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EX-31.2 - EX-31.2 - SQN Alternative Investment Fund III, L.P. | y05229exv31w2.htm |
EX-31.1 - EX-31.1 - SQN Alternative Investment Fund III, L.P. | y05229exv31w1.htm |
EX-32.1 - EX-32.1 - SQN Alternative Investment Fund III, L.P. | y05229exv32w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - SQN Alternative Investment Fund III, L.P. | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011
OR
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION FROM _______ TO _____.
COMMISSION FILE NUMBER: 333-166195
SQN Alternative Investment Fund III L.P.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
27-2173346 (I.R.S. Employer ID No.) |
|
110 William Street, 26th Floor New York, NY (Address of principal executive offices) |
10038 (Zip code) |
Issuers telephone number: (212) 422-2166
None
(Former name, former address and former fiscal year, if changed since last report.)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) 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 (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
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 o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
At November 10, 2011, there were 7,530.90 units of the Registrants partnership interests issued
and outstanding.
SQN Alternative Investment Fund III L.P.
INDEX
Table of Contents
Part I FINANCIAL INFORMATION
SQN Alternative Investment Fund III L.P.
Condensed Balance Sheets
September 30, | ||||||||
2011 (Unaudited) | December 31, 2010 | |||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 529,014 | $ | 232 | ||||
Escrow deposits |
1,519,773 | | ||||||
Investment in finance leases, net |
3,683,270 | | ||||||
Initial direct costs, net of accumulated amortization of $7,494 and $- |
124,959 | | ||||||
Other assets |
8,673 | | ||||||
Total Assets |
$ | 5,865,689 | $ | 232 | ||||
Liabilities and Partners Equity |
||||||||
Liabilities: |
||||||||
Accrued expenses |
$ | 120,850 | $ | | ||||
Limited Partners contributions received in advance |
1,517,400 | | ||||||
Total Liabilities |
1,638,250 | | ||||||
Partners Equity: |
||||||||
Limited Partners |
4,233,128 | 133 | ||||||
General Partner |
(5,689 | ) | 99 | |||||
Total Partners Equity |
4,227,439 | 232 | ||||||
Total Liabilities and Partners Equity |
$ | 5,865,689 | $ | 232 | ||||
See notes to condensed financial statements.
3
Table of Contents
SQN Alternative Investment Fund III L.P.
Condensed Statements of Operations
Three Months | ||||||||
Ended September | Nine Months Ended | |||||||
30, 2011 | September 30, 2011 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenue: |
||||||||
Rental income |
$ | 36,633 | $ | 36,633 | ||||
Finance income |
9,984 | 9,984 | ||||||
Interest income |
944 | 1,878 | ||||||
Total Revenue |
47,561 | 48,495 | ||||||
Expenses: |
||||||||
Management fees Investment Partner |
180,000 | 300,000 | ||||||
Fund administation expense |
1,800 | 24,100 | ||||||
Investor relations expense |
4,245 | 4,245 | ||||||
Professional fees |
32,041 | 96,095 | ||||||
Depreciation and amortization |
15,494 | 15,494 | ||||||
Other expenses |
205 | 487 | ||||||
Foreign currency transaction loss |
186,806 | 186,806 | ||||||
Total Expenses |
420,591 | 627,227 | ||||||
Net Loss |
$ | (373,030 | ) | $ | (578,732 | ) | ||
Net loss allocable to: |
||||||||
Limited Partners |
$ | (369,300 | ) | $ | (572,944 | ) | ||
General Partner |
(3,730 | ) | (5,788 | ) | ||||
$ | (373,030 | ) | $ | (578,732 | ) | |||
Weighted average number of limited partnership
interests outstanding |
4,768 | 3,642 | ||||||
Net loss attributable to Limited Partners per
weighted average number of limited partnership
interests outstanding |
$ | (77.46 | ) | $ | (157.33 | ) | ||
See notes to condensed financial statements.
4
Table of Contents
SQN Alternative Investment Fund III L.P.
Condensed Statements of Changes in Partners Equity
Period From March 10, 2010 (Commencement of Operations) Through December 31, 2010
and the Nine Months Ended September 30, 2011
Period From March 10, 2010 (Commencement of Operations) Through December 31, 2010
and the Nine Months Ended September 30, 2011
Limited | Subscription | |||||||||||||||||||
Partnership | General | Limited | Receivable - | |||||||||||||||||
Interests | Total | Partner | Partners | Limited Partner | ||||||||||||||||
Partners capital contributions |
1.00 | $ | 1,100 | $ | 100 | $ | 1,000 | $ | | |||||||||||
Less: subscription receivable |
| (750 | ) | | | (750 | ) | |||||||||||||
Net loss |
| (118 | ) | (1 | ) | (117 | ) | | ||||||||||||
Balance, December 31, 2010 |
1.00 | 232 | 99 | 883 | (750 | ) | ||||||||||||||
Limited Partners capital contributions |
5,853.50 | 5,853,500 | | 5,853,500 | | |||||||||||||||
Redemption of initial Limited Partner
capital contribution |
(1.00 | ) | (250 | ) | | (1,000 | ) | 750 | ||||||||||||
Offering and Distribution Expenses |
| (1,047,311 | ) | | (1,047,311 | ) | | |||||||||||||
Net loss |
| (578,732 | ) | (5,788 | ) | (572,944 | ) | | ||||||||||||
Balance, September 30, 2011 (Unaudited) |
5,853.50 | $ | 4,227,439 | $ | (5,689 | ) | $ | 4,233,128 | $ | | ||||||||||
See notes to condensed financial statements.
5
Table of Contents
SQN Alternative Investment Fund III L.P.
Condensed Statement of Cash Flows
Nine Months Ended September 30, 2011
(Unaudited)
Nine Months Ended September 30, 2011
(Unaudited)
Cash flows from operating activities: |
||||
Net loss |
$ | (578,732 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: |
||||
Finance income |
(9,984 | ) | ||
Depreciation and amortization |
15,494 | |||
Foreign currency transaction loss |
139,390 | |||
Change in operating assets and liabilities: |
||||
Minimum rental payments received |
96,127 | |||
Other assets |
(8,673 | ) | ||
Accrued expenses |
20,850 | |||
Net cash used in operating activities |
(325,528 | ) | ||
Cash flows from investing activities: |
||||
Purchase of finance leases |
(3,916,803 | ) | ||
Cash paid for initial direct costs |
(132,453 | ) | ||
Net cash used in investing activities |
(4,049,256 | ) | ||
Cash flows from financing activities: |
||||
Proceeds from Limited Partners capital contributions |
5,853,500 | |||
Cash paid for redemption of initial Limited Partner capital contribution |
(250 | ) | ||
Cash paid for offering and distribution expenses |
(947,311 | ) | ||
Increase in escrow deposits |
(1,519,773 | ) | ||
Limited Partners capital contributions received in advance |
1,517,400 | |||
Net cash provided by financing activities |
4,903,566 | |||
Net increase in cash and cash equivalents |
528,782 | |||
Cash and cash equivalents, beginning of period |
232 | |||
Cash and cash equivalents, end of period |
$ | 529,014 | ||
See notes to condensed financial statements.
