Quarterly Report — Form 10-Q — Sect. 13 / 15(d) – SEA’34 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 226K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 20K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 20K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 16K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 16K
23: R1 Document and Entity Information HTML 43K
41: R2 Condensed Balance Sheets HTML 86K
31: R3 Condensed Balance Sheets (Parenthetical) HTML 22K
15: R4 Condensed Statements of Operations HTML 66K
22: R5 Condensed Statement of Partners' Capital HTML 38K
39: R6 Condensed Statements of Cash Flow HTML 47K
29: R7 Business HTML 22K
17: R8 Summary of Significant Accounting Policies HTML 31K
20: R9 Information Technology, Medical Technology, HTML 25K
Telecommunications Technology, Inventory
Management Equipment (''Equipment'')
12: R10 Related Party Transactions HTML 26K
25: R11 Notes Payable HTML 29K
37: R12 Supplemental Cash Flow Information HTML 22K
34: R13 Commitments and Contingencies HTML 27K
13: R14 Summary of Significant Accounting Policies HTML 39K
(Policies)
26: R15 Summary of Significant Accounting Policies HTML 18K
(Tables)
38: R16 Information Technology, Medical Technology, HTML 18K
Telecommunications Technology, Inventory
Management Equipment (Tables)
35: R17 Related Party Transactions (Tables) HTML 25K
14: R18 Notes Payable (Tables) HTML 29K
24: R19 Supplemental Cash Flow Information (Tables) HTML 22K
42: R20 Business (Details) HTML 16K
27: R21 Summary of Significant Accounting Policies HTML 20K
(Details)
16: R22 Information Technology, Medical Technology, HTML 24K
Telecommunications Technology, Inventory
Management Equipment (Details)
19: R23 Information Technology, Medical Technology, HTML 22K
Telecommunications Technology, Inventory
Management Equipment (Details Narrative)
43: R24 Related Party Transactions (Details) HTML 21K
28: R25 Notes Payable (Details) HTML 56K
18: R26 Notes Payable (Details 1) HTML 27K
21: R27 Supplemental Cash Flow Information (Details) HTML 17K
40: R28 Supplemental Cash Flow Information (Details 1) HTML 18K
30: R29 Supplemental Cash Flow Information (Details HTML 16K
Narrative)
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36: EXCEL IDEA Workbook of Financial Reports XLSX 35K
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32: ZIP XBRL Zipped Folder -- 0001654954-19-012829-xbrl Zip 45K
(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 ☒
Equipment
acquisition costs and deferred expenses, net of accumulated
amortization of approximately $29,000 and $64,000 at September 30,2019 and December 31, 2018, respectively
11,616
27,967
Total
Assets
$756,438
$1,184,824
LIABILITIES
AND PARTNERS' CAPITAL
LIABILITIES
Accounts
payable
$162,986
$159,643
Accounts payable,
CIGF, Inc., net
95,638
148,482
Other accrued
expenses
15,026
5,058
Unearned lease
income
13,209
15,933
Notes
payable
248,800
554,134
Total
Liabilities
535,659
883,250
COMMITMENTS
AND CONTINGENCIES
PARTNERS'
CAPITAL
General
Partner
1,000
1,000
Limited
Partners
219,779
300,574
Total
Partners' Capital
220,779
301,574
Total
Liabilities and Partners' Capital
$756,438
$1,184,824
see
accompanying notes to condensed financial statements
Equipment
acquisition fees paid to General Partner
-
(3,635)
Net proceeds from
the sale of equipment
125
39,673
Net
cash provided by investing activities
125
21,959
Cash
flows from financing activities
Redemptions
-
(46,383)
Debt placement
fee
-
(720)
Net
cash used in financing activities
-
(47,103)
Net
increase (decrease) in cash and cash equivalents
48,968
(15,132)
Cash
and cash equivalents, beginning of the period
5,863
24,583
Cash
and cash equivalents, end of the period
$54,831
$9,451
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 and Going Concern
The
General Partner and CCC have committed to fund, either through cash
contributions and/or forgiveness of indebtedness, any necessary
operational cash shortfalls of the Partnership through November 30,2020. The General Partner will continue to reassess the funding of
limited partner distributions throughout 2019 and will continue to
waive certain fees. The General Partner and CCC will also determine
if related party payables owed to the Partnership may be deferred
(if deemed necessary) in an effort to further increase the
Partnership’s cash flow. If available cash flow or net
disposition proceeds are insufficient to cover the Partnership
expenses and liabilities on a short and long term basis, the
Partnership may attempt to obtain additional funds by disposing of
or refinancing equipment, or by borrowing within its permissible
limits.
