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Commonwealth Income & Growth Fund V (CIGF5)

Filed: 18 May 22, 1:09pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022

 

or

 

☐    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 333-108057

 

COMMONWEALTH INCOME & GROWTH FUND V

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

65-1189593

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

4532 US Highway 19 North

Suite 200

New Port Richey, FL 34652

(Address, including zip code, of principal executive offices)

 

(800) 249-3700

(Registrant’s telephone number including area code)

 

Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (ii) has been subject to such filing requirements for the past 90 days: Yes ☒ NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

Non-accelerated Filer

Smaller reporting company

(Do not check if a smaller reporting company.)

Emerging growth company

 

Indicate by check mark whether the registrant is an emerging growth company (as defined in Rule 12b-2 of the Exchange Act). YES ☐    NO ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

 

 

 

 

FORM 10-Q

March 31, 2022

 

TABLE OF CONTENTS

 

PART I

Item 1.

Financial Statements

 

3

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

20

 

Item 4.

Controls and Procedures

 

20

 

PART II

Item 1.

Commitments and Contingencies

 

21

 

Item 2.

Legal Proceedings

 

21

 

Item 2A.

Risk Factors

 

22

 

Item 3.

Unregistered Sales of Equity Securities and Use of Proceeds

 

23

 

Item 4.

Defaults Upon Senior Securities

 

23

 

Item 5.

Mine Safety Disclosures

 

23

 

Item 6.

Other Information

 

23

 

Item 7.

Exhibits

 

23

 

 

 
2

Table of Contents

 

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

Commonwealth Income & Growth Fund V

Condensed Balance Sheets

(unaudited)

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$513

 

 

$29,571

 

Lease income receivable, net of reserve of approximately $46,000 at both March 31, 2022 and December 31, 2021

 

 

60,071

 

 

 

36,537

 

Accounts receivable, Commonwealth Capital Corp, net

 

 

0

 

 

 

0

 

Other receivables

 

 

333

 

 

 

333

 

Prepaid expenses

 

 

3,412

 

 

 

1,680

 

 

 

 

64,329

 

 

 

68,121

 

 

 

 

 

 

 

 

 

 

Equipment, at cost

 

 

3,411,451

 

 

 

3,411,451

 

Accumulated depreciation

 

 

(3,300,708)

 

 

(3,282,768)

 

 

 

110,743

 

 

 

128,683

 

Total Assets

 

$175,072

 

 

$196,804

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$138,430

 

 

$165,476

 

Accounts payable, CIGF, Inc.

 

 

120,613

 

 

 

100,732

 

Accounts payable, Commonwealth Capital Corp, net of accounts receivable of approximately $30,700 and $14,000 at March 31, 2022 and December 31, 2021, respectively

 

 

172,870

 

 

 

165,514

 

Other accrued expenses

 

 

0

 

 

 

0

 

Unearned lease income

 

 

115

 

 

 

4,883

 

Notes payable

 

 

13,518

 

 

 

14,695

 

Total Liabilities

 

 

445,546

 

 

 

451,300

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

PARTNERS’ DEFICIT

 

 

 

 

 

 

 

 

General Partner

 

 

1,000

 

 

 

1,000

 

Limited Partners

 

 

(271,474)

 

 

(255,496)

Total Partners’ Deficit

 

 

(270,474)

 

 

(254,496)

Total Liabilities and Partners’ Deficit

 

$175,072

 

 

$196,804

 

 

see accompanying notes to condensed financial statements

 

 
3

Table of Contents

 

Commonwealth Income & Growth Fund V

Condensed Statements of Operations

(unaudited)

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Revenue

 

 

 

 

 

 

Lease

 

$46,094

 

 

$60,841

 

Interest and other

 

 

90

 

 

 

34

 

Sales and property taxes

 

 

1,277

 

 

 

2,662

 

Total revenue and gain on sale of equipment

 

 

47,461

 

 

 

63,537

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

Operating, excluding depreciation and amortization

 

 

44,043

 

 

 

74,578

 

Interest

 

 

179

 

 

 

313

 

Depreciation

 

 

17,940

 

 

 

33,797

 

Sales and property taxes

 

 

1,277

 

 

 

2,662

 

Loss on sale of equipment

 

 

0

 

 

 

5,080

 

Total expenses

 

 

63,439

 

 

 

116,430

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$(15,978)

 

$(52,893)

 

 

 

 

 

 

 

 

 

Net Loss allocated to Limited Partners

 

$(15,978)

 

$(52,893)

 

 

 

 

 

 

 

 

 

Net Loss per equivalent Limited Partnership unit

 

$(0.01)

 

$(0.04)

Weighted average number of equivalent limited

 

 

 

 

 

 

 

 

partnership units outstanding during the year

 

 

1,233,548

 

 

 

1,235,066

 

 

see accompanying notes to condensed financial statements

 

 
4

Table of Contents

 

Commonwealth Income & Growth Fund V

Condensed Statements of Partners’ Deficit

For the three months ended March 31, 2022 and 2021

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

General

 

 

Limited

 

