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 1934FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2023 or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission 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 400
New Port Richey, FL 33764
(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
☒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
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 | ☐ | 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, 2023
TABLE OF CONTENTS
3 | ||
Management's Discussion and Analysis of Financial Condition and Results of Operations | 13 | |
18 | ||
18 | ||
19 | ||
19 | ||
Item | Risk Factors | |
20 | ||
20 | ||
20 | ||
20 | ||
20 |
2 |
Table of Contents |
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Commonwealth Income & Growth Fund V | ||
Condensed Balance Sheets | ||
September 30, | December 31, | |
2017 | 2016 | |
(unaudited) | ||
ASSETS | ||
Cash and cash equivalents | $9,934 | $16,529 |
Lease income receivable, net of reserve of approximately | ||
$10,000 at September 30, 2017 and December 31, 2016 | 80,023 | 41,927 |
Other receivables | 10,312 | 20,754 |
Prepaid expenses | 1,994 | 309 |
102,263 | 79,519 | |
Net investment in finance leases | 39,176 | 66,789 |
Equipment, at cost | 6,743,712 | 6,142,862 |
Accumulated depreciation | (5,759,964) | (5,492,621) |
983,748 | 650,241 | |
Total Assets | $1,125,187 | $796,549 |
LIABILITIES AND PARTNERS' CAPITAL | ||
LIABILITIES | ||
Accounts payable | $135,912 | $127,286 |
Accounts payable, CIGF, Inc., net | 74,884 | 104,992 |
Accounts payable, Commonwealth Capital Corp., net | 272,014 | 249,525 |
Other accrued expenses | 54,726 | 16,102 |
Unearned lease income | 41,324 | 27,977 |
Notes payable | 635,992 | 359,590 |
Total Liabilities | 1,214,852 | 885,472 |
COMMITMENTS AND CONTINGENCIES | ||
PARTNERS' CAPITAL (DEFICIT) | ||
General Partner | 1,000 | 1,000 |
Limited Partners | (90,665) | (89,923) |
Total Partners' Capital (Deficit) | (89,665) | (88,923) |
Total Liabilities and Partners' Capital (Deficit) | $1,125,187 | $796,549 |
see accompanying notes to condensed financial statements |
Condensed Statements of Operations | ||||
(unaudited) | ||||
Three Months Ended | Nine Months Ended | |||
September 30, | September 30, | |||
2017 | 2016 | 2017 | 2016 | |
Revenue | ||||
Lease | $164,740 | $179,717 | $464,158 | $537,534 |
Interest and other | 3,445 | 1,407 | 5,693 | 4,869 |
Gain on sale of equipment | 1,944 | - | 2,626 | 35,000 |
Total revenue and gain on sale of equipment | 170,129 | 181,124 | 472,477 | 577,403 |
Expenses | ||||
Operating, excluding depreciation and amortization | 41,445 | 97,145 | 142,254 | 322,888 |
Equipment management fee, General Partner | - | - | - | 4,633 |
Interest | 6,631 | 3,978 | 14,956 | 14,276 |
Depreciation | 120,333 | 126,083 | 324,545 | 447,548 |
Amortization of equipment acquisition costs and deferred expenses | - | 491 | - | - |
Total expenses | 168,409 | 227,697 | 481,755 | 789,345 |
Other income | ||||
Gain from insurance recovery | - | - | 10,863 | - |
Total other income | - | - | 10,863 | - |
Net income (loss) | $1,720 | $(46,573) | $1,585 | $(211,942) |
Net income (loss) allocated to Limited Partners | $1,720 | $(46,573) | $1,585 | $(211,942) |
Net income (loss) per equivalent Limited Partnership unit | $0.00 | $(0.04) | $0.00 | $(0.17) |
Weighted average number of equivalent Limited Partnership units outstanding during the period | 1,236,386 | 1,236,608 | 1,236,533 | 1,236,608 |
see accompanying notes to condensed financial statements |
Commonwealth Income & Growth Fund V | |||||
Condensed Statement of Partners' Capital (Deficit) | |||||
For the nine months ended September 30, 2017 | |||||
(unaudited) | |||||
General | Limited | ||||
Partner | Partner | General | Limited | ||
Units | Units | Partner | Partners | Total | |
Balance, January 1, 2017 | 50 | 1,236,608 | $1,000 | $(89,923) | $(88,923) |
Net income | - | - | - | 1,585 | 1,585 |
Redemptions | - | (460) | - | (2,610) | (2,610) |
Capital Contribution - CCC | - | - | - | 283 | 283 |
Balance, September 30, 2017 | 50 | 1,236,148 | $1,000 | $(90,665) | $(89,665) |
see accompanying notes to condensed financial statements |
Commonwealth Income & Growth Fund V | ||
Condensed Statements of Cash Flow | ||
(unaudited) | ||
Nine months ended | ||
September 30, | ||
2017 | 2016 | |
Net cash provided by (used in) operating activities | $76,108 | $(44,756) |
Cash flows from investing activities | ||
Capital expenditures | (112,497) | (74,089) |
Payments received from finance leases | 26,290 | 28,170 |
Net proceeds from the sale of equipment | 5,830 | 40,813 |
Net cash used in investing activities | (80,377) | (5,106) |
Cash flows from financing activities | ||
Redemptions | (2,326) | |
Distributions to partners | - | (481) |
Net cash used in financing activities | (2,326) | (481) |
Net decrease in cash and cash equivalents | (6,595) | (50,343) |
Cash and cash equivalents, beginning of period | 16,529 | 51,344 |
Cash and cash equivalents, end of period | $9,934 | $1,001 |
