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 March 31,September 30, 2020 and December 31, 2019 due to the short-term nature of these financial instruments.
The Partnership’s long-term debt consists of notes payable, which are secured by specific equipment and are nonrecourse liabilities of the Partnership. The estimated fair value of this debt at March 31,September 30, 2020 and December 31, 2019 approximates the carrying value of these instruments, due to the interest rates on the debt approximating current market interest rates. The Partnership classifies the fair value of its notes payable within Level 2 of the valuation hierarchy based on the observable inputs used to estimate fair value.
We consider cash equivalents to be highly liquid investments with the original maturity dates of 90 days or less.
Recent Accounting Pronouncements Not Yet Adopted
FASB issued a new guidance, Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as clarified and amended by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses and ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief.Relief,Accounting Standards Update No. 2020-02,Financial Instruments – Credit Losses (Topic 326). The new guidance is effective for fiscal years, within those fiscal years, beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. The new guidance requires an allowance for credit losses based on the expectation of lifetime credit losses on financial receivables carried at amortized cost, including, but not limited to, mortgage loans, premium receivables, reinsurance receivables and certain leases. The new current expected credit loss (“CECL”) impairment model for financial assets reported at amortized cost will be applicable to receivables associated with sales-type and direct financing leases but not to operating lease receivables.
The FASB developed the guidance in response to concerns that credit losses were identified and recorded “too little, too late” in the period leading up to the global financial crisis of 2008. More recently, the impact of the COVID -19 pandemic may bring new challenges to identifying credit losses. While the new standard is expected to have a significant effect on entities in the financial services industry, particularly banks and others with lending operations, the guidance affects all entities in all industries and applies to a wide variety of financial instruments, including trade receivables.
ASC 326-20’s CECL impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument that considers forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides entities with significant flexibility in how to pool financial assets with similar risk characteristics, determine the contractual term and obtain and adjust the relevant historical loss information that serves as the starting point for developing the estimate of expected lifetime credit losses.
The Financial reporting developments (“FRD”) addresses the new guidance on the following topics:
● The current expected credit loss (CECL) impairment model (ASC 326-20) for financial assets measured at amortized cost, including net investments (i.e. for sales-type lease, the lease receivable and the unguaranteed residual asset; for direct finance lease, the lease receivable and the unguaranteed residual asset less any deferred selling profit).
● The available-for-sale (AFS) debt security impairment model (ASC 326-30)
● The initial recognition of what are called purchased financial assets with evidence of credit deterioration or purchased credit-deteriorated (PCD) assets
● The accounting for beneficial interests in securitized financial assets in the scope of ASC 325-40,Investments — Other — Beneficial Interests in Securitized Financial Assets
On November 15, 2019, the FASB delayed the effective date of FASB ASC Topic 326 for certain small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The Partnership continues to evaluate the impact of the new guidance on its condensed financial statements.
In January 2020, The FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force).This ASU clarifies that the observable price changes in orderly transactions that should be considered when applying the measurement alternative in accordance with ASC 321 include transactions that require it to either apply or discontinue the equity method of accounting under ASC 323. For example, as it relates to investments for which the measurement alternative is elected, if an observable price change in an orderly transaction for the identical investment or similar security of the same issuer results in a change in ownership that causes the investor to either newly apply or discontinue the equity method, the carrying amount of the security accounted for under the measurement alternative should be adjusted to its fair value immediately before applying or upon discontinuing the equity method.
ASU 2020-01 also addresses questions about how to apply the guidance in Topic 815,“Derivatives and Hedging,”for certain forward contracts and purchased options to purchase securities that, upon settlement or exercise, would be accounted for under the equity method of accounting. The ASU clarifies that, for the purpose of applying ASC 815-10-15-141(a), an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, the underlying securities would be accounted for under the equity method in ASC 323 or the fair value option in accordance with the financial instruments guidance in Topic 825, “Financial Instruments.”An entity also should evaluate the remaining characteristics in ASC 815-10-15-141 to determine the accounting for those forward contracts and purchased options.
For public business entities, ASU 2020-01 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, ASU 2020-01 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period, (a) for public business entities for periods for which financial statements have not yet been issued and (b) for all other entities for periods for which financial statements have not yet been made available for issuance. The Partnership continues to evaluate the impact of the new guidance on its condensed financial statements.
3. Information Technology, Medical Technology, Telecommunications Technology, Inventory Management Equipment and other Business-Essential Capital Equipment (“Equipment”)
The Partnership is the lessor of equipment under operating leases with periods that generally will range from 12 to 48 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee.
Gains and losses from the sale of equipment resulting from early buyouts are recognized when the lease is modified and terminated concurrently. GainGains from the sale of equipment included in lease revenue for the threenine months ended March 31,September 30, 2020 wasand 2019 were approximately $12,000.$19,000 and $3,000, respectively.
CCC, on behalf of the Partnership and on behalf of other affiliated companies and partnerships (“partnerships”), acquires equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various companies based on certain risk factors.
