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CIGF6 Commonwealth Income & Growth Fund VI

Filed: 16 Nov 20, 4:18pm

 
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 SEPTEMBER 30, 2020 or
 
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 333-131736
 
COMMONWEALTH INCOME & GROWTH FUND VI
(Exact name of registrant as specified in its charter)
 
Pennsylvania    20-4115433
(State or other jurisdiction of incorporation or organization)
  (I.R.S. Employer Identification Number)
 
 
17755 US Highway 19 North
Suite 400
Clearwater, FL 33764
(Address, including zip code, of principal executive offices)
 
(877) 654-1500
 (Registrant’s telephone number including area code)
 
Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (ii) has been subject to such filing requirements for the past 90 days: YES NO
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).YES NO
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer, “large accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company.)
Emerging growth company
  
Indicate by check mark whether the registrant is an emerging growth company (as defined in Rule 12b-2 of the Exchange Act). YES NO
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO
 

 
1
 
  FORM 10-Q
SEPTEMBER 30, 2020
 
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 19
Item 4.Controls and Procedures 19
PART II
Item 1.Legal Proceedings 20
Item 1A.Risk Factors 21
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3.Defaults Upon Senior Securities 23
Item 4.Mine Safety Disclosures 23
Item 5.Other Information 23
Item 6.Exhibits 23
 
  
 
2
 
 Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
Commonwealth Income & Growth Fund VI
Condensed Balance Sheets
 
 
 
 
 
 
 
 
 
 September 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
 
 
(unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 $179,311 
 $3,624 
Lease income receivable, net of reserve of approximately $33,000 and $63,000 at September 30, 2020 and December 31, 2019, respectively
  23,747 
  108,646 
Accounts receivable, Commonwealth Capital Corp., net of accounts payable of approximately $5,000 and $50,000 at September 30, 2020 and December 31, 2019, respectively
  46,246 
  74,026 
Other receivables, net of reserve of approximately $15,000 and $12,000 at September 30, 2020 and December 31, 2019, respectively
  25,178 
  9,255 
Prepaid expenses
  3,780 
  3,042 
 
  278,262 
  198,593 
 
    
    
Equipment, at cost
  3,536,865 
  4,825,207 
Accumulated depreciation
  (3,352,875)
  (4,381,343)
 
  183,990 
  443,864 
 
    
    
Equipment acquisition costs and deferred expenses, net of accumulated amortization of approximately $15,000 and $32,000 at September 30, 2020 and December 31, 2019, respectively
  5,271 
  10,328 
 
    
    
Total Assets
 $467,523 
 $652,785 
 
    
    
LIABILITIES AND PARTNERS' CAPITAL
    
    
LIABILITIES
    
    
Accounts payable
 $77,693 
 $133,865 
Accounts payable, CIGF, Inc., net
  111,943 
  137,577 
Other accrued expenses
  6 
  5,059 
Unearned lease income
  20,638 
  41,988 
Notes payable
  70,324 
  160,453 
Total Liabilities
  280,604 
  478,942 
 
    
    
COMMITMENTS AND CONTINGENCIES
    
    
PARTNERS' CAPITAL
    
    
General Partner
  1,000 
  1,000 
Limited Partners
  185,919 
  172,843 
Total Partners' Capital
  186,919 
  173,843 
 
    
    
Total Liabilities and Partners' Capital
 $467,523 
 $652,785 
 
    
    
see accompanying notes to condensed financial statements
 
 
3
 
  
Commonwealth Income & Growth Fund VI
Condensed Statements of Operations
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
Lease
 $121,083 
 $185,054 
 $462,271 
 $557,810 
Interest and other
  3 
  13 
  17,790 
  2,567 
Sales and property taxes
  2,711 
  6,394 
  18,173 
  21,623 
Gain on sale of equipment
  19,696 
  - 
  66,390 
  125 
Total revenue and gain on sale of equipment
  143,493 
  191,461 
  564,624 
  582,125 
 
    
    
    
    
Expenses
    
    
    
    
Operating, excluding depreciation
  46,980 
  25,984 
  244,579 
  202,589 
Equipment management fee, General Partner
  6,054 
  9,253 
  20,021 
  27,891 
Interest
  1,183 
  4,477 
  4,778 
  17,192 
Depreciation
  51,218 
  110,096 
  238,336 
  377,095 
Amortization of equipment acquisition costs
    
