Company Quick10K Filing
Quick10K
SQN Asset Income Fund V
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-09-30 Quarter: 2016-09-30
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SQNF 2019-06-30
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Item 2. General Partner's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

SQN Asset Income Fund V Earnings 2019-06-30

SQNF 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

 

OR

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION FROM __________ TO __________

 

COMMISSION FILE NUMBER: 333-211626

 

Arboretum Silverleaf Income Fund, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware   81-1184858

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S.

Employer ID No.)

     
100 Arboretum Drive, Suite 105    
Portsmouth, NH   03801
(Address of principal executive offices)   (Zip code)

 

Issuer’s telephone number: (603) 294-1420

 

SQN Asset Income Fund V, L.P.

(Former name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] 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 [X]

 

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 [X]
   
Emerging growth company [  ]  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

At August 14, 2019 there were 2,535,672.53 units of the Registrant’s limited partnership interests issued and outstanding.

 

 

 

   
 

 

Arboretum Silverleaf Income Fund, L.P. and Subsidiary

 

INDEX

 

PART I – FINANCIAL INFORMATION  
     
Item 1. Condensed Consolidated Financial Statements 3
     
  Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018 3
     
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 4
     
  Condensed Consolidated Statement of Changes in Partners’ Equity (Deficit) for the Six Months Ended June 30, 2019 5
     
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 6
     
  Notes to Condensed Consolidated Financial Statements 7
     
Item 2. General Partner’s Discussion and Analysis of Financial Condition and Results of Operations 21
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
     
Item 4. Controls and Procedures 32
     
PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 34
     
Item 1A. Risk Factors 34
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
     
Item 3. Defaults Upon Senior Securities 34
     
Item 4. Mine Safety Disclosures 34
     
Item 5. Other Information 34
     
Item 6. Exhibits 34
     
Signatures 35

 

 2 
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

Arboretum Silverleaf Income Fund, L.P. and Subsidiary

(A Delaware Limited Partnership)

Condensed Consolidated Balance Sheets

 

   June 30,   December 31, 
   2019   2018 
    

(Unaudited)

      
Assets          
           
Cash and cash equivalents  $4,763,264   $3,192,541 
Investments in finance leases, net   10,012,128    8,058,033 
Investments in equipment subject to operating leases, net   1,989,414    127,498 
Collateralized loans receivable, including accrued interest of $740 and $657   2,948,448    3,318,420 
Other assets   71,194    348 
Total Assets  $19,784,448   $14,696,840 
           
Liabilities and Partners’ Equity          
Liabilities:          
Accounts payable and accrued liabilities  $99,219   $125,419 
Funding liability for collateralized loans and leases   80,953    81,872 
Distributions payable to Limited Partners   505,765    370,290 
Distributions payable to General Partner   25,785    16,583 
Security deposit payable   49,391    - 
Deferred revenue   441,889    251,948 
Total Liabilities   1,203,002    846,112 
           
Partners’ Equity (Deficit):          
Limited Partners   18,621,903    13,882,867 
General Partner   (40,457)   (32,139)
Total Equity   18,581,446    13,850,728 
Total Liabilities and Partners’ Equity  $19,784,448   $14,696,840 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 3 
 

 

Arboretum Silverleaf Income Fund, L.P. and Subsidiary

(A Delaware Limited Partnership)

Condensed Consolidated Statements of Operations

Three and Six Months Ended June 30, 2019 and 2018

(Unaudited)

 

   Three Months
Ended
   Three Months
Ended
   Six Months
Ended
   Six Months
Ended
 
   June 30, 2019   June 30, 2018   June 30, 2019   June 30, 2018 
Revenue                    
Rental income  $120,256   $27,256   $178,512   $54,512 
Finance income   231,643    217,827    487,579    350,889 
Interest income   116,134    14,677    235,481    77,010 
Other income   241    -    688    830 
Total Revenue   468,274    259,760    902,260    483,241 
                     
Expenses                    
Management fees - Investment Manager   187,500    187,500    375,000    375,000 
Depreciation   99,435    23,897    148,496    47,780 
Professional fees   123,500    60,516    173,050    137,045 
Administration expense   73,739    41,577    108,880    84,461 
Other expenses   4,169    1,414    8,469    10,414 
Total Expenses   488,343    314,904    813,895    654,700 
Net (loss) income  $(20,069)  $(55,144)  $88,365   $(171,459)
                     
Net (loss) income attributable to the Partnership                    
Limited Partners  $(19,868)  $(54,593)  $87,481   $(169,744)
General Partner   (201)   (551)   884    (1,715)
Net (loss) income attributable to the Partnership  $(20,069)  $(55,144)  $88,365   $(171,459)
                     
Weighted average number of limited partnership interests outstanding   2,535,672.53    1,351,321.50    2,016,141.01    1,049,409.37 
                     
Net (loss) income attributable to Limited Partners per weighted average number of limited partnership interests outstanding  $(0.01)  $(0.04)  $0.04   $(0.16)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 4 
 

 

Arboretum Silverleaf Income Fund, L.P. and Subsidiary

(A Delaware Limited Partnership)

Condensed Consolidated Statement of Changes in Partners’ Equity (Deficit) (Unaudited)

Six Months Ended June 30, 2019

 

   Limited             
   Partnership   Total   General   Limited 
   Interests   Equity   Partner   Partners 
                 
Balance, January 1, 2019   1,935,481.94    13,850,728    (32,139)   13,882,867 
                     
Partners’ capital contributions   600,190.59    6,001,906    -    6,001,906 
Offering expenses   -    (9,630)   -    (9,630)
Underwriting fees   -    (418,337)   -    (418,337)
Net income   -    88,365    884    87,481 
Distributions to partners   -    (931,586)   (9,202)   (922,384)
                     
Balance, June 30, 2019   2,535,672.53   $18,581,446   $(40,457)  $18,621,903 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 5 
 

 

Arboretum Silverleaf Income Fund, L.P. and Subsidiary

(A Delaware Limited Partnership)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   For the six months
ended
   For the six months
ended
 
   June 30, 2019   June 30, 2018 
         
Cash flows from operating activities:          
Net income (loss)  $88,365   $(171,459)
           
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Finance income   (487,579)   (350,889)
Accrued interest income   (235,642)   (76,980)
Depreciation   148,496    47,780 
Change in operating assets and liabilities:          
Minimum rents receivable   1,968,475    832,272 
Accrued interest income   235,282    110,613 
Other assets   (70,846)   (112,144)
Accounts payable and accrued liabilities   (26,200)   167,057 
Security deposit payable   49,391    - 
Deferred revenue   189,941    119,445 
Funding liability for collateralized loans and leases   (919)   - 
Net cash provided by operating activities   1,858,764    565,695 
           
Cash flows from investing activities:          
Purchase of finance leases   (5,445,403)   (5,795,107)
Cash paid for collateralized loans receivable   (287,436)   (61,459)
Cash received from collateralized loans receivable   511,427    3,238,065 
Proceeds from sale of collateralized loans receivable   146,341    - 
Net cash used in investing activities   (5,075,071)   (2,618,501)
           
Cash flows from financing activities:          
Cash received from Limited Partner capital contributions   5,916,286    3,440,450 
Cash paid for Limited Partner distributions   (786,909)   (383,830)
Cash paid for Limited Partner redemptions   -    (4,885)
Cash paid for underwriting fees   (332,717)   (180,632)
Cash paid for offering costs   (9,630)   (84,477)
Net cash provided by financing activities   4,787,030    2,786,626 
           
Net increase in cash and cash equivalents   1,570,723    733,820 
Cash and cash equivalents, beginning of period   3,192,541    2,036,337 
Cash and cash equivalents, end of period  $4,763,264   $2,770,157 
           
Supplemental disclosure of non-cash investing and financing activities:          
Units issued as underwriting fee discount  $85,620   $62,947 
Distributions payable to General Partner  $9,202   $4,559 
Distributions payable to Limited Partners  $505,765   $72,093 
Reclassification of investment in finance leases to equipment subject to operating leases  $2,010,412   $- 
Funding liability for collateralized loans and leases  $-   $113,107 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 6 
 

 

Arboretum Silverleaf Income Fund, L.P. and Subsidiary

(A Delaware Limited Partnership)

Notes to Condensed Consolidated Financial Statements

Three and Six Months Ended June 30, 2019 and 2018

(Unaudited)

 

1. Organization and Nature of Operations.

 

Organization – Arboretum Silverleaf Income Fund, L.P. (f/k/a SQN Asset Income Fund V, L.P.) (the “Partnership”) was formed on January 14, 2016, as a Delaware limited partnership. On July 19, 2019, the Partnership changed its name from SQN Asset Income Fund V, L.P. to Arboretum Silverleaf Income Fund, L.P. The Partnership is 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. The Partnership will terminate no later than December 31, 2040.

 

Nature of Operations – The principal investment strategy of the Partnership is to invest in business-essential, revenue-producing (or cost-saving) equipment or other physical assets with high in-place value and long, relative to the investment term, economic life and other financings. The Partnership executes its investment strategy by making investments in equipment already subject to lease or originating equipment leases and loans in such equipment, which will include: (i) purchasing equipment and leasing it to third-party end users; (ii) providing equipment and other asset 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 Arboretum Investment Advisors, LLC (the “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. 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 ASIF GP, LLC (f/k/a SQN AIF V GP, LLC) (the “General Partner”), a wholly-owned subsidiary of the Partnership’s Investment Manager. On July 8, 2019, the General Partner changed its name from SQN AIF V GP, LLC to ASIF GP, LLC. 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 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 their capital contributions plus an 8% per year, compounded annually, cumulative return on their capital contributions. After such time, all income, losses and distributable cash will be allocated 80% to the Limited Partners and 20% to the General Partner. The Partnership expects to conduct its activities for at least six years and divide the Partnership’s life into three distinct stages: (i) the Offering Period, (ii) the Operating Period and (iii) the Liquidation Period. The Offering Period began on August 11, 2016 and concluded on March 31, 2019. The Operating Period commenced on October 3, 2016, the date of the Partnership’s initial closing, and will last for four years unless extended at the sole discretion of the General Partner. During the Operating Period, the Partnership will invest most of the net proceeds from its offering in business-essential, revenue-producing (or cost-saving) equipment, other physical assets with substantial economic lives and, in many cases, associated revenue streams and project financings. The Liquidation Period, which follows the conclusion of the Operating Period, is the period in which the Partnership will sell its assets in the ordinary course of business and will last two years, unless it is extended, at the sole discretion of the General Partner.