The Partnership’s share of the cost of the equipment in which it participates with other partnerships at March 31,September 30, 2020 was approximately $2,034,000$2,014,000 and is included in the Partnership’s equipment on its balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at March 31,September 30, 2020 was approximately $8,515,000.$8,475,000. The Partnership’s share of the outstanding debt associated with this equipment at March 31,September 30, 2020 was approximately $27,000$9,000 and is included in the Partnership’s notes payable on its balance sheet. The total outstanding debt related to the equipment shared by the Partnership at March 31,September 30, 2020 was approximately $613,000.$302,000.
The Partnership’s share of the cost of the equipment in which it participates with other partnerships at December 31, 2019 was approximately $2,213,000 and is included in the Partnership’s equipment on its balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at December 31, 2019 was approximately $8,873,000. The Partnership’s share of the outstanding debt associated with this equipment at December 31, 2019 was approximately $51,000 and is included in the Partnership’s notes payable on its balance sheet. The total outstanding debt related to the equipment shared by the Partnership at December 31, 2019 was approximately $798,000.
As the Partnership and the other programs managed by the General Partner continue to acquire new equipment for the portfolio, opportunities for shared participation are expected to continue. Sharing in the acquisition of a lease portfolio gives the fund an opportunity to acquire additional assets and revenue streams, while allowing the fund to remain diversified and reducing its overall risk with respect to one portfolio.
The following is a schedule of approximate future minimum rentals on non-cancellable operating leases at March 31,September 30, 2020:
| For the period ended December | |
NineThree months ended December 31, 2020 | $78,00067,000 |
| Year Ended December 31, 2021 | 13,00020,000 |
| Year Ended December 31, 2022 | 2,000 |
| | $91,00089,000 |
| |
Finance Leases:
The following lists the approximate components of the net investment in finance leases:
| | |
| Carrying value of lease receivable | $4,000 | $6,000 |
| Estimated residual value of leased equipment (unguaranteed) | 2,000 | 2,000 |
| Initial direct costs finance leases | - | - |
| Net investment in finance leases | $6,000 | $8,000 |
| | |
| Carrying value of lease receivable | $- | $6,000 |
| Estimated residual value of leased equipment (unguaranteed) | - | 2,000 |
| Initial direct costs finance leases | - | - |
| Net investment in finance leases | $- | $8,000 |
We assess credit risk for all of our customers, including those that lease under finance leases. This credit risk is assessed using an internally developed model which incorporates credit scores from third party providers and our own customer risk ratings and is periodically reviewed. Our internal ratings are weighted based on the industry that the customer operates in. Factors taken into consideration when assessing risk include both general and industry specific qualitative and quantitative metrics. We separately take into consideration payment history, open lawsuits, liens and judgments. Typically, we will not extend credit to a company that has been in business for less than 5 years or that has filed for bankruptcy within the same period. Our internally based model may classify a company as high risk based on our analysis of their audited financial statements. Additional considerations of high risk may include history of late payments, open lawsuits and liens or judgments. In an effort to mitigate risk, we typically require deposits from those in this category.
A reserve for credit losses is deemed necessary when payment has not been received for one or more months of receivables due on the equipment held under finance leases. At the end of each period, management evaluates the open receivables due on this equipment and determines the need for a reserve based on payment history and any current factors that would have an impact on payments.
The following table presents the credit risk profile, by creditworthiness category, of our finance lease receivables at March 31, 2020:
Risk Level | Percent of Total |
Low | -% |
Moderate-Low | -% |
Moderate | -% |
Moderate-High | 100% |
High | -% |
Net finance lease receivable | 100% |
As of March 31, 2020, and December 31, 2019, we determined that we did not have a need for an allowance for uncollectible accounts associated with any of our finance leases, as the customer payment histories with us, associated with these leases, has been positive, with no late payments.
The following is a schedule of approximate future minimum rentals on non-cancellable finance leases at March 31, 2020:
| |
Nine months ended December 31, 2020 | $4,000
|
Total | $4,000
|
Receivables/Payables
As of March 31,September 30, 2020, and December 31, 2019, the Company’s related party receivables and payables are short term, unsecured and non-interest bearing. Effective April 2, 2020, CCC agreed to convert approximately $169,000 of the December 31, 2019 related party payables from due on demand to long term. Such payables won't be due until sometime after April 15, 2021. The purpose of this was to help the Partnership with preserving liquidity.