    
    
    
and deferred expenses
  1,581 
  3,414 
  6,628 
  16,352 
Sales and property taxes
  2,711 
  6,394 
  18,173 
  21,623 
Bad debt expense
  2,848 
  178 
  11,175 
  178 
Total expenses
  112,575 
  159,796 
  543,690 
  662,920 
 
    
    
    
    
Net Income (loss)
 $30,918 
 $31,665 
 $20,934 
 $(80,795)
 
    
    
    
    
Net income (loss) allocated to Limited Partners
 $30,918 
 $31,665 
 $20,934 
 $(80,795)
 
    
    
    
    
Net income (loss) per equivalent Limited Partnership unit
 $0.02 
 $0.02 
 $0.01 
 $(0.05)
 
    
    
    
    
Weighted average number of equivalent Limited
    
    
    
    
Partnership units outstanding during the period
  1,741,755 
  1,744,330 
  1,742,562 
  1,744,330 
 
    
    
    
    
see accompanying notes to condensed financial statements
 
 
4
 
 
 
Commonwealth Income & Growth Fund VI
 
 
Condensed Statement of Partners' Capital
 
 
For the three, six and nine months ended September 30, 2020 and 2019
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General
 
 
Limited
 
 
 
 
 
 
 
 
 
 
 
 
Partner
 
 
Partner
 
 
General
 
 
Limited
 
 
 
 
 
 
Units
 
 
Units
 
 
Partner
 
 
Partners
 
 
Total
 
Balance, January 1, 2020
  50 
  1,744,254 
 $1,000 
 $172,843 
 $173,843 
Net loss
  - 
  - 
  - 
  (26,630)
  (26,630)
Redemptions
  - 
  (2,500)
  - 
  (7,858)
  (7,858)
Balance, March 31, 2020
  50 
  1,741,754 
 $1,000 
 $138,355 
 $139,355 
Net income
  - 
  - 
  - 
  16,646 
  16,646 
Balance, June 30, 2020
  50 
  1,741,754 
 $1,000 
 $155,001 
 $156,001 
Net income
  - 
  - 
  - 
  30,918 
  30,918 
Balance, September 30, 2020
  50 
  1,741,754 
 $1,000 
 $185,919 
 $186,919 
 
    
    
    
    
    
 
    
    
    
    
    
 
 
General
 
 
Limited
 
 
 
 
 
 
 
 
 
 
 
 
Partner
 
 
Partner
 
 
General
 
 
Limited
 
 
 
 
 
 
Units
 
 
Units
 
 
Partner
 
 
Partners
 
 
Total
 
Balance, January 1, 2019
  50 
  1,744,254 
 $1,000 
 $300,574 
 $301,574 
Net loss
  - 
  - 
  - 
  (71,225)
  (71,225)
Balance, March 31, 2019
  50 
  1,744,254 
 $1,000 
 $229,349 
 $230,349 
Net loss
  - 
  - 
  - 
  (41,235)
  (41,235)
Balance, June 30, 2019
  50 
  1,744,254 
 $1,000 
 $188,114 
 $189,114 
Net income
  - 
  - 
  - 
  31,665 
  31,665 
Balance, September 30, 2019
  50 
  1,744,254 
 $1,000 
 $219,779 
 $220,779 
 
    
    
    
    
    
 
see accompanying notes to condensed financial statements
 
 
5
 
   
Commonwealth Income & Growth Fund VI
Condensed Statements of Cash Flow
(unaudited)
 
 
 
 
 
 
 
 
 
Nine months ended
 
 
 
September 30,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 $97,187 
 $48,843 
 
    
    
Cash flows from investing activities
    
    
Capital expenditures
  (39,250)
  - 
Equipment acquisition fees paid to General Partner
  (1,570)
  - 
Net proceeds from the sale of equipment
  127,178 
  125 
 
    
  - 
Net cash provided by investing activities
  86,358 
  125 
 
    
    
Cash flows from financing activities
    
    
Redemptions
  (7,858)
  - 
 
    
    
Net cash used in financing activities
  (7,858)
  - 
 
    
    
Net increase in cash and cash equivalents
  175,687 
  48,968 
 
    
    
Cash and cash equivalents, beginning of the period
  3,624 
  5,863 
 
    
    
Cash and cash equivalents, end of the period
 $179,311 
 $54,831 
 
    
    
see accompanying notes to condensed financial statements
 
 
6
 
 
NOTES TO CONDENSED FINANCIAL STATEMENTS
 
1. Business
 
Commonwealth Income & Growth Fund VI (“CIGF6” or the “Partnership” or the “Fund”) is a limited partnership organized in the Commonwealth of Pennsylvania on January 6, 2006. The Partnership offered for sale up to 2,500,000 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 May 10, 2007. The offering terminated on March 6, 2009 with 1,810,311 units sold for a total of approximately $36,000,000 in limited partner contributions.
 