 

 

 

 

 

 

 

 

 

 

 

Partner

 

 

Partner

 

 

General

 

 

Limited

 

 

 

 

 

 

Units

 

 

Units

 

 

Partner

 

 

Partners

 

 

Total

 

Balance, January 1, 2022

 

 

50

 

 

 

1,233,548

 

 

$1,000

 

 

$(255,496)

 

$(254,496)

Net loss

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(15,978)

 

 

(15,978)

Balance March 31, 2022

 

 

50

 

 

 

1,233,548

 

 

$1,000

 

 

$(271,474)

 

$(270,474)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General

 

 

Limited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partner

 

 

Partner

 

 

General

 

 

Limited

 

 

 

 

 

 

 

Units

 

 

Units

 

 

Partner

 

 

Partners

 

 

Total

 

Balance, January 1, 2021

 

 

50

 

 

 

1,235,581

 

 

$1,000

 

 

$(95,974)

 

$(94,974)

Net loss

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(52,893)

 

 

(52,893)

Redemption

 

 

0

 

 

 

(833)

 

 

0

 

 

 

0

 

 

 

0

 

Balance March 31, 2021

 

 

50

 

 

 

1,234,748

 

 

$1,000

 

 

$(148,867)

 

$(147,867)

 

see accompanying notes to condensed financial statements

 

 
5

Table of Contents

 

Commonwealth Income & Growth Fund V

Condensed Statements of Cash Flow

(unaudited)

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$(29,058)

 

$(11,075)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Net proceeds from the sale of equipment

 

 

0

 

 

 

2,400

 

Net cash provided by investing activities

 

 

0

 

 

 

2,400

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(29,058)

 

 

(8,675)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

29,571

 

 

 

33,920

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$513

 

 

$25,245

 

 

see accompanying notes to condensed financial statements

 

 
6

Table of Contents

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

1. Business

 

Commonwealth Income & Growth Fund V (the “Partnership”) is a limited partnership organized in the Commonwealth of Pennsylvania in May 2003. The Partnership offered for sale up to 1,250,000 units of the limited partnership at the purchase price of $20 per unit (the “offering”). The Partnership reached the minimum amount in escrow and commenced operations on March 14, 2005. As of February 24, 2006, the Partnership was fully subscribed.

 

The Partnership used the proceeds of the offering to acquire, own and lease various types of information technology, medical technology, telecommunications technology, inventory management equipment and other similar capital equipment, which is leased primarily to U.S. corporations and institutions.

 

Commonwealth Capital Corp. (“CCC”), on behalf of the Partnership and other affiliated partnerships, acquires equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various partnerships that it manages based on certain risk factors.

 

The Partnership’s investment objective is to acquire primarily high technology equipment. Information technology has developed rapidly in recent years and is expected to continue to do so. Technological advances have permitted reductions in the cost of information technology processing capacity, speed, and utility. In the future, the rate and nature of equipment development may cause equipment to become obsolete more rapidly. The Partnership also acquires high technology medical, telecommunications and inventory management equipment. The Partnership’s general partner will seek to maintain an appropriate balance and diversity in the types of equipment acquired. The market for high technology medical equipment is growing each year. Generally, this type of equipment will have a longer useful life than other types of technology equipment. This allows for increased re-marketability, if it is returned before its economic or announcement cycle is depleted.

 

The Partnership’s General Partner is Commonwealth Income & Growth Fund, Inc. (the “General Partner”), a Pennsylvania corporation which is an indirect wholly owned subsidiary of CCC. Approximately ten years after the commencement of operations (the “operational phase”), the Partnership intended to sell or otherwise dispose of all of its equipment; make final distributions to partners, and to dissolve. The Partnership was originally scheduled to end its operational phase on February 4, 2017. During the year ended December 31, 2015, the operational phase was officially extended to December 31, 2020 through an investor proxy vote. The Partnership is expected to terminate on December 31, 2022.

 

Liquidity and Going Concern

 

For the three months ended March 31, 2022, the Partnership incurred negative cash flow.  At March 31, 2022, the Partnership has a working capital deficit of approximately $381,000. Such factors raise substantial doubt about the Partnership’s ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

The General Partner agreed to forgo distributions and allocations of net income owed to it, and suspended limited partner distributions. The General Partner will continue to waive certain fees and may defer certain related party payables owed to the Partnership in an effort to further increase the Partnership’s cash flow. Additionally, the Partnership will seek to enhance portfolio returns and maximize cash flow through the use of leveraged lease transactions: the acquisition of lease equipment through financing. The Partnership may also attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within its permissible limits. However, at this time, it is uncertain as to whether the General Partner’s plans will be successful.

 

 
7

Table of Contents

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The financial information presented as of any date other than December 31, 2021 has been prepared from the books and records without audit. The following unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Financial information as of December 31, 2021 has been derived from the audited financial statements of the Partnership, but does not include all disclosures required by generally accepted accounting principles to be included in audited financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods indicated, have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2022.