6
Table of Contents
SQN Alternative Investment Fund III L.P.
Notes to Condensed Financial Statements
September 30, 2011
(Unaudited)
September 30, 2011
(Unaudited)
1. Organization and Nature of Operations
Nature of business and operations The condensed financial statements at September 30, 2011
and for the three and nine months ended September 30, 2011 are unaudited, but in the opinion of
management include all adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation of the results for the interim periods. The results reported in these
condensed financial statements should not necessarily be taken as indicative of results that may
be expected for the entire year. The financial information included herein should be read in
conjunction with the financial statements and notes in the Prospectus, dated March 17, 2011,
contained in the Partnerships Registration Statement on Form S-1, as amended.
SQN Alternative Investment Fund III L.P. (the Partnership) was organized as a Delaware limited
partnership on March 10, 2010 and is engaged in a single business segment, the ownership and
investment in leased equipment, which includes: (i) purchasing equipment and leasing it to
third-party end users; (ii) providing equipment and other asset financing; (iii) acquiring
equipment subject to lease and (iv) acquiring ownership rights (residual value interests) in
leased equipment at lease expiration. From time to time, the Partnership may also purchase
equipment and sell it directly to its leasing customers. The Partnership will terminate no later
than December 31, 2034.
The principal investment strategy of the Partnership is to invest in business-essential,
revenue-producing equipment with high in-place value and long, relative to the investment term,
economic life. The Partnership expects to achieve its investment strategy by making investments
in equipment already subject to lease or originating equipment leases in such equipment.
The General Partner of the Partnership is SQN AIF III GP, LLC (the General Partner), a
wholly-owned subsidiary of the Partnerships Investment Manager, SQN Capital Management, LLC
(the Investment Manager). Both the Partnerships General Partner and its Investment Manager
are Delaware limited liability companies. The General Partner will manage and control the day to
day activities and operations of the Partnership, pursuant to the terms of the Partnership
Agreement. The General Partner paid an aggregate capital contribution of $100 for a 1% interest
in the Partnerships income, losses and distributions. The Investment Manager will make all
investment decisions and manage the investment portfolio of the Partnership.
On June 28, 2011, the officers of Summit Asset Management Limited (SAM) which prior to that
date had equal ownership of the Investment Manager with SQN Capital Corporation (the parent
company of the Investment Manager) resigned from both the General Partner and the Investment
Manager. At that time, SAM redeemed its ownership interest in the Investment Manager.
SQN Capital Corporation and SAM will, from time to time, originate transactions on their own
behalf and offer to sell all or part of such transactions to the Partnership either individually
or as a portfolio depending upon, among other things, the appropriateness of the proposed
investment for the Partnership (as determined by the Investment Manager, in its sole discretion)
and the amount available for investment by the Partnership at such time.
The Partnership will make, at the sole discretion of the Investment Manager, semi-annual cash
distributions to each partner computed at 3% (pro-rated to the date of admission for each
limited partner) of each partners capital contribution, beginning six months after the
Partnerships initial closing which occurred on May 2, 2011. The Partnerships income, losses
and distributions are allocated 99% to the Limited Partners and 1% to the General Partner until
the Limited Partners have received total distributions equal to each Limited Partners capital
contribution plus an 8%, compounded annually, cumulative return on each Limited Partners
capital contribution. After such time, income, losses and distributions will be allocated 80% to
the Limited Partners and 20% to the General Partner.
A Limited Partner may not redeem their partnership interests in the Partnership without the
prior written consent of the General Partner. The General Partner has the sole discretion to
approve or deny any redemption requested by a Limited Partner.
7
Table of Contents
SQN Alternative Investment Fund III L.P.
Notes to Condensed Financial Statements
September 30, 2011
(Unaudited)
September 30, 2011
(Unaudited)
The Partnership is currently in the Offering Period, which expires the earlier of raising
$50,000,000 in Limited Partner capital contributions (50,000 units at $1,000 per unit) or March
17, 2013. During the Operating Period the Partnership invests most of the net proceeds from its
offering in items of equipment that are subject to leases, equipment financing transactions, and
residual ownership rights in leased equipment. The Operating Period begins when the Partnership
starts investing the offering proceeds, which occurred on June 29, 2011, and will last for three
years, unless it is extended, at the sole discretion of the Partnerships General Partner for a
maximum of two one-year extensions. After the net offering proceeds are invested, additional
investments will be made with the cash generated from the Partnerships initial investments, to
the extent that cash is not needed for expenses, reserves, or distributions to partners. The
investment in additional equipment in this manner is called reinvestment. After the Operating
Period, the Partnership will sell its assets in the ordinary course of business, a time frame
called the Liquidation Period. The Liquidation Period is expected to last four years, unless
it is extended, at the sole discretion of the Partnerships General Partner for a maximum of two
one-year extensions.
On May 2, 2011, the first business day after April 30, 2011, the Partnership admitted its
initial 19 Limited Partners with total capital contributions of $1,200,000. From May 3, 2011
through September 30, 2011, the Partnership admitted an additional 76 Limited Partners with
total capital contributions of $4,653,500.
2. Summary of Significant Accounting Policies
Cash and cash equivalents The Partnership considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. Cash and cash
equivalents consist of funds maintained in checking and money market accounts held at financial
institutions.
The Partnerships cash and cash equivalents are held principally at two financial institutions
and at times may exceed federally insured limits. The Partnership has placed these funds in high
quality institutions in order to minimize risk relating to exceeding insured limits.
Finance lease receivables and allowance for doubtful accounts In the normal course of
business, the Partnership provides credit or financing to its customers, performs credit
evaluations of these customers, and maintains reserves for potential credit losses. These credit
or financing transactions are normally collateralized by the equipment being financed. In
determining the amount of allowance for doubtful accounts, the Investment Manager considers
historical credit losses, the past due status of receivables, payment history, and other
customer-specific information. The past due status of a receivable is based on its contractual
terms. Expected credit losses are recorded as an allowance for doubtful accounts. Receivables
are written off when the Investment Manager determines they are uncollectible. An allowance for
doubtful accounts is not currently provided since, in the opinion of the Investment Manager, all
accounts recorded on the books are deemed collectible.
Risks and uncertainties In the normal course of business, the Partnership is exposed to credit
risk. Credit risk is the risk of a lessees inability or unwillingness to make contractually
required payments. Concentrations of credit risk with respect to lessees are dispersed across
different industry segments throughout the United Kingdom. Although the Partnership does not
currently foresee a concentrated credit risk associated with these customers, lease payments are
dependent upon the financial stability of the industry segments in which they operate.