The Partnership used the proceeds of the offering to acquire, own and lease various types of information technology equipment and other similar capital equipment, which will be 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 General Partner is Commonwealth Income & Growth Fund, Inc. (the “General Partner”), a Pennsylvania corporation which is an indirect wholly owned subsidiary of CCC. CCC is a member of the Institute for Portfolio Alternatives (“IPA”) and the Equipment Leasing and Finance Association (“ELFA”). Approximately ten years after the commencement of operations, the Partnership intends 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 December 31, 2018. During the year ended December 31, 2018, the operational phase was officially extended to December 31, 2021 through an investor proxy vote. The Partnership is expected to terminate on December 31, 2023.
 
Liquidity
 
The General Partner elected to forgo distributions and allocations of net income owed to it, and suspended limited partner distributions. 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.
 
2. Summary of Significant Accounting Policies
 
Basis of Presentation
 
The financial information presented as of any date other than December 31, 2019 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, 2019 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 nine months ended September 30, 2020 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2020.
 
Adjustment to Prior Financial Statements
 
The Partnership has determined that there had been an immaterial error in its accounting for Other LP expenses and accumulated depreciation in its financial statements of the Commonwealth Income & Growth Fund VI for the year ended December 31, 2019 and the quarter ended March 31, 2020. The Partnership determined that Other LP expenses should have been presented in the Statement of Operations as an increase of expense under Operating expenses, excluding depreciation and amortization. An adjustment was made to correct the error in prior period ending December 31, 2019 by reporting as an increase of expense for Other LP expenses of $9,500, and an increase in Accounts Payable, CIGF, Inc. by the same amount. An adjustment was also made to correct the error in the prior period ending March 31, 2020 by reporting an increase in Accounts Payable, CIGF, Inc. of $9,500 and the cumulative decreasing effect on the Partners’ Capital by the same amount.
  
7
 
 
Disclosure of Fair Value Financial Instruments
 
Estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, judgment was necessary to interpret market data and develop estimated fair value. Cash and cash equivalents, receivables, accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of 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 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. 
 
Cash and cash equivalents
 
At September 30, 2020, cash and cash equivalents were held in one account maintained at one financial institution with an aggregate balance of approximately $182,000. Bank accounts are federally insured up to $250,000 by the FDIC. At September 30, 2020, the total cash balance was as follows:
 
At September 30, 2020
 
Balance
 
Total bank balance
 $182,000 
FDIC insured
  (182,000)
Uninsured amount
 $- 
 
The Partnership believes it mitigates the risk of holding uninsured deposits by only depositing funds with major financial institutions. The Partnership has not experienced any losses in our accounts, and believes it is not exposed to any significant credit risk. The amounts in such accounts will fluctuate throughout 2020 due to many factors, including cash receipts, equipment acquisitions, interest rates and distributions to limited partners.
 
Recent Accounting Pronouncements Not Yet Adopted
 
FASB issued 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, Accounting Standards Update No. 2020-02, Financial Instruments – Credit Losses (Topic 326) . The 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 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 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.
 
 
8
 
 
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.
 
3. Information Technology, Medical Technology, Telecommunications Technology, Inventory Management and Other Business-Essential Capital Equipment (“Equipment”)
 
The Partnership is the lessor of equipment under 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 from the sale of equipment resulting from early buyouts are recognized when the lease is modified and terminated concurrently. Gain from sale of equipment included in revenue for the nine months ended September 30, 2020 and 2019, was approximately $66,000 and $0, 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 September 30, 2020 was approximately $2,503,000 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 September 30, 2020 was approximately $8,860,000. The Partnership’s share of the outstanding debt associated with this equipment at September 30, 2020 was approximately $30,000 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 September 30, 2020 was approximately $343,000.
The Partnership’s share of the cost of the equipment in which it participates with other partnerships at December 31, 2019 was approximately $2,539,000 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 $9,007,000. The Partnership’s share of the outstanding debt associated with this equipment at December 31, 2019 was approximately $88,000 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 $873,000.
 
The following is a schedule of approximate future minimum rentals on non-cancellable operating leases:
 
 Periods Ended December 31,
 
Amount
 
Three months ended December 31, 2020
 $75,000 
Year Ended December 31, 2021
  41,000 
Year Ended December 31, 2022
  16,000 
Year Ended December 31, 2023
  11,500 
Year Ended December 31, 2024
  6,000 
 
 $149,500 
 
The Partnership is scheduled to terminate on December 31, 2023. CCC will assume the rights to the remaining active leases and their related remaining revenue stream through their termination.
 
