our lease revenue decreased to approximately $124,000$88,000 for the three months ended September 30, 2019,March 31, 2020, from approximately $144,000$128,000 for the three months ended September, 2018.March 31, 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 6153 and 7163 active operating leases during the three months ended September 30,March 31, 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
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 will record a gain on sale of equipment of approximately $12,000. For the three months ended September 30,March 31, 2019, the Partnership soldwe recorded a gain on a sale of equipment with a net book value of approximately $5,000 for a net gain of approximately $2,000. For the three months ended September 30, 2018, the Partnership sold equipment with a net book value of approximately $4,000 for a net gain of approximately $3,000.$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 decreasedincreased to approximately $3,000$86,000 for the three months ended September 30, 2019,March 31, 2020, from approximately $45,000$43,000 for the three months ended September 30, 2018.March 31, 2019. This decreaseincrease is primarily attributable to a decreasean increase in legalother LP expenses of $27,000 when previously no expense had been allocated. Other attributable reasons for an increase are in accounting fees of approximately $43,000.$9,000, recruiting fees of $3,000, other office supplies of $2,000 and other miscellaneous expenses of $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% 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 bothFor the three months ended September 30, March 31, 2020 and 2019, and 2018, respectively.
the equipment management fee was waived.
Depreciation and Amortization Expenses
Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expensesequipment. This expense decreased to approximately $64,000$49,000 for the three months ended September 30, 2019,March 31, 2020, from $93,000$80,000 for the three months ended September 30, 2018.March 31, 2019. This decrease is primarilywas due to significantthe higher frequency in the termination of leases that becameand equipment being fully depreciated.depreciated as compared to the acquisition of new leases for the three months ended March 31, 2020.
Net Income (Loss)
For the three months ended September 30,March 31, 2020, we recognized revenue of approximately $116,000, expenses of approximately $118,000, resulting in net loss of approximately $2,000. For the three months ended March 31, 2019, we recognized revenue of approximately $134,000 and$128,000, expenses of approximately $76,000,$126,000, resulting in net income of approximately $58,000. For the three months ended September 30, 2018, we recognized revenue of approximately $148,000 and expenses of approximately $143,000, resulting in$2,000. This change to a net income of approximately $5,000. This change in net income due to the changes in revenue and expenses as described above.
Nine months ended September 30, 2019 compared to nine months ended September 30, 2018
Lease Revenue
Our lease revenue decreased to approximately $379,000 for the nine months ended September 30, 2019, from approximately $441,000 for the nine months ended September 30, 2018. The Partnership had 63 and 80 operating leases during the nine months ended September 30, 2019 and 2018, respectively. The decline in number of active leases is consistent with the overall decrease in lease revenue. Management expects to add new leases to our portfolio throughout the remainder of 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 $12,000 for the nine months ended September 30, 2019 for a net gain of approximately $3,000. This compared to equipment sold for the nine months ended September 30, 2018 with net book value of approximately $7,000, for a net gain of approximately $13,000.
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 $68,000 for the nine months ended September 30, 2019, from approximately $110,000 for the nine months ended September 30, 2018. This decrease is primarily attributable to a decrease in legal fees of approximately $43,000.
Equipment Management Fees
We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 2.5% of the gross lease revenue attributable to equipment that is subject to operating leases. The equipment management fee of approximately $10,000 and $11,000 for the nine months ended September 30, 2019 and 2018 was earned but waived by the General Partner.
Depreciation and Amortization Expenses
Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses decreased to approximately $218,000 for the nine months ended September 30, 2019, from $296,000 for the nine months ended September, 2018.
Net Income
For the nine months ended September 30, 2019, we recognized revenue of approximately $405,000 and expenses of approximately $317,000, resulting in net income of approximately $88,000. For the nine months ended September 30, 2018, we recognized revenue of approximately $456,000 and expenses of approximately $424,000, resulting in net income of approximately $32,000. This change in net incomeloss is due to the changes in revenue and expenses as described above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
N/A
Item 4. Controls and Procedures
Our management, under the supervision and with the participation of the General Partner’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures related to our reporting and disclosure obligations as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the General Partner’s Chief Executive Officer and Principal Financial Officer have concluded that, as of September 30, 2019,March 31, 2020, our disclosure controls and procedures are effective in ensuring that information relating to us which is required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934 is (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) accumulated and communicated to management, including the General Partner’s Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There were no changes in the Partnership’s internal control over financial reporting during the thirdfirst quarter of 20192020 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.
Part II: OTHER INFORMATION
Item 1.Item 1. Commitments and Contingencies
N/A
Leased Equipment
The General Partner 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 12.5% of the Partnership’s total equipment at cost as of September 30, 2019.
Item 2.2. 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 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 November 13, 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.
That appeal is pending as of May 15, 2020.
23
Item 2A.2A. Risk Factors
COVID-19 PandemicIn March 2020, the World Health Organization classified the novel coronavirus (“COVID-19”) outbreak as a pandemic, based on the rapid increase in exposure globally. The Fund’s operation is located in Florida, which has been restricted during April-May for gatherings of people due to the coronavirus outbreak. On May 4th, Governor DeSantis of Florida started his plan to begin opening certain retail stores and restaurants at limited capacity. At present, the Fund’s operations have not been adversely affected and continue to function effectively.
●
On May 11th, certain administrative employees will begin to return to the office on a full-time basis, based on a three-phase plan.
●
On May 4th, the General Partner applied and received a grant for Paycheck Protection Program (“PPP”) based on the “Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferments of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modification to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.
●
The General Partner may be eligible for forgiveness of the PPP loan based on the sum of the costs incurred and payments made during the 8-week covered period (average number of full-time employees of the borrower per month between January 1, 2020 and February 29, 2020) on:
■
Any interest payment on any covered mortgage obligation (not including any prepayment of or principal payment on a covered mortgage obligation),
■
Any payment on any covered rent obligation, and
■
Any covered utility payment
●
The full principal amount of the loan and accrued interest may be forgiven, borrowers must follow the Small Business Association’s (“SBA’s”) strict guidelines on the use of the loan proceeds to obtain full loan forgiveness. Notably, a borrower must use the full loan amount within the 8-week period, with 75 percent of that amount going towards payroll costs. We continue to examine the impacts the CARES Act may have on our business through the General Partner and indirectly, the Funds.
●
The Funds do not have any employees. The General Partner provides administrative services, such as sales and marketing, IT, legal and accounting that indirectly benefit the Fund, which pay for these services through an agreed upon partnership agreement. The PPP loan provides additional stimulus to the General Partner to maintain an on-going group of employees, without any furlough or layoffs during this COVID-19 pandemic crisis.
Item 3. Unregistered Sales of Equity Securities and Use of Proceeds
N/A
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 |
Item 4. Defaults Upon Senior SecuritiesN/A
Item 5. Mine Safety Disclosures
N/A
Item 6. Other Information
NONE
Item 7. Exhibits
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| COMMONWEALTH INCOME & GROWTH FUND V |
| BY: COMMONWEALTH INCOME & GROWTH FUND, INC., General Partner |
| |
| |
November 13, 2019May 15, 2020 | By: /s/ Kimberly A. Springsteen-Abbott |
Date | Kimberly A. Springsteen-Abbott |
| Chief Executive Officer And Principal Financial Officer Commonwealth Income & Growth Fund, Inc. |
| |
| |
November 13, 2019May 15, 2020 Date | By: /s/ Theodore CavaliereKarl A. Hazen Karl A. Hazen SEC Reporting Officer |
| Theodore Cavaliere |
| Vice President, Financial Operations Principal |