Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014 |
OR
| ☐ | 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 | 27-2173346 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer ID No.) | |
100 Wall Street, 28th Floor New York, NY |
10005 | |
| (Address of principal executive offices) | (Zip code) | |
Registrant’s telephone number: (212) 422-2166
Securities registered pursuant to Section 12 (b) of the Act:
None
| Securities registered pursuant to Section 12 (g) of the Act: Units of Limited Partnership Interests |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☒ 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 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 | ☐ | Accelerated filer | ☐ | ||
| Non-accelerated filer | ☐ | Smaller Reporting Company | ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: Not applicable. There is no established market for the units of limited partnership interests of the registrant.
Number of outstanding units of limited partnership interests of the registrant on March 31, 2015 was 27,721.10.
| DOCUMENTS INCORPORATED BY REFERENCE |
None.
SQN Alternative Investment Fund III L.P.
Annual Report on Form 10-K for Year Ended December 31, 2014
Table of Contents
As used in this Annual Report on Form 10-K, references to “we,” “us,” “our” or similar terms include SQN Alternative Investment Fund III L.P and its subsidiaries.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission (the “SEC”), all as may be amended from time to time, which are subject to the safe harbor created by those sections. Forward-looking statements are those that do not relate solely to historical fact and include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by our General Partner and our Investment Manager. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “may,” “will,” “would,” “could,” “should,” “seeks,” or “scheduled to,” or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors discussed from time to time in this Annual Report on Form 10-K, including the risks described in greater detail in “Risk Factors” in Item 1A of this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in Item 7. In addition, such statements could be affected by risks and uncertainties related to our ability to raise additional equity contributions, investment objectives, competition, government regulations and requirements, the ability to find suitable equipment transactions, as well as general industry and market conditions and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report.
AVAILABILITY OF INFORMATION
You may read and copy any of our materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of such materials also can be obtained free of charge at the SEC’s website, www.sec.gov, or by mail from the Public Reference Room of the SEC, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. The SEC maintains an Internet site that contains reports and information statements, and other information regarding issuers that file electronically with the SEC. This information can be accessed at the web site http://www.sec.gov.
Our History
We were organized as a Delaware limited partnership on March 10, 2010 and are engaged in a single business segment, the ownership and investment in leased equipment and related financings 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. We will terminate no later than December 31, 2034.
The General Partner of the Partnership is SQN AIF III GP, LLC (the “General Partner”), a wholly-owned subsidiary of our Investment Manager, SQN Capital Management, LLC (the “Investment Manager”). Both the Partnership’s General Partner and the Partnership’s Investment Manager are Delaware limited liability companies. The General Partner manages and controls 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 income, losses and distributions. The Investment Manager makes all investment decisions and manages the investment portfolio of the Partnership.
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On January 19, 2015, the Investment Manager, through a wholly-owned subsidiary, entered into an agreement to acquire the leasing division of Summit Asset Management Limited (“Summit Asset Management”). Upon the acquisition, the Origination and Servicing Agreement between the Investment Manager and Summit Asset Management was terminated. From January 1, 2015, all activities of Summit Asset Management are conducted under SQN Capital Management (UK) Limited (“SQN UK”). Where Summit Asset Management was previously the servicer on transactions sold to us, SQN UK will now act as servicer.
Our Business
Our principal investment strategy is to invest in business-essential, revenue-producing (or cost-savings) equipment and other physical assets with high in-place value and long, relative to the investment term, economic life and project financings. We expect to achieve our investment strategy by making investments in equipment already subject to lease or originating equipment leases in such equipment, which will include: (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, we may also purchase equipment and sell it directly to our leasing customers.
Our fund operates under a structure in which we pool the capital invested by our limited partners. 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 anticipated to be 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 the 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 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.
The life cycle of our fund is divided into three distinct stages: (i) the Offering Period, (ii) the Operating Period and (iii) the Liquidation Period. The Offering Period was the time-frame in which we raised capital contributions from limited partners through the sale of the Units and ended on March 15, 2013. The Operating Period commenced on the initial closing date of our first equipment lease transaction, which was June 29, 2011, and will last for three years unless it is extended, at the sole discretion of the General Partner for a maximum of two one-year extensions. Our Offering Period and Operating Period overlapped. The Liquidation Period is the period in which we will sell our assets in the ordinary course of business. The Liquidation Period will last four years, unless it is extended, at the sole discretion of the General Partner for a maximum of two one-year extensions.
Our Offering Period commenced on March 17, 2011 and on May 2, 2011, the first business day after April 30, 2011, we admitted 19 Limited Partners with total capital contributions of $1,200,500. From May 3, 2011 through December 31, 2011, we admitted an additional 118 Limited Partners with total capital contributions of $7,250,400. For the year ended December 31, 2012, we admitted an additional 188 limited partners with total capital contributions of $13,904,200. From January 1, 2013 through March 15, 2013, the date the Offering Period concluded, we admitted an additional 50 Limited Partners, including our Investment Manager who invested $100,000 on March 15, 2013, and received additional capital contributions totaling $5,506,000. Due to our not achieving certain equity raising milestones during the Offering Period, our General Partner and/or our Investment Manager are required to reimburse us for organizational and offering expenses of $441,897 previously paid. At March 15, 2013, organizational and offering expenses were limited to $557,222 or 2% of total equity raised. At December 31, 2014, the balance of the note receivable from the Investment Manager to the Partnership was $258,529, which is included as Due from investment manager on the accompanying consolidated financial statements.
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SQN Securities, LLC (“Securities”), a Delaware limited liability company and a majority-owned subsidiary of the Investment Manager was the sole selling agent of the Partnership’s units. Securities is a broker-dealer registered with the SEC and is a member of both the Financial Industry Regulatory Authority (“FINRA”) and the Security Investor Protection Corporation. We paid Securities a distribution expense equal to 2% of the aggregate offering proceeds, excluding proceeds from the General Partner or any affiliated entities also sponsored by the Partnership’s Investment Manager. For the years ended December 31, 2014 and 2013, we paid or accrued to Securities $0 and $108,120 respectively, in distribution expenses. For the years ended December 31, 2014 and 2013, our Investment Manager paid $0 and $1,555 respectively, in organizational and offering expenses on our behalf.
Net offering proceeds to us after deducting organizational and offering expenses and distribution expenses were approximately $26,750,000. See the disclosure under “Recent Significant Transactions” in Item 7 for a discussion of the investments that we have made with our net offering proceeds.
We commenced our Operating Period on June 29, 2011 with our first equipment transaction. During the Operating Period, we invest most of the net offering proceeds in equipment that are subject to leases, equipment financing transactions, and residual ownership rights in leased equipment, as described above. After the net offering proceeds are invested, additional investments will be made with the cash proceeds generated from our initial investments, to the extent that cash is not needed for expenses, reserves, or distributions to Limited Partners. The investment in additional equipment in this manner is called “reinvestment.”
We are making, at the sole discretion of the Partnership’s Investment Manager, semi-annual cash distributions to each limited partner computed at 3% (pro-rated to the date of admission for each limited partner) of each limited partner’s capital contribution, beginning six months after the initial closing which occurred on May 2, 2011. The 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 Units without the prior written consent of our General Partner. The General Partner has the sole discretion to approve or deny any redemption requested by a limited partner.
At December 31, 2014, we had total assets of $36,272,240. Of this amount, $20,274,523 was for various investments: (i) $12,471,340 related to investments in finance leases and the related initial direct costs (ii) $1,484,789 related to investments in equipment subject to operating leases (iii) $634,702 related to residual value investments in equipment on lease and (ii) $5,683,692 was associated with equipment notes receivable and accrued interest. For the year ended December 31, 2014, two of our lessees’ accounted for approximately 83% of the total rental income and two of the lessees’ accounted for approximately 77% of the total finance income. In addition to the above leases, we also had a convertible promissory note receivable of $1,375,714, an investment in a participation interest of $8,421,915, an equity method investment in SQN Echo LLC of $780,897 and an equity method investment in SQN Echo II LLC of $374,739. For the year ended December 31, 2014, we had net income of $921,267.
At December 31, 2013, we had total assets of $40,497,799. Of this amount, $27,485,487 was for various investments: (i) $6,253,003 related to twelve finance leases and the related initial direct costs (ii) $3,548,323 related to six investments in equipment subject to operating leases (iii) $3,134,702 related to two residual value investments in equipment on lease and (ii) $14,549,459 was associated with three equipment notes receivable and accrued interest. For the year ended December 31, 2013, four of our lessees’ accounted for approximately 74% of our total rental income and two of our lessees’ accounted for approximately 51% of our total finance income. In addition to the above leases, we also had a convertible promissory note receivable of $1,435,714,an investment in a participation interest of $8,421,915 and an equity method investment in SQN Echo LLC of $550,000. For the year ended December 31, 2013, we had net income of $1,742,690.
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On June 19, 2013, the Partnership sold certain assets along with their related rental streams to a newly formed special purpose entity, SQN Bravo LLC (“Bravo”). The Partnership’s Investment Manager determined that this was in its best interests due to the following factors: (i) the Partnership was able to leverage investments through debt at rates less than the corresponding leased equipment were earning and (ii) the Partnership was able to use the proceeds to make additional lease investments at higher rates.
On June 19, 2013, Bravo obtained financing as follows; (i) a non-recourse loan payable for $5,860,085 and (ii) an equity investment from the Partnership of $3,906,724. Bravo also purchased a seasoned portfolio of leased equipment from SQN Alternative Investment Fund II, LLC (“SQN Fund II”), an entity also sponsored by the Partnership’s Investment Manager. The portfolio purchased from SQN Fund II was valued at the time of purchase based on discounted cash flows for the revenue streams at a predetermined rate and the residual values of the underlying assets were supported by third party appraisals. Bravo purchased the following general types of leased assets: (i) $632,284 in finance leases, (ii) $1,937,636 in equipment subject to operating leases and (iii) $2,500,000 in residual value investments in equipment on lease. In addition, the Partnership sold various leased assets with a net book value of $4,137,073 to Bravo.
As a result of the equity purchase noted above, on June 19, 2013, the Partnership acquired the primary economic risks and rewards in Bravo and accordingly, now has to consolidate Bravo into its financial statements and results of operations.
At December 31, 2014 and 2013, the Partnership’s investment portfolio consisted of the following transactions:
Anaerobic Digestion Plant
An anaerobic digestion plant is a series of processes in which microorganism’s breakdown biodegradable materials and produces a biogas which can be used to generate electricity.
On June 19, 2013, Bravo purchased a lease for a 20% ownership interest in an anaerobic digestion plant located in the United Kingdom from SQN Fund II for £118,564 ($187,332 applying the exchange rate used in the agreement). The Investment Manager re-tested the remaining lease term and determined the lease to be a finance lease. Under the terms of the lease, Bravo will receive 28 monthly payments as follows: (i) £3,935 ($5,984 applying exchange rates at June 30, 2013) through September 20, 2015 and (ii) there will be a rent holiday, where no payments are due through January 20, 2016. At the expiration of the lease term, the lessee has a purchase option as follows: (i) make a one-time payment of £16,018 ($24,360 applying exchange rates at June 30, 2013) or (ii) make 4 additional monthly payments of £3,935 ($5,964 applying exchange rates at June 30, 2013) and then a final payment of £762 ($1,159 applying exchange rates at June 30, 2013). Once the final payment is received, title to the equipment passes to the lessee. When the anaerobic digestion plant produces sufficient electricity, Bravo will be entitled to a payment under United Kingdom government program for the production of alternative energy and will account for this as contingent rental payments.
The purchase option is contingent upon Orchard House Foods Limited, the end user of the electricity generated by the anaerobic digestion plant, extending its service agreement for six months or longer with BioWayste Holdings Limited, the LLC’s lessee. The service agreement term runs concurrently with the lease term and is between Orchard House Foods Limited and BioWayste Holdings Limited, an independent service provider, who operates and maintains the anaerobic digestion plant.
We originally purchased an 80% ownership interest in the anaerobic digestion plant during 2012. On June 19, 2013, we sold our 80% interest to Bravo for $749,327.
During the year ended December 31, 2014, we granted a rental holiday to BioWayste upon their request in order to allow the company to fund some modifications to the system that will ultimately improve the efficiency and energy production and therefore increases revenue and the amount of government subsidies in which we have a 25% share.
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Furniture and fixtures
On June 19, 2013, Bravo purchased a lease for furniture and fixtures located in the United Kingdom from SQN Fund II for £179,170 ($283,089 applying the exchange rate used in the agreement). The Investment Manager re-tested the remaining lease term and determined the lease to be a finance lease. The lease has an initial lease term through March 31, 2015 and a renewal period through December 31, 2016. The initial lease term ended in June 30, 2013 with a renewal period beginning at that time with quarterly payments of £20,380 ($30,994 applying exchange rates as of June 30, 2013) through March 31, 2015. The second renewal period has quarterly payments of £6,750 ($10,265 applying exchange rates as of June 30, 2013) through December 31, 2016. At the end of the renewal period the lessee acquires title to the furniture and fixtures.
On June 19, 2013, Bravo purchased a lease for furniture and fixtures located in the United Kingdom from SQN Fund II for £72,997 ($115,335 applying the exchange rate used in the agreement). The Investment Manager re-tested the remaining lease term and determined the lease to be a finance lease. The lease, which ended during the year ended December 31, 2014 required quarterly payments of £18,627 ($28,328 applying the exchange rate as of June 30, 2013).
Information Technology Infrastructure Equipment
On June 19, 2013, Bravo purchased a lease for information technology infrastructure equipment located in the United Kingdom from SQN Fund II for £29,448 ($46,528 applying the exchange rate used in the agreement). The Investment Manager re-tested the remaining lease term and determined the lease to be a finance lease. The lease, which ended during the year ended December 31, 2014 required quarterly payments of £6,091 ($9,263 applying the exchange rate as of June 30, 2013).
Submersible Vessel
On April 17, 2013, we entered into a lease transaction classified as a finance lease for £895,718 ($1,388,990 applying exchange rates at April 30, 2013). The equipment is used in the United Kingdom and is a remotely operated submersible vehicle used in the offshore energy industry. This equipment may be used for, but not limited to, drilling support, underwater rig inspections, repairs, maintenance and offshore wind farm construction projects. The term of the lease is for 60 months with the following schedule of payments: (i) £96,149 ($149,098 applying exchange rates at April 30, 2013) was paid on May 2, 2013 for the period from April 14, 2013 through April 30, 2013, (iii) £17,183 ($26,646 applying exchange rates at April 30, 2013) monthly, in arrears through April 30, 2018 and (iv) £87,349 ($135,452 applying exchange rates at April 30, 2013) due on April 30, 2018. The final payment may be extended, at our option for an additional 48 months at £2,300 ($3,567 applying exchange rates at April 30, 2013). If the extended rental period is not entered into then the lessee will pay annually, in advance, £7,996 ($12,399 applying exchange rates at April 30, 2013).
On June 19, 2013, we sold the investment in the submersible vessel to Bravo for $1,361,751. On July 31, 2014 Bravo sold this lease to a third party for total cash proceeds of £725,486 ($1,228,176 applying exchange rates at July 31, 2014). The net book value of the lease at the time of sale was $1,205,566 and we recognized a gain of $22,610.
Medical Equipment
On March 27, 2013, we entered into a transaction classified as a finance lease for medical equipment located in the United States of America for $475,317. The finance lease has a 60 month term, requires monthly payments, in advance, of $10,500 and included a bargain purchase option at the expiration of the lease term. The initial monthly rental payment was paid on March 27, 2013. At March 31, 2013, we accrued a fee to a third party totaling $4,495 which is included in acquisition expense in the accompanying consolidated statements of operations.
On June 19, 2013, we sold the investment in this medical equipment to Bravo for $486,820.
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Commercial LED lighting
On February 28, 2013, the Partnership’s Investment Manager entered into a transaction under a Vendor Program, and allocated the transaction to us. The transaction was to finance the installation of an LED lighting system for a community center located in the United Kingdom for £20,941 ($31,677 applying exchange rates at February 28, 2013). This transaction has a lease term of 36 months which commenced upon completion of the installation of the lighting system, which was completed during early March 2013. Under the terms of the agreement, we receive quarterly lease payments, in advance, of £2,055 ($3,109 applying exchange rates at February 28, 2013). After the lease term expires, title to the equipment will pass to the lessee.
Bottle Recycling and Extrusion Production Line
On June 29, 2011, we entered into a Participation Agreement (the “Agreement”) for an ownership interest in a Hire Purchase Agreement (the “HP Agreement”). The HP Agreement is between an independent United Kingdom leasing entity and the lessee of a bottle recycling and extrusion line located in the United Kingdom. We made our initial payment under the Agreement on June 29, 2011 totaling £1,100,000 ($1,774,520 applying exchange rates at June 30, 2011) and made our final payment on October 13, 2011 totaling £730,000 ($1,151,575 applying exchange rates at October 31, 2011).
Under the terms of the HP Agreement there is both an initial rental period and a fixed rental period. The initial rental period ran through June 30, 2012 at which time the fixed rental period began. During the initial rental period we received monthly rental income between £11,229 ($17,987 applying exchange rates at June 30, 2011) and £18,425 ($29,514 applying exchange rates at June 30, 2011). The fixed rental period is for a term of 60 months and we receive monthly payments of £41,021 ($65,573 applying exchange rates at June 30, 2011). At lease termination the lessee has an option to purchase the leased equipment at a fixed price. Our portion of the proceeds will be £253,821 ($396,341 applying exchange rates at June 30, 2011). We paid initial direct costs as follows: (i) on November 30, 2011 we paid £9,125 ($14,195 applying exchange rates at November 30, 2011) and (ii) on July 15, 2011 we paid £45,775 ($73,322 applying exchange rates at July 15, 2011) related to the acquisition of this leased equipment.
Wind Turbine
On January 24, 2014, we entered into entered into a new finance lease transaction for a wind turbine in Northern Ireland for £490,280 ($809,845 applying exchange rates at January 24, 2014). The finance lease requires 25 quarterly payments, in arrears, of £27,728 ($45,799 applying exchange rates at January 24, 2014). On July 31, 2014, we sold this lease to a third party for total cash proceeds of £506,882 ($858,100 applying exchange rates at July 31, 2014). The net book value of the lease at the time of sale was $789,038 and we recognized a gain of $69,062.