9
 
 
4. Related Party Transactions
 
 Receivables/Payables
 
As of 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 $128,000 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.
 
Nine months ended September 30,
 
2020
 
 
2019
 
 
 
 
 
 
 
 
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 nine months ended September 30, 2020 and 2019, the Partnership was charged approximately $82,000 and $73,000 in Other LP expense, respectively.
 $234,000 
 $183,000 
 
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.
 $2,000 
 $- 
 
Equipment management fee
    
    
The general partner is entitled to be paid a monthly fee equal to the lesser of (a) the fees which would be charged by an independent third party in the same geographic market for similar services and equipment or (b) the sum of (i) two percent of gross lease revenues attributable to equipment subject to full payout net leases which contain net lease provisions and (ii) five percent of the gross lease revenues attributable to equipment subject to operating leases. Our general partner, based on its experience in the equipment leasing industry and current dealings with others in the industry, will use its business judgment to determine if a given fee is competitive, reasonable and customary. The amount of the fee will depend upon the amount of equipment we manage, which in turn will depend upon the amount we raise in this offering. Reductions in market rates for similar services would also reduce the amount of this fee we will receive.
 $20,000 
 $28,000 
 
Equipment liquidation fee
    
    
Also referred to as a "resale fee." With respect to each item of equipment sold by the general partner, we will pay a fee equal to the lesser of (i) 50% of the competitive equipment sale commission or (ii) three percent of the sales price of the equipment. The payment of this fee is subordinated to the receipt by the limited partners of (i) a return of their 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. Our general partner, based on its experience in the equipment leasing industry and current dealings with others in the industry, uses its business judgment to determine if a given sales commission is competitive, reasonable and customary. Such fee will be reduced to the extent any liquidation or resale fees are paid to unaffiliated parties. The amount of such fees will depend upon the sale price of equipment sold. Sale prices will vary depending upon the type, age and condition of equipment sold. The shorter the terms of our leases, the more often we may sell equipment, which will increase liquidation fees we receive.
 $5,000 
 $- 
 
 
10
 
 
5. Notes Payable
 
Notes payable consisted of the following approximate amounts:
 
 
 
September 30, 2020
 
 
December 31, 2019
 
Installment note payable to bank; interest rate of 5.46%, due in monthly installments of $4,364, including interest, with final payment in January 2020
 $- 
  4,000 
Installment note payable to bank; interest rate of 5.93%, due in monthly installments of $1,425, including interest, with final payment in February 2020
  - 
  3,000 
Installment note payable to bank; interest rate of 5.56%, due in monthly installments of $2,925, including interest, with final payment in June 2020
  - 
  17,000 
Installment note payable to bank; interest rate of 4.87%, due in quarterly installments of $4,785, including interest, with final payment in October 2020
  4,500 
  18,000 
Installment note payable to bank; interest rate of 5.31%, due in quarterly installments of $6,157, including interest, with final payment in January 2021
  12,000 
  30,000 
Installment note payable to bank; interest rate of 6.33%, due in quarterly installments of $5,805, including interest, with final payment in January 2021
  11,500 
  28,000 
Installment note payable to bank; interest rate of 6.66%, due in quarterly installments of $2,774, including interest, with final payment in January 2021
  5,500 
  13,000 
Installment note payable to bank; interest rate of 5.33%, due in monthly installments of $582, including interest, with final payment in August 2021
  6,000 
  11,000 
Installment note payable to bank; interest rate of 4.14%, due in monthly installments of $705, including interest, with final payment in August 2024
  30,500 
  36,000 
 
 $70,000 
 $160,000 
 
The notes are secured by specific equipment with a carrying value of approximately $110,000 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 September 30, 2020 are as follows:
 
 
Amount
 
Three months ended December 31, 2020
 $22,000 
Year ended December 31, 2021
  26,000 
Year ended December 31, 2022
  8,000 
Year ended December 31, 2023
  8,000 
Year ended December 31, 2024
  6,000 
 
 $70,000 
 
The Partnership is scheduled to terminate on December 31, 2023. CCC will assume the obligation and rights to the remaining notes payable and its related secured equipment as described above through their termination.
 
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.
 