Three months ended March 31, | | |
| | | |
| Reimbursable Expenses | | |
The General Partner and its affiliates are entitled to reimbursement by the Partnership for the cost of goods, supplies or services obtained and used by the General Partner in connection with the administration and operation of the Partnership from third parties unaffiliated with the General Partner. In addition, the General Partner and its affiliates are entitled to reimbursement of certain expenses incurred by the General Partner and its affiliates in connection with the administration and operation of the Partnership. For the three months ended March 31, 2020 and 2019, the General Partner waived certain reimbursable expenses due to it by the Partnership. For the three months ended both March 31, 2020 and 2019, the Partnership was charged approximately $27,000 and $0 in Other LP expense, respectively. | $73,000 | $29,000 |
| | | |
| 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 three months ended March 31, 2020 and 2019. For the three months ended March 31, 2020 and 2019, equipment management fees of approximately $4,000 and $3,000 were earned but were waived by the General Partner, respectively. | $- | $- |
Nine months ended September 30, | | |
Reimbursable Expenses | | |
| The General Partner and its affiliates are entitled to reimbursement by the Partnership for the cost of goods, supplies or services obtained and used by the General Partner in connection with the administration and operation of the Partnership from third parties unaffiliated with the General Partner. In addition, the General Partner and its affiliates are entitled to reimbursement of certain expenses incurred by the General Partner and its affiliates in connection with the administration and operation of the Partnership. For the three months ended September 30, 2020 and 2019, the General Partner waived certain reimbursable expenses due to it by the Partnership. For the nine months ended September 30, 2020 and 2019, the Partnership was charged approximately $100,000 and $0 in Other LP expense, respectively. | $210,000 | $59,000 |
| | | |
| Equipment Acquisition Fee | | |
| The General Partner earned an equipment acquisition fee of 4% of the purchase price of each item of equipment purchased as compensation for the negotiation of the acquisition of the equipment and lease thereof or sale under a conditional sales contract. For the nine months ended September 30, 2020 and 2019, approximately $800 and $0 of acquisition fees were waived by the General Partner, respectively. | $- | $- |
| | | |
| Equipment Management Fee | | |
| The General Partner is entitled to be paid for managing the equipment portfolio a monthly fee equal to the lesser of (i) the fees which would be charged by an independent third party for similar services for similar equipment or (ii) the sum of (a) two percent of (1) the gross lease revenues attributable to equipment which is subject to full payout net leases which contain net lease provisions plus (2) the purchase price paid on conditional sales contracts as received by the Partnership and (b) 5% of the gross lease revenues attributable to equipment which is subject to operating leases. In an effort to increase future cash flow for the fund our General Partner has elected to waive equipment management fees. For the nine months ended September 30, 2020 and 2019, equipment management fees of approximately $11,000 and $10,000 were earned but waived by the General Partner, respectively. | $- | $- |
| | | |
| Equipment liquidation Fee | | |
| With respect to each item of equipment sold by the General Partner (other than in connection with a conditional sales contract), a fee equal to the lesser of (i) 50% of the competitive equipment sale commission or (ii) three percent of the sales price for such equipment is payable to the General Partner. The payment of such fee is subordinated to the receipt by the limited partners of (i) a return of their net capital contributions and a 10% per annum cumulative return, compounded daily, on adjusted capital contributions and (ii) the net disposition proceeds from such sale in accordance with the Partnership Agreement. Such fee will be reduced to the extent any liquidation or resale fees are paid to unaffiliated parties. During the nine months ended September 30, 2020 and 2019, the General Partner waived approximately $5,000 and $500 of equipment liquidation fees, respectively. | $- | $- |
12
5. Notes Payable
Notes payable consisted of the following approximate amounts:
| | | | |
| | | | | |
| 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 | - | 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 | 8,500 | 17,000 | - | 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 | 4,000 | 6,000 | - | 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 | 2,000 | 3,000 | - | 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 | 7,000 | 9,000 | 1,500 | 9,000 |
| Installment note payable to bank; interest at 5.31% due in quarterly installments of $4,618, including interest, with final payment in January 2021 | 18,000 | 22,000 | 9,000 | 22,000 |
| Installment note payable to bank; interest at 4.70% due in monthly installments of $1,360, including interest, with final payment in February 2021 | 14,500 | 18,000 | 6,500 | 18,000 |
| | $54,000 | $87,000 | $17,000 | $87,000 |
These notes are secured by specific equipment with a carrying value of approximately $97,000$35,000 and are nonrecourse liabilities of the Partnership. As such, the notes do not contain any financial debt covenants with which we must comply on either an annual or quarterly basis. Aggregate approximate maturities of notes payable for each of the periods subsequent to March 31,September 30, 2020 are as follows:
| |
NineThree months ended December 31, 2020
| $47,00010,000 |
| Year ended December 31, 2021 | 7,000 |
| $54,00017,000 |
6. Supplemental Cash Flow Information
No interest or principal on notes payable was paid by the Partnership during 2020 and 2019 because direct payment was made by lessee to the bank in lieu of collection of lease income and payment of interest and principal by the Partnership.
Other noncash activities included in the determination of net income (loss)loss are as follows:
| Three months ended March 31, | | | |
| Nine months ended September 30, | | | |
| Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank | $33,000 | $59,000 | $70,000 | $161,000 |
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.
Although the Partnership cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the Partnership results of future operations, financial position, and liquidity in fiscal year 2020 and beyond.