see accompanying notes to condensed financial statements |
Commonwealth Income & Growth Fund V |
Condensed Balance Sheets (unaudited) |
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
ASSETS |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | - |
|
| $ | - |
|
Lease income receivable, net of reserve of approximately $34,000 at both March 31, 2023 and December 31, 2022 |
|
| 28,133 |
|
|
| 57,295 |
|
Other receivables |
|
| 333 |
|
|
| 333 |
|
Prepaid expenses |
|
| 2,193 |
|
|
| 2,520 |
|
|
|
| 30,658 |
|
|
| 60,148 |
|
|
|
|
|
|
|
|
|
|
Equipment, at cost |
|
| 3,470,113 |
|
|
| 3,470,113 |
|
Accumulated depreciation |
|
| (3,424,250 | ) |
|
| (3,413,190 | ) |
|
|
| 45,864 |
|
|
| 56,924 |
|
Total Assets |
| $ | 76,521 |
|
| $ | 117,072 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS' DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 131,317 |
|
| $ | 146,868 |
|
Accounts payable, CIGF, Inc. |
|
| 267,844 |
|
|
| 227,781 |
|
Accounts payable, Commonwealth Capital Corp, net of accounts receivable of approximately $193,500 and $143,000 at March 31, 2023 and December 31, 2022, respectively |
|
| 74,743 |
|
|
| 110,694 |
|
Unearned lease income |
|
| - |
|
|
| 4,470 |
|
Note payable |
|
| 8,658 |
|
|
| 9,896 |
|
Total Liabilities |
|
| 482,563 |
|
|
| 499,710 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
PARTNERS' DEFICIT |
|
|
|
|
|
|
|
|
General Partner |
|
| 1,000 |
|
|
| 1,000 |
|
Limited Partners |
|
| (407,042 | ) |
|
| (383,638 | ) |
Total Partners' Deficit |
|
| (406,042 | ) |
|
| (382,638 | ) |
Total Liabilities and Partners' Deficit |
| $ | 76,521 |
|
| $ | 117,072 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these condensed financial statements |
3 |
Table of Contents |
Commonwealth Income & Growth Fund V | ||||||||
Condensed Statements of Operations | ||||||||
(unaudited) | ||||||||
|
|
|
| |||||
|
| Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Revenue |
|
|
|
|
|
| ||
Lease |
| $ | 34,520 |
|
| $ | 46,094 |
|
Interest and other |
|
| 22 |
|
|
| 90 |
|
Sales and property taxes |
|
| 1,044 |
|
|
| 1,277 |
|
Gain on sale of equipment |
|
| 1,750 |
|
|
| - |
|
Total revenue and gain on sale of equipment |
|
| 37,336 |
|
|
| 47,461 |
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
Operating, excluding depreciation and amortization |
|
| 48,517 |
|
|
| 44,043 |
|
Interest |
|
| 119 |
|
|
| 179 |
|
Depreciation |
|
| 11,060 |
|
|
| 17,940 |
|
Sales and property taxes |
|
| 1,044 |
|
|
| 1,277 |
|
Total expenses |
|
| 60,740 |
|
|
| 63,439 |
|
|
|
|
|
|
|
|
|
|
Net Loss |
| $ | (23,404 | ) |
| $ | (15,978 | ) |
|
|
|
|
|
|
|
|
|
Net Loss allocated to Limited Partners |
| $ | (23,404 | ) |
| $ | (15,978 | ) |
|
|
|
|
|
|
|
|
|
Net Loss per equivalent Limited Partnership unit |
| $ | (0.02 | ) |
| $ | (0.01 | ) |
Weighted average number of equivalent limited |
|
|
|
|
|
|
|
|
partnership units outstanding during the year |
|
| 1,233,036 |
|
|
| 1,233,548 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these condensed financial statements |
4 |
Table of Contents |
Commonwealth Income & Growth Fund V | ||||||||||||||||||||
Condensed Statement of Partners' Capital | ||||||||||||||||||||
For the three months ended March 31, 2023 and 2022 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| General |
|
| Limited |
|
|
|
|
|
|
| ||||||||
|
| Partner |
|
| Partner |
|
| General |
|
| Limited |
|
|
| ||||||
|
| Units |
|
| Units |
|
| Partner |
|
| Partners |
|
| Total |
| |||||
Balance, January 1, 2023 |
|
| 50 |
|
|
| 1,233,036 |
|
| $ | 1,000 |
|
| $ | (383,638 | ) |
| $ | (382,638 | ) |
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (23,404 | ) |
|
| (23,404 | ) |
Redemption |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Balance March 31, 2023 |
|
| 50 |
|
|
| 1,233,036 |
|
| $ | 1,000 |
|
| $ | (407,042 | ) |
| $ | (406,042 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (15,978 | ) |
|
| (15,978 | ) |
Redemption |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Balance March 31, 2022 |
|
| 50 |
|
|
| 1,233,548 |
|
| $ | 1,000 |
|
| $ | (271,474 | ) |
| $ | (270,474 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these condensed financial statements |
5 |
Table of Contents |
Commonwealth Income & Growth Fund V | ||||||||
Condensed Statements of Cash Flow | ||||||||
(unaudited) | ||||||||
|
|
|
|
|
|
| ||
|
| Three months ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
| ||
Net cash used in operating activities |
| $ | (1,750 | ) |
| $ | (29,058 | ) |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Net proceeds from the sale of equipment |
|
| 1,750 |
|
|
| - |
|
Net cash provided by investing activities |
|
| 1,750 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
| - |
|
|
| (29,058 | ) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
| - |
|
|
| 29,571 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
| $ | - |
|
| $ | 513 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these 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 expectedintends to terminate on December 31, 2022.