 
11
 
 
Other noncash activities included in the determination of net loss are as follows:
 
Nine months ended September 30,
 
2020
 
 
2019
 
Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank
 $90,000 
 $305,000 
 
During the nine months ended September 30, 2020 and 2019, the Partnership wrote-off fully amortized acquisition and finance fees of approximately $24,000 and $1,000, respectively.
 
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.
 
Medshare
 
In January 2015, CCC, on behalf of the Funds, entered into a Purchase Agreement (“Purchase Agreement”) for the sale of the equipment to Medshare Technologies (“Medshare”) for approximately $3,400,000.  The Partnership’s share of the sale proceeds was approximately $77,000.  As of November 16, 2020, the Partnership had received approximately $62,000 of the approximate $77,000 sale proceeds and has recorded a reserve of $15,000 against the outstanding receivables.  On April 3, 2015 Medshare was obligated to make payment in full and failed to do so.  As a result, Medshare defaulted on its purchase agreement with CCC and was issued a demand letter for full payment of the equipment.  On June 25, 2015, Medshare filed a lawsuit in Texas state court for breach of contract (“State Suit”).  On June 26, 2015, Commonwealth filed a lawsuit in the Northern District of Texas against Medshare seeking payment in full and/or return of the Equipment and damages. 
 
 
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In July 2016, CCC, on behalf of the Funds, entered into a $1,400,000 binding Settlement Agreement (“Settlement Agreement”) with Medshare and its principal owner, Chris Cleary (collectively referred to as “Defendants”), who are held jointly and severally liable for the entire settlement.  On August 2, 2016, the Defendants made payment to CCC of an initial $200,000 to be followed by 24 structured monthly payments of approximately $50,000 per month to begin no later than September 15, 2016.  The Partnership’s share of the Settlement Agreement is approximately $23,000 and is to be applied against the net Medshare receivable of approximately $18,000 as of the settlement date. The remaining $5,000 will be applied against the $15,000 reserve and recorded as a bad debt recovery.  As of November 16, 2020, the Partnership received approximately $9,000 of the approximate $23,000 settlement agreement which was applied against the net Medshare receivable of approximately $18,000 as of the settlement date.  As Defendant defaulted on settlement agreement, CCC sought and obtained consent judgment from U.S. District Court for Northern District of Texas, Dallas Division on July 27, 2017 in the amount of $1.5 million, less $450,000 previously paid plus $6,757 in attorney fees, both the Defendant and Cleary being jointly and severally liable for the judgment amount.  The court also vacated the September 21, 2016 settlement dismissal. 
 
On July 27, 2017 Defendant filed Chapter 11 in Northern District of Texas Dallas Division.  On July 26, 2017 Legacy Texas Bank, a secured creditor of the Defendant filed for a TRO in the U.S. District Court of the Northern District of Texas, Dallas Division.  Included with the TRO filing was a request for appointment of trustee for operation of Defendant, which was granted and the case converted to Chapter 7. On December 18, 2018 the Bankruptcy Court entered final order and issued its last payment to CCC in March 2019 of approximately $43,000, of which the Partnership’s share was approximately $700.  The Medshare Bankruptcy matter is now closed. Although the trustee’s final distribution to Commonwealth did not fully satisfy the judgment, recovery may still be pursued directly against Cleary.
 
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 November 16, 2020.
 
 
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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, 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
 
ELFA President and CEO Ralph Petta said, “Despite the drop in September year-over-year new business, a look at the data beginning with the advent of the 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 downturn resulting from the COVID pandemic.”
 
“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 Anthony Sasso, Head of TD Equipment Finance. “Within any disruption, there is opportunity. Here at TDEF, we have seen our customers find innovative ways to continue to grow, 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 those companies who are in a position to 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 our 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.
 
 
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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 of recent accounting pronouncements.
 
LEASE INCOME RECEIVABLE
 
Lease income receivable includes current lease income receivable net of allowances for uncollectible amounts. The Partnership monitors lease income receivable to ensure timely and accurate payment by lessees. Its Lease Relations department is responsible for monitoring lease income receivable and, as necessary, resolving outstanding invoices.
The Partnership reviews a customer’s credit history before extending credit. The Partnership may establish an allowance for uncollectible lease income receivable based upon the credit risk of specific customers, historical trends and other information when the analysis indicates that the probability of full collection is unlikely. The Partnership writes off its accounts receivable when it determines that it is uncollectible and all economically sensible means 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 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. The Partnership recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration the Partnership expects to be entitled to in exchange for such products or services.
 
Through September 30, 2020, 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.
 
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 sale of equipment 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 technology and inventory management 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 released, the Partnership reassesses the useful life of an asset.
 