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a complaint naming Commonwealth Capital Securities Corp. (“CCSC”) and the owner of the firm, Kimberly Springsteen-Abbott, as respondents; however, on October 22, 2013, FINRA filed an amended complaint that dropped the allegations against CCSC and reduced the scope of the allegations against Ms. Springsteen-Abbott. The sole remaining charge was that Ms. Springsteen-Abbott had approved the misallocation of some expenses to certain Funds. Management believes that the expenses at issue include amounts that were proper and that were properly allocated to Funds, and also identified a smaller number of expenses that had been allocated in error, but were adjusted and repaid to the affected Funds when they were identified in 2012. During the period in question, Commonwealth Capital Corp. (“CCC”) and Ms. Springsteen-Abbott provided important financial support to the Funds, voluntarily absorbed expenses and voluntarily waived fees in amounts aggregating in excess of any questioned allocations. A Hearing Panel ruled on March 30, 2015, that Ms. Springsteen-Abbott should be barred from the securities industry because the Panel concluded that she allegedly misallocated approximately $208,000 of expenses involving certain Funds over the course of three years. As such, management had already reallocated back approximately $151,225 of the $208,000 (in allegedly misallocated expenses) to the affected funds, which was fully documented, as good faith payments for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed to FINRA's National Adjudicatory Council (the “NAC”) pursuant to FINRA Rule 9311. The NAC issued a decision that upheld the lower panel’s ruling and the bar took effect on August 23, 2016. Ms. Springsteen-Abbott appealed the NAC’s decision to the U.S. Securities and Exchange Commission (the “SEC”). On March 31, 2017, the SEC criticized that decision as so flawed that the SEC could not even review it, and remanded the matter back to FINRA for further consideration consistent with the SEC’s remand, but did not suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling $208,000 to a remaining list of 87 items totaling $36,226 (which includes approximately $30,000 of continuing education expenses for personnel providing services to the Funds), and reduced the proposed fine from $100,000 to $50,000, but reaffirmed its position on the bar from the securities industry. Respondents promptly appealed FINRA’s revised ruling to the SEC. All the requested or allowed briefs have been filed with the SEC. The SEC upheld FINRA’s order on February 7, 2020 to bar, but eliminated FINRA’s proposed fine. Ms. Springsteen-Abbott has filed a Petition for Review in the United States Court of Appeals for the District of Columbia Circuit to review a final order entered against her by the U.S. Securities and Exchange Commission. As the SEC eliminated FINRA’s fine completely, Management is even more confident that regardless of final resolution, it will not result in any material adverse financial impact to the Funds, although a final assurance cannot be provided until the legal matter is resolved. That appeal is pending as of May 15,November 16, 2020.
8. Subsequent Events
COVID-19 Pandemic
In March 2020, the World Health Organization classified the novel coronavirus (“COVID-19”) outbreak as a pandemic, based on the rapid increase in exposure globally. The Fund’s operation is located in Florida, which has been restricted during April-May for gatherings of people due to the coronavirus outbreak. On May 4th, Governor DeSantis of Florida started his plan to begin opening certain retail stores and restaurants at limited capacity. At present, the Fund’s operations have not been adversely affected and continue to function effectively.
●
On May 11th, certain administrative employees will begin to return to the office on a full-time basis, based on a three-phase plan.
●
On May 4th, the General Partner applied and received a grant for Paycheck Protection Program (“PPP”) based on the “Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferments of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modification to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.
●
The General Partner may be eligible for forgiveness of the PPP loan based on the sum of the costs incurred and payments made during the 8-week covered period (average number of full-time employees of the borrower per month between January 1, 2020 and February 29, 2020) on:
■
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, 2019 filed with the SEC. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.
INDUSTRY OVERVIEW
The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross section of the $900 billion equipment finance sector, showed their overall new business volume for March was $8.9 billion, up 9 % year-over-year from new business volume in March 2019. Volume was up 31 % month-to-month from $6.8 billion in February. Year-to-date, cumulative new business volume was up 17 % compared to 2019.
Receivables over 30 days were 2.60 %, up from 2.00 % the previous month and up from 1.90 % the same period in 2019. Charge-offs were 0.55 %, up from 0.51 % the previous month, and up from 0.37 % in the year-earlier period.
Credit approvals totaled 74.2 %, down from 74.7 % in February. Total headcount for equipment finance companies was down 2.9 % year-over-year.
Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) decreased from 46.0 in March to a historic low of 22.3 in April due to the impact of COVID-19.
ELFA President and CEO Ralph Petta said, “The increase“Despite the drop in MarchSeptember year-over-year new business, volumea look at the data is misleading. It presents a ‘tale of two cities.’ Duringbeginning with the first halfadvent of the month,pandemic in February shows that the industry, in general is holding its own. In fact, anecdotal evidence from some ELFA member companies indicates they are enjoying a very strong year. Tempering this positive data point; however, is a spike in losses – not surprising, given that the losses in all likelihood reflect customers in distressed industry sectors significantly impacted by the economic activity and industry performance were strong, mirroring overall strength indownturn resulting from the U.S. economy. However, during the second half of March, as the coronavirus pandemic’s impact—both from a health and economic standpoint—entered the country’s consciousness, all that changed. One need not look any further than the delinquency and charge-off data to understand the myriad challenges confronting U.S. businesses, both large and small, in the weeks and months ahead as this insidious disease grips the nation and our people. For now, acquiring and financing business equipment takes a back seat to critical efforts by families vitally concerned about their health and safety. Things we know: this crisis is temporary; the equipment leasing and finance industry’s resilience and resolve are enduring.COVID pandemic.”