Liquidity and Going Concern
For the ninethree months ended September 30, 2017,March 31, 2023, the Partnership incurred negative cash flows from operations. At March 31, 2023, the Partnership has a working capital deficit of approximately $452,000. 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 electedagreed to forgo distributions and allocations of net income owed to it, and suspended limited partner distributions. The General Partner will reassess the funding of limited partner distributions on a quarterly basis, throughout 2017. The General Partnercontinue to waive certain fees and CCC will also determine ifmay defer certain related party payables owed to them by the Partnership may be deferred (if deemed necessary) in an effort to further increase the Partnership’s cash flow.
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, 20162022 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, 20162022 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 ninethree months ended September 30, 2017March 31, 2023 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2017.
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. Cash and cash equivalents, receivables,Receivables, accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of September 30, 2017March 31, 2023 and December 31, 20162022 due to the short termshort-term nature of these financial instruments.
The Partnership’s long-term debt consists of notesa note payable, which areis secured by specific equipment and are nonrecourse liabilities of the Partnership. The estimated fair value of this debt at September 30, 2017March 31, 2023 and December 31, 20162022 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, 2017,March 31, 2023, cash and cash equivalents was held in two accountsone account maintained at one financial institution with an aggregate balance of approximately $11,000.$200. Bank accounts are federally insured up to $250,000 by the FDIC. At September 30, 2017,March 31, 2023, the total cash bank balance was as follows:
At March 31, 2023 |
| Balance |
| |
Total bank balance |
| $ | 200 |
|
FDIC insured |
|
| (200 | ) |
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 20172023 due to many factors, including cash receipts, equipment acquisitions and interest rates.
Recent Accounting Pronouncements
In OctoberJune 2016, the FASB issued Accounting Standards Update 2016-17— Consolidation(“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 810)326): Interests Held through Related Parties That Are under Common Control.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 |
Table of Contents |
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 until fiscal year beginning after December 15, 2022.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The amendments in this Update are effectiveeliminate the accounting guidance for (Troubled Debt Restructurings (TDRs) by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. For public business entities, for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. This standard was adopted January 1, 2017; however, adoption of this ASU had no impact on the Partnership’s financial statements during the nine months ended September 30, 2017.
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 which the Partnership purchases leases. These are fees that are earned by the leasing companies when the initial terms of the lease have been met. The General Partner believes that this strategy adds value since it entices the leasing company to remain actively involved with the lessee and encourages potential extensions, remarketing or sale of equipment. This strategy is designed to minimize any conflicts the leasing company may have with a new lessee and may assist in maximizing overall portfolio performance. The remarketing fee is tied into lease performance thresholds and is a factor in the negotiation of the fee. Remarketing fees incurred in connection with lease extensions are accounted for as operating costs. Remarketing fees incurred in connection with the sale of equipment are included in the gain or loss calculations. For the nine months ended September 30, 2017 and 2016, no remarketing fees were incurred or paid.
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.
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The Partnership’s share of the cost of the equipment in which it participates with other partnerships at September 30, 2017March 31, 2023 and December 31, 2022 was approximately $3,165,000$1,656,000 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, 2017March 31, 2023 was approximately $11,456,000.$7,759,000. The Partnership’s share of the outstanding debt associated with this equipment at September 30, 2017March 31, 2023 was approximately $473,000$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 September 30, 2017March 31, 2023 was approximately $3,379,000.
As the Partnership and the other programs managed by the General Partner continue to acquire new equipment for the portfolio, opportunities for shared participation are expected to continue. Sharing in the acquisition of a lease portfolio gives the fund an opportunity to acquire additional assets and revenue streams, while allowing the fund to remain diversified and reducing its overall risk with respect to one portfolio.
The following is a schedule of approximate future minimum rentals on non-cancellable operating leases at September 30, 2017:
September 30, 2017 | December 31, 2016 | |
Total minimum lease payments to be received | $28,000 | $55,000 |
Estimated residual value of leased equipment (unguaranteed) | 13,000 | 17,000 |
Less: unearned income | (2,000) | (5,000) |
Net investment in finance leases | $39,000 | $67,000 |
For the period ended December |
| Amount |
| |
Nine months ended December 31, 2023 |
| $ | 23,000 |
|
Year Ended December 31, 2024 |
|
| 27,500 |
|
Year Ended December 31, 2025 |
|
| 9,000 |
|
|
| $ | 59,500 |
|
4. Related Party Transactions
Receivables/Payables
As of September 30, 2017March 31, 2023, and December 31, 2016, we determined that we did not have a need for an allowance for uncollectible accounts associated with any of our finance leases, as the customer payment histories with us, associated with these leases, has been positive, with no late payments.