Asset impairments The significant assets in the Partnerships investment portfolio are
periodically reviewed, no less frequently than annually or when indicators of impairment exist,
to determine whether events or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. An impairment loss is recognized only if the carrying amount of a
long-lived asset is not recoverable and exceeds its fair value. If there is an indication of
impairment, the Partnership estimates the future cash flows (undiscounted and without interest
charges) expected from the use of the asset and its eventual disposition. Future cash flows are
the future cash inflows expected to be generated by an asset less the future outflows expected
to be necessary to obtain those inflows. If an impairment is
determined to exist, the impairment loss
is measured as the amount by which the carrying value of a long-lived asset exceeds its fair
value and is recorded in the statement of operations in the period the determination is made.
8
Table of Contents
SQN Alternative Investment Fund III L.P.
Notes to Condensed Financial Statements
September 30, 2011
(Unaudited)
September 30, 2011
(Unaudited)
The events or changes in circumstances that generally indicate that an asset may be impaired
are, (i) the estimated fair value of the underlying equipment is less than its carrying value,
(ii) the lessee is experiencing financial difficulties and (iii) it does not appear likely that
the estimated proceeds from the disposition of the asset will be sufficient to satisfy the
residual value in the asset. The preparation of the undiscounted cash flows requires the use of
assumptions and estimates, including the level of future rents or receipts from the sale of the
residual value investment, estimated downtime between re-leasing events, and the amount of
re-leasing costs. The Investment Managers review for impairment includes a consideration of the
existence of impairment indicators, including third party appraisals, published values for
similar assets, recent transactions for similar assets, adverse changes in market conditions for
specific asset types, and the occurrence of significant adverse changes in general industry and
market conditions that could affect the fair value of the asset.
Revenue recognition The Partnership records revenue based upon the lease classification
determined at the inception of the transaction and based upon the terms of lease.
The Partnership leases equipment to third parties and each such lease may be classified as
either a finance lease or an operating lease. Initial direct costs will be capitalized and
amortized over the term of the related lease for a finance lease. For an operating lease, the
initial direct costs will be included as a component of the cost of the equipment and
depreciated.
For finance leases, the Partnership will record, at lease inception, the total minimum lease
payments receivable from the lessee, the estimated unguaranteed residual value of the equipment
upon lease termination, the initial direct costs, if any, related to the lease and the related
unearned income. Unearned income represents the difference between the sum of the minimum lease
payments receivable plus the estimated unguaranteed residual value, minus the cost of the leased
equipment. Unearned income will be recognized as finance income over the term of the lease using
the effective interest rate method.
For operating leases, rental income will be recognized on a straight line basis over the lease
term. Billed and uncollected operating lease receivables will be included in accounts
receivable. Accounts receivable will be stated at their estimated net realizable value. Deferred
rental income is the difference between the timing of the cash payments and the income
recognized on a straight line basis.
The Investment Manager has an investment committee that approves each new equipment lease,
financing transaction, and lease acquisition. As part of its process it determines the
unguaranteed residual value, if any, to be used once the acquisition has been approved. The
factors considered in determining the unguaranteed residual value include, but are not limited
to, the creditworthiness of the potential lessee, the type of equipment being considered, how
the equipment is integrated into the potential lessees business, the length of the lease and the
industry in which the potential lessee operates. Unguaranteed residual values are reviewed for
impairment in accordance with the Partnerships policy relating to impairment review.
Initial direct costs The Partnership capitalizes initial direct costs (IDC) associated with
the origination and funding of lease assets. IDC includes both internal costs (e.g., labor and
overhead) and external broker fees incurred with the origination. These costs are amortized on a
lease by lease basis based on actual contract term using the effective interest rate method for
finance leases and a straight-line method for operating leases. Upon disposal of the underlying
lease assets, both the IDC and the associated accumulated amortization are relieved. Costs
related to leases that are not consummated are not eligible for capitalization as initial direct
costs and are expensed as incurred as acquisition expense.
Acquisition expense Acquisition expense represents costs which include, but are not limited
to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting
fees and expenses, and miscellaneous expenses related to selection and acquisition of equipment
which are to be borne by the Partnership under the terms of the Registration Statement, as
amended. As these costs are not eligible for capitalization as initial direct costs, such
amounts are expensed as incurred.
Income taxes As a partnership no provision for income taxes will be recorded since the
liability for such taxes is that of each of the partners rather than the Partnership. The
Partnerships income tax returns are subject to
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SQN Alternative Investment Fund III L.P.
Notes to Condensed Financial Statements
September 30, 2011
(Unaudited)
September 30, 2011
(Unaudited)
examination by the federal and state taxing authorities, and changes, if any, could adjust the
individual income tax of the partners.
Uncertain tax positions The Partnership has adopted the provisions of Accounting for
Uncertainty in Income Taxes (Uncertain Tax Position). Uncertain Tax Position prescribes
recognition thresholds that must be met before a tax position is recognized in the financial
statements and provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. Under Uncertain Tax Position, an
entity may only recognize or continue to recognize tax positions that meet a more likely than
not threshold. The Partnership has evaluated its tax position for the period ended December 31,
2010 and the nine months ended September 30, 2011, and does not expect any material adjustments
to be made. The tax year 2010 remains open to examination by the major taxing jurisdictions to
which the Partnership is subject.
Per Share Data Net loss attributable to the Partnerships weighted average number of limited
partnership interests is calculated based upon the weighted average number of limited
partnership interests outstanding during the period.
Foreign currency transactions The Partnership has designated the United States of America
dollar as the functional currency for most of the Partnerships operations in international
locations. In those countries where the Partnership has designated the United States of America
dollar as the functional currency, certain assets and liabilities are translated at historical
exchange rates, revenues and expenses in these countries are translated at the average rate of
exchange for the period, and all transaction gains or losses are reflected in the periods
results of operations.
Use of estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the General Partner and
Investment Manager to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenue and expenses during the reporting
period. Significant estimates primarily include the determination of allowances for doubtful
accounts, depreciation and amortization, impairment losses, estimated useful lives, and residual
values. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (the FASB) issued Accounting
Standards Update No. 2011-08, IntangiblesGoodwill and Other (Topic 350)Testing Goodwill for
Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for
impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine
whether it is more likely than not that the fair value of a reporting unit is less than its
carrying value. If it is concluded that this is the case, it is necessary to perform the
currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill
impairment test is not required. The guidance is effective for annual and interim goodwill
impairment testing performed for fiscal years beginning after December 15, 2011. The adoption of
this guidance will not have an effect on the Partnerships financial position or results of
operations.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income
(Topic 220) (ASU 2011-05), new accounting guidance related to the presentation of other
comprehensive income (OCI). ASU 2011-05 eliminates the option to present components of OCI as
part of the statement of changes in partners equity. ASU 2011-05 allows for a one-statement or
two-statement approach, outlined as follows:
| One-statement approach: Present the components of net income and total net income, the components of OCI and total OCI, along with the total comprehensive income in a single continuous statement. | ||
| Two-statement approach: Present the components of net income and total net income in the statement of operations. A statement of OCI would immediately follow the statement of operations and include the components of OCI and a total for OCI, along with the total of comprehensive income. |
ASU 2011-05 also requires an entity to present on the face of the financial statements any
reclassification adjustments for items that are reclassified from OCI to net income. At the
FASBs October 21, 2011 Board
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SQN Alternative Investment Fund III L.P.