Anaerobic Digestion Plant
In April 2014, the construction of the Anaerobic Digestion Plant, which was part of the Bravo transaction, was completed and the project concluded the pre-lease stage. On May 1, 2014 the second stage began with interest charged at a rate of 9.5% under an equipment lease for an initial term of seven years with a four year extension. In May 2014, because Bravo was consolidated, we reclassified the equipment note receivable recorded for the pre-lease stage as a direct finance lease. The finance lease requires 9 monthly payments, in arrears, of £47,520 ($79,558 using the exchange rate at May 31, 2014) and 75 monthly payments, in arrears, of £106,500 ($178,302 using the exchange rate at May 31, 2014). The lease has a four years extension option which requires 48 monthly payments of £12,489 ($20,909 using the exchange rate at May 31, 2014).
Aircraft Rotables
On June 19, 2013, Bravo purchased a lease for a 90% ownership interest in aircraft rotables located in the United States of America from SQN Fund II for $1,155,000, which includes the assumption by Bravo of a security deposit of $171,000. The Investment Manager re-tested the remaining lease term and determined the lease to be an operating lease. The lease required monthly rental payments of $16,220 and was terminated in February 2014. The lease was reclassified to other assets at March 31, 2014 as negotiations for sale and release of the equipment are conducted.
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On June 19, 2013, Bravo purchased an additional lease for a 90% ownership interest in aircraft rotables located in Australia from SQN Fund II for $310,000, which includes the assumption by Bravo of a security deposit of $29,700. The Investment Manager re-tested the remaining lease term and determined the lease to be an operating lease. The lease has a remaining term which expires on March 13, 2015 and requires monthly rental payments of $3,777.
As part of these transactions Bravo became a party to a participation agreement and a service agreement with an unrelated third party (the “Participant”). Under the participation agreement the Participant acquired a 10% ownership interest by providing 10% of the financing for each transaction. Under the service agreement, the Participant will receive 5% of the gross payments from the lessees. The Participant will provide program management services and inventory tracking and monitoring services for all of the aircraft rotable parts. Bravo is required to remit the Participant’s portion of both the participation agreement and service agreement from the gross payments from the lessee within 10 days of receipt from the lessee.
Computer Equipment
On June 19, 2013, Bravo purchased a lease for computer equipment located in the United Kingdom from SQN Fund II for £37,459 ($59,186 applying the exchange rate used in the agreement). The Investment Manager re-tested the remaining lease term and determined the lease to be an operating lease. The original lease term ended during the quarter ended September 30, 2013. On December 21, 2013, the lease was extended for a minimum of two years with an optional extension at that date. The current lease requires for quarterly rental payments of £4,411 ($6,061 applying the exchange rate at the date of extension) which includes applicable taxes.
Furniture and fixtures
On June 19, 2013, Bravo purchased a lease for furniture and fixtures located in the United Kingdom from SQN Fund II for £172,815 ($273,050 applying the exchange rate used in the agreement). The Investment Manager re-tested the remaining lease term and determined the lease to be an operating lease. The lease has a remaining term through February 28, 2015 and quarterly payments of £21,014 ($31,958 applying the exchange rate as of June 30, 2013).
Reusable Plastic Bulk Storage Containers – Participation
On March 30, 2012, we entered into a participation agreement with a third party to purchase an 18.08% residual value interest in a pool of intermediate bulk agricultural containers located in the United States of America for $1,367,173. The initial lease term expired June 29, 2013, at which point the lessee entered into a 3 year extension agreement. The Investment Manager tested this investment and determined that it is an operating lease. The terms of the lease require three annual payments in the amount of $471,000 ($2,610,000 multiplied by our interest). On June 23, 2014, we purchased an additional approximate 1.67% of the residual value interest from the third party at the net book value, for $101,858. The transaction increased our interest in this investment to approximately 19.75%.
Subsequent to the extension of the lease, we entered into a transaction to sell the right to the receivable to an another third party for $1,406,604. We are also required to make a one-time payment to the buyer in the amount of $139,216 after the lease expires. We continue to own the underlying assets and are entitled to any residual value on this investment subject to an existing remarketing agreement.
Reusable Plastic Bulk Storage Containers – Lease
On March 29, 2012, we entered into an operating lease transaction for 10,000 reusable plastic bulk storage bins used in the agricultural and food processing industries for $1,150,000 with a lease term of 60 months. The equipment is located in the United States of America. Under the terms of the agreement, we received monthly payments, in advance, of $20,547. The lessee paid a security deposit of $297,176. We paid initial direct costs associated with the acquisition of this leased equipment totaling $42,641 which has been included in the cost of the leased equipment.
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On April 4, 2013, we sold 5,000 of the reusable plastic bulk storage containers to the lessee. The sale price was determined based upon the buy-out calculation in the lease agreement to be $508,725. We received cash proceeds of $360,137, net of a refund of the security deposit payable totaling $148,588. The remaining storage containers under this operating lease were sold by us to Bravo on June 19, 2013. In January 2014, the lessee purchased the remaining 5,000 containers from Bravo for $451,870 which resulted in a full payout of the lease. Bravo received cash proceeds of $303,282, net of a refund of the security deposit payable totaling $148,588. The net book value of these containers at the time of sale was $465,875 which resulted in us recognizing a loss of $14,005.
Modular Accommodations
On June 19, 2013, Bravo purchased residual value interests in modular accommodations configured as healthcare centers in the United Kingdom for £1,582,278 ($2,500,000 applying the exchange rate used in the agreement). The lease was reclassified to other assets at March 31, 2014 as negotiations for sale and release of the equipment are conducted.
Gamma Knife Suite
On October 30, 2012, we entered into a Participation Agreement with a third party to acquire a 99.99% residual interest in a gamma knife suite located in the United Kingdom for £379,620 ($609,442 applying exchange rates at October 31, 2012). We paid initial direct costs, which have been included in the cost of the residual value asset, of £15,185 as follows: (i) on October 30, 2012, £8,535 ($13,702 applying exchange rates at October 31, 2012), (ii) on November 30, 2012, £2,979 ($4,635 applying exchange rates at November 30, 2012) and (iii) on July 14, 2012, £3,671 ($6,923 applying exchange rates at July 15, 2012).
Hydro-electric generating plant – Northern Ireland
On April 4, 2013, we entered into an equipment note receivable (the “Note”) for £1,440,000 ($2,196,440 applying exchange rates at April 15, 2013) with a special purpose entity controlled by a third party. This special purpose entity was organized to provide financing for a hydro-electric generating plant located in Northern Ireland, as collateral for the Note.. The Note accrues interest at 12.0% per year with the interest payable quarterly in arrears. The proceeds from the Note were used for the purchase of a hydro-electric generating plant located in Northern Ireland. The entire principal balance and unpaid interest may be repaid, at any time, along with a redemption fee, as defined in the Note. The borrower’s parent company has guaranteed the full amount of the Note.
Hydro-electric generating plant – Windsor, England
On October 31, 2011, we entered into a Senior Loan Note Instrument (the “Instrument”) with a special purpose entity controlled by a third party. This special purpose entity was set-up to provide financing for a hydro-electric generating plant located on the Romney Weir in Windsor, England, as collateral for the Instrument. The total amount available under the Instrument is £2,125,000, accrues interest at 12.0% per year and is guaranteed in full by the borrower’s parent company. Interest accrues on the Instrument until the project commencement date, at which time all accrued interest is due and payable. Thereafter, repayment consisting of principal and interest commences three months after the project commencement date and quarterly thereafter. Quarterly principal and interest payments are calculated as follows: £46 per £1,000 of original outstanding principal for the first eight years and the £22 per £1,000 of original outstanding principal for the next three years.
During the year ended December 31, 2013, we advanced an additional £250,000 ($386,935 applying exchange rates at various dates during the period), under the Instrument which provided further financing for the hydro-electric generating plant located on the Romney Weir in Windsor, England. During the year ended December 31, 2014, the borrower refinanced a portion of the notes with an unrelated lender. As part of the refinancing, we subordinated our debt to this lender and became a junior lender to this senior lender until the senior loan is repaid in full. After refinancing, the principal balance on the books was reduced to £1,309,564. The instrument continues accruing interest at 12.0% per year.
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Anaerobic Digestion Plant
In September 2013, Bravo entered into an equipment note receivable agreement with an unrelated third party to advance up to £6,000,000 to provide financing for equipment in relation to an anaerobic digestion plant. From September 2013 through February 2014, Bravo funded £5,470,000 ($8,940,576 using exchange rates on various dates) of that amount, with the remainder to be funded on a future date. The initial funding of £1,993,860 ($3,217,293 using the exchange rate on September 30, 2013) was made by the Partnership and increased the Partnership’s interest in its investment in Bravo. The Anaerobic Digestion project is in two stages. The first is the pre-lease stage when Bravo finances the construction of the plant according to certain milestones that get certified by an independent party. Bravo charged 1% interest per month for that stage. When the plant is constructed and produces a predetermined amount of energy, the second stage begins with interest charged at a rate of 9.5% under an equipment lease for an initial term of seven years with a four year extension. On May 1, 2014, the lease stage of the project began at which point the equipment note receivable was tested and reclassified as a direct finance lease. In June 2014, Bravo funded an additional £265,000 ($451,242 using the exchange rate on June 30, 2014). The remaining balance of £265,000 (approximately $493,509) that has yet to be advanced is included as Other liability on the condensed consolidated balance sheets at September 30, 2014.
Manufacturing Equipment and Inventory
On January 24, 2014, Bravo entered into a participation agreement with us and an unrelated lender to purchase manufacturing equipment and inventory. Bravo lent $1,175,000 to a third party under a note receivable agreement on March 4, 2014. The interest on the note is charged at a rate of 12% per annum and interest is payable in twelve installments of $11,750 each. The note matures on March 4, 2015 and the principal balance due shall be paid in one lump sum. The note is secured by the equipment and inventory of the borrower. We advanced $470,000 to Bravo to fund the transaction. Bravo borrowed $705,000 from the lender which accrues interest at 7.75% and is repayable with the proceeds from the investments.
Convertible Promissory Note
On February 27, 2013, we entered into a Subscription and Securities Purchase Agreement to purchase a portion of a $3,500,000 Convertible Promissory Note (“Promissory Note”). On February 28, 2013, we purchased the Promissory Note with a principal amount of $1,500,000. The Promissory Note bears simple interest at 10% per year which is payable quarterly, in arrears, beginning June 30, 2013. The Promissory Note may be prepaid until March 31, 2016 at 120% of the outstanding principal balance plus accrued and unpaid interest. The entire principal balance is due and payable on March 31, 2018. The Promissory Note is collateralized by the shares of the borrower and by an investment portfolio consisting of among other assets, equipment leases, direct hard assets and infrastructure investments. The Promissory Note is convertible, at our option, into units of the borrower, as defined in the agreements.
SQN Delta LLC
On October 9, 2013, we formed a special purpose entity, SQN Delta, LLC (“Delta”), a limited liability company registered in the state of Delaware which is 100% owned by the Partnership. On October 25, 2013, Delta entered into a participation agreement with unrelated third parties for the purchase of an approximate $8,540,000 ownership interest in two, less than 1 year old, bulk carrier vessels. Each vessel is subject to an initial 6 year charter of which approximately 5 years remain. In accordance with the participation agreement, we have the right to force a sale of the vessels at any time the sale proceeds would be sufficient to provide Delta with a 14% internal rate of return on an unleveraged basis. We incurred $4,200,000 of debt relating to the transaction, accruing interest at 10.9% per annum with maturity in December 2020. The debt will be repaid with cash flows generated from the underlying assets acquired. In addition to the above debt, we contributed $4,000,000 to Delta to complete the investment.
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Investment in SQN Echo LLC
On December 6, 2013, the Partnership formed SQN Echo, LLC (“Echo”), a joint venture with an entity also sponsored by the Partnership’s Investment Manager, SQN AIF IV, LP (“Fund IV) to purchase a junior collateralized participation in two portfolios of various equipment leases. Echo paid approximately $9,300,000 in cash and assumed approximately $8,500,000 in existing debt due to various financial institutions. The Partnership contributed $550,000 to purchase a 20% share of Echo. Since the partnership owns 20% of Echo and exercises significant influence,this investment is accounted for by using the equity method of accounting. On December 20, 2013, Echo entered into an agreement with an unrelated third party for the purchase of two portfolios of leases for an aggregate of $17,800,000. The first portfolio consists of various types of equipment including material handling, semiconductor test and manufacturing equipment, computer, medical, and telecommunications equipment. The second portfolio consists of lease financings, which have been accounted for as equipment loans receivable in the consolidated financial statements of Fund IV. The rights to receive payments of interest and principal under the agreement are junior to the loan note holder. In February 2014, the Partnership funded an additional $120,000 into Echo (at the same time an additional $480,000 was funded by Fund IV) to decrease the principal of the debt originally obtained to finance the acquisition and to reduce the interest rate on the debt.
Investment in SQN Echo II LLC
On March 26, 2014, the Partnership formed SQN Echo II, LLC (“Echo II”), a joint venture with an entity also sponsored by the Partnership’s Investment Manager, SQN AIF IV, LP to purchase a junior collateralized participation in two portfolios of various equipment leases. Echo II paid approximately $10,416,000 in cash and assumed approximately $11,447,000 in non-recourse debt. The Partnership originally contributed $200,000 to purchase a 20% share of Echo II. Since the Partnership owns 20% of Echo II and exercises significant influence, this investment is accounted for by the equity method of accounting. On March 28, 2014, Echo II entered into an agreement with an unrelated third party for the purchase of two portfolios of leases for an aggregate of $21,863,000. The first portfolio consists of (i) various types of equipment including material handling, semiconductor test and manufacturing equipment, computer, medical, and telecommunications equipment and (ii) direct finance leases in medical equipment. The second portfolio consists of lease financings, which have been accounted for as equipment loans receivable in the consolidated financial statements of Fund IV. The rights to receive payments of interest and principal under the agreement are junior to the loan note holder. In June 2014, the Partnership funded an additional $150,000 into Echo II (at the same time, an additional $600,000 was funded by Fund IV) to decrease the principal of the debt originally obtained to finance the acquisition and reduce the interest rate.
Segment Information
The Partnership 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 our leasing customers.
Competition
The commercial leasing and financing industry is highly competitive and is characterized by competitive factors that vary based upon product and geographic region. The partnership’s competitors are varied and include other equipment leasing and finance funds, hedge funds, private equity funds, captive and independent finance companies, commercial and industrial banks, manufacturers and vendors.
Other equipment finance companies and equipment manufacturers or their affiliated financing companies may be in a position to offer equipment to prospective customers on financial terms that are more favorable than those that we can offer. There are numerous other potential entities, including entities organized and managed similarly to us, seeking to make investments in leased equipment. Many of these potential competitors are larger and have greater financial resources than us.
The partnership competes primarily on the basis of terms and structure, particularly on structuring flexible, responsive, and customized financing solutions for our customers. The Partnership’s investments are often made directly rather than through competition in the open market. This approach limits the competition for our typical investment, which may enhance returns. The Partnership’s Investment Manager believes that investment model may represent the best way for individual investors to participate in investing in leased equipment. Nevertheless, to the extent that the Partnership’s competitors compete aggressively on any combination of the foregoing factors, the Partnership could fail to achieve our investment objectives. For additional information about our competition and other risks related to our operations, please see “Item 1A. Risk Factors.”
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Employees
The partnership has no direct employees. The Partnership’s General Partner and/or the Investment Manager supervise and control the Partnership’s business affairs and service our investments.
Available Information
The Partnership’s Annual Report on Form 10-K, the most recent Quarterly Reports on Form 10-Q and any amendments to those reports and the Current Reports on Form 8-K, if any, and any amendments to those reports are available free of charge on the SEC’s website at http://www.sec.gov or from the Partnership’s Investment Manager website at http://www.sqncapital.com.
Financial Information Regarding Geographic Areas
The Partnership has long-lived assets, which include finance leases, operating leases, residual value investments and project financings, and the Partnership generates revenues in geographic areas outside of the United States of America. For additional information, refer to Part II. Item 8. Financial Statement and Supplementary Data, Note 16 Geographic Information in the financial statements included in this Annual Report on Form 10-K.
Not applicable.
Item 1B. Unresolved Staff Comments
None.
We neither own nor lease office space or any other real property in our business at the present time.
We are not aware of any material legal proceedings that are currently pending against us or against any of our assets.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Units are not publicly traded and there is no established public trading market for our Units. It is unlikely that any such market will develop.
| Title of Class | Number of Partners at March 31, 2015 |
|||
| General Partner | 1 | |||
| Limited Partners | 375 | |||
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The Partnership pays, at the sole discretion of the Investment Manager and contingent upon the availability of funds, semi-annual cash distributions to each limited partner computed at 3% (pro-rated to the date of admission for each limited partner) of each limited partner’s capital contribution, beginning six months after our initial closing, which occurred on May 2, 2011 through the Partnership’s Operating Period, which concluded on June 29, 2014. The Liquidation Period started on June 29, 2014 and is expected to last approximately four years. For the years ended December 31, 2014 and 2013, the Partnership paid distributions to our Limited Partners totaling $1,801,878 and $1,530,271, respectively. As of December 31, 2014 the Partnership accrued $41,638 for distributions payable to our General Partner.
The Partnership is required pursuant to FINRA Rule 2310(b)(5) to disclose in each annual report distributed to the limited partners a per Unit estimated value of our Units, the method by which we developed the estimated value, and the date used to develop the estimated value. In addition, the Partnership’s Investment Manager prepares statements of our estimated Unit values to assist fiduciaries of retirement plans subject to the annual reporting requirements of ERISA in the preparation of their reports relating to an investment in our Units. For these purposes, the estimated value of our Units is deemed to be $1,000 per Unit at December 31, 2014. This estimated value is provided to assist plan fiduciaries in fulfilling their annual valuation and reporting responsibilities and should not be used for any other purpose. Because this is only an estimate, the Partnership may subsequently revise this valuation.
During the offering of the Partnership’s Units and consistent with NASD Rule 2340(c), the value of the Partnership’s Units are estimated to be the offering price of $1,000 per Unit. At December 31, 2014 the Partnership was in the Liquidating Period which the Partnership had begun on June 29, 2014 and the value of the Units are estimated to be the offering price of $1,000 per Unit.
Following the completion of our Offering Period, the estimated value of the Partnership’s Units will be based on fair value assumptions of the Partnership’s various equipment investments using cash flow modeling techniques. To estimate the cash flow for each investment, the Partnership calculates the sum of: (i) the unpaid balance of minimum rents for the finance lease, (ii) amounts that will reasonably be expected to be collectible from our notes receivable, (iii) future rental income payments from non-cancellable lease agreements for equipment subject to operating leases and (iv) the residual value of our equipment leases, all discounted to arrive at the net present value for each such transaction and (v) the Partnership’s cash on hand. From this amount, the Partnership then subtracts the total liabilities outstanding and then divide that difference by the total number of Units outstanding for the period.