Amount | |
Three months ended December 31, 2017 | $7,000 |
2018 | 20,000 |
2019 | 1,000 |
Total | $28,000 |
Nine months ended September 30, | 2017 | 2016 |
Reimbursable Expenses | ||
Reimbursable expenses, which are charged to the partnership by CCC in connection with the administration and operation of the Partnership, are allocated to the Partnership based upon several factors including, but not limited to, the number of investors, compliance issues, and the number of existing leases. For the nine months ended September 30, 2017 and 2016, “Other LP” expense was charged to the Partnership of approximately $0 and $98,000, respectively. | $122,000 | $308,000 |
Equipment Management Fee | ||
Reimbursable expenses, which are charged to the partnership by CCC in connection with the administration and operation of the Partnership, are allocated to the Partnership based upon several factors including, but not limited to, the number of investors, compliance issues, and the number of existing leases. For the nine months ended June 30, 2017 and 2016, equipment management fees of approximately $12,000 and $9,000, respectively, were earned but waived by the General Partner. | $- | $5,000 |
Three months ended March 31, |
| 2023 |
|
| 2022 |
| ||
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, 2023 and 2022, the General Partner waived certain reimbursable expenses due to it by the Partnership. For the three months ended March 31, 2023 and 2022, the Partnership was charged approximately $25,000 and $20,000 in Other LP expense, respectively. |
| $ | 38,000 |
|
| $ | 42,000 |
|
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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, 2023 and 2022, approximately $0 and $0 of acquisition fees were waived by the General Partner, respectively. | $ | - | $ | - | ||||
Equipment Management Fee | ||||||||
The General Partner is entitled to be paid for managing the equipment portfolio a monthly fee equal to the lesser of (i) the fees which would be charged by an independent third party for similar services for similar equipment or (ii) the sum of (a) two percent of (1) the gross lease revenues attributable to equipment which is subject to full payout net leases which contain net lease provisions plus (2) the purchase price paid on conditional sales contracts as received by the Partnership and (b) 5% of the gross lease revenues attributable to equipment which is subject to operating leases. In an effort to increase future cash flow for the fund our General Partner has elected to waive equipment management fees. For the three months ended March 31, 2023 and 2022, equipment management fees of approximately $1,000 and $2,000 were earned but waived by the General Partner, respectively. | $ | - | $ | - | ||||
Equipment liquidation Fee | ||||||||
With respect to each item of equipment sold by the General Partner (other than in connection with a conditional sales contract), a fee equal to the lesser of (i) 50% of the competitive equipment sale commission or (ii) three percent of the sales price for such equipment is payable to the General Partner. The payment of such fee is subordinated to the receipt by the limited partners of (i) a return of their net capital contributions and a 10% per annum cumulative return, compounded daily, on adjusted capital contributions and (ii) the net disposition proceeds from such sale in accordance with the Partnership Agreement. Such fee will be reduced to the extent any liquidation or resale fees are paid to unaffiliated parties. During the three months ended March 31, 2023 and 2022, the General Partner waived approximately $53 and $0 of equipment liquidation fees, respectively. | $ | - | $ | - |
5. Notes Payable
September 30, 2017 | December 31, 2016 | |
Installment note payable to bank; interest at 4.23%, due in quarterly installments of $478, including interest, with final payment in February 2017 | - | 1,000 |
Installment notes payable to bank; interest at 4.23%, due in quarterly installments ranging from $951 to $1,327, including interest, with final payment in March 2017 | - | 2,000 |
Installment note payable to bank; interest at 4.85%, due in monthly installments of $922, including interest, with final payment in March 2017 | - | 3,000 |
Installment note payable to bank; interest at 1.60%, due in monthly installments of $2,286, including interest, with final payment in May 2017 | - | 11,000 |
Installment note payable to bank; interest at 4.23%, due in quarterly installments of $1,991, including interest, with final payment in June 2017 | - | 4,000 |
Installment note payable to bank; interest at 4.23%, due in quarterly installments of $2,711, including interest, with final payment in May 2017 | - | 5,000 |
Installment notes payable to bank; interest at 6.00%, due in monthly installments ranging from $132 to $663, including interest, with final payment in August 2017 | - | 4,000 |
Installment note payable to bank; interest at 4.85%, due in quarterly installments of $1,751, including interest, with final payment in September 2017 | - | 5,000 |
Installment note payable to bank; interest at 4.88%, due in quarterly installments of $1,852, including interest, with final payment in October 2017 | 2,000 | 18,000 |
Installment note payable to bank; interest at 4.23%, due in quarterly installments of $9,663, including interest, with final payment in February 2018 | 19,000 | 47,000 |
Installment notes payable to bank; interest at 4.23%, due in quarterly installments of $278, including interest, with final payment in March 2018 | 1,000 | 3,000 |
Installment notes payable to bank; interest at 4.23%, due in quarterly installments of $278, including interest, with final payment in April 2018 | 3,000 | 5,000 |
Installment note payable to bank; interest at 4.23% due in quarterly installments of $2,797, including interest, with final payment in June 2018 | 8,000 | 16,000 |
Installment notes payable to bank; interest at 4.23% due in quarterly installments of $458, including interest, with final payment in September 2018 | 2,000 | 3,000 |