Notes to Condensed Financial Statements
September 30, 2011
(Unaudited)
September 30, 2011
(Unaudited)
meeting it was decided that the effective date of this guidance will be deferred, therefore ASU
2011-05 will no longer be effective for interim and annual periods beginning after December 15,
2011.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement
(Topic 820) Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements
in U.S. GAAP and IFRS (ASU 2011-04). ASU 2011-04 amendments the accounting guidance related to
fair value measurements in order to more closely align its disclosure requirements with those in
International Financial Reporting Standards (IFRS). ASU 2011-04 clarifies the application of
existing fair value measurement and disclosure requirements and also changes certain principles
or requirements for measuring fair value or for disclosing information about fair value
measurements. The guidance is effective for interim and annual periods beginning after December
15, 2011. The adoption of this guidance is not expected to have a material effect on the
Partnerships financial position or results of operations.
3. Related Party Transactions
The General Partner is responsible for the day-to-day operations of the Partnership and the
Investment Manager makes all investment decisions and manages the investment portfolio of the
Partnership. The Partnership pays the General Partner an allowance for organizational and
offering costs not to exceed 2% of all capital contributions received by the Partnership. The
General Partner also has a promotional interest in the Partnership equal to 20% of all
distributed cash available for distribution, after the Partnership has provided an 8% cumulative
return, compounded annually, to the Limited Partners on their capital contributions. The General
Partner also has a 1% interest in the profits, losses and distributions of the Partnership.
The Partnership also pays the Investment Manager an amount equal to or the greater of; (i) a
fixed monthly management fee of $60,000 or (ii) 1.975% per annum of the aggregate offering
proceeds. The monthly management fee reimburses the Investment Manager for normal overhead
expenses, which include, but are not limited to, employee compensation, rent, professional
services, office equipment, and supplies. For the three and nine months ended September 30,
2011, the Partnership paid the Investment Manager $180,000 and $300,000, respectively, for
management fees which is included in the condensed statement of operations.
SQN Securities, LLC (Securities) is a Delaware limited liability company and is a
majority-owned subsidiary of the Partnerships Investment Manager. Securities is the sole
selling agent of the Partnerships interests and is a member of both the Financial Industry
Regulatory Authority and the Security Investor Protection Corporation. The Partnership pays
Securities a distribution expense equal to 2% of the aggregate offering proceeds, excluding
proceeds from the General Partner or any affiliated entities. For the nine months ended
September 30, 2011, Securities was paid $117,070, which is included in offering and distribution
expense in the condensed statement of changes in partners equity.
On June 28, 2011 the officers of SAM which prior to that date had equal ownership of the
Investment Manager with SQN Capital Corporation resigned from both the General Partner and the
Investment Manager. At that time, SAM redeemed its ownership interest in the Investment Manager.
SQN Capital Corporation and SAM, will, from time to time, originate transactions on their own
behalf and offer to sell all or part of such transactions to the Partnership either individually
or as a portfolio depending upon, among other things, the appropriateness of the proposed
investment for the Partnership (as determined by the Investment Manager, in its sole discretion)
and the amount available for investment by the Partnership at such time.
4. Investment in finance lease
On August 19, 2011, the Partnership entered into a lease transaction for a public address system
for a Scottish Premier League football team located in Scotland for £602,794 ($985,509 applying
exchange rates at August 31, 2011) with a lease term of 48 months. Under the terms of the
agreement the Partnership is to receive quarterly lease payments of £58,797 ($96,127 applying
exchange rates at August 31, 2011) through May 16, 2014 and quarterly lease payments of £13,931
($22,775 applying exchange rates at August 31, 2011) through November 16, 2016. At the
termination of the lease the lessee has a bargain purchase option to acquire the
11
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SQN Alternative Investment Fund III L.P.
Notes to Condensed Financial Statements
September 30, 2011
(Unaudited)
September 30, 2011
(Unaudited)
public address system for $1. The Partnership paid initial direct costs of $59,131 related to
the acquisition of this leased equipment. For the three and nine months ended September 30,
2011, the Partnership incurred amortization expense related to this $7,494.
On June 29, 2011, the Partnership entered into a lease transaction for a bottle recycling and
extrusion line located in the United Kingdom for £1,830,000 ($2,931,294 applying exchange rates
at June 30, 2011) with a lease term of 60 months. Under the terms of the agreement the
Partnership is to fund the lessee in two installments; an initial installment of £1,100,000 and
a second installment of £730,000. The Partnership paid the initial installment on June 29, 2011,
in the amount of $1,774,520. The second installment was contingent upon the lessee raising its
own equity of £3,000,000, which it reached during September 2011 and the Partnership funded the
second installment on September 30, 2011 in the amount of $1,185,220. At lease termination the
lessee has an option to purchase the leased equipment for £253,821 ($406,570 applying exchange
rates at June 30, 2011). On July 14, 2011, the Partnership paid initial direct costs of $73,322
related to the acquisition of this leased equipment.
During the period from the initial payment until the lease commences the Partnership earns
monthly rental income of £11,229 ($17,987 applying exchange rates at June 30, 2011). For the
three and nine months ended September 30, 2011, the Partnership earned $36,633 in rental income
and incurred $8,000 in depreciation expense. Once the lease commences, the Partnership will
receive monthly payments of £40,937 ($65,573 applying exchange rates at June 30, 2011).
Investment in finance lease consists of the following at September 30, 2011:
Minimum rents receivable |
$ | 4,935,476 | ||
Estimated residual value |
406,570 | |||
Unearned income |
(1,658,776 | ) | ||
$ | 3,683,270 | |||
At September 30, 2011, the aggregate amounts of future minimum lease payments receivable
are as follows:
Years Ending September 30, |
||||
2012 |
$ | 283,762 | ||
2013 |
1,135,048 | |||
2014 |
1,135,048 | |||
2015 |
994,840 | |||
2016 |
811,102 | |||
Thereafter |
575,676 | |||
$ | 4,935,476 | |||
5. Indemnifications
The Partnership enters into contracts that contain a variety of indemnifications. The
Partnerships maximum exposure under these arrangements is not known.