 

American Elm Distribution Partners, LLC (“American Elm”), a Delaware limited liability company, is affiliated with the General Partner. American Elm acted as the initial selling agent for the offering of the units (“Units”). The Units are offered on a “best efforts,” “minimum-maximum” basis.

 

 7 
 

 

During the Operating Period, the Partnership plans to make quarterly distributions of cash to the Limited Partners, if, in the opinion of the Partnership’s Investment Manager, such distributions are in the Partnership’s best interests. Therefore, the amount and rate of cash distributions could vary and are not guaranteed. The targeted distribution rate is 6.0% annually, paid quarterly as 1.5%, of each Limited Partner’s capital contribution (pro-rated to the date of admission for each Limited Partner). Since June 30, 2017, our distribution rate has been 6.5% annually, paid quarterly at 1.625%, of capital contributions. Beginning as of March 31, 2018, we increased our distribution to 7.0% annually, paid quarterly at 1.75% of capital contributions. Beginning as of June 30, 2018, we increased our distribution to 7.5%, paid quarterly at 1.875% of capital contributions. Beginning as of September 30, 2018 we increased our distribution to 8.0%, paid quarterly at 2.00% of capital contributions. The amount and rate of cash distributions could vary and are not guaranteed. During the six months ended June 30, 2019, we made quarterly cash distributions to our Limited Partners totaling $786,909, and accrued $505,765 for distributions due to Limited Partners which resulted in a distributions payable to Limited Partners of $505,765 at June 30, 2019. At June 30, 2019, the Partnership declared and accrued a distribution of $5,057, for distributions due to the General Partner which resulted in distributions payable to the General Partner of $25,785 at June 30, 2019.

 

On September 11, 2018, the Partnership formed a special purpose entity SQN Lifestyle Leasing, LLC (“Lifestyle Leasing”), a limited liability company registered in the state of Delaware which is wholly owned by the Partnership. On May 24, 2019, the Partnership terminated Lifestyle Leasing.

 

From August 11, 2016 through June 30, 2019, the Partnership admitted 617 Limited Partners with total capital contributions of $25,371,709 resulting in the sale of 2,537,170.91 Units. The Partnership received cash contributions of $24,718,035 and applied $653,674 which would have otherwise been paid as sales commission to the purchase of 65,367.46 additional Units.

 

2. Summary of Significant Accounting Policies.

 

Basis of Presentation — The interim condensed consolidated balance sheets, statements of operations, statement of changes in partners’ equity and statements of cash flows of the Partnership at June 30, 2019 and 2018 and for the three and six months ended June 30, 2019 and 2018 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the SEC with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements furnished reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The results reported in these interim condensed consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Partnership’s annual report on Form 10-K, as filed with the SEC on March 28, 2019.

 

Principles of Consolidation — The condensed consolidated financial statements include the accounts of the Partnership and its entity, 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.

 

Variable interests are investments or other interests that absorb portions of a variable interest entity’s (“VIE”) expected losses or receive portions of the Partnership’s expected residual returns and are contractual, ownership, or other pecuniary interests in a VIE that change with changes in the fair value of the VIE. An entity is considered to be a VIE if any of the following conditions exist. (1) The total equity investment at risk is insufficient to permit the legal entity to finance its activities without additional subordinated financial support; or (2) As a group, the holders of equity investments at risk lack any of the three characteristics of a controlling financial interest: (a) The direct or indirect ability through voting or similar rights to make decisions that have a significant effect on the success of the legal entity. The equity holders at risk are deemed to lack this characteristic if: i. the voting rights of some investors are not proportional to their obligation to absorb the expected losses of the legal entity or rights to receive expected residual returns; and ii. substantially all of the legal entity’s activities are either involved with or are conducted on behalf of an investor that has disproportionately few voting rights (b) The obligation to absorb the expected losses of the legal entity or (c) The right to receive the expected residual returns of the legal entity. An entity that is determined to be a VIE is required to be consolidated by its primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities that most significantly affect the VIE’s economic performance (“Power”) and the obligation to absorb losses of, or the right to receive benefits from the VIE, that could potentially be significant to the VIE (“Benefits”). The determination of whether a reporting entity is the primary beneficiary involves complex and subjective analyses.

 

 8 
 

 

Use of Estimates — The preparation of condensed consolidated 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 interim condensed consolidated 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, notes 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 an original 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 maintained at financial institutions.

 

The Partnership’s cash and cash equivalents are held principally at one financial institution and at times may exceed federally insured limits. The Partnership has placed these funds in a full service commercial financial institution in order to minimize risk relating to exceeding insured limits.

 

Credit Risk — In the normal course of business, the Partnership is exposed to credit risk. Credit risk is the risk that the Partnership’s counterparty to an agreement either has an inability or unwillingness to make contractually required payments. The Partnership expects concentrations of credit risk with respect to lessees to be dispersed across different industry segments and different regions of the world.

 

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 inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss is measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and is recorded in the statement of operations in the period the determination is made. 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 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.

 

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.

 

 9 
 

 

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.

 

The investment committee of the Investment Manager approves each new equipment lease, financing transaction, and lease acquisition. As part of 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 the industry in which the potential lessee operates and the secondary market value of the equipment. Unguaranteed residual values are reviewed for impairment in accordance with the Partnership’s policy relating to impairment review.

 

The residual value assumes, among other things, that the asset will be 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.

 

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, notes 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, notes and loan accounts. Receivables are written off when the Investment Manager determines they are uncollectible. At June 30, 2019 and 2018, an allowance for doubtful lease, notes and loan accounts is not currently provided since, in the opinion of the Investment Manager, all accounts recorded are deemed collectible.

 

Equipment Notes and Loans Receivable — Equipment notes and loans receivable are reported in the interim condensed consolidated financial statements as the outstanding principal balance net of any unamortized deferred fees, and premiums or discounts on purchased loans. Costs to originate loans, if any, are reported as other assets in the interim condensed consolidated financial statements and amortized to expense over the estimated life of the loan. Income is recognized over the life of the note agreement. On certain equipment notes and loans 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 condensed consolidated statements of operations using the effective interest rate method. Equipment notes and loans receivable are generally placed in a non-accrual status when payments are more than 90 days past due and all unpaid accrued interest is reversed. 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.

 

Income Taxes — As a partnership, no provision for income taxes is recorded since the liability for such taxes is the responsibility 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.

 

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The Partnership is subject to the Bipartisan Budget Act of 2015 (“BBA”), which, among other requirements, stipulates that any tax liability incurred based on an IRS tax examination will become due by the Partnership versus the partners of the Partnership. The Partnership, at its discretion, will be able to seek repayment from its partners or treat as a distribution of the individual partners’ account to satisfy this obligation. The Partnership will treat any liability incurred as a deduction to equity. As of June 30, 2019, there were no expected liabilities to be incurred under the BBA.

 

The Partnership has adopted the provisions of Financial Accounting Standards Board’s (“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 interim condensed consolidated 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 positions for the years ended December 31, 2018 and 2017, and does not expect any material adjustments to be made. The tax years 2018, 2017 and 2016 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 condensed consolidated statements of operations.

 

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 Partnership’s 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. Current US GAAP is based on an incurred loss model that delays recognition of credit losses until it is probable the loss has been incurred. Accordingly, it is anticipated that credit losses will be recognized earlier under the CECL model than under the incurred loss model. ASU 2016-13 is currently effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings. Early adoption is permitted. In July 2019, the FASB decided to add a project to its technical agenda to propose staggered effective dates for certain accounting standards, including ASU 2016-13. The FASB has proposed an approach that ASU 2016-13 will be effective for Public Business Entities that are SEC filers, excluding smaller reporting companies such as the Partnership, for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. For all other entities, including smaller reporting companies like the Partnership, ASU 2016-13 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies). The FASB is currently in the process of drafting a proposed ASU for this project to be voted upon by FASB members after a 30 day comment period. The Partnership is currently a smaller reporting company, and if this proposal is approved and becomes effective, the Partnership’s expected adoption date for ASU 2016-13 would change from fiscal years beginning after December 15, 2019 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Partnership is currently evaluating the impact of this guidance on its interim condensed consolidated financial statements.

 

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In February 2016, the FASB issued new guidance to improve consolidation guidance for legal entities, ASU 2016-02, Leases (Topic 842): Amendments to the FASB Accounting Standards Codification (“ASU 2016-02”), effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets, and makes targeted changes to lessor accounting. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Partnership has adopted ASU 2016-02 and has determined there was no significant impact on its interim condensed 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 interim condensed consolidated financial statements.