The
Partnership has incurred recurring losses and has a working capital
deficit at September 30, 2019. The Partnership believes it has
alleviated these conditions as discussed above. Allocations of
income and distributions of cash are based on the Agreement. The
various allocations under the Agreement prevent any limited
partner’s capital account from being reduced below zero and
ensure the capital accounts reflect the anticipated sharing ratios
of cash distributions, as defined in the Agreement.
2. Summary of Significant Accounting Policies
Basis of Presentation
The
financial information presented as of any date other than December31, 2018 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, 2018 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, 2019 are not necessarily
indicative of financial results that may be expected for the full
year ended December 31, 2019.
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,
accounts payable and accrued expenses and other liabilities are
carried at amounts which reasonably approximate their fair values
as of September 30, 2019 and December 31, 2018 due to the short
term nature of these financial instruments.
7
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, 2019 and December 31, 2018 approximates the carrying
value of these instruments, due to the interest rates on the debt
approximating current market interest rates. The Partnership
classifies the fair value of its notes payable within Level 2 of
the valuation hierarchy based on the observable inputs used to
estimate fair value.
Cash and cash equivalents
We
consider cash equivalents to be highly liquid investments with an
original maturity of 90 days or less.
At
September 30, 2019, cash and cash equivalents were held in one
account maintained at one financial institution with an aggregate
balance of approximately $57,000. Bank accounts are federally
insured up to $250,000 by the FDIC. At September 30, 2019, the
total cash balance was as follows:
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 2019
due to many factors, including cash receipts, equipment
acquisitions, interest rates and distributions to limited
partners.
Recently Adopted Accounting Pronouncements
In
December 2018, the Financial Accounting Standard Board
(“FASB”) issued ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements
for Lessors, which is expected to reduce a lessor’s
implementation and ongoing costs associated with applying the new
leases standard. The ASU also clarifies a specific lessor
accounting requirement. Specifically, this ASU addresses
the following issues facing lessors when applying the leases
standard: Sales taxes and other similar taxes collected from
lessees, certain lessor costs paid directly by lessees and
recognition of variable payments for contracts with lease and
non-lease components. The Partnership concluded, upon adoption of
this update that there was no significant change to their
accounting.
In
March 2016, the FASB issued Accounting Standards Update No.
2016-02, Leases (Topic 842)
Section A—Leases: Amendments to the FASB Accounting Standards
Codification® Section B—Conforming Amendments Related to
Leases: Amendments to the FASB Accounting Standards
Codification® Section C—Background Information and Basis
for Conclusions- Effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal
years, for any of the following: A public business entity; A
not-for-profit entity that has issued, or is a conduit bond obligor
for, securities that are traded, listed, or quoted on an exchange
or an over-the-counter market; An employee benefit plan that files
financial statements with the U.S. Securities and Exchange
Commission (SEC). The new standard requires the recognition and
measurement of leases at the beginning of the earliest period
presented using a modified retrospective approach, which includes a
number of optional practical expedients that entities may elect to
apply. This guidance also expands the requirements for
lessees to record leases embedded in other arrangements and the
required quantitative and qualitative disclosures surrounding
leases. Additionally, our business involves lease agreements with
our customers whereby we are the lessor in the transaction.