In the normal course of business, the Partnership enters into contracts of various types,
including lease contracts, contracts for the sale or purchase of lease assets, and management
contracts. It is prevalent industry
practice for most contracts of any significant value to include provisions that each of the
contracting parties, in addition to assuming liability for breaches of the representations,
warranties, and covenants that are part of the underlying contractual obligations, to also
assume an obligation to indemnify and hold the other contractual party harmless for such
breaches, and for harm caused by such partys gross negligence and willful misconduct,
including, in certain instances, certain costs and expenses arising from the contract.
Generally, to the extent these contracts are performed in the ordinary course of business under
the reasonable business judgment of the
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SQN Alternative Investment Fund III L.P.
Notes to Condensed Financial Statements
September 30, 2011
(Unaudited)
September 30, 2011
(Unaudited)
General Partner and Investment Manager, no liability
will arise as a result of these provisions. The General Partner and Investment Manager knows of
no facts or circumstances that would make the Partnerships contractual commitments outside
standard mutual covenants applicable to commercial transactions between businesses. Accordingly,
the Partnership believes that these indemnification obligations are made in the ordinary course
of business as part of standard commercial and industry practice, and that any potential
liability under the Partnerships similar commitments is remote. Should any such indemnification
obligation become payable, the Partnership would separately record and/or disclose such
liability in accordance with accounting principles generally accepted in the United States of
America.
6. Subsequent Events
On October 31, 2011, the Partnership entered into a Loan Note Instrument (the Agreement) with
an entity located in the United Kingdom for £1,700,000, with a term of eight years and interest
accruing at 12% per annum. The Partnership made its initial payment under the Agreement on
October 31, 2011 for £300,000 ($485,400 applying exchange rates at October 31, 2011). Repayment
of the proceeds under the Agreement will not commence until three months after the project
commencement date, which is defined as the date on which the project commences to earn revenue.
The equipment is guaranteed by the entitys parent company, also located in the United Kingdom.
The Partnership expects to pay the remaining outstanding balance under the Agreement before the
end of 2011.
During October 2011, the Partnership admitted an additional 26 Limited Partners with capital
contributions totaling $1,677,400. At October 31, 2011, the Partnership incurred and paid to
Securities $33,548 in distribution expenses related to the capital contributions raised during
October 2011.
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Item 2. General Partners Discussion and Analysis of Financial Condition and Results of
Operations
The following is a discussion of our current financial position and results of operations.
This discussion should be read together with our Prospectus, dated March 17, 2011, contained in our
Registration Statement on Form S-1, as amended. This discussion should also be read in conjunction
with the disclosures below regarding Forward-Looking Statements and the Risk Factors set forth
in Item 1A of Part II of this Quarterly Report on Form 10-Q.
As used in this Quarterly Report on Form 10-Q, references to we, us, our or similar
terms include SQN Alternative Investment Fund III L.P.
Forward-Looking Statements
Certain statements within this Quarterly Report on Form 10-Q may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA).
These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits
of the safe harbor provisions of the PSLRA, and, other than as required by law, we assume no
obligation to update or supplement such statements. Forward-looking statements are those that do
not relate solely to historical fact. They include, but are not limited to, any statement that may
predict, forecast, indicate or imply future results, performance, achievements or events. You can
identify these statements by the use of words such as may, will, could, anticipate,
believe, estimate, expect, intend, predict, continue, further, seek, plan, or
project and variations of these words or comparable words or phrases of similar meaning. These
forward-looking statements reflect our current beliefs and expectations with respect to future
events and are based on assumptions and are subject to risks and uncertainties and other factors
outside our control that may cause actual results to differ materially from those projected. We
undertake no obligation to update publicly or review any forward-looking statement, whether as a
result of new information, future developments or otherwise.
Overview
We are a Delaware limited partnership formed on March 10, 2010. We operate a fund in which the
capital invested by partners is pooled together. This pool of capital is then used to invest in
business-essential, revenue-producing (or cost-saving) equipment and other physical assets with
substantial economic lives and, in many cases, associated revenue streams. The pooled capital
contributions are also used to pay fees and expenses associated with our organization and to fund a
capital reserve.
Many of our investments are structured as full payout or operating equipment leases. In
addition, we invest by way of participation agreements and residual sharing agreements where we
acquire an interest in a pool of equipment or other assets or rights to those equipment or other
assets, at a future date. We also structure investments as project financings that are secured by,
among other things, essential use equipment and/or assets. Finally, we use other investment
structures, such as vendor and rental (hire) programs that our Investment Manager believes will
provide us the appropriate level of security, collateralization, and flexibility to optimize our
return on investment while protecting against downside risk. In most cases, the structure includes
us holding title to or a priority position in the equipment or other asset.
Although the overall composition of our portfolio cannot be determined at this stage, we
invest in assets and equipment that are considered essential use or core to a business or operation
in the agricultural, energy, environmental, medical, manufacturing, technology, and transportation
industries. Our Investment Manager also may identify other assets or industries that meet our
investment objectives. We invest in assets and equipment located primarily within the United
States, Canada and the European Union.
We will conduct our activities for at least seven years and divide our life into three
periods: the Offering Period, the Operating Period and the Liquidation Period. During the Offering
Period we raise money from investors for the earlier of; (i) $50,000,000 or (ii) two years from the
date of our Prospectus, which was March 17, 2011. During the Operating Period we invest the
offering proceeds in business-essential, revenue-producing (or cost-saving) equipment and other
physical assets with substantial economic lives and, in many cases, associated revenue streams. The
Operating Period begins and, unless extended by our General Partner, will last for three years from
the date we acquired our first leased equipment which was June 29, 2011. During the Operating
Period, we anticipate paying a semi-annual cash distribution to our partners equal to 3% of their
capital contributions. We anticipate that the Operating Period will overlap with the Offering
Period. The Liquidation Period, unless extended at the sole discretion of our General Partner will
last four years. During the Liquidation Period we will make irregular
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distributions to our partners as the investments in our portfolio mature. We generally will
not be reinvesting the proceeds from investments during this period. It is our intention to wind
down the portfolio and distribute proceeds to our partners during this period.
Our General Partner is SQN AIF III GP, LLC (the General Partner), a wholly-owned subsidiary
of our Investment Manager, SQN Capital Management, LLC (the Investment Manager). Our General
Partner manages and controls our business affairs, including, but not limited to, our investments
in equipment leases, under the terms of our Partnership Agreement. Our Investment Manager will
originate and service our investments. Our Investment Manager also sponsors and manages three other
equipment leasing and finance funds.
SQN Capital Corporation and Summit Asset Management (SAM) will, from time to time, originate
transactions on their own behalf and offer to sell all or part of such transactions to us, either
individually or as a portfolio depending upon, among other things, the appropriateness of the
proposed investment for us (as determined by the Investment Manager, in its sole discretion) and
the amount available for investment by us at such time.