 

3. Related Party Transactions.

 

The General Partner is responsible for the operations of the Partnership and the Investment Manager makes all investment decisions and manages the investment portfolio of the Partnership. The Partnership reimburses the General Partner for actual incurred organizational and offering costs not to exceed 1.5% of all capital contributions received by the Partnership. Because organizational and offering expenses will be paid, as and to the extent they are incurred, organizational and offering expenses may be drawn disproportionately to the gross proceeds of each closing. The General Partner also has a promotional interest in the Partnership equal to 20% of all distributed distributable cash, after the Partnership has provided an 8% cumulative return, compounded annually, to the Limited Partners on their capital contributions. The General Partner has a 1% interest in the profits, losses and distributions of the Partnership. The General Partner will initially receive 1% of all distributed distributable cash, which was accrued at June 30, 2019 and 2018.

 

The Partnership pays the Investment Manager during the Offering Period, Operating Period and the Liquidation Period a management fee equal to the greater of, (i) 2.5% per annum of the aggregate offering proceeds, payable monthly in advance or (ii) $62,500 per month. For the three months ended June 30, 2019 and 2018, the Partnership paid $187,500 in management fee expense to the Investment Manager. For the six months ended June 30, 2019 and 2018, the Partnership paid $375,000 in management fee expense to the Investment Manager.

 

The Partnership pays the Investment Manager during the Operating Period a structuring fee in an amount equal to 1.5% of each cash investment made, including reinvestments, payable on the date each such investment is made. For the six months ended June 30, 2019 and 2018, the Partnership accrued $83,028 and $108,370, respectively, of structuring fees to the Investment Manager.

 

On December 15, 2017, the Partnership entered into two assignment and purchase agreements with Arboretum Core Asset Finance Fund, L.P., a Delaware limited partnership, a fund managed by the Investment Manager, to purchase two seasoned and performing promissory notes for total cash of $130,559. The funds from the promissory notes with the borrower were used to acquire point-of-sale systems for multiple restaurants. The two promissory notes will be paid in 13 monthly installments of principal and interest of $7,943 and $2,870, respectively. The notes accrued interest at a rate of 18% per annum and matured on January 1, 2019. The promissory notes are secured by a first priority lien with respect to the equipment. For the three and six months ended June 30, 2019, the promissory notes earned interest income of $0 and $4, respectively.

 

American Elm is a Delaware limited liability company and is a subsidiary of an affiliate of the Partnership’s Investment Manager. American Elm in its capacity as the Partnership’s selling agent receives an underwriting fee of 2% of the gross proceeds from Limited Partners’ capital contributions (excluding proceeds, if any, the Partnership receives from the sale of the Partnership’s Units to the General Partner or its affiliates). While American Elm is initially acting as the Partnership’s exclusive selling agent, the Partnership may engage additional selling agents in the future.

 

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For the six months ended June 30, 2019 and the year ended December 31, 2018, the Partnership incurred the following transactions with American Elm:

 

   June 30, 2019   December 31, 2018 
   (unaudited)     
Balance - beginning of period  $   $ 
Underwriting fees earned by American Elm   118,326    157,443 
Payments by the Partnership to American Elm   (118,326)   (157,443)
           
Balance - end of period  $   $ 

 

For the six months ended June 30, 2019 and 2018, the Partnership incurred the following underwriting fee transactions:

 

   Six Months Ended
June 30, 2019
   Six Months Ended
June 30, 2018
 
   (unaudited)   (unaudited) 
Underwriting discount incurred by the Partnership  $85,620   $62,947 
Underwriting fees earned by American Elm   118,326    68,409 
Fees paid to outside brokers   214,391    112,223 
Total underwriting fees  $418,337   $243,579 

 

4. Investments in Finance Leases.

 

At June 30, 2019 and December 31, 2018, net investments in finance leases consisted of the following:

 

   June 30, 2019   December 31, 2018 
   (unaudited)     
Minimum rents receivable  $11,865,240   $9,240,140 
Estimated unguaranteed residual value   214,571    662,066 
Unearned income   (2,067,683)   (1,844,173)
Total  $10,012,128   $8,058,033 

 

Computer Equipment

 

On October 6, 2016, the Partnership funded a lease facility for $680,020 of Apple computers with a private school in New York City. The finance lease requires 36 monthly payments of $17,402. The lessee made a down payment of $102,002 and the remainder amount was funded by the Partnership. The lease is secured by ownership of the equipment. At June 30, 2019, there were no significant changes to this lease.

 

Furniture and Kitchen Equipment

 

On October 21, 2016, the Partnership funded a finance lease for $357,020 of an assortment of school furniture and kitchen equipment with a public charter school in New Jersey. The finance lease requires 36 monthly payments of $11,647 with the first and last payments due in advance. The lease is secured by a first priority lien against the equipment. At June 30, 2019, there were no significant changes to this lease.

 

Agricultural Equipment

 

On November 9, 2017, the Partnership funded a lease facility for $406,456 of agricultural equipment and supplies with a company based in Illinois. The finance lease requires 36 monthly payments of $13,819 with the first and last payments due in advance. On February 9, 2018, the Partnership funded a second lease facility for $48,850 of agricultural equipment and supplies with the company based in Illinois. The finance lease requires 36 monthly payments of $1,661 with the first and last payments due in advance. On April 17, 2018, the Partnership funded a third lease facility for $44,380 of agricultural equipment and supplies with the company based in Illinois. The finance lease requires 36 monthly payments of $1,509 with the first and last payments due in advance. The leases are secured by a first priority lien against the agricultural equipment and supplies and a personal guarantee from the company’s CEO. At June 30, 2019, there were no significant changes to these leases.

 

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Infrastructure Equipment

 

On December 4, 2017, the Partnership entered into a lease facility for $940,000 of railcar movers with a company based in Missouri. The finance lease requires 60 monthly payments of $16,468 with the first and last payments due in advance, and an additional final payment of $350,709. The lease is secured by a first priority lien against the railcar movers. At June 30, 2019, there were no significant changes to this lease.

 

On June 29, 2018, the Partnership entered into a lease facility for $1,199,520 for water pumps based in North Dakota. The finance lease requires 48 monthly payments of $31,902 with the first and last payments due in advance. On October 31, 2018, the Partnership entered into a second lease facility for $529,239 for water pumps. The finance lease requires 36 monthly payments of $17,888 with the first and last payments due in advance. On January 29, 2019, the Partnership entered into a third lease facility for $67,500 for water pumps. On January 29, 2019, the Partnership funded $33,750 and on April 9, 2019, the Partnership funded the remaining $33,750. The finance lease requires 36 monthly payments of $2,282 with the first and last payments due in advance and commences on May 1, 2019. On June 19, 2019, the Partnership entered into and funded a fourth lease facility for $1,270,125 for water pumps. The finance lease requires 36 monthly payments of $43,565 with the first and last payments due in advance and commences on July 1, 2019. The lease is secured by a first priority lien against the water pumps. At June 30, 2019, there were no significant changes to this lease.

 

On November 20, 2018, the Partnership entered into a lease facility for $33,450 for water pumps based in Texas. The finance lease requires 36 monthly payments of $1,159 with the first and last payments due in advance. On November 20, 2018, the Partnership entered into a second lease facility for $162,943 for water pumps. The finance lease requires 36 monthly payments of $5,648 with the first two months and last payments due in advance. The lease is secured by a first priority lien against the water pumps. At June 30, 2019, there were no significant changes to this lease.

 

On May 30, 2019, the Partnership entered into a lease facility for $3,600,000 for industrial dryers based in Kentucky. On May 31, 2019, the Partnership advanced $3,600,000 under this lease facility. The finance lease requires 48 monthly payments of $94,802 with the first and last payments due in advance and commences on November 1, 2019. The lease is secured by a first priority lien against the industrial dryers. At June 30, 2019, there were no significant changes to this lease.

 

Fabrication Equipment

 

On January 18, 2018, the Partnership entered into a lease facility for $2,188,377 of fabrication equipment with a company based in Texas. The lease required 42 monthly payments of $57,199 with the first and last payments due in advance. The lease is secured by a first priority lien against the fabrication equipment. The lease was expected to commence on the first day of the calendar quarter following final funding, and the company was paying pre-commencement rents to the Partnership. On January 30, 2018, February 14, 2018 and on March 16, 2018, the Partnership advanced $1,079,895, $647,122 and $349,428, respectively, under this lease facility. On September 21, 2018, the Partnership issued a Notice of Default letter to the company and on October 18, 2018, the Partnership issued a Commencement of Lease and Demand for Payment letter to the company. In November 2018, the Partnership entered into a forbearance agreement with the company, whereby the company paid the outstanding October and November rent payments and then beginning in December 2018, they paid a forbearance fee of $25,000 per month for three months while the company underwent an internal restructuring. On February 28, 2019, the lease was amended and restated to a 60 month lease commencing on March 1, 2019. The lease requires 24 monthly payments of $31,000 and 36 monthly payments of $40,000, on maturity, the lessee can return the equipment or purchase it for $500,000. The lease is secured by a first priority lien against the fabrication equipment. The Partnership reclassified this lease as an operating lease.

 

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Virtual Office Software Equipment

 

On February 5, 2018, the Partnership entered into a lease facility and advanced $245,219 of virtual office software and equipment with a company based in Florida. The lease requires 24 monthly payments of $12,020 with the first and last payments due in advance. The lease is secured by a first priority lien against the virtual office software and equipment. At June 30, 2019, there were no significant changes to this lease.

 

Education and Tourism Equipment

 

On February 12, 2018, the Partnership entered into a lease facility for up to $1,500,000 of educational multimedia content equipment with a global company. The lease is secured by a first priority lien against the educational multimedia content equipment. On February 14, 2018, the Partnership advanced $1,015,720 as equipment lease schedule 1 (“Schedule 1”) under this lease facility. Schedule 1 of the lease required 36 monthly payments of $33,402 with the first payment due in advance, commencing on March 1, 2018. On June 29, 2018, the Partnership amended and restated the above lease facility and Schedule 1 to $1,175,720 and advanced an additional $160,000 under the amended and restated lease facility. The amended and restated Schedule 1 lease requires 32 monthly payments of $39,212 and commenced on July 1, 2018. At June 30, 2019, there were no significant changes to this lease.