Installment notes payable to bank; interest at 6.00% due in monthly installments ranging from $132 to $1,479, including interest, with final payment in September 2018 | 10,000 | 22,000 |
Installment notes payable to bank; interest at 6.00%, due in monthly installments ranging from $803 to $1,216, including interest, with final payment in February 2019 | 19,000 | 29,000 |
Installment notes payable to bank; interest at 4.23%, due in quarterly installments ranging from $296 to $458, including interest, with final payment in October 2018 | 8,000 | 13,000 |
Installment note payable to bank; interest at 4.23% due in quarterly installments of $208, including interest, with final payment in November 2018 | 1,000 | 2,000 |
Installment note payable to bank; interest at 1.80% due in monthly installments of $2,116, including interest, with final payment in February 2019 | 36,000 | 54,000 |
Installment note payable to bank; interest at 1.80% due in monthly installments of $175, including interest, with final payment in March 2019 | 3,000 | 5,000 |
Installment notes payable to bank; interest at 1.80% due in monthly installments ranging from $121 to $175, including interest, with final payment in April 2019 | 9,000 | 13,000 |
Installment note payable to bank; interest at 4.98% due in monthly installments of $2,847, including interest, with final payment in December 2019 | 73,000 | 95,000 |
Installment note payable to bank; interest at 4.47% due in monthly installments of $2,208, including interest, with final payment in February 2019 | 34,000 | - |
Installment note payable to bank; interest at 5.25% due in quarterly installments of $8,102, including interest, with final payment in December 2019 | 68,000 | - |
Installment note payable to bank; interest at 4.87% due in quarterly installments of $11,897, including interest, with final payment in January 2020 | 111,000 | - |
Installment note payable to bank; interest at 5.56% due in monthly installments of $2,925, including interest, with final payment in June 2020 | 89,000 | - |
Installment note payable to bank; interest at 5.75% due in monthly installments of $857, including interest, with final payment in November 2020 | 30,000 | - |
Installment note payable to bank; interest at 5.31% due in quarterly installments of $4,618, including interest, with final payment in January 2021 | 59,000 | - |
Installment note payable to bank; interest at 4.70% due in monthly installments of $1,360, including interest, with final payment in February 2021 | 51,000 | - |
$636,000 | $360,000 |
Notes payable consisted of the following approximate amounts:
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Installment note payable to bank; interest at 5.00% due in monthly installments of $452, including interest, with final payment in November 2024 |
|
| 9,000 |
|
|
| 10,000 |
|
|
| $ | 9,000 |
|
| $ | 10,000 |
|
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The note is secured by specific equipment with a carrying value of approximately 890,000 as of September 30, 2017$12,000 and areis a nonrecourse liabilitiesliability of the Partnership. As such, the notes donote does not contain any financial debt covenants with which wethe Partnership must comply on either an annual or quarterly basis. Aggregate approximate maturities of notesnote payable for each of the periods subsequent to September 30, 2017March 31, 2023 are as follows:
|
| Amount |
| |
Nine months ended December 31, 2023 |
| $ | 4,000 |
|
Year ended December 31, 2024 |
|
| 5,000 |
|
|
| $ | 9,000 |
|
6. Supplemental Cash Flow Information
No interest or principal on notes payable was paid by the Partnership during 2017the three months ended 2023 and 20162022 because direct payment was made by lessee to the bank in lieu of collection of lease income and payment of interest and principal by the Partnership.
Other noncash activities included in the determination of net loss are as follows:
Nine months ended September 30, | 2017 | 2016 |
Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank | $268,000 | $296,000 |
Nine months ended September 30, | 2017 | 2016 |
Debt assumed in conjunction with purchase of equipment | $545,000 | $118,000 |
Three months ended March 31, |
| 2023 |
|
| 2022 |
| ||
Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank |
| $ | 1,000 |
|
| $ | 1,000 |
|
7. Commitments and Contingencies
FINRA naming CCSC and Ms. Springsteen-Abbott (the “Respondents”). The Claimants, at the advice and recommendation of their personal financial advisors, purchased limited partnership units in CIGF5 between February 2005 and February 2006 and in CIGPF3 between April 2005 and February 2007. The Claimants allege that the Respondents did not properly perform their duties as fund manager. The Funds are not members of FINRA and/or subject to its jurisdiction.
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.
The decision of the Hearing Officers may bePanel was stayed when it was appealed to FINRA's National Adjudicatory Council (NAC)(the “NAC”) pursuant to FINRA Rule 9311. The NAC Decisionissued a decision that upheld the Panel’s ruling. Thelower panel’s ruling and the bar took effect on August 23, 2016. Ms. Springsteen-Abbott appealed the NAC DecisionNAC’s decision to the SEC.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 reaffirmed its position on the bar from the securities industry, but reduced the list of 1,840 items totaling $208,000 to a remaining list of 8487 items totaling $36,226 (which includes approximately $30,000 of continuing education expenses for personnel providing services to the Funds), and reduced the proposed fine from $100,000 to $50,000. On August 14, 2017 respondents$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. AsThey dismissed in part and denied in part Ms. Springsteen-Abbott’s petition. This was regardless of November 14, 2017, management believesCCC’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 final resolutionremoval, the General Partner anticipates that this ruling will not result in any material adverse financial impact onto the Funds, but no assurance can be provided until the legal matter is resolved. Ms. Springsteen-Abbott has filed a Notice of Appeal and Preliminary Statement with the SEC.