On June 28, 2011, the officers of SAM which prior to that date had equal ownership of the
Investment Manager with SQN Capital Corporation (the parent company of the Investment Manager)
resigned from both the General Partner and the Investment Manager. At that time, SAM redeemed its
ownership interest in the Investment Manager. In doing so, SAM will be able to provide credit
enhancements and origination services that could not be provided as an affiliate of ours under
NASAA Guidelines.
Recent Significant Transactions
Hydroelectric
Facility Loan Receivable
On October 31, 2011, we entered into a Loan Note Instrument (the Agreement) with Romney
Hydropower Company Limited, an entity located in the United Kingdom for £1,700,000, with a term of
eight years and interest accruing at 12% per annum. We made our initial payment under the Agreement
on October 31, 2011 for £300,000 ($485,400 applying exchange rates at October 31, 2011). Repayment
of the proceeds under the Agreement will not commence until three months after the project
commencement date, which is defined as the date on which the project commences to earn revenue. The
Agreement is guaranteed by the entitys parent company, Southeast Power Engineering Ltd., also
located in the United Kingdom. We expect to pay the remaining outstanding balance under the
Agreement before the end of 2011.
Public address system
On August 19, 2011, we entered into a lease transaction for a public address system for a
Scottish Premier League football team located in Scotland for £602,794 ($985,509 applying exchange
rates at August 31, 2011) with a lease term of 48 months. Under the terms of the agreement we will
receive quarterly lease payments of £58,797 ($96,127 applying exchange rates at August 31, 2011)
through May 16, 2014 and quarterly lease payments of £13,931 ($22,775 applying exchange rates at
August 31, 2011) through November 16, 2016. At the termination of the lease the lessee has a
bargain purchase option to acquire the public address system for $1. We paid initial direct costs
of $59,131 related to the acquisition of this leased equipment.
Bottle recycling and extrusion line
On June 29, 2011, we entered into a lease transaction with Eco Plastics Limited for a bottle
recycling and extrusion line located in the United Kingdom for £1,830,000 ($2,931,294 applying
exchange rates at June 30, 2011) with a lease term of 60 months. Under the terms of the agreement
the Partnership is to fund the lessee in two installments; an initial installment of £1,100,000 and
a second installment of £730,000. The Partnership paid the initial installment on June 29, 2011, in
the amount of $1,774,520. The second installment was contingent upon the lessee raising its own
equity of £3,000,000, which it reached during September 2011 and we funded the second installment
on September 30, 2011 in the amount of $1,185,220. On July 14, 2011, we paid initial direct costs
of $73,322 related to the acquisition of this leased equipment.
During the period from the initial payment until the lease commences we earn monthly rental
income of £11,229 ($17,987 applying exchange rates at June 30, 2011). Once the lease commences, the
Partnership will receive monthly payments of £40,937 ($65,573 applying exchange rates at June 30,
2011).
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Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (the FASB) issued Accounting
Standards Update No. 2011-08, IntangiblesGoodwill and Other (Topic 350)Testing Goodwill for
Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for
impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine
whether it is more likely than not that the fair value of a reporting unit is less than its
carrying value. If it is concluded that this is the case, it is necessary to perform the currently
prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is
not required. The guidance is effective for annual and interim goodwill impairment testing
performed for fiscal years beginning after December 15, 2011. The adoption of this guidance will
not have an effect on our financial position or results of operations.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income
(Topic 220) (ASU 2011-05), new accounting guidance related to the presentation of other
comprehensive income (OCI). ASU 2011-05 eliminates the option to present components of OCI as
part of the statement of changes in partners equity. ASU 2011-05 allows for a one-statement or
two-statement approach, outlined as follows:
| One-statement approach: Present the components of net income and total net income, the components of OCI and total OCI, along with the total comprehensive income in a single continuous statement. |
| Two-statement approach: Present the components of net income and total net income in the statement of operations. A statement of OCI would immediately follow the statement of operations and include the components of OCI and a total for OCI, along with the total of comprehensive income. |
ASU 2011-05 also requires an entity to present on the face of the financial statements any
reclassification adjustments for items that are reclassified from OCI to net income. At the FASBs
October 21, 2011 Board meeting it was decided that the effective date of this guidance will be
deferred, therefore ASU 2011-05 will no longer be effective for interim and annual periods
beginning after December 15, 2011.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement
(Topic 820) Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in
U.S. GAAP and IFRS (ASU 2011-04). ASU 2011-04 amendments the accounting guidance related to fair
value measurements in order to more closely align its disclosure requirements with those in
International Financial Reporting Standards (IFRS). ASU 2011-04 clarifies the application of
existing fair value measurement and disclosure requirements and also changes certain principles or
requirements for measuring fair value or for disclosing information about fair value measurements.
The guidance is effective for interim and annual periods beginning after December 15, 2011. The
adoption of this guidance is not expected to have a material effect on our financial position or
results of operations.
Critical Accounting Policies
An understanding of our critical accounting policies is necessary to understand our financial
results. The preparation of financial statements in accounting principles generally accepted in the
United States of America requires our General Partner and Investment Manager to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant estimates primarily
include the determination of allowance for doubtful accounts, depreciation and amortization,
impairment losses, estimated useful lives and residual values. Actual results could differ from
those estimates.
Lease Classification and Revenue Recognition
Each equipment lease we enter into is classified as either a finance lease or an operating
lease, which is determined at lease inception, based upon the terms of each lease. For a finance
lease, initial direct costs are capitalized and amortized over the lease term. For an operating
lease, the initial direct costs are included as a component of the cost of the equipment and
depreciated over the lease term.
For finance leases, we record, at lease inception, the total minimum lease payments receivable
from the lessee, the estimated unguaranteed residual value of the equipment at lease termination,
the initial direct costs related to the lease, if any, and the related unearned income. Unearned
income represents the difference between the sum of the minimum lease payments receivable, plus the
estimated unguaranteed residual value, minus the cost of the leased
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equipment. Unearned income is recognized as finance income over the term of the lease using
the effective interest rate method.
For operating leases, rental income is recognized on a straight-line basis over the lease
term. Billed operating lease receivables are included in accounts receivable until collected.
Accounts receivable are stated at their estimated net realizable value. Deferred revenue is the
difference between the timing of the receivables billed and the income recognized on a
straight-line basis.
Our Investment Manager has an investment committee that approves each new equipment lease and
other financing transaction. As part of its process, the investment committee determines the
residual value, if any, to be used once the investment has been approved. The factors considered in
determining the residual value include, but are not limited to, the creditworthiness of the
potential lessee, the type of equipment considered, how the equipment is integrated into the
potential lessees business, the length of the lease and the industry in which the potential lessee
operates. Residual values are reviewed for impairment in accordance with our impairment review
policy.
The residual value assumes, among other things, that the asset is utilized normally in an
open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded
and it is assumed that there is no necessity either to dispose of a significant number of the
assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value
is calculated using information from various external sources, such as trade publications, auction
data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical
asset and other economic indicators.