 

Information Technology Equipment

 

On April 3, 2018, the Partnership funded a lease facility for $390,573 of IT server equipment with a company based in California. The finance lease requires 36 monthly payments of $13,444 with the first payment due in advance. The lease is secured by a first priority lien against the IT server equipment. At June 30, 2019, there were no significant changes to this lease.

 

Medical Equipment

 

On June 26, 2018, the Partnership entered into a lease facility for $673,706 of electrosurgical fiber, manufacturing, and testing equipment with a company based in Massachusetts. The lease is secured by a first priority lien against the equipment and a corporate guarantee of the parent company of the lessee. On June 26, 2018, the Partnership advanced a total of $455,749 as equipment lease schedule 1 (“Schedule 1”) and schedule 2 (“Schedule 2”) under this lease facility. On August 2, 2018 and September 26, 2018, the Partnership advanced a total of $71,361 and $35,680 as additional funding under equipment lease Schedule 1. Schedule 1 requires 42 monthly payments of $10,711 with the first and last payment due upon commencement, commencing on October 1, 2018. Schedule 2 requires 42 monthly payments of $9,513 with the first and last payment due upon commencement, commencing on January 1, 2019. At June 30, 2019, there were no significant changes to this lease.

 

On March 22, 2019, the Partnership entered into a lease facility for $493,906 of medical equipment with a hospital based in Texas. The lease is secured by a first priority lien against the medical equipment. On March 22, 2019, the Partnership advanced a total of $493,906 under this lease facility. The lease schedule requires 36 monthly payments of $16,820 with the first payment due upon commencement, commencing on April 1, 2019, on maturity, the lessee can return the equipment or purchase it at its then fair market value, not to exceed 16% of equipment cost. At June 30, 2019, there were no significant changes to this lease.

 

Helicopter

 

On October 1, 2018, the Partnership, on behalf of Lifestyle Leasing, funded $600,000 into an escrow account. On November 9, 2018, the funds were released from escrow and used to fund a helicopter lease. The lessee provided $450,000 of the $1,050,000 purchase price of the helicopter. The finance lease required 36 monthly payments of $13,423, payable in arrears, and a final payment of $284,435 on November 1, 2021. On funding, the lessee paid the November 1, 2018 rent payment and a four month security deposit of $53,692. The lease was secured by a first priority lien against the leased helicopter and against an additional helicopter. On February 14, 2019, Lifestyle Leasing, on behalf of the Partnership, received cash of $577,025 as total payoff, in connection with the helicopter lease entered into on October 1, 2018. The finance lease had a net book value of $525,063 resulting in an increase in finance income of $51,962.

 

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5. Investment in Equipment Subject to Operating Leases.

 

On October 18, 2016, the Partnership funded a lease facility for $318,882 for 16 pizza ovens to five separate lessees. Each lease has a 36 month term with various monthly payments. The lease is secured by ownership of the equipment and by a corporate guarantee of the parent of the lessees.

 

On February 28, 2019, the lease for fabrication equipment was amended and restated to a 60 month lease commencing on March 1, 2019. The lease requires 24 monthly payments of $31,000 and 36 monthly payments of $40,000, on maturity, the lessee can return the equipment or purchase it for $500,000. The lease is secured by a first priority lien against the fabrication equipment. The Partnership reclassified this lease from a finance lease to an operating lease.

 

The composition of the equipment subject to operating leases of the Partnership as of June 30, 2019 is as follows:

 

Description  Cost Basis   Accumulated
Depreciation
   Net Book Value 
   (unaudited)   (unaudited)   (unaudited) 
Food equipment  $334,826   $255,130   $79,696 
Fabrication Equipment  $2,010,412   $100,694   $1,909,718 
   $2,345,238   $355,824   $1,989,414 

 

The composition of the equipment subject to operating leases of the Partnership as of December 31, 2018 is as follows:

 

Description  Cost Basis   Accumulated
Depreciation
   Net Book Value 
             
Food equipment  $334,826   $207,328   $127,498 
   $334,826   $207,328   $127,498 

 

Depreciation expense for the three and six months ended June 30, 2019 was $99,435 and $148,496, respectively.

 

6. Collateralized Loans Receivable.

 

On June 26, 2017, the Partnership entered into a Commercial Finance Agreement (“CFA”) with a borrower to provide secured financing for $1,184,850 of warehouse racking equipment. The CFA is secured by the racking equipment, and accrues interest at a rate of 9% per annum and matures on June 26, 2020. The borrower will make 36 monthly payments as follows: one payment of $39,083, 11 monthly payments of $69,498 and 24 monthly payments of $20,222. In connection with the CFA, on June 26, 2017, the Partnership advanced $689,552 to the vendor as a progress payment for the equipment. On July 31, 2017, the Partnership advanced $495,298 to the vendor as the final payment for the equipment. On May 31, 2019, the Partnership received cash of $222,439 as payment in full of the CFA entered into on June 26, 2017. For the three and six months ended June 30, 2019, the CFA earned interest income of $12,175 and $17,601, respectively.

 

On June 26, 2017, the Partnership entered into a loan agreement with a borrower to refinance the borrower’s debt. In connection with the refinancing, the Partnership received a promissory note from the borrower in the amount of $150,000. The note accrues interest at a rate of 12% per annum and matures on June 26, 2021. The promissory note will be paid through 48 monthly installments of principal and interest of $3,931. The promissory note is secured by a first priority security interest in all of the borrower’s assets and personal guarantees of the borrower’s principals as well as a corporate guarantee of an affiliate of the borrower. For the three and six months ended June 30, 2019, the promissory note earned interest income of $2,013 and $4,255, respectively.

 

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On June 29, 2018, the Partnership entered into a loan agreement with a borrower to provide financing in an amount up to $7,500,000 to finance a food production facility in Georgia. The loan facility is structured as two tranches: Tranche I: $5,500,000 was funded on July 5, 2018. Tranche II: Up to $2,000,000 is available at lender’s discretion subject to the borrower achieving certain milestones. The loan facility is secured by a first priority security interest in all of the borrower’s assets. In connection with the Tranche I loan, the Partnership received three promissory notes from the borrower in the amount of $1,500,000, $2,000,000 and $2,000,000 respectively. On July 5, 2018, the Partnership funded $5,500,000 for the Tranche I loan. The Tranche I loan accrues interest at a rate of 12.75% plus 3 month LIBOR with a floor of 1.5% and matures on June 30, 2021. The Tranche I loan requires 18 monthly interest only payments upon commencement (first 12 monthly interest payments to be paid in cash at 11% and the remainder to be paid in kind (“PIK”) by adding such PIK interest to the principal balance and 6 monthly interest payments to be paid in cash) and 18 monthly payment of principal and interest payment with monthly principal paydowns of $150,000. Upon maturity of the Tranche I loan, the borrower will make a final balloon payment of approximately $3,029,000 ($2,900,000 principal plus accrued PIK interest). On June 29, 2018, the Partnership entered into an assignment agreement with a third party and sold $3,000,000 of the Tranche I loan, effective July 5, 2018, and sold $1,000,000 of the Tranche I loan, effective on or about September 1, 2018. On July 5, 2018, the Partnership returned two promissory notes to the borrower in the amount of $2,000,000 and $2,000,000 respectively and the borrower reissued one promissory note to the Partnership in the amount of $1,000,000 and one promissory note to the third party in the amount of $3,000,000. On July 5, 2018 and August 31, 2018, the Partnership received cash of $3,000,000 and $1,000,000, respectively, from the third party for the sale of those promissory notes. For the three and six months ended June 30, 2019, the promissory notes earned interest income of $60,457 and $119,928, respectively.

 

On December 11, 2018, the Partnership entered into a loan agreement with two affiliated North Dakota based firms as co-borrowers to provide financing in an amount up to $4,100,000 for oilfield services related equipment, of which the Partnership agreed to provide up to $1,700,000, with the balance funded by a third party. The loan facility is structured as two tranches: Tranche I: $3,200,000 and Tranche II: 900,000 which are available at lender’s discretion subject to the borrower achieving certain milestones. The loan facility is secured by a first priority lien on all of the borrower’s assets. In connection with the Tranche I loan, the Partnership received two promissory notes from the borrower in the amount of $1,326,830 and $1,873,170. On December 11, 2018, $1,326,830 and $1,873,170 were funded for Tranche I, in which $100,000 was held back for a security deposit and $200,000 will be funded upon completion of title work related to purchased vehicles. The Tranche I loan accrues interest at a rate of 10.6% plus 3 month LIBOR with a floor of 2.4% and matures on December 11, 2021. The Tranche I loan requires 36 monthly payments of $41,463 with one interest only payment due upon loan commencement. On December 11, 2018, the Partnership entered into an assignment agreement with a third party and sold $1,873,170 of the Tranche I loan, effective December 11, 2018. On December 14, 2018, the Partnership received cash of $1,682,842 from the third party for the sale of the promissory note. On January 25, 2019, the Partnership funded $250,000 of Tranche II. The Partnership received two promissory notes from the borrower in the amount of $103,659 and $146,341. On January 25, 2019, the Partnership entered into an assignment agreement with a third party and sold $146,341 of the Tranche II loan, effective January 25, 2019. On January 25, 2019, the Partnership received cash of $148,902 from the third party for the sale of the promissory note. For the three and six months ended June 30, 2019, the promissory notes earned interest income of $41,476 and $93,664, respectively.