The foregoing valuation is an estimate only. The methodology incorporated by the Partnership’s Investment Manager in estimating the Partnership’s per Unit value is subject to various limitations and is based on a number of assumptions and estimates that may or may not be accurate or complete. No liquidity discounts or discounts relating to the fact that the Partnership is currently externally managed were applied to the Partnership’s estimated per Unit valuation, and no attempt was made to value the Partnership as an enterprise.
As noted above, the foregoing valuation was performed solely for ERISA and FINRA purposes described above and was based solely on the Partnership’s Investment Manager’s perception of market conditions and the types and amounts of the Partnership’s assets as of the reference date for such valuation and should not be viewed as an accurate reflection of the value of the Partnership’s Units or the Partnership’s assets. Our Investment Manager did not obtain independent third-party appraisals for any of the Partnership’s assets. In addition, as stated above, as there is no significant public trading market for our Units at this time and none is expected to develop, there can be no assurance that limited partners could receive $1,000 per Unit if such a market did exist and they sold their Units or that they will be able to receive such amount for their Units in the future. Furthermore, there can be no assurance:
| • | as to the amount limited partners may actually receive if and when we seek to liquidate the Partnership’s assets or the amount of lease and note receivable payments and asset disposition proceeds the Partnership will actually receive over our remaining term; the total amount of distributions the Partnership’s limited partners may receive may be less than $1,000 per Unit primarily due to the fact that the funds initially available for investment were reduced from the gross offering proceeds in order to pay distribution expenses and organizational and offering expenses; |
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• |
that the foregoing valuation, or the method used to establish the value, will satisfy the technical requirements imposed on plan fiduciaries under ERISA; or |
• |
that the foregoing valuation, or the method used to establish value, will not be subject to challenge by the IRS if used for any tax (income, estate, gift or otherwise) valuation purposes as an indicator of the current value of our Units. |
The redemption price the Partnership offers to repurchase the Partnership’s Units utilizes a different valuation methodology than that which we use to determine the current value of our Units for ERISA and FINRA purposes described above. Therefore, the $1,000 per Unit does not reflect the amount that a limited partner should expect to receive under our redemption plan. In addition, there can be no assurance that a limited partner will be able to redeem their Units under our redemption plan. A limited partner may not redeem their Units without the prior written consent of our General Partner. the Partnership’s General Partner has the sole discretion to approve or deny any redemption requested by any of our limited partners.
Item 6. Selected Financial Data
The selected financial data should be read in conjunction with the financial statements and related notes included in “Item 8. Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K.
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Total revenue | $ | 4,783,010 | $ | 2,948,416 | ||||
| Net income | $ | 921,267 | $ | 1,742,690 | ||||
| Net income allocable to Limited Partners | $ | 912,054 | $ | 1,725,263 | ||||
| Weighted average number of limited partnership interests outstanding | 27,721.10 | 26,917.16 | ||||||
| Net income per weighted average number of limited partnership interests outstanding | $ | 32.90 | $ | 64.10 | ||||
| Distributions paid to Limited Partners | $ | 1,801,878 | $ | 1,530,271 | ||||
| Distributions per weighted average number of limited partnership interests outstanding | $ | 65.00 | $ | 56.85 | ||||
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Total assets | $ | 36,272,240 | $ | 40,497,799 | ||||
| Partners’ Equity | $ | 24,490,962 | $ | 25,397,908 | ||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a Delaware limited partnership formed on March 10, 2010. Our fund operates under a structure in which we pool the capital invested by our partners. 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.
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Our principal investment strategy is to invest in business-essential, revenue-producing (or cost-savings) equipment with high in-place value and long, relative to the investment term, economic life. We expect to achieve our investment strategy by making investments in equipment already subject to lease or originating equipment leases in such equipment, which will include: (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, we may also purchase equipment and sell it directly to our leasing customers.
Many of our investments are, and we anticipate will continue to be, structured as full payout or operating leases. Full payout leases generally are leases under which the rent over the initial term of the lease will return our invested capital plus an appropriate return without consideration of the residual value, and where the lessee may acquire the equipment or other assets at the expiration of the lease term. Operating leases generally are leases under which the aggregate non-cancelable rental payments during the original term of the lease, on a net present value basis, are not sufficient to recover the purchase price of the equipment or other assets leased under the lease.
We commenced our Operating Period on June 29, 2011 with our first equipment transaction. During the Operating Period we will invest most of the net offering proceeds in items of equipment that are subject to leases, equipment financing transactions, and residual ownership rights in leased equipment. After the net offering proceeds are invested, additional investments will be made with the cash proceeds generated from our initial investments, to the extent that cash is not needed for expenses, reserves, or distributions to Limited Partners. The investment in additional equipment in this manner is called “reinvestment.” After the termination of our Operating Period, we will sell our assets in the ordinary course of business, a time frame called the Liquidation Period. The Liquidation Period started on June 29, 2014 and is expected to last approximately four years, unless it is extended, at the sole discretion of our General Partner for a maximum of two one-year extensions.
Current Business Environment and Outlook
We believe that 2015 will continue to present attractive opportunities for equipment lease and asset finance investments. While interest rates have been at historical lows, we expect rates to increase later in the year. Increasing interest rates generally result in increased returns on asset based investments but it also increases the cost of leverage so we do not see much of a net effect on our gross margins on the leverage portions of our portfolios. Our single investor leases and loans should benefit from any increase in interest rates over the long term. In the short term, we are seeing a lot of downward pressure on returns in certain of the asset classes that we have historically invested in in the United Kingdom. Specifically, alternative energy products tied to UK government subsidies such as solar installations and LED lighting. Specialty finance firms have raised a tremendous amount of capital targeted toward these asset classes which has driven down financing rates across the sector. The competitive environment is firming up with a few large participants exiting the market but with a growing number of well capitalized new participants prepared to absorb market share. As the market settles, we think there is more opportunity than there has been in years to acquire season portfolios of equipment leases. We also think that there may be opportunity for consolidation in the next year or two. Overall we think that companies have a positive outlook for growth in 2015 and we anticipate capital asset and equipment acquisition will be an essential part of that growth.
Current Industry Trends
According to the Equipment Leasing and Finance Foundation’s “2015 Equipment Leasing and Financing U.S. Economic Outlook” the U.S. economy’s growth is expected to be above 3.0% in 2015, the fastest pace since the 2008-2009 recession. Economic growth will be driven by a number of positive factors such as a strong housing market recovery, falling natural gas prices, robust auto sales, record high household wealth, steadily improving credit availability, and improving employment. However, these positive trends are counter-balanced by high oil prices, slow international growth, moderating fiscal consolidation and the continued threat of policy uncertainty. More dependable economic growth will help to generate stronger overall investment in equipment and software. Additionally, a rising interest rate environment could induce companies to lock in lower rates. Overall, these trends could yield a positive result for the equipment finance industry.
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Recent Significant Transactions
Investment in SQN Echo II LLC
On March 26, 2014, we formed SQN Echo II, LLC, a joint venture with an entity also sponsored by us, SQN AIF IV, LP (“Fund IV) to purchase a junior collateralized participation in portfolios of various equipment leases. Echo II paid approximately $10,416,000 in cash and assumed approximately $11,447,000 in non-recourse debt. We originally contributed $200,000 to purchase a 20% share of Echo II. Since we own 20% of Echo II and exercises significant influence, we account for our investment using the equity method of accounting. On March 28, 2014, Echo II entered into an agreement with an unrelated third party for the purchase of two portfolios of leases for an aggregate of $21,863,000. The first portfolio consists of (i) various types of equipment including material handling, semiconductor test and manufacturing equipment, computer, medical, and telecommunications equipment and (ii) direct finance leases in medical equipment. The second portfolio consists of lease financings, which have been accounted for as equipment loans receivable in the consolidated financial statements of Fund IV. The rights to receive payments of interest and principal under the agreement are junior to the loan note holder. In June 2014, we funded an additional $150,000 into Echo (at the same time, an additional $600,000 was funded by Fund IV) to decrease the principal of the debt originally obtained to finance the acquisition and reduce the interest rate.
Investment in SQN Echo LLC
On December 6, 2013, we formed SQN Echo, LLC (“Echo”), a joint venture with an entity also sponsored by us, SQN AIF IV, LP to purchase a junior collateralized participation in two portfolios of various equipment leases. Echo paid approximately $9,300,000 in cash and assumed approximately $8,500,000 in existing debt due to various financial institutions. We contributed $550,000 to purchase a 20% share of Echo. Since we own 20% of Echo and we exercise significant influence, we account for our investment using the equity method of accounting. On December 20, 2013, Echo entered into an agreement with an unrelated third party for the purchase of two portfolios of leases for an aggregate of $17,800,000. The first portfolio consists of various types of equipment including material handling, semiconductor test and manufacturing equipment, computer, medical, and telecommunications equipment. The second portfolio consists of lease financings, which have been accounted for as equipment loans receivable in the consolidated financial statements of Fund IV. The rights to receive payments of interest and principal under the agreement are junior to the loan note holder. In February 2014, we funded an additional $120,000 into Echo (at the same time an additional $480,000 was funded by Fund IV) to decrease the principal of the debt originally obtained to finance the acquisition and to reduce the interest rate.
SQN Delta LLC
During October 2013, we formed a special purpose entity, SQN Delta, LLC (“Delta”), a Limited Liability Company registered in the state of Delaware which is 100% owned by us. On October 25, 2013, Delta entered into a participation agreement with unrelated third parties for the purchase of an approximate $8,540,000 ownership interest in two, less than 1 year old, bulk carrier vessels. Each vessel is subject to an initial 6 year charter of which approximately 5 years remain. In accordance with the participation agreement, we have the right to force a sale of the vessels at any time the sale proceeds would be sufficient to provide Delta with a 14% internal rate of return on an unleveraged basis. We incurred $4,200,000 of debt relating to the transaction, accruing interest at 10.9% per annum with maturity in December 2020. The debt will be repaid with cash flows generated from the underlying assets acquired. In addition to the above loan, we contributed $4,000,000 to Delta to complete the investment.
The investment is accounted for using the cost method whereas we will recognize as income, dividends received that are distributed from net accumulated earnings of the investee since the date of acquisition. Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions of cost of the investment. In conjunction with this transaction, we recorded a purchase discount of $340,000 which was recorded as a deferred gain on the accompanying consolidated financial statements. The deferred gain will be amortized over the expected term of the investment and will be recorded as income.
SQN Bravo LLC
On June 19, 2013, we sold certain assets along with their related rental streams to a newly formed special purpose entity, SQN Bravo LLC (“Bravo”). Our Investment Manager determined that this was in our best interests due to the following factors: (i) we were able to leverage investments through debt at rates less than the corresponding leased equipment were earning and (ii) we were able to use the proceeds to make additional lease investments at higher rates.
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On June 19, 2013, Bravo obtained financing as follows; (i) a non-recourse loan payable for $5,860,085 and (ii) an equity investment from us of $3,906,724. Bravo also purchased a seasoned portfolio of leased equipment from SQN Fund II, a private equipment leasing fund managed by our Investment Manager. The portfolio purchased from SQN Fund II was valued at the time of purchase based on discounted cash flows for the revenue streams at a predetermined rate and the residual values of the underlying assets were supported by third party appraisers. Bravo purchased the following general types of leased assets: (i) $632,284 in finance leases, (ii) $1,937,636 in equipment subject to operating leases and (iii) $2,500,000 in residual value investments in equipment on lease. In addition, we sold various leased assets with a net book value of $4,137,073 to Bravo.
As a result of our equity purchase noted above, on June 19, 2013, we acquired the primary economic risks and rewards in Bravo and accordingly, we now consolidate Bravo into our financial statements and results of operations.
Convertible Promissory Note
On February 27, 2013, we entered into a Subscription and Securities Purchase Agreement to purchase a portion of a $3,500,000 Convertible Promissory Note (“Promissory Note”). On February 28, 2013, we purchased a Promissory Note with a principal amount of $1,500,000. The Promissory Note bears simple interest at 10% per year which is payable quarterly, in arrears, beginning June 30, 2013. The Promissory Note may be prepaid until March 31, 2016 at 120% of the outstanding principal balance plus accrued and unpaid interest. The entire principal balance is due and payable on March 31, 2018. The Promissory Note is collateralized by all of the shares of the Borrower and by an investment portfolio consisting of equipment leases, direct hard assets and infrastructure investments. The Promissory Note is convertible, at our option, into Units of the Borrower, as defined in the agreements.
Equipment Notes Receivable
Hydro-electric generating plant – Northern Ireland
On April 4, 2013, we entered into an equipment note receivable (the “Note”) for £1,440,000 ($2,196,440 applying exchange rates at April 15, 2013) with a special purpose entity controlled by a third party. This special purpose entity was organized to provide financing for a hydro-electric generating plant located in Northern Ireland, as collateral for the Note. The Note accrues interest at 12.0% per year with the interest payable quarterly in arrears. The proceeds from the Note were used for the purchase of a hydro-electric generating plant located in Northern Ireland. The entire principal balance and unpaid interest may be repaid, at any time, along with a redemption fee, as defined in the Note. The borrower’s parent company has guaranteed the full amount of the Note.
Hydro-electric generating plant – Windsor, England
On October 31, 2011, we entered into a Senior Loan Note Instrument (the “Instrument”) with a special purpose entity controlled by a third party. This special purpose entity was set-up to provide financing for a hydro-electric generating plant located on the Romney Weir in Windsor, England, as collateral for the Instrument. The total amount available under the Instrument is £2,125,000, accrues interest at 12.0% per year and is guaranteed in full by the borrower’s parent company. During the year ended December 31, 2013, we advanced an additional £250,000 ($386,935 applying exchange rates at various dates during the period), under the Instrument, which provided further financing for the hydro-electric generating plant located on the Romney Weir in Windsor, England.
During the year ended December 31, 2014, the borrower refinanced a portion of the notes with an unrelated lender. As part of the refinancing, we subordinated our debt to this lender and became a junior lender to this senior lender until the senior loan is repaid in full. After refinancing, the principal balance on the books was reduced to £1,309,564. The instrument continues accruing interest at 12.0% per year.
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Anaerobic Digestion Plant
In September 2013, Bravo entered into an equipment note receivable agreement with an unrelated third party to advance up to £6,000,000 to provide financing for equipment in relation to an anaerobic digestion plant. From September 2013 through February 2014, Bravo funded £5,470,000 ($8,940,576 using exchange rates on various dates) of that amount, with the remainder to be funded on a future date. The initial funding of £1,993,860 ($3,217,293 using the exchange rate on September 30, 2013) was made by us and increased our interest in our investment in Bravo. The Anaerobic Digestion project is in two stages. The first is the pre-lease stage when Bravo finances the construction of the plant according to certain milestones that get certified by an independent party. Bravo charged 1% interest per month for that stage. When the plant is constructed and produces a predetermined amount of energy, the second stage begins with interest charged at a rate of 9.5% under an equipment lease for an initial term of seven years with a four year extension. On May 1, 2014, the lease stage of the project began at which point the equipment note receivable was tested and reclassified as a direct finance lease. In June 2014, Bravo funded an additional £265,000 ($451,242 using the exchange rate on June 30, 2014). The remaining balance of £265,000 (approximately $411,598 using the exchange rate on December 31, 2014) that has yet to be advanced is included as Other liability on the consolidated balance sheets at December 31, 2014.
Manufacturing Equipment and Inventory
On January 24, 2014, Bravo entered into a participation agreement with us and an unrelated lender to purchase manufacturing equipment and inventory. Bravo lent $1,175,000 to a third party under a note receivable agreement on March 4, 2014. The interest on the note is charged at a rate of 12% per annum and interest is payable in twelve installments of $11,750 each. The note matures on March 4, 2015 and the principal balance due shall be paid in one lump sum. The note is secured by the equipment and inventory of the borrower. We advanced $470,000 to Bravo to fund the transaction. Bravo borrowed $705,000 from the lender which accrues interest at 7.75% and is repayable with the proceeds from the investments. As of December 31, 2014, the outstanding balance of principal and interest is $1,257,250.
Critical Accounting Policies
An understanding of our critical accounting policies is necessary to understand our financial results. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires our General Partner and our 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 and the estimated useful lives and residual values of the leased equipment we acquire. 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, or when there are significant changes to the lease terms. We capitalize initial direct costs associated with the origination and funding of lease assets. Initial direct costs include both internal costs (e.g., labor and overhead) and external broker fees incurred with the origination. 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. For a finance lease, initial direct costs are capitalized and amortized over the lease term using the effective interest rate method. 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 equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
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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. Rental income received in advance is the difference between the timing of the receivables billed and the income recognized on a straight-line basis.
For leases subject to equipment notes receivable, specific payment terms were reached requiring payments which resulted in the recognition of interest income. This income is recognized over the course of the lease agreement.
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 lessee’s 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 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, we 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 in-flows expected to be generated by an asset less the future out-flows expected to be necessary to obtain those in-flows. 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. 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 Manager’s review for impairment will include 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.
Equipment Notes Receivable
Equipment notes receivable are reported in our balance sheets as the outstanding principal balance net of any unamortized deferred fees, premiums or discounts on purchased loans. Costs to originate loans, if any, are reported as other assets in our balance sheets. Income is recognized over the life of the note agreement. On certain equipment notes receivable, specific payment terms were reached requiring prepayments which resulted in the recognition of unearned interest income. Unearned income, discounts and premiums, if any, are amortized to interest income in the statements of operations using the effective interest rate method. Equipment notes receivable are generally placed in a non-accrual status when payments are more than 90 days past due. Additionally, the Investment Manager periodically reviews the creditworthiness of companies with payments outstanding less than 90 days. Based upon the Investment Manager’s judgment, accounts may be placed in a non-accrual status. Accounts on a non-accrual status are only returned to an accrual status when the account has been brought current and we believe recovery of the remaining unpaid receivable is probable. Revenue on non-accrual accounts is recognized only when cash has been received.
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Cost method of accounting
We record our investment in SQN Delta at cost. Under the cost method of accounting for investments, dividends are the basis for recognition by an investor of earnings from an investment. We recognize as income dividends received that are distributed from net accumulated earnings of the investee since the date of acquisition. The net accumulated earnings of the investee subsequent to the date of investment are recognized by us only to the extent distributed by the investee as dividends. Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions of cost of the investment. We consolidate the activity of Delta for financial reporting purposes.
Equity method of accounting
We record our 20% investment in Echo and Echo II using the equity method of accounting. According to U.S. GAAP, a company that holds 20% or greater investment in another company could potentially exercise significant influence over the investee company’s operating and financing activities and should therefore utilize the equity method of accounting. Our portion of earnings in the investee are recorded as an increase in our investment and recognized in the consolidated statement of operations, and any distributions received from the investee are recorded as a reduction in our investment.
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.