 
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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 sources of cash for the nine months ended September 30, 2020, were cash provided by operating activities of approximately $97,000 and net proceeds from the sale of equipment of approximately $127,000, compared to the nine months ended September 30, 2019 where our primary source of cash was cash provided by operating activities of approximately $49,000.
 
Our primary uses of cash for the nine months ended September 30, 2020 were capital expenditures in investing activities of approximately $39,000, equipment acquisition fees paid to the GP of approximately $2,000 and redemptions of approximately $8,000. For the nine months ended September 30, 2019, there were no primary uses of cash.
 
Cash was provided by operating activities for the nine months ended September 30, 2020 of approximately $97,000, which includes net income of approximately $21,000 and depreciation and amortization expenses of approximately $245,000.  Other noncash activities included in the determination of net income include direct payments to banks by lessees of approximately $90,000.  For the nine months ended September 30, 2019, cash was provided by operating activities of approximately $49,000, which includes net loss of approximately $81,000 and depreciation and amortization expenses of approximately $393,000.  Other noncash activities included in the determination of net income include direct payments to banks by lessees of approximately $305,000.   
 
When we 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.
 
CCC, on our behalf and on behalf of other affiliated partnerships, acquires equipment subject to associated debt obligations and lease revenue and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors.
 
We consider cash equivalents to be highly liquid investments with an original maturity of 90 days or less.
 
At September 30, 2020, cash and cash equivalents were held in one account maintained at one financial institution with an aggregate balance of approximately $182,000. Bank accounts are federally insured up to $250,000 by the FDIC. At September 30, 2020, the total cash balance was as follows:
 
At September 30, 2020
 
Balance
 
Total bank balance
 $182,000 
FDIC insured
  (182,000)
Uninsured amount
 $- 
 
The Partnership believes it mitigates the risk of holding uninsured deposits by only depositing funds with major financial institutions. The Partnership has not experienced any losses in our accounts, and believes it is not exposed to any significant credit risk. The amounts in such accounts will fluctuate throughout 2020 due to many factors, including cash receipts, equipment acquisitions, interest rates and distributions to limited partners.
 
 
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The Partnership’s investment strategy of acquiring equipment and generally leasing it under triple-net leases to operators who generally meet specified financial standards minimizes our operating expenses. As of September 30, 2020, the Partnership had future minimum rentals on non-cancelable operating leases of approximately $75,000 for the balance of the year ending December 31, 2020 and approximately $74,500 thereafter.
 
As of September 30, 2020, our non-recourse debt was approximately $70,000 with interest rates ranging from 4.14% to 6.66% and will be payable through August 2024. The Partnership is scheduled to terminate on December 31, 2023. CCC will assume the obligation and rights to the remaining notes payable and its related secured equipment through their termination.
 
The Partnership was originally scheduled to end its operational phase on December 31, 2018. During the year ended December 31, 2018, the operational phase was officially extended to December 31, 2021 through an investor proxy vote. The Partnership is expected to terminate on December 31, 2023.
 
RESULTS OF OPERATIONS
 
Three Months Ended September 30, 2020 compared to Three Months Ended September 30, 2019
 
Lease Revenue
 
Lease revenue decreased to approximately $121,000 for the three months ended September 30, 2020, from approximately $185,000 for the three months ended September 30, 2019.  The Partnership had 21 and 34 active operating leases for the three months ended September 30, 2020 and 2019, respectively.  This decrease in lease revenue is primarily due to a greater number of lease agreements ending versus new lease agreements being acquired. Management expects to add new leases to the Partnership’s portfolio throughout 2020, primarily through debt financing.
 
Sale of Equipment
 
For the three months ended September 30, 2020, the Partnership sold fully depreciated equipment with a net book value of approximately $0 for a net gain of approximately $20,000.  This compares to the three months ended September 30, 2019, when the Partnership had no equipment sales.
 
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 $47,000 for the three months ended September 30, 2020, from approximately $26,000 for the three months ended September 30, 2019.  This increase is primarily attributable to an increase in legal fees associated with the FINRA matter (see Item 1. Legal Proceedings) of approximately $13,000 and “Other LP” expenses charged by CCC for the administration of the Partnership of approximately $7,000.
 
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 approximately 2% of the gross lease revenue attributable to equipment that is subject to direct financing leases. The equipment management fee decreased to approximately $6,000 for the three months ended September 30, 2020, from approximately $9,000 for the three months ended September 30, 2019. This decrease in equipment management fees is consistent with the decrease in lease revenue as described above.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses decreased to approximately $53,000 for the three months ended September 30, 2020, from approximately $114,000 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 September 30, 2020.
 