Nancy Pistorio, CLFP, President, Madison Capital LLC,“The pandemic continues to have a negative impact on the overall economy, and this data demonstrates that our industry is not immune. However, the 24% growth in month-to-month volume in September 2020 MLFI-25 is promising,” said “March results for the equipment finance industry illustrate how robust activity was asAnthony Sasso, Head of TD Equipment Finance. “Within any disruption, there is opportunity. Here at TDEF, we headed into the final month of the first quarter. However, duehave seen our customers find innovative ways 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 timegrow, and we ourselves have been able to increase our portfolio. The low interest rate environment, combined with rising spot rates within trucking, presents a good opportunity for our industry. I believe independentsthose companies who are in the small-ticket space will be hit particularly hard as their customers—small and medium-sized businesses—strugglea position 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.expand.”
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 the business of leasing equipment. Ancillary to the Partnership’s principal equipment leasing business, the Partnership also sells certain equipment and may offer certain services to support its customers.
The Partnership’s lease transactions are principally accounted for under Topic 842 on January 1, 2019. Prior to Topic 842, the Partnership accounted for these transactions under Topic 840, Leases (“Topic 840”). Lease revenue includes revenue generated from leasing equipment to customers, including re-rent revenue, and is recognized as either on a straight-line basis or using the effective interest method over the length of the lease contract, if such lease is either an operating lease or finance lease, respectively.
The Partnership’s sale of equipment along with certain services provided to customers is recognized under ASC Topic 606, Revenue from Contracts with Customers, (“Topic 606”), which was adopted on January 1, 2018. Prior to adoption of Topic 606, the Partnership recognized these transactions under ASC Topic 605, Revenue Recognized, and (“Topic 605”). The Partnership recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration the Partnership expects to be entitled to in exchange for such products or services.
Through March 31,September 30, 2020, the Partnership’s lease portfolio consisted of operating leases and finance leases. For operating leases, lease revenue is recognized on a straight-line basis in accordance with the terms of the lease agreement. Finance lease interest income is recorded over the term of the lease using the effective interest method.
Upon the end of the lease term, if the lessee has not met the return conditions as set out in the lease, the Partnership is entitled in certain cases to additional compensation from the lessee. The Partnership’s accounting policy for recording such payments is to treat them as revenue.
Gains or losses from sales of leased and off-lease equipment are recorded on a net basis in the Partnership’s Statement of Operations. Gains from the terminationsale of leasesequipment resulting from early buyouts are recognized when the lease is modified and terminated concurrently. Our leases do not contain any step-rent provisions or escalation clauses nor are lease revenues adjusted based on any index.
Partnership’s accounting policy for sales and property taxes collected from the lessees are recorded in the current period as gross revenues and expenses.
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 fourfive 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 sourcesources of cash for the threenine months ended March 31,September 30, 2020 waswere cash provided by operating activities of approximately $130,000 and net proceeds from the sale of equipment of approximately $55,000.$61,000. This compares to the threenine months ended March 31,September 30, 2019 where our primary source of cash was net proceeds from the sale of equipment of approximately $8,000.$15,000.
Our primary use of cash for the threenine months ended March 31,September 30, 2020 andwas capital expenditures in investing activities of approximately $20,000. Our primary use of cash for the nine months ended September 30, 2019 was cash used in operating activities of approximately $48,000 and $16,000, respectively.
$31,000. For the threenine months ended March 31,September 30, 2020 and March 31, 2019, the Partnership had no financing activities.
As we continue to acquire equipment for the equipment portfolio, operating expenses may increase, but because of our investment strategy of leasing equipment primarily through triple-net leases, we avoid operating expenses related to equipment maintenance or taxes.
Cash was used inprovided by operating activities for the threenine months ended March 31,September 30, 2020 of approximately $48,000$130,000, which includes net loss of approximately $2,000,$59,000 and depreciation and amortization expenses of approximately $49,000, loss on sale of computer equipment of approximately $12,000, and bad debt recovery of approximately $34,000.$131,000. Other non-cash activities included in the determination of net incomeloss include direct payments of lease income by lessees to banks of approximately $33,000. For the three months ended March 31, 2019, cash$70,000. Cash was used in operating activities for the nine months ended September 30, 2019 of approximately $16,000$31,000, which includes net income of approximately $2,000$88,000 and depreciation and amortization expenses of approximately $80,000.$218,000. Other non-cash activities included in the determination of net incomeloss include direct payments of lease income by lessees to banks of approximately $59,000.$161,000.
We consider cash equivalents to be highly liquid investments with the original maturity dates of 90 days or less.
At March 31,September 30, 2020, cash and cash equivalents werewas held in one account maintained at one financial institution with aan aggregate balance of approximately $12,000. $178,000. Bank accounts are federally insured up to $250,000 by the FDIC. At March 31,September 30, 2020, the total cash bank balance was as follows:
At March 31,September 30, 2020 | |
| Total bank balance | $12,000178,000 |
| FDIC insured | (12,000178,000) |
| 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 2020 due to many factors, including cash receipts, equipment acquisitions, interest rates, and distributions to limited partners.