Accounting guidance for lessors is largely unchanged. The
amendments are effective for fiscal years beginning after December15, 2018, and interim periods within those fiscal
years. We adopted Topic 842 at the required adoption
date of January 1, 2019. We used the package of practical
expedients permitted under the transition guidance that allowed us
not to reassess: (1) lease classification for expired or existing
leases and (2) initial direct costs for any expired or existing
leases. We did not recognize an adjustment to the opening balance
of partner’s capital upon adoption.
In
March 2019, the FASB issued Accounting Standards Update No.
2019-01, Leases (Topic 842)
Codification Improvements — Effective for fiscal years
beginning after December 15, 2019, including interim periods within
those fiscal years, for any of the following: A public business
entity; A not-for-profit entity that has issued, or is a conduit
bond obligor for, securities that are traded, listed, or quoted on
an exchange or an over-the-counter market; An employee benefit plan
that files financial statements with the U.S. Securities and
Exchange Commission (SEC). The amendments in this Update include
the following items brought to the Board’s attention through
those interactions with stakeholders:
●
Determining the
fair value of the underlying asset by lessors that are not
manufacturers or dealers (Issue 1).
●
Presentation on the
statement of cash flows—sales-type and direct financing
leases (Issue 2).
●
Transition
disclosures related to Topic 250, Accounting Changes and Error
Corrections (Issue 3).
8
We
adopted Topic 842 at the required adoption date of January 1, 2019.
The Partnership concluded that the sales taxes and other similar
taxes collected from the lessees are recorded in the current period
in the Condensed Statement of Operations as gross revenues and
expenses. As permitted by the guidance, we elected the practical
expedient that allows us not to restate comparative periods in the
financial statements. Upon adoption of this update, there was no
significant change to the Partnership accounting.
Recent Accounting Pronouncements Not Yet Adopted
FASB
issued a new guidance, Accounting Standards Update No. 2016-13,
Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, as clarified
and amended by ASU 2018-19, Codification Improvements to Topic 326,
Financial Instruments – Credit Losses and ASU 2019-05,
Financial Instruments – Credit Losses (Topic 326): Targeted
Transition Relief. The new guidance is effective for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2019. Thus, for a calendar-year company, it would be
effective January 1, 2020. The new guidance requires an allowance
for credit losses based on the expectation of lifetime credit
losses on financial receivables carried at amortized cost,
including, but not limited to, mortgage loans, premium receivables,
reinsurance receivables and certain leases. The new current
expected credit loss (“CECL”) impairment model for
financial assets reported at amortized cost will be applicable to
receivables associated with sales-type and direct financing leases
but not to operating lease receivables. The 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.
Remarketing
fees will be paid to the leasing companies 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 lessees for 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, 2019 and 2018, there were no remarketing fees
incurred and/or paid with cash or netted against receivables due
from such parties, respectively.
Gains
from the termination of leases are recognized when the lease is
modified and terminated concurrently. Gains from lease termination
included in lease revenue for the nine months ended September 30,2019 and 2018, was approximately $0 and $500,
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, 2019 was
approximately $1,840,000 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 30,2019 was approximately $6,789,000. The Partnership’s share of
the outstanding debt associated with this equipment at September30, 2019 was approximately $114,000 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, 2019 was approximately $1,061,000.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2018 was
approximately $1,840,000 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 31,2018 was approximately $6,789,000. The Partnership’s share of
the outstanding debt associated with this equipment at December 31,2018 was approximately $197,000 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, 2018 was approximately $1,701,000.
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. As additional investment opportunities arise during
the remainder of 2019, the Partnership expects total shared
equipment and related debt to trend higher as the Partnership
builds its portfolio.
9
The following is a schedule of approximate future minimum rentals
on non-cancellable operating leases at September 30,2019:
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 30,2019 and 2018, the Partnership was charged approximately $73,000
and $110,000 in Other LP expense, respectively.