 
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Net Income
 
For the three months ended September 30, 2020, we recognized revenue of approximately $144,000 and expenses of approximately $113,000, resulting in net income of approximately $31,000.  For the three months ended September 30, 2019, we recognized revenue of approximately $192,000 and expenses of approximately $160,000, resulting in net income of approximately $32,000.  This change in net income 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 $462,000 for the nine months ended September 30, 2020, from approximately $558,000 for the nine months ended September 30, 2019.  The Partnership had 34 and 35 active operating leases for the nine months ended September 30, 2020 and 2019.  This decrease in lease revenue is primarily due to the termination of existing lease agreements with higher rental rates. Management expects to add new leases to the Partnership’s portfolio throughout 2020, primarily through debt financing.
 
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 to 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 $85,000, for the sale price of primarily, High End Sun Servers and Small IBM Servers and recorded a gain on sale of equipment of approximately $34,000. The Partnership disposed of and sold other equipment to various customers during 2020. For the nine months ended September 30, 2020, the Partnership sold equipment to other customers besides Cummins with a total net book value of $13,000 and net gain of approximately $32,000. This compared to the nine months ended September 30, 2019, the Partnership sold equipment with net book value of approximately $0 for a net gain of approximately $125.
 
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 $245,000 for the nine months ended September 30, 2020, from approximately $203,000 for the nine months ended September 30, 2019. This increase is primarily attributable to an increase in legal fees associated with the FINRA matter (see Item 1. Legal Proceedings) of approximately $18,000, accounting fees related to changes in tax reporting of approximately $10,000, “Other LP” expenses charged by CCC for the administration of the Partnership of approximately $9,000 and outside office services-investor services of approximately $6,000.
 
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 approximately 2% of the gross lease revenue attributable to equipment that is subject to direct financing leases. The equipment management fee decreased to approximately $20,000 for the nine months ended September 30, 2020 from approximately $28,000 for the nine months ended September 30, 2019.  This decrease is consistent with the overall decrease in lease revenue.
 
 
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Depreciation and Amortization Expense
 
Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses decreased to approximately $245,000 for the nine months ended September 30, 2020, from approximately $393,000 for the nine 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 nine months ended September 30, 2020.
 
Net Income (Loss)
 
For the nine months ended September 30, 2020, we recognized revenue of approximately $565,000 and expenses of approximately $544,000, resulting in net income of approximately $21,000.  For the nine months ended September 30, 2019, we recognized revenue of approximately $582,000 and expenses of approximately $663,000, resulting in a net loss of approximately $81,000. This change in net income 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 September 30, 2020, our disclosure controls and procedures were not effective due to the presence of a material weakness in internal control over financial reporting.
 
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there 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 provide 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 material weaknesses under the standards of the Public Company Accounting Oversight Board were: (i) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our principal financial officer and principal accounting officer, in connection with the review of our financial statements as of June 30, 2020.
 
Remediation of Material Weakness
 
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have 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 as intended to be reported for financial reporting and                 the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
 
 
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 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.
 
Changes in Internal Control over Financial Reporting:
 
There were no other changes in our internal control over financial reporting during the quarter ending September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Part II: OTHER INFORMATION
 
Item 1. Legal Proceedings
 
Medshare
 
In January 2015, CCC, on behalf of the Funds, entered into a Purchase Agreement (“Purchase Agreement”) for the sale of the equipment to Medshare Technologies (“Medshare”) for approximately $3,400,000.  The Partnership’s share of the sale proceeds was approximately $77,000.  As of November 16, 2020, the Partnership had received approximately $62,000 of the approximate $77,000 sale proceeds and has recorded a reserve of $15,000 against the outstanding receivables.  On April 3, 2015 Medshare was obligated to make payment in full and failed to do so.  As a result, Medshare defaulted on its purchase agreement with CCC and was issued a demand letter for full payment of the equipment.  On June 25, 2015, Medshare filed a lawsuit in Texas state court for breach of contract (“State Suit”).  On June 26, 2015, Commonwealth filed a lawsuit in the Northern District of Texas against Medshare seeking payment in full and/or return of the Equipment and damages. 
 