 

The future principal maturities of the Partnership’s collateralized loans receivable at June 30, 2019 are as follows:

 

Years ending June 30, (unaudited)    
2020  $656,702 
2021   1,764,050 
2022   526,956 
2023    
2024    
Thereafter    
Total  $2,947,708 

 

7. Fair Value of Financial Instruments

 

The Partnership’s carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and other liabilities, approximate fair value due to their short term until maturities.

 

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The Partnership’s carrying values and approximate fair values of its financial instruments were as follows:

 

   June 30, 2019   December 31, 2018 
   Carrying Value   Fair Value   Carrying Value   Fair Value 
   (unaudited)   (unaudited)         
Assets:                    
Collateralized loans receivable  $2,948,448   $2,948,448   $3,318,420   $3,318,420 

 

As of June 30, 2019, the Partnership evaluated the carrying values of its financial instruments and they approximate fair value.

 

8. 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, loan agreements 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 the 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 U.S. GAAP.

 

9. Business Concentrations

 

For the six months ended June 30, 2019, the Partnership had two lessee which accounted for approximately 70% and 30% of the Partnership’s rental income derived from operating leases. For the six months ended June 30, 2018, the Partnership had one lessee which accounted for approximately 100% of the Partnership’s rental income derived from operating leases. For the six months ended June 30, 2019, the Partnership had three leases which accounted for approximately 21%, 13% and 12% of the Partnership’s income derived from finance leases. For the six months ended June 30, 2018, the Partnership had four lessees which accounted for approximately 42%, 15%, 13% and 11% of the Partnership’s income derived from finance leases. For the six months ended June 30, 2019, the Partnership had two loans which accounted for approximately 51% and 40% of the Partnership’s interest income derived from collateralized loans receivable. For the six months ended June 30, 2018, the Partnership had two promissory notes which accounted for approximately 56% and 28% of the Partnership’s interest income derived from collateralized loans receivable.

 

At June 30, 2019, the Partnership had one lessee which accounted for approximately 96% of the Partnership’s investment in operating leases. At June 30, 2018, the Partnership had one lessee which accounted for approximately 100% of the Partnership’s investment in operating leases. At June 30, 2019, the Partnership had two lessees which accounted for approximately 36% and 27% of the Partnership’s investment in finance leases. At June 30, 2018, the Partnership had four lessees which accounted for approximately 30%, 16%, 15% and 12% of the Partnership’s investment in finance leases. At June 30, 2019, the Partnership had two borrowers which accounted for approximately 53% and 44% of the Partnership’s investment in collateralized loans receivable. At June 30, 2018, the Partnership had three borrowers which accounted for approximately 69%, 20% and 12% of the Partnership’s investment in collateralized loans receivable.

 

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10. Geographic Information

 

Geographic information for revenue for the three months ended June 30, 2019 and 2018 was as follows:

 

   Three Months Ended June 30, 2019 
   United States   Total 
   (unaudited)   (unaudited) 
Revenue:          
Rental income  $120,256   $120,256 
Finance income  $231,643   $231,643 
Interest income  $116,134   $116,134 

 

   Three Months Ended June 30, 2018 
   United States   Total 
   (unaudited)   (unaudited) 
Revenue:          
Rental income  $27,256   $27,256 
Finance income  $217,827   $217,827 
Interest income  $14,677   $14,677 

 

Geographic information for revenue for the six months ended June 30, 2019 and 2018 was as follows:

 

   Six Months Ended June 30, 2019 
   United States   Total 
   (unaudited)   (unaudited) 
Revenue:          
Rental income  $178,512   $178,512 
Finance income  $487,579   $487,579 
Interest income  $235,481   $235,481 

 

   Six Months Ended June 30, 2018 
   United States   Total 
   (unaudited)   (unaudited) 
Revenue:          
Rental income  $54,512   $54,512 
Finance income  $350,889   $350,889 
Interest income  $77,010   $77,010 

 

Geographic information for long-lived assets at June 30, 2019 and December 31, 2018 was as follows:

 

   June 30, 2019 
   United States   Total 
   (unaudited)   (unaudited) 
Long-lived assets:          
Investment in finance leases, net  $10,012,128   $10,012,128 
Investments in equipment subject to operating leases, net  $1,989,414   $1,989,414 
Collateralized loan receivable, including accrued interest  $2,948,448   $2,948,448 

 

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   December 31, 2018 
   United States   Total 
Long-lived assets:          
Investment in finance leases, net  $8,058,033   $8,058,033 
Investments in equipment subject to operating leases, net  $127,498   $127,498 
Collateralized loan receivable, including accrued interest  $3,318,420   $3,318,420 

 

11. Commitments and Contingencies

 

On May 1, 2018, the Partnership, as co-borrower, entered into a loan agreement with a bank for a $5,000,000 revolving line of credit. This short term line is intended to be utilized to warehouse transactions to be invested in by the Partnership as investor proceeds are received. In connection with the loan agreement, the Partnership issued a promissory note to the bank in the amount of $5,000,000 that matures on May 1, 2020. To date, the Partnership has not drawn any funds under the revolving line of credit. In the event the Partnership draws funds, interest shall accrue at a rate of Prime Rate plus 1% per annum.

 

12. Subsequent Events

 

On July 19, 2019, the Partnership filed an Amendment to the Certificate of Limited Partnership with regard to the Partnership’s Certificate of Limited Partnership in order to formally amend the name of the Partnership to Arboretum Silverleaf Income Fund, L.P. effective as of July 19, 2019.

 

On July 8, 2019, the General Partner filed a Certificate of Amendment with regard to the General Partner’s Certificate of Formation in order to formally amend the name of the General Partner to ASIF GP, LLC effective as July 8, 2019.

 

On July 11, 2019, the lessee of the lease facility for railcar movers voluntarily filed for Chapter 11 bankruptcy protection. The lessee is current with its monthly lease payments to the Partnership.

 

On August 6, 2019, the Partnership funded a finance lease for $27,351 for water pumps based in North Dakota. The finance lease requires 36 monthly payments of $938. The lease is secured by a first priority lien against the water pumps.

 

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Item 2. General Partner’s Discussion and Analysis of Financial Condition and Results of Operations

 

As used in this Quarterly Report on Form 10-Q, references to “we,” “us,” “our” or similar terms include Arboretum Silverleaf Income Fund, L.P. (f/k/a SQN Asset Income Fund V, L.P.).

 

The following is a discussion of our current financial position and results of operations. This discussion should be read in conjunction with the disclosures below regarding “Forward-Looking Statements” and the “Risk Factors” set forth in Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

Forward-Looking Statements

 

Certain statements within this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “will,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “continue,” “further,” “seek,” “plan,” or “project” and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected. We undertake no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

Overview

 

We are a Delaware limited partnership formed on January 14, 2016. Our partnership operates under a structure 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 and project financings. The pooled capital contributions are also used to pay fees and expenses associated with our organization and to fund a capital reserve.

 

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 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.

 

Many of our investments will 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 also intend to invest by way of loans, participation agreements and residual sharing agreements where we would 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 may structure investments as project financings that are secured by, among other things, essential use equipment and/or assets. Finally, we may use other investment structures that our Investment Manager believes will provide us with the appropriate level of security, collateralization, and flexibility to optimize our return on our investment while protecting against downside risk, such as vendor and rental programs. In many cases, the structure will include us holding title to or a priority or controlling position in the equipment or other asset.

 

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Although the final composition of our portfolio cannot be determined at this stage, we expect to invest in equipment and other assets that are considered essential use or core to a business or operation in the agricultural, energy, environmental, medical, manufacturing, technology, and transportation industries. Our Investment Manager may identify other assets or industries that meet our investment objectives. We expect to invest in equipment, other assets and project financings located primarily within the United States of America and the European Union but may also make investments in other parts of the world.

 

We are currently in the Operating Period. The Partnership elected to close the Offering Period on March 31, 2019. During the Operating Period, we will invest most of the net proceeds from our offering in business-essential, revenue-producing (or cost-saving) equipment, other physical assets with substantial economic lives and, in many cases, associated revenue streams and project financings. The Operating Period began on the date we admitted our first Limited Partners, at the initial closing, which occurred on October 3, 2016 and will last for four years from that date unless extended at the sole discretion of the General Partner. At our initial closing, we reimbursed our Investment Manager for a portion of the fees and expenses associated with our organization and offering which they previously paid on our behalf and we funded a small capital reserve. The Liquidation Period, which follows the conclusion of the Operating Period, is the period in which we will sell assets in the ordinary course of business and will last two years, unless it is extended, at the sole discretion of the General Partner.

 

Our General Partner, our Investment Manager and their affiliates, including American Elm in its capacity as our selling agent and certain non-affiliates (namely, Selling Dealers) receive fees and compensation from the offering of our Units, including the following, with any and all compensation paid to our General Partner solely in cash. We pay an underwriting fee of 2% of the gross proceeds of the offering (excluding proceeds, if any, we receive from the sale of our Units to our General Partner or its affiliates) to our selling agent or selling agents. While American Elm initially acts as our exclusive selling agent, we may engage additional selling agents in the future. From these underwriting fees, a selling agent may pay Selling Dealers, a non-accountable marketing fee based upon such factors as the volume of sales of such Selling Dealers, the level of marketing support provided by such participating dealers and the assistance of such Selling Dealers in marketing the offering, or to reimburse representatives of such Selling Dealers for the costs and expenses of attending our educational conferences and seminars. This fee will vary, depending upon separately negotiated agreements with each Selling Dealer. In addition, we pay a sales commission to Selling Dealers up to 5% of the gross proceeds of this offering (excluding proceeds, if any, we receive from the sale of our Units to our General Partner or its affiliates).