$183,000
$295,000
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.
$-
$4,000
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 the fee we
will receive.
$28,000
$35,000
Debt placement fee
As compensation for
arranging term debt to finance our acquisition of equipment, we
will pay the general partner a fee equal to one percent of such
indebtedness; provided, however, that such fee shall be reduced to
the extent we incur such fees to third parties unaffiliated with
the general partner or the lender with respect to such
indebtedness. No such fee will be paid with respect to borrowings
from the general partner or its affiliates. We intend to initially
acquire leases on an all cash basis with the proceeds of this
offering, but may borrow funds after the offering proceeds have
been invested. The amount we borrow, and therefore the amount of
the fee, will depend upon interest rates at the time of a loan, and
the amount of leverage we determine is appropriate at the time. We
do not intend to use more than 30% leverage overall in our
portfolio. Fees will increase as the amount of leverage we use
increases, and as turnover in the portfolio increases and
additional equipment is purchased using leverage.
$-
$1,000
10
5. Notes Payable
Notes payable consisted of the following approximate
amounts:
Installment
note payable to bank; interest rate of 4.47%, due in monthly
installments of $9,935, including interest, with final payment in
January 2019
-
10,000
Installment
note payable to bank; interest rate of 1.80%, due in monthly
installments of $456, including interest, with final payment in
February 2019
-
1,000
Installment
note payable to bank; interest rate of 4.23%, due in monthly
installments of $1,339, including interest, with final payment in
August 2019
-
11,000
Installment
note payable to bank; interest rate of 4.37%, due in quarterly
installments of $42,121, including interest, with final payment in
October 2019
42,000
164,000
Installment
note payable to bank; interest rate of 5.46%, due in monthly
installments of $904, including interest, with final payment in
December 2019
3,000
11,000
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
17,000
55,000
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
7,000
19,000
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
26,000
50,000
Installment
note payable to bank; interest rate of 5.25%, due in monthly
installments of $253, including interest, with final payment in
August 2020
3,000
5,000
Installment
note payable to bank; interest rate of 5.25%, due in quarterly
installments of $5,330, including interest, with final payment in
August 2020
20,000
35,000
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
23,000
36,000
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
35,000
52,000
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
33,000
48,000
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
16,000
23,000
Installment
note payable to bank; interest rate of 6.66%, due in monthly
installments of $665, including interest, with final payment in
March 2021
11,000
17,000
Installment
note payable to bank; interest rate of 5.33%, due in monthly
installments of $582, including interest, with final payment in
August 2021
13,000
17,000
$249,000
$554,000
11
The notes are secured by specific equipment with a carrying value
of approximately $495,000 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, 2019 are as
follows:
No
interest or principal on notes payable was paid by the Partnership
during 2019 and 2018 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:
Debt assumed in
connection with purchase of equipment
$-
$52,000
Accrued expenses
incurred in connection with purchase of technology
equipment
$-
$25,000
During the nine months ended September 30, 2019 and 2018, the
Partnership wrote-off fully amortized acquisition and finance fees
of approximately $1,000 and $2,000, respectively.
12
7. Commitments and Contingencies
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 13, 2019, the
Partnership has received approximately $62,000 of the approximate
$77,000 sale proceeds and has recorded a reserve against the
outstanding receivable of approximately $12,000. 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 $12,000 reserve and
recorded as a bad debt recovery. As of November 13, 2019, 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 Defendant and Cleary being jointly and
severally liable for judgment amount. The court also vacated the
September 21, 2016 settlement dismissal.
On July27, 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. As such, management
believes that the foregoing will not result in any adverse
financial impact on the Funds, but no assurance can be provided
until the proceedings are resolved.