Our investment strategy of acquiring equipment and generally leasing it under triple-net leases to operators who generally meet specified financial standards minimizes our operating expenses. As of March 31,September 30, 2020, we had future minimum rentals on non-cancelable operating leases of approximately $78,000$67,000 for the balance of the year ending December 31, 2020 and approximately $13,000$22,000 thereafter. As of March 31, 2020,September 30, 2019, we had future minimum rentals on non-cancelable finance leases of approximately $4,000$90,000 for the balance of the year ending December 31, 20202019 and noneapproximately $109,000 thereafter.
As of March 31,September 30, 2020, our non-recourse debt was approximately $54,000,$17,000, with interest rates ranging from 4.70% to 6.28%5.75%, and will be payable through February 2021.
The Partnership was originally scheduled to end its operational phase on February 4, 2017. During the year ended December 31, 2015, the operational phase was officially extended to December 31, 2020 through an investor proxy vote. The Partnership is expected to terminate on December 31, 2022. As such, the Partnership will continue to report its financial statements on a going concern basis until a formal plan of liquidation is approved by the General Partner.
As the Partnership and the other programs managed by the General Partner increase their overall portfolio size, opportunities for shared participation are expected to continue. Sharing in the acquisition of a lease portfolio gives the fund an opportunity to acquire additional assets and revenue streams, while allowing the fund to remain diversified and reducing its overall risk with respect to one portfolio.
For the nine months ended September 30, 2020, the Partnership incurred positive cash flow. However, historically the Partnership has reported recurring negative cash flows. At September 30, 2020, the Partnership has a working capital deficit of approximately $125,000. Such factors raise substantial doubt about the Partnership’s ability to continue as a going concern.
The General Partner elected to forgo distributions and allocations of net income owed to it, and suspended limited partner distributions for the three months ended March 31, 2020.distributions. The General Partner will continue to reassess the funding of limited partner distributions throughout 2020 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 will continue to reassess the funding of limited partner distributions throughout 2020 and will continue to waive certain fees. If available cash flow or net disposition proceeds are insufficient to cover the Partnership expenses and liabilities on a short and long-term basis, the Partnership may attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within its permissible limits.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 debt financing. This strategy allows the General PartnerThe Partnership may also attempt to acquireobtain additional revenue generating leases without the usefunds by disposing 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.or refinancing equipment, or by borrowing within its permissible limits.
RESULTS OF OPERATIONS
Three months ended March 31,September 30, 2020 compared to three months ended March 31,September 30, 2019
Lease Revenue
Our lease revenue decreased to approximately $88,000$66,000 for the three months ended March 31,September 30, 2020, from approximately $128,000$124,000 for the three months ended March 31,September 30, 2019. This revenue decrease is primarily due to a decrease in active lease agreements as described below.
The Partnership had 5325 and 63 active61 operating leases during the three months ended March 31,September 30, 2020 and 2019, respectively. The decreasedecline in number of active leases is consistent with the overall decrease in lease revenue. Management expects to add new leases to our portfolio throughout the remainder of 2020, funded primarily through debt financing. As the operational phase of the Partnership has been extended to December 31, 2020, management will continue to seek lease opportunities to enhance portfolio returns and cash flow.
Sale of Equipment
For the three months ended September 30, 2020, the Partnership sold equipment with a net book value of approximately $0 for a net gain of approximately $1,000. For the three months ended September 30, 2019, the Partnership sold equipment with a net book value of approximately $5,000 for a net gain of approximately $2,000.
Operating Expenses
Our operating expenses, excluding depreciation, primarily consist of accounting and legal fees, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. These expenses increased to approximately $51,000 for the three months ended September 30, 2020, from approximately $3,000 for the three months ended September 30, 2019. This increase is primarily attributable to the reestablishment of previously waived other LP expenses of approximately $33,000, an increase in legal fees associated with the FINRA matter (see Item 1. Legal Proceedings) of approximately $6,000, an increase in outside office services-investor services of approximately $3,000 and an increase in IT expenses of approximately $2,000.
Equipment Management Fees
We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases and 2% of the gross lease revenue attributable to equipment that is subject to finance leases. An equipment management fee of approximately $3,000 and $3,000 was earned but waived by the General Partner for both the three months ended September 30, 2020 and 2019, respectively.
Depreciation and Amortization Expenses
Depreciation expenses consist of depreciation on equipment. This expense decreased to approximately $41,000 for the three months ended September 30, 2020, from $64,000 for the three months ended September 30, 2019. This decrease was due to the higher frequency in the termination of leases and equipment being fully depreciated as compared to the acquisition of new leases for the three months ended June 30, 2020.
Net (Loss) Income
For the three months ended September 30, 2020, we recognized revenue of approximately $71,000 and expenses of approximately $95,000, resulting in net loss of approximately $24,000. For the three months ended September 30, 2019, we recognized revenue of approximately $134,000 and expenses of approximately $76,000, resulting in net income of approximately $58,000. This change to a net loss is due to the changes in revenue and expenses as described above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Lease Revenue
Our lease revenue decreased to approximately $236,000 for the nine months ended September 30, 2020, from approximately $379,000 for the nine months ended September 30, 2019. The Partnership had 54 and 63 operating leases during the nine months ended September 30, 2020 and 2019, respectively. The decline in number of active leases is consistent with the overall decrease in lease revenue. As the operational phase of the Partnership has been extended to December 31, 2020, Management will continue to seek lease opportunities to enhance portfolio returns and cash flow.