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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, 20162022 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
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 $1 trillion equipment finance sector, showed their overall new business volume for SeptemberMarch was $8.7$10.4 billion, down 7%2 percent year-over-year from new business volume in September 2016.March 2022. Volume was up 12% month-to-month32 percent from $7.8$7.9 billion in August. Year to date,February. Year-to-date, cumulative new business volume was up 4%4 percent compared to 2016. 2022.
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Receivables over 30 days were 1.40%, down1.9 percent, up from 1.50%1.8 percent the previous month and downup from 1.50%1.5 percent in the same period in 2016.2022. Charge-offs were 0.40%, down0.32 percent, unchanged from 0.44% the previous month and downup from 0.460.10 percent in the year-earlier period.
Credit approvals totaled 74% in September,75.3, down from 75.3%75.7 percent in August.February. Total headcount for equipment finance companies was up 16.5% year over year, largely attributable to continued acquisition activity at an MLFI reporting company. down 4.6 percent year-over-year.
Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in April is 47.0, a decrease from the March index of 50.3.
ELFA President and CEO Ralph Petta said, “While originations for Octoberthe month are strong—in the face of a persistently high interest rate and inflationary environment—the metrics that bear monitoring deal with portfolio quality. Delinquencies and losses are up compared to the same period last year, indicating a potential softness in the economy that is 63.7, unchangedmaking it more difficult for lessees to honor their lease and financing obligations.”
Linda Redding, Head of Equipment Finance, J.P. Morgan Commercial Banking, said, “Despite continued economic uncertainty, rising interest rates and other challenges, the equipment finance industry remains resilient, as seen in the increase in cumulative new business volume in the first quarter. The industry continues to demonstrate its viability throughout economic cycles, as there is a consistent need for companies of all industries and sizes to invest in equipment. Times of economic uncertainty can even create unique opportunities for the equipment finance industry, as its flexible solutions can allow businesses to preserve strong liquidity and cash positions when they need them most.”
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.
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 September.
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.
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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.
LEASE INCOME RECEIVABLE
Lease income receivable includes current lease income receivable net of allowances for uncollectible accounts,amounts, if any. The Partnership monitors lease income receivable to ensure timely and accurate payment by lessees. ItsThe Partnership’s Lease Relations department is responsible for monitoring lease income receivable and, as necessary, resolving outstanding invoices. Lease revenue is recognized on a monthly straight-line basis which is in accordance with the terms of the lease agreement.
The Partnership reviews a customer’s credit history before extending credit. When the analysis indicates that the probability of full collection is unlikely, the Partnership may establish an allowance for uncollectible lease income receivable based upon the credit risk of specific customers, historical trends and other information. The Partnership writes off its lease income receivable when it determines that it is uncollectible and all economically sensible means of recovery have been exhausted.
REVENUE RECOGNITION
The Partnership is principally engaged in business of September 30, 2017,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, 2023, the Partnership’s lease portfolio consisted of operating and finance leases. For operating leases, lease revenue is recognized on a straight-line basis in accordance with the terms of the lease agreements.
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 leaseoff-lease equipment are recorded on a net basis in the Fund’s condensedPartnership’s Statement of Operations.
Partnership’s accounting policy for sales and property taxes collected from the termination of leaseslessees are recognized whenrecorded in the lease is modifiedcurrent period as gross revenues and terminated concurrently. Gains from lease termination included in lease revenue for the nine months ended September 30, 2017 and 2016 were approximately $0 and $500, respectively.
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LONG-LIVED ASSETS
Depreciation on equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of two to fourfive years. Once an asset comes off lease or is re-leased, the Partnership reassesses the useful life of an asset.
The Partnership evaluates its long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable. The Partnership determines whether impairment exists by estimating the undiscounted cash flows to be generated by each asset. If the estimated undiscounted cash flows are less than the carrying value of the asset then impairment exists. The amount of the impairment is determined based on the difference between the carrying value and the fair value. Fair value is determined based on estimated discounted cash flows to be generated by the asset, third party appraisals or comparable sales of similar assets, as applicable, based on asset type.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our primary sourcessource of cash for the ninethree months ended September 30, 2017 wereMarch 31, 2023 was cash provided by operating activities of approximately $76,000, payments received from finance leases of approximately $26,000 andnet proceeds from the sale of computer equipment of approximately $6,000.$2,000. This compares to the ninethree months ended September 30, 2016March 31, 2022, where ourthe Partnership did not have a primary sourcessource of cash were provided by payments received from finance leases of approximately $28,000 and proceeds from the sale of equipment of approximately $41,000.
Our primary use of cash for the ninethree months ended September 30, 2017March 31, 2023 and 2022 was for the purchase of new equipment of approximately $112,000. For the nine months ended September 30, 2016, our primary uses of cash were operating activities of approximately $45,000 and for the purchase of new equipment of approximately $74,000.