 

Our General Partner receives an organizational and offering expense allowance of up to 1.5% of our offering proceeds to reimburse it for expenses incurred in preparing us for registration or qualification under federal and state securities laws and subsequently offering and selling our Units. The organizational and offering expense allowance will be paid out of the proceeds of the offering. The organizational and offering expense allowance will not exceed the actual fees and expenses incurred by our General Partner and its affiliates. Because organizational and offering expenses will be paid as and to the extent they are incurred, organizational and offering expenses may be drawn disproportionately to the gross proceeds of each closing.

 

During our Operating Period, our Investment Manager will receive a structuring fee in an amount equal to 1.5% of each cash investment made, including reinvestments, payable on the date each such investment is made.

 

During our Operating Period and our Liquidation Period, our Investment Manager receives a management fee in an amount equal to the greater of (i) 2.5% per annum of the aggregate offering proceeds, payable monthly in advance or (ii) $62,500 per month.

 

Our General Partner will initially receive 1% of all distributed distributable cash. Our General Partner has a Promotional Interest in us equal to 20% of all distributed distributable cash after we have provided a return to our Limited Partners of their respective capital contributions plus an 8% per annum, compounded annually, cumulative return on their capital contributions.

 

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Recent Significant Transactions

 

Collateralized Loans Receivable

 

On December 11, 2018, the Partnership entered into a loan agreement with two affiliated North Dakota based firms as co-borrowers to provide financing in an amount up to $4,100,000 for oilfield services related equipment, of which the Partnership agreed to provide up to $1,700,000, with the balance funded by a third party. The loan facility is structured as two tranches: Tranche I: $3,200,000 and Tranche II: 900,000 which are available at lender’s discretion subject to the borrower achieving certain milestones. The loan facility is secured by a first priority lien on all of the borrower’s assets. In connection with the Tranche I loan, the Partnership received two promissory notes from the borrower in the amount of $1,326,830 and $1,873,170. On December 11, 2018, $1,326,830 and $1,873,170 were funded for Tranche I, in which $100,000 was held back for a security deposit and $200,000 will be funded upon completion of title work related to purchased vehicles. The Tranche I loan accrues interest at a rate of 10.6% plus 3 month LIBOR with a floor of 2.4% and matures on December 11, 2021. The Tranche I loan requires 36 monthly payments of $41,463 with one interest only payment due upon loan commencement. On December 11, 2018, the Partnership entered into an assignment agreement with a third party and sold $1,873,170 of the Tranche I loan, effective December 11, 2018. On December 14, 2018, the Partnership received cash of $1,682,842 from the third party for the sale of the promissory note. On January 25, 2019, the Partnership funded $250,000 of Tranche II. The Partnership received two promissory notes from the borrower in the amount of $103,659 and $146,341. On January 25, 2019, the Partnership entered into an assignment agreement with a third party and sold $146,341 of the Tranche II loan, effective January 25, 2019. On January 25, 2019, the Partnership received cash of $148,902 from the third party for the sale of the promissory note.

 

Infrastructure Equipment

 

On May 30, 2019, the Partnership entered into a lease facility for $3,600,000 for industrial dryers based in Kentucky. On May 31, 2019, the Partnership advanced $3,600,000 under this lease facility. The finance lease requires 48 monthly payments of $94,802 with the first and last payments due in advance and commences on November 1, 2019. The lease is secured by a first priority lien against the industrial dryers.

 

Infrastructure Equipment

 

On June 29, 2018, the Partnership entered into a lease facility for $1,199,520 for water pumps based in North Dakota. The finance lease requires 48 monthly payments of $31,902 with the first and last payments due in advance. On October 31, 2018, the Partnership entered into a second lease facility for $529,239 for water pumps. The finance lease requires 36 monthly payments of $17,888 with the first and last payments due in advance. On January 29, 2019, the Partnership entered into a third lease facility for $67,500 for water pumps. On January 29, 2019, the Partnership funded Tranche I for $33,750. On April 9, 2019, the Partnership funded Tranche II for $33,750. The finance lease requires 36 monthly payments of $2,282 with the first and last payments due in advance and commences on May 1, 2019. On June 19, 2019, the Partnership entered into and funded a fourth lease facility for $1,270,125 for water pumps. The finance lease requires 36 monthly payments of $43,565 with the first and last payments due in advance and commences on July 1, 2019. The lease is secured by a first priority lien against the water pumps.

 

Helicopter

 

On October 1, 2018, the Partnership, on behalf of Lifestyle Leasing, funded $600,000 into an escrow account. On November 9, 2018, the funds were released from escrow and used to fund a helicopter lease. The lessee provided $450,000 of the $1,050,000 purchase price of the helicopter. The finance lease required 36 monthly payments of $13,423, payable in arrears, and a final payment of $284,435 on November 1, 2021. On funding, the lessee paid the November 1, 2018 rent payment and a four month security deposit of $53,692. The lease was secured by a first priority lien against the leased helicopter and against an additional helicopter. On February 14, 2019, Lifestyle Leasing, on behalf of the Partnership, received cash of $577,025 as total payoff, in connection with the helicopter lease entered into on October 1, 2018. The finance lease had a net book value of $525,063 resulting in an increase in finance income of $51,962.

 

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Fabrication Equipment

 

On January 18, 2018, the Partnership entered into a lease facility for $2,188,377 of fabrication equipment with a company based in Texas. The lease required 42 monthly payments of $57,199 with the first and last payments due in advance. The lease is secured by a first priority lien against the fabrication equipment. The lease was expected to commence on the first day of the calendar quarter following final funding, and the company was paying pre-commencement rents to the Partnership. On January 30, 2018, February 14, 2018 and on March 16, 2018, the Partnership advanced $1,079,895, $647,122 and $349,428, respectively, under this lease facility. On September 21, 2018, the Partnership issued a Notice of Default letter to the company and on October 18, 2018, the Partnership issued a Commencement of Lease and Demand for Payment letter to the company. In November 2018, the Partnership entered into a forbearance agreement with the company, whereby the company paid the outstanding October and November rent payments and then beginning in December 2018, they paid a forbearance fee of $25,000 per month for three months while the company underwent an internal restructuring. On February 28, 2019, the lease was amended and restated to a 60 month lease commencing on March 1, 2019. The lease requires 24 monthly payments of $31,000 and 36 monthly payments of $40,000, on maturity, the lessee can return the equipment or purchase it for $500,000. The lease is secured by a first priority lien against the fabrication equipment. The Partnership reclassified this lease as an operating lease.

 

Medical Equipment

 

On March 22, 2019, the Partnership entered into a lease facility for $493,906 for medical equipment with a hospital based in Texas. The lease is secured by a first priority lien against the medical equipment. On March 22, 2019, the Partnership advanced a total of $493,906 under this lease facility. The lease schedule requires 36 monthly payments of $16,820 with the first payment due upon commencement, commencing on April 1, 2019, on maturity, the lessee can return the equipment or purchase it at its then fair market value, not to exceed 16% of equipment cost.

 

Collateralized Loan Receivable

 

On June 26, 2017, the Partnership entered into a Commercial Finance Agreement (“CFA”) with a borrower to provide secured financing for $1,184,850 of warehouse racking equipment. The CFA is secured by the racking equipment, and accrues interest at a rate of 9% per annum and matures on June 26, 2020. The borrower will make 36 monthly payments as follows: one payment of $39,083, 11 monthly payments of $69,498 and 24 monthly payments of $20,222. In connection with the CFA, on June 26, 2017, the Partnership advanced $689,552 to the vendor as a progress payment for the equipment. On July 31, 2017, the Partnership advanced $495,298 to the vendor as the final payment for the equipment. On May 31, 2019, the Partnership received cash of $222,439 as total payoff, in connection with the CFA entered into on June 26, 2017.

 

Critical Accounting Policies

 

An understanding of our critical accounting policies is necessary to understand our financial results. The preparation of interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) 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 interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates will primarily include the determination of allowance for notes and leases, 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), if any, and external broker fees incurred with the lease 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.

 

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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.

 

For operating leases, rental income is recognized on the straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected. Accounts receivable is stated at its estimated net realizable value. Deferred revenue is the difference between the timing of the receivables billed and the income recognized on the straight-line basis.

 

Our Investment Manager has an investment committee that approves each new equipment lease and other financing transaction. As part of its process, the investment committee determines the residual value, if any, to be used once the investment has been approved. The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease, the industry in which the potential lessee operates and the secondary market value of the equipment. Residual values are reviewed for impairment in accordance with our impairment review policy.

 

The residual value assumes, among other things, that the asset will be 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 will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair value. If there is an indication of impairment, we will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash 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 will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the statement of operations in the period the determination is made. The events or changes in circumstances that generally indicate that an asset may be impaired are, (i) the estimated fair value of the underlying equipment is less than its carrying value, (ii) the lessee is experiencing financial difficulties and (iii) it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. Our Investment 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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Equipment Notes and Loans Receivable

 

Equipment notes and loans receivable are reported in our condensed consolidated balance sheets at the outstanding principal balance net of any unamortized deferred fees, premiums or discounts on purchased notes and loans. Costs to originated notes, if any, are reported as other assets in our condensed consolidated balance sheets. Unearned income, discounts and premiums, if any, are amortized to interest income in the condensed consolidated statements of operations using the effective interest rate method. Equipment notes and loans receivable are generally placed in a non-accrual status when payments are more than 90 days past due. Additionally, we periodically review 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.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. Current US GAAP is based on an incurred loss model that delays recognition of credit losses until it is probable the loss has been incurred. Accordingly, it is anticipated that credit losses will be recognized earlier under the CECL model than under the incurred loss model. ASU 2016-13 is currently effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings. Early adoption is permitted. In July 2019, the FASB decided to add a project to its technical agenda to propose staggered effective dates for certain accounting standards, including ASU 2016-13. The FASB has proposed an approach that ASU 2016-13 will be effective for Public Business Entities that are SEC filers, excluding smaller reporting companies such as the Partnership, for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. For all other entities, including smaller reporting companies like the Partnership, ASU 2016-13 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies). The FASB is currently in the process of drafting a proposed ASU for this project to be voted upon by FASB members after a 30 day comment period. The Partnership is currently a smaller reporting company, and if this proposal is approved and becomes effective, the Partnership’s expected adoption date for ASU 2016-13 would change from fiscal years beginning after December 15, 2019 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Partnership is currently evaluating the impact of this guidance on its interim condensed consolidated financial statements.