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,$55,000, for the sale price of primarily, Small IBM Servers and High Volume & Spec Printers and will recordrecorded a gain on sale of equipment of approximately $12,000. The Partnership disposed of and sold other equipment to various customers during 2020. For the threenine months ended March 31, 2019, we recordedSeptember 30, 2020, the Partnership sold equipment to other customers besides Cummins with a gain on a saletotal net book value of equipment$0 and net gain of approximately $400.$7,000. This compared to the nine months ended September 30, 2019, the Partnership sold equipment with net book value of approximately $12,000 for a net gain of approximately $3,000.
Operating Expenses
Our operating expenses, excluding depreciation, primarily consist of accounting and legal fees, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. These expenses increased to approximately $86,000$220,000 for the threenine months ended March 31,September 30, 2020, from approximately $43,000$68,000 for the threenine months ended March 31,September 30, 2019. This increase is primarily attributable to an increase inthe reestablishment of previously waived other LP expenses of $27,000 when previously no expense had been allocated. Other attributable reasons for approximately $100,000, an increase are in accounting fees related to changes in tax reporting of approximately $11,000, an increase in legal fees associated with the FINRA matter (see Item 1. Legal Proceedings)of approximately $9,000, an increase in IT expenses of approximately $7,000, an increase in outside services-investor services of approximately $6,000, an increase in expenses related to the corporate office relocation of approximately $4,000, an increase in recruiting fees of $3,000, other office suppliesapproximately $4,000 and an increase in partnership taxes of $2,000 and other miscellaneous expenses of $2,000.approximately $3,000.
Equipment Management Fees
We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 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. For the threenine months ended September March 31,30, 2020 and 2019, the total equipment management fee was waived.fees of approximately $11,000 and $10,000 were earned but waived by the General Partner, respectively.
Depreciation and Amortization Expenses
Depreciation and amortization expenses consist of depreciation on equipment. This expenseequipment and amortization of equipment acquisition fees. These expenses decreased to approximately $49,000$131,000 for the threenine months ended March 31,September 30, 2020, from $80,000$218,000 for the threenine months ended March 31,September, 2019. This decrease was due to the higher frequency in the termination of leases and equipment being fully depreciated as compared to the acquisition of new leases for the threenine months ended March 31, 2020.September 30, 2020
Net (Loss) Income (Loss)
For the threenine months ended March 31,September 30, 2020, we recognized revenue of approximately $116,000,$283,000 and expenses of approximately $118,000,$342,000, resulting in net loss of approximately $2,000. $59,000. For the threenine months ended March 31,September 30, 2019, we recognized revenue of approximately $128,000,$405,000 and expenses of approximately $126,000,$317,000, resulting in net income of approximately $2,000.$88,000. This change to 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 March 31,September 30, 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 September 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 disclosed in our periodic reports filed or submittedmaterial weaknesses under the Securities Exchange Actstandards of 1934 is (a)the Public Company Accounting Oversight Board were: (i) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our principal financial officer and principal accounting officer, in connection with the review of our financial statements as of June 30, 2020.
Remediation of Material Weakness
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have implemented the following measure:
1. We have incorporated a procedure within our written policies and procedures to require for nonrecurring journal entries, referenced as “one-off” journal entries to be reviewed and signed-off by both the accounting manager and a senior staff accountant to ensure appropriate transactions are recorded processed, summarizedas intended to be reported for financial reporting and reported within the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time periods specifiedand management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed by the end of fiscal year 2020.
Changes in 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 first quarter ofending September 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. Commitments and Contingencies
N/A
Item 21. . Legal Proceedings
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a complaint naming Commonwealth Capital Securities Corp. (“CCSC”) and the owner of the firm, Kimberly Springsteen-Abbott, as respondents; however, on October 22, 2013, FINRA filed an amended complaint that dropped the allegations against CCSC and reduced the scope of the allegations against Ms. Springsteen-Abbott. The sole remaining charge was that Ms. Springsteen-Abbott had approved the misallocation of some expenses to certain Funds. Management believes that the expenses at issue include amounts that were proper and that were properly allocated to Funds, and also identified a smaller number of expenses that had been allocated in error, but were adjusted and repaid to the affected Funds when they were identified in 2012. During the period in question, Commonwealth Capital Corp. (“CCC”) and Ms. Springsteen-Abbott provided important financial support to the Funds, voluntarily absorbed expenses and voluntarily waived fees in amounts aggregating in excess of any questioned allocations. A Hearing Panel ruled on March 30, 2015, that Ms. Springsteen-Abbott should be barred from the securities industry because the Panel concluded that she allegedly misallocated approximately $208,000 of expenses involving certain Funds over the course of three years. As such, management had already reallocated back approximately $151,225 of the $208,000 (in allegedly misallocated expenses) to the affected funds, which was fully documented, as good faith payments for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed to FINRA's National Adjudicatory Council (the “NAC”) pursuant to FINRA Rule 9311. The NAC issued a decision that upheld the lower panel’s ruling and the bar took effect on August 23, 2016. Ms. Springsteen-Abbott appealed the NAC’s decision to the U.S. Securities and Exchange Commission (the “SEC”). On March 31, 2017, the SEC criticized that decision as so flawed that the SEC could not even review it, and remanded the matter back to FINRA for further consideration consistent with the SEC’s remand, but did not suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling $208,000 to a remaining list of 87 items totaling $36,226 (which includes approximately $30,000 of continuing education expenses for personnel providing services to the Funds), and reduced the proposed fine from $100,000 to $50,000, but reaffirmed its position on the bar from the securities industry. Respondents promptly appealed FINRA’s revised ruling to the SEC. All the requested or allowed briefs have been filed with the SEC. The SEC upheld FINRA’s order on February 7, 2020 to bar, but eliminated FINRA’s proposed fine. Ms. Springsteen-Abbott has filed a Petition for Review in the United States Court of Appeals for the District of Columbia Circuit to review a final order entered against her by the U.S. Securities and Exchange Commission. As the SEC eliminated FINRA’s fine completely, Management is even more confident that regardless of final resolution, it will not result in any material adverse financial impact to the Funds, although a final assurance cannot be provided until the legal matter is resolved. That appeal is pending as of May 15,November 16, 2020.