Recent Accounting Pronouncements
In August 2014, FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The adoption of ASU 2014-15 becomes effective for us on our fiscal year ending December 31, 2016, and all subsequent annual and interim periods. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on our consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Results of Operations for the Year Ended December 31, 2014 (“2014”) as compared to the Year Ended December 31, 2013 (“2013”)
Our Offering Period terminated on March 15, 2013, after which time we no longer accepted Limited Partner capital contributions. During the Offering Period the majority of our cash in-flows were from Limited Partners purchasing our Units. After the termination of our Offering Period, the majority of our cash in-flows are expected to come from rental payments, interest payments, and sales proceeds from our various equipment investments.
During our Operating Period, we use the net offering proceeds to make our initial investments, which include: (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. As our investments mature, we anticipate reinvesting the cash proceeds, to the extent that the cash will not be needed for expenses, reserves and distributions to our Limited Partners, in additional investments in leased equipment and financing transactions. Additionally, we expect to see our rental income and finance income increase, as well as related expenses, such as depreciation and amortization expense.
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Revenue for 2014 and 2013 is summarized as follows:
| For the Year Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Revenue: | ||||||||
| Rental income | $ | 734,643 | $ | 729,831 | ||||
| Finance income | 1,458,869 | 1,044,724 | ||||||
| Gain on sale of assets | 392,030 | 41,447 | ||||||
| Investment income | 1,037,078 | 142,333 | ||||||
| Interest income | 1,160,390 | 990,081 | ||||||
| Total Revenue | 4,783,010 | 2,948,416 | ||||||
For the year ended December 31, 2014, we earned total revenue of $4,783,010, which is an increase of approximately $1,855,000 from 2013. The increase in total revenue was due to an increase in rental income of approximately $5,000, an increase in finance income of approximately $414,000, an increase in income from investments of approximately $895,000, an increase in gain on sale of assets of approximately $351,000 and an increase in interest income of approximately $170,000. The increase in finance income is primarily due to the reclassification of the lease for the anaerobic digestion plant from equipment notes receivable to direct finance lease. The increase in income from investments is a result of the income we earned from our investments in participation interests related to Delta and our investments in Echo and Echo II. The increase in interest income is due to several factors, the most significant was the addition of the note receivable in relation to the anaerobic digestion plant in 2014. We also earned interest from a convertible promissory note and from equipment leases.
Expenses for 2014 and 2013 are summarized as follows:
| Year Ended December 31 | ||||||||
| 2014 | 2013 | |||||||
| Expenses: | ||||||||
| Management fees - Investment Manager | $ | 570,308 | $ | 605,031 | ||||
| Depreciation and amortization | 516,442 | 581,606 | ||||||
| Professional fees | 316,549 | 227,172 | ||||||
| Administration expense | 50,602 | 44,256 | ||||||
| Acquisition costs | — | 11,556 | ||||||
| Other expenses | 38,368 | 22,038 | ||||||
| Interest expense | 1,150,020 | 394,806 | ||||||
| Foreign currency transaction (gains) losses | 1,219,454 | (680,739 | ) | |||||
| Total Expenses | $ | 3,861,743 | $ | 1,205,726 | ||||
During the year ended December 31, 2014, we incurred total expenses of $2,642,289, excluding a foreign currency transaction loss of $1,219,454, versus total expenses of $1,886,465 for 2013 which excluded a foreign currency transaction gain of $680,739. The primary reason for the increase was due to the increases in professional fees and interest expense. The increase in professional fees from 2013 is attributable to the increase in fees related to audit and income tax compliance. As the size and complexity of our activities grow we expect professional fees will increase accordingly. Interest expense increased significantly compared to 2013 due to the addition of the non-recourse loans payable. These increases were offset by decreases in depreciation and amortization and fees paid to our Investment Manager.
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We have paid our Investment Manager a management fee 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. If, at the end of the Offering Period, we raised total offering proceeds of less than $36,000,000, the management fee would be reduced to such an amount that over our entire life the total average management fee will not be greater than 2% per year of the aggregate offering proceeds. We did not reach this equity threshold. In accordance with the terms of the Offering Agreement, beginning in April 2013, the monthly management fee was reduced from $60,000 per month to $47,226 per month through December 2016. The reduced management fee calculation was based upon our Investment Managers expectation that we will conclude our business operations during June 2017. The Investment Manager will continue to monitor our operations, which may change the monthly management fee amount.
For 2014, we generated foreign currency transaction losses of $1,219,454 which were incurred as follows: (i) approximately $1,130,000 was related directly to our equipment leasing transactions or project financings in the United Kingdom and (ii) approximately 88,000 related to foreign exchange fluctuation changes in our cash accounts located in the United Kingdom. The exchange rate between the British Pound and the United States of America dollar decreased 5.8% during 2014.
Net income
As a result of the factors discussed above we incurred net income of $921,267 for the year ended December 31, 2014 compared to net income of $1,742,690 for the year ended December 31, 2013.
Liquidity and Capital Resources
Sources and Uses of Cash
| Year Ended December 31 | ||||||||
| 2014 | 2013 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | 4,315,155 | $ | 1,817,572 | ||||
| Investing activities | $ | 755,199 | $ | (26,118,214 | ) | |||
| Financing activities | $ | (5,177,799 | ) | $ | 18,237,633 | |||
Sources of Liquidity
We are currently in our Liquidation Period. The Liquidation Period is the time-frame in which we sell equipment under lease in the normal course of business. During this time period we anticipate that a substantial portion of our cash out-flows will be from operating activities and the majority of our cash in-flows are expected to be from operating and investing activities. We believe that the cash in-flows will be sufficient to finance our liquidity requirements for the foreseeable future, including semi-annual distributions to our Limited Partners, general and administrative expenses, interest on the Partnership’s, Bravo’s and Delta’s non-recourse loan payable and fees paid to our Investment Manager.
Operating Activities
During 2014, we generated cash in-flows from operating activities of $4,315,155. This was principally due to cash collections from rental payments from both our finance and operating leases as well as interest income on the equipment notes receivable. We received cash of approximately $2,443,000 from our finance leases and cash of approximately $1,904,000 from our equipment notes receivable during 2014. The majority of our leases are payable in British Pound Sterling, therefore future cash in-flows will be affected by the foreign currency exchange rates at the time we receive these payments. The cash in-flows were offset by various non-cash deductions which totaled approximately $1,987,000 and consisted of finance income, investment income, and gain on sale of assets. These non-cash deductions were offset by a non-cash increase of approximately $1,647,000 which represented depreciation and amortization and unrealized foreign currency transaction losses. We anticipate that we will continue to generate net cash in-flows from operations but we may experience swings due mostly to changes in the foreign currency transaction gains or losses from year to year.
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During 2013, we generated cash in-flows from operating activities of $1,817,572. This was principally due to cash collections from rental payments from both our finance and operating leases. We received cash of $3,420,099 from our finance leases and cash of $729,879 from our operating leases during 2013. The majority of our leases are payable in British Pound Sterling, therefore future cash in-flows will be affected by the foreign currency exchange rates at the time we receive these payments. The cash in-flows were offset by various non-cash deductions which totaled $2,645,823 and consisted of finance income, accrued interest income, and unrealized foreign currency transaction gains. These non-cash deductions were offset by a non-cash increase of $609,118 which represented depreciation and amortization and accrued interest payable. We anticipate that as we enter into additional equipment leasing transactions we will continue to generate net cash in-flows from operations but we may experience swings due mostly to changes in the foreign currency transaction gains losses from year to year.
Investing Activities
Cash provided by investing activities for 2014 was $755,199. We had cash inflows of approximately $2,876,000 proceeds received from sale of leased assets, the receipt of approximately $1,363,000 for the repayment of an outstanding note receivable, approximately $710,000 from payments received from our investment in participation interest and $60,000 for principal payments received on convertible notes. These inflows were offset by cash outflows of approximately $1,755,000 for the purchase of finance leases and approximately $2,315,000 for the purchase of equipment notes receivable during 2014. As noted above, we invested an additional $120,000 in a junior partnership interest in Echo and we invested $350,000 in a junior partnership interest in Echo II. We anticipate generating cash in-flows during the Liquidation Period as we sell our various equipment leases.
Cash used in investing activities was $26,118,214 during 2013. The biggest cash outflow of $13,331,745 related to our origination of several equipment notes receivable during the year. One of the notes was fully repaid during the year and we expect the remaining notes to provide returns in the next few years. The second largest cash out-flow of $8,200,000 was related to our investment in interests described above regarding SQN Delta, LLC. Other cash out-flows were related to our purchase of finance leases of $2,528,266, initial direct costs related to the acquisition of these leases of $113,822, purchase of equipment subject to operating leases of $1,937,636, and purchase of residual value investments in equipment on lease of $2,500,000. As noted above, the Partnership also invested $550,000 in a junior partnership interest of SQN Echo LLC. These outflows were offset by $1,309,263 proceeds received from sale of leased assets and the receipt of $3,070,071 for the repayment of an outstanding note receivable. We expect to continue to incur cash out-flows from investing activities through the Operating Period as we continue to acquire leased equipment. We anticipate generating cash in-flows during the Liquidation Period as we sell our various equipment leases.
Financing Activities
Cash used by financing activities was $5,177,799 for 2014. During 2014, Bravo borrowed $705,000 from an unrelated lender. The proceeds were utilized to enter into an agreement with the Partnership and the unrelated lender for a note receivable issued to a borrower. In addition, we collected approximately $110,000 from a note receivable with our Investment Manager. Offsetting these increases were cash out-flows of approximately $4,191,000 for principal payments on the loans payable and approximately $1,802,000 for distributions to our Limited Partners.
During 2013, we generated cash in-flows from financing activities of $18,237,633. This was mostly due to $14,736,689 financing we have obtained at interest rates ranging from 7.75% to 10.9% to make investments that produce higher returns for our investors. Also, as we were in our Offering Period until March 15, 2013 - we received capital contributions from our Limited Partners totaling $5,506,000 in 2013. These cash in-flows were offset by cash out-flows for distributions paid to our Limited Partners of $1,530,271, distribution expense of $108,120 as well as cash redemptions to Limited Partners of $140,000. Since our Offering Period ended on March 15, 2013, we will no longer generate cash in-flows from capital contributions from our Limited Partners, nor will we incur cash out-flows for distribution expense payable to SQN Securities, LLC and organizational and offering expenses. With the completion of our Offering Period in 2013, we expect to incur cash out-flows from financing activities from distributions payable to our Limited Partners. We plan to make, at the sole discretion of our Investment Manager and contingent upon the availability of funds, semi-annual cash distributions to each Limited Partner computed at 3% (pro-rated to the date of admission for each Limited Partner) of each Limited Partner’s capital contribution.
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Distributions
We make, at the sole discretion of our Investment Manager and contingent upon the availability of funds, semi-annual cash distributions to each Limited Partner computed at 3% (pro-rated to the date of admission for each Limited Partner) of each Limited Partner’s capital contribution which began six months after the our initial closing which occurred on May 2, 2011. We expect to make distributions to our Limited Partner’s through the Operating Period. During the years ended December 31, 2014 and 2013, we made distributions to our Limited Partners totaling approximately $1,801,878 and $1,530,271, respectively. We did not make a cash distribution to the General Partner during the years ended December 31, 2014 and 2013; however, we accrued approximately $41,638 for distributions due to the General Partner at December 31, 2014.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitment and Contingencies
Our income, losses and distributions are allocated 99% to our Limited Partners and 1% to our 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 our Limited Partners and 20% to our General Partner.
We enter into contracts that contain a variety of indemnifications. Our maximum exposure under these arrangements is not known.
In the normal course of business, we enter 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 party’s 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 our General Partner and our Investment Manager, no liability will arise as a result of these provisions. Our General Partner and our Investment Manager knows of no facts or circumstances that would make our contractual commitments outside standard mutual covenants applicable to commercial transactions between businesses. Accordingly, we believe 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 our similar commitments is remote. Should any such indemnification obligation become payable, we would separately record and/or disclose such liability in accordance with accounting principles generally accepted in the United States of America.
Off-Balance Sheet Transactions
None.
Subsequent Events
None.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 and 2013
| Page(s) | ||
| Report of Independent Registered Public Accounting Firm | 27 | |
| Consolidated Financial Statements: | ||
| Consolidated Balance Sheets | 28 | |
| Consolidated Statements of Operations | 29 | |
| Consolidated Statements of Changes in Partners’ Equity | 30 | |
| Consolidated Statements of Cash Flows | 31 | |
| Notes to Consolidated Financial Statements | 33 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners
SQN Alternative Investment Fund III L.P. and Subsidiaries
New York, NY
We have audited the accompanying consolidated balance sheets of SQN Alternative Investment Fund III L.P. and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in partners’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SQN Alternative Investment Fund III L.P. and Subsidiaries as of December 31, 2014 and 2013 and the results of their operations and cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Baker Tilly Virchow Krause, LLP
New York, NY
March 31, 2015
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SQN Alternative Investment Fund III L.P. and Subsidiaries
(A Delaware Limited Partnership)
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 333,039 | $ | 440,484 | ||||
| Accounts receivable | 37,562 | 31,698 | ||||||
| Investments in finance leases, net | 12,406,091 | 6,150,910 | ||||||
| Investments in equipment subject to operating leases, net | 1,484,789 | 3,548,323 | ||||||
| Residual value investments in equipment on lease | 634,702 | 3,134,702 | ||||||
| Convertible promissory note | 1,375,714 | 1,435,714 | ||||||
| Equipment notes receivable, including accrued interest of $238,069 and $827,706 | 5,683,692 | 14,549,459 | ||||||
| Loan origination costs, net of accumulated amortization of $131,859 and $50,184 | 28,921 | 110,600 | ||||||
| Due from investment manager | 258,529 | 368,200 | ||||||
| Initial direct costs, net of accumulated amortization of $403,919 and $371,946 | 65,249 | 102,093 | ||||||
| Investment in participation interest | 8,421,915 | 8,421,915 | ||||||
| Investment in SQN Echo LLC | 780,897 | 550,000 | ||||||
| Investment in SQN Echo II LLC | 374,739 | — | ||||||
| Other assets | 4,386,401 | 1,653,701 | ||||||
| Total Assets | $ | 36,272,240 | $ | 40,497,799 | ||||
| Liabilities and Partners’ Equity | ||||||||
| Liabilities: | ||||||||
| Non-recourse loans payable, including interest of $88,441 and $27,511 | $ | 10,627,439 | $ | 14,049,411 | ||||
| Accounts payable and accrued expenses | 135,458 | 92,299 | ||||||
| Distributions payable to General Partner | 41,638 | 15,303 | ||||||
| Rental income received in advance | 250,794 | 25,553 | ||||||
| Deferred gain from investment | 284,651 | 568,037 | ||||||
| Other liability | 411,598 | — | ||||||
| Security deposits payable | 29,700 | 349,288 | ||||||
| Total Liabilities | 11,781,278 | 15,099,891 | ||||||
| Commitments and contingencies | — | — | ||||||
| Partners’ Equity (Deficit): | ||||||||
| Limited Partners | 24,510,504 | 25,400,328 | ||||||
| General Partner | (19,542 | ) | (2,420 | ) | ||||
| Total Partners’ Equity | 24,490,962 | 25,397,908 | ||||||
| Total Liabilities and Partners’ Equity | $ | 36,272,240 | $ | 40,497,799 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 28 |
SQN Alternative Investment Fund III L.P. and Subsidiaries
(A Delaware Limited Partnership)
Consolidated Statements of Operations
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Revenue: | ||||||||
| Rental income | $ | 734,643 | $ | 729,831 | ||||
| Finance income | 1,458,869 | 1,044,724 | ||||||
| Gain on sale of assets | 392,030 | 41,447 | ||||||
| Investment income from participation interest and equity method investment | 1,037,078 | 142,333 | ||||||
| Interest income | 1,160,390 | 990,081 | ||||||
| Total Revenue | 4,783,010 | 2,948,416 | ||||||
| Expenses: | ||||||||
| Management fees- Investment Manager | 570,308 | 605,031 | ||||||
| Depreciation and amortization | 516,442 | 581,606 | ||||||
| Professional fees | 316,549 | 227,172 | ||||||
| Administration expense | 50,602 | 44,256 | ||||||
| Acquisition costs | — | 11,556 | ||||||
| Other expenses | 38,368 | 22,038 | ||||||
| Interest expense | 1,150,020 | 394,806 | ||||||
| Foreign currency transaction (gains) losses | 1,219,454 | (680,739 | ) | |||||
| Total Expenses | 3,861,743 | 1,205,726 | ||||||
| Net income | 921,267 | 1,742,690 | ||||||
| Net income allocable to: | ||||||||
| Limited Partners | $ | 912,054 | $ | 1,725,263 | ||||
| General Partner | 9,213 | 17,427 | ||||||
| Net income | $ | 921,267 | $ | 1,742,690 | ||||
| Weighted average number of limited partnership interest outstanding | 27,721.10 | 26,917.16 | ||||||
| Net income attributable to Limited Partners per weighted average number of limited partnership interest outstanding | $ | 32.90 | $ | 64.10 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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SQN Alternative Investment Fund III L.P. and Subsidiaries
(A Delaware Limited Partnership)
Consolidated Statements of Changes in Partners’ Equity
Years ended December 31, 2014 and 2013
| Limited Partnership Interests | Total Partners’ Equity | General Partner | Limited Partners | |||||||||||||
| Balance, January 1, 2013 | 22,355.10 | $ | 19,501,015 | $ | (4,544 | ) | $ | 19,505,559 | ||||||||
| Limited Partners’ capital contributions | 5,506.00 | 5,506,000 | — | 5,506,000 | ||||||||||||
| Limited Partners’ redemptions | (140.00 | ) | (140,000 | ) | — | (140,000 | ) | |||||||||
| Distribution expenses | — | (108,120 | ) | — | (108,120 | ) | ||||||||||
| Offering Expense Reimbursement from Investment Manager | — | 441,897 | — | 441,897 | ||||||||||||
| Distributions to Partners | — | (1,545,574 | ) | (15,303 | ) | (1,530,271 | ) | |||||||||
| Net income | — | 1,742,690 | 17,427 | 1,725,263 | ||||||||||||
| Balance, December 31, 2013 | 27,721.10 | 25,397,908 | (2,420 | ) | 25,400,328 | |||||||||||
| Distributions to Partners | — | (1,828,213 | ) | (26,335 | ) | (1,801,878 | ) | |||||||||
| Net income | — | 921,267 | 9,213 | 912,054 | ||||||||||||
| Balance, December 31, 2014 | 27,721.10 | $ | 24,490,962 | $ | (19,542 | ) | $ | 24,510,504 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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SQN Alternative Investment Fund III L.P. and Subsidiaries
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows
| For the Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 921,267 | $ | 1,742,690 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Finance income | (1,458,869 | ) | (1,044,724 | ) | ||||
| Accrued interest income | (1,112,671 | ) | (1,042,786 | ) | ||||
| Investment income from equity method investments | (135,636 | ) | — | |||||
| Interest expense payable | — | 27,512 | ||||||
| Gain on sale of assets | (392,030 | ) | (41,447 | ) | ||||
| Depreciation and amortization | 516,441 | 581,606 | ||||||
| Foreign currency transaction (gains) losses | 1,130,882 | (516,865 | ) | |||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | (5,864 | ) | — | |||||
| Accrued interest income received | 1,903,938 | 247,668 | ||||||
| Minimum rental payments received | 2,442,489 | 3,420,099 | ||||||
| Other assets | 1,313,826 | (1,615,201 | ) | |||||
| Accounts payable and accrued expenses | 43,159 | 54,014 | ||||||
| Deferred gain from investment | (283,386 | ) | — | |||||
| Accrued interest on notes and loans payable | (793,632 | ) | — | |||||
| Rental income received in advance | 225,241 | 5,006 | ||||||
| Net cash provided by operating activities | 4,315,155 | 1,817,572 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of finance leases | (1,754,596 | ) | (2,528,265 | ) | ||||
| Purchase of equipment subject to operating leases | (101,857 | ) | (1,937,636 | ) | ||||
| Purchase in residual value investments of equipment on lease | — | (2,500,000 | ) | |||||
| Proceeds from sale of leased assets | 2,875,702 | 1,309,263 | ||||||
| Cash paid for convertible note receivable | — | (1,500,000 | ) | |||||
| Principal payments received on convertible note | 60,000 | 64,286 | ||||||
| Loan origination costs paid | (23,658 | ) | (160,784 | ) | ||||
| Cash paid for equipment notes receivable | (2,315,060 | ) | (13,331,745 | ) | ||||
| Cash received for repayment of equipment notes receivable | 1,362,838 | 3,070,071 | ||||||
| Investment in participation interest | 710,232 | (7,939,582 | ) | |||||
| Investment in SQN Echo LLC | (120,000 | ) | (550,000 | ) | ||||
| Investment in SQN Echo II LLC | (350,000 | ) | — | |||||
| Other liability | 411,598 | — | ||||||
| Cash paid for initial direct costs | — | (113,822 | ) | |||||
| Net cash provided by (used in) investing activities | 755,199 | (26,118,214 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from Limited Partners’ capital contributions | — | 5,506,000 | ||||||
| Proceeds from loans payable | 705,000 | 14,736,689 | ||||||
| Principal payments of loan payable | (4,190,592 | ) | (300,362 | ) | ||||
| Cash paid for distribution expenses | — | (108,120 | ) | |||||
| Cash paid for distributions to Limited Partners | (1,801,878 | ) | (1,530,271 | ) | ||||
| Cash paid for redemption of Limited Partner Units | — | (140,000 | ) | |||||
| Repayment of note from Investment Manager | 109,671 | 73,697 | ||||||
| Net cash (used in) provided by financing activities | (5,177,799 | ) | 18,237,633 | |||||
| Net decrease in cash and cash equivalents | (107,445 | ) | (6,063,009 | ) | ||||
| Cash and cash equivalents, beginning of year | 440,484 | 6,503,493 | ||||||
| Cash and cash equivalents, end of year | $ | 333,039 | $ | 440,484 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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SQN Alternative Investment Fund III L.P. and Subsidiaries
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows
| For the Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 1,943,652 | $ | 309,834 | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Reclassification of equipment subject to notes receivable to investment in finance lease | $ | 9,100,449 | $ | — | ||||
| Reclassification of net value of a residual value lease to other assets | $ | 2,500,000 | $ | — | ||||
| Reclassification of equipment subject to operating leases to other assets | $ | 1,219,920 | $ | 70,200 | ||||
| Reclassification of investment in participation interest to other assets | $ | 143,768 | $ | — | ||||
| Distributions payable to General Partner | $ | 26,335 | $ | — | ||||
| Reclassification of net value of a residual value lease to equipment subject to operating leases | $ | — | $ | 1,367,173 | ||||
| Reclassification of accounts receivable to other assets | $ | — | $ | 31,968 | ||||
| Note payable repayment from third party | $ | — | $ | 414,428 | ||||
| Deferred gain on investment in participation interests | $ | — | $ | 340,000 | ||||
| Offering expenses reimbursement from Investment Manager | $ | — | $ | 441,897 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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SQN Alternative Investment Fund III L.P. and Subsidiaries
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
Years Ended December 31, 2014 and 2013
| 1. | Organization and Nature of Operations |
Organization — SQN Alternative Investment Fund III, LP (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. The Partnership will terminate no later than December 31, 2034.