Asset Impairments
The significant assets in our portfolio are periodically reviewed, no less frequently than
annually or when indicators of impairment exist, to determine whether events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. An impairment
loss will be recognized only if the carrying value of a long-lived asset is not recoverable and
exceeds its fair value. If there is an indication of impairment, we will estimate the future cash
flows (undiscounted and without interest charges) expected from the use of the asset and its
eventual disposition. Future cash flows are the future cash inflows expected to be generated by an
asset less the future outflows expected to be necessary to obtain those inflows. If an impairment
is determined to exist, the impairment loss will be measured as the amount by which the carrying
value of a long-lived asset exceeds its fair value and recorded in the statement of operations in
the period the determination is made.
The events or changes in circumstances that generally indicate that an asset may be impaired
are, (i) the estimated fair value of the underlying equipment is less than its carrying value, (ii)
the lessee is experiencing financial difficulties and (iii) it does not appear likely that the
estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual
position in the asset. The preparation of the undiscounted cash flows requires the use of
assumptions and estimates, including the level of future rents, the residual value expected to be
realized upon disposition of the asset, estimated downtime between re-leasing events and the amount
of re-leasing costs. Our Investment Managers review for impairment includes a consideration of the
existence of impairment indicators including third-party appraisals, published values for similar
assets, recent transactions for similar assets, adverse changes in market conditions for specific
asset types and the occurrence of significant adverse changes in general industry and market
conditions that could affect the fair value of the asset.
Depreciation
We record depreciation expense on equipment when the lease is classified as an operating
lease. In order to calculate depreciation, we first determine the depreciable equipment cost,
which is the cost less the estimated residual value. The estimated residual value is our estimate
of the value of the equipment at lease termination. Depreciation expense is recorded by applying
the straight-line method of depreciation to the depreciable equipment cost over the lease term.
Results of Operations from July 1, 2011 through September 30, 2011 (the 2011 Quarter)
We are currently in our Offering Period and entered into our initial lease transaction on June
29, 2011, which marked the beginning of our Operating Period. The Offering Period is designated as
the period in which we are raising capital from investors. During this period we expect to generate
the majority of our cash in-flow from financing activities. During the 2011 Quarter we admitted 38
Limited Partners totaling $2,003,000 in Limited
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Partner capital contributions. We have also entered our Operating Period, which is defined as
the period in which we invest the net proceeds from the Offering Period into business-essential,
revenue-producing (or cost saving) equipment and other physical assets with substantial economic
lives and, in many cases, associated revenue streams. During this period we anticipate substantial
cash outflows from investing activities as we acquire leased equipment.
For the 2011 Quarter we earned total revenue of $47,561, which consisted of rental income from
Eco Plastics Limited of $36,633, finance income of $9,984 from our lease of a public address system
for a Scottish Premier League football team and interest income of $994. The rental income from Eco
Plastics is not expected to continue, since we anticipate the lease term commencing in the near
future. Once that event happens, the lease will begin earning finance income as a finance lease. As
we acquire additional equipment leases we expect our revenue to grow substantially.
For the 2011 Quarter we incurred $420,591 in total expenses. The largest component of our
total expenses was $186,806 in foreign currency transaction losses. Our foreign currency
transaction loss was due to fact that our lessees are contractually obligated to make their lease
payments in British Pounds and the exchange rate has experienced a 2.5% decrease in value since we
entered into our recent lease transactions. Since we do not hedge our foreign currency transactions
we expect our foreign currency transaction (gain) loss to fluctuate over time. We also incurred
$180,000 in management fees we paid to our Investment Manager. For the 2011 Quarter we incurred
$32,041 in professional fees. Professional fees relate primarily to costs incurred relating to
filing our reports with the Securities and Exchange Commission. We anticipate that these costs will
continue and increase somewhat over time as our leasing activity increases.
Net Loss
As a result of the factors discussed above we incurred a net loss for the 2011 Quarter of
$373,030.
Results of Operations from January 1, 2011 through September 30, 2011 (the 2011 Period)
On March 17, 2011 the Securities and Exchange Commission (the SEC) declared our Registration
Statement effective. Since that date, we have completed our application process to sell our
partnership interests in numerous states and are continuing the process in other states. For the
2011 Period, in those states where we have completed the application process, we have admitted 95
Limited Partners and accepted $5,853,500 in Limited Partner capital contributions.
We are currently in our Offering Period and entered into our initial lease transaction on June
29, 2011, which marked the beginning of our Operating Period. The Offering Period is designated as
the period in which we are raising capital from investors. During this period we expect to generate
the majority of our cash in-flow from financing activities. We have also entered our Operating
Period, which is defined as the period in which we invest the net proceeds from the Offering Period
into business-essential, revenue-producing (or cost saving) equipment and other physical assets
with substantial economic lives and, in many cases, associated revenue streams. During this period
we anticipate substantial cash outflows from investing activities as we acquire leased equipment.
For the 2011 Period we earned total revenue of $48,495, which consisted of rental income from
Eco Plastics Limited of $36,633, finance income of $9,984 from our lease of a public address system
for a Scottish Premier League football team and interest income of $1,878. The rental income from
Eco Plastics is not expected to continue, since we anticipate the lease term commencing in the near
future. Once that event happens, the lease will begin earning finance income as a finance lease. As
we acquire additional equipment leases we expect our revenue to grow substantially.
For the 2011 Period we incurred $627,227 in total expenses. The largest component of our total
expenses was $300,000 in management fees paid to our Investment Manager. We also incurred $186,806
in foreign currency transaction losses. Our foreign currency transaction loss was due to fact that
our lessees are contractually obligated to make their lease payments in British Pounds and the
exchange rate has experienced a 2.5% decrease in value since we entered into our recent lease
transactions. Since we do not hedge our foreign currency transactions we expect our foreign
currency transaction (gain) loss to fluctuate over time. For the 2011 Period we incurred $96,095 in
professional fees. We anticipate that these costs will continue and increase somewhat over time as
our leasing activity increases. We also incurred expenses of $24,100 for fund administration
expense. Fund administration expense is required by certain of our
custodial platforms used to retain and deliver financial information
electronically to our Limited Partners. We anticipate as our investor base grows these
costs will increase.
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Net Loss
As a result of the factors discussed above we incurred a net loss for the 2011 Period of
$578,732.
Liquidity and Capital Resources
Cash Flows Summary
For the 2011 Period, we increased our overall cash position by $528,782. This increase was
primarily the result of our entering the Offering Period and admitting 95 Limited Partners, who
combined, contributed $5,853,500 in capital contributions. We also incurred various cash out flows;
(i) the acquisition of leased equipment and related costs totaled $4,049,256 which was from
investing activities and (ii) $947,311 relating to costs paid for offering and distribution
expenses which were from financing activities.