 

Disclosure of Fair Value of Financial Instruments

 

Estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, judgment was necessary to interpret market data and develop estimated fair value.  Receivables, accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of March 31, 2022 and December 31, 2021 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, 2022 and December 31, 2021 approximates the carrying value of these instruments, due to the interest rates on the debt approximating current market interest rates. The Partnership classifies the fair value of its notes payable within Level 2 of the valuation hierarchy based on the observable inputs used to estimate fair value.

 

Cash and cash equivalents

 

We consider cash equivalents to be highly liquid investments with the original maturity dates of 90 days or less.

 

At March 31, 2022, cash and cash equivalents was held in one account maintained at one financial institution with an aggregate balance of approximately $2,000. Bank accounts are federally insured up to $250,000 by the FDIC. At March 31, 2022, the total cash bank balance was as follows:

 

At March 31, 2022

 

Balance

 

Total bank balance

 

$2,000

 

FDIC insured

 

 

(2,000)

Uninsured amount

 

$0

 

 

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 2022 due to many factors, including cash receipts, equipment acquisitions and interest rates.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard establishes an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is intended to result in a timelier recognition of losses. Under the CECL model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of the financial instrument. Measurement of expected credit losses are to be based on relevant forecasts that affect collectability. The scope of financial assets within the CECL methodology is broad and includes trade receivables from certain revenue transactions and certain off-balance sheet credit exposures. Different components of the guidance require modified retrospective or prospective adoption.

 

 
8

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In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of the credit losses standard. Instead, entities would need to apply other U.S. GAAP, namely Topic 842 (Leases), to account for changes in the collectability assessment for operating leases. Other than operating lease receivables, Partnership trade receivables include receivables from finance leases and equipment sales. Under Topic 606 (Revenue from Contracts with Customers), revenue is recognized when, among other criteria, it is probable that the entity will collect the consideration to which it is entitled for goods or services transferred to a customer. At the point that finance lease receivables are recorded, they become subject to the CECL model and estimates of expected credit losses over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. Trade receivables derived from equipment sales are of short duration and there is not a material difference between incurred losses and expected losses.

 

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which amends and clarifies several provisions of Topic 326. In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, which amends Topic 326 to allow the fair value option to be elected for certain financial instruments upon adoption. ASU 2019-10 extended the effective date of ASU 2016-13 for the Partnership until December 15, 2022. While the Partnership continues to evaluate the new guidance, including the subsequent updates to Topic 326, it does not anticipate that adoption will have a material impact on the Partnership’s financial statements and related disclosures.  For the three months ended March 31, 2022, the Partnership’s finance lease revenue subject to CECL represented less than 1% of total lease revenue.

 

3. Information Technology, Medical Technology, Telecommunications Technology, Inventory Management Equipment and other Business-Essential Capital Equipment (“Equipment”)

 

The Partnership is the lessor of equipment under operating leases with periods that generally will range from 12 to 48 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee.

 

Gains and losses from the sale of equipment are recognized when the lease is modified and terminated concurrently. Gain from the sale of equipment included in lease revenue for the three months ended March 31, 2022, was approximately $0.

 

CCC, on behalf of the Partnership and on behalf of other affiliated companies and partnerships (“partnerships”), acquires equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various companies based on certain risk factors. 

 

The Partnership’s share of the cost of the equipment in which it participates with other partnerships at March 31, 2022 was approximately $1,887,000 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, 2022 was approximately $8,222,000. The Partnership’s share of the outstanding debt associated with this equipment at March 31, 2022 was approximately $0 and is included in the Partnership’s notes payable on its balance sheet. The total outstanding debt related to the equipment shared by the Partnership at March 31, 2022 was approximately $0.

 

The Partnership’s share of the cost of the equipment in which it participates with other partnerships at December 31, 2021 was approximately $1,887,000 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, 2021 was approximately $8,222,000. The Partnership’s share of the outstanding debt associated with this equipment at December 31, 2021 was approximately $0 and is included in the Partnership’s notes payable on its balance sheet. The total outstanding debt related to the equipment shared by the Partnership at December 31, 2021 was approximately $0.

 

 
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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, 2022:

 

 For the period ended December

 

Amount

 

Nine months ended December 31, 2022

 

$21,000

 

Year Ended December 31, 2023

 

 

23,000

 

Year Ended December 31, 2024

 

 

21,000

 

Year Ended December 31, 2025

 

 

9,000

 

 

 

$74,000

 

 

4. Related Party Transactions

 

Receivables/Payables

 

As of March 31, 2022, and December 31, 2021, the Company’s related party receivables and payables are short term, unsecured and non-interest bearing.

 

Three months ended March 31,

 

2022

 

 

2021

 

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, 2022 and 2021, the General Partner waived certain reimbursable expenses due to it by the Partnership.  For the three months ended March 31, 2022 and 2021, the Partnership was charged approximately $20,000 and $21,000 in Other LP expense, respectively.