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 allocated approximately $87,000 of the $208,000 in
allegedly misallocated expenses back to the affected funds as a
contingency accrual in CCC’s financial statements and a good
faith payment 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 84 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. That appeal is
pending as of November 13, 2019. All requested or allowed
briefs have been filed with the SEC. Management believes that
whatever final resolution of this may be, it will not result in any
material adverse financial impact on the Funds, although a final
assurance cannot be provided until the legal matter is
resolved.
13
Leased Equipment
The General Partner is in the process of negotiations with a lessee
to “Buy-out” certain equipment currently under lease
contract. If a “Buy-out” agreement is not
reached, the lessee will continue to lease the equipment as written
under the original lease contract. The equipment to be
included in the “Buy-out” represents approximately 6.7%
of the Partnership’s total equipment at cost as of September30, 2019.
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, 2018 filed with the SEC. We undertake no obligation to
update or revise any forward-looking information, whether as a
result of new information, future developments or
otherwise.
INDUSTRY OVERVIEW
The Equipment
Leasing and Finance Association’s (ELFA) Monthly
Leasing and Finance Index (MLFI-25), which reports economic
activity from 25 companies representing a cross section of the $1
trillion equipment finance sector, showed their overall new
business volume for September was $10 billion, up
18 %
year-over-year from new business volume in September 2018. Volume
was up 9 % month-to-month from $9.2 billion in August. Year to
date, cumulative new business volume was up 5 % compared to 2018.
Receivables over 30 days were 1.70 %, down from 2.0 % the previous
month and up from 1.60 % the same period in 2018. Charge-offs was
0.40 %, down from 0.42 % the previous month, and unchanged from the
year-earlier period. Credit approvals totaled 76.3 %, down from
76.6 % in August. Total headcount for equipment finance companies
was down 2.1 % year-over-year. Separately, the Equipment Leasing
& Finance Foundation’s Monthly Confidence Index (MCI-EFI)
in October is 51.4, down from the September index of
54.7.
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.
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.
14
REVENUE RECOGNITION
Through September 30, 2019, 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.
Finance lease interest income is recorded over the term of the
lease using the effective interest method. For finance leases, we
record, at lease inception, unearned finance lease income which is
calculated as follows: total lease payments, plus any residual
values and initial direct costs, less the cost of the leased
equipment.
Upon the end of the lease term, if the lessee has not met the
return conditions as set out in the lease, the Partnership is
entitled, in certain cases, to additional compensation from the
lessee. The Partnership’s accounting policy for recording
such payments is to treat them as revenue.
Gain or losses from sales of leased and off lease equipment are
recorded on a net basis in the Fund’s condensed Statement of
Operations.
Our leases do not contain any step-rent provisions or escalation
clauses nor are lease revenues adjusted based on any
index.
Gains from the termination of leases are recognized when the lease
is modified and terminated concurrently. Gains from lease
termination included in lease revenue for the nine months ended
September 30, 2019 and 2018, was approximately $0 and $500,
respectively.
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.
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 30,2019, was cash provided by operating activities of approximately
$49,000, compared to the nine months ended September 30, 2018 where
our primary sources of cash were cash provided by operating
activities of approximately $10,000, payments received from finance
leases of approximately $5,000 and net proceeds from the sale of
equipment of approximately $40,000.
There were no primary uses of cash for the nine months ended
September 30, 2019. For the nine months ended September 30, 2018,
our primary uses of cash were limited partner redemptions of
approximately $46,000, the purchase of new equipment of
approximately $19,000 and equipment acquisition fees of
approximately $4,000.
Cash was provided by operating activities for the nine months ended
September 30, 2019 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. For the nine
months ended September 30, 2018, cash was provided by operating
activities of approximately $10,000, which includes net loss of
approximately $123,000 and depreciation and amortization expenses
of approximately $481,000. Other noncash activities included
in the determination of net income include direct payments to banks
by lessees of approximately $337,000.
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.
15
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.