 

In February 2016, the FASB issued new guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements, ASU 2016-02, Leases (Topic 842): Amendments to the FASB Accounting Standards Codification (“ASU 2016-02”), effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets, and makes targeted changes to lessor accounting. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Partnership has adopted ASU 2016-02 and has determined there was no significant impact on its interim condensed 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 interim condensed consolidated financial statements.

 

Business Overview

 

Our Offering Period commenced on August 11, 2016 and concluded on March 31, 2019. We were approved for sale under Blue Sky regulations in 49 states and the District of Columbia. During the Offering Period, the majority of our cash inflows were derived from financing activities and the direct result of capital contributions from Limited Partners.

 

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During our Operating Period, which began on October 3, 2016, the date of our initial closing, we will use the majority of our net offering proceeds from Limited Partner capital contributions to acquire our initial investments. As our investments mature, we anticipate reinvesting the cash proceeds in additional investments in leased equipment and financing transactions, to the extent that the cash will not be needed for expenses, reserves and distributions to our Limited Partners. During this time-frame we expect both rental income and finance income to increase substantially as well as related expenses such as depreciation and amortization. During the Operating Period, we believe the majority of our cash outflows will be from investing activities as we acquire additional investments and to a lesser extend from financing activities from our paying quarterly distributions to our Limited Partners. Our cash flow from operations is expected to increase, primarily from the collection of rental and interest payments.

 

We are currently in our Operating Period. The Offering Period was designated as the period in which we raised capital from investors. During this period, we generated the majority of our cash inflow from financing activities though the sale of our Units to investors. Through June 30, 2019, the Partnership admitted 617 Limited Partners with total capital contributions of $25,371,709 resulting in the sale of 2,537,170.91 Units. The Partnership received cash contributions of $24,718,035 and applied $653,674 which would have otherwise been paid as sales commission to the purchase of 65,367.46 additional Units.

 

We have also entered our Operating Period, which is defined as the period in which we invest the net proceeds from the Offering Period into business-essential, revenue-producing (or cost-saving) equipment and other physical assets with substantial economic lives and, in many cases, associated revenue streams. During this period we anticipate substantial cash outflows from investing activities as we acquire leased and financed equipment. We also expect our operating activities to generate cash inflows during this time as we collect rental payments from the leased and financed assets we acquire.

 

Results of Operations for the Three Months Ended June 30, 2019 compared to the Three Months Ended June 30, 2018

 

Our revenue for the three months ended June 30, 2019 and 2018 is summarized as follows:

 

  

Three Months
Ended

June 30, 2019

  

Three Months
Ended

June 30, 2018

 
   (unaudited)   (unaudited) 
Revenue:          
Rental income  $120,256   $27,256 
Finance income   231,643    217,827 
Interest income   116,134    14,677 
Other income   241     
Total Revenue  $468,274   $259,760 

 

For the three months ended June 30, 2019, we earned $120,256 in rental income from five operating leases of pizza ovens equipment, and one fabrication equipment operating lease. We received monthly lease payments of approximately $667,037 and recognized $231,643 in finance income from various finance leases during the same period. We also recognized $116,134 in interest income from collateralized loans receivable during the same period. As we acquire finance leases and operating leases, and as we participate in additional financing projects, we believe our revenue will grow significantly during 2019.

 

For the three months ended June 30, 2018, we earned $27,256 in rental income from five operating leases of pizza ovens equipment. We received monthly lease payments of approximately $536,000 and recognized $217,827 in finance income from various finance leases during the same period. We also recognized $14,677 in interest income from collateralized loans receivable during the same period.

 

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Our expenses for the three months ended June 30, 2019 and 2018 are summarized as follows:

 

   Three Months
Ended
June 30, 2019
   Three Months
Ended
June 30, 2018
 
   (unaudited)   (unaudited) 
Expenses:          
Management fees — Investment Manager  $187,500   $187,500 
Depreciation   99,435    23,897 
Professional fees   123,550    60,516 
Administration expense   73,739    41,577 
Other expenses   4,169    1,414 
Total Expenses  $488,343   $314,904 

 

For the three months ended June 30, 2019, we incurred $488,343 in total expenses. We paid $187,500 in management fees to our Investment Manager during the three months ended June 30, 2019. We pay our Investment Manager a management fee during the Operating Period and the Liquidation Period equal to the greater of, (i) 2.5% per annum of the aggregate offering proceeds, payable monthly in advance or (ii) $62,500 per month. We recognized $99,435 in depreciation expense and $73,739 in administration expense. Administration expense mainly consists of expenses paid to the fund administrator. We also incurred $123,550 in professional fees, which were mostly comprised of fees related to compliance with the rules and regulations of the SEC and consulting services. As the size and complexity of our activities grow, we expect that our professional fees will increase accordingly.

 

For the three months ended June 30, 2018, we incurred $314,904 in total expenses. We paid $187,500 in management fees to our Investment Manager during the three months ended June 30, 2018. We pay our Investment Manager a management fee during the Operating Period and the Liquidation Period equal to the greater of, (i) 2.5% per annum of the aggregate offering proceeds, payable monthly in advance or (ii) $62,500 per month. We recognized $23,897 in depreciation expense and $41,577 in administration expense. Administration expense mainly consists of expenses paid to the fund administrator. We also incurred $60,516 in professional fees, which were mostly comprised of fees related to compliance with the rules and regulations of the SEC and consulting services.

 

Net Loss

 

As a result of the factors discussed above, we reported a net loss for the three months ended June 30, 2019 of $20,069, as compared to a net loss of $55,144 for the three months ended June 30, 2018.

 

Results of Operations for the Six Months Ended June 30, 2019 compared to the Six Months Ended June 30, 2018

 

Our revenue for the six months ended June 30, 2019 and 2018 is summarized as follows:

 

  

Six Months
Ended

June 30, 2019

  

Six Months
Ended

June 30, 2018

 
   (unaudited)   (unaudited) 
Revenue:          
Rental income  $178,512   $54,512 
Finance income   487,579    350,889 
Interest income   235,481    77,010 
Other income   688    830 
Total Revenue  $902,260   $483,241 

 

For the six months ended June 30, 2019, we earned $178,512 in rental income from five operating leases of pizza ovens equipment, and one fabrication equipment operating lease. We received monthly lease payments of $1,968,475 and recognized $487,579 in finance income from various finance leases during the same period. We also recognized $235,481 in interest income from collateralized loans receivable during the same period. As we acquire finance leases and operating leases, and as we participate in additional financing projects, we believe our revenue will grow significantly during 2019.

 

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For the six months ended June 30, 2018, we earned $54,512 in rental income from five operating leases of pizza ovens equipment. We received monthly lease payments of $832,272 and recognized $350,889 in finance income from various finance leases during the same period. We also recognized $77,010 in interest income from collateralized loans receivable during the same period.

 

Our expenses for the six months ended June 30, 2019 and 2018 are summarized as follows:

 

   Six Months
Ended
June 30, 2019
   Six Months
Ended
June 30, 2018
 
   (unaudited)   (unaudited) 
Expenses:          
Management fees — Investment Manager  $375,000   $375,000 
Depreciation   148,496    47,780 
Professional fees   173,050    137,045 
Administration expense   108,880    84,461 
Other expenses   8,469    10,414 
Total Expenses  $813,895   $654,700 

 

For the six months ended June 30, 2019, we incurred $813,895 in total expenses. We paid $375,000 in management fees to our Investment Manager during the six months ended June 30, 2019. We pay our Investment Manager a management fee during the Operating Period and the Liquidation Period equal to the greater of, (i) 2.5% per annum of the aggregate offering proceeds, payable monthly in advance or (ii) $62,500 per month. We recognized $148,496 in depreciation expense and $108,880 in administration expense. Administration expense mainly consists of expenses paid to the fund administrator. We also incurred $173,050 in professional fees, which were mostly comprised of fees related to compliance with the rules and regulations of the SEC and consulting services. As the size and complexity of our activities grow, we expect that our professional fees will increase accordingly.

 

For the six months ended June 30, 2018, we incurred $654,700 in total expenses. We paid $375,000 in management fees to our Investment Manager during the six months ended June 30, 2018. We pay our Investment Manager a management fee during the Operating Period and the Liquidation Period equal to the greater of, (i) 2.5% per annum of the aggregate offering proceeds, payable monthly in advance or (ii) $62,500 per month. We recognized $47,780 in depreciation expense and $84,461 in administration expense. Administration expense mainly consists of expenses paid to the fund administrator. We also incurred $137,045 in professional fees, which were mostly comprised of fees related to compliance with the rules and regulations of the SEC and consulting services.