 

$42,000

 

 

$68,000

 

Equipment Acquisition Fee

 

 

 

 

 

 

 

 

The General Partner earned an equipment acquisition fee of 4% of the purchase price of each item of equipment purchased as compensation for the negotiation of the acquisition of the equipment and lease thereof or sale under a conditional sales contract.  For the three months ended March 31, 2022 and 2021, approximately $0 and $0 of acquisition fees were waived by the General Partner, respectively.

 

$0

 

 

$0

 

Equipment Management Fee

 

 

 

 

 

 

 

 

The General Partner is entitled to be paid for managing the equipment portfolio a monthly fee equal to the lesser of (i) the fees which would be charged by an independent third party for similar services for similar equipment or (ii) the sum of (a) two percent of (1) the gross lease revenues attributable to equipment which is subject to full payout net leases which contain net lease provisions plus (2) the purchase price paid on conditional sales contracts as received by the Partnership and (b) 5% of the gross lease revenues attributable to equipment which is subject to operating leases. In an effort to increase future cash flow for the fund our General Partner has elected to waive equipment management fees. For the three months ended March 31, 2022 and 2021, equipment management fees of approximately $2,000 and $3,000 were earned but waived by the General Partner, respectively.

 

$0

 

 

$0

 

Equipment liquidation Fee

 

 

 

 

 

 

 

 

With respect to each item of equipment sold by the General Partner (other than in connection with a conditional sales contract), a fee equal to the lesser of (i) 50% of the competitive equipment sale commission or (ii) three percent of the sales price for such equipment is payable to the General Partner. The payment of such fee is subordinated to the receipt by the limited partners of (i) a return of their net capital contributions and a 10% per annum cumulative return, compounded daily, on adjusted capital contributions and (ii) the net disposition proceeds from such sale in accordance with the Partnership Agreement. Such fee will be reduced to the extent any liquidation or resale fees are paid to unaffiliated parties. During the three months ended March 31, 2022 and 2021, the General Partner waived approximately $0 and $39 of equipment liquidation fees, respectively.

 

$0

 

 

$0

 

 

 
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5. Notes Payable

 

Notes payable consisted of the following approximate amounts:

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Installment note payable to bank; interest at 5.00% due in monthly installments of $452, including interest, with final payment in November 2024

 

 

14,000

 

 

 

15,000

 

 

 

$14,000

 

 

$15,000

 

 

These notes are secured by specific equipment with a carrying value of approximately $19,000 and are nonrecourse liabilities of the Partnership. As such, the notes do not contain any financial debt covenants with which the Partnership must comply on either an annual or quarterly basis. Aggregate approximate maturities of notes payable for each of the periods subsequent to March 31, 2022 are as follows:

 

 

 

Amount

 

Nine months ended December 31, 2022

 

$4,000

 

Year ended December 31, 2023

 

 

5,000

 

Year ended December 31, 2024

 

 

5,000

 

 

 

$14,000

 

 

6. Supplemental Cash Flow Information

 

No interest or principal on notes payable was paid by the Partnership during 2022 and 2021 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.

 

 
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Other noncash activities included in the determination of net income (loss) are as follows:

 

Three months ended March 31,

 

 2022

 

 

          2021

 

Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank

 

$1,000

 

 

$8,000

 

 

7. Commitments and Contingencies

 

COVID-19 Pandemic

 

The amount of revenue recognized and the pattern of revenue recognition may be impacted by COVID-19. In December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, and has spread globally, and on March 12, 2020, the World Health Organization (“WHO”) declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, have imposed unprecedented restrictions on travel, quarantines, and other public health safety measures. Such government-imposed precautionary measures may have been relaxed in certain countries or states, but there is no assurance that more strict measures will be put in place again due to a resurgence in COVID-19 cases. In addition, the COVID-19 virus and other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact the Company’s business, financial condition, and results of operations. 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 Partnership continues to evaluate whether adjustments to the financial statements are required or whether additional disclosures are necessary.  In its leasing business, the Partnership 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 Partnership 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 a receivable’s or a loan’s effective interest rate, except that, as a practical expedient, impairment can be measured based on a receivable’s or a loans’ observable market price or the fair value of the underlying collateral.

 

The Partnership 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’s results of future operations, financial position, and liquidity in fiscal year 2022 and beyond. 

 

 
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FINRA

 

On May 3, 2013, the FINRA Department of Enforcement filed a complaint naming Commonwealth Capital Securities Corp. (“CCSC”) and the owner of the firm, Kimberly Springsteen-Abbott, as respondents; however, on October 22, 2013, FINRA filed an amended complaint that dropped the allegations against CCSC and reduced the scope of the allegations against Ms. Springsteen-Abbott.  The sole remaining charge was that Ms. Springsteen-Abbott had approved the misallocation of some expenses to certain Funds.  Management believes that the expenses at issue include amounts that were proper and that were properly allocated to Funds, and also identified a smaller number of expenses that had been allocated in error, but were adjusted and repaid to the affected Funds when they were identified in 2012.  During the period in question, Commonwealth Capital Corp. (“CCC”) and Ms. Springsteen-Abbott provided important financial support to the Funds, voluntarily absorbed expenses and voluntarily waived fees in amounts aggregating in excess of any questioned allocations.  A Hearing Panel ruled on March 30, 2015, that Ms. Springsteen-Abbott should be barred from the securities industry because the Panel concluded that she allegedly misallocated approximately $208,000 of expenses involving certain Funds over the course of three years.  As such, management had already at that time reallocated back approximately $151,225 of the $208,000 (in allegedly misallocated expenses) to the affected funds, which was fully documented, as good faith payments for the benefit of those Income Funds.