Capital expenditures and
distributions are expected to continue to increase overall during
the remainder of 2019 as management focuses on additional equipment
acquisitions and funding limited partner distributions. We intend
to invest during the remainder of 2019, depending on the
availability of investment opportunities.
We
consider cash equivalents to be highly liquid investments with an
original maturity of 90 days or less.
At
September 30, 2019, cash and cash equivalents were held in one
account maintained at one financial institution with an aggregate
balance of approximately $57,000. Bank accounts are federally
insured up to $250,000 by the FDIC. At September 30, 2019, the
total cash balance was as follows:
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 2019
due to many factors, including cash receipts, equipment
acquisitions, interest rates and distributions to limited
partners.
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, 2019, the Partnership had
future minimum rentals on non-cancelable operating leases of
approximately $169,000 for the balance of the year ending December31, 2019 and approximately $160,000 thereafter.
As of
September 30, 2019, our non-recourse debt was approximately
$249,000 with interest rates ranging from 1.80% to 6.66% and will
be payable through August 2021.
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.
The
General Partner and CCC have committed to fund, either through cash
contributions and/or forgiveness of indebtedness, any necessary
operational cash shortfalls of the Partnership through November 30,2020. The General Partner will continue to reassess the funding of
limited partner distributions throughout 2019 and will continue to
waive certain fees if the General Partner determines it is in the
best interest of the Partnership to do so. If available cash flow
or net disposition proceeds are insufficient to cover the
Partnership expenses and liabilities on a short and long term
basis, the Partnership may attempt to obtain additional funds by
disposing of or refinancing equipment, or by borrowing within its
permissible limits. Additionally, the Partnership will seek to
enhance portfolio returns and maximize cash flow through the use of
leveraged lease transactions; the acquisition of lease equipment
through financing. This strategy allows the General
Partner to acquire additional revenue generating leases without the
use of investor funds, thus maximizing overall return.
Our lease revenue decreased to approximately $185,000 for the three
months ended September 30, 2019, from approximately $215,000 for
the three months ended September 30, 2018. The Partnership
had 34 and 41 active operating leases for the three months ended
September 30, 2019 and 2018, 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 2019, primarily through debt
financing.
Sale of Equipment
For the three months ended September 30, 2019, the Partnership had
no equipment sales. This compares to the three months ended
September 30, 2018, when the Partnership sold fully depreciated
equipment with a net book value of approximately $0 for net gain of
approximately $200.
Operating Expenses
Our operating expenses, excluding depreciation, primarily consist
of accounting and legal fees, outside service fees and
reimbursement of expenses to CCC for administration and operation
of the Partnership. These expenses decreased to approximately
$26,000 for the three months ended September 30, 2019, from
approximately $90,000 for the three months ended September 30,2018. This decrease is primarily attributable to a
decrease in legal fees of approximately $45,000, other LP expenses
of approximately $11,000 and postage/shipping 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 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 $9,000 for the three months ended
September 30, 2019, from approximately $11,000 for the three months
ended September 30, 2018. 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 $141,000 for the three months
ended September 30, 2019, from approximately $151,000 for the three
months ended September 30, 2018. 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, 2019.
Net Gain (Loss)
For the three months ended September 30, 2019, we recognized
revenue of approximately $192,000 and expenses of approximately
$160,000, resulting in net gain of approximately $32,000. For
the three months ended September 30, 2018, we recognized revenue of
approximately $215,000 and expenses of approximately $261,000,
resulting in net loss of approximately $46,000. This change
in net gain is due to the changes in revenue and expenses as
described above.
Our lease revenue decreased to approximately $558,000 for the nine
months ended September 30, 2019, from approximately $702,000 for
the nine months ended September 30, 2018. The Partnership had
35 and 53 active operating leases for the nine months ended
September 30, 2019 and 2018. 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 2019,
primarily through debt financing.