Item 2A.1A. Risk Factors
COVID-19 Pandemic
In March 2020, the World Health Organization classified the novel coronavirus (“COVID-19”) outbreak as a pandemic, based on the rapid increase in exposure globally. The Fund’s operation is located in Florida, which has been restricted during April-May for gatherings of people due to the coronavirus outbreak. On May 4th, Governor DeSantis of Florida started his plan to begin opening certain retail stores and restaurants at limited capacity. At present, the Fund’s operations have not been adversely affected and continue to function effectively.Going Concern
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On May 11th, certain administrative employees will beginFor the nine months ended September 30, 2020, the Partnership incurred positive cash flow. However, historically the Partnership has reported recurring negative cash flows. At September 30, 2020, the Partnership has a working capital deficit of approximately $125,000. Such factors raise substantial doubt about the Partnership’s ability to return to the office oncontinue as a full-time basis, based on a three-phase plan.
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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.
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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 eligible for forgivenessimpacted by COVID-19. Some of the PPP loanbusiness 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 sumpresent 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 costs incurredunderlying collateral.
The Company believes its estimate of expected losses have been recognized based on historical experience, current conditions, and payments made duringreasonable forecasts. The impacts of COVID-19 may necessitate additional adjustments in future forecasts of expected losses.
Although the 8-week covered period (average number of full-time employeesPartnership cannot estimate the length or gravity of the borrower per month between January 1,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 February 29, 2020) on:
■Material Weakness
Payroll
Failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could result in additional costs
■
Any interest paymentEffective internal control over financial reporting is necessary for us to provide accurate financial information. We
previously identified a material weakness in our internal controls over financial reporting as of June 30, 2020. We have concluded that our internal controls over financial reporting were not effective as of September 30, 2020 due to the existence of material weaknesses in our monthly close for not properly reviewing certain journal entries that had an impact on the internal controls over financial reporting.
The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed by the end of fiscal year 2020.
If our remediation measures are insufficient to address the identified deficiencies, or if additional deficiencies in our
internal control over financial reporting are discovered or occur in the future, our financial statements may contain material misstatements and we could be required to restate our financial results. Moreover, because of the inherent limitations of any covered mortgage obligation (not including any prepayment ofcontrol system, material misstatements due to error or principal paymentfraud may not be prevented or detected on a covered mortgage obligation),
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Any payment on any covered rent obligation,timely basis, or at all. If we are unable to provide reliable and
■
Any covered utility payment
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The full principal amount of timely financial reports in the loanfuture, our business and accrued interestreputation may be forgiven, borrowers must followfurther harmed. Failures in internal controls may negatively affect investor confidence in our management and the Small Business Association’s (“SBA’s”) strict guidelines on the useaccuracy of the loan proceedsour financial statements and disclosures, or result in adverse publicity and concerns from investors, any of which could have a negative effect, subject us 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 onregulatory investigations and penalties and/or shareholder litigation, and materially adversely impact our business through the General Partner and indirectly, the Funds.financial condition.
●
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 3.2. Unregistered Sales of Equity Securities and Use of Proceeds
N/A
Item 4.3. Defaults Upon Senior Securities
N/A
Item 5.4. Mine Safety Disclosures
N/A
Item 6.5. Other Information
NONE
Item 7.6. 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 |
May 15, | |
| |
| November 16, 2020 | By: /s/ Kimberly A. Springsteen-Abbott |
| Date | Kimberly A. Springsteen-Abbott |
| | Chief Executive Officer And Principal Financial Officer Commonwealth Income & Growth Fund, Inc. |
| | |
May 15,
| |
| November 16, 2020 Date
| By: /s/ Karl A. HazenTheodore Cavaliere Karl A. Hazen
SEC Reporting Officer
|
| Date | Theodore Cavaliere |
| Vice President, Financial Operations Principal |