  

The decision of the Hearing Panel was stayed when it was appealed to FINRA’s National Adjudicatory Council (the “NAC”) pursuant to FINRA Rule 9311.  The NAC issued a decision that upheld the lower panel’s ruling and the bar took effect on August 23, 2016.  Ms. Springsteen-Abbott appealed the NAC’s decision to the U.S. Securities and Exchange Commission (the “SEC”).  On March 31, 2017, the SEC criticized that decision as so flawed that the SEC could not even review it, and remanded the matter back to FINRA for further consideration consistent with the SEC’s remand, but did not suggest any view as to a particular outcome.

 

On July 21, 2017, FINRA reduced the list of 1,840 items totaling $208,000 to a remaining list of 87 items totaling $36,226 (which includes approximately $30,000 of continuing education expenses for personnel providing services to the Funds), and reduced the proposed fine from $100,000 to $50,000, but reaffirmed its position on the bar from the securities industry.  Respondents promptly appealed FINRA’s revised ruling to the SEC.  All the requested or allowed briefs have been filed with the SEC.  Despite offering no additional evidence or legal reasoning from when SEC originally remanded this matter (for FINRA’s opinion being an unreviewably flawed opinion), the SEC upheld FINRA’s new order on February 7, 2020 as to the bar; however, FINRA’s fine was voided.  Ms. Springsteen-Abbott has filed a Petition for Review in the United States Court of Appeals for the District of Columbia Circuit to review a final order entered against her by the U.S. Securities and Exchange Commission.  On February 26, 2021, the United States Court of Appeals for the District of Columbia Circuit, made their ruling.  They dismissed in part and denied in part Ms. Springsteen-Abbott’s petition. This was regardless of CCC’s good faith reimbursements made many years ago of the questioned expense items of $208,000 (due to improper documentation), initially claimed misallocations by FINRA, even prior to FINRA’s reducing its final claim to $36,226. 

 

Prior to the original appeal to the SEC, Ms. Springsteen-Abbott discovered CCC’s required documentation of these items for FINRA review, which FINRA refused to consider, despite such efforts the District Court upheld the bar, despite admittingly not addressing her “due process” rights, for legal administrative procedural reasons.  However, given the SEC’s prior removal of FINRA’s fine and the District Court upholding that removal, the General Partner anticipates that this ruling will not result in any material financial impact to the Funds.

 

 
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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, 2021 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.

 

 
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INDUSTRY OVERVIEW

 

We invest in various types of domestic information technology equipment leases located solely within the United States. Our investment objective is to acquire primarily high technology equipment. We believe that dealing in high technology equipment is particularly advantageous due to a robust aftermarket. Information technology has developed rapidly in recent years and is expected to continue to do so. Technological advances have permitted reductions in the cost of computer processing capacity, speed, and utility. In the future, the rate and nature of equipment development may cause equipment to become obsolete more rapidly. In an effort to mitigate this risk our portfolio manager attempts to diversify our fund through the acquisition of different types of equipment, staggered lease maturities, various lessees, and businesses located throughout the U.S., and industries served.

  

We also acquire high technology medical, telecommunications and inventory management equipment. Our General Partner seeks to maintain an appropriate balance and diversity in the types of equipment acquired. The market for high technology medical equipment is growing each year. Generally, this type of equipment has a longer useful life. This allows for increased re-marketability, if it is returned before its economic or announcement cycle is depleted.

 

The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross section of the $900 billion equipment finance sector, showed their overall new business volume for March was $10.6 billion, up 14 percent year-over-year from new business volume in March 2021. Volume was up 49 percent month-to-month from $7.1 billion in February. Year-to-date, cumulative new business volume was up 5 percent compared to 2021.

 

Receivables over 30 days were 1.5 percent, down from 1.7 percent the previous month and down from 1.9 percent in the same period in 2021. Charge-offs were 0.10 percent, up from 0.09 percent the previous month and down from 0.43 percent in the year-earlier period.

 

Credit approvals totaled 78.3 percent, up from 78.2 percent in February. Total headcount for equipment finance companies was flat year-over-year.

 

Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in April is 56.1, a decrease from 58.2 in March.

 

ELFA President and CEO Ralph Petta said, “MLFI-25 participants end the first quarter of the year very favorably: new business volume continues to surge and portfolios are performing extremely well. This, while inflationary pressures, the war in Ukraine and supply chain disruptions continue unabated. With the Fed increasing short-term borrowing rates now and into the foreseeable future, business owners—both large and small—are choosing to lease and finance their critical equipment needs.”