Cash was used in operating activities for the three months ended March 31, 2023 of approximately $2,000 which includes a net loss of approximately $212,000$23,000 and depreciation and amortization expenses of approximately $448,000.$11,000. Other non-cash activities included in the determination of net loss include direct payments of lease income by lessees to banks of approximately $296,000$1,000. For the three months ended March 31, 2022, cash was used in operating activities of approximately $29,000 which includes net loss of approximately $16,000 and a gain on saledepreciation expenses of equipmentapproximately $18,000. Other non-cash activities included in the amountdetermination of net loss include direct payments of lease income by lessees to banks of approximately $35,000.
We consider cash equivalents to be highly liquid investments with the original maturity dates of 90 days or less.
At September 30, 2017,March 31, 2023, cash wasand cash equivalents were held in two accountsone account maintained at one financial institution with an aggregate balance of approximately $11,000.$200. Bank accounts are federally insured up to $250,000 by the FDIC. At September 30, 2017,March 31, 2023, the total cash bank balance was as follows:
At March 31, 2023 |
| Balance |
| |
Total bank balance |
| $ | 200 |
|
FDIC insured |
|
| (200 | ) |
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 20172023 due to many factors, including cash receipts, equipment acquisitions, interest rates, and distributions to limited partners.
Our investment strategy of acquiring equipment and generally leasing it under triple-net leases to operators who generally meet specified financial standards minimizes our operating expenses. As of September 30, 2017,March 31, 2023, we had future minimum rentals on non-cancelable operating leases of approximately $143,000$23,000 for the balance of the year ending December 31, 20172023 and approximately $630,000$36,500 thereafter.
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As of September 30, 2017, we had future minimum rentals on non-cancelable finance leases of approximately $9,000 for the balance of the year ending DecemberMarch 31, 2017 and approximately $42,000 thereafter.
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 expectedintends to terminate on December 31, 2022.2023. As such, it is the Partnership willPartnership’s intention to continue to report its financial statements on a going concern basis until a formal plan of liquidation is approved by the General Partner.
As the Partnership and the other programs managed by the General Partner increase their overall portfolio size, opportunities for shared participation are expected to continue. Sharing in the acquisition of a lease portfolio gives the fund an opportunity to acquire additional assets and revenue streams, while allowing the fund to remain diversified and reducing its overall risk with respect to one portfolio. Thus, total shared equipment and related debt should continue to trend higher in fiscal 2017, as
For the three months ended March 31, 2023, the Partnership builds its portfolio.
The General Partner elected to forgo distributions and allocations of net income owed to it, and suspended limited partner distributions for the ninethree months ended September 30, 2017.March 31, 2023. The General Partner will continue to reassess the funding of limited partner distributions throughout 20172023 and will continue to waive certain fees if the General Partner determines it is in the best interest of the Partnership to do so. If available cash flow or net disposition proceeds are insufficient to cover the Partnership expenses and liabilities on a short and long termlong-term basis, the Partnership may attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within its permissible limits.
The General Partner will continue to reassess the funding of limited partner distributions throughout 20172023 and will continue to waive certain fees if the General Partner determines it is in the best interest of the Partnership to do so.fees. If available cash flow or net disposition proceeds are insufficient to cover the Partnership expenses and liabilities on a short and long termlong-term basis, the Partnership may attempt to obtain additional funds by disposing of or refinancing equipment, or by borrowing within its permissible limits. Additionally, the Partnership will seek to enhance portfolio returns and maximize cash flow through the use of leveraged lease transactions;transactions: the acquisition of lease equipment through debt financing. This strategy allows the General Partner to acquire additional revenue generating leases without the use of investor funds thus maximizing overall return.
RESULTS OF OPERATIONS
Three months ended September 30, 2017March 31, 2023 compared to three months ended September 30, 2016
Lease Revenue
Our lease revenue decreased to approximately $165,000$35,000 for the three months ended September 30, 2017,March 31, 2023, from approximately $180,000$46,000 for the three months ended September 30, 2016.March 31, 2022. This revenue decrease is primarily due to morea decrease in active lease agreements ending versus new lease agreements being acquired.
The Partnership had 7813 and 8415 active operating leases during the three months ended September 30, 2017March 31, 2023 and 2016,2022, respectively. The declinedecrease in number of active leases is consistent with the overall decrease in lease revenue. Management expectsdoes not expect to addacquire new leases to our portfolio throughoutin the remainder of 2017, funded primarily through debt financing. Asfuture as the Partnership's operational phase of the Partnership has beenwas extended to December 31, 2020, management will continue to seek lease opportunities to enhance portfolio returns and cash flow.
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Sale of Equipment
For the three months ended September 30, 2017,March 31, 2023, the Partnership soldsoled fully depreciated equipment with a net book value of approximately $3,000$0 for a net gain of approximately $2,000. For the three months ended September 30, 2016,March 31, 2022, the Partnership sold equipment with net book value of approximately $4,000 for a net loss of approximately $500.