Operating Activities
For the 2011 Period, we incurred net cash flows used in operating activities of $325,528. This
was principally due to our net loss for the 2011 Period of $578,732, which was offset by our
increases in cash flows from foreign currency transaction loss of $139,390, minimum rental payments
received of $96,127 and accrued expenses of $20,850. Our foreign currency transaction loss was due
to fact that our lessees are contractually obligated to make their lease payments in British
Pounds and the exchange rate has experienced a 2.5% decrease in value since we entered into our
recent lease transactions. We anticipate that foreign currency transaction (gain) loss will
fluctuate period to period. As we acquire additional leased equipment we believe that we will begin
to experience positive cash flows from operating activities.
Investing Activities
For the 2011 Period, we experienced net cash flows used in investing activities of $4,049,256.
This was solely due to expenditures relating to leased equipment acquisitions. During August 2011,
we paid $985,509 for a public address system for a Scottish Premier League football team and an
additional $59,131 relating to initial direct costs associated with acquiring this lease. During
September 2011 and June 2011, we made several payments totaling $2,931,294 for the acquisition of a
bottle recycling and extrusion line on lease to Eco Plastics and an additional $73,322 relating to
initial direct costs associated with acquiring this lease. We expect that over the next several
years we will continue to have cash out flows from investing activities as we acquire more leased
equipment.
Financing Activities
For the 2011 Period we generated cash flow from financing activities of $4,903,566. This was
predominately due to our entering our Offering Period and admitting 95 Limited Partners, who
combined contributed $5,853,500 in capital contributions. We also had various cash outflows during
the 2011 Period, most notable for offering and distribution expenses which totaled $947,311. We
anticipate, during the Offering Period that most, if not all, of our source of cash will be from
capital contributions from new investors purchasing our limited partnership interests.
Contractual Obligations
On October 31, 2011, we entered into an Agreement with Romney Hydropower Company Limited, an
entity located in the United Kingdom for £1,700,000. We made our initial payment under the
Agreement on October 31, 2011 for £300,000 ($485,400 applying exchange rates at October 31, 2011).
We expect to pay the remaining outstanding balance of £1,400,000 before the end of 2011.
At September 30, 2011, we have contractual obligations with our Investment Manager and SQN
Securities, LLC (Securities). We will pay the Investment Manager either a fixed monthly
management fee of $60,000 or 1.975% per annum of the aggregate offering proceeds. The monthly
management fee reimburses the Investment Manager for normal overhead expenses, which include, but
are not limited to, employee compensation, rent, professional services, office equipment, and
supplies. We anticipate that we will pay this monthly management fee through the Operating Period.
We will pay Securities a distribution expense equal to 2% of the aggregate offering proceeds,
excluding proceeds from the General Partner or any affiliated entities. At September 30, 2011, we
cannot determine what this amount will be.
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During the Operating Period, we anticipate paying a semi-annual cash distribution to our
partners equal to 3% of their capital contributions.
Commitments and Contingencies and Off-Balance Sheet Transactions
At September 30, 2011, we had entered into no commitments and had no off balance sheet
transactions.
Subsequent Event
On October 31, 2011, we entered into a Loan Note Instrument (the Agreement) with Romney
Hydropower Company Limited, an entity located in the United Kingdom for £1,700,000, with a term of
eight years and interest accruing at 12% per annum. We made our initial payment under the Agreement
on October 31, 2011 for £300,000 ($485,400 applying exchange rates at October 31, 2011). Repayment
of the proceeds under the Agreement will not commence until three months after the project
commencement date, which is defined as the date on which the project commences to earn revenue. The
Agreement is guaranteed by the entitys parent company, Southeast Power Engineering Ltd., also
located in the United Kingdom. We expect to pay the remaining outstanding balance under the
Agreement before the end of 2011.
During October 2011, we admitted an additional 26 Limited Partners with capital contributions
totaling $1,677,400. At October 31, 2011, we incurred and paid to SQN Securities, LLC $33,548 in
distribution expenses related to the capital contributions raised during October 2011.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There are no material changes to the disclosures related to these items since we filed our
Prospectus, dated March 17, 2011, contained in our Registration Statement on Form S-1, as amended.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended
September 30, 2011, as well as the financial statements for our General Partner, our General
Partner carried out an evaluation, under the supervision and with the participation of the
management of our General Partner, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our General Partners disclosure
controls and procedures as of the end of the period covered by this Report pursuant to the
Securities Exchange Act of 1934. Based on the foregoing evaluation, the Chief Executive Officer and
the Chief Financial Officer concluded that our General Partners disclosure controls and procedures
were effective.
In designing and evaluating our General Partners disclosure controls and procedures, our
General Partner recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. Our General Partners disclosure controls and
procedures have been designed to meet reasonable assurance standards. Disclosure controls and
procedures cannot detect or prevent all error and fraud. Some inherent limitations in disclosure
controls and procedures include costs of implementation, faulty decision-making, simple error and
mistake. Additionally, controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The design of any
system of controls is based, in part, upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals
under all anticipated and unanticipated future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with established policies
or procedures.
Evaluation of internal control over financial reporting
There have been no changes in our internal control over financial reporting during the most
recently completed fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of conducting our business, there may be certain claims, suits and
complaints filed against us. In the opinion of management, the outcome of such matters, if any,
will not have a material impact on our financial position or results of operations. We are not
aware of any material legal proceedings that are currently pending against us or against any of our
assets.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in our prospectus, dated
March 17, 2011, contained in our Registration Statement on Form S-1, as amended.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Registration Statement on Form S-1, as amended, was declared effective by the SEC on March
17, 2011. Our Offering Period commenced on March 17, 2011 and is anticipated to end no later than
March 16, 2013. From March 17, 2011 through September 30, 2011 we received capital contributions
totaling $5,853,500. For the 2011 Period we have paid distribution expenses to SQN Securities, LLC
of $117,070 and we have paid or accrued offering expenses totaling $930,241.
During October 2011, we admitted an additional 26 Limited Partners with capital contributions
totaling $1,677,400. At October 31, 2011, we incurred and paid to SQN Securities, LLC $33,548 in
distribution expenses related to the capital contributions raised during October 2011.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended September 30,
2011.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibits 31.1
Exhibits 31.2
Exhibits 32.1
Exhibits 31.2
Exhibits 32.1
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacity and on the dates
indicated.
File No. 333-166195
SQN AIF III GP, LLC
General Partner of the Registrant
SQN AIF III GP, LLC
General Partner of the Registrant
November 14, 2011 | ||||
/s/ Jeremiah Silkowski | ||||
Jeremiah Silkowski | ||||
Chief Executive Officer and President (Principal Executive Officer) |
||||
November 14, 2011 | ||||
/s/ David C. Wright | ||||
David C. Wright | ||||
Chief Financial Officer (Principal Accounting and Financial Officer) |
||||
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