 

Mike Jones, President, CIT Business Capital, a division of First Citizens Bank, said, “Strong performance in the ELFA survey—for both month-over-month and year-over-year results—highlights the continued strength of the economy and the appetite of the business community for equipment financing to drive their growth. These positive results come even as ongoing supply chain issues delay some deliveries. Overall, the results are very encouraging for the balance of 2022, as end-customers show their determination to compete by investing in the latest equipment to power their businesses forward.”

 

Our business is directly impacted by factors such as economic, political, and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond our control. Given these circumstances, we believe companies overall, will continue to increasingly turn to leasing, as a financing solution. It is our belief that companies lease business-essential equipment because leasing can provide many benefits to a company. The number one benefit of leasing that we see is that there is no large outlay of cash required. Therefore, companies can preserve their working capital, lease equipment, which is an expense item, have the flexibility to upgrade the equipment when needed, and have no risk of obsolescence. Because we expect leasing to remain an attractive financing solution for American businesses during the next 12 months, we feel that our ability to increase our portfolio size and leasing revenues during that period will remain strong.

 

 
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We, at Commonwealth, are currently operating business as usual (with our employees working remotely).  We may see a slowdown on new equipment acquisition decisions from Corporate Lessees until the crisis is resolved and businesses can resume their normal operation.  We have no way of knowing what this period of time will be.  We will keep our investors informed of subsequent events.  For information relating to COVID-19 and the overall effects, as expressed by Ralph Petta, President of ELFA (The Equipment Leasing & Finance Association), please refer to elfaonline.org.

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that our critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.  See Note 2 to our condensed financial statements included herein for a discussion related to recent accounting pronouncements.

 

LEASE INCOME RECEIVABLE

 

Lease income receivable includes current lease income receivable net of allowances for uncollectible amounts, if any. The Partnership monitors lease income receivable to ensure timely and accurate payment by lessees. The Partnership’s Lease Relations department is responsible for monitoring lease income receivable and, as necessary, resolving outstanding invoices.

 

The Partnership reviews a customer’s credit history before extending credit. When the analysis indicates that the probability of full collection is unlikely, the Partnership may establish an allowance for uncollectible lease income receivable based upon the credit risk of specific customers, historical trends and other information. The Partnership writes off its lease income receivable when it determines that it is uncollectible and all economically sensible means of recovery have been exhausted.

 

REVENUE RECOGNITION

 

The Partnership is principally engaged in 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, 2022, the Partnership’s lease portfolio consisted of operating leases. For operating leases, lease revenue is recognized on a straight-line basis in accordance with the terms of the lease agreement.  Finance lease interest income is recorded over the term of the lease using the effective interest method.

 

 
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Upon the end of the lease term, if the lessee has not met the return conditions as set out in the lease, the Partnership is entitled in certain cases to additional compensation from the lessee. The Partnership’s accounting policy for recording such payments is to treat them as revenue.

 

Gains or losses from sales of leased and off-lease equipment are recorded on a net basis in the Partnership’s Statement of Operations.  Gains from the termination of leases are recognized when the lease is modified and terminated concurrently.  Our leases do not contain any step-rent provisions or escalation clauses nor are lease revenues adjusted based on any index.

 

Partnership’s accounting policy for sales and property taxes collected from the lessees are recorded in the current period as gross revenues and expenses.

 

LONG-LIVED ASSETS

 

Depreciation on equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of two to five years. Once an asset comes off lease or is re-leased, the Partnership reassesses the useful life of an asset.

 

The Partnership evaluates its long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable. The Partnership determines whether impairment exists by estimating the undiscounted cash flows to be generated by each asset. If the estimated undiscounted cash flows are less than the carrying value of the asset then impairment exists. The amount of the impairment is determined based on the difference between the carrying value and the fair value. Fair value is determined based on estimated discounted cash flows to be generated by the asset, third party appraisals or comparable sales of similar assets, as applicable, based on asset type.  Residual values are determined by management and are calculated using information from both internal and external sources, as well as other economic indicators.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Sources and Uses of Cash

 

For the three months ended March 31, 2022, the Partnership did not have a primary source of cash.  This compares to the three months ended March 31, 2021, where our primary source of cash was net proceeds from the sale of equipment of approximately $2,000.

 

Our primary use of cash for the three months ended March 31, 2022 and 2021 was cash used in operating activities of approximately $29,000 and $11,000, respectively.  For the three months ended March 31, 2022 and March 31, 2021, the Partnership had no financing activities. 

 

Cash was used in operating activities for the three months ended March 31, 2022 of approximately $29,000 which includes net loss of approximately $16,000 and depreciation expenses of approximately $18,000. Other non-cash activities included in the determination of net loss include direct payments of lease income by lessees to banks of approximately $1,000.  For the three months ended March 31, 2021, cash was used in operating activities of approximately $11,000 which includes net loss of approximately $53,000, depreciation expenses of approximately $34,000 and loss on sale of computer equipment of approximately $5,000. Other non-cash activities included in the determination of net loss include direct payments of lease income by lessees to banks of approximately $8,000. 