Nature of Operations — The principal investment strategy of the Partnership is to invest in business-essential, revenue-producing (or cost-savings) equipment or other physical assets with high in-place value and long, relative to the investment term, economic life and project financings. The Partnership executes its investment strategy by making investments in equipment already subject to lease or originating equipment leases in such equipment, which will include: (i) purchasing equipment and leasing it to third-party end users; (ii) providing equipment and other asset and project financings; (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 may use other investment structures that its Investment Manager believes will provide the Partnership with an appropriate level of security, collateralization, and flexibility to optimize its return on its investment while protecting against downside risk, such as vendor and rental programs. In many cases, the structure will include the Partnership holding title to or a priority or controlling position in the equipment or other asset.
The General Partner of the Partnership is SQN AIF III GP, LLC (the “General Partner”), a wholly-owned subsidiary of the Partnership’s Investment Manager, SQN Capital Management, LLC (the “Investment Manager”). Both the Partnership’s General Partner and its Investment Manager are Delaware limited liability companies. The General Partner manages and controls the day to day activities and operations of the Partnership, pursuant to the terms of the Limited Partnership Agreement. The General Partner paid an aggregate capital contribution of $100 for a 1% interest in the Partnership’s income, losses and distributions. The Investment Manager makes all investment decisions and manages the investment portfolio of the Partnership. The General Partner or its affiliates purchased 100 limited partnership interests (“Units”) for $100,000 on March 15, 2013.
On December 6, 2013, the Partnership formed a special purpose entity SQN Echo LLC (“Echo”), a limited liability company registered in the state of Delaware which is 20% owned by the Partnership and 80% owned by SQN AIF IV, L.P. (“Fund IV”), an entity also sponsored by the Partnership’s Investment Manager. The Partnership originally contributed $550,000 to purchase the 20% share of Echo. Fund IV contributed $2,200,000 to purchase an 80% share of Echo. Since the Partnership owns 20% of Echo and exercises significant influence, the Partnership accounts for its investment using the equity method of accounting. On December 20, 2013, Echo entered into an agreement with a third party for the purchase of two portfolios of leases for $17,800,000. The first portfolio consists of various types of equipment including material handling, semiconductor test and manufacturing equipment, computer, medical, and telecommunications equipment. The second portfolio consists of lease financings, which have been accounted for as equipment loans receivable in the consolidated financial statements of Fund IV. Echo paid approximately $9,300,000 in cash and assumed approximately $8,500,000 in non-recourse equipment notes payable. In February 2014, the Partnership funded an additional $120,000 into Echo (at the same time, an additional $480,000 was funded by Fund IV) to decrease the principal of the debt originally obtained to finance the acquisition and reduce the interest rate.
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On March 26, 2014, the Partnership formed a special purpose entity SQN Echo II, LLC (“Echo II”), a limited liability company registered in the state of Delaware which is 20% owned by the Partnership and 80% owned by Fund IV. The Partnership originally contributed $200,000 to purchase the 20% share of Echo II. Fund IV contributed $800,000 to purchase an 80% share of Echo II. Since the Partnership owns 20% of Echo II and exercises significant influence, the Partnership accounts for its investment using the equity method. On March 28, 2014, Echo II entered into an agreement with a third party for the purchase of three portfolios of leases for approximately $21,863,000. The first portfolio consists of (i) various types of equipment including material handling, semiconductor test and manufacturing equipment, computer, medical, and telecommunications equipment and (ii) direct finance leases in medical equipment. The second portfolio consists of lease financings, which have been accounted for as equipment loans receivable in the consolidated financial statements of Fund IV. The third portfolio consists of direct finance leases in medical equipment. Echo II paid approximately $10,416,000 in cash and assumed approximately $11,447,000 in non-recourse equipment notes payable. On June 26, 2014, the Partnership contributed an additional $150,000 to Echo II (at the same time, an additional $600,000 was funded by Fund IV) to decrease the principal of the debt originally obtained to finance the acquisition and reduce the interest rate.
On October 9, 2013, the Partnership formed a special purpose entity, SQN Delta, LLC (“Delta”), a limited liability company registered in the state of Delaware which is 100% owned by the Partnership. The sole purpose of Delta is to acquire an $8,540,000 interest in two newly commissioned shipping vessels under long-term charter contracts. The Partnership consolidates Delta into the consolidated financial statements.
On June 19, 2013, the Partnership acquired the primary economic risks and rewards in a newly formed special purpose entity, SQN Bravo LLC (“Bravo”). The Partnership’s Investment Manager evaluated this acquisition based on the following factors: (i) the Partnership was able to leverage its investments through debt at rates less than the corresponding leased equipment are earning and (ii) the Partnership was able to use the proceeds to make additional lease investments at higher rates. The Partnership consolidates Bravo into the consolidated financial statements.
The Partnership will make, at the sole discretion of the Investment Manager, semi-annual cash distributions to each Limited Partner computed at 3% (pro-rated to the date of admission for each Limited Partner) of each Limited Partner’s capital contribution, beginning six months after the Partnership’s initial closing which occurred on May 2, 2011. The Partnership’s 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.
The Partnership was declared effective by the Securities and Exchange Commission (“SEC”) on March 17, 2011, which was the commencement date of the Offering Period. The Offering Period concluded on March 15, 2013. During the Offering Period, the Partnership admitted 375 Limited Partners, raised $27,861,100 in capital contributions, issued 27,861.10 Units at $1,000 per Unit and paid organizational and offering expenses totaling $999,119. During the Offering Period the Partnership paid $557,222 in distribution expenses to SQN Securities LLC, (“Securities”) a majority-owned subsidiary of the Investment Manager. Securities was the sole selling agent for the Partnership’s Units. A Limited Partner may not redeem their Units 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. During 2013, the General Partner approved the redemption of 140 Units and directed the Partnership refunded the Limited Partners $140,000.
Due to the Partnership not achieving certain equity raising milestones during the Offering Period the Partnership’s General Partner and/or its Investment Manager were required to reimburse a portion of the organizational and offering expenses incurred by the Partnership and reduce the management fee paid to the Investment Manager to such an amount over the Partnership’s entire life that the total average management fee will not be greater than 2% per year of the aggregate offering proceeds (See note 3).
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| 2. | Summary of Significant Accounting Policies |
Basis of Presentation — The consolidated financial statements of SQN Alternative Investment Fund III, L.P. at December 31, 2014 and 2013 and for the years then ended have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Principles of Consolidation — The consolidated financial statements include the accounts of the Partnership and its subsidiaries, where the Partnership has the primary economic benefits of ownership. The Partnership’s consolidation policy requires the consolidation of entities where a controlling financial interest is held as well as the consolidation of variable interest entities in which the Partnership has the primary economic benefits. All material intercompany balances and transactions are eliminated in consolidation.
Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP 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 lease, note and loan accounts, depreciation and amortization, impairment losses, estimated useful lives, and residual values. Actual results could differ from those estimates.
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 Partnership’s cash and cash equivalents are held principally at one financial institution in the United States of America and at times the balances may exceed federally insured limits. The Partnership has placed these funds in an international financial institution in order to minimize risk relating to exceeding insured limits. The Partnership, through Summit Asset Management Limited, maintains an unrestricted Client Account at a major financial institution in the United Kingdom for purposes of receiving payments and funding transactions in Pound Sterling. At December 31, 2014 and 2013, the Partnership had £75,294 ($116,947 applying exchange rates at December 31, 2014) and £173,805 ($286,571 applying exchange rates at December 31, 2013), respectively, of cash and cash equivalents held in one bank in the United Kingdom.
Credit Risk — In the normal course of business, the Partnership is exposed to credit risk. Credit risk is the risk that the Partnerships’ counterparty to an agreement will at some point either have an 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 and the United States of America. Although the Partnership does not currently foresee a concentrated credit risk associated with these lessees, lease payments are dependent upon the financial stability of the industry segments in which they operate.
Asset Impairments —Assets in the Partnership’s investment portfolio, which are considered long lived assets, 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 the 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 in-flows expected to be generated by an asset less the future out-flows expected to be necessary to obtain those in-flows. 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. 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 recover the carrying value of 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 Manager’s 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.
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Lease Classification and Revenue Recognition — The Partnership records revenue based upon the lease classification determined at the inception of the transaction and based upon the terms of the lease or when there are significant changes to the lease terms.
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 are capitalized and amortized over the term of the related lease for a finance lease. For an operating lease, initial direct costs are included as a component of the cost of the equipment and depreciated.
For finance leases, the Partnership records, 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 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 the straight line basis over the lease term. Billed and uncollected operating lease receivables will be included in accounts receivable. Accounts receivable are stated at their estimated net realizable value. Rental income received in advance is the difference between the timing of the cash payments and the income recognized on the straight line basis.
For leases subject to equipment notes receivable, specific payment terms were reached requiring payments which resulted in the recognition of interest income. This income is recognized over the course of the lease agreement.
The Investment Manager has an investment committee that approves each new equipment lease, financing transaction, and lease acquisition. As part this 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 Partnership’s policy relating to impairment review.
Finance Lease Receivables and Allowance for Doubtful Lease, Notes and Loan 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 lease, note and loan accounts, the Investment Manager considers historical credit losses, the past due status of receivables, payment history, and other customer-specific information, including the value of the collateral. The past due status of a receivable is based on its contractual terms. Expected credit losses are recorded as an allowance for doubtful lease, note and loan accounts. Receivables are written off when the Investment Manager determines they are uncollectible. At December 31, 2014 and 2013, an allowance for doubtful lease, note and loan accounts was not recorded because the Investment Manager, all accounts recorded on the books are deemed collectible.
Equipment Notes Receivable — Equipment notes receivable are reported in the consolidated financial statements as the outstanding principal balance net of any unamortized deferred fees, premiums or discounts on purchased loans. Costs to originate loans, if any, are reported as other assets in the consolidated financial statements. Income is recognized over the life of the note agreement. On certain equipment notes receivable, specific payment terms were reached requiring prepayments which resulted in the recognition of unearned interest income. Unearned income, discounts and premiums, if any, are amortized to interest income in the statements of operations using the effective interest rate method. Equipment notes receivable are generally placed in a non-accrual status when payments are more than 90 days past due. Additionally, the Investment Manager periodically reviews the creditworthiness of companies with payments outstanding less than 90 days. Based upon the Investment Manager’s judgment, accounts may be placed in a non-accrual status. Accounts on a non-accrual status are only returned to an accrual status when the account has been brought current and the Partnership believes recovery of the remaining unpaid receivable is probable. Revenue on non-accrual accounts is recognized only when cash has been received.
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Initial Direct Costs — The Partnership capitalizes initial direct costs associated with the origination and funding of lease assets. These costs are amortized on a lease by lease basis based over the actual contract term of each lease using the effective interest rate method for finance leases and the straight-line method for operating leases. Upon disposal of the underlying lease assets, both the initial direct costs 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.
Cost Method — The Partnership records its investment in participation interests at cost. Under the cost method of accounting for investments, dividends are the basis for recognition by an investor of earnings from an investment. The Partnership recognizes as income dividends received that are distributed from net accumulated earnings of the investee since the date of acquisition. The net accumulated earnings of the investee subsequent to the date of investment are recognized by the Partnership only to the extent distributed by the investee as dividends. Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as a reduction of the cost of the investment.
Equity Method — The Partnership records its 20% investment in Echo and Echo II using the equity method of accounting. According to U.S. GAAP, a company that holds 20% or greater investment in another company could potentially exercise significant influence over the investee company’s operating and financing activities and should therefore utilize the equity method of accounting. The Partnership’s portion of earnings in the investee are recorded as an increase in its investment and recognized in the consolidated statement of operations, and any distributions received from the investee are recorded as a reduction in its investment.
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 the selection and acquisition of leased equipment which are incurred by the Partnership under the terms of the Limited Partnership Agreement, 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 is recorded since the liability for such taxes is that of each of the Partners rather than the Partnership. The Partnership’s income tax returns are subject to examination by the federal and state taxing authorities, and changes, if any, could adjust the individual income tax of the Partners.
The Partnership has adopted the provisions of FASB Topic 740, Accounting for Uncertainty in Income Taxes. This accounting guidance 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. Additionally, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Partnership has evaluated its entity level tax position for the years ended December 31, 2014, 2013 and 2012, and does not expect any material adjustments to be made. The tax years 2014, 2013 and 2012 remain open to examination by the major taxing jurisdictions to which the Partnership is subject.
Per Share Data — Net income or loss attributable to Limited Partners per weighted average number of limited partnership interests outstanding is calculated as follows; the net income or loss allocable to the Limited Partners divided by 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 the Partnership’s investments denominated in foreign currencies. Accordingly, certain assets and liabilities are translated at either the reporting period exchange rates or the historical exchange rates, revenues and expenses are translated at the average rate of exchange for the period, and all transaction gains or losses are reflected in the period’s results of operations.
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Depreciation — The Partnership records depreciation expense on equipment when the lease is classified as an operating lease. In order to calculate depreciation, the Partnership first determines the depreciable equipment cost, which is the cost less the estimated residual value. The estimated residual value is the 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 which varies from one to five years.
Recent Accounting Pronouncements
In August 2014, FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The adoption of ASU 2014-15 becomes effective for the Partnership on its fiscal year ending December 31, 2016, and all subsequent annual and interim periods. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on the Partnership’s consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
| 3. | Related Party Transactions |
The General Partner is responsible for the operations and management of the Partnership and the Investment Manager makes all investment decisions and manages the investment portfolio of the Partnership. The Partnership paid the General Partner an allowance for organizational and offering expenses totaling $999,119, to reimburse the General Partner for expenses incurred in the preparation for qualification under federal and state securities laws. Total organizational and offering expenses may not exceed 2% of all offering proceeds. At the end of the Offering Period, the total offering proceeds were less than the maximum offering of $50,000,000, the General Partner was required to reimburse a portion of the organizational and offering expenses previously paid. The Offering Period ended on March 15, 2013 with the Partnership receiving $27,861,100 in total capital contributions and as a result, the General Partner and/or its Investment Manager were required to reimburse the Partnership organizational and offering expenses of $441,897. Organizational and offering expenses were limited to $557,222 or 2% of total equity raised. At March 15, 2013, the Partnership recorded an amount due from the Investment Manager in the amount of $441,897, which bears interest at 10% per year, has monthly principal and interest payments of $11,767 and terminates on December 2016. At December 31, 2014 and 2013, the Partnership has a remaining balance on the note receivable from its Investment Manager of $258,529 and $368,200, respectively, which is included in the consolidated balance sheets.
The Partnership paid the Investment Manager for organizational and offering expenses incurred on behalf of the Partnership and a management fee 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. If, at the end of the Offering Period, the Partnership raised total offering proceeds of less than $36,000,000, the management fee would be reduced to such an amount that over the entire life of the Partnership the total average management fee will not be greater than 2% per year of the aggregate offering proceeds. The Partnership did not reach this equity threshold. In accordance with the terms of the Offering Agreement, beginning in April 2013, the monthly management fee was reduced from $60,000 per month to $47,226 per month through December 2016. The reduced management fee was based upon the Investment Managers expectation that the Partnership will conclude its business operations during June 2017. The Investment Manager will continue to monitor the Partnership’s operations, which may change the monthly management fee amount. 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 years ended December 31, 2014 and 2013, the Partnership paid the Investment Manager $570,308 and $605,031, respectively, which is included in Management fees – Investment Manager in the accompanying consolidated statements of operations.
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The Partnership paid Securities a distribution expense equal to 2% of the aggregate offering proceeds, excluding proceeds from the Partnership’s General Partner or any affiliated entities. The distribution expense was paid to Securities for, among other costs, due diligence costs incurred in connection with the offering and sale of Units. For the year ended December 31, 2014 and 2013, Securities was paid distribution expenses of $0 and $108,120, respectively, which is included in distribution expenses in the consolidated statement of changes in partners’ equity.
The General Partner has a 1% interest in the profits, losses and distributions of the Partnership. In addition, the General Partner 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.
| 4. | SQN Bravo LLC |
On June 19, 2013, the Partnership sold certain assets along with their related rental streams to a newly formed special purpose entity, SQN Bravo LLC. On the same date, the Partnership made an equity investment in Bravo. The Partnership’s Investment Manager determined that this was in the Partnership’s best interests due to the following factors: (i) the Partnership was able to leverage investments through debt at rates less than the corresponding leased equipment were earning and (ii) the Partnership was able to use the proceeds to make additional lease investments at higher rates of return.
On June 19, 2013, Bravo obtained financing as follows; (i) a non-recourse loan payable for $5,860,085 and (ii) an equity investment from the Partnership of $3,906,724. SQN Alternative Investment Fund II, LLC (“ SQN Fund II”), a private equipment leasing fund managed by the Partnership’s Investment Manager also sold a seasoned portfolio of leased equipment to Bravo. The portfolio purchased from SQN Fund II was valued at the time of purchase based on discounted cash flows for the revenue streams at a predetermined rate and the residual values of the underlying assets were supported by third party appraisers. Bravo purchased the following general types of leased assets: (i) $632,284 in finance leases (See Note 5), (ii) $1,937,636 in equipment subject to operating leases (See Note 6) and (iii) $2,500,000 in residual value investments in equipment on lease (See Note 7). In addition, the Partnership sold various leased assets with a net book value of $4,137,073 to Bravo. During the year ended December 31, 2014, the Partnership increased its equity investment in Bravo to a total of $7,509,808, comprised of $3,217,293 for equipment lease transactions and $470,000 for equipment notes receivable.
As a result of the equity purchase noted above, on June 19, 2013, the Partnership acquired the primary economic risks and rewards in Bravo and accordingly, the Partnership consolidates Bravo into its consolidated financial statements and results of operations.
| 5. | Investments in Finance Leases |
At December 31, 2014 and 2013, net investments in finance leases consisted of the following:
| 2014 | 2013 | |||||||
| Minimum rents receivable | $ | 15,869,984 | $ | 7,255,160 | ||||
| Estimated unguaranteed residual value | 1,452,872 | 535,324 | ||||||
| Unearned income | (4,916,765 | ) | (1,639,574 | ) | ||||
| $ | 12,406,091 | $ | 6,150,910 | |||||
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Anaerobic Digestion Plant
An anaerobic digestion plant is a series of processes in which microorganism’s breakdown biodegradable materials and produces a biogas which can be used to generate electricity.
On June 19, 2013, Bravo purchased a lease for a 20% ownership interest in an anaerobic digestion plant located in the United Kingdom from SQN Fund II for £118,564 ($187,332 applying the exchange rate used in the agreement). The Investment Manager re-tested the remaining lease term and determined the lease to be a finance lease. Under the terms of the lease, Bravo will receive 28 monthly payments as follows: (i) £3,935 ($5,984 applying exchange rates at June 30, 2013) through September 20, 2015 and (ii) there will be a rent holiday, where no payments are due through January 20, 2016. At the expiration of the lease term, the lessee has a purchase option as follows: (i) make a one-time payment of £16,018 ($24,360 applying exchange rates at June 30, 2013) or (ii) make 4 additional monthly payments of £3,935 ($5,964 applying exchange rates at June 30, 2013) and then a final payment of £762 ($1,159 applying exchange rates at June 30, 2013). Once the final payment is received, title to the equipment passes to the lessee. When the anaerobic digestion plant produces sufficient electricity, Bravo will be entitled to a payment under United Kingdom government program for the production of alternative energy and will account for this as contingent rental payments.
The purchase option is contingent upon Orchard House Foods Limited (“Orchard House”), the end user of the electricity generated by the anaerobic digestion plant, extending its service agreement for six months or longer with BioWayste Holdings Limited (“BioWayste”), Bravo’s lessee. The service agreement term runs concurrently with the lease term and is between Orchard House and BioWayste, an independent service provider, who operates and maintains the anaerobic digestion plant.
The Partnership sold the remaining 80% ownership interest which it acquired during 2012 to Bravo.
During the year ended December 31, 2014, the Partnership granted a rental holiday to BioWayste upon their request to fund some modifications to the system that will ultimately improve the efficiency and energy production and therefore increases revenue and the amount of government subsidies in which the Partnership has a 25% share. As of December 31, 2014, the outstanding balance of this net investment in finance lease is $586,737.
Furniture and fixtures
On June 19, 2013, Bravo purchased a lease for furniture and fixtures located in the United Kingdom from SQN Fund II for £179,170 ($283,089 applying the exchange rate used in the agreement). The lease term is through March 31, 2015 and a renewal period through December 31, 2016. The lease term has quarterly payments of £20,380 ($30,994 applying exchange rates as of June 30, 2013) through March 31, 2015. The renewal period has quarterly payments of £6,750 ($10,265 applying exchange rates as of June 30, 2013) through December 31, 2016. At the end of the renewal period the lessee acquires title to the furniture and fixtures.
On June 19, 2013, Bravo purchased a lease for furniture and fixtures located in the United Kingdom from SQN Fund II for £72,997 ($115,335 applying the exchange rate used in the agreement). The lease, which ended during the year ended December 31, 2014 required quarterly payments of £18,627 ($28,328 applying the exchange rate as of June 30, 2013).
Information Technology Infrastructure Equipment
On June 19, 2013, Bravo purchased a lease for information technology infrastructure equipment located in the United Kingdom from SQN Fund II for £29,448 ($46,528 applying the exchange rate used in the agreement). The lease, which ended during the year ended December 31, 2014 required quarterly payments of £6,091 ($9,263 applying the exchange rate as of June 30, 2013).
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Submersible Vessel
On April 17, 2013, the Partnership entered into a lease transaction classified as a finance lease for £895,718 ($1,388,990 applying exchange rates at April 30, 2013). The equipment is used in the United Kingdom and is a remotely operated submersible vehicle used in the offshore energy industry. This equipment may be used for, but not limited to, drilling support, underwater rig inspections, repairs, maintenance and offshore wind farm construction projects. The term of the lease is for 60 months with the following schedule of payments: (i) £96,149 ($149,098 applying exchange rates at April 30, 2013) was paid on May 2, 2013 for the period from April 14, 2013 through April 30, 2013, (iii) £17,183 ($26,646 applying exchange rates at April 30, 2013) monthly, in arrears through April 30, 2018 and (iv) £87,349 ($135,452 applying exchange rates at April 30, 2013) due on April 30, 2018. The final payment may be extended, at the Partnership’s option for an additional 48 months at £2,300 ($3,567 applying exchange rates at April 30, 2013). If the extended rental period is not entered into then the lessee will pay annually, in advance, £7,996 ($12,399 applying exchange rates at April 30, 2013).
On June 19, 2013, the Partnership sold its investment in the submersible vessel to Bravo. During the year ended December 31, 2014, this asset was sold to a third party for total cash proceeds of £725,486 ($1,228,176 applying exchange rates at July 31, 2014). The net book value of the lease at the time of sale was $1,205,566 and the Partnership recognized a gain of $22,610.
Medical Equipment
On March 27, 2013, the Partnership entered into a finance lease transaction classified as a for medical equipment located in the United States of America for $475,317. The finance lease has a 60 month term, requires monthly payments, in advance, of $10,500 and included a bargain purchase option at the expiration of the lease term. The initial monthly rental payment was paid on March 27, 2013. At March 31, 2013, the Partnership accrued a fee totaling $4,495 which is included in acquisition expense in the consolidated statements of operations.
On June 19, 2013, the Partnership sold its investment in this medical equipment to Bravo.
Commercial LED lighting
On February 28, 2013, the Partnership’s Investment Manager entered into a transaction under the Vendor Program, and allocated the transaction to the Partnership. The transaction was to finance the installation of a LED lighting system for a community center located in the United Kingdom for £20,941 ($31,677 applying exchange rates at February 28, 2013). This transaction has a lease term of 36 months which commenced upon completion of the installation of the lighting system, which was completed during early March 2013. Under the terms of the agreement the Partnership receives quarterly lease payments, in advance, of £2,055 ($3,109 applying exchange rates at February 28, 2013). After the lease term expires title to the equipment will pass to the lessee.
Bottle Recycling and Extrusion Production Line
On June 29, 2011, the Partnership entered into a Participation Agreement (the “Agreement”) for an ownership interest in a Hire Purchase Agreement (the “HP Agreement”). The HP Agreement is between an independent United Kingdom leasing entity and the lessee of a bottle recycling and extrusion line located in the United Kingdom. The Partnership made it’s initial payment under the Agreement on June 29, 2011 totaling £1,100,000 ($1,774,520 applying exchange rates at June 30, 2011) and made it’s final payment on October 13, 2011 totaling £730,000 ($1,151,575 applying exchange rates at October 31, 2011).
Under the terms of the HP Agreement there is both an initial rental period and a fixed rental period. The initial rental period ran through June 30, 2012 at which time the fixed rental period began. During the initial rental period the Partnership received monthly rental income between £11,229 ($17,987 applying exchange rates at June 30, 2011) and £18,425 ($29,514 applying exchange rates at June 30, 2011). The fixed rental period is for a term of 60 months and the Partnership receives monthly payments of £41,021 ($65,573 applying exchange rates at June 30, 2011). At lease termination the lessee has an option to purchase the leased equipment at a fixed price. The Partnership’s portion of the proceeds will be £253,821 ($396,341 applying exchange rates at June 30, 2011). The Partnership paid initial direct costs as follows: (i) on November 30, 2011, the Partnership paid £9,125 ($14,195 applying exchange rates at November 30, 2011) and (ii) on July 15, 2011, the Partnership paid £45,775 ($73,322 applying exchange rates at July 15, 2011) related to the acquisition of this leased equipment.
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Wind Turbine
On January 24, 2014, the Partnership entered into entered into a finance lease transaction for a wind turbine in Northern Ireland for £490,280 ($809,845 applying exchange rates at January 24, 2014). The finance lease requires 25 quarterly payments, in arrears, of £27,728 ($45,799 applying exchange rates at January 24, 2014). On July 31, 2014, the Partnership sold this lease to a third party for total cash proceeds of £506,882 ($858,100 applying exchange rates at July 31, 2014). The net book value of the lease at the time of sale was $789,038 and the Partnership recognized a gain of $69,062.
Anaerobic Digestion Plant
In September 2013, Bravo entered into an equipment note receivable agreement with a third party to advance up to £6,000,000 to provide financing for equipment in relation to an anaerobic digestion plant. From September 2013 through February 2014, Bravo funded £5,470,000 ($8,940,576 using exchange rates on various dates) of that amount, with the remainder to be funded at a future date. The initial funding of £1,993,860 ($3,217,293 using the exchange rate on September 30, 2013) was made by the Partnership and increased the Partnership’s interest in its investment in Bravo. The Anaerobic Digestion project is in two stages. The first is the pre-lease stage when Bravo finances the construction of the plant according to certain milestones that get certified by an independent party. Bravo charged 1% interest per month for that stage. When the plant is constructed and produces a predetermined amount of energy, the second stage begins with interest charged at a rate of 9.5% per annum under an equipment lease for an initial term of seven years with a four year extension. In April 2014, the construction of the Anaerobic Digestion Plant, which was part of the Bravo transaction, was completed and the project concluded the pre-lease stage. On May 1, 2014, the lease stage of the project began at which point the equipment note receivable was tested and reclassified as a direct finance lease. The finance lease requires 9 monthly payments, in arrears, of £47,520 ($79,558 using the exchange rate at May 31, 2014) and 75 monthly payments, in arrears, of £106,500 ($178,302 using the exchange rate at May 31, 2014). The lease has a four year extension option which requires 48 monthly payments of £12,489 ($20,909 using the exchange rate at May 31, 2014). In June 2014, Bravo funded an additional £265,000 ($451,242 using the exchange rate on June 30, 2014). The remaining balance of £265,000 (approximately $411,598 using the exchange rate on December 31, 2014) that has yet to be advanced is included as Other liability on the consolidated balance sheets at December 31, 2014.
At December 31, 2014, the aggregate amounts of future minimum lease payments receivable, are as follows:
| Lease Payment Currencies | ||||||||||||
| U.S. Dollars | British Pounds (1) | Total | ||||||||||
| Years Ending December 31, | ||||||||||||
| 2015 | $ | 126,000 | $ | 3,076,910 | $ | 3,202,910 | ||||||
| 2016 | 126,000 | 2,759,975 | 2,885,975 | |||||||||
| 2017 | 126,000 | 2,539,948 | 2,665,948 | |||||||||
| 2018 | 31,500 | 2,539,948 | 2,571,448 | |||||||||
| 2019 | — | 2,062,234 | 2,062,234 | |||||||||
| Thereafter | — | 2,481,469 | 2,481,469 | |||||||||
| $ | 409,500 | $ | 15,460,484 | $ | 15,869,984 | |||||||
(1) Converted to U.S. Dollars at December 31, 2014 exchange rate
For the years ended December 31, 2014 and 2013, the Partnership incurred a foreign currency transaction loss on its various investments in finance leases of $1,055,923 and $52,049, respectively. All amounts are included in foreign currency transaction losses in the consolidated statements of operations.
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| 6. | Investment in Equipment Subject to Operating Leases |
At December 31, 2014 and 2013, investments in equipment subject to operating leases consisted of the following:
| 2014 | 2013 | |||||||
| Aircraft rotables | $ | 339,700 | $ | 1,665,700 | ||||
| Computer equipment | 59,186 | 129,385 | ||||||
| Furniture and fixtures | 273,050 | 273,050 | ||||||
| Plastic bulk storage bins | 1,469,030 | 1,963,494 | ||||||
| Accumulated depreciation | (656,177 | ) | (483,306 | ) | ||||
| $ | 1,484,789 | $ | 3,548,323 | |||||
Depreciation expense was $479,597 and $446,037 for the years ended December 31, 2014 and 2013, respectively.
Aircraft Rotables
On June 19, 2013, Bravo purchased a lease for a 90% ownership interest in aircraft rotables located in the United States of America from SQN Fund II for $1,155,000, which included the assumption by Bravo of a security deposit of $171,000. The lease required monthly rental payments of $16,220 and was terminated in February 2014. The lease was reclassified to Other assets at March 31, 2014 as negotiations for sale and release of the equipment are conducted. The lease generated approximately $44,400 in rental income for the year ended December 31, 2014.
On June 19, 2013, Bravo purchased an additional lease for a 90% ownership interest in aircraft rotables located in Australia from SQN Fund II for $310,000, which included the assumption by Bravo of a security deposit of $29,700. The lease has a remaining term which expires on March 13, 2015 and requires monthly rental payments of $3,777. The lease generated approximately $45,300 in rental income for the year ended December 31, 2014.
As part of these transactions Bravo became a party to a participation agreement and a service agreement with an unrelated third party (the “Participant”). Under the participation agreement the Participant acquired a 10% ownership interest by providing 10% of the financing for each transaction. Under the service agreement the Participant will receive 5% of the gross payments from the lessees. The Participant will provide program management services and inventory tracking and monitoring services for all of the aircraft rotable parts. Bravo is required to remit the Participant’s portion of both the participation agreement and service agreement from the gross payments from the lessee within 10 days of receipt from the lessee.
Computer Equipment
On June 19, 2013, Bravo purchased a lease for computer equipment located in the United Kingdom from SQN Fund II for £37,459 ($59,186 applying the exchange rate used in the agreement). On December 21, 2013 the lease was extended for a minimum of two years with an optional extension at that date. The current lease requires for quarterly rental payments of £4,411 ($6,061 applying the exchange rate at the date of extension) which includes applicable taxes. The lease generated approximately $24,200 in rental income for the year ended December 31, 2014.
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Furniture and fixtures
On June 19, 2013, Bravo purchased a lease for furniture and fixtures located in the United Kingdom from SQN Fund II for £172,815 ($273,050 applying the exchange rate used in the agreement). The lease has a remaining term through February 28, 2015 and quarterly payments of £21,014 ($31,958 applying the exchange rate as of June 30, 2013). The lease generated approximately $138,600 in rental income for the year ended December 31, 2014.
Reusable Plastic Bulk Storage Containers - Participation
On March 30, 2012, the Partnership entered into an agreement to purchase, from an entity controlled by a third party (the “Selling Entity”), an 18.08% residual value interest in a pool of intermediate bulk agricultural containers located in the United States of America for $1,367,173. The initial lease term expired June 29, 2013, at which point the lessee of the containers entered into a 3 year extension agreement. The terms of the lease require three annual payments in the amount of approximately $471,000 ($2,610,000 multiplied by Partnership’s interest). On June 23, 2014 the Partnership purchased an additional approximate 1.67% of the residual value interest from the Selling Entity for $101,858. The transaction increased the Partnership’s interest in this investment to approximately 19.75%. The lease generated approximately $472,000 and $236,000 of rental income for the years ended December 31, 2014 and 2013, respectively.
Subsequent to the extension of the lease, the Partnership entered into a transaction to sell the rights to the receivable to another third party for $1,406,604. The Partnership is also required to make a one-time payment to the buyer in the amount of $139,216 after the lease expires. The Partnership continues to own the underlying assets and is entitled to any residual value on this investment subject to an existing remarketing agreement.
Reusable Plastic Bulk Storage Containers
On March 29, 2012, the Partnership entered into an operating lease transaction for 10,000 reusable plastic bulk storage bins used in the agricultural and food processing industries for $1,150,000 with a lease term of 60 months. The equipment is located in the United States of America. Under the terms of the agreement the Partnership received monthly payments, in advance, of $20,547. The lessee paid a security deposit of $297,176. The Partnership paid initial direct costs associated with the acquisition of this leased equipment totaling $42,641 which has been included in the cost of the leased equipment. On April 4, 2013, the Partnership sold 5,000 of the reusable plastic bulk storage containers to the lessee. The sale price of $508,725 was determined based upon the buy-out calculation in the lease agreement. The Partnership received cash proceeds of $360,137, net of a refund of the security deposit payable totaling $148,588. The remaining storage containers under this operating lease were sold by the Partnership to Bravo on June 19, 2013. In January 2014, the lessee purchased the remaining 5,000 containers from Bravo for $451,870 which resulted in a full payout of the lease. Bravo received cash proceeds of $303,282, net of a refund of the security deposit payable totaling $148,588. The net book value of these containers at the time of sale was $465,875 which resulted in the Partnership recognizing a loss of $14,005.
At December 31, 2014, the aggregate amounts of future minimum lease payments receivable under non-cancellable operating leases are as follows:
| Lease Payment Currencies | ||||||||||||
| U.S. Dollars | British Pounds (1) | Total | ||||||||||
| Years Ending December 31, | ||||||||||||
| 2015 | $ | 481,670 | $ | 65,278 | $ | 546,948 | ||||||
| 2016 | 235,944 | — | 235,944 | |||||||||
| $ | 717,614 | $ | 65,278 | $ | 782,892 | |||||||
(1) Converted to U.S. Dollars at December 31, 2014 exchange rate.
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| 7. | Residual Value Investments in Equipment on Lease |
Modular Accommodations
On June 19, 2013, Bravo purchased residual value interests in modular accommodations configured as healthcare centers in the United Kingdom for £1,582,278 ($2,500,000 applying the exchange rate used in the agreement). The residual value interests were reclassified to Other Assets at March 31, 2014 as negotiations for sale and release of the equipment are conducted.
Gamma Knife Suite
On October 30, 2012, the Partnership entered into a Participation Agreement with a third party to acquire a 99.99% residual interest in a gamma knife suite located in the United Kingdom for £379,620 ($609,442 applying exchange rates at October 31, 2012). The Partnership paid initial direct costs, which have been included in the cost of the residual value asset, of £15,185 as follows: (i) on October 30, 2012, £8,535 ($13,702 applying exchange rates at October 31, 2012), (ii) on November 30, 2012, £2,979 ($4,635 applying exchange rates at November 30, 2012) and (iii) on July 14, 2012, £3,671 ($6,923 applying exchange rates at July 15, 2012).
| 8. | Convertible Promissory Note |
On February 27, 2013, the Partnership entered into a Subscription and Securities Purchase Agreement to purchase a portion of a $3,500,000 Convertible Promissory Note (“Promissory Note”). On February 28, 2013, the Partnership purchased a Promissory Note with a principal amount of $1,500,000. The Promissory Note bears simple interest at 10% per year which is payable quarterly, in arrears, beginning June 30, 2013. The Promissory Note may be prepaid until March 31, 2016 at 120% of the outstanding principal balance plus accrued and unpaid interest. The entire principal balance is due and payable on March 31, 2018. The Promissory Note is collateralized by all of the shares of the Borrower and by an investment portfolio consisting of equipment leases, direct hard assets and infrastructure investments. The Promissory Note is convertible, at the Partnership’s option, into Units of the Borrower, as defined in the agreements.
| 9. | Equipment Notes Receivable |
At December 31, 2014 and 2013, investments in equipment notes receivable consisted of the following:
| December 31, | ||||||||||||
| Equipment Description | Maturity Date | Interest Rate | 2014 | 2013 | ||||||||
| Hydro-electric generating plant | 10/31/22 | 12.00% | $ | 2,303,527 | $ | 2,445,305 | ||||||
| Hydro-electric generating plant | 04/04/15 | 12.00% | 2,122,915 | 4,194,759 | ||||||||
| Anaerobic digestion equipment | (1) | (1) | — | 7,909,395 | ||||||||
| Manufacturing equipment and inventory | 03/04/15 | 7.75% | 1,257,250 | — | ||||||||
| $ | 5,683,692 | $ | 14,549,459 | |||||||||
(1) - Lease was reclassified to investment in finance leases.
Hydro-electric generating plant – Northern Ireland
On April 4, 2013, the Partnership entered into an equipment note receivable (the “Note”) for £1,440,000 ($2,196,440 applying exchange rates at April 15, 2013) with a special purpose entity controlled by a third party. This special purpose entity was organized to provide financing for a hydro-electric generating plant located in Northern Ireland. The plant serves as collateral for the Note. The Note accrues interest at 12.0% per year with the interest payable quarterly in arrears. The proceeds from the Note were used for the purchase of a hydro-electric generating plant located in Northern Ireland. The entire principal balance and unpaid interest may be repaid, at any time, along with a redemption fee, as defined in the Note. The borrower’s parent company has guaranteed the full amount of the Note.
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Hydro-electric generating plant – Windsor, England
On October 31, 2011, the Partnership entered into a Senior Loan Note Instrument (the “Instrument”) with a special purpose entity controlled by a third party. This special purpose entity was set-up to provide financing for a hydro-electric generating plant located on the Romney Weir in Windsor, England. The plant serves as collateral for the Instrument. The total amount available under the Instrument is £2,125,000, accrues interest at 12.0% per year and is guaranteed in full by the borrower’s parent company. During the year ended December 31, 2013, the Partnership advanced an additional £250,000 ($386,935 applying exchange rates at various dates during the period), under the Instrument, which provided further financing for the hydro-electric generating plant.
During the year ended December 31, 2014, the borrower refinanced a portion of the Instrument with an unrelated lender. As part of the refinancing, the Partnership subordinated its debt to this lender and became a junior lender to this senior lender until the senior loan is repaid in full. After the refinancing, the principal balance of the Instrument was reduced to £1,309,564. The Instrument continues accruing interest at 12.0% per year.
Manufacturing Equipment and Inventory
On January 24, 2014, Bravo entered into a participation agreement with a lender to purchase manufacturing equipment and inventory. Bravo lent $1,175,000 to a third party under a note receivable agreement on March 4, 2014. The interest on the note is charged at a rate of 12% per annum and interest is payable in twelve monthly installments of $11,750 each. The note matures on March 4, 2015 and the principal balance due shall be paid in one lump sum. The note is secured by the equipment and inventory of the borrower. Bravo borrowed $705,000 from the lender which accrues interest at 7.75% and is repayable with the proceeds from the investments. As of December 31, 2014, the outstanding balance of principal and interest is $1,257,250.
| 10. | Investment in Participation Interest |
On October 9, 2013, the Partnership formed Delta which is 100% owned by the Partnership. The sole purpose of Delta was to acquire an $8,540,000 interest in two, less than 1 year old, bulk carrier vessels. Each vessel is subject to an initial 6 year charter of which approximately 5 years remain. In accordance with the participation agreement, Delta has the right to force a sale of the vessels at any time the sale proceeds would be sufficient to provide Delta with a 14% internal rate of return on an unleveraged basis. The Partnership incurred $4,200,000 of debt relating to the transaction, accruing interest at 10.9% per annum with maturity in December 2020. The debt will be repaid with cash flows generated from the underlying assets acquired.
The investment is accounted for using the cost method whereas the Partnership will recognize as income, dividends received that are distributed from net accumulated earnings of the investee since the date of acquisition. Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions of cost of the investment. In conjunction with this transaction, the Partnership recorded a purchase discount of $340,000 which was recorded as a deferred gain on the accompanying consolidated financial statements. The gain is being amortized over the expected term of the investment and is recorded as income.
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| 11. | Investment in SQN Echo LLC |
On December 6, 2013, the Partnership formed SQN Echo, LLC, a joint venture with Fund IV to purchase a junior collateralized participation in two portfolios of various equipment leases. The Partnership originally contributed $550,000 to purchase a 20% share of Echo. Since the Partnership owns 20% of Echo and exercises significant influence, the Partnership accounts for its investment using the equity method. On December 20, 2013, Echo entered into an agreement with a third party for the purchase of two portfolios of leases for $17,800,000. The first portfolio consists of various types of equipment including material handling, semiconductor test and manufacturing equipment, computer, medical, and telecommunications equipment. The second portfolio consists of lease financings, which have been accounted for as loans receivable in the consolidated financial statements of Fund IV. Echo paid approximately $9,300,000 in cash and assumed approximately $8,500,000 in non-recourse equipment notes payable. The rights to receive payments of interest and principal under the agreement are junior to the loan note holder. In February 2014, the Partnership funded an additional $120,000 into Echo ($480,000 by Fund IV) to decrease the principal of the debt originally obtained to finance the acquisition and reduce the interest rate.
| 12. | Investment in SQN Echo II LLC |
On March 26, 2014, the Partnership formed SQN Echo II, LLC, a joint venture with Fund IV to purchase a junior collateralized participation in two portfolios of various equipment leases. The Partnership originally contributed $200,000 to purchase a 20% share of Echo II. Since the Partnership owns 20% of Echo II and exercises significant influence, the Partnership accounts for its investment using the equity method. On March 28, 2014, Echo II entered into an agreement with a third party for the purchase of two portfolios of leases for approximately $21,863,000. The first portfolio consists of (i) various types of equipment including material handling, semiconductor test and manufacturing equipment, computer, medical, and telecommunications equipment and (ii) direct finance leases in medical equipment. The second portfolio consists of lease financings, which have been accounted for as loans receivable in the consolidated financial statements of Fund IV. Echo II paid approximately $10,416,000 in cash and assumed approximately $11,447,000 in non-recourse equipment notes payable. The rights to receive payments of interest and principal under the agreement are junior to the loan note holder. In June 2014, the Partnership funded an additional $150,000 into Echo II (at the same time, an additional $600,000 was funded by Fund IV) to decrease the principal of the debt originally obtained to finance the acquisition and reduce the interest rate.
| 13. | Other Assets |
Other assets primarily include $1,290,120 and $2,500,000 of several leases that were transferred from operating lease and residual value lease investments due to lease terms expiring during the year ended December 31, 2014. During the year ended December 31, 2014, the Partnership sold parts of these leases for total cash proceeds of $306,648 and accounts receivable of $30,922, net of a refund of the security deposit payable totaling $171,000. The net book value of these parts at the time of sale was $325,733 which resulted in the Partnership recognizing a gain of $182,837. In addition, this balance also includes a receivable of $143,768 related to income from the senior participation 10% return on Delta’s investment in participation interest. In addition, in December 2013 the Partnership funded £500,000 ($824,400 using the exchange rate on December 31, 2013) to an escrow account for a lease that has not been executed as of December 31, 2014.
| 14. | Non-recourse Loans Payable |
On June 19, 2013, Bravo borrowed $5,860,085 from a third party lender with an interest rate of 7.75% per annum. The majority of the proceeds were used to acquire various types of leased assets. Bravo entered into a financing agreement with the lender and had the ability to borrow additional amounts, at monthly intervals, between July 2013 and March 2014 which cumulatively total $9,130,085. The lender made additional advances to Bravo in the amount of $1,200,000 on November 19, 2013 and $2,070,000 on December 12, 2013. During the three months ended March 31, 2014, Bravo borrowed an additional $705,000 from the same lender as noted above. At December 31, 2014 and 2013, the unpaid principal balance of the loan is $6,305,612 and $9,039,373, respectively. Interest paid on the loan during the years ended December 31, 2014 and 2013 amounted to $653,836 and $259,018, respectively. The lender, as collateral, has a first priority security interest in all of the leased assets acquired by Bravo. The lender has the right to receive 100% of the cash proceeds from all of the leased assets, including the leased assets sold by the Partnership to Bravo, until the loan is repaid in full. Beginning July 31, 2013, and monthly thereafter, Bravo will remit all of the cash received from its leased assets to be applied first against interest with any excess applied against the outstanding principal balance. There is no stated repayment term for the principal.
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In September 2013, the Partnership sold the receivable related to the three year lease extension entered into by the lessee of reusable plastic storage containers in which the Partnership had an 18.08% participation interest. The net proceeds to the Partnership on the non-recourse sale of receivables were approximately $1,400,000. The receivable sale note accrues interest at 8.5% per annum with expected maturity date of July 31, 2016. The outstanding principal balance at December 31, 2014 and 2013 was $586,183 and $992,176, respectively.
On October 29, 2013, Delta borrowed $4,200,000 in the form of a senior participation from the same third party lender as disclosed in the Bravo loan above. The loan accrues interest at 10.9% per annum. The debt will be repaid with cash flows generated from the underlying assets acquired. The senior participant, as collateral, has a first priority security interest in all of the leased assets acquired by Delta as well as a senior participation interest in the proceeds from the leased assets, while the Partnership has a junior participation interest until the loan is repaid in full. The outstanding principal balance at December 31, 2014 and 2013 was $3,710,407 and $3,990,350, respectively.
| 15. | Fair Value of Financial Instruments |
The Partnership’s carrying value of cash and cash equivalents, other assets and accounts payable and accrued expenses approximate fair value.
The Partnership’s carrying values and approximate fair values of its financial instruments were as follows:
| December 31, 2014 | December 31, 2013 | |||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
| Assets: | ||||||||||||||||
| Convertible promissory note | $ | 1,375,714 | $ | 1,351,213 | $ | 1,435,714 | $ | 1,309,306 | ||||||||
| Equipment notes receivable | $ | 5,445,623 | $ | 5,460,560 | $ | 13,721,753 | $ | 14,170,652 | ||||||||
| Liabilities: | ||||||||||||||||
| Non- recourse loans payable | $ | 10,538,998 | $ | 10,390,234 | $ | 14,021,900 | $ | 14,641,382 | ||||||||
| 16. | Business Concentrations |
For the year ended December 31, 2014, the Partnership had two lessees which accounted for approximately 64%, and 19% of the Partnership’s rental income derived from operating leases. For the year ended December 31, 2013, the Partnership had four lessees which accounted for approximately 32%, 16%, 13% and 13% of the Partnership’s rental income derived from operating leases. For the year ended December 31, 2014, the Partnership had two lessees which accounted for approximately 53% and 24% of the Partnership’s income derived from finance leases. For the year ended December 31, 2013, the Partnership had two lessees which accounted for approximately 40% and 10% of the Partnership’s income derived from finance leases. For the year ended December 31, 2014, the Partnership had three loans which accounted for approximately 25%, 24%, and 12% of the Partnership’s interest income. For the year ended December 31, 2013, the Partnership had five loans that accounted for approximately 39%, 16%, 14%, 13% and 13% of the Partnership’s interest income.
At December 31, 2014, the Partnership had two lessees which accounted for approximately 74% and 18% of the Partnership’s investment in finance leases. At December 31, 2013, the Partnership had three lessees which accounted for approximately 40%, 20%, and 13% of the Partnership’s investment in finance leases. At December 31, 2014, the Partnership had three lessees which accounted for approximately 67%, 21% and 11% of the Partnership’s investment in operating leases. At December 31, 2013, the Partnership had three lessees which accounted for approximately 36%, 35%, and 13% of the Partnership’s investment in operating leases. At December 31, 2014, the Partnership had one lessee which accounted for 100% of the Partnership’s investment in residual value leases. At December 31, 2013, the Partnership had two lessees which accounted for 100% of the Partnership’s investment in residual value leases. At December 31, 2014, the Partnership had three lessees which accounted for approximately 100% of the Partnership’s investment in equipment notes receivable. At December 31, 2014, the Partnership had three leases which accounted for approximately 100% of the Partnership’s investment in equipment notes receivable.
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At December 31, 2014 and 2013, the Partnership’s convertible promissory note receivable was from a single debtor and the Partnership’s equipment notes receivable was from three debtors.
As of December 31, 2014 and 2013, the outstanding loans payable of $10,627,439 and $14,049,411 respectively, were from one lender.
| 17. | Geographic Information |
Geographic information for revenue for the years ended December 31, 2014 and 2013 was as follows:
| Year Ended December 31, 2014 | ||||||||||||||||||||
| Revenue: | United States | United Kingdom |
Europe | Australia | Total | |||||||||||||||
| Rental income | $ | 526,523 | $ | 162,864 | $ | — | $ | 45,256 | $ | 734,643 | ||||||||||
| Finance income | $ | — | $ | 1,458,869 | $ | — | $ | — | $ | 1,458,869 | ||||||||||
| Gain on sale of assets | $ | 168,832 | $ | 223,197 | $ | — | $ | — | $ | 392,030 | ||||||||||
| Investment income from participation interest and equity method investment | $ | 135,636 | $ | — | $ | 901,442 | $ | — | $ | 1,037,078 | ||||||||||
| Interest income | $ | 246,307 | $ | 914,082 | $ | — | $ | — | $ | 1,160,390 | ||||||||||
| Year Ended December 31, 2013 | ||||||||||||||||
| Revenue: | United States | Europe | Australia | Total | ||||||||||||
| Rental income | $ | 513,817 | $ | 189,578 | $ | 26,436 | $ | 729,831 | ||||||||
| Finance income | $ | 9,344 | $ | 1,035,380 | $ | — | $ | 1,044,724 | ||||||||
| Gain (loss) on sale of assets | $ | (13,058 | ) | $ | 54,505 | $ | — | $ | 41,447 | |||||||
| Investment income from participation interest | $ | — | $ | 142,333 | $ | — | $ | 142,333 | ||||||||
| Interest income | $ | 193,929 | $ | 796,152 | $ | — | $ | 990,081 | ||||||||
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Geographic information for long-lived assets at December 31, 2014 and 2013 was as follows:
| December 31, 2014 | ||||||||||||||||
| Long-lived assets: | United States | Europe | Australia | Total | ||||||||||||
| Investment in finance leases, net | $ | 340,404 | $ | 12,065,687 | $ | — | $ | 12,406,091 | ||||||||
| Investments in equipment subject to operating leases, net | $ | 1,000,677 | $ | 174,983 | $ | 309,129 | $ | 1,484,789 | ||||||||
| Residual value investment in equipment on lease | $ | — | $ | 634,702 | $ | — | $ | 634,702 | ||||||||
| Convertible promissory note | $ | 1,375,714 | $ | — | $ | — | $ | 1,375,714 | ||||||||
| Equipment notes receivable, including accrued interest | $ | 1,257,250 | $ | 4,426,442 | $ | — | $ | 5,683,692 | ||||||||
| December 31, 2013 | ||||||||||||||||
| Long-lived assets: | United States | Europe | Australia | Total | ||||||||||||
| Investment in finance leases, net | $ | 420,968 | $ | 5,729,942 | $ | — | $ | 6,150,910 | ||||||||
| Investments in equipment subject to operating leases, net | $ | 2,975,362 | $ | 257,040 | $ | 315,921 | $ | 3,548,323 | ||||||||
| Residual value investment in equipment on lease | $ | — | $ | 3,134,702 | $ | — | $ | 3,134,702 | ||||||||
| Convertible promissory note | $ | 1,435,714 | $ | — | $ | — | $ | 1,435,714 | ||||||||
| Equipment notes receivable, including accrued interest | $ | — | $ | 14,549,459 | $ | — | $ | 14,549,459 | ||||||||
| 18. | Indemnifications |
The Partnership enters into contracts that contain a variety of indemnifications. The Partnership’s 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 party’s 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 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 Partnership’s 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 Partnership’s 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.
| 19. | Income Tax Reconciliation (unaudited) |
At December 31, 2014 and 2013, total Partners’ equity included in the consolidated financial statements was $24,490,962 and $25,397,908, respectively. At December 31, 2014 and 2013, total Partners’ equity for federal income tax purposes was $25,623,954 and $20,954,717. The primary differences are (i) income that is deferred to future period for financial reporting purposes but not for federal income tax reporting purposes, (ii) treatment of lease classifications and asset sales for financial reporting purposes compared to federal income tax reporting purposes, (iii) the treatment of foreign income, and (iv) the differences in depreciation and amortization and foreign currency translation (gain) loss for financial reporting purposes and federal income tax purposes.
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The following table reconciles the net income for financial statement reporting purposes to the net income (loss) for federal income tax purposes for the years ended December 31, 2014 and 2013:
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Net income (loss) per financial statements | $ | 921,267 | $ | 1,742,690 | ||||
| Depreciation and amortization | (18,404 | ) | (77,230 | ) | ||||
| Amortization | 34,124 | 42,118 | ||||||
| Gain (loss) on asset sales - 4797 | 208,744 | (1,387,643 | ) | |||||
| Foreign income | — | — | ||||||
| Deferred income | — | 261,497 | ||||||
| Other | — | 73 | ||||||
| Income from H&P Shipping | (191,210 | ) | 110,178 | |||||
| Income from SQN Echo & Echo II | 93,391 | (8,151 | ) | |||||
| Foreign currency translation (gain) loss - unrealized | (1,119,405 | ) | (728,735 | ) | ||||
| Net (loss) income for federal income tax purposes | $ | (71,493 | ) | $ | (45,203 | ) | ||
| 20. | Selected Quarterly Financial Data (unaudited) |
The following table is a summary of selected financial data, by quarter:
| Quarterly Information (unaudited) | Year Ended December 31, |
|||||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | 2014 | ||||||||||||||||
| Total revenue | $ | 1,074,498 | $ | 1,145,197 | $ | 1,507,567 | $ | 1,055,748 | $ | 4,783,010 | ||||||||||
| Net income (loss) allocable to Limited Partners | $ | 606,056 | $ | 890,303 | $ | (275,511 | ) | $ | (308,794 | ) | $ | 912,054 | ||||||||
| Weighted average number of limited partnership interests outstanding | 27,721.10 | 27,721.10 | 27,721.10 | 27,721.10 | 27,721.10 | |||||||||||||||
| Net income (loss) attributable to Limited Partners per weighted average number of limited partnership interests outstanding | $ | 21.86 | $ | 32.12 | $ | (9.94 | ) | $ | (11.00 | ) | $ | 32.90 | ||||||||
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| Quarterly Information (unaudited) | Year Ended December 31, |
|||||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | 2013 | ||||||||||||||||
| Total revenue | $ | 431,003 | $ | 593,160 | $ | 835,865 | $ | 1,088,388 | $ | 2,948,416 | ||||||||||
| Net income (loss) allocable to Limited Partners | $ | (570,855 | ) | $ | 168,568 | $ | 1,373,220 | $ | 754,330 | $ | 1,725,263 | |||||||||
| Weighted average number of limited partnership interests outstanding | 24,333.11 | 27,802.86 | 27,761.10 | 27,725.01 | 26,917.16 | |||||||||||||||
| Net income (loss) attributable to Limited Partners per weighted average number of limited partnership interests outstanding | $ | (23.46 | ) | $ | 6.06 | $ | 49.47 | $ | 35.02 | $ | 64.10 | |||||||||
| 20. | Subsequent Events |
The Partnership has evaluated subsequent events through the date these consolidated financial statements were issued.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
In connection with the preparation of this Annual Report on Form 10-K for the year ended December 31,2014, our General Partner and our Investment Partner carried out an evaluation, under the supervision and with the participation of the management of our General Partner and our Investment Manager, including its Chief Executive Officer, of the effectiveness of the design and operation of our General Partner’s and our Investment Manager’s disclosure controls and procedures as of the end of the year covered by this report pursuant to the Securities Exchange Act of 1934, as amended. Based on the foregoing evaluation, the Chief Executive Officer concluded that our General Partner’s and our Investment Manager’s disclosure controls and procedures were effective.
In designing and evaluating our General Partner’s and our Investment Manager’s disclosure controls and procedures, our General Partner and our Investment Manager 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 Partner’s and our Investment Manager’s 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.
Our General Partner’s and our Investment Manager’s Chief Executive Officer has determined that no weakness in disclosure controls and procedures had any material effect on the accuracy and completeness of our financial reporting and disclosure included in this Annual Report on Form 10-K.
Evaluation of internal control over financial reporting
Our General Partner is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our General Partner and our Investment Manager have assessed the effectiveness of their internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control—Integrated Framework.”
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Based on their assessment, our General Partner and our Investment Manager believe that, as of December 31, 2014, its internal control over financial reporting is effective.
Changes in internal control over financial reporting
There were no additional material changes in our General Partner’s or our Investment Manager’s internal control over financial reporting during the quarter ended December 31, 2014, that materially affected, or are reasonably likely to materially affect, their internal control over financial reporting.
Not applicable.
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Item 10. Directors, Executive Officers and Corporate Governance
Our General Partner
Our General Partner is SQN AIF III GP, LLC, a Delaware limited liability company and was formed in March 2010. The sole member of our General Partner is SQN Capital Management, LLC, our Investment Manager. The executive officers of our General Partner are as follows:
| Name | Age | Position | ||
| Jeremiah J. Silkowski | 40 | President and Chief Executive Officer | ||
| Michael C. Ponticello | 36 | Senior Vice President and National Sales Manager | ||
| Claudine Aquillon | 50 | Chief Operating Officer | ||
| Matthew Leszyk | 35 | Vice President | ||
| Hugh Shelmerdine | 63 | Vice President—Chief Credit Officer |
Biographical information regarding the officers and directors of our General Partner follows the table setting forth information regarding our Investment Manager’s current executive officers and directors.
Our Investment Manager
Our Investment Manager is SQN Capital Management, LLC, a Delaware limited liability company that was formed in December 2007 to act as the manager of direct participation programs and its managing directors and executive officers will be responsible for selecting, managing and disposing of our assets, equipment and leases. In this regard, after we receive the minimum offering proceeds and hold our initial closing, we intend to enter into the Management, Origination and Servicing Agreement under which our Investment Manager will originate leases and other investments for us, and our Investment Manager will service our portfolio of leases and other investments. Our Investment Manager is responsible for all aspects of the performance by its affiliates of services necessary to our operation and for the facilities, personnel, equipment, financial and other resources used by its affiliates in the performance of those services. The executive officers of our Investment Manager are as follows:
| Name | Age | Position | ||
| Jeremiah J. Silkowski | 40 | President and Chief Executive Officer | ||
| Michael C. Ponticello | 36 | Senior Vice President and National Sales Manager | ||
| Claudine Aquillon | 50 | Chief Operating Officer | ||
| Matthew Leszyk | 35 | Vice President | ||
| Hugh Shelmerdine | 63 | Vice President—Chief Credit Officer |
Jeremiah J. Silkowski has been President and Chief Executive Officer of SQN Capital Corporation, a company that provides asset-backed and lease-based financing to multiple under-served market sectors including the off-shore oilfield services industry, since its inception in January 2006. Mr. Silkowski has served as Managing Director of our Investment Manager since December 2007 and President and Chief Executive Officer since April 2010 and has served as President and Chief Executive Officer of our General Partner since March 2010. Prior to forming SQN Capital Corporation, Mr. Silkowski spent 13 years in various capacities with ICON Capital Corp., including Senior Vice President of Operations and head of Portfolio Management, Remarketing, Cash Management, Tax, Middle Market Acquisitions, and Structured Finance. Mr. Silkowski was responsible for the day-to-day management of over $1.0 billion dollars of assets including two securitizations and eight public partnerships. Mr. Silkowski received his B.A. in Economics from New York University. He also holds Series 7, 24, and 63 licenses.
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Michael C. Ponticello has served as Vice President of SQN Capital Corporation since April 2007 and was responsible for the establishment and development of the equity-raising arm of the company through our Investment Manager. Mr. Ponticello has also served as Senior Vice President and National Sales Manager of our Investment Manager since December 2007 and of our General Partner since March 2010. From June 2001 until December 2004, Mr. Ponticello served as a Management Associate of ICON Capital Corp., from December 2004 to January 2006, he served as Regional Marketing Director of the Southwest for ICON Securities Corp. and from March 2006 to April 2007, he served as Assistant Vice President of Operations at ICON Capital Corp. responsible for the management and monitoring of eight-investment funds with assets in excess of $1.0 billion. Mr. Ponticello received his B.B.A. from the Zicklin School of Business at Baruch College. He also holds Series 7, 24, and 63 licenses.
Claudine Aquillon serves as the Chief Operating Officer of our Investment Manager and General Partner. Ms. Aquillon joined our Investment Manager and General Partner in September 2014 and brings over 25 years of operations experience, in both the public and private sectors. During her career in the financial services industry, Ms. Aquillon has served in multiple senior management and director positions at independent leasing companies, international banks, and financial consulting and due diligence firms where her primary responsibility was to oversee and manage the administrative, financial, legal, operational and risk functions. Ms. Aquillon also brings mergers & acquisition experience, having been part of a team that structured several successful acquisitions in the banking and financial services industry. Ms. Aquillon received her BA in Business Administration & Finance from Bradford College and has a Master Black Belt in Six Sigma.
Matthew Leszyk has served as Vice President of our Investment Manager since June 2011. Prior to joining SQN Capital Management, LLC, Mr. Leszyk worked in various capacities at financial institutions, an investment fund manager and in the private practice of law. From July 2010 to May 2011, Mr. Leszyk was employed at the Law Office of John F. O’Halloran in Bayonne, New Jersey where his practice included acting as counsel to a local bank for commercial loan transactions. From October 2009 to July 2010, Mr. Leszyk was employed at the Law Office of Richard A. Leszyk in Ontario, New York where his practice primarily focused on residential and commercial real estate transactions. From February 2009 to October 2009, Mr. Leszyk was engaged by Sterling National Bank to assist the workout department restructure and negotiate underperforming accounts. From November 2001 to May 2008, Mr. Leszyk was employed by ICON Capital Corp. During his tenure he was responsible for various matters including legal, operations, tax, portfolio management and remarketing. Mr. Leszyk received a J.D. from New York Law School and a B.A. from the University of Rochester with majors in Economics and Japanese. He is an attorney licensed in New York and New Jersey and he holds Series 7, 63 and 99 licenses.
Hugh Shelmerdine has served as Chief Credit Officer of our Investment Manager’s private placement investments since October 2009. Mr. Shelmerdine has over 30 years of senior level lease, bank and finance company executive and directorship experience. From 1977 to 1985 Mr. Shelmerdine served as a Director of Chemco Equipment Finance, Ltd, the asset finance subsidiary of Chemical Bank. From 1985 to 1995, Mr. Shelmerdine served as a Director of Concord Leasing, the asset finance subsidiary of HSBC. From 1996 to 1997, Mr. Shelmerdine served as a Director of Vendor Finance for Nikko Bank (UK) plc. After Concord, from 1997 to 1999, he served as a Senior Account Manager of de Lage Landen Leasing, the leasing subsidiary of Rabobank. Between 2000 and 2009, Mr. Shelmerdine served as a business advisor for Business Link for London and as a Director of The Business Development Experience, Ltd. The last two appointments were providing coaching, mentoring and business advice to business owners. Mr. Shelmerdine has a degree in the United Kingdom that is equivalent to a bachelor’s degree in the United States of America and is qualified as a Charted Secretary.
Code of Business Conduct and Ethics
We do not directly employ any persons, we rely on a Code of Business Conduct and Ethics adopted by our General Partner that applies to the principal executive officer, principal financial officer and principal accounting officer of our General Partner, as well as to persons performing services for us generally. You may request a copy of this code of ethics from our General Partner at SQN AIF III GP, LLC, 100 Wall Street, 28th Floor, New York, New York, 10005.
We are not required to and do not have an independent audit committee or a financial expert.
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Item 11. Executive Compensation
We do not pay the officers or directors of our General Partner, our Investment Manager or their affiliates any compensation. However, we will pay our General Partner, our Investment Manager and their affiliate’s fees and reimburse certain of their expenses incurred on our behalf. These expense reimbursements include reimbursing our General Partner, our Investment Manager and their affiliate’s for certain costs incurred on our behalf, including the cost of personnel, other than controlling persons of our General Partner, our Investment Manager and their affiliates, who will perform administration, accounting, secretarial, transfer and other services required by us. These individuals also will perform similar services for our General Partner, our Investment Manager or their affiliates and other affiliated investment programs, including our Investment Manager’s prior equipment leasing and finance programs, as well as investment programs to be formed in the future by our General Partner and its affiliates. Our partnership agreement provides that expense reimbursements paid by us to our General Partner, our Investment Manager and their affiliates must be limited to the lesser of their actual cost or the cost of comparable services from third-parties. We expect that we will allocate the cost of compensation and benefits of our General Partner’s officers, the officers and employees of our Investment Manager, and the officers and employees of their affiliates, excluding expenses allocable to their controlling persons, based on the amount of their business time spent on our business.
Our General Partner, Investment Manager and their affiliates were paid or accrued the following compensation and reimbursement for costs and expenses:
| Entity | Capacity | Description | Year Ended December 31, 2014 |
||||||
| SQN Capital Management, LLC | Investment Manager | Management fees (1) | $ | 570,308 | |||||
| SQN Securities, LLC | Dealer—Manager | Distribution expense (2) | — | ||||||
| $ | 570,308 | ||||||||
| (1) | Amount charged directly to operations. |
| (2) | Amount charged directly to partners’ equity. |
| Entity | Capacity | Description | Year Ended December 31, 2013 |
||||||
| SQN Capital Management, LLC | Investment Manager | Management fees (1) | $ | 605,031 | |||||
| SQN Securities, LLC | Dealer—Manager | Distribution expense (2) | 108,120 | ||||||
| $ | 713,151 | ||||||||
| (1) | Amount charged directly to operations. |
| (2) | Amount charged directly to partners’ equity. |
Our General Partner has a 1% interest in our income, losses and distributions 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 20% to our General Partner. We did not pay our General Partner any distributions during 2014 or 2013; however, we did accrue approximately $42,000 for distributions due to the General Partner at December 31, 2014. For the years ended December 31, 2014 and 2013, the General Partner’s 1% interest in our net income was $9,213 and $17,427, respectively.
Item 12. Security Ownership of Certain Beneficial Owners and the General Partner and Related Security Holder Matters
| a. | We do not have any securities authorized for issuance under any equity compensation plan. |
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| b. | We have one Limited Partner who owns 8.49% of our Units at December 31, 2014. |
| c. | As of March 31, 2015, no directors or officers of our General Partner or our Investment Manager own any of our equity securities. |
| d. | Neither we nor our General Partner or our Investment Manager are aware of any arrangements with respect to our securities, the operation of which may at a subsequent date result in a change of control of us. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
For information regarding executive compensation and related party transactions refer to Part III Item 11. Executive Compensation and Part II Item. 8. Financial Statements and Supplementary Data, Note 3. Related Party Transactions in our financial statements for a discussion of our related party transactions.
Because we are not listed on any national securities exchange or inter-dealer quotation system, we have elected to use the Nasdaq Stock Market’s definition of “independent director” in evaluating whether any of our General Partner’s and Investment Manager’s directors are independent. Under this definition, the board of directors of both our General Partner and our Investment Manager has determined that they do not have any independent directors, nor are we required to have any.
Item 14. Principal Accounting Fees and Services
During the years ended December 31, 2014 and 2013 our auditors provided audit services relating to our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. Additionally, our auditors provided other services in the form of tax compliance work. The following table presents the fees for both audit and non–audit services rendered by Baker Tilly Virchow Krause LLP, for the years ended December 31, 2014 and 2013:
| Years Ended December 31, | ||||||||
| Description of fees | 2014 | 2013 | ||||||
| Audit fees (1) | $ | 115,000 | $ | 118,500 | ||||
| Tax compliance fees | 15,710 | 18,037 | ||||||
| $ | 130,710 | $ | 136,537 | |||||
| (1) | Includes audits and interim quarterly reviews. |
Item 15. Exhibits, Financial Statement Schedules
| 1) | Documents filed as part of this Report. |
| a) | The Following financial statements are filed herewith in Part II Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K: |
| i) | Report of Independent Registered Public Accounting Firm |
| ii) | Consolidated Balance Sheets at December 31, 2014 and 2013 |
| iii) | Consolidated Statements of Operations for the years ended December 31, 2014 and 2013 |
| iv) | Consolidated Statements of Changes in Partners’ Equity for the years ended December 31, 2014 and 2013 |
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| v) | Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013 |
| vi) | Notes to Consolidated Financial Statements for the years ended December 31, 2014 and 2013 |
| b) | Listing of Exhibits:
|
101. |
The following financial statements from SQN Alternative Investment Fund III L.P.’s annual report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Operations, (iii) Statements of Changes in Partners’ Equity, (iv) Statements of Cash Flows, (v) Notes to Financial Statements and (vi) document and entity information. |
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
March 31, 2015
| /s/ JEREMIAH SILKOWSKI | |
| Jeremiah Silkowski | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) |
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