Operating Expenses
Our operating expenses, excluding depreciation, primarily consist of accounting and legal fees, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. These expenses decreasedincreased to approximately $41,000$49,000 for the three months ended September 30, 2017,March 31, 2023, from approximately $97,000$44,000 for the three months ended September 30, 2016.March 31, 2022. This increase is primarily attributable to a decreasean increase in accounting fees of approximately $9,000 and other LP expenses of approximately $29,000,$5,000, partially offset by a decrease in legal feestemporary services expenses of approximately $23,000$6,000, a decrease in partnership taxes of approximately $2,000 and a decrease in accounting feesoutside office services expenses of approximately $3,000.
Equipment Management Fees
We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 2.5%5% of the gross lease revenue attributable to equipment that is subject to operating leases. The equipment management fee was waived for the three months ended September 30, 2017 as well as for the three months ended September 30, 2016.
Depreciation and Amortization Expenses
Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expensesequipment. This expense decreased to approximately $325,000$11,000 for the ninethree months ended September 30, 2017,March 31, 2023, from $448,000$18,000 for the ninethree months ended September 30, 2016.March 31, 2022. This decrease is primarilywas due to significantthe higher frequency in the termination of leases that becameand equipment being fully depreciated partially offset byas compared to the acquisition of new equipment acquisitions.
Net Income
For the ninethree months ended September 30, 2017,March 31, 2023, we recognized revenue of approximately $472,000$37,000, expenses of approximately $482,000 and an insurance recovery of approximately $11,000,$61,000, resulting in net loss of approximately $1,000.$23,000. For the ninethree months ended September 30, 2016,March 31, 2022, we recognized revenue of approximately $577,000 and$47,000, expenses of approximately $789,000,$63,000, resulting in net loss of approximately $212,000.$16,000. This change into a net gainloss 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
The Company’s management, under the supervision and with the participation of the General Partner’s ChiefCompany’s Principal Executive Officer and Principal Financial and Accounting Officer has evaluated the effectiveness of ourthe Company’s disclosure controls and procedures related to our reporting(as such term is defined in Rules 13a-15(e) and disclosure obligations15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.Report. Based on such evaluation, the General Partner’s ChiefCompany’s Principal Executive Officer and Principal Financial and Accounting Officer have concluded that, as of September 30, 2017, ourthe end of such period covered by this Quarterly Report, the Company’s disclosure controls and procedures are effective in ensuringwere temporarily rendered non-effective to provide reasonable assurance that information relating to us whichthat it is required to be discloseddisclose in our periodic reports filed or submitted underthat the Securities Exchange Act of 1934Company files with the SEC is (a) recorded, processed, summarized and reported within the time periods specified by the Exchange Act rules and regulations due to the reasons set forth below.
During the period covered by this report, management determined the filing delay of financial information for the period was a result of a contractual dispute with a third-party financial vendor which provides information necessary for completion of audit process for the filing of the 10K, which thereby resulted in the Securities and Exchange Commission’s rules and forms, and (b) accumulated and communicateddelay of the 10Q. Specifically, we were unable to management, includingconduct a timely reconciliation of all accounts until resolution of 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’saforesaid dispute. As a result, we have concluded that our internal control over financial reporting during the second quarter of 2017 thatwas not effective for this period. We have materially affected or are reasonably likelytaken steps to materially affect itsremediate this issue and improve our 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 naming CCSC and Ms. Springsteen-Abbott (the “Respondents”). The Claimants, at the advice and recommendation of their personal financial advisors, purchased limited partnership units in CIGF5 between February 2005 and February 2006 and in CIGPF3 between April 2005 and February 2007. The Claimants allege that the Respondents did not properly perform their duties as fund manager. The Funds are not members of FINRA and/or subject to its jurisdiction.
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.
The decision of the Hearing Officers may bePanel was stayed when it was appealed to FINRA's National Adjudicatory Council (NAC)(the “NAC”) pursuant to FINRA Rule 9311. The NAC Decisionissued a decision that upheld the Panel’s ruling. Thelower panel’s ruling and the bar took effect on August 23, 2016. Ms. Springsteen-Abbott appealed the NAC DecisionNAC’s decision to the SEC.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 reaffirmed its position on the bar from the securities industry, but reduced the list of 1,840 items totaling $208,000 to a remaining list of 8487 items totaling $36,226 (which includes approximately $30,000 of continuing education expenses for personnel providing services to the Funds), and reduced the proposed fine from $100,000 to $50,000. On August 14, 2017 respondents$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. AsThey dismissed in part and denied in part Ms. Springsteen-Abbott’s petition. This was regardless of November 14, 2017, management believesCCC’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 final resolutionremoval, the General Partner anticipates that this ruling will not result in any material adverse financial impact onto the Funds, but no assurance can be provided until the legal matter is resolved. Ms. Springsteen-Abbott has filed a Notice of Appeal and Preliminary Statement with the SEC.
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Item 1A. Risk Factors
N/A
Item 3. 4. Defaults Upon Senior Securities
N/A
Item 4. 5. Mine Safety Disclosures
N/A
Item 6. Other Information
NONE
Item 7. Exhibits
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 | ||
June 27, 2023 | ||
By: | ||
Date | Kimberly A. Springsteen-Abbott | |
Chief Executive Officer | ||
And Principal Financial Officer Commonwealth Income & Growth Fund, Inc. |
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