 

We consider cash equivalents to be highly liquid investments with the original maturity dates of 90 days or less.

 

 
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At March 31, 2022, cash and cash equivalents were held in one account maintained at one financial institution with an aggregate balance of approximately $2,000. Bank accounts are federally insured up to $250,000 by the FDIC. At March 31, 2022, the total cash bank balance was as follows:

 

At March 31, 2022

 

Balance

 

Total bank balance

 

$2,000

 

FDIC insured

 

 

(2,000)

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 2022 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, 2022, we had future minimum rentals on operating leases of approximately $21,000 for the balance of the year ending March 31, 2022 and approximately $43,000 thereafter

 

As of March 31, 2022, our non-recourse debt was approximately $14,000, with interest rate of 5.31%, and will be payable through November 2024.

 

The Partnership was originally scheduled to end its operational phase on February 4, 2017.  During the year ended December 31, 2015, the operational phase was officially extended to December 31, 2020 through an investor proxy vote.  The Partnership is expected to terminate on December 31, 2022.  As such, it is the Partnership’s intention to continue to report its financial statements on a going concern basis until a formal plan of liquidation is approved by the General Partner.

 

As the Partnership and the other programs managed by the General Partner increase their overall portfolio size, opportunities for shared participation are expected to continue. Sharing in the acquisition of a lease portfolio gives the fund an opportunity to acquire additional assets and revenue streams, while allowing the fund to remain diversified and reducing its overall risk with respect to one portfolio.

 

For the three months ended March 31, 2022, the Partnership incurred negative cash flow.  At March 31, 2022, the Partnership has a working capital deficit of approximately $381,000. 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, 2022.  The General Partner will continue to reassess the funding of limited partner distributions throughout 2022 and will continue to waive certain fees if the General Partner determines it is in the best interest of the Partnership to do so.  If available cash flow or net disposition proceeds are insufficient to cover the Partnership expenses and liabilities on a short and long-term basis, the Partnership may attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within its permissible limits.

 

The General Partner will continue to reassess the funding of limited partner distributions throughout 2021 and will continue to waive certain fees. If available cash flow or net disposition proceeds are insufficient to cover the Partnership expenses and liabilities on a short and long-term basis, the Partnership may attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within its permissible limits.  Additionally, the Partnership will seek to enhance portfolio returns and maximize cash flow through the use of leveraged lease transactions: the acquisition of lease equipment through debt financing.  This strategy allows the General Partner to acquire additional revenue generating leases without the use of investor funds thus maximizing overall return. 

 

 
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RESULTS OF OPERATIONS

 

Three months ended March 31, 2022 compared to three months ended March 31, 2021

 

Lease Revenue

 

Our lease revenue decreased to approximately $46,000 for the three months ended March 31, 2022, from approximately $61,000 for the three months ended March 31, 2021. This revenue decrease is primarily due to a decrease in active lease agreements as described below.

 

The Partnership had 15 and 28 active operating leases during the three months ended March 31, 2022 and 2021, respectively. The decrease in number of active leases is consistent with the overall decrease in lease revenue. Management expects to add new leases to our portfolio throughout the remainder of 2022, funded primarily through debt financing.  As the operational phase of the Partnership has been extended to December 31, 2021, Management will continue to seek lease opportunities to enhance portfolio returns and cash flow.

 

Sale of Equipment

 

For the three months ended March 31, 2022, the Partnership did not sell any equipment.  For the three months ended March 31, 2021, the Partnership sold equipment with a net book value of approximately $7,000 for a net loss of approximately $5,000.

 

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 $44,000 for the three months ended March 31, 2022, from approximately $75,000 for the three months ended March 31, 2021.  This decrease is primarily attributable to a decrease in accounting fees of approximately $38,000, partially offset by an increase in temporary services expenses of approximately $10,000.

 

Equipment Management Fees

 

We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases and 2% of the gross lease revenue attributable to equipment that is subject to finance leases.  For the three months ended March 31, 2022 and 2021, the equipment management fee was waived.

 

Depreciation and Amortization Expenses

 

Depreciation expenses consist of depreciation on equipment.  This expense decreased to approximately $18,000 for the three months ended March 31, 2022, from $34,000 for the three months ended March 31, 2021.  This decrease was due to the higher frequency in the termination of leases and equipment being fully depreciated as compared to the acquisition of new leases for the three months ended March 31, 2022.

 

Net Loss

 

For the three months ended March 31, 2022, we recognized revenue of approximately $47,000, expenses of approximately $63,000, resulting in net loss of approximately $16,000.  For the three months ended March 31, 2021, we recognized revenue of approximately $63,000, expenses of approximately $116,000, resulting in net loss of approximately $53,000.  This change to a net loss is due to the changes in revenue and expenses described above.