Sale of Equipment
We sold equipment, held under operating leases, with net book value
of approximately $0 for a net gain of approximately $125 for the
nine months ended September 30, 2019. This compares to the
nine months ended September 30, 2018, when the Partnership sold
equipment, held under operating leases, with net book value of
approximately $8,000 for a net gain of approximately
$31,000.
Operating Expenses
Our operating expenses, excluding depreciation, primarily consist
of accounting and legal fees, outside service fees and
reimbursement of expenses to CCC for administration and operation
of the Partnership. These expenses decreased to approximately
$203,000 for the nine months ended September 30, 2019, from
approximately $310,000 for the nine months ended September 30,2018. This decrease is primarily attributable to a decrease
in legal fees of approximately $55,000, other LP expenses of
approximately $37,000, temporary services – accounting
expenses of approximately $5,000, outside office services –
equity placement expenses of approximately $4,000 and
postage/shipping 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 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 $28,000 for the nine months ended
September 30, 2019 from approximately $36,000 for the nine months
ended September 30, 2018. This decrease is consistent with
the overall decrease in lease revenue.
Depreciation and Amortization Expense
Depreciation and amortization expenses consist of depreciation on
equipment and amortization of equipment acquisition fees. These
expenses decreased to approximately $393,000 for the nine months
ended September 30, 2019, from approximately $481,000 for the nine
months ended September 30, 2018. 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, 2019.
Net Loss
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. For the
nine months ended September 30, 2018, we recognized revenue of
approximately $734,000 and expenses of approximately $857,000,
resulting in a net loss of approximately $123,000. This change in
net loss is due to the changes in revenue and expenses as described
above.
18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
N/A
Item 4. Controls and Procedures
Our
management, under the supervision and with the participation of the
General Partner’s Chief Executive Officer and Principal
Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures related to our reporting and
disclosure obligations as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on such evaluation, the
General Partner’s Chief Executive Officer and Principal
Financial Officer have concluded that, as of September 30, 2019,
our disclosure controls and procedures are effective in ensuring
that information relating to us which is required to be disclosed
in our periodic reports filed or submitted under the Securities
Exchange Act of 1934 is (a) recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and (b) accumulated
and communicated to management, including the General
Partner’s Chief Executive Officer and Principal Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure. There were no changes in the
Partnership’s internal control over financial reporting
during the third quarter of 2019 that have materially affected or
are reasonably likely to materially affect its internal control
over financial reporting.
Part II: OTHER INFORMATION
Item 1. Commitments and
Contingencies
Leased Equipment
The General Partner is in the process of negotiations with a lessee
to “Buy-out” certain equipment currently under lease
contract. If a “Buy-out” agreement is not
reached, the lessee will continue to lease the equipment as written
under the original lease contract. The equipment to be
included in the “Buy-out” represents approximately 6.7%
of the Partnership’s total equipment at cost as of October15, 2019.
Item 2. 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 13, 2019, the
Partnership has received approximately $62,000 of the approximate
$77,000 sale proceeds and has recorded a reserve against the
outstanding receivable of approximately $12,000. 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 $12,000 reserve and
recorded as a bad debt recovery. As of November 13, 2019, 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 Defendant and Cleary being jointly and
severally liable for judgment amount. The court also vacated the
September 21, 2016 settlement dismissal.
On July27, 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. As such, management
believes that the foregoing will not result in any adverse
financial impact on the Funds, but no assurance can be provided
until the proceedings are resolved.
19
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 allocated approximately $87,000 of the $208,000 in
allegedly misallocated expenses back to the affected funds as a
contingency accrual in CCC’s financial statements and a good
faith payment 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 84 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. That appeal is
pending as of November 13, 2019. All requested or allowed
briefs have been filed with the SEC. Management believes that
whatever final resolution of this may be, it will not result in any
material adverse financial impact on the Funds, although a final
assurance cannot be provided until the legal matter is
resolved.
20
Item
2A. Risk
Factors
N/A
Item 3.
Unregistered Sales of Equity
Securities and Use of Proceeds
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