In July 2016, CCC, on behalf of the Funds, entered into a $1,400,000 binding Settlement Agreement (“Settlement Agreement”) with Medshare and its principal owner, Chris Cleary (collectively referred to as “Defendants”), who are held jointly and severally liable for the entire settlement.  On August 2, 2016, the Defendants made payment to CCC of an initial $200,000 to be followed by 24 structured monthly payments of approximately $50,000 per month to begin no later than September 15, 2016.  The Partnership’s share of the Settlement Agreement is approximately $23,000 and is to be applied against the net Medshare receivable of approximately $18,000 as of the settlement date. The remaining $5,000 will be applied against the $15,000 reserve and recorded as a bad debt recovery.  As of November 16, 2020, the Partnership received approximately $9,000 of the approximate $23,000 settlement agreement which was applied against the net Medshare receivable of approximately $18,000 as of the settlement date.  As Defendant defaulted on settlement agreement, CCC sought and obtained consent judgment from U.S. District Court for Northern District of Texas, Dallas Division on July 27, 2017 in the amount of $1.5 million, less $450,000 previously paid plus $6,757 in attorney fees, both the Defendant and Cleary being jointly and severally liable for the judgment amount.  The court also vacated the September 21, 2016 settlement dismissal. 
 
On July 27, 2017 Defendant filed Chapter 11 in Northern District of Texas Dallas Division.  On July 26, 2017 Legacy Texas Bank, a secured creditor of the Defendant filed for a TRO in the U.S. District Court of the Northern District of Texas, Dallas Division.  Included with the TRO filing was a request for appointment of trustee for operation of Defendant, which was granted and the case converted to Chapter 7. On December 18, 2018 the Bankruptcy Court entered final order and issued its last payment to CCC in March 2019 of approximately $43,000, of which the Partnership’s share was approximately $700.  The Medshare Bankruptcy matter is now closed. Although the trustee’s final distribution to Commonwealth did not fully satisfy the judgment, recovery may still be pursued directly against Cleary.
 
 
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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 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 November 16, 2020.
 
Item 1A. Risk Factors
 
COVID-19 Pandemic
 
The amount of revenue recognized and the pattern of revenue recognition may be impacted by COVID-19. Some of the business sectors that we service such as education centers, medical facilities, payroll administrators, manufacturing and transportation, we may need to account for returns and refund liabilities. The pattern of revenue recognition may change for delays in rendering services.
 
In periods ended subsequent to the outbreak of COVID-19, the impact on expected credit losses and future cash flow projections used in impairment testing will need to be considered.
 
The Company continues to evaluate whether adjustments to the financial statements are required or whether additional disclosures are necessary. In our leasing business, the Company is always subject to credit losses as it relates to a customer’s ability to make timely rental payments. The impact of COVID-19 may contribute to risk of non-performance, where a customer may experience financial difficulty and may delay in making timely payments.
 
The Company recognizes impairment of receivables and loans when losses are incurred, which is when it is probable that an entity will be unable to collect all amounts due according to the contractual terms of the arrangement. Impairment is measured based on the present value of expected future cash flows discounted at the receivable’s or loans effective interest rate, except that, as a practical expedient, impairment can be measured based on a receivable’s or loans’ observable market price or the fair value of the underlying collateral.
 
 
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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.
 
Material Weakness
 
Failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could result in additional costs being incurred for remediation and cause a loss of confidence in our financial reporting.
 
Effective internal control over financial reporting is necessary for us to provide accurate financial information. We
previously identified a material weakness in our internal controls over financial reporting as of June 30, 2020. We have concluded that our internal controls over financial reporting were not effective as of 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 control system, material misstatements due to error or fraud may not be prevented or detected on a timely basis, or at all. If we are unable to provide reliable and timely financial reports in the future, our business and reputation may be further harmed. Failures in internal controls may negatively affect investor confidence in our management and the accuracy of our financial statements and disclosures, or result in adverse publicity and concerns from investors, any of which could have a negative effect, subject us to regulatory investigations and penalties and/or shareholder litigation, and materially adversely impact our business and financial condition.
 
 
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
N/A            
 
Item 3. Defaults Upon Senior Securities
N/A
 
Item 4. Mine Safety Disclosures
N/A
 
Item 5. Other Information
NONE
 
Item 6. Exhibits
 
 
 
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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 VI
 BY: COMMONWEALTH INCOME & GROWTH FUND, INC., General Partner
 
November 16, 2020
By: /s/ Kimberly A. Springsteen-Abbott
DateKimberly A. Springsteen-Abbott
 
Chief Executive Officer
Commonwealth Income & Growth Fund, Inc.
  
  
November 16, 2020
By: /s/ Theodore Cavaliere
DateTheodore Cavaliere
 Vice President, Financial Operations Principal
 
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