 

 
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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

N/A

 

Item 4. Controls and Procedures

 

Our management, under the supervision and with the participation of the General Partner’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures related to our reporting and disclosure obligations as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the General Partner’s Chief Executive Officer and Principal Financial Officer have concluded that, as of March 31, 2022, 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 fiscal quarter ended March 31, 2022 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

 

 
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Part II: OTHER INFORMATION

 

Item 1. Commitments and Contingencies

 

N/A

 

Item 2. Legal Proceedings

 

FINRA 

 

On May 3, 2013, the FINRA Department of Enforcement filed a complaint naming Commonwealth Capital Securities Corp. (“CCSC”) and the owner of the firm, Kimberly Springsteen-Abbott, as respondents; however, on October 22, 2013, FINRA filed an amended complaint that dropped the allegations against CCSC and reduced the scope of the allegations against Ms. Springsteen-Abbott.  The sole remaining charge was that Ms. Springsteen-Abbott had approved the misallocation of some expenses to certain Funds.  Management believes that the expenses at issue include amounts that were proper and that were properly allocated to Funds, and also identified a smaller number of expenses that had been allocated in error, but were adjusted and repaid to the affected Funds when they were identified in 2012.  During the period in question, Commonwealth Capital Corp. (“CCC”) and Ms. Springsteen-Abbott provided important financial support to the Funds, voluntarily absorbed expenses and voluntarily waived fees in amounts aggregating in excess of any questioned allocations.  A Hearing Panel ruled on March 30, 2015, that Ms. Springsteen-Abbott should be barred from the securities industry because the Panel concluded that she allegedly misallocated approximately $208,000 of expenses involving certain Funds over the course of three years.  As such, management had already at that time reallocated back approximately $151,225 of the $208,000 (in allegedly misallocated expenses) to the affected funds, which was fully documented, as good faith payments for the benefit of those Income Funds.

 

The decision of the Hearing Panel was stayed when it was appealed to FINRA’s National Adjudicatory Council (the “NAC”) pursuant to FINRA Rule 9311.  The NAC issued a decision that upheld the lower panel’s ruling and the bar took effect on August 23, 2016.  Ms. Springsteen-Abbott appealed the NAC’s decision to the U.S. Securities and Exchange Commission (the “SEC”).  On March 31, 2017, the SEC criticized that decision as so flawed that the SEC could not even review it, and remanded the matter back to FINRA for further consideration consistent with the SEC’s remand, but did not suggest any view as to a particular outcome.

 

On July 21, 2017, FINRA reduced the list of 1,840 items totaling $208,000 to a remaining list of 87 items totaling $36,226 (which includes approximately $30,000 of continuing education expenses for personnel providing services to the Funds), and reduced the proposed fine from $100,000 to $50,000, but reaffirmed its position on the bar from the securities industry.  Respondents promptly appealed FINRA’s revised ruling to the SEC.  All the requested or allowed briefs have been filed with the SEC.  Despite offering no additional evidence or legal reasoning from when SEC originally remanded this matter (for FINRA’s opinion being an unreviewably flawed opinion), the SEC upheld FINRA’s new order on February 7, 2020 as to the bar; however, FINRA’s fine was voided.  Ms. Springsteen-Abbott has filed a Petition for Review in the United States Court of Appeals for the District of Columbia Circuit to review a final order entered against her by the U.S. Securities and Exchange Commission.  On February 26, 2021, the United States Court of Appeals for the District of Columbia Circuit, made their ruling.  They dismissed in part and denied in part Ms. Springsteen-Abbott’s petition. This was regardless of CCC’s good faith reimbursements made many years ago of the questioned expense items of $208,000 (due to improper documentation), initially claimed misallocations by FINRA, even prior to FINRA’s reducing its final claim to $36,226. 

 

 
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Prior to the original appeal to the SEC, Ms. Springsteen-Abbott discovered CCC’s required documentation of these items for FINRA review, which FINRA refused to consider, despite such efforts the District Court upheld the bar, despite admittingly not addressing her “due process” rights, for legal administrative procedural reasons.  However, given the SEC’s prior removal of FINRA’s fine and the District Court upholding that removal, the General Partner anticipates that this ruling will not result in any material financial impact to the Funds.

 

Item 2A. Risk Factors

 

COVID-19 Pandemic

 

The amount of revenue recognized and the pattern of revenue recognition may be impacted by COVID-19. In December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, and has spread globally, and on March 12, 2020, the World Health Organization (“WHO”) declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, have imposed unprecedented restrictions on travel, quarantines, and other public health safety measures. Such government-imposed precautionary measures may have been relaxed in certain countries or states, but there is no assurance that more strict measures will be put in place again due to a resurgence in COVID-19 cases. In addition, the COVID-19 virus and other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact the Company’s business, financial condition, and results of operations. 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 Partnership 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 Partnership 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 Partnership 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 2022 and beyond. 

 

 
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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

 

31.1

THE RULE 15d-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER

31.2

THE RULE 15d-14(a) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

32.1

SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

32.2

SECTION 1350 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

 

 
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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 18, 2022

By:

/s/ Kimberly A. Springsteen-Abbott

 

Date

Kimberly A. Springsteen-Abbott

 

Chief Executive Officer And Principal Financial Officer

Commonwealth Income & Growth Fund, Inc.

 

 

 
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