 

Net Income (Loss)

 

As a result of the factors discussed above, we reported net income for the six months ended June 30, 2019 of $88,365, as compared to a net loss of $171,459 for the six months ended June 30, 2018.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

  

Six Months
Ended

June 30, 2019

  

Six Months
Ended

June 30, 2018

 
   (unaudited)   (unaudited) 
Cash provided by (used in):          
Operating activities  $1,858,764   $565,695 
Investing activities  $(5,075,071)  $(2,618,501)
Financing activities  $4,787,030   $2,786,626 

 

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Sources of Liquidity

 

We are currently in our Operating Period. The Offering Period was the time frame in which we raised capital contributions from Limited Partners through the sale of our Units. As such, during our Offering Period a substantial portion of our cash inflows were be from financing activities. The Operating Period is the time frame in which we acquire equipment under lease or enter into other equipment financing transactions. During this time period we anticipate that a substantial portion of our cash outflows will be for investing activities. We believe that cash inflows will be sufficient to finance our liquidity requirements for the foreseeable future, including quarterly distributions to our Limited Partners, general and administrative expenses, fees paid to our Investment Manager and new investment opportunities.

 

Operating Activities

 

Cash provided by operating activities for the six months ended June 30, 2019 was $1,858,764 and was primarily driven by the following factors; a net income for the six months ended June 30, 2019 of approximately $88,000, receipt of approximately $1,968,000 in minimum rental payments from finance leases, receipt of approximately $235,000 in interest income payments from collateralized loans receivable, an increase in security deposit payable of $49,000, an increase in deferred revenue of approximately $190,000 and depreciation of approximately $149,000. Offsetting these fluctuations was, finance income of approximately $488,000, accrued interest income of approximately $236,000, an increase in other assets of approximately $71,000 and a decrease of accounts payable of approximately $26,000. We expect our accounts payable and accrued expenses will fluctuate from period to period primarily due to the timing of payments related to lease and financings transactions we will enter into. We anticipate that as we enter into additional equipment leasing and financing transactions we will generate greater net cash inflows from operations principally from rental payments received from lessees.

 

Cash provided by operating activities for the six months ended June 30, 2018 was $565,695 and was primarily driven by the following factors; depreciation expense of approximately $48,000, receipt of approximately $832,000 in minimum rental payments from finance leases acquired during the period, receipt of approximately $111,000 in interest income payments from collateralized loans receivable acquired during the period, an increase of deferred revenue of approximately $120,000 and an increase of accounts payable of approximately $167,000. Offsetting these fluctuations was a net loss for the six months ended June 30, 2018 of approximately $171,000, finance income of approximately $351,000, and a decrease in other assets of $112,000.

 

Investing Activities

 

Cash used in investing activities was $5,075,071 for the six months ended June 30, 2019, which consisted of approximately $5,445,000 that we paid for the purchase of finance leases and approximately $287,000 that we paid for the purchase of collateralized loans receivable, offset by approximately $511,000 in cash received from collateralized loan receivables and approximately $146,000 in cash received from sale of collateralized loan receivables.

 

Cash used in investing activities was $2,618,501 for the six months ended June 30, 2018, which consisted of approximately $5,795,000 and $62,000 that we paid for the purchase of finance leases and for the acquisition of collateralized loans receivable, respectively, offset by approximately $3,238,000 in cash received from collateralized loans receivable.

 

Financing Activities

 

Cash provided by financing activities for the six months ended June 30, 2019 was $4,787,030 and was primarily due to cash proceeds received of approximately $5,916,000 from the sale of our Units to Limited Partners. Offsetting this increase were payments for distributions to our Limited Partners of approximately $787,000, payments of approximately $10,000 for organizational and offering costs and underwriting fees of $333,000.

 

Cash provided by financing activities for the six months ended June 30, 2018 was $2,786,626 and was primarily due to cash proceeds received of approximately $3,440,000 from the sale of our Units to Limited Partners. Offsetting this increase were payments for distributions to our Limited Partners of approximately $384,000, payments of approximately $85,000 for organizational and offering costs and underwriting fees of $181,000.

 

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Distributions

 

During our Operating Period, we intend to pay cash distributions on a quarterly basis to our Limited Partners at 1.5% per quarter, the equivalent rate of 6.0% per annum, of each Limited Partners’ capital contribution (pro-rated to the date of admission for each Limited Partner). Since June 30, 2017, our distribution rate has been 6.5% annually, paid quarterly at 1.625%, of capital contributions. Beginning as of March 31, 2018, we increased our distribution to 7.0% annually, paid quarterly at 1.75% of capital contributions. Beginning as of June 30, 2018, we increased our distribution to 7.5%, paid quarterly at 1.875% of capital contributions. Beginning as of September 30, 2018 we increased our distribution to 8.0%, paid quarterly at 2.00% of capital contributions. The amount and rate of cash distributions could vary and are not guaranteed. During the six months ended June 30, 2019, we made quarterly cash distributions to our Limited Partners totaling $786,909, and accrued $505,765 for distributions due to Limited Partners which resulted in a distributions payable to Limited Partners of $505,765 at June 30, 2019. At June 30, 2019, the Partnership declared and accrued a distribution of $5,057, for distributions due to the General Partner which resulted in distributions payable to the General Partner of $25,785 at June 30, 2019.

 

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 leased assets, loan agreements 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. 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.

 

On May 1, 2018, the Partnership, as co-borrower, entered into a loan agreement with a bank for a $5,000,000 revolving line of credit. This short term line is intended to be utilized to warehouse transactions to be invested in by the Partnership as investor proceeds are received. In connection with the loan agreement, the Partnership issued a promissory note to the bank in the amount of $5,000,000 that matures on May 1, 2020. To date, the Partnership has not drawn any funds under the revolving line of credit. In the event the Partnership draws funds, interest shall accrue at a rate of Prime Rate plus 1% per annum.

 

Off-Balance Sheet Transactions

 

None.

 

Contractual Obligations

 

None.

 

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Subsequent Events

 

On July 19, 2019, the Partnership filed an Amendment to the Certificate of Limited Partnership with regard to the Partnership’s Certificate of Limited Partnership in order to formally amend the name of the Partnership to Arboretum Silverleaf Income Fund, L.P. effective as of July 19, 2019.

 

On July 8, 2019, the General Partner filed a Certificate of Amendment with regard to the General Partner’s Certificate of Formation in order to formally amend the name of the General Partner to ASIF GP, LLC effective as July 8, 2019.

 

On July 11, 2019, the lessee of the lease facility for railcar movers voluntarily filed for Chapter 11 bankruptcy protection. The lessee is current with its monthly lease payments to the Partnership.

 

On August 6, 2019, the Partnership funded a finance lease for $27,351 for water pumps based in North Dakota. The finance lease requires 36 monthly payments of $938. The lease is secured by a first priority lien against the water pumps.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not Applicable for Smaller Reporting Companies.

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, our General Partner and Investment Manager carried out an evaluation, under the supervision and with the participation of the management of our General Partner and Investment Manager, including its Chief Executive Officer, of the effectiveness of the design and operation of our General Partner’s and Investment Manager’s disclosure controls and procedures as of the end of the period covered by this Report pursuant to the Securities Exchange Act of 1934. Based on the foregoing evaluation, the Chief Executive Officer concluded that our General Partner’s and Investment Manager’s disclosure controls and procedures were effective.

 

In designing and evaluating our General Partner’s and Investment Manager’s disclosure controls and procedures, our General Partner and 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 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.

 

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 condensed consolidated financial statements for external purposes in accordance with U.S. GAAP 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 Partnership; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of condensed consolidated financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Partnership are being made only in accordance with authorizations of management and directors of the Partnership; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the condensed consolidated financial statements.

 

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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 June 30, 2019. 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.”

 

Based on their assessment, our General Partner and our Investment Manager believe that, as of June 30, 2019, its internal control over financial reporting is effective.

 

Changes in internal control over financial reporting

 

Beginning January 1, 2018, we implemented ASU 2014-09 Revenue from Contracts with Customers (Topic 606) and ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date. Although the adoption of the new revenue standard had no significant impact on our results of operations, cash flows, or financial position, we did implement changes to our controls related to revenue. These included the development of new policies based on the five-step model provided in the new revenue standard, enhanced contract review requirements, and other ongoing monitoring activities. These controls were designed to provide assurance at a reasonable level of the fair presentation of our condensed consolidated financial statements and related disclosures.

 

Beginning January 1, 2019, we implemented ASU 2016-02 Leases (Topic 842), although the adoption of the new leases standard had no significant impact on our results of operations, cash flows, or financial position, we did implement changes to our controls related to leases. As part of the implementation process, we assessed our lease arrangements and evaluated practical expedients and accounting policy elections to meet the reporting requirements of this standard. We also evaluated the changes in controls and processes that were necessary to implement the new standard, and no material changes were required. The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’ which permitted us not to reassess under the new standard the prior conclusions about lease identification, lease classification and initial direct costs. There was no other change in our internal control over financial reporting during the quarter ended June 30, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not aware of any material legal proceedings that are currently pending against us or against any of our assets.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Our Registration Statement on Form S-1, as amended, was declared effective by the SEC on August 11, 2016. Our Offering Period commenced on August 11, 2016 and concluded on March 31, 2019. From August 11, 2016 through March 31, 2019, the Partnership admitted 617 Limited Partners with total capital contributions of $25,371,709 resulting in the sale of 2,537,170.91 Units. The Partnership received cash contributions of $24,718,035 and applied $653,674 which would have otherwise been paid as sales commission to the purchase of 65,367.46 additional Units.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.1   Certification of President and Chief Compliance Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of President and Chief Compliance Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101   Interactive Data Files

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated.

 

File No. 333-211626

ASIF GP, LLC (f/k/a SQN AIF V GP, LLC)

General Partner of the Registrant

 

Date: August 14, 2019

 

/s/ Michael Miroshnikov  
Michael Miroshnikov  